<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997
Commission file number 0-16177
ONCOR, Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-1310084
(State of Incorporation) (I.R.S Employer Identification No.)
209 Perry Parkway
Gaithersburg, Maryland 20877
(Address of principal executive offices)
(Zip code)
(301) 963-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO
At October 31, 1997, there were 25,957,133 shares of Common Stock
outstanding. <PAGE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The unaudited consolidated balance sheet as of September 30,
1997, the audited consolidated balance sheet as of December 31,
1996 and the unaudited consolidated statements of operations for
the three month and nine month periods ended September 30, 1997
and 1996 and of cash flows for the nine month periods ended
September 30, 1997 and 1996 set forth below, have been prepared
pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Certain information and
note disclosures normally included in the annual financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
those rules and regulations. Oncor, Inc.(the "Company") believes
that the disclosures made are adequate to make the information
presented not misleading.
In the opinion of management of the Company, the
accompanying consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments)
that are necessary for a fair presentation of results for the
periods presented. Management suggests that this financial
information be read in conjunction with the Form 10-K, including
"Item 1. Business - Additional Risk Factors," filed with the
Commission for the year ended December 31, 1996.
The results for the third quarter and nine months ended
September 30, 1997, presented in the accompanying financial
statements, are not necessarily indicative of the results for the
entire year. In addition, the results for the three and nine
month periods ended September 30, 1996 have been restated to give
effect to the accounting treatment for the Company's convertible
debentures. See Note 5 of the Notes to Financial Statements.<PAGE>
<PAGE> 3
<TABLE>
ONCOR, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
As of
------------------------------
Sept. 30, 1997 Dec.31, 1996
Unaudited
--------------- --------------
<S> ASSETS
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $3,821,854 $13,058,657
Short-term investments, at market 588,515 388,504
Restricted Cash 2,022,402 5,432,478
Accounts receivable, net of allowance
for doubtful accounts of approxi-
mately $409,000 and $372,000 1,840,077 2,401,639
Receivable from Officer/Director 302,542 294,039
Inventories 3,720,436 3,839,630
Advances to affiliates 1,052,271 -
Other current assets 1,967,851 863,060
------------- -------------
Total current assets 15,315,948 26,278,007
------------- -------------
NON-CURRENT ASSETS:
Property and equipment, net 4,405,767 5,044,270
Deposits and other non-current assets 403,098 216,035
Investment in and advances to
affiliates 715,751 3,213,548
Intangible assets, net 5,246,837 6,918,278
------------- -------------
Total non-current assets 10,771,453 15,392,131
------------- -------------
Total assets $26,087,401 $41,670,138
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,357,049 $2,523,585
Accrued expenses and other current
liabilities 2,264,866 1,656,900
Current portion of long-term debt 460,751 719,337
------------- -------------
Total current liabilities 5,082,666 4,899,822
------------- -------------
<PAGE>
<PAGE> 4
NON-CURRENT LIABILITIES:
Long-term debt 10,855,586 10,386,110
Deferred rent 389,142 -
------------- -------------
Total non-current liabilities 11,244,728 10,386,110
------------- -------------
Total liabilities 16,327,394 15,285,932
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 2,718,534 3,040,119
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000
shares authorized, no shares issued - -
Common stock, $.01 par value,
50,000,000 shares authorized,
25,645,189 and 24,214,349 issued;
25,565,780 and 24,134,940 outstanding 256,452 242,143
Common stock warrants outstanding 781,250 781,250
Additional paid-in capital 132,718,835 125,327,438
Deferred compensation (1,015,984) (641,270)
Unrealized gain on investments (2,225) (94)
Cumulative translation adjustment (2,072,680) (508,172)
Accumulated deficit (123,403,663) (101,636,696)
Less - 79,409 shares of common stock
held in treasury, at cost (220,512) (220,512)
------------- -------------
Total stockholders' equity 7,041,473 23,344,087
------------- -------------
Total liabilities and
stockholders' equity $26,087,401 $41,670,138
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 5
<TABLE>
ONCOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
------------------------ --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S>
GROSS REVENUES: <C> <C> <C> <C>
Product sales $3,030,011 $3,975,376 $9,728,062 $11,799,269
Grants and contracts 96,000 91,058 322,249 584,779
------------ ------------ ------------ -------------
Gross revenues 3,126,011 4,066,434 10,050,311 12,384,048
OPERATING EXPENSES:
Direct cost of sales 2,026,705 2,345,051 6,192,328 7,269,032
Product discontinuation
costs - - - 1,975,000
Amortization of
intangibles 281,073 332,394 877,512 1,014,540
Selling, general and
administrative 3,492,996 3,927,636 10,311,101 11,083,907
Research and development 1,927,846 1,685,598 5,458,537 5,477,008
Clinical and regulatory 376,413 432,035 1,488,560 1,436,308
------------ ------------ ------------ -------------
Total operating expenses 8,105,033 8,722,714 24,328,038 28,255,795
------------ ------------ ------------ -------------
LOSS FROM OPERATIONS (4,979,022) (4,656,280) (14,277,727) (15,871,747)
------------ ------------ ------------ -------------
OTHER INCOME (EXPENSE):
Investment income 84,941 120,628 449,287 357,727
Interest and other
expenses, net (Note 5) (1,135,843) (822,733) (4,935,696) (2,279,360)
Foreign exchange (loss) (2,822) 29,579 (27,739) (27,561)
Equity in net loss of
affiliates (858,560) (960,898) (2,975,092) (3,510,414)
------------- ------------ ------------- ------------
(1,912,284) (1,633,424) (7,489,240) (5,459,608)
Net loss ($6,891,306) ($6,289,704) ($21,766,967) ($21,331,355)
============= ============ ============= ============
NET LOSS PER SHARE ($0.27) ($0.27) ($0.86) ($0.94)
============= ============ ============= ============
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING 25,533,691 23,516,159 25,233,561 22,788,528
============= ============ ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.<PAGE>
</TABLE>
<PAGE> 6
<TABLE>
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the nine months ended Sept 30,
----------------------------------
1997 1996
----------------------------------
<S>
CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C>
Net loss ($21,766,967) ($21,331,355)
Adjustments to reconcile net loss to
net cash used in operating activities:
Issuance of common stock for
interest and imputed interest of
convertible notes 2,800,000 2,316,235
Issuance of common stock warrants
in stock of an affiliate for interest 881,250
Issuance of common stock in
connection with research and
and development agreements 324,374 350,423
Depreciation and amortization 1,913,470 2,191,983
Gain on disposal of assets (105,488) (269,978)
Non-cash product discontinuation - 1,619,473
Expenses for non-employee stock
options 391,461 -
Equity in net loss of affiliate
and other 2,995,675 3,510,403
Changes in operating assets
and liabilities:
Accounts receivable 399,044 1,165,700
Inventories (50,126) 514,397
Other current assets (1,271,860) (330,578)
Deposits and other non-current
assets 87,442 1,776
Accounts payable (485,548) 44,998
Accrued expenses and other
current liabilities 2,213,890 (623,734)
Deferred rent 389,142 (18,223)
------------- -------------
Net cash used in operating
activities (11,284,241) (10,858,480)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (566,038) (500,605)
Proceeds from disposal of assets - 340,982
Currency protection in Appligene
agreement - (44,423)
Purchase of stock in affiliate - (300,000)
Redemptions of investments - 149,907
Purchases of investments (202,142) -
------------- -------------
Net cash provided by (used
in) investing activities (768,180) (354,139)
------------- -------------<PAGE>
<PAGE> 7
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants 37,634 658,535
Proceeds from sales of stock of
subsidiary - 9,138,484
Reduction in restricted funds 3,410,069 -
Offering costs of private placement - (54,100)
Payment on bank loans (614,465) (2,497,243)
Loan to unconsolidated affiliate (1,290,239) -
Proceeds from borrowings and
issuance of warrants 2,052,420 5,207,410
------------- -------------
Net cash provided by (used in)
financing activities 3,595,419 12,453,086
------------- -------------
EFFECT OF CHANGE IN EXCHANGE RATE ON CASH (779,801) (372,106)
------------- -------------
Net decrease in cash and cash
equivalents (9,236,803) 868,361
CASH AND CASH EQUIVALENTS, beginning of
the period 13,058,657 13,458,895
------------- -------------
CASH AND CASH EQUIVALENTS, end of the
period $3,821,854 $14,327,256
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 8
ONCOR, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
(Unaudited)
1. Cash Equivalents and Investments
Cash equivalents and investments consist primarily of funds
invested in money market instruments, commercial paper and U.S.
government treasury bills. Investments with maturities between
three months and one year are classified as short-term
investments. Investments in securities with original maturities
of three months or less are considered cash equivalents.
Approximately $1.0 million in restricted cash is pledged as
collateral for a loan of an officer and director for an
indefinite period of time. Cash of approximately another $1.0
million is held in escrow pursuant to a lawsuit brought by a
former employee in France.
Investments that are classified as available-for-sale
securities are carried at fair market value. Unrealized holding
gains and losses are excluded from earnings and reported as a net
amount in a separate component of shareholders' equity until
realized.
2. Intangible Assets
The intangible assets are the result of an acquisition made
in 1994. They comprise (i) technology acquired,(ii) the
estimated value of contractual positions, and (iii) the excess of
the purchase price over the fair market value of the tangible
assets acquired. The intangible assets are being amortized on a
straight line method over periods of five to ten years, with a
weighted average amortization period of eight years.
3. Net Loss Per Share
Net loss per share is determined using the weighted-average
number of shares of Common Stock outstanding during the periods
presented. The effects of options and warrants have not been
considered since the effects would be antidilutive.
The Financial Accounting Standards Board has issued
Statement No. 128, Earnings Per Share. Statement 128 requires
dual presentation of basic and diluted earnings per share on the<PAGE>
<PAGE> 9
face of the income statement for all periods presented. Statement
128 is effective for financial statements issued after December
15, 1997 and requires restatement of prior years' earnings per
share. Since the effect of outstanding options is antidilutive,
they have been excluded from the Company's computation of net
loss per share. Accordingly, Statement 128 does not have an
impact upon historical net loss per share as reported.
4. Investments in Debt Securities at September 30, 1997
The aggregate fair value of investments in debt securities,
comprising commercial paper, as of September 30, 1997 was
$497,611.
5. Accounting for the Issuance of Convertible Debentures
The unaudited financial position and results of operations
for the quarter and nine months ending September 30, 1996 have
been restated to give effect to the accounting treatment
announced in March 1997 by the staff of the Securities and
Exchange Commission (SEC) at a meeting of the Emerging Issues
Task Force relative to the method of accounting for beneficial
conversion features of convertible debentures issued by the
Company.
In December 1995, August 1996, December 1996 and January
1997, the Company issued convertible debentures in private
placements in exchange for cash of $7.0 million, $5.0 million,
$8.0 million and $2.0 million, respectively. In each such
issuance, the holders of the debentures had beneficial conversion
rights to convert the debentures into common shares of the
Company at established discounts to the quoted trading price of
the shares in a period immediately preceding the dates of
conversions.
Under the recently announced accounting treatment, the value
of the fixed discount, ranging from 15%-20% of the respective
face value of the Company's issuances, has been reflected in the
interest expense in an aggregate amount of $2.8 million for the
nine months of 1997 with no interest expense recorded in the
third quarter of 1997, and $0.9 million and $2.1 million for the
third quarter and nine months of 1996, respectively. Such
additional fixed discount has been accreted for the period from
date of issuance through the actual or earliest conversion dates
of the respective issuances.<PAGE>
<PAGE> 10
The effects of the restatement are:
As originally reported:
3rd Quarter Nine Months
1996 Ended 1996
----------- -----------
Interest and other
expense, net $ ( 88,267) $ (144,360)
Net loss (5,378,704) (19,196,355)
Net loss per share (0.23) (0.85)
As restated:
3rd Quarter Nine Months
1996 Ended 1996
----------- -----------
Interest and other
expense, net $ (822,733) $(2,279,360)
Net loss (6,289,704) (21,331,355)
Net loss per share (0.27) (0.94)
6. Related Party Transactions
During the third quarter of 1997, the Company increased its
advances to Codon Pharmaceuticals, Inc. (a 42%-owned affiliate)
from $622,000 to $1,290,000.
7. Contingency
A former employee brought suit against the Company in France
for approximately $0.3 million and instituted arbitration
proceedings for $0.6 million, all related to the employee's
termination. The plaintiff has obtained a ruling that the
Company must retain in escrow an amount of funds equal to the
aggregate amount of the claims. Such amounts are shown on the
balance sheet as restricted cash. Management believes that the
outcome of these matters will not be material to the results of
operations or financial condition of the Company.
8. Subsequent Event
During the fourth quarter of 1997, the Company obtained an
extension of $3.0 million in lines of credit until October 31,
1998 and borrowed $1.0 million from the lines. The line is
secured by substantially all of the assets of the Company. The
Company issued options to purchase 900,000 shares of OncorMed,<PAGE>
<PAGE> 11
Inc. ("OncorMed," a 25% owned affiliate), held by the
Company in conjunction with establishing and extending these
lines of credit. The Company has valued 300,000 of the options
at approximately $0.9 million and recorded such amount as a
charge to interest and other non-operating expense in the third
quarter of 1997. Interest charges related to the value of the
remaining 600,000 options will be recorded in future periods over
the line of credit term.
In the fourth quarter of 1997, certain debenture holders
elected to acquire additional shares exercising certain
beneficial acquisition rights. A charge to interest of $0.2
million will be recognized in the fourth quarter in conjunction
with this election. In future periods, similar non-cash charges,
possibly in substantially larger amounts, could be incurred if
the debenture holders elect to make additional such exercises.
<PAGE>
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis provides information
which management believes is relevant to an assessment and
understanding of the Company's results of operations and
financial condition. The discussion should be read in
conjunction with the audited consolidated financial statements of
the Company and notes thereto, which were included in the
Company's Annual Report on Form 10-K for fiscal year ended
December 31, 1996. This Form 10-Q contains certain statements of
a forward-looking nature relating to future events or the future
financial performance of the Company. Readers are cautioned that
such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements,
readers should specifically consider the various factors
identified in this Report which could cause actual results to
differ materially from those indicated by such forward-looking
statements, including the matters set forth in "Risk Factors."
Results of Operations
Consolidated product sales decreased 24% to $3.0 million for
the third quarter of 1997, as compared to $4.0 million for the
third quarter of 1996. This sales decrease was attributable to
the discontinuation of certain product lines in the U.S. in 1996
(-16%), a decrease in the exchange rate of the French franc
compared to the U.S. dollar (-6%), and a decrease in sales of
continuing products (-2%).
Consolidated product sales decreased 18% to $9.7 million for
the nine months ended September 30, 1997, as compared to $11.8
million for the nine months ended September 30, 1996, due to the
discontinuation of certain product lines in the U.S. in 1996
(-20%) and a decrease in the exchange rate of the French franc
compared to the U.S. dollar (-6%), partially offset by an
increase in sales of continuing products (+8%).
Contract and grant revenue remained unchanged in the third
quarter of 1997 when compared to the third quarter of 1996, and
decreased 45% to $0.3 million for the nine months ended September
30, 1997 as compared to $0.6 million for the corresponding period
in 1996. The contract and grant revenue decreased in 1997 due to
the completion of a grant received in 1995 from the National
Institutes of Health (NIH). A new six month grant from NIH in
the aggregate of $200,000 was awarded in the fourth quarter of
1997 and will be recognized as the funds are expended.
Gross profit as a percentage of product sales decreased to
33.1% and 36.3% for the quarter and nine months, respectively,
ended September 30, 1997, from 41.0% and 38.4% for the
corresponding periods in 1996. The decreases in 1997 were due to
a decrease in margins in Europe due to product mix changes and<PAGE>
<PAGE> 13
competitive pressures on margins and to costs incurred for
validating, regulating, and scaling up the initial stages of the
manufacture of a controlled diagnostic product which still
requires approval by the FDA for sale in the U.S., partially
offset by the discontinuation of sales of lower profit product
lines in the U.S.
The product discontinuation costs in 1996 of $1,975,000
comprise the revaluation of inventory of discontinued products,
charge off of goodwill associated with such products, and
severance payments to employees terminated in conjunction with
the Company's discontinuation plan. There were no product
discontinuation costs in 1997.
Amortization of intangible assets in 1997 and 1996 was due
to the amortization of the portion of the purchase price of
Appligene attributable to the value of intangible assets
acquired, primarily for contracts, completed research projects,
and the excess of the purchase price over the book value of the
assets acquired. The decline in the amortization in both periods
presented for 1997 was due to the change in exchange rates and
the completed research projects being fully amortized in the
third quarter of 1996. The Company expects that such
amortization will continue approximately at the rate recorded in
the third quarter of 1997 for the next eight quarters.
Selling, general and administrative expenses decreased 11.1%
to $3.5 million for the quarter ended September 30, 1997 from
$3.9 million for the corresponding period in 1996. The decrease
was due to the change in the exchange rates and a reduction in
legal expenses associated with certain intellectual property
issues. These decreases were partially offset by consulting and
other expenses associated with certain proposed financial and
strategic transactions.
Selling, general and administrative expenses decreased 6.9%
to $10.3 million for the nine months ended September 30, 1997
from $11.1 million in the nine months ended September 30, 1996.
The decrease was due to the beneficial effects of the
discontinuation plan instituted in the second quarter of 1996 in
the U.S., the change in the exchange rates and a reduction in
legal expenses associated with certain intellectual property
issues. These decreases were partially offset by legal and other
expenses associated with certain proposed strategic transactions
and with a lawsuit brought by a former employee.
Research and development expenses increased 14.4% to $1.9
million in the third quarter of 1997 from $1.7 million in the
same period in 1996. The increase resulted from the timing of
the incurrence of intellectual property legal expenses associated
with maintaining existing and prosecuting new patent filings.
Research and development expenses remained unchanged in
Europe in the third quarter of 1997. Research and development<PAGE>
<PAGE> 14
expenses remained level at $5.5 million for both the nine months
ended September 30, 1996 and 1997.
Clinical and regulatory expenses in the U.S. remained level
for the third quarter of 1996 and 1997, and increased by 3.6% to
$1.5 million for the nine months ended September 30, 1997 from
$1.4 million in the nine months ended September 30, 1996. In the
third quarter of 1997, the increased staff hired to support the
Company's applications for diagnostic products with the FDA
was offset by a decrease in consulting expenses from the third
quarter of 1996. The increase for the first nine months was due
to the increased staff hired to support the Company's
applications for diagnostic products with the FDA and the
clinical trials performed with the corresponding French
regulatory agency.
Other net non-operating expenses increased $0.3 million for
the third quarter of 1997 compared to the corresponding quarter
in 1996. The increase in the third quarter resulted primarily
from the charge to interest for the valuation of the stock
options issued in connection with a line of credit agreement.
These interest charges are expected to continue through the
fourth quarter of 1998, as additional options were issued in the
fourth quarter of 1997 in connection with the line of credit
agreement and their valuation of will be amortized over the life
of the agreement.
Other net non-operating expenses increased $2.0 million for
the nine months ended September 30, 1997 compared to the
corresponding period in 1996. In the nine months ended
September 30, 1997, interest and other expenses included a
non-cash charge of $2.8 million compared to $2.1 million in the
nine months ended September 30, 1996 related to the value of
certain beneficial conversion features in convertible debentures
issued in August and December of 1996. The increase in interest
expenses was partially offset by a decrease of $0.5 million in
the equity in net losses of Codon due to a significant decrease
in the Company's ownership percentage in Codon.
In the fourth quarter of 1997, the Company expects to
complete an exchange offer through which it would reacquire all
or substantially all of the 58% equity interest in Codon
currently held by others in exchange for approximately 1.65
million Oncor shares. At the completion of this transaction,
Oncor expects to record a substantial portion of the purchase
price to be written as incomplete research acquired thereby and
thereafter will include 100% of the losses of Codon in its
consolidated results of operations.
In the fourth quarter of 1997, certain debenture holders
elected to acquire additional shares exercising certain
beneficial acquisition rights. A charge to interest of $0.2
million will be recognized in the fourth quarter in conjunction<PAGE>
<PAGE> 15
with this election. In future periods, similar non-cash charges,
possibly in substantially larger amounts, could be incurred if
the debenture holders elect to make additional such exercises.
As a result of the factors discussed above, net loss
increased to $6.9 million ($0.27 per share) in the third quarter
of 1997 from $6.3 million ($0.27 per share) in the third quarter
of 1996 and increased to $21.8 million ($0.86 per share) in the
first nine months of 1997 from $21.3 million ($0.94 per share) in
the corresponding period in 1996.
Liquidity and Capital Resources
Overview
The Company continues to experience significant cash flow
shortfalls in North America and lacks the capital resources to
continue its North American operations at present levels without
securing substantial additional funding or selling significant
corporate assets in the next few months. The Company is
considering alternative forms of providing such funding. Absent
such funding or sale, the successful completion of which cannot
be assured, the Company will need to significantly reduce its
cash loss from operations through the cessation of significant
operating activities. See "Risk Factors - Additional Financing
Requests and Access to Capital Funding."
Analysis of Historical Cash Losses
The following table sets forth the most significant elements
of the cash flows of the Company in the first nine months of 1997
(in millions):
Cash and liquid investments at January 1, 1997 $18.9
Net cash loss (11.3)
Proceeds from issuance of debentures 2.0
Effects of foreign exchange rate adjustments (0.8)
Loan to unconsolidated affiliate (1.3)
Purchases of equipment (0.6)
Repayment of bank loans and other (0.5)
------
Cash and liquid investments at September 30, 1997 $ 6.4
======
Approximately $4.2 million of the cash and liquid
investments at September 30, 1997 in the table set forth above is<PAGE>
<PAGE> 16
limited to fund operations of the Company's European subsidiary,
of which $1.0 million is restricted. In addition, another
approximately $1.0 million is currently restricted in North
America. A discussion of the elements of the table follows.
The net cash loss from operations is the result of the
losses of the Company discussed in "Results of Operations" above
in this management's discussion and analysis.
The proceeds of $2.0 million from the issuance of debentures
was from a private placement completed in January. The effects
of foreign exchange rate reflects the 12 % decrease in the French
franc compared to the U.S. dollar. The loan to the
unconsolidated affiliate represents funds advanced to Codon to
finance the operations of this affiliate. The Company expects
such advances to continue at a rate of $0.6 million per quarter
until such time, if ever, as Codon secures sufficient funding
from third parties.
Purchases of equipment are for the on-going replacement of
office and laboratory equipment; the Company expects such
purchases to increase as larger scale facilities are prepared for
the anticipated manufacture of certain products. Any substantial
leasehold improvements which may be required in manufacturing
facilities are expected to be funded by the Company's primary
landlord in accordance with the Company's current lease
agreements. The repayment of bank loans was made by a subsidiary
to repay the obligation in full.
Current Cash Position in North America
The Company has available for use in operations in North
America, where most of its cash losses occur, (i) approximately
$1.2 million dollars at September 1997 and (ii) a $3.0 million
secured line of credit from a bank, subject to minimal lending
conditions, expiring October 31, 1998, of which the Company
borrowed $1.0 million after September 30, 1997. An additional
approximately $1.0 million of the cash in North America is not
included in available cash above because it is currently
restricted and may not become available to fund the operations of
the Company in the near future. The Company believes that it has
sufficient sources of cash to fund operations through the
remainder of 1997, but believes that it will need to raise funds
or liquidate assets to fund North America operations after the
end of 1997.
Potential Cash Sources for North American Operations
The Company is considering alternative forms of financing,
including among others, equity or debt financing, sale of
significant assets which may result from the previously announced
retention of Lehman Brothers by the Company to explore strategic
alternatives to increase stockholder value, including sale of the<PAGE>
<PAGE> 17
Company, sale of publicly-traded OncorMed common stock, third
party funding of Codon for future cash requirements and recovery
of Oncor advances to Codon and other alternatives. There can be
no assurance that any of such forms of financing can be completed
by the Company in sufficient amounts in timely fashion on
acceptable terms, or at all, which would have a material adverse
effect on the Company. Even if completed, each of such financing
alternatives may have certain terms, conditions or ramifications
which may have a material adverse effect on the Company's
business, financial condition and results of operations. For
instance, any such equity financings likely will be dilutive to
stockholders, and the terms of any debt financing, as does the
existing line of credit, may require substantially all of the
assets of the Company to be pledged as collateral, may involve
warrant or equity dilution and/or may contain restrictive
covenants which limit the Company's ability to pursue certain
courses of action.
The Company holds 2.0 million shares of common stock in
OncorMed, Inc., a publicly traded affiliate of the Company, whose
shares have traded in the past three months in the range of
$6.75 to $7.75 per share. The Company is restricted from selling
0.9 million such shares in the public markets due to outstanding
options it has issued pursuant to which the Company has offered
to sell the shares to the option holders for $5.75 to $6.00 per
share. While exercise of such options would generate cash of
approximately $5.3 million, such exercise is outside the control
of the Company. The remaining 1.1 million shares of common stock
of OncorMed can be sold in the public markets only pursuant to
restrictions imposed by the SEC such that the complete
liquidation of this position in the public markets likely would
take a year or more. Trading activity in OncorMed stock is
limited, which would further restrict the Company's ability
to liquidate a significant portion of its position. The Company
is also considering attempting to secure a purchaser for a block
of the stock in a private transaction.
Cash Position in Europe
With respect to Europe, the Company believes that its cash
position of approximately $4.2 million is sufficient to fund
operations for at least one year.
Effort to Obtain Strategic Transaction
In June 1997, the Company engaged Lehman Brothers to assist
in securing strategic alliances, including the possible sale of
the Company, which would, among other effects, alleviate the
Company's cash requirements. The process is on-going, but to
date no such alliances or sale has been concluded and there can
be no assurance that any such transaction will be concluded.<PAGE>
<PAGE> 18
Risk Factors
History of Operating Losses
Oncor has not been profitable since its inception in July
1983. For the nine months ended September 30, 1997, the Company
incurred net losses of approximately $22 million. As of
September 30, 1997, the accumulated deficit of the Company was
approximately $123 million. The Company expects to incur
additional substantial losses for at least for the next 12
months. The Company is unable to predict when, or if, it will
become profitable.
Additional Financing Requirements and Access to Capital
Funding
The Company has expended and will continue to expend in the
future substantial funds to continue the research and development
of its products, conduct clinical trials, make capital
expenditures, establish additional manufacturing capability, and
market its products. The Company believes that its existing
sources of funds will be adequate to finance its operations
through 1997, but believes it will need to raise funds or
liquidate assets to fund North America operations after the end
of 1997. The Company is considering alternative forms of
financing, including among others, equity or debt financing, sale
of significant assets which may result from the previously
announced retention of Lehman Brothers by the Company to explore
strategic alternatives to increase stockholder value, including
sale of the Company, sale of publicly-traded OncorMed common
stock, third party funding of Codon for future cash requirements
and recovery of Oncor advances to Codon and other alternatives.
There can be no assurance that any of such forms of financing can
be completed by the Company in sufficient amounts in timely
fashion on acceptable terms, or at all, which would have a
material adverse effect on the Company. Even if completed, each
of such financing alternatives may have certain terms, conditions
or ramifications which may have a material adverse effect on the
Company's business, financial condition and results of
operations. For instance, any such equity financings likely will
be dilutive to stockholders, and the terms of any debt financing,
as does the existing line of credit, may require substantially
all of the assets of the Company to be pledged as collateral, may
involve warrant or equity dilution and/or may contain restrictive
covenants which limit the Company's ability to pursue certain
courses of action.
Risk Associated with the HER-2/neu Gene-Based Test System
In November 1995, an FDA advisory panel (the "Panel") made a
recommendation against final approval of the Company's Pre-Market
Approval ("PMA") application for the use of its HER-2/neu
gene-based test system for diagnostic purposes. Since then, the<PAGE>
<PAGE> 19
Company has conducted additional tests and filed additional
supplemental applications with the FDA. No assurance can be
given that the FDA will overturn the recommendation of the Panel
or that the Company will obtain FDA approval for its HER-2/neu
gene-based test system. The failure to obtain FDA approval for
its HER-2/neu gene-based test system on a timely basis, or at
all, would have a material and adverse effect on the Company's
business, financial condition and results of operations. In the
event that the Company receives FDA approval for its HER-2/neu
gene-based test system, there can be no assurance that the
Company will be capable of manufacturing the test system in
commercial quantities at reasonable costs or marketing the
product successfully, that the test system will be accepted by
the medical community, or that the market demand for the test
system will be sufficient to allow profitable sales.
No Assurance of Regulatory Approvals; Government Regulation
The Company is currently pursuing FDA approval of certain
existing products and expects to pursue FDA approval of certain
additional products under development. There can be no
assurance that the Company will receive regulatory approval for
any of its products or, even if it does receive regulatory
approval for a particular product, that the Company will ever
recover its costs in connection with obtaining such approval.
The timing of regulatory approvals is not within the control of
the Company. The failure of the Company to receive requisite
approval, or significant delays in obtaining such approval, could
have a material and adverse effect on the business, financial
condition and results of operations of the Company. Approval by
the FDA requires lengthy, detailed and costly laboratory
procedures, clinical testing procedures and application
preparation and defense efforts to demonstrate a product's
efficacy and safety before a product can be sold for diagnostic
use. Even if such regulatory approval is obtained for a
product, its manufacturer and its manufacturing facilities are
subject to continual review and periodic inspections by the FDA
and other regulatory agencies. The regulatory standards for
manufacturing are applied stringently by the FDA. Discovery of
previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or
manufacturer, including costly recalls or even withdrawal of the
product from the market. Furthermore, approval may entail
ongoing requirements for postmarketing studies. Failure to
maintain requisite manufacturing standards or discovery of
previously unknown problems could have a material and adverse
effect on the Company's business, financial condition or results
of operations.
Patents and Proprietary Rights
The Company's success will depend in large part on its, or
its licensors', ability to obtain patents, defend its patents,<PAGE>
<PAGE> 20
maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the United States and in
foreign countries. The patent position of firms relying upon
biotechnology is highly uncertain in general and involves complex
legal and factual questions. To date there has emerged no
consistent policy regarding the breadth of claims allowed in
biotechnology patents or the degree of protection afforded under
such patents. The Company relies on certain patents and pending
United States and foreign patent applications relating to various
aspects of its products. These patents and patent applications
are either owned by the Company or rights under them are licensed
to the Company. There can be no assurance that patents will
issue as a result of any such pending applications or that, if
issued, such patents will be sufficiently broad to afford
protection against competitors with similar technology.
In addition, there can be no assurance that any patents issued to
the Company, or for which the Company has license rights, will
not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide competitive advantages to
the Company. The commercial success of the Company will also
depend upon avoiding the infringement of patents issued to
competitors and upon maintaining the technology licenses upon
which certain of the Company's current products are, or any
future products under development might be, based. Litigation,
which could result in substantial cost to the Company, may be
necessary to enforce the Company's patent and license rights or
to determine the scope and validity of others' proprietary
rights. If competitors of the Company prepare and file patent
applications in the United States that claim technology also
claimed by the Company, the Company may have to participate in
interference proceedings declared by the United States Patent and
Trademark Office ("PTO") to determine the priority of invention,
which could result in substantial cost to the Company, even if
the outcome is favorable to the Company. An adverse outcome
could subject the Company to significant liabilities to third
parties and require the Company to license disputed rights from
third parties or cease using the technology. A United States
patent application is maintained under conditions of
confidentiality while the application is pending in the PTO, so
that the Company cannot determine the inventions being claimed in
pending patent applications filed by its competitors in the PTO.
Further, United States patents do not provide any remedies for
infringement that occurred before the patent is granted.
The University of California and its licensee, Vysis, Inc.
("Vysis"), filed suit against Oncor on September 5, 1995 for
infringement of U.S. Patent No. 5,447,841 entitled Methods and
Compositions for Chromosome Specific Staining which issued on
that same date. The patent relates to a method of performing in
situ hybridization using a blocking nucleic acid that is
complementary to repetitive sequences. The Company had requested
summary judgment of invalidity, non-infringement and
unenforceability of the patent claims in suit. The University<PAGE>
<PAGE> 21
and Vysis had requested a summary judgment of infringement and
validity. On August 19, 1997 the Court (i) denied Vysis' motion
for a summary judgment that the Company's unique sequence probes
infringe the patent in suit, leaving that issue for trial, (ii)
granted Vysis' motion for a summary judgment that the patent
claims are novel and non-obvious over the prior art, (iii)
granted Vysis' motion for a summary judgment that the Company's
COATASOME brand probes, which represent approximately 5% of
consolidated sales, infringe the patent in suit, and (iv) left
for trial the issues of whether the patent in suit is invalid for
failure to set forth the best mode and is unenforceable due to
fraudulent procurement. On October 24, 1997, the Court
additionally (i) granted the Company's request to amend its
answer to plead an additional basis of unenforceability of the
patent in suit, (ii) denied Vysis' request for additional
discovery on the issue of infringement, and (iii) denied the
Company's request for entry of a final judgment with respect to
the Court's prior ruling of validity over the prior art. A trial
date of April 20, 1998 has been set by the Court to adjudicate
the remaining issues. A failure to successfully defend against
or settle this suit would likely result in damages being assessed
against the Company and may even result in an injunction against
the sale of some of the Company's probes and genetic test kits,
which could have a material adverse effect on the Company's
business, financial condition and results of operation.
The Company has licensed rights to inventions disclosed in
United States and foreign patent applications relating to methods
and probes for detecting the presence of the Fragile X syndrome.
The Company believes that its licensors are original inventors
and are entitled to patent protection in the United States, but
the Company is aware that certain third parties also have filed
patent applications in the United States and abroad and claim to
be entitled to patents related to this technology. The Company
has initiated an interference proceeding with these third parties
in the PTO to resolve which party is entitled to a United States
patent, if any. The application licensed by the Company is
senior in the interference. The Company has settled the
interference with respect to both of the other parties, and is
awaiting a formal dismissal of the interference by the PTO. An
unfavorable decision in such a proceeding could have an adverse
effect on the Company.
The Company is a party to an interference proceeding in the
PTO with Beckman Instruments, Inc. regarding patent rights to the
Company's TRI-AMP technology. The Company's patent application
is junior in the interference. An unfavorable decision in such a
proceeding could have an adverse effect on the Company.
The Company currently has certain licenses from third
parties and in the future may require additional licenses from
other parties to develop, manufacture and market commercially
viable products effectively. There can be no assurance that such<PAGE>
<PAGE> 22
licenses will be obtainable on commercially reasonable terms, if
at all, that the patents underlying such licenses will be valid
and enforceable or that the proprietary nature of the patented
technology underlying such licenses will remain proprietary.
The Company relies substantially on certain technologies
that are not patentable or proprietary and are therefore
available to the Company's competitors. The Company also relies
on certain proprietary trade secrets and know-how that are not
patentable. Although the Company has taken steps to protect its
unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and
certain of its contractors, there can be no assurance that these
agreements will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently
developed or discovered by competitors.
Uncertainties Relating to Product Development
The Company's currently saleable products have not been
approved by the FDA and may be sold only for research purposes.
The Company has undertaken to seek FDA approval for certain of
these products, and may in the future undertake to seek such
approval for other products, and substantial additional
investment, laboratory development, clinical testing and FDA
approval will be required prior to the commercialization of such
products for diagnostic purposes. There can be no assurance that
the Company will be successful in developing such existing or
future products, that such products will prove to be efficacious
in clinical trials, that required regulatory approvals can be
obtained for such products, that such products, if developed and
approved, will be capable of being manufactured in commercial
quantities at reasonable costs, will be marketed successfully or
will be accepted by the medical diagnostic community, or that
market demand for such products will be sufficient to allow
profitable operations.
International Sales and Foreign Exchange Risk
The Company derived approximately $8.7 million or 57% of its
total product revenues, from customers outside of the United
States for the year ended December 31, 1996. The
Company anticipates that a significant amount of its sales will
take place in European countries and likely will be denominated
in currencies other than the U.S. dollar. These sales may be
adversely affected by changing economic conditions in foreign
countries and by fluctuations in currency exchange rates. Any
significant decline in the applicable rates of exchange could
have a material adverse effect on the Company's business,
financial condition and results of operations. Additional risks
inherent in the Company's international business activities
generally include unexpected changes in regulatory requirements,<PAGE>
<PAGE> 23
tariffs and other trade barriers, lack of acceptance of products
in foreign markets, longer accounts receivable payment cycles,
difficulties in managing international operations, potentially
adverse tax consequences, restrictions on repatriation of
earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will
not have a material adverse effect on the Company's future
international revenues and, consequently, on the Company's
business, financial condition and results of operations.
Competition and Technological Change
The diagnostic and biotechnology industries are subject to
intense competition and rapid and significant technological
change. Competitors of the Company in the United States and in
foreign countries are numerous and include, among others,
diagnostic, health care, pharmaceutical, biotechnology and
chemical companies, academic institutions, government
agencies and other public and private research organizations.
Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities
than the Company. There can be no assurance that these
competitors will not succeed in developing technologies and
products that are more effective, easier to use or less expensive
than those that have been or are being developed by the Company
or that would render the Company's technology and products
obsolete and noncompetitive. The Company also competes with
various companies in acquiring technology from academic
institutions, government agencies and research organizations. In
addition, many of the Company's competitors have significantly
greater experience than the Company in conducting clinical trials
of new diagnostic products and in obtaining FDA and other
regulatory approvals of products for use in health care.
Accordingly, the Company's competitors may succeed in obtaining
regulatory approval for products more rapidly than the Company.
Investment in OncorMed and Codon
The Company owns approximately 25% of the common stock of its
publicly-traded affiliate, OncorMed, and 42% of the voting securities of its
affiliate, Codon. The Company has issued options to acquire approximately 45%
of its position in OncorMed. Therefore, these shares are not available to be
traded. The Company intends to reacquire all or substantially all of the stock
of Codon not presently held by the Company. The shares of common stock of both
OncorMed and Codon held by the Company are not currently freely tradeable and
no public market exists for the common stock of Codon. Therefore, there can be
no assurance that the Company will be able to realize the economic benefit of
its investment or predict the timing of such realization. The value of the
Company's investment in OncorMed represents a significant portion of the total
assets of the Company and such value fluctuates with the market price of
OncorMed's common stock. Therefore, any event that has a material and adverse
effect on the market price of the common stock of OncorMed will have a material
and adverse effect on the value of the Company's investment in OncorMed.
<PAGE>
<PAGE> 24
Although Stephen Turner, the Company's Chief Executive Officer, is a Director of
OncorMed and the Company is a significant stockholder in OncorMed, the Company
does not control the day-to-day operations and management of OncorMed and,
therefore, has little direct control over its operations and financial results.
Codon will continue to require additional funding in the immediate future.
The failure of Codon to obtain such financing on acceptable terms would have a
material and adverse effect on the value of the Company's investment in and
advances to Codon.
Other Factors
Other factors that may affect the Company's business,
financial condition and results of operations, include the
Company's limited manufacturing, marketing and distribution
experience, the level and availability of government funding, the
Company's ability to attract and retain key personnel, potential
health care reform measures and the availability of third-party
reimbursement, potential product liability claims, and
environmental risks.<PAGE>
<PAGE> 25
Item 4. Election of Chairman of the Board of Directors.
a. A meeting of the Company's Board of Directors was held on
September 29, 1997. At that meeting, the Board accepted the
resignation of Stephen Turner as Chairman of the Board and
elected Jose J. Coronas to that position.
<PAGE>
<PAGE> 26
Item 6. Exhibits and Reports on Form 8-K.
a. The following exhibits are filed as part of this report on
Form 10-Q.
27. Financial Data Schedule.
b. Reports on Form 8-K.
None.
<PAGE>
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ONCOR, INC.
(Registrant)
Date: November 14, 1997 /s/ Stephen Turner
Stephen Turner, Chairman and Chief
Executive Officer
Date: November 14, 1997 /s/ Cecil Kost
Cecil Kost, President and Chief
Operating Officer
Date: November 14, 1997 /s/ John L. Coker
John L. Coker, Vice President
of Finance and Administration,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3821854
<SECURITIES> 0
<RECEIVABLES> 2249530
<ALLOWANCES> (409453)
<INVENTORY> 3720436
<CURRENT-ASSETS> 15315948
<PP&E> 11001983
<DEPRECIATION> (6596216)
<TOTAL-ASSETS> 26087401
<CURRENT-LIABILITIES> 5082666
<BONDS> 0
0
0
<COMMON> 256452
<OTHER-SE> 6785021
<TOTAL-LIABILITY-AND-EQUITY> 26087401
<SALES> 9728062
<TOTAL-REVENUES> 10050311
<CGS> 6192328
<TOTAL-COSTS> 14277727
<OTHER-EXPENSES> (7489240)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4904590
<INCOME-PRETAX> (21766967)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21766967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21766967)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
