1
UNITED STATES 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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26483
VAXGEN, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
94-3236309
(I.R.S. Employer Identification Number)
1000 MARINA BLVD., SUITE 200
BRISBANE, CALIFORNIA 94005
(Address of Principal Administrative Offices) (Zip Code)
(650) 624-1000
(Registrants Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12 (g) of the Securities Exchange
Act of 1934:
Common Stock ($.01 par value)
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 [ ]
The issuer has one class of common stock with 13,604,155 shares outstanding as
of July 31, 2000.
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VAXGEN, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Condensed Balance Sheets............................................. 1
Condensed Statements of Operations................................... 2
Condensed Statements of Cash Flows................................... 3
Notes to Condensed Financial Statements.............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Overview............................................................. 6
Results of Operations................................................ 8
Liquidity and Capital Resources...................................... 10
Year 2000 Compliance................................................. 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk............. 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................. 13
Item 4. Submission of Matter to a Vote of Security Holders.................... 13
Item 6. Exhibits and Reports on Form 8-K...................................... 15
Signature............................................................. 16
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PART I - FINANCIAL INFORMATION
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 18,033,000 $ 16,063,000
Investment securities 41,685,000 54,471,000
Interest receivable 798,000 514,000
Prepaid expenses and other current assets 1,296,000 1,151,000
------------- -------------
TOTAL CURRENT ASSETS 61,812,000 72,199,000
Property and equipment, net 3,083,000 2,856,000
Other assets 169,000 170,000
------------- -------------
TOTAL ASSETS $ 65,064,000 $ 75,225,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to Genentech $ 50,000 $ 817,000
Accounts payable 751,000 509,000
Accrued liabilities 2,164,000 2,629,000
Current portion of long-term obligations 31,000 31,000
------------- -------------
TOTAL CURRENT LIABILITIES 2,996,000 3,986,000
LONG-TERM OBLIGATIONS 77,000 89,000
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value. 20,000,000 shares
authorized; none issued or outstanding - -
Common stock, $0.01 par value. 20,000,000 shares
authorized; 13,593,642 and 13,511,565 shares issued
and outstanding at June 30, 2000 and
December 31, 1999, respectively 136,000 135,000
Additional paid-in capital 111,947,000 111,034,000
Deferred stock compensation (1,998,000) (2,225,000)
Accumulated other comprehensive loss -
unrealized loss on investment securities (239,000) (125,000)
Deficit accumulated during the development stage (47,855,000) (37,669,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 61,991,000 71,150,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,064,000 $ 75,225,000
============= =============
See accompanying notes to condensed financial statements.
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VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED PERIOD FROM
June 30, June 30, NOVEMBER 27, 1995
---------------------------- ---------------------------- (inception) through
2000 1999 2000 1999 June 30, 2000
------------ ------------ ------------ ------------ -------------------
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT:
Genentech charges $ 410,000 $ 155,000 $ 660,000 $ 395,000 $ 6,806,000
Other 4,394,000 4,041,000 8,196,000 6,839,000 31,717,000
------------ ------------ ------------ ------------ ------------
TOTAL RESEARCH AND DEVELOPMENT 4,804,000 4,196,000 8,856,000 7,234,000 38,523,000
TOTAL GENERAL AND ADMINISTRATIVE 1,771,000 3,797,000 3,365,000 4,803,000 15,386,000
LOSS FROM OPERATIONS (6,575,000) (7,993,000) (12,221,000) (12,037,000) (53,909,000)
OTHER INCOME (EXPENSE):
Investment income, net 1,007,000 233,000 2,041,000 518,000 6,107,000
Interest expense - Genentech -- -- -- -- (47,000)
Interest expense - other (2,000) -- (6,000) (1,000) (6,000)
------------ ------------ ------------ ------------ ------------
TOTAL OTHER INCOME, NET 1,005,000 233,000 2,035,000 517,000 6,054,000
------------ ------------ ------------ ------------ ------------
NET LOSS $ (5,570,000) $ (7,760,000) $(10,186,000) $(11,520,000) $(47,855,000)
============ ============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.41) $ (1.01) $ (0.75) $ (1.51)
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED LOSS
PER SHARE 13,564,000 7,685,000 13,552,000 7,653,000
============ ============ ============ ============
See accompanying notes to condensed financial statements.
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VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED PERIOD FROM
JUNE 30, NOVEMBER 27, 1995
------------------------------ (inception) through
2000 1999 June 30, 2000
------------- ------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (10,186,000) $ (11,520,000) $ (47,855,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 363,000 181,000 951,000
Amortization of premiums and discounts on investment securities 143,000 (52,000) (672,000)
Stock compensation expense 449,000 2,930,000 3,781,000
Changes in assets and liabilities:
Interest receivable (284,000) (52,000) (798,000)
Prepaid expenses and other current assets (145,000) 94,000 (1,296,000)
Other assets 1,000 (47,000) (57,000)
Payable to Genentech (767,000) 395,000 50,000
Accounts payable and accrued liabilities (223,000) 279,000 2,915,000
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (10,649,000) (7,792,000) (42,981,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities (11,512,000) (5,005,000) (128,624,000)
Sale and maturities of investment securities 24,041,000 8,049,000 87,372,000
Purchase of property and equipment (590,000) (1,286,000) (3,888,000)
Long-term lease deposits -- -- (120,000)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 11,939,000 1,758,000 (45,260,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations (12,000) (2,000) (30,000)
Stock issued to Genentech -- -- 1,025,000
Stock issued to other founders -- -- 20,000
Stock issued in private placements -- 5,537,000 65,164,000
Stock issued in initial public offering -- -- 46,345,000
Issuance costs of private placements -- (264,000) (4,208,000)
Issuance costs of initial public offering -- (455,000) (4,386,000)
Exercise of employee stock options 692,000 -- 1,344,000
Loans from Genentech -- -- 1,000,000
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 680,000 4,816,000 106,274,000
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,970,000 (1,218,000) 18,033,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,063,000 6,818,000 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,033,000 $ 5,600,000 $ 18,033,000
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:
Equipment acquired through capital leases $ -- $ 133,000 $ 138,000
Issuance of stock through conversion of Genentech note payable $ -- $ -- $ 1,000,000
Accrued issuance costs of initial public offering $ -- $ 585,000 $ --
See accompanying notes to condensed financial statements.
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VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed financial statements of VaxGen, Inc. (the "Company")
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information or
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of the management
of the Company, the accompanying unaudited condensed financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information included herein. While the
Company believes that the disclosures are adequate to make the information not
misleading, it is suggested that these financial statements should be read in
conjunction with the Company's audited financial statements contained in its
Annual Report on Form 10-K for the year ended December 31, 1999.
2. NON-CASH COMPENSATION
On April 1, 1999, the shareholders of the Company approved an increase in the
number of shares reserved for grant under the Company's 1996 Stock Option Plan
to 1,750,000 shares. This represents the measurement date for stock options
granted to employees earlier in 1999 and in 1998, which were granted subject to
stockholder approval of the plan amendment. As a result, the Company recorded
deferred compensation in the amount of $3,223,000, representing the excess of
fair market value of the common shares on April 1, 1999, $13.00 per share, over
the exercise price of the options on the date stockholder approval was obtained.
The Company has recorded charges to non-cash compensation expense of $386,000
for the portion of the vesting period lapsed for the six months ended June 30,
2000. The balance of deferred compensation is being amortized to expense over
the remaining vesting period of the options.
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VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
3. LOSS PER SHARE
Excluded from the computation of basic and diluted loss per share, were stock
options and warrants outstanding for the purchase of 1,934,000 and 1,684,000
shares of common stock as of June 30, 2000 and June 30, 1999, respectively,
because the representative share increments would be antidilutive.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (SFAS) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company does not expect that the adoption of SFAS No.
133 will have a material impact on its financial statements.
In March 2000, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101B. SAB 101B delays the effective date of SAB
101, "Revenue Recognition in Financial Statements," to the fourth quarter for
fiscal years beginning after December 15,1999. SAB 101 provides guidance on
revenue recognition and the SEC staff's views on the application of accounting
principles to selected revenue recognition issues. The interpretation of SAB No.
101 is currently uncertain as it relates to biotechnology companies and,
consequently, the impact on the Company's financial statements is unknown. The
Company does not anticipate that the application of this pronouncement will have
a material impact on its financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 (FIN 44), "Accounting for Certain Transactions involving Stock
Compensation." FIN 44 clarifies the application of Accounting Principles Board
Opinion No. 25 (APB 25) and is effective July 1, 2000. FIN 44 clarifies the
definition of "employee" for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. The Company does not expect the adoption of FIN 44 to
have a material impact on its financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with our condensed
financial statements and related notes thereto appearing in Item 1 of this
report. In addition to historical information, this report contains
"forward-looking statements" that are within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, and 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", and similar expressions are used to identify forward-looking
statements, but their absence does not mean that such statement is not
forward-looking. Many factors could affect the Company's actual results,
including those factors described under "Factors Affecting Future Results" and
"Business" contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. 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 anticipated
events.
OVERVIEW
In November 1995, VaxGen was formed to continue development of AIDSVAX(R) in
partnership with Genentech, Inc. ("Genentech"). In connection with our
formation, Genentech licensed to us the technology necessary for completing
development and commercialization of AIDSVAX(R).
Since our formation, we have focused on developing and testing AIDSVAX(R). We
have developed formulations of AIDSVAX(R), which focus on the predominant HIV
subtype in the Americas, Europe, the Caribbean, and Australia (subtype B) and
the predominant HIV subtype in Southeast Asia and East Asia (subtype E). We have
commenced two phase III clinical trials, one principally in North America and
one in Thailand to determine the efficacy of AIDSVAX(R). In October 1999, we
completed the initial inoculation and enrollment of over 5,400 trial volunteers
for the North American phase III clinical trial, which is being conducted in 61
clinical centers. The Thai phase III clinical trial is being conducted in 17
clinical centers in Bangkok and is designed for 2,500 trial volunteers.
To date, we have generated no operating revenues. We anticipate only modest
revenues from government or other grants or from collaborations with other
entities over the next three to four years. We have incurred losses since
inception as a result of research and development and general and administrative
expenses in support of our operations. As of June 30, 2000, we had a deficit
accumulated during the development stage of $47,855,000. We anticipate incurring
substantial losses over at least the next three to four
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years as we complete our clinical trials, apply for regulatory approvals,
continue development of our technology and expand our operations.
We believe that our current resources will be sufficient to fund the anticipated
completion of our current phase III clinical trials, with the first of the
trials, the North American phase III trial, scheduled to finish at the end of
2002. If AIDSVAX(R) receives regulatory approval, we do not believe AIDSVAX(R)
will be on the market before 2003. We will need to raise additional capital to
finance commercialization of AIDSVAX(R), or to continue operations if the phase
III clinical trials are not successful, are delayed or more costly than
currently anticipated, or if commercialization is delayed for any other reason.
Our future capital requirements depend on several factors, including:
- The progress of our current phase III clinical trials;
- The progress of other internal research and development projects;
- The need for leasehold improvements to facilities and the purchase of
additional capital equipment;
- The availability of government research grants; and
- The timing of revenue, if any, from AIDSVAX(R).
In the future, we may have additional non-cash compensation expense based on
employment agreements we have with three of our executive officers. Our
employment agreements with these officers provide for issuance of an aggregate
of 325,757 shares of common stock if:
- Our stock trades at an average price of $28.00 per share over a 30-day
period; or
- We are acquired in a transaction at a price greater than $28.00 per
share.
If the shares are issued, we will record non-cash compensation expense equal to
the aggregate value of shares on the date the $28.00 per share condition is met.
We have a license and supply agreement with Genentech, whereby Genentech
supplies clinical material for all of our clinical sites. We anticipate that we
will incur an additional expense for clinical material, in the approximate
aggregate sum of $2,500,000 over the next two years, of which $1,500,000 will be
incurred in the third quarter of 2000.
On April 1, 1999, the shareholders of the Company approved an increase in the
number of shares reserved for grant under the Company's 1996 Stock Option Plan
to 1,750,000 shares. This represents the measurement date for stock options
granted to employees earlier in 1999 and in 1998, which were granted subject to
stockholder approval of the plan amendment. As a result, we recorded deferred
compensation, representing the excess of fair market value of the common shares
on April 1, 1999, $13.00 per share, over the exercise price of the options on
the date stockholder approval was obtained. We will continue to incur non-cash
compensation expense as the balance of deferred compensation is being amortized
to expense over the remaining vesting period of the options.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 22% from $7,234,000 for the six
months ended June 30, 1999 to $8,856,000 for the six months ended June 30, 2000.
The increase in research and development expenses is related to the on-going
North American and Thai clinical trials along with development of additional
AIDSVAX(R) vaccines (See further discussion in "Liquidity and Capital
Resources"). These expenses included costs for additional personnel, non-cash
compensation expense related to vesting of stock options, maintaining our new
research laboratory facility and increases in fees paid to third parties
associated with conducting the clinical trials.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 30% from $4,803,000 for the six
months ended June 30, 1999 to $3,365,000 for the six months ended June 30, 2000.
The decrease in general and administrative expenses was due primarily to
non-cash compensation expense recorded in the second quarter of 1999 related to
the issuance of warrants and modification of the terms of options in connection
with resolving two employment matters offset by increased expenses incurred in
2000 related to additional personnel hired to support our growing
infrastructure, equipment expense related to larger office facilities and
certain administrative expenses associated with being a public company.
OTHER INCOME, NET
Other income, net, consisting primarily of investment income, increased by 294%
from $517,000 for the six months ended June 30, 1999 to $2,035,000 for the six
months ended June 30, 2000. This was primarily attributed to higher average
balances of cash, cash equivalents and investment securities as a result of
funds received from the initial public offering completed during the third
quarter of 1999 and a private placement completed in the fourth quarter of 1999.
NET LOSS
Net loss for the six months ended June 30, 2000, was $10,186,000 compared to a
loss of $11,520,000 for the comparable period in 1999. The decrease in net loss
was due to non-cash compensation expense in 1999 and an increase in investment
income offset by an increase in expenses in 2000 as noted above.
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THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 14% from $4,196,000 for the three
months ended June 30, 1999 to $4,804,000 for the three months ended June 30,
2000. The increase in research and development expenses is related to the
on-going North American and Thai clinical trials along with development of
additional AIDSVAX(R) vaccines (See further discussion in "Liquidity and Capital
Resources"). These expenses included costs for additional personnel, non-cash
compensation expense related to vesting of stock options, maintaining our new
research laboratory facility and increases in fees paid to third parties
associated with conducting the clinical trials.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 53% from $3,797,000 for the three
months ended June 30, 1999 to $1,771,000 for the three months ended June 30,
2000. The decrease in general and administrative expenses was due primarily to
non-cash compensation expense recorded in the second quarter of 1999 related to
the issuance of warrants and modification of the terms of options in connection
with resolving two employment matters offset by increased expenses in 2000
related to additional personnel hired to support our growing infrastructure,
non-cash compensation expense related to vesting of stock options, equipment
expense related to larger office facilities and certain administrative expenses
associated with being a public company.
OTHER INCOME, NET
Other income, net, consisting primarily of investment income, increased by 331%
from $233,000 for the three months ended June 30, 1999 to $1,005,000 for the
three months ended June 30, 2000. This was primarily attributed to higher
average balances of cash, cash equivalents and investment securities as a result
of funds received from the initial public offering completed during the third
quarter of 1999 and a private placement completed in the fourth quarter of 1999.
NET LOSS
Net loss for the three months ended June 30, 2000, was $5,570,000 compared to a
loss of $7,760,000 for the comparable period in 1999. The decrease in net loss
was due to non-cash compensation expense in 1999 and an increase in investment
income offset by an increase in expenses in 2000 as noted above.
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LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities were $59,718,000 at June 30,
2000. We have financed our operations since inception through capital provided
by Genentech and sales of our common stock. Genentech has no obligation to
provide future funding to the Company.
We completed our initial public offering ("IPO") in July 1999, in which we
issued and sold 3,565,000 shares of common stock for aggregate proceeds to us in
the amount of $46,345,000. Of the aggregate proceeds received in the IPO,
approximately $4,400,000 was used to pay costs and expenses related to the IPO,
resulting in net proceeds of approximately $42,000,000. In early 1999, we
received net proceeds of $5,273,000 from private placement financing activities,
all of which were completed prior to the IPO. In December 1999, we completed a
private placement of common stock with Vulcan Ventures, Inc., the investment
organization of Paul G. Allen. This private placement has enabled us to commence
development of a formulation of AIDSVAX(R), which focuses on the predominant HIV
type found in Africa, China, India and South America (subtype C). Currently, we
have developed formulations of AIDSVAX(R), which focus on the predominant HIV
type in the Americas, Europe, the Caribbean and Australia (subtype B) and the
predominant HIV subtype in Southeast Asia and East Asia (subtype E). The private
placement consisted of approximately 2,174,000 shares of common stock, which
resulted in proceeds, net of commissions and private placement expenses, to us
of approximately $24,000,000.
Since our inception, investing activities, other than purchases and sales of
investment securities, have consisted entirely of equipment acquisitions and
leasehold improvements. From inception through June 30, 2000, our investment in
equipment and leasehold improvements was $3,888,000. The increase in equipment
and leasehold improvements has been primarily due to the to development of our
research and development laboratory and the establishment of larger office
facilities. Net cash used in operating activities for the six months ended June
30, 2000 was $10,649,000 representing expenditures for research and development
costs and general and administrative expenses.
In October 1999, we entered into a collaboration with the federal Centers for
Disease Control and Prevention ("CDC") to support research at six of the 56
clinics in the United States currently conducting phase III clinical trials of
our AIDSVAX(R) vaccine. The CDC selected the six sites in the fourth quarter of
1999. Contractual arrangements between the CDC and the clinics have been
completed. The participating sites will continue to implement our phase III
protocol, as well as conduct epidemiological, social and behavioral research,
which will be shared by VaxGen and the CDC. The sites will be compensated
directly by the CDC for the clinical costs, which would have been incurred by
VaxGen, and for conducting the additional research. The CDC has agreed to
contribute approximately $8,000,000 over a four year period to the participating
sites.
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The National Institute of Allergy and Infectious Diseases ("NIAID") is forming a
collaboration with us to obtain and store clinical specimens from our North
American phase III clinical trial. The proposal provides that NIAID would fund
approximately $4,600,000 for this program. Consummation of the collaboration
remains subject to final approval of the collaborative agreement by both
parties.
We believe that our existing cash and cash equivalents, investment securities
and investment income along with funds from other potential collaborative
arrangements, will enable us to meet our forecasted expenditures through the
anticipated completion of our current phase III clinical trials. We will need to
raise additional capital to finance commercialization of AIDSVAX(R), or to
continue operations if the phase III clinical trials are not successful, are
delayed or more costly than currently anticipated, or if commercialization is
delayed for any other reason. We cannot assure you that we will be able to raise
sufficient funds when needed, or that such funds will be available on favorable
terms.
Our exposure to market rate changes is related primarily to our debt securities
included in our investment portfolio. We do not have any material derivative
financial instruments. By policy, we invest in debt instruments of the U. S.
Government and high-quality corporate issuers, limit the amount of credit
exposure to any one issuer, limit duration by restricting the term, and hold
investments to maturity except under rare circumstances. 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, our future investment income may fall short of
expectations due to changes in interest rates or we 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, 2000, we held government debt
instruments in the principal amount of $17,847,000. If market interest rates
were to increase immediately and uniformly by 10% from levels at June 30, 2000,
the fair value of our portfolio would decline by an immaterial amount. Our
exposure to losses as a result of interest rate changes is managed through
investing primarily in securities that mature in a period of one year or less.
We have exposure to foreign exchange rate risk primarily related to our
conducting clinical trials in Thailand. Thailand is currently considered an
emerging economy. A material increase in the value of Thailand's currency
against the U.S. Dollar could cause an increase in our expenses. The majority of
our contracts associated with conducting clinical trials in Thailand are priced
in Baht. At the time these contracts were written, the Thailand exchange rate
was 37.5 Baht per one U. S. Dollar. As of June 30, 2000, we have incurred $1,000
in foreign exchange losses. We anticipate that we will not record any material
foreign exchange gains or losses due to transactions in Thai Baht in the third
quarter of 2000.
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YEAR 2000 COMPLIANCE
To date, we have not experienced any disruptions in our operations relating to
Year 2000 issues. However, it is not possible to conclude that all aspects of
the Year 2000 issue that may affect us, including those relating to third
parties with whom we have material business relationships, have been resolved.
As of the date of this report, the costs to address our Year 2000 issues have
not exceeded $5,000 and all costs have been expensed as incurred.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the caption "Liquidity and Capital Resources" in Part I,
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings or claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's Registration Statement under the Securities Act of 1933 (File No.
333-78065) became effective June 29, 1999. Offering proceeds, net of aggregate
expenses of approximately $4,400,000, were approximately $42,000,000. All of the
expenses related to the offering were direct or indirect payments to others and
not payments to our directors or officers (or their associates) or to our
affiliates or 10% shareholders. The Company has invested the entire net proceeds
from the offering in short-term investments such as commercial paper and
government obligations. The Company has not used any of the net offering
proceeds for construction of plant, building or facilities, purchases of real
estate, acquisition of other businesses or repayment of indebtedness.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders, held on May 31, 2000, three matters were
voted upon. A description of each matter and tabulation of votes follows:
1. Election of Directors
Votes
----------------------------------
Nominee For Withheld
------- --------- --------
Robert C. Nowinski 9,884,681 18,235
Donald P. Francis 9,884,681 18,235
Phillip W. Berman 9,884,681 18,235
Stephen C. Francis 9,884,681 18,235
Roberta R. Katz 9,884,681 18,235
Ruth B. Kunath 9,884,681 18,235
William D. Young 9,881,981 20,935
There were no abstentions or broker non-votes.
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2. Increase the number of shares of common stock authorized for
issuance under the 1996 Stock Option Plan from a total of
1,750,000 shares to 3,250,000 shares:
Votes
-------------------------------------------------------
For Against Abstain
--------- --------- -------
6,411,390 1,084,115 0
There were no abstentions and 2,357,365 broker non-votes.
3. Ratification of KPMG LLP as our independent auditors for the
2000 fiscal year ending December 31, 2000:
Votes
-------------------------------------------------------
For Against Abstain
--------- --------- -------
9,872,137 11,965 0
There were no abstentions or broker non-votes.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 and Regulation S-K:
27.1 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission
for information purposes only and is not deemed filed.
(b) Reports on Form 8-K:
None.
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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.
VaxGen, Inc.
(Registrant)
Dated: August 10, 2000 By: /s/ Carter A. Lee
------------------------------------
Carter A. Lee
Senior Vice President
Finance & Administration
(Principal Financial Officer)
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