<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 JUNE 30, 1999 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 July 7, 1999 there were outstanding 21,006,964 shares of the Company's
Common Stock, $.02 par value.
<PAGE>
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Balance Sheets as of June 30, 1999
and December 31, 1998 3
Statements of Operations for the
three and six months ended June 30,
1999 and 1998 4
Statements of Cash Flows for the
three and six months ended June 30,
1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Signature 14
2
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<TABLE>
<CAPTION>
NEORX CORPORATION
BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,397 $ 1,910
Investment securities 22,168 28,242
Prepaid expenses and other current assets 562 857
--------- ---------
Total current assets 24,127 31,009
--------- ---------
FACILITIES AND EQUIPMENT, at cost:
Leasehold improvements 3,283 3,283
Equipment and furniture 4,923 4,886
--------- ---------
8,206 8,169
Less: accumulated depreciation and amortization (7,230) (7,049)
--------- ---------
Facilities and equipment, net 976 1,120
--------- ---------
OTHER ASSETS, NET 251 312
--------- ---------
Total assets $ 25,354 $ 32,441
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 762 $ 756
Accrued liabilities 876 1,192
Deferred revenue -- 250
Current portion of convertible subordinated debentures 1,195 --
Current portion of capital leases -- 4
--------- ---------
Total current liabilities 2,833 2,202
LONG-TERM LIABILITIES:
Convertible subordinated debentures, 9:% (Due June 2000) -- 1,195
--------- ---------
Total liabilities 2,833 3,397
--------- ---------
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 (entitled in
liquidation to $5,248) 4 4
Common stock, $.02 par value, 60,000,000 shares authorized,
21,006,964 shares issued and outstanding at June 30,
1999 and December 31, 1998, respectively 420 420
Additional paid-in capital 163,189 163,189
Accumulated deficit (141,056) (134,637)
Accumulated other comprehensive income (loss) - unrealized
gain (loss) on investment securities (36) 68
--------- ---------
Total shareholders' equity 22,521 29,044
--------- ---------
Total liabilities and shareholders= equity $ 25,354 $ 32,441
--------- ---------
--------- ---------
</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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE $ 47 $ 10 $ 460 $ 7,548
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 2,744 2,259 5,240 4,480
General and administrative 977 1,368 1,827 2,390
-------- -------- -------- --------
Total operating expenses 3,721 3,627 7,067 6,870
-------- -------- -------- --------
Income(loss) from operations (3,674) (3,617) (6,607) 678
OTHER INCOME (EXPENSE):
Interest income 246 517 501 1,108
Interest expense (29) (32) (59) (65)
-------- -------- -------- --------
Net income(loss) $ (3,457) $ (3,132) $ (6,165) $ 1,721
-------- -------- -------- --------
-------- -------- -------- --------
Preferred stock dividends (127) (132) (254) (273)
-------- -------- -------- --------
Net income(loss) applicable to
common shares $ (3,584) $ (3,264) $ (6,419) $ 1,448
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share:
Basic $ (.17) $ (.16) $ (.31) $ .07
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ (.17) $ (.16) $ (.31) $ .07
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in calculation of
earnings (loss) per share:
Basic 21,007 20,895 21,007 20,807
-------- -------- -------- --------
-------- -------- -------- --------
Diluted 21,007 20,895 21,007 21,554
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to the financial statements.
4
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<TABLE>
<CAPTION>
NEORX CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (3,457) $ (3,132) $ (6,165) $ 1,721
Adjustments to reconcile net income
(loss)to net cash provided by
(used in) operating activities:
Depreciation and amortization 88 89 181 175
(Increase) decrease in prepaid
expenses and other assets 273 (328) 356 149
Increase (decrease) in accounts
payable 11 (33) 6 (40)
Decrease in accrued liabilities (65) (376) (316) (116)
Decrease in deferred revenue -- -- (250) --
-------- -------- -------- --------
Net cash provided by (used in) operating
activities (3,150) (3,780) (6,188) 1,889
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment
securities 7,371 15,687 20,675 33,821
Purchases of investment securities (3,333) (11,332) (14,705) (35,745)
Facilities and equipment purchases (6) (266) (37) (527)
Other -- 6 -- 12
-------- -------- -------- --------
Net cash provided by (used in)
investing activities 4,032 4,095 5,933 (2,439)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations -- (11) (4) (21)
Proceeds from stock options and warrants
exercised -- 409 -- 447
Preferred stock dividends (254) (256) (254) (256)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (254) 142 (258) 170
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 628 457 (513) (380)
CASH AND CASH EQUIVALENTS:
Beginning of period 769 1,112 1,910 1,949
-------- -------- -------- --------
End of period $ 1,397 $ 1,569 $ 1,397 $ 1,569
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to the financial statements.
5
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NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 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, 1998.
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 June 30, 1999 and the results of
its operations and cash flows for the three and six month periods ended
June 30, 1999 and 1998.
The results of operations for the three and six month periods ended June 30,
1999 are not necessarily indicative of the expected operating results for the
full year.
Note 2. Shareholders' Equity
Changes in shareholders' equity from December 31, 1998 to June 30, 1999 are as
follows (in thousands):
Balance December 31, 1998 $29,044
Preferred stock dividends (254)
Net loss (6,165)
Accumulated other comprehensive
income (loss) - unrealized loss
on investment securities (104)
-------
Balance June 30, 1999 $22,521
-------
-------
6
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NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 3. Earnings (loss) per share
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings (loss) per share computations for the three and six months
ended June 30, 1999 and 1998 (in thousands, except per share data):
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss) $ (3,457) $ (3,132) $ (6,165) $ 1,721
Less: preferred
stock dividends (127) (132) (254) (273)
-------- -------- -------- --------
Net income (loss)
applicable to basic
& diluted earnings
(loss) per share $ (3,584) $ (3,264) $ (6,419) $ 1,448
======== ======== ======== ========
Weighted average
shares - basic 21,007 20,895 21,007 20,807
Dilutive effect of
options -- -- -- 747
-------- -------- -------- --------
Weighted average
shares - diluted 21,007 20,895 21,007 21,554
======== ======== ======== ========
Basic earnings (loss)
per share $ (.17) $ (.16) $ (.31) $ .07
======== ======== ======== ========
Diluted earnings (loss)
per share $ (.17) $ (.16) $ (.31) $ .07
======== ======== ======== ========
The numerator and denominator of the basic and diluted loss per share
calculations for the quarters ended June 30, 1999 and 1998 were the same, as
including the effect of options to purchase an additional 3,680,140 and
2,354,856 shares of Common Stock, respectively, would have been antidilutive.
The numerator and denominator of the basic and diluted loss per share
calculations for the six months ended June 30, 1999 were the same, as including
the effect of options to purchase an additional 3,680,140 shares of Common Stock
would have been antidilutive. Options to purchase 942,589 additional shares of
Common Stock were outstanding during the six months ended June 30, 1998 but were
not included in the computation of diluted earnings per share because the
options' average exercise price of $8.60 was greater than the average market
price of the common shares of $5.55.
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
7
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NEORX CORPORATION
In addition, shares issuable upon conversion of the Company's Convertible
Subordinated Debentures and its Series 1 Preferred Stock are not included in the
calculation of diluted EPS for the three and six month periods ended June 30,
1999 and 1998 because the effect of including such shares would have been
antidilutive.
Note 4. Comprehensive Income/(Loss)
The Company's total comprehensive loss for the quarters ended June 30, 1999 and
1998 was $(3,547,000) and $(3,132,000), respectively. Comprehensive loss for the
quarter ended June 30, 1999 consisted essentially of net loss. Comprehensive
loss for the quarter ended June 30, 1998 consisted of net loss. The Company's
total comprehensive income (loss) for the six months ended June 30, 1999 and
1998 was $(6,269,000) and $1,721,000, respectively. Comprehensive loss for the
six months ended June 30, 1999 consisted essentially of net loss. Comprehensive
income for the six months ended June 30, 1998 consisted of net income.
8
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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" which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The words "believe", "expect", "intend",
"anticipate", and similar expressions are used to identify forward-looking
statements, but their absence does not mean the statement is not forward
looking. Many factors could affect the Company's actual results, including those
factors described under "Factors Affecting Forward Looking Statements",
contained in the Company's Annual Report on Form 10-K filed with the Commission.
These risk factors, among others, could cause results to differ materially from
those presently anticipated by the Company. 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 publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date of this report or to
reflect the occurrence of unanticipated events.
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO QUARTER AND SIX MONTHS
ENDED JUNE 30, 1998.
Revenues for the quarter ended June 30, 1999 were $47,000 compared to $10,000
for the quarter ended June 30, 1998. For the six months ended June 30, 1999
revenues were $460,000 compared to $7,548,000 for the six months ended June 30,
1998. For the six months ended June 30, 1999, the Company recorded $460,000 of
revenue from the licensing of non-strategic patent technologies received from
Theseus, LTD. 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-Registered Trademark- cancer therapy product. Janssen terminated this
agreement on December 29, 1998.
Total operating expenses for the quarter ended June 30, 1999 increased 3% to
$3,721,000 from $3,627,000 in the quarter ended June 30, 1998, and for the six
month period increased 3% to $7,067,000 from $6,870,000. Research and
development expenses for the quarter ended June 30, 1999 increased 21% to
$2,744,000 from $2,259,000 for the same time period in 1998. Research and
development expenses for the six months ended June 30, 1999 increased 17% to
$5,240,000 from $4,480,000. The increases in research and development costs for
the quarter and six month periods in 1999 were primarily the result of decreased
research and
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
9
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NEORX CORPORATION
development reimbursements, increased supplies and clinical patient costs for
the Company's Skeletal Targeted Radiotherapy ("STR") project, and supplies
for the Chemotides-TM- project.
The Company currently receives reimbursed research and development expenses
from non-strategic patent technologies, but no longer receives expense
reimbursements related to the Avicidin-Registered Trademark- and
Biostent-Registered Trademark- programs. Reimbursed research and development
expenses totaled $40,000 and $858,000 for the quarters ended June 30, 1999
and 1998, respectively. Reimbursed research and development expenses totaled
$146,000 and $1,420,000 for the six months ended June 30, 1999 and 1998,
respectively.
General and administrative expenses for the quarter ended June 30, 1999
decreased 29% to $977,000 from $1,368,000 for the quarter ended June 30, 1998.
General and administrative expenses for the six months ended June 30, 1999
decreased 24% to $1,827,000 from $2,390,000. General and administrative
expenses for the quarter and the six months ended June 30, 1999 decreased
principally due to decreased expenses for personnel and outside consulting
services.
Interest income for the quarter ended June 30, 1999 decreased to $246,000
from $517,000 for the same time period in 1998, and decreased to $501,000
from $1,108,000 for the six months ended June 30,1999 and 1998, respectively.
The decreases are due to the decrease in funds available for investment and
lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and investment securities as of June 30, 1999 were $23,565,000 compared to
$30,152,000 at December 31, 1998. The balance of cash and investment securities
decreased primarily as a result of the 1999 year-to-date net loss.
The Company expects that its capital resources and interest income will be
sufficient to finance its currently anticipated working capital and capital
requirements at least through the second quarter of 2000.
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition (continued)
The Company's working capital and capital requirements will depend
10
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NEORX CORPORATION
upon numerous factors, including results of research and development activities,
clinical trials, expenses associated with expanding marketing, competitive and
technological developments and the timing, cost and successful continuation of
the Company's collaborative relationships. 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 manufacturing capabilities.
The Company intends to seek additional funding through arrangements with
corporate collaborators, public or private equity financing, out-licensing
certain technologies, or other sources.
Adequate funds may not be available when needed or on terms acceptable to the
Company. If funding is insufficient at any time in the future, the Company will
be forced to delay, reduce or eliminate some or all of its research and
development activities, clinical studies and trials and administrative programs,
dispose of assets or technology, or cease operations.
IMPACT OF YEAR 2000.
The Year 2000 Problem is pervasive and complex, as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. This issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize date sensitive information could generate erroneous data or
cause a system to fail.
Readiness
The Company has undertaken an initial review of its information technology
computer systems and believes that the Year 2000 problem does not pose
significant operational problems to its information technology systems. The
majority of the Company's software and computer equipment has been purchased
within the last five years from third-party vendors who have already provided
upgrades intended to bring their products into Year 2000 compliance. The Company
plans to survey by the end of the third fiscal quarter of 1999 its research and
development equipment and significant suppliers, including clinical research
organizations, to determine any additional needed Year 2000 solutions.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
Costs
At this time, the Company cannot determine the full cost of correcting any
potential year 2000 problems. Based upon the
11
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NEORX CORPORATION
Company's initial review of its computer systems, the Company estimates that the
cost to replace older, non-compliant computers and software is immaterial. The
full estimated cost of correcting the Year 2000 problem will be known by the end
of the third fiscal quarter of 1999 after the Company completes its survey of
its research and development equipment and significant suppliers.
Risks
The Company anticipates that its largest Year 2000 risks are in activities
involving research and development equipment and significant suppliers,
including clinical research organizations. If Year 2000 problems exist in these
areas, it could take longer for the Company to bring a product to market, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Contingency
After the Company completes its survey of Year 2000 issues by the end of the
third fiscal quarter of 1999, it will establish a contingency plan to address
any "high-risk" issues that could delay its efforts to bring products to market.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market values of its investments.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's debt securities included in its investment portfolio.
The Company does not have any
12
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NEORX CORPORATION
derivative financial instruments. The Company invests in debt instruments of the
U.S. Government and its agencies and high-quality corporate issuers. Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates. At June 30, 1999, the Company owned government
debt instruments in the amount of $8.0 million and corporate debt securities in
the amount of $13.5 million. The Company's exposure to losses as a result of
interest rate changes is managed through investing primarily in securities with
maturities of one year or less.
INVESTMENT RISK
The Company has received equity instruments under licensing agreements. These
investments are included in investment securities and are accounted for at fair
value with unrealized gains and losses reported as a component of comprehensive
income and classified as accumulated other comprehensive income - unrealized
gain (loss) on investment securities in shareholders' equity. Such investments
are subject to significant fluctuations in fair market value due to the
volatility of the stock market. At June 30, 1999, the Company owned such
corporate equity securities in the amount of approximately $700,000.
13
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NEORX CORPORATION
SIGNATURE
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: August 4, 1999 By: /s/ Richard L. Anderson
-------------------------------
Richard L. Anderson
President, Chief Operating Officer,
Secretary
(Principal Financial and
Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,397
<SECURITIES> 22,168
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,127
<PP&E> 8,206
<DEPRECIATION> 7,230
<TOTAL-ASSETS> 25,354
<CURRENT-LIABILITIES> 1,638
<BONDS> 1,195
0
0
<COMMON> 420
<OTHER-SE> 22,101
<TOTAL-LIABILITY-AND-EQUITY> 25,354
<SALES> 0
<TOTAL-REVENUES> 460
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> (6,165)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,165)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
