SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 6, 2004
VAXGEN, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 0-26483 94-3236309
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of organization) incorporation or
Identification Number)
1000 MARINA BLVD., SUITE 200 BRISBANE, CALIFORNIA 94005
(Address of Principal Administrative Offices)
Registrants Telephone Number, Including Area Code: (650) 624-1000
Item 4.01. Changes in Registrant's Certifying Accountant.
The Audit Committee of the Board of Directors ("the Audit Committee") of
VaxGen, Inc., a Delaware corporation (the "Company"), regularly reviews the
performance of and its relationship with the independent auditors of the
Company. As part of that review process, the Audit Committee considered KPMG LLP
("KPMG") and two other independent accounting firms to serve as the Company's
independent auditors in 2004. At the conclusion of that process, the Committee
dismissed KPMG as its independent auditors effective as of April 6, 2004 and
approved the selection of PricewaterhouseCoopers LLP ("PWC") as the Company's
independent auditors for the year ending December 31, 2004.
In connection with audits of the two fiscal years ended December 31, 2003,
and the subsequent interim period through April 5, 2004, there were no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which, if not
resolved to their satisfaction, would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
The audit report of KPMG on the financial statements of the Company as of
and for the years ended December 31, 2002 and 2001, dated February 7, 2003,
included in the Form 10-K filed with the SEC on March 31, 2003, did not contain
any adverse opinion or disclaimer of opinion, nor was it qualified or modified
as to uncertainty, audit scope, or accounting principles, except as follows:
KPMG's report on the financial statements of the Company as of and for the
years ended December 31, 2002 and 2001, contained a separate paragraph stating
that "the Company has suffered recurring losses from operations and has a net
capital deficiency, which raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty."
The audit report of KPMG on the consolidated financial statements of the
Company as of and for the years ended December 31, 2003 and 2002 did not contain
any adverse opinion or disclaimer of opinion, nor was it qualified or modified
as to uncertainty, audit scope, or accounting principles.
In connection with the completion of its audit of, and the issuance of an
unqualified report on, the Company's consolidated financial statements for the
fiscal years ended December 31, 2003 and 2002, KPMG identified deficiencies that
existed in the design or operation of the Company's internal controls that it
considered to be material weaknesses in the effectiveness of the Company's
internal controls pursuant to standards established by the American Institute of
Certified Public Accountants. A "material weakness" is a reportable condition in
which the design or operation of one or more of the specific internal control
components does not reduce to a relatively low level the risk that errors or
fraud in amounts that would be material in relation to the consolidated
financial statements being audited may occur and not be detected within a timely
period by employees in the normal course of performing their assigned functions.
KPMG advised the Audit Committee of the Company's Board of Directors of the
following material weaknesses:
o Inappropriate revenue recognition for government contracts;
o Account reconciliations not performed on a timely basis or at
all;
o Inadequate segregation of duties;
o Insufficient controls over recording of journal entries; and
o Lack of adequate depth of accounting knowledge.
The Audit Committee and Management believe that the areas of weakness
described above contributed to errors and misapplications in the Company's
financial statements for the fiscal year 2003, for the fiscal year 2002 and for
the second, third and fourth fiscal quarters of 2001.
The effects of the areas of weakness described above upon previously
issued financial statements were as follows:
o Inappropriate revenue recognition for government contracts
o No effect upon previously issued financial statements. The
deficiencies identified by the auditors principally related to
transactions occurring in the fourth fiscal quarter of 2003
and were corrected prior to the issuance of such financial
statements.
o Account reconciliations not performed on a timely basis or at all
o No direct effect upon previously issued financial statements.
o Inadequate segregation of duties
o No direct effect upon previously issued financial statements.
o Insufficient controls over recording of journal entries
o Management believes that this area of weakness contributed to
a transaction in which approximately $600,000 was incorrectly
recorded to correct a prior journal entry that had already
been corrected. The effect of this error upon financial
statements for the third fiscal quarter was corrected by
restatement in the Company's Annual Report on Form 10-K for
the fiscal year 2003, which was filed on March 30, 2004. The
effect of this error upon financial statements for the fourth
fiscal quarter of 2003 was corrected prior to the issuance of
such financial statements.
o Management also believes that this area of weakness
contributed to the recording of property and equipment costs
of $606,000 as operating expenses in the second fiscal quarter
of 2003. This error was corrected by restatement in the
Company's Report on Form 10-Q/A for the second fiscal quarter
of 2003, which was filed on November 19, 2003.
o Management also believes this area of weakness contributed to
the incorrect capitalization of costs in the third quarter of
2003 related to its majority-owned subsidiary, VCI, in the
amount of $856,000. This error was corrected by restatement in
the Company's Annual Report on Form 10-K for the fiscal year
2003, which was filed on March 30, 2004.
o Lack of adequate depth of accounting knowledge
o Management believes this area of weakness contributed to
errors related to the recognition, classification and
valuation of warrants and contingent beneficial conversion
features related to the Company's Series A Redeemable
Convertible Preferred Stock financing, which closed in May
2001. Under the terms of these warrants, warrant holders could
demand cash redemption upon the occurrence of certain events
outside the control of the Company. As such, the Company
reclassified these warrants from equity to a liability. As a
result, the financial statements for the fiscal year 2002 and
for the second, third and fourth fiscal quarters of 2001 were
restated in the Company's Annual Report on Form 10-K/A, filed
November 19, 2003. The net loss applicable to common
stockholders increased by $1,818,000 for the two-year period
ended December 31, 2002 as a result of the restatement. In
addition, the financial statements for the first and second
fiscal quarters of 2003 were restated in the Company's Reports
on Form 10-Q/A, filed November 19, 2003. The net loss
applicable to common stockholders decreased by $4,748,000 for
the three months ended March 31, 2003, and increased by
$2,131,000 for the three months ended June 30, 2003 as a
result of the restatements.
KPMG discussed the areas of weakness described above with the Audit
Committee. The Audit Committee is taking an active role in responding to the
deficiencies identified by KPMG, including overseeing Management's
implementation of the remedial measures described below with the goal of
identifying and rectifying past accounting errors and preventing the situations
that resulted in the need to restate prior period financial statements from
recurring. To this end, Management of the Company is working with the Audit
Committee to identify and implement corrective actions where required to improve
the effectiveness of the Company's internal controls, including the enhancement
of systems and procedures. The Company has implemented the following measures:
o Hired an interim Chief Financial Officer, effective March
2004;
o Hired key additional accounting staff; including two
individuals hired in November 2003 and two individuals in
March 2004;
o Initiated a comprehensive review of financial controls and
procedures to address the issues identified by KPMG and to
bring the Company into compliance with the requirements of the
Sarbanes-Oxley Act with respect to internal controls and
procedures; and
o Engaged the services of an independent internal controls
consultant to document, test and develop current and expanded
internal controls and procedures.
The Audit Committee and Management believe that the measures noted above
will address the conditions identified by KPMG as material weaknesses. The
Company and the Audit Committee plan to continue to monitor the effectiveness of
the Company's internal controls and procedures on an ongoing basis and will take
further action, as appropriate.
The Company did not consult with PWC during the fiscal years ended
December 31, 2003 and 2002, or during the subsequent interim period from January
1, 2004 through and including April 6, 2004, on either the application of
accounting principles to a specific transaction, either completed or proposed,
the type of audit opinion that might be rendered on the Company's consolidated
financial statements, or any of the reportable conditions described above. The
Company has authorized KPMG to respond fully to any inquiries of PWC concerning
the reportable conditions described above.
The Company has provided a copy of the foregoing disclosure to KPMG and
has requested KPMG to furnish an updated letter addressed to the Securities and
Exchange Commission stating whether KPMG agrees with the statements made above
by the Company. A copy of the letter from KPMG, dated November 10, 2004, is
filed as Exhibit 16.1 to this report and is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits
(a) Financial statements of business acquired. Not applicable.
(b) Pro forma financial information. Not applicable.
(c) Exhibits.
Exhibit No. Description
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16.1 Letter, dated as of November 10, 2004, from KPMG LLP, the
Registrant's former accountants, to the Securities and Exchange
Commission.
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 hereunto duly authorized.
VaxGen, Inc.
(Registrant)
Dated: November 19, 2004
By: /s/ James M. Cunha
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James M. Cunha
Chief Financial Officer