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 June 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 July 31, 1997, there were 25,347,529 shares of Common Stock
outstanding. <PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The unaudited consolidated balance sheet as of June 30,
1997, the audited consolidated balance sheet as of December 31,
1996 and the unaudited consolidated statements of operations for
the three month and six month periods ended June 30, 1997 and
1996 and of cash flows for the six month periods ended June 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. It is suggested 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 second quarter and six months ended
June 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 six month period
ended June 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>
<TABLE>
ONCOR, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
As of
------------------------------
June 30, 1997 Dec.31, 1996
Unaudited
--------------- --------------
<S> ASSETS
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $6,190,337 $13,058,657
Short-term investments, at market 2,998,685 388,504
Restricted Cash 1,895,268 5,432,478
Accounts receivable, net of allowance
for doubtful accounts of approxi-
mately $382,000 and $372,000 2,043,638 2,401,639
Receivable from Officer/Director 302,542 294,039
Inventories 3,737,585 3,839,630
Advances to affiliates 622,198 -
Other current assets 1,456,946 863,060
------------- -------------
Total current assets 19,247,199 26,278,007
------------- -------------
NON-CURRENT ASSETS:
Property and equipment, net 4,573,737 5,044,270
Deposits and other non-current assets 414,909 216,035
Investment in and advances to
affiliates 2,153,602 3,213,548
Intangible assets, net 5,557,354 6,918,278
------------- -------------
Total non-current assets 12,699,602 15,392,131
------------- -------------
Total assets $31,946,801 $41,670,138
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,207,731 $2,523,585
Accrued expenses and other current
liabilities 1,583,235 1,656,900
Current portion of long-term debt 466,635 719,337
------------- -------------
Total current liabilities 4,257,601 4,899,822
------------- -------------
<PAGE>
NON-CURRENT LIABILITIES:
Long-term debt 11,395,852 10,386,110
Deferred rent 406,061 -
------------- -------------
Total non-current liabilities 11,801,913 10,386,110
------------- -------------
Total liabilities 16,059,514 15,285,932
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 2,844,721 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,
25,426,938 and 24,214,349 issued;
25,347,529 and 24,134,940 outstanding 254,269 242,143
Common stock warrants outstanding 781,250 781,250
Additional paid-in capital 131,642,633 125,327,438
Deferred compensation (920,784) (641,270)
Unrealized gain on investments 922 (94)
Cumulative translation adjustment (1,982,855) (508,172)
Accumulated deficit (116,512,357) (101,636,696)
Less - 79,409 shares of common stock
held in treasury, at cost (220,512) (220,512)
------------- -------------
Total stockholders' equity 13,042,566 23,344,087
------------- -------------
Total liabilities and
stockholders' equity $31,946,801 $41,670,138
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ONCOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S>
GROSS REVENUES: <C> <C> <C> <C>
Product sales $3,493,665 $3,900,521 $6,698,051 $7,823,893
Grants and contracts 103,499 221,696 226,249 493,721
------------ ------------ ------------ -------------
Gross revenues 3,597,164 4,122,217 6,924,300 8,317,614
OPERATING EXPENSES:
Direct cost of sales 2,235,574 2,510,866 4,165,623 4,923,981
Product discontinuation
costs - 1,975,000 - 1,975,000
Amortization of
intangibles 289,320 337,767 596,439 682,146
Selling, general and
administrative 3,577,005 3,697,455 6,818,105 7,156,271
Research and development 1,990,161 1,804,933 3,530,691 3,791,410
Clinical and regulatory 655,981 511,994 1,112,147 1,004,273
------------ ------------ ------------ -------------
Total operating expenses 8,748,041 10,838,015 16,223,005 19,533,081
------------ ------------ ------------ -------------
LOSS FROM OPERATIONS (5,150,877) (6,715,798) (9,298,705) (11,215,467)
------------ ------------ ------------ -------------
OTHER INCOME (EXPENSE):
Investment income 170,501 58,135 364,346 237,099
Interest and other
expenses, net (Note 5) (1,053,930) (795,932) (3,799,853) (1,456,627)
Foreign exchange (loss) (20,130) (35,975) (24,917) (57,140)
Equity in net loss of
affiliates (817,445) (952,744) (2,116,532) (2,549,516)
------------- ------------ ------------- ------------
(1,721,004) (1,726,516) (5,576,956) (3,826,184)
Net loss ($6,871,881) ($8,442,314) ($14,875,661) ($15,041,651)
============= ============ ============= ============
NET LOSS PER SHARE ($0.27) ($0.37) ($0.59) ($0.67)
============= ============ ============= ============
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING 25,293,839 23,025,997 25,081,010 22,420,711
============= ============ ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<C>
For the six months ended June 30,
---------------------------------
1997 1996
---------------------------------
<S>
CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C>
Net loss ($14,875,661) ($15,041,651)
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 1,319,708
Issuance of common stock in
connection with research and
and development agreements 223,362 192,525
Depreciation and amortization 1,230,428 1,457,903
Non-cash product discontinuation - 1,619,473
Expenses for non-employee stock
options 214,235 -
Equity in net loss of affiliate
and other 2,137,115 2,549,516
Changes in operating assets
and liabilities:
Accounts receivable 217,244 970,262
Inventories (57,682) 369,615
Other current assets (641,828) (355,378)
Deposits and other non-current
assets 24,465 17,113
Accounts payable (636,168) (207,507)
Accrued expenses and other
current liabilities 1,268,225 (153,195)
Deferred rent 406,061 (18,223)
------------- -------------
Net cash used in operating
activities (7,690,204) (7,279,839)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (324,862) (371,553)
Purchase of stock in affiliate - (300,000)
Redemptions of investments - 777,105
Purchases of investments (2,609,165) -
------------- -------------
Net cash provided by (used
in) investing activities (2,934,027) 105,552
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants 37,634 558,518
Reduction in restricted funds 3,537,210 -
Offering costs of private placement - (54,100)
Payment on bank loans (500,242) (1,727,721)
<PAGE>
Loan to unconsolidated affiliate (622,198) -
Proceeds from borrowings and
issuance of warrants 2,051,865 207,410
------------- -------------
Net cash provided by (used in)
financing activities 4,504,269 (1,015,893)
------------- -------------
EFFECT OF CHANGE IN EXCHANGE RATE ON CASH (748,358) (20,331)
------------- -------------
Net decrease in cash and cash
equivalents (6,868,320) (8,210,511)
CASH AND CASH EQUIVALENTS, beginning of
the period 13,058,657 13,458,895
------------- -------------
CASH AND CASH EQUIVALENTS, end of the
period $6,190,337 $5,248,384
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
ONCOR, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 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 $0.9 million is
held in escrow until the settlement of 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
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 June 30, 1997
The aggregate fair value of investments in debt securities
as of June 30, 1997 is as follows:
Government securities $ 734,595
Commercial paper 2,971,657
---------
Total: $3,706,252
==========
5. Accounting for the Issuance of Convertible Debentures
The unaudited financial position and results of operations
for the unaudited quarter and six months ending June 30, 1996 has
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 $0.6 million and $2.8
million for the second quarter and six months of 1997,
respectively, and $0.7 million and $1.2 million for the
second quarter and six 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.
The effects of the restatement are:
As originally reported:
2nd Quarter Six Months
1996 Ended 1996
----------- ----------
Interest and other
expense, net $ ( 80,934) $ (232,627)
Net loss (7,727,314) (13,817,651)
Net loss per share (0.34) (0.62)
As restated:
2nd Quarter Six Months
1996 Ended 1996
----------- ----------
Interest and other
expense, net $ (795,932) $(1,456,627)
Net loss (8,442,314) (15,041,651)
Net loss per share (0.37) (0.67)
6. Related Party Transactions
During the second quarter of 1997, the Company agreed to
increase the guarantee of a loan for an officer and director from
$960,000 to $1,045,000.
During the second quarter of 1997, the Company increased its
advances to Codon Pharmaceuticals, Inc. (a 42%-owned affiliate)
from $250,000 to $622,000.<PAGE>
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. Counsel for the Company
believes that the escrow of such amounts will be significantly
reduced or eliminated in the second half of 1997. Management
believes that the outcome of these matters will not be material
to the results of operations or financial condition of the
Company.
<PAGE>
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 products sales decreased 10% to $3.5 million
for the second quarter of 1997, as compared to $3.9 million for
the second quarter of 1996. The sales decrease was attributable
largely to the discontinuation of certain product lines in the
United States in 1996 and a decrease in the exchange rate of the
French franc, compared to the value of the U.S. dollar.
After adjusting for the elimination of the sales of discontinued
products in the US, sales of continuing products increased 18%
from the second quarter of 1996 to the second quarter of
1997.
Consolidated products sales decreased 14% to $6.7 million
for the six months ended June 30, 1997, as compared to $7.8
million for the six months ended June 30, 1996, due largely to
the discontinuation of product lines in the U.S. in 1996 and a
decrease in the exchange rate of the French franc. After
adjusting for the elimination of the sales of the discontinued
products, sales of continuing products increased 11% from the
second quarter of 1996 to the second quarter of 1997.
Contract and grant revenue decreased 53% and 54% to $0.1
million and $0.2 million for the quarter and six months,
respectively, ended June 30, 1997, as compared to $0.2 million
and $0.5 million, respectively, for the corresponding periods in
1996. The contract and grant revenue decreased in 1997 due to
the completion of a grant received from the U.S. National
Institutes of Health. Application for renewal of the research
grant has been made but there can be no assurance that such
renewals will be granted.
Gross profit as a percentage of product sales increased to
36.0% and 37.8% for the quarter and six months, respectively,
ended June 30, 1997, from 35.6% and 37.1% for the corresponding
periods in 1996. The increases in 1997 were due to the
discontinuation of sales of lower profit product lines in the
U.S., partially offset by a decrease in margins in Europe due to
product mix changes and competitive pressures on margins and by
the 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.
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 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 was due to the
change in exchange rates and the completion of the amortization
of completed research projects.
Selling, general and administrative expenses decreased 3.3%
to $3.6 million for the quarter ended June 30, 1997 from $3.7
million for the corresponding period in 1996 and decreased 4.7%
to $6.8 million for the six months ended June 30, 1997 from $7.2
million in the six months ended June 30, 1996. The decreases
were due to the beneficial effects of the discontinuation plan
instituted in the second quarter of 1996 in the U.S., the change
in 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 10.3% to $2.0
million in the second quarter of 1997 from $1.8 million in the
same period in 1996. The increase is due to an initial quarterly
payment for a new collaboration research agreement signed with
The John Hopkins University in 1997, more than offsetting the
beneficial effects of the discontinuation plan and the change in
exchange rates.
Research and development expenses decreased 6.9% to $3.5
million in the first half of 1997 from $3.8 million in the first
half of 1996. This decrease was due to the change in exchange
rates and the effects of the discontinuation plan in the U.S.,
partially offset by an increase in research and development
personnel costs in Europe to accelerate certain product
development.
Clinical and regulatory expenses increased $0.1 million for
both the second quarter and first half of 1997 from the
corresponding periods in 1996. These increases are due to the
increased staff hired and the clinical trials performed to
support the Company's applications for diagnostic products with
the FDA and with the corresponding French regulatory agency.
Other net non-operating expenses remained unchanged for the
second quarter of 1997 compared to the corresponding quarter in
1996 and increased $1.8 million for the first half of 1997
compared to the corresponding period in 1996. This increase
resulted primarily from increased interest expense due to
amortization in the U.S. of the value of beneficial conversion
features in issuances of convertible debentures in 1995 and 1996.
In the six months ended June 30, 1997, interest and other
expenses included a non-cash charge of $2.8 million compared to
$1.2 million in the six months ended June 30, 1996. The value of
the beneficial conversion features have been fully amortized and,
thus, interest charges for these issuances will not continue
past the second quarter of 1997. The increase in interest
expenses was partially offset by a decrease of $0.4 million in
the equity in net losses of affiliates. The Company's
proportionate share of net losses attributable to Codon decreased
due to a significant decrease in the Company's ownership
percentage.
As a result of the factors discussed above, net loss
decreased to $6.9 million ($0.27 per share) in the second quarter
of 1997 from $8.4 million ($0.37 per share) in the second quarter
of 1996 and decreased to $14.9 million ($0.59 per share) in the
first half of 1997 from $15.0 million ($0.67 per share) in the
corresponding period in 1996.
Liquidity and Capital Resources
The following table sets forth the most significant elements
of the cash flows of the Company in the first six months of 1997
(in millions):<PAGE>
Cash and liquid investments at January 1, 1997 $18.9
Net cash loss from operations (7.7)
Proceeds from issuance of debentures 2.0
Effects of foreign exchange rate adjustments (0.7)
Loan to unconsolidated affiliate (0.6)
Purchases of equipment (0.3)
Repayment of banks loans (0.5)
------
Cash and liquid investments at June 30, 1997 $11.1
======
Approximately $4.5 million of the cash and liquid
investments at June 30, 1997 shown in the table set forth above
is limited to fund operations of the Company's European
subsidiary. In addition, approximately $1.9 million is currently
restricted. 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.
Purchases of equipment are for the on-going replacement of
office and laboratory equipment; the Company expects such
purchases to continue at this rate. 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.
The Company has available for use in operations in North
America, where most of its cash losses occur, (i) approximately
$6.6 million dollars at June 30, 1997, and (ii) an irrevocable
commitment from a lending source in the amount of $3.0 million
expiring May 31, 1998. Approximately $1.0 million of the cash
in North America is currently restricted and may not be available
to fund the operations of the Company in the near future.
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
$5.00-$6.75 per share. The common stock of OncorMed can be sold
only pursuant to restrictions imposed by the SEC such that the
complete liquidation of the position likely would take a year or
more. Trading activity in OncorMed stock is limited, which may
further restrict the Company's ability to liquidate a significant
portion of its position. The Company is contemplating offering
to exchange a portion of its holdings of OncorMed shares for
nearly all of the preferred and common shares of Codon
Pharmaceuticals, Inc. ("Codon") which it does not currently own,
thereby further reducing the number of OncorMed shares held by
the Company which could be sold to generate cash.
The cash losses in North America in the first half of 1997
were approximately $7.1 million. In addition, the Company has
advanced approximately $0.6 million to Codon during that
period. Oncor is considering alternative financing plans which
have been proposed by financial institutions for the Company to
raise funds to be invested in Codon for use in funding the future
operations of Codon and repaying the amounts advanced to it by
the Company. The Company anticipates concluding a financing for
the purpose of investing the proceeds in Codon in the third
quarter of 1997 and recovering its advances. There can be no
assurance that such financing will be completed or that the
advances will be recovered. 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 shortly thereafter.
With respect to Europe, the Company believes that its cash
position of approximately $4.5 million is sufficient to fund
operations beyond 1997.
Risk Factors
History of Operating Losses
Oncor has not been profitable since its inception in July
1983. For the six months ended June 30, 1997, the Company
incurred net losses of approximately $15 million. As of June 30,
1997, the accumulated deficit of the Company was approximately
$117 million. The Company expects to incur additional substantial
losses for at least 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. This belief is based on the Company's current
research and development plans, the current regulatory
environment, historical industry experience in the development of
biotechnology products and general economic conditions. However,
the Company's cash requirements may vary materially from those
now planned as a result of unforeseen changes that could consume
a significant portion of the available resources before such
time. To the extent that funds on hand and expected to be
generated from the Company's operations are insufficient to meet
current or planned operating requirements, the Company will seek
to obtain additional funds through equity or debt financing,
collaborative or other arrangements with corporate partners and
others, and from other sources. No assurance can be given that
additional financing will be available when needed or on terms
acceptable to the Company. If adequate funds are not available,
the Company likely will be materially and adversely affected.
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. No assurance can
be given that the Panel will reconsider its position or 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,
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 Off ice ("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 has requested
summary judgment of invalidity, non-infringement and
unenforceability of the patent claims in suit. The University
and Vysis have requested a summary judgment of infringement and
validity. In January 1997, a summary judgment hearing was held
but as of August 10, 1997, there had been no decision on the
motions. A failure to successfully defend against or settle this
suit may result in damages being assessed against the Company and
an injunction against the sale of some of the Company's probes
and genetic test kits.
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 one of the parties, and has reached
a settlement agreement in principle with the other party. 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
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
Most of the Company's 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,
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 26% of the common stock of
its publicly-traded affiliate, OncorMed, and 42% of the voting
securities of its affiliate, Codon. 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.
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 require additional funding in the future.
If the Company is successful in securing sufficient additional
financing, it will likely fund the operations of Codon into the
foreseeable future. The failure of the Company to obtain such
financing on acceptable terms would have a material and adverse
effect on the value of the Company's 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>
Item 4. Submission of Matters to a Vote of Security Holders.
a. The annual meeting of stockholders was held on June 25,1997.
b. Motions before the stockholders:
(1) To elect seven directors.
Stephen Turner Votes for 22,180,234
Withheld 429,209
Cecil Kost Votes for 22,393,734
Withheld 215,709
Timothy J. Triche Votes for 22,441,969
Withheld 167,474
William H. Taylor II Votes for 22,420,219
Withheld 189,224
Glenn W. Bartlett Votes for 22,441,069
Withheld 168,374
Jose J. Coronas Votes for 22,438,734
Withheld 170,709
Derace L. Schaffer Votes for 22,440,469
Withheld 168,974
(2) To ratify the selection of Arthur Andersen LLP as
independent public accountants of the Company for the year 1997.
Votes for 22,544,599
Votes against 21,551
Abstain 43,293
<PAGE>
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>
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: August 13, 1997 /s/ Stephen Turner
Stephen Turner, Chairman and Chief
Executive Officer
Date: August 13, 1997 /s/ Cecil Kost
Cecil Kost, President and Chief
Operating Officer
Date: August 13, 1997 /s/ John L. Coker
John L. Coker, Vice President
of Finance and Administration,
Chief Financial Officer
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