<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d)
- --- of the Securities Exchange Act of 1934 for the Quarterly
Period ended March 31, 1998 or
Transition Report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the transition period from _____________ to
________________.
Commission File Number 0-16614
NeoRx Corporation
(Exact Name of Registrant as Specified in its Charter)
WASHINGTON 91-1261311
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
410 West Harrison Street, Seattle, Washington 98119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 281-7001
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
--- ---
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of April 13, 1998 there were outstanding 20,738,900 shares of the Company's
Common Stock, $.02 par value.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
<S> <C> <C>
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Balance Sheets as of March 31, 1998
and December 31, 1997 3
Statements of Operations for the
three months ended March 31, 1998
and 1997 4
Statements of Cash Flows for the
three months ended March 31, 1998
and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 8
Item 3. Quantitative and Qualitative
Disclosure About Market Risks *
Signature 10
* No information is provided due to inapplicability of this item.
</TABLE>
2
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NEORX CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents .................................................... $ 1,112 $ 1,949
Short-term investments ....................................................... 38,039 31,760
Prepaids and other ........................................................... 947 1,820
--------- ---------
Total current assets ....................................................... 40,098 35,529
--------- ---------
FACILITIES AND EQUIPMENT, at cost:
Leasehold improvements ....................................................... 3,260 3,300
Equipment and furniture ...................................................... 4,324 4,023
--------- ---------
7,584 7,323
Less: accumulated depreciation and amortization .............................. (6,723) (6,642)
--------- ---------
Facilities and equipment, net .............................................. 861 681
--------- ---------
OTHER ASSETS ................................................................... 496 111
--------- ---------
Total assets ............................................................... $ 41,455 $ 36,321
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................. $ 793 $ 800
Accrued liabilities .......................................................... 1,312 911
Current portion of capital leases ............................................ 35 43
--------- ---------
Total current liabilities .................................................. 2,140 1,754
LONG-TERM LIABILITIES:
Convertible subordinated debentures, 9 3/4% .................................. 1,195 1,195
Capital leases, less current portion ......................................... 2 4
--------- ---------
Total liabilities .......................................................... 3,337 2,953
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series preferred stock, $.02 par value,
3,000,000 shares authorized:
Convertible exchangeable preferred stock, Series 1, 208,240 shares issued
and outstanding at March 31, 1998 and December 31, 1997(entitled in
liquidation to $5,375 at March 31, 1998 and $5,248 at December 31, 1997)
Convertible preferred stock, Series 2, 5,167 shares issued and outstanding
at March 31, 1998 and December 31, 1997 (entitled in liquidation to $517
at March 31, 1998 and December 31, 1997)
Convertible preferred stock, Series 3, 1,000 shares issued and outstanding
at March 31, 1998 and December 31, 1997 (entitled in liquidation to $100
at March 31, 1998 and December 31, 1997) .............................. 4 4
Common stock, $.02 par value, 60,000,000 shares authorized, 20,733,539 and
20,707,251 shares issued and outstanding
at March 31, 1998 and December 31, 1997, respectively ...................... 415 414
Additional paid-in capital ................................................... 162,649 162,612
Accumulated deficit .......................................................... (124,950) (129,662)
--------- ---------
Total shareholders' equity ................................................. 38,118 33,368
--------- ---------
Total liabilities and shareholders' equity ................................. $ 41,455 $ 36,321
========= =========
</TABLE>
See accompanying notes to the financial statements.
3
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NEORX CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1998 1997
------- -------
REVENUE:
<S> <C> <C>
Contract revenues and fees ............................................ $ 7,538 $ 12
-------- --------
OPERATING EXPENSES:
Research and development ............................................. 2,221 2,652
General and administrative ........................................... 1,022 894
-------- --------
Total operating expenses ........................................... 3,243 3,546
-------- --------
Income (loss) from operations .......................................... 4,295 (3,534)
OTHER INCOME (EXPENSE):
Investment and interest income, net ................................... 591 338
Interest expense ...................................................... (33) (35)
-------- --------
Net income (loss) ..................................................... $ 4,853 $ (3,231)
======== ========
Preferred stock dividends .............................................. (141) (1,906)
-------- --------
Net income (loss) applicable to common shares .......................... $ 4,712 $ (5,137)
======== ========
Earnings (loss) per share:
Basic ................................................................ $ .23 $ (.31)
======== ========
Diluted .............................................................. $ .22 $ (.31)
======== ========
Shares used in calculation of earnings (loss) per share:
Basic ................................................................ 20,719 16,481
======== ========
Diluted .............................................................. 21,583 16,481
======== ========
</TABLE>
See accompanying notes to the financial statements.
4
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NEORX CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1998 1997
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ...................................................... $ 4,853 $ (3,231)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization ....................................... 86 96
Decrease in prepaids and other assets ............................... 477 65
(Decrease) increase in accounts payable ............................. (7) 147
Increase in accrued liabilities ..................................... 260 16
-------- --------
Net cash provided by (used in) operating
activities ........................................................... 5,669 (2,907)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments .......................... 18,133 6,896
Purchases of short-term investments .................................... (24,412) (4,515)
Facilities and equipment purchases ..................................... (261) (142)
Other .................................................................. 6 6
-------- --------
Net cash (used in) provided by investing
activities ........................................................... (6,534) 2,245
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock .................................. -- 9,490
Repayments of capital lease obligations ................................ (10) (13)
Proceeds from stock options exercised .................................. 38 127
-------- --------
Net cash provided by financing activities .............................. 28 9,604
-------- --------
Net increase (decrease) in cash
and cash equivalents ................................................. (837) 8,942
Cash and cash equivalents:
Beginning of period .................................................... 1,949 2,945
-------- --------
End of period .......................................................... $ 1,112 $ 11,887
======== ========
</TABLE>
See accompanying notes to the financial statements.
5
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NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The interim financial statements contained herein have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1997.
Certain reclassifications were made to the 1997 financial statements to make
them comparable with the 1998 presentation.
In the opinion of management, the interim financial statements reflect all
adjustments, consisting only of normal recurring accruals necessary to present
fairly the Company's financial position as of March 31, 1998 and the results of
operations and cash flows for the three month periods ended March 31, 1998 and
1997.
The results of operations for the three month period ended March 31, 1998 are
not necessarily indicative of the expected operating results for the full year.
2. Shareholders' Equity
Changes in shareholders' equity from December 31, 1997 to March 31, 1998 were as
follows (in thousands):
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<S> <C>
Balance December 31, 1997 $33,368
Common stock issued 38
Preferred stock dividends (141)
Net income 4,853
-------
Balance March 31, 1998 $38,118
=======
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6
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NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Revenue
In January 1998, the Company received a $7,000,000 milestone payment from
Janssen Pharmaceutica NV ("Janssen"), a wholly owned subsidiary of Johnson &
Johnson Inc., reflecting Janssen's decision to begin Phase II trials of
Avicidin(R) cancer therapy product as part of the agreement entered into with
Janssen in August 1997.
Note 4. Earnings per Share ("EPS")
The following is a reconciliation of the numerator and denominator of the basic
and diluted EPS computations for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
Weighted Income
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ---------
<S> <C> <C> <C>
Net income .............. $ 4,852,863
Less:
Preferred stock
dividends .............. (140,623)
----------
Basic EPS ............... $ 4,712,240 20,719,064 $ .23
====
Dilutive Effect of
options, warrants and
convertible preferred
stock, Series 2 and
Series 3 ............... 13,726 864,152
---------- ----------
Diluted EPS ............. $ 4,725,966 21,583,216 $ .22
========== ========== ====
</TABLE>
Options to purchase 943,824 additional shares of Common Stock were outstanding
during the three months ended March 31, 1998 but were not included in the
computation of diluted EPS because the options' average exercise price of $8.61
was greater than the average market price of the common shares of $5.44. The
numerator and denominator of the basic and diluted EPS calculations for the
three months ended March 31, 1997 were the same, as including the effect of
options and warrants to purchase an additional 4,127,253 shares of Common Stock
would have been antidilutive.
Shares issuable upon conversion of The Company's Convertible Subordinated
Debentures and Series 1 Preferred Stock are not included in the calculation of
diluted EPS for the three months ended March 31, 1998 and 1997 because the
effect of including such shares would be antidilutive.
7
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
This discussion contains forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. The words "believe","expect", "intend", "anticipate",
variations of such words and similar expressions identify forward-looking
statements, but their absence does not mean the statement is not forward
looking. Factors that could affect the Company's actual results include, among
other things, results of research and development activities, clinical trials,
expenses associated with expanding marketing and manufacturing capability,
competitive and technological developments and the timing and cost of
collaborative relationships. Reference is made to the Company's Annual Report on
Form 10-K filed with the Commission for a more detailed description of such
factors. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to update publicly any forward-looking
statement to reflect new information, events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events.
Quarter ended March 31, 1998 compared to quarter ended March 31, 1997.
Revenues for the three months ended March 31, 1998 were $7,538,000 compared to
$12,000 for the three months ended March 31, 1997. In January 1998, the Company
received a $7,000,000 milestone payment from Janssen Pharmaceutica NV
("Janssen"), a subsidiary of Johnson & Johnson, Inc., reflecting Janssen's
decision to begin Phase II trials of Avicidin(R) cancer therapy product.
Total operating expenses for the quarter ended March 31, 1998 decreased 9% to
$3,243,000 from $3,546,000 for the quarter ended March 31, 1997. Research and
development expenses for the quarter ended March 31, 1998 decreased 16% to
$2,221,000 from $2,652,000 for the same time period in 1997, as a result of
increased research and development reimbursements. The Company receives expense
reimbursements related to the Avicidin(R) and Biostent(R) programs. Reimbursed
research and development expenses totaled $562,000 for the quarter ended March
31, 1998. In the first quarter of 1997, the Company had no research and
development expense reimbursements.
General and administrative expenses for the quarter ended March 31, 1998
increased 14% to $1,022,000 from $894,000 for the quarter ended March 31, 1997,
principally due to increased expenses for personnel and outside consulting
services.
8
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition (continued)
Investment and interest income increased to $591,000 from $338,000 and interest
expense was $33,000 and $35,000 for the three months ended March 31, 1998 and
1997, respectively. Interest income increased due to higher average cash
balances which resulted from milestone payments and equity sales.
Liquidity and capital resources.
Cash and short-term investments as of March 31, 1998 were $39,151,000 compared
to $33,709,000 at December 31, 1997 and $24,828,000 at March 31, 1997. The first
quarter balance of cash and short-term investments increased due to the receipt
of a $7,000,000 milestone payment from Janssen in January 1998, reflecting
Janssen's decision to begin Phase II trials of Avicidin(R) cancer therapy
product.
The Company expects that its capital resources and interest income will be
sufficient to finance its currently anticipated working capital and capital
requirements through 1999. The Company's working capital and capital
requirements will depend upon numerous factors, including results of research
and development activities, clinical trials, the levels of resources that the
Company devotes to establishing and expanding marketing and manufacturing
capabilities, competitive and technological developments and the timing and cost
of relationships with parties to collaborative agreements. The Company will need
to raise substantial additional funds to conduct research and development
activities, preclinical studies and clinical trials necessary to bring its
potential products to market, and to establish marketing and limited
manufacturing capabilities, The Company intends to seek additional funding
through public or private equity financings, arrangements with corporate
collaborators or other sources. Adequate funds may not be available when needed
or on terms acceptable to the Company.
Impact of Year 2000.
In 1997 the Company initiated the installation of a new accounting system that
is compliant with the year 2000 requirements and is currently evaluating other
systems for Year 2000 concerns. The Company has not initiated formal
communications with its significant suppliers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issue. There can be no guarantee that the systems of other companies
on which the Company relies will be timely converted, or that failure to convert
by another company would not have a material adverse effect on the Company.
9
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NEORX CORPORATION
Item 3. Quantitative and Qualitative Disclosure About Market Risks
Not applicable.
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.
NeoRx Corporation
(Registrant)
Date: May 8, 1998 By: /s/Richard L. Anderson
----------------------
Richard L. Anderson
Senior Vice President,
Finance and Operations,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS OF NEORX CORPORATION AS OF 03/31/98 AND 12/31/97, AND THE RELATED STATE-
MENTS OF OPERATIONS FOR EACH OF THE 3 MONTHS ENDED 3/31/98 AND 3/31/97 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q REPORT FOR THE PERIOD ENDED
03/31/98.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,112
<SECURITIES> 38,039
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,098
<PP&E> 7,584
<DEPRECIATION> 6,723
<TOTAL-ASSETS> 41,455
<CURRENT-LIABILITIES> 2,140
<BONDS> 1,197
0
4
<COMMON> 415
<OTHER-SE> 37,699
<TOTAL-LIABILITY-AND-EQUITY> 41,455
<SALES> 0
<TOTAL-REVENUES> 7,538
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 4,853
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,853
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
