UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _______.
Commission file number 00-26078
--------
EXEGENICS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-2402409
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2110 Research Row
Dallas, Texas 75235
(Address of Principal Executive Offices)
(214) 358-2000
--------------
(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 []
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes [ ] No [X]
As of August 14, 2003 the registrant had 16,184,486 shares of common stock
outstanding.
EXEGENICS INC. TABLE OF CONTENTS
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of June 30, 2003 (unaudited)
and December 31, 2002 3
Statements of Operations for the Three Months and
Six Months Ended June 30, 2003 and 2002 (unaudited) 4
Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
20
EXHIBIT INDEX 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXEGENICS Inc.
BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2003 2002
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 13,487 $ 6,188
Restricted cash 550 550
Investments -- 10,004
Prepaid expenses and other current assets 207 515
-------- --------
Total current assets 14,244 17,257
Other assets 33 258
-------- --------
Total assets $ 14,277 $ 17,515
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 810 $ 1,239
Current portion of capital lease obligations 97 94
-------- --------
Total current liabilities 907 1,333
Capital lease obligations, less current portion 59 108
-------- --------
Total liabilities 966 1,441
-------- --------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock - $.01 par value, 10,000,000 shares authorized; 910,857 and
828,023 shares of Series A convertible preferred issued and outstanding
(liquidation value $2,277,000 and $2,070,000) 9 8
Common stock - $.01 par value, 30,000,000 shares authorized; 16,184,486 shares issued 162 162
Additional paid-in capital 67,291 67,272
Subscriptions receivable (302) (301)
Accumulated deficit (51,279) (48,497)
Treasury stock, 511,200 shares of common stock, at cost (2,570) (2,570)
-------- --------
Total stockholders' equity 13,311 16,074
-------- --------
Total liabilities and stockholders' equity $ 14,277 $ 17,515
======== ========
See accompanying notes.
3
EXEGENICS Inc.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(unaudited) (unaudited)
Revenue:
Licensing & research fees $ -- $ 222 $ 13 $ 556
-------- -------- -------- --------
Operating Expenses:
Research and development 32 1,254 163 2,476
General and administrative 1,513 1,031 2,309 2,097
Expenses related to strategic redirection, net
of reimbursements 299 -- 447 --
-------- -------- -------- --------
1,844 2,285 2,919 4,573
-------- -------- -------- --------
Operating loss (1,844) (2,063) (2,906) (4,017)
Other (income) expense, primarily interest (49) (178) (124) (364)
-------- -------- -------- --------
Net Loss (1,795) (1,885) (2,782) (3,653)
Preferred stock dividend -- -- (31) (169)
-------- -------- -------- --------
Net loss attributable to common shareholders $ (1,795) $ (1,885) $ (2,813) $ (3,822)
======== ======== ======== ========
Net loss per share-basic and diluted $ (0.11) $ (0.12) $ (0.18) $ (0.24)
======== ======== ======== ========
Weighted average number of shares outstanding -
basic and diluted 15,673 15,673 15,673 15,671
======== ======== ======== ========
See accompanying notes.
4
EXEGENICS Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
---------------------------
2003 2002
-------- --------
(unaudited)
Cash flows from operating activities:
Net loss $ (2,782) $ (3,653)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 46 210
Value assigned to common shares and options 20 125
Changes in:
Prepaids and other assets 308 248
Deferred revenue -- (56)
Accounts payable and accrued expenses (243) (336)
-------- --------
Net cash used in operating activities (2,651) (3,462)
-------- --------
Cash flows from investing activities:
Maturity of investment 10,000 23
(Purchase) sale of equipment (4) 110
-------- --------
Net cash provided by investing activities 9,996 133
-------- --------
Cash flows from financing activities:
Capital lease payments (46) (46)
-------- --------
Net cash used in financing activities (46) (46)
-------- --------
NET INCREASE (DECREASE) IN CASH 7,299 (3,375)
Cash and cash equivalents at beginning of period 6,188 14,995
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,487 $ 11,620
======== ========
See accompanying notes.
5
EXEGENICS INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of eXegenics Inc., a Delaware
corporation (the "Company"), included herein have been prepared in
accordance with the rules and regulations promulgated by the Securities
and Exchange Commission and, in the opinion of management, reflect all
adjustments necessary to present fairly the results of operations for
the interim periods presented. Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, management believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements and the notes thereto should be
read in conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K and in the
Amendment to the Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2002. The results for the interim periods are not
necessarily indicative of the results for the full fiscal year.
(2) CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all non-restrictive, highly liquid short-term
investments purchased with an original maturity of three months or less
to be cash equivalents. Cash and cash equivalents, which amount to
$13,487,000 and $6,188,000 at June 30, 2003 and December 31, 2002,
respectively, consist principally of interest-bearing cash deposits
placed with a single financial institution. Restricted cash, which
amounts to $550,000 at both June 30, 2003 and December 31, 2002,
consists of certificates of deposits that are used as collateral for
equipment leases.
Investments at December 31, 2002, consisted of a $10,004,000
government agency debt security of which $4,000 represented the
remaining unamortized premium associated with the initial purchase of
the security. The security matured in February 2003.
(3) LOSS PER COMMON SHARE
Basic and diluted loss per common share is based on the net loss
increased by dividends on preferred stock divided by the weighted
average number of common shares outstanding during the period. No
effect has been given to outstanding options, warrants or convertible
preferred stock in the diluted computation, as their effect would be
antidilutive.
6
(4) STOCKHOLDERS' EQUITY
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which establishes a fair value-based
method of accounting for stock-based compensation plans. The Company
has adopted the disclosure-only alternative under SFAS No. 123. The
Company accounts for stock based compensation to non-employees using
the fair value method in accordance with SFAS No. 123 and Emerging
Issues Task Force (EITF) Issue No. 96-18. The Company has recognized
deferred stock compensation related to certain stock option and
warrants grants. No options to purchase shares of common stock were
granted in return for consulting services for the six months ended June
30, 2003. During the six months ended June 30, 2002, the Company
granted 10,000 and 25,000 options to purchase shares of common stock at
$3.20 and $1.67 per share, respectively, in return for consulting
services. The Company valued these options based on the Black-Scholes
option pricing model. As a result, the Company recorded charges of
$14,000 and $18,000 for the three months and the six months ended June
30, 2002, respectively, related to these grants. In connection with
other option grants to consultants in previous years, the Company
recorded charges of $15,000 and $20,000 the three months and six months
ended June 30, 2003, respectively, and $26,000 and $107,000 for the
three months and six months ended June 30, 2002, respectively.
We reported 910,822 shares of preferred stock issued and outstanding at
March 31, 2003. According to our stock transfer agent, 910,857 shares
of preferred stock were outstanding at March 31, 2003 and June 30,
2003. This difference was due to the issuance of full rather than
fractional shares of stock associated with the January 2003 preferred
stock dividend.
Additional paid-in capital was $67,291,000 at June 30, 2003, an
increase of $19,000 from December 31, 2002. This increase was the
result of option grant compensation for consultants of $20,000 during
the six months ended June 30, 2003 discussed in the previous paragraph,
partially offset by the $1,000 charge for the par value of the
additional shares of Series A convertible preferred stock issued to
satisfy the yearly dividend requirement.
On June 9, 2003, in an effort to preserve the ability of the Board and
eXegenics' senior management to resist takeover proposals believed to
be inadequate and thus protect stockholder value, eXegenics adopted a
stockholder rights plan (the "Rights Plan"). The Rights Plan requires
any party seeking to acquire 15% or more of the outstanding eXegenics
common stock to obtain the approval of the Board or else the rights
granted to eXegenics' stockholders under the Rights Plan that are not
held by the acquirer will become exercisable for eXegenics common
stock, or common stock of the acquirer, at a discounted price that
would make the acquisition prohibitively expensive.
(5) STRATEGIC REDIRECTION
During the six months ended June 30, 2003, the Company recognized
additional expenses of $711,000 for severance benefits and legal and
other expenses related to terminated scientific programs. These costs
were offset by expense reimbursement from Bristol Myers Squibb ("BMS")
of $264,000 received during the same period, resulting in a net charge
of $447,000 for the six months ended June 30, 2003. Cash payments of
$460,000 were charged against previously accrued restructuring expenses
during the six months ended June 30, 2003.
During the three months ended June 30, 2003, the Company recognized
additional expenses of $563,000 for severance benefits and legal and
other expenses related to terminated scientific programs. These costs
were offset by expense reimbursement from BMS of $264,000 received
during the same period, resulting in a net charge of $299,000 for the
three months ended June 30, 2003. Cash payments of $80,000 were charged
against previously accrued restructuring expenses during the three
months ended June 30, 2003.
7
(6) STOCK OPTIONS
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of SFAS Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based compensation.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- --------
(in thousands, except per (in thousands, except per
share amounts) share amounts)
(unaudited) (unaudited)
Net loss attributable to common stockholders as reported $ (1,795) $ (1,885) $ (2,813) $(3,822)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (33) (163) (90) (410)
--------- --------- --------- -------
Pro forma net loss $ (1,828) $ (2,048) $ (2,903) $(4,232)
========= ========= ========= =======
Earnings per share:
Basic and diluted - as reported $ (0.11) $ (0.12) $ (0.18) $ (0.24)
========= ========= ========= =======
Basic - pro forma $ (0.12) $ (0.13) $ (0.19) $ (0.27)
========= ========= ========= =======
The Company has adopted the provisions of SFAS 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, which requires
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reporting results. The Black-Scholes
option valuation model was developed for use in estimating the fair
market value of traded options that have no vesting restrictions and
are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock
price volatility. Because our stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the
fair market value estimates, in management's option, the existing modes
do not necessarily provide a reliable single measure of the fair market
value of our stock options.
(7) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
8
(8) NEW ACCOUNTING PRONOUNCEMENT
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34, or FIN No. 45. FIN
No. 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of certain guarantees.
The initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Since January 1, 2003, we have not issued or modified any
guarantees as defined by FIN No. 45.
Our charter provides for indemnification, to the fullest extent permitted under
Delaware law, of any person who is made a party to any action or threatened with
any action as a result of such person's serving or having served as one of our
officers or directors or having served, at our request, as an officer or
director of another company. We have separate indemnification agreements with
certain of our officers and directors. The indemnification does not apply if,
among other things, the person's conduct is finally adjudicated to have been
knowingly fraudulent or deliberately dishonest, or to constitute willful
misconduct. The indemnification obligation survives termination of the
indemnified party's involvement with us but only as to those claims arising from
such person's role as an officer or director. The maximum potential amount of
future payments that we could be required to make under the charter provision
and the corresponding indemnification agreements is unlimited; however, we have
director and officer insurance policies that, in most cases, would limit our
exposure and enable us to recover a portion of any future amounts paid.
We also enter into indemnification provisions under our agreements with other
companies in the ordinary course of business, typically with business partners,
contractors, clinical sites and customers. Under these provisions, we generally
indemnify and hold harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of our activities. These
indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments we could be required
to make under these indemnification provisions is unlimited. However, to date we
have not incurred material costs to defend lawsuits or settle claims related to
these indemnification provisions.
(9) NEW BUSINESS STRATEGY
eXegenics historically operated as a drug discovery company. In 2002, however,
changing market conditions led the Board and eXegenics senior management to
consider strategies that would shift the focus of eXegenics from drug discovery
into clinical drug development for the purpose of building stockholder value. To
that end, the Board concluded that it would be in the best interests of
eXegenics' stockholders if eXegenics entered into a business combination with a
company having products in clinical development and/or pursued a strategy of
in-licensing compounds already engaged in human clinical trials and completed
that process.
(10) LITIGATION
On May 15, 2003, The M&B Weiss Family Limited Partnership of 1996 filed a
lawsuit in the Delaware Court of Chancery, purportedly as a class action on
behalf of all other similarly situated stockholders of eXegenics, against
eXegenics and certain of its directors, and purportedly as a derivative action
on behalf of eXegenics against the directors (the "Weiss Litigation"). The
complaint alleges, among other things, that the defendants have mismanaged
eXegenics, have made unwarranted and wasteful loans and payments to certain
directors and third parties, have disseminated a materially false and misleading
proxy statement in connection with the 2003 annual meeting of eXegenics'
stockholders, and have breached their fiduciary duties to act in the best
interests of eXegenics and its stockholders. The complaint seeks, among other
things, court orders mandating that the defendants cooperate with parties
proposing bona fide transactions
9
to maximize stockholder value, make corrective disclosures with respect to the
proxy statement for the 2003 annual meeting, and account to eXegenics and the
plaintiffs for damages suffered as a result of the actions alleged in the
complaint. The plaintiffs are, in addition, seeking an award of costs and
attorneys' fees and expenses. eXegenics and the individual defendants believe
the suit to be without merit. Accordingly, on June 9, 2003, the defendants filed
a joint motion with the Delaware Court of Chancery to dismiss the complaint for
failure to state a claim and for failure to make the statutorily required demand
on eXegenics to assert the subject claims. eXegenics cannot predict at this
point the length of time that the Weiss Litigation will be ongoing or the
liability, if any, which may arise therefrom.
On the same date that the Weiss Litigation was commenced, Dr. Ira J. Gelb and
Mr. Irwin C. Gerson resigned as directors of eXegenics citing in their
respective letters of resignation apparent stockholder dissatisfaction with the
management of the business of eXegenics by the Board and eXegenics senior
management. Furthermore, on May 19, 2003, Gary M. Frashier's service as a
director ended.
(11) AVI BIOPHARMA, INC. TENDER OFFER
On June 26, 2003, representatives from eXegenics and AVI BioPharma, Inc. ("AVI")
met to discuss a merger between the two companies. The terms of the proposed
transaction with AVI would offer eXegenics' stockholders shares of the AVI's
common stock valued roughly at 110% of the net cash and cash equivalents
expected to be held by eXegenics at August 31, 2003, the earliest date by which
the parties anticipated the transaction could be completed.
The eXegenics Board of Directors on July 16, 2003 unanimously determined that
the merger offer by AVI is fair to and in the best interests of the holders of
eXegenics' common stock and the holders of eXegenics' preferred stock, approved
the merger agreement and the transactions contemplated thereby and declared that
the merger agreement is advisable. The Board further resolved that it would
unanimously recommend that eXegenics' stockholders accept AVI's offer, tender
their shares in the offer and vote to adopt the merger agreement (if a vote
becomes requires under applicable law). On July 25, 2003, AVI commenced the
offer.
Our liquidity is primarily affected by responding to the unsolicited tender
offer and by the proposed merger with AVI. Under the terms of the merger
agreement, we are bound by covenant to having cash and cash equivalents net of
accrued and potential liabilities of at least $9,000,000 at the expiration of
the tender offer. We believe we will satisfy this condition. We estimate further
expenses related to the unsolicited tender offer and merger transactions to
include:
Legal $ 692,000
Transaction fees & solicitation 882,000
Directors & Officers Insurance* 1,013,000
Wages, Salaries and Severance 1,196,000
Termination of Lease Obligations 375,000
Other 259,000
----------
Total $4,417,000
==========
* eXegenics has indemnification agreements with its directors, in addition to
the rights to indemnification afforded such individuals in eXegenics' bylaws.
The indemnification agreements require eXegenics to maintain directors' and
officers' liability insurance covering these individuals for a period from the
date of such agreements until six years after the last date on which the
individual ceases to be a director, officer, employee, agent or fiduciary of
eXegenics. Consistent with these existing obligations, the merger agreement
requires eXegenics to procure a six-year "tail" coverage policy for the benefit
of each current and former director and officer with whom eXegenics has entered
into an indemnification agreement. The estimated cost of this policy is
$1,013,000.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In this section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," references to "we," "us," "our," and
"ours" refer to eXegenics Inc.
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Financial Statements and the Notes thereto included in this
report. This report contains certain forward-looking statements as that term is
defined in the Private Securities Litigation Reform of 1995. Such statements are
based on management's current expectations and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements.. When used in this
report the words "anticipate," "believe," "estimate," "expect" and similar
expressions as they relate to our management or us are intended to identify such
forward-looking statements. Our actual results, performance or achievements
could differ materially from those expressed in, or implied by, these
forward-looking statements. Historical operating results are not necessarily
indicative of the trends in operating results for any future period.
eXegenics historically operated as a drug discovery company. In 2002, however,
changing market conditions led the Board and eXegenics senior management to
consider strategies that would shift the focus of eXegenics from drug discovery
into clinical drug development for the purpose of building stockholder value. To
that end, the Board concluded that it would be in the best interests of
eXegenics' stockholders if eXegenics entered into a business combination with a
company having products in clinical development and/or pursued a strategy of
in-licensing compounds already engaged in human clinical trials and completed
that process.
On May 15, 2003, The M&B Weiss Family Limited Partnership of 1996 filed a
lawsuit in the Delaware Court of Chancery, purportedly as a class action on
behalf of all other similarly situated stockholders of eXegenics, against
eXegenics and certain of its directors, and purportedly as a derivative action
on behalf of eXegenics against the directors (the "Weiss Litigation"). The
complaint alleges, among other things, that the defendants have mismanaged
eXegenics, have made unwarranted and wasteful loans and payments to certain
directors and third parties, have disseminated a materially false and misleading
proxy statement in connection with the 2003 annual meeting of eXegenics'
stockholders, and have breached their fiduciary duties to act in the best
interests of eXegenics and its stockholders. The complaint seeks, among other
things, court orders mandating that the defendants cooperate with parties
proposing bona fide transactions to maximize stockholder value, make corrective
disclosures with respect to the proxy statement for the 2003 annual meeting, and
account to eXegenics and the plaintiffs for damages suffered as a result of the
actions alleged in the complaint. The plaintiffs are, in addition, seeking an
award of costs and attorneys' fees and expenses. eXegenics and the individual
defendants believe the suit to be without merit. Accordingly, on June 9, 2003,
the defendants filed a joint motion with the Delaware Court of Chancery to
dismiss the complaint for failure to state a claim and for failure to make the
statutorily required demand on eXegenics to assert the subject claims. eXegenics
cannot predict at this point the length of time that the Weiss Litigation will
be ongoing or the liability, if any, which may arise therefrom.
On the same date that the Weiss Litigation was commenced, Dr. Ira J. Gelb and
Mr. Irwin C. Gerson resigned as directors of eXegenics citing in their
respective letters of resignation apparent stockholder dissatisfaction with the
management of the business of eXegenics by the Board and eXegenics senior
management. Furthermore, on May 19, 2003, Gary M. Frashier's service as a
director ended.
On May 29, 2003, EI Acquisition Inc. ("EI Acquisition"), a wholly-owned
subsidiary of Foundation Growth Investments LLC (together with EI Acquisition,
the "Foundation Group"), commenced an unsolicited cash tender offer (the
"Foundation Offer") for all of the outstanding shares of common stock and Series
A preferred stock at a price of $0.40 per share, which offer price was later
reduced to $0.37 per share. For the reasons described in eXegenics'
Solicitation/Recommendation Statement on Schedule 14D-9 in response to the
Foundation Offer, filed with the Securities and Exchange Commission on June 12,
2003,
11
as amended (the "Foundation Schedule 14D-9"), the Board has unanimously
recommended that eXegenics stockholders reject the Foundation Offer and not
tender their shares of eXegenics Stock to the Foundation Group. On July 31,
2003, the Foundation Group announced that it has raised the offer price to $0.51
per share.
On June 9, 2003, in an effort to preserve the ability of the Board and
eXegenics' senior management to resist inadequate takeover proposals and thus
protect stockholder value, eXegenics adopted a stockholder rights plan (the
"Rights Plan"). The Rights Plan requires any party seeking to acquire 15% or
more of the outstanding eXegenics common stock to obtain the approval of the
Board or else the rights granted to eXegenics' stockholders under the Rights
Plan that are not held by the acquirer will become exercisable for eXegenics
common stock, or common stock of the acquirer, at a discounted price that would
make the acquisition prohibitively expensive.
On June 18, 2003, the Foundation Group filed with the Securities and Exchange
Commission (the "Commission") preliminary proxy materials relating to its
commencement of a solicitation of eXegenics' stockholders to consent to the
removal of all the members of eXegenics' board of directors and the election of
three new directors nominated by the Foundation Group to serve as the sole
members of eXegenics' board of directors. The Foundation Group's consent
solicitation materials stated the belief of the Foundation Group that, if
elected, the Foundation Group's nominees would consider taking the following
actions: (i) exempting the Foundation Group from the application of the poison
pill adopted by eXegenics' board of directors; (ii) exempting the Foundation
Group from the application of the Delaware anti-takeover statute; (iii)
repealing all of the recent amendments to eXegenics' bylaws, which provide,
among other things, for certain procedures for stockholder proposals and
nominations to be presented at stockholder meetings and for stockholders taking
action by written consent; and (iv) approving a merger between eXegenics and EI
Acquisition Inc. following the completion of the Foundation Offer. On June 25,
2003, eXegenics filed with the Commission preliminary proxy materials relating
to its opposition to the Foundation Group's consent solicitation. eXegenics'
materials stated the belief of eXegenics that its stockholders should not
provide their consent to the Foundation Group's proposals and should revoke any
such consents that might have been given.
On June 26, 2003, representatives from eXegenics and AVI BioPharma, Inc. ("AVI")
met to discuss a merger between the two companies. The terms of the proposed
transaction with AVI would offer eXegenics' stockholders shares of the AVI's
common stock valued roughly at 110% of the net cash and cash equivalents
expected to be held by eXegenics at August 31, 2003, the earliest date by which
the parties anticipated the transaction could be completed.
The eXegenics Board of Directors on July 16, 2003 unanimously determined that
the merger offer by AVI is fair to and in the best interests of the holders of
eXegenics' common stock and the holders of eXegenics' preferred stock, approved
the merger agreement and the transactions contemplated thereby and declared that
the merger agreement is advisable. The Board further resolved that it would
unanimously recommend that eXegenics' stockholders accept AVI's offer, tender
their shares in the offer and vote to adopt the merger agreement (if a vote
becomes requires under applicable law). On July 25, 2003, AVI commenced the
offer.
On August 11, 2003, AVI announced that it had amended the terms of its offer and
extended the offer to August 29, 2003. Under the terms of the amended offer, AVI
is offering to exchange 0.123 of a share of AVI common stock for each share of
eXegenics common stock, and 0.185 of a share of AVI common stock for each share
of eXegenics preferred stock. These exchange ratios represent an increase of
approximately 20 percent over the corresponding exchange ratios previously
announced by AVI. Also on August 11, 2003, eXegenics announced that its Board of
Directors had unanimously reaffirmed its recommendation that stockholders accept
AVI's offer and reject the unsolicited offer by the Foundation Group.
Our discussion and analysis of our financial condition and results of operations
are based upon our financial
12
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to investments, intangible assets, income
taxes, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Revenue from research support agreements is recognized
ratably over the length of the agreements. Revenue resulting from contracts or
agreements with milestones is recognized when the milestone is achieved. Amounts
received in advance of services to be performed or the achievement of milestones
are recorded as deferred revenue. Payments to third parties in connection with
nonrefundable license fees are being recognized over the period of performance
of related research and development activities. We record a valuation allowance
to reduce our deferred tax assets to the amount that is more likely than not to
be realized. While we have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the net deferred tax asset would increase income in the period
such determination was made. Likewise, should we determine that we would not be
able to realize all or part of our net deferred tax asset in the future, an
adjustment to the net deferred tax asset would be charged to income in the
period such determination was made.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Revenue
There were no revenues for the three months ended June 30, 2003. Revenues were
$222,000 for the three months ended June 30, 2002, which were attributable to
license and research and development payments from Bristol-Myers Squibb ("BMS").
Research and Development Expenses
We incurred research and development expenses of $32,000 for the three months
ended June 30, 2003 and $1,254,000 for the three months ended June 30, 2002, a
decrease of $1,222,000 or 97 percent. The decrease in research and development
expenses for the three months ended June 30, 2003, as compared to the same
period in 2002, was attributable to the termination of substantially all
research programs resulting in a $396,000 decrease in research salaries and
benefits, a $204,000 decrease in contract research, license and royalty
agreements, and a $406,000 decrease in research services, supplies and
consultants. The remaining decrease of $216,000 was due to decreased building,
equipment, depreciation and other research and development expenses.
General and Administrative Expenses
We incurred general and administrative expenses as of $1,513,000 for the three
months ended June 30, 2003 and $1,031,000 for the three months ended June 30,
2002, an increase of $482,000 or 47 percent. The increase in general and
administrative expenses for the three months ended June 30, 2003 as compared to
the same period in 2002 was attributable to a $430,000 increase in legal fees
and a $52,000 increase in other operating expenses. Legal expenses for the three
months ended June 30, 2003 included approximately $44,000 related to threatened
or pending litigation and $330,000 related primarily to
13
responding to the Foundation Group unsolicited tender offer, as well as the AVI
merger transaction. Total transaction related expenses, including business and
legal expenses, incurred in the quarter ended June 30, 2003 were approximately
$520,000.
Expenses Related to Strategic Redirection
Expenses related to strategic redirection, net of recoveries, were $299,000 for
the quarter ended June 30, 2003. We incurred $563,000 in expenses from
operations terminated during the three months ended June 30, 2003, which
included $272,000 for terminated employees, a charge of $170,000 for writing
down laboratory equipment to its estimated resale value, and $121,000 for other
expenses related to terminated scientific programs. This amount was offset by
the reimbursement of $264,000 of research and development costs from BMS.
Approximately $362,000 in accrued expenses remains to be paid.
Other Income and Expense
Other income, net of other expenses, was $49,000 and $178,000 for the three
months ended June 30, 2003 and June 30, 2002, respectively, a decrease of
$129,000 or 72 percent. This decrease was due primarily to a decline in interest
income of $142,000, from $182,000 for the three months ended June 30, 2002 to
$40,000 for the same period in 2003. The decrease in interest income was due to
lower interest rates in 2003 and also to lower invested balances. The decrease
in interest income was partially offset by an increase in gains on the
disposition of assets and other miscellaneous income totaling $13,000.
Net Loss
We incurred a net loss attributable to common shareholders of $1,795,000 and
$1,885,000 for the three months ended June 30, 2003 and June 30, 2002,
respectively. The decrease in net loss of $90,000 was primarily the result of
the aforementioned changes in our operations. Net loss per common share was
$0.11 and $0.12 for the three months ended June 30, 2003 and June 30, 2002,
respectively.
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Revenue
Revenues were $13,000 and $556,000 for the six months ended June 30, 2003 and
2002, respectively, a decrease of $543,000 or 98 percent. Revenues in both
periods were attributable to license and research and development payments from
our agreements, with Aventis in 2003 and Bristol-Myers Squibb in 2002. Since we
have terminated substantially all licenses to research and development
agreements, we do not expect to record revenue for the foreseeable future.
Research and Development Expenses
We incurred research and development expenses of $163,000 for the six months
ended June 30, 2003 and $2,476,000 for the six months ended June 30, 2002, a
decrease of $2,313,000 or 93 percent. The decrease in research and development
expenses for the six months ended June 30, 2003 as compared to the same period
in 2002 was attributable to the termination of substantially all research
programs resulting in a $768,000 decrease for research salaries and benefits, a
$551,000 decrease in expenses for contract research, licenses and royalties, and
a $639,000 decrease in research services, supplies, and consultants. The
remaining decrease of $355,000 was due to decreased building, equipment,
depreciation and lab supplies expenses.
General and Administrative Expenses
We incurred general and administrative expenses of $2,309,000 for the six months
ended June 30, 2003 and $2,097,000 for the six months ended June 30, 2002, an
increase of $212,000 or 10 percent. The increase in general and administrative
expenses for the six months ended June 30, 2003 as compared to the same period
14
in 2002 was attributable to a $421,000 increase in corporate legal activities
and a $76,000 increase in professional consulting fees and a $40,000 increase in
other operating expenses, partially offset by a $325,000 decrease in expenses
and legal services related to intellectual property. Legal expenses for the six
months ended June 30, 2003 included approximately $44,000 related to threatened
or pending litigation and $355,000 related primarily to responding to the
Foundation Group unsolicited tender offer, as well as the AVI merger
transaction. Total transaction related expenses, including business and legal
expenses, incurred in the six months ended June 30, 2003 were approximately
$554,000.
Expenses Related to Strategic Redirection
We incurred expenses related to strategic redirection, net of recoveries, of
$447,000 for the six months ended June 30, 2003. The charge was primarily due to
$399,000 in severance benefits and $170,000 for the write down of laboratory
equipment to its estimated resale value. In addition, there were charges of
$142,000 for other expenses of terminated scientific programs. These expenses
were partially offset by the $264,000 reimbursement from Bristol-Myers Squibb.
Other Income and Expense
Other income, net of other expenses, was $124,000 and $364,000 for the six
months ended June 30, 2003 and June 30, 2002, respectively, a decrease of
$240,000 or 66 percent. This change was due primarily to a decrease in interest
income of $258,000 for the six months ended June 30, 2003 as compared to the
same period in 2002. The decrease in interest income was due to lower interest
rates in 2003 and also to lower invested balances. The decline in interest
income was partially offset by the net increase in other income and expense of
$18,000.
Net Loss
In the six months ended June 30, 2003, we incurred a net loss attributable to
common shareholders of $2,813,000, or 26 percent less than the $3,822,000 loss
for the six months ended June 30, 2002. The decrease in net loss of $1,009,000
was primarily the result of the aforementioned changes in our operations. Net
loss per common share was $0.18 for the six months ended June 30, 2003 and $0.24
for the six months ended June 30, 2002.
Liquidity and Capital Resources
At June 30, 2003, we had cash and cash equivalents of approximately $14,037,000.
Since our inception, we have financed our operations from debt and equity
financings as well as fees received from licensing and research and development
agreements. During the six months ended June 30, 2003, net cash used in
operating activities was $2,651,000, the largest elements of which were
payments, net of reimbursements, of approximately $737,000 related to the
termination of scientific programs. In addition, during the six months ended
June 30, 2003, we received $10,000,000 from a maturing investment instrument.
The latter funds were reinvested in short-term money market instruments.
Our liquidity is primarily affected by responding to the unsolicited tender
offer and by the proposed merger with AVI. Under the terms of the merger
agreement, we are bound by covenant to having cash and cash equivalents net of
accrued and potential liabilities of at least $9,000,000 at the expiration of
the tender offer. We believe we will satisfy this condition. We estimate further
expenses related to the unsolicited tender offer and merger transactions to
include:
Legal $ 692,000
Transaction fees & solicitation 882,000
Directors & Officers Insurance* 1,013,000
Wages, Salaries and Severance 1,196,000
Termination of Lease Obligations 375,000
Other 259,000
----------
Total $4,417,000
==========
15
* eXegenics has indemnification agreements with its directors, in addition to
the rights to indemnification afforded such individuals in eXegenics' bylaws.
The indemnification agreements require eXegenics to maintain directors' and
officers' liability insurance covering these individuals for a period from the
date of such agreements until six years after the last date on which the
individual ceases to be a director, officer, employee, agent or fiduciary of
eXegenics. Consistent with these existing obligations, the merger agreement
requires eXegenics to procure a six-year "tail" coverage policy for the benefit
of each current and former director and officer with whom eXegenics has entered
into an indemnification agreement. The estimated cost of this policy is
$1,013,000.
We believe that we have sufficient cash and cash equivalents on hand at June 30,
2003 to finance our plan of operation through June 30, 2004. We currently have
no new material commitments to purchase capital assets or intellectual property
through December 31, 2003. There can be no assurance that any required
financings will be available, through bank borrowings, debt or equity offerings
on acceptable terms or at all, should additional funding be required.
Trading in the Company's Common Stock
On October 25, 2002, we transferred from the Nasdaq National Market to the
Nasdaq SmallCap Market as a result of our failure to comply with the Nasdaq
National Market's minimum bid price requirement of $1.00 per share. On January
21, 2003, we were provided an additional 180 calendar days, or until July 21,
2003, to regain compliance with such requirement. Although on July 21, 2003 we
failed to regain compliance with such requirement given that we met the initial
listing requirements for the Nasdaq SmallCap Market, specifically, the $5
million stockholders' equity requirement on July 21, 2003, Nasdaq provided us
with an additional 90 calendar days, or until October 20, 2003 to regain
compliance with the minimum bid price requirement. If we are unable to achieve
or maintain the minimum $1.00 bid price per share requirement of either the
Nasdaq National Market or the Nasdaq SmallCap Market, we will be delisted.
If we are delisted from the Nasdaq SmallCap Market, the liquidity of our common
stock could be further materially impaired, not only with respect to the number
of shares that may be bought and sold at a given price, but also through delays
in the timing of transactions and reduction in media coverage of our company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risk, including changes in interest rates,
relates primarily to our cash and cash equivalents portfolio. Our cash and cash
equivalents portfolio is invested in money market funds that maintain large
portfolios consisting of short-term securities with investment grade ratings to
minimize interest rate and credit risk as well as to provide for an immediate
source of funds. Due to the nature of our investments we have concluded that
there is no material market risk exposure. We do not believe that a 100 basis
point increase or decrease in interest rates would significantly impact our
business. We do not have any derivative instruments. We operate only in the
United States and all sales have been made in U.S. dollars. We do not have any
material exposure to changes in foreign currency exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including President and Chief Executive Officer Ronald L. Goode
and Chief Business Officer and Chief Financial Officer David E. Riggs, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this Quarterly Report on Form 10-Q, have concluded that, based on such
evaluation, our disclosure controls and procedures were adequate and effective,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.
16
Further, there were no significant changes in the internal control over
financial reporting, identified in connection with the evaluation of such
internal control that occurred during our last fiscal quarter, that have
materially affected, or are reasonably likely to materially affect our internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 15, 2003, a lawsuit was filed by The M&B Weiss Family Limited Partnership
of 1996 in the Delaware Court of Chancery against eXegenics, purportedly as a
class action on behalf of the plaintiff and on behalf of all other similarly
situated stockholders of eXegenics, and as a derivative action on behalf of
eXegenics against certain directors and senior officers of eXegenics. The
complaint alleges, among other things, that the defendants have mismanaged
eXegenics, have made unwarranted and wasteful loans and payments to certain
directors and third parties, have disseminated a materially false and misleading
proxy statement in connection with the upcoming annual meeting of eXegenics'
stockholders, and have breached their fiduciary duties to act in the best
interests of eXegenics and its stockholders. The complaint seeks, among other
things, court orders mandating that the defendants cooperate with parties
proposing bona fide transactions to maximize stockholder value, make corrective
disclosures with respect to the latest proxy statement, and account to eXegenics
and the plaintiffs for damages suffered as a result of the actions alleged in
the complaint. The plaintiffs are in addition seeking an award of costs and
attorneys' fees and expenses.
eXegenics and the individual defendant officers and directors believe the suit
to be without merit. Accordingly, on June 9, 2003, the defendants filed a joint
motion with the Delaware Court of Chancery to dismiss the complaint for failure
to state a claim and for failure to make the statutorily required demand on
eXegenics to assert the subject claims. eXegenics cannot predict at this point
the length of time that this litigation will be ongoing.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 17, 2003, the Annual Meeting of Shareholders was held and the shares
present voted on the following matters:
(2.) The shareholders approved the election of the following
nominees to serve on the Board of Directors:
VOTES FOR VOTES WITHHELD
---------- --------------
Joseph M. Davie 14,551,431 425,645
Robert J. Easton 14,486,736 490,338
Ronald L. Goode 14,551,451 425,623
Walter M. Lovenberg 14,551,431 425,643
Two additional nominees, Dr. Ira J. Gelb and Mr. Irwin C.
Gerson, received sufficient votes to be elected to serve as directors at the
Annual Meeting and would have been elected had they not resigned on May 15,
2003.
17
(2.) The appointment of Ernst & Young LLP as auditors for the Company
for the fiscal year 2003 was approved with 14,847,550 votes FOR, 109,232 votes
AGAINST, and 20,292 votes ABSTAINING.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 3.1 Certificate of Correction to the Certificate of Amendment to the
Certificate of Incorporation of eXegenics filed with the Delaware Secretary of
State on July 14, 2003.*
Exhibit 4.1 Amendment to Stockholder Rights Agreement entered into as of July
16, 2003, by and between eXegenics and American Stock and Transfer Company, as
Rights Agent.*
Exhibit 10.1 Form of Indemnification Agreement by and among eXegenics and
certain of its current and former directors and officers.*
Exhibit 31.1 Certification of the Principal Executive Officer pursuant to Rule
13A-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30,
2003.*
Exhibit 31.2 Certification of the Principal Financial Officer pursuant to Rule
13A-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30,
2003.*
Exhibit 32.1 Certification of the Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for the quarterly period ended June 30, 2003.*
Exhibit 32.2 Certification of the Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for the quarterly period ended June 30, 2003.*
(* Filed herewith.)
(b) The following reports were filed on Form 8-K during the quarter ended June
30, 2003:
(1) On April 11, 2003, we filed a Current Report on Form 8-K
disclosing, among other things, that the termination of the
Master License Agreement between the Registrant and
Bristol-Myers Squibb had been finalized and that we had sent a
termination notice to the related license from The Washington
State University Foundation.
(2) On May 13, 2003, we filed a Current Report on Form 8-K
announcing results for the three months ended March 31, 2003.
(3) On May 19, 2003, we filed a Current Report on Form 8-K
disclosing, among other things, a lawsuit filed by The M&B
Weiss Family Limited Partnership of 1996 against the
Registrant and
18
the resignation of Dr. Ira J. Gelb and Mr. Irwin C. Gerson as
directors of the Registrant.
(4) On May 30,2003, we filed a Current Report on Form 8-K
announcing an unsolicited offer from EI Acquisition Inc. and
Foundation Growth Investments LLC to acquire the outstanding
common and preferred stock of the Registrant.
(5) On June 9, 2003, we filed a Current Report on Form 8-K
announcing the declaration of a dividend distribution of one
right to purchase one one-thousandth of a share of Series B
Junior Participating Preferred Stock for each outstanding
share of common stock.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXEGENICS INC.
Date: August 14, 2003 /s/ Ronald L. Goode
-----------------------------------
Chairman, President & Chief
Executive Officer
Date: August 14, 2003
/s/ David E. Riggs
-----------------------------------
David E. Riggs
Vice President, Chief Business
Officer and Chief Financial Officer
20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Correction to the Certificate of Amendment to the
Certificate of Incorporation of eXegenics field with the Delaware
Secretary of State on July 14, 2003.
4.1 Amendment to stockholder Rights Agreement entered into as of July 16,
2003, by and between eXegenics and American Stock and Transfer Company,
as Rights Agent.
10.1 Form of Indemnification Agreement by and among eXegenics and certain of
its current and former directors and officers.
31.1 Certification of the Principal Executive Officer pursuant to Rule
13A-14 of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for the quarterly period
ended June 30, 2003.
31.2 Certification of the Principal Financial Officer pursuant to Rule
13A-14 of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for the quarterly period
ended June 30, 2003.
32.1 Certification of the Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for the quarterly period ended June 30, 2003.
32.2 Certification of the Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for the quarterly period ended June 30, 2003.
21