<PAGE> 1
AS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON JUNE 11,
1999
REGISTRATION NO. 333-78065
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VAXGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2834 94-3236309
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1000 MARINA BOULEVARD, SUITE 200
BRISBANE, CALIFORNIA 94005
(650) 624-1000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT C. NOWINSKI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1000 MARINA BOULEVARD, SUITE 200
BRISBANE, CALIFORNIA 94005
TEL (650) 624-1000
FAX (650) 624-1001
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
AGENT FOR SERVICE)
COPIES TO:
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BENJAMIN F. STEPHENS SUSAN L. PRESTON
WILLIAM W. BARKER KATHRYN A. WALKER
MARK F. HOFFMAN COOLEY GODWARD LLP
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S. 5200 CARILLON POINT
1001 FOURTH AVENUE PLAZA, SUITE 4500 KIRKLAND, WASHINGTON 98033
SEATTLE, WASHINGTON 98154 TEL: (425) 893-7700
TEL: (206) 624-3600 FAX: (425) 893-7777
FAX: (206) 389-1708
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
DESCRIPTION OF ARTWORK
Inside Front Cover:
Introductory text: Preventing HIV infection with AIDSVAX
Graphics on blue background depicting:
(1) gp120 molecule, arrow pointing to gp120
TEXT: HIV virus, gp120
(2) creation of synthetic gp120
TEXT: Synthetic gp120 created by genetic engineering
(3) Injection of AIDSVAX in arm of vaccinee
TEXT: AIDSVAX vaccine, AIDSVAX induces antibodies in blood
(4) binding of antibodies to gp120
TEXT: Protection, Antibodies to gp120 block HIV infection
*AIDSVAX is still in the development stage and has not yet obtained FDA
approval.
<PAGE> 3
DESCRIPTION OF ARTWORK
INSIDE BACK COVER:
Graphic depicting: Colored map of the world on blue background with vertical
bars indicating number of people living with HIV/AIDS.
TEXT: People Living with HIV/AIDS
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North America 890,000
Caribbean 330,000
Latin America 1,400,000
North Africa, Middle East 210,000
Western Europe 500,000
Sub Saharan Africa 22,500,000
South and South-East Asia 6,700,000
Eastern Europe, Central Asia 270,000
East Asia and Pacific 560,000
Australia and New Zealand 12,000
Total: 33.4 million
</TABLE>
Source: UNAIDS, AIDS Epidemic Update, Dec. 1998
<PAGE> 4
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. VAXGEN
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION -- JUNE 11, 1999
PROSPECTUS
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3,100,000 Shares
[VAXGEN LOGO]
Common Stock
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VaxGen, Inc. is offering 3,100,000 shares of its common stock in an initial
public offering. Prior to this offering, there has been no public market for
VaxGen's common stock.
VaxGen is developing preventive vaccines for worldwide use against HIV. We are
conducting two large-scale Phase III clinical trials, one in North America and
one in Thailand.
It is anticipated that the public offering price will be between $13.00 and
$15.00 per share. The shares of VaxGen will be quoted in the Nasdaq National
Market under the symbol "VXGN".
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<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price............................. $ $
Underwriting discounts and commissions............ $ $
Proceeds, before expenses, to VaxGen.............. $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES 8 TO 12 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE
INVESTING IN THE SHARES OF VAXGEN.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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The underwriters may, under certain circumstances, purchase up to 465,000
additional shares from VaxGen at the public offering price, less underwriting
discounts and commissions. Delivery and payment for the shares will be on
.
PRUDENTIAL SECURITIES PUNK, ZIEGEL & COMPANY
, 1999
<PAGE> 5
[GRAPHICS TO BE DETERMINED]
DESCRIPTION OF ARTWORK
Inside Front Cover:
Introductory text: Preventing HIV infection with AIDSVAX Graphics on blue
background depicting:
(1) gp120 molecule, arrow pointing to gp120
TEXT: HIV virus, gp120
(2) creation of synthetic gp120
TEXT: Synthetic gp120 created by genetic engineering
(3) Injection of AIDSVAX in arm of vaccinee
TEXT: AIDSVAX vaccine, AIDSVAX induces antibodies in blood
(4) binding at antibodies to gp120
TEXT: Protection, Antibodies to gp120 block HIV infection
<PAGE> 6
TABLE OF CONTENTS
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PAGE
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Prospectus Summary................. 4
Risk Factors....................... 8
Forward-Looking Statements......... 13
Use of Proceeds.................... 13
Dividend Policy.................... 13
Dilution........................... 14
Capitalization..................... 15
Selected Financial Data............ 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 17
Business........................... 21
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PAGE
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Management......................... 43
Certain Transactions............... 49
Principal Stockholders............. 50
Description of Capital Stock....... 51
Shares Eligible for Future Sale.... 53
Underwriting....................... 54
Legal Matters...................... 55
Experts............................ 55
Where You Can Find More
Information...................... 56
Index to Financial Statements...... F-1
</TABLE>
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AIDSVAX(R) is a registered trademark of VaxGen. Our web site address is
www.vaxgen.com. Information contained on our web site is not a part of this
prospectus.
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any jurisdiction where the offer or sale
is not permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front cover of
this prospectus.
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3
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Investors should read the entire prospectus carefully.
VAXGEN
We are developing preventive vaccines for worldwide use against HIV. We are
conducting two large-scale Phase III clinical trials of our AIDSVAX vaccines,
one principally in North America and one in Thailand. To date, we are the only
company to advance an HIV vaccine into Phase III clinical trials. If the Phase
III clinical trials are successful, we will apply to the United States Food and
Drug Administration and foreign regulatory authorities for licenses to
manufacture and sell AIDSVAX in the United States and abroad.
Initial development of AIDSVAX was funded by Genentech at a cost of over
$50 million during a period of nearly ten years. We were formed in November 1995
to complete the development of, and commercialize, AIDSVAX in partnership with
Genentech. Genentech licensed to us the technology necessary for development and
commercialization of AIDSVAX.
The HIV/AIDS Epidemic
HIV/AIDS is one of the largest epidemics in human history. According to the
World Health Organization and UNAIDS:
- in just two decades, over 47 million people have been infected with HIV
worldwide;
- 14 million lives have been claimed by AIDS;
- each day approximately 16,000 individuals become infected with HIV; and
- AIDS is the fourth leading cause of death worldwide, now exceeding
cancer.
We believe that, because of the magnitude and severity of the epidemic, an
HIV vaccine would have one of the largest population-based markets in the
history of modern medicine.
Our Vaccines
Our vaccines are designed to prevent infection by HIV, rather than treat
established infection. Because AIDSVAX contains synthetic copies of proteins
from the surface of HIV, it is incapable of causing HIV infection. Humans
vaccinated with AIDSVAX form antibodies against HIV which, in laboratory tests,
bind to the virus and neutralize its infectivity. Vaccination with AIDSVAX also
stimulates immune memory, training the immune system to mobilize rapidly in the
event of future exposure to HIV.
We believe that AIDSVAX will be successful for the following reasons:
- EFFICACY: In Phase II clinical trials, all human volunteers vaccinated
with AIDSVAX developed neutralizing antibodies to HIV. In chimpanzees,
vaccination with AIDSVAX protected chimps against infection upon
subsequent injection with infectious HIV. The level of neutralizing
antibodies in humans vaccinated with AIDSVAX equaled or exceeded that
observed in vaccinated chimps.
- SAFETY: In Phase I/II clinical trials, none of the 2,000 human volunteers
vaccinated with AIDSVAX had serious side effects.
- HIV COVERAGE: AIDSVAX is designed to neutralize the majority of HIV
subtypes and strains encountered during natural infection in the regions
where we are conducting Phase III clinical trials.
- BROAD USE: AIDSVAX has no clinical impact on people previously infected
with HIV. We believe, therefore, that AIDSVAX will be used without
requiring the prescreening of recipients. This is particularly
advantageous in populations where there is a high rate of HIV-infected
people.
- MANUFACTURING: Genentech has manufactured AIDSVAX in commercial
quantities.
- VACCINE RATIONALE: The design of AIDSVAX follows that of previous
successful vaccines, such as hepatitis B vaccine. The blocking of HIV
infection by neutralizing antibody conforms with generally accepted
principles of vaccinology.
4
<PAGE> 8
Our Clinical Trials
We are conducting Phase III clinical trials of AIDSVAX to determine whether
AIDSVAX protects humans from HIV infection by sexual transmission or injection
drug use. Phase III clinical trials are large-scale trials to test for efficacy
and further safety. The North American Phase III trial is designed for 5,400
volunteers. It is being conducted in 56 clinics across the United States. It is
also being tested in one clinic in Puerto Rico, one clinic in Canada and one
clinic in The Netherlands. In Thailand, the Phase III clinical trial is designed
for 2,500 volunteers and is being conducted in 17 clinical sites in Bangkok.
To gain regulatory approval for AIDSVAX, we believe the vaccine must
demonstrate, at statistical significance, efficacy of at least 30%. This is
based on meetings and documented discussions we have had with the FDA and its
Vaccines and Related Biological Products Advisory Committee.
Our clinical protocol provides for two opportunities to measure efficacy:
- An independent monitoring board will conduct an interim analysis
approximately midway through the observation period of each clinical
trial. Should AIDSVAX demonstrate 30% efficacy, the independent
monitoring board will recommend termination of, and we will terminate,
the trial and we will submit an application for regulatory approval.
- If 30% efficacy has not been shown by the time of the interim analysis,
we will have a second opportunity to determine the vaccine's efficacy at
the completion of the trial.
Under the current timetable, the interim analysis for each clinical trial
will be conducted in the second half of 2001.
Our Strategic Relationships
We intend to use Genentech as our partner to manufacture and distribute
AIDSVAX. Genentech has exclusive options to manufacture and market AIDSVAX on
specified financial terms. If Genentech does not exercise its options, we have
the right to pursue third party arrangements, with Genentech providing the
transfer of technology necessary to manufacture AIDSVAX.
We will work with two federal agencies in relation to our North American
Phase III trial: the Centers for Disease Control and Prevention and the National
Institute for Allergy and Infectious Diseases. The Centers for Disease Control
and Prevention have proposed to co-sponsor the Phase III trial and to fund $8.0
million over a period of four years. The National Institute for Allergy and
Infectious Diseases is working with us on a $4.6 million program related to the
Phase III clinical trial. The purpose of this program is to obtain and store
specimens for studies on the immune system.
We also intend to work selectively with other companies that are developing
vaccines for HIV. For example, we are working with Pasteur Merieux Connaught to
co-develop an alternative HIV vaccine. This vaccine will combine technologies
and components provided by Pasteur Merieux Connaught and us. We anticipate that
such a combination vaccine could enter Phase III clinical trials by 2001.
We believe we have a strong competitive lead in the development of an HIV
vaccine. We are the only company worldwide with Phase III clinical trials of an
HIV vaccine underway. In addition to having the advantage of lead-time, we also
have an exclusive license from Genentech to a portfolio of U.S. and foreign
patents on AIDSVAX and associated technology, consisting of 88 issued patents
and 47 pending patent applications.
Our Management Team
Our management team, together with Genentech, has extensive experience in
the international arena of HIV research, public health policy, and the practical
aspects of developing, manufacturing and marketing biological products. Our
President is Donald Francis, M.D. During his 20-year tenure at the Centers for
Disease Control, he was involved in the control or eradication of several
epidemics, including a major epidemic of cholera in Africa, smallpox in India
and the first known outbreak of the Ebola virus. He subsequently was the lead
clinician for the Phase III trial of the hepatitis B vaccine. Our Chairman of
the Board and Chief Executive Officer is Robert Nowinski, Ph.D. Dr. Nowinski is
a pioneering executive in the biotechnology industry, having founded three
publicly-traded biotechnology companies: Genetic Systems Corporation in 1981,
ICOS Corporation in 1989, and PathoGenesis Corporation in 1991. Our Senior Vice
President, Research & Development is Phillip Berman, Ph.D., who is an inventor
of AIDSVAX and a former senior scientist at Genentech.
VaxGen, Inc. was incorporated in Delaware in November 1995. Our principal
executive offices are located at 1000 Marina Boulevard, Suite 200, Brisbane, CA
94005, and our telephone number is (650) 624-1000.
5
<PAGE> 9
THE OFFERING
Shares offered by VaxGen.................... 3,100,000 shares
Total shares outstanding after this
offering.................................... 10,785,161 shares(1)
Use of proceeds............................. To complete Phase III clinical
trials of AIDSVAX in North
America and Thailand, develop
data management systems, apply
for regulatory approval and for
working capital and other
general corporate purposes.
Proposed Nasdaq National Market symbol...... VXGN
(1) Reflects a one-for-two reverse stock split effective on April 9, 1999, and
does not include: (a) 891,671 shares of common stock issuable on exercise of
stock options outstanding at April 15, 1999 at a weighted average exercise
price of $8.33 per share; (b) 861,150 shares of common stock reserved for
future issuance under our 1996 stock option plan; (c) 28,929 shares of
common stock reserved for future issuances under our 1998 Director Stock
Option Plan; (d) 309,825 shares of common stock issuable on exercise of
warrants at April 15, 1999 at a weighted average exercise price of $7.73 per
share; and (e) exercise of the underwriters' over-allotment option.
6
<PAGE> 10
SUMMARY FINANCIAL INFORMATION
The following tables reflect selected financial information since
inception. The "as adjusted" column of the balance sheet data reflects the
estimated net proceeds from the sale of 3,100,000 shares of common stock to be
sold in this offering at an assumed initial public offering price of $14.00 per
share.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 27, 1995 YEAR ENDED THREE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ---------------------------- -------------------
1995 1996 1997 1998 1998 1999
----------------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Loss from operations.......... $(30) $(2,054) $(3,946) $(10,176) $(1,163) $(4,044)
Net loss...................... $(30) $(2,082) $(3,060) $ (9,163) $ (857) $(3,760)
==== ======= ======= ======== ======= =======
Net loss per share -- basic
and diluted................. $ -- $ (1.90) $ (0.60) $ (1.48) $ (0.14) $ (0.49)
==== ======= ======= ======== ======= =======
Weighted average shares
outstanding -- basic and
diluted..................... -- 1,093 5,096 6,185 6,066 7,619
</TABLE>
<TABLE>
<CAPTION>
AT AT MARCH 31, 1999
DECEMBER 31, -------------------------
1998 ACTUAL AS ADJUSTED(1)
------------ ------- --------------
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash, cash equivalents and investment securities....... $19,468 $20,607 $59,707
Working capital........................................ 17,866 19,318 58,418
Total assets........................................... 21,472 22,693 61,793
Stockholders' equity................................... 19,398 20,896 59,996
</TABLE>
7
<PAGE> 11
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus, before purchasing shares of
common stock of VaxGen. Each of these risk factors could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock.
IF WE ARE UNABLE TO COMMERCIALIZE OUR SOLE PRODUCT CANDIDATE, AIDSVAX, WE MAY
NOT HAVE REVENUES TO CONTINUE OPERATIONS. AIDSVAX is our only product candidate.
We do not know whether the current or planned formulations of AIDSVAX will be
effective in preventing HIV infection. The overall scientific knowledge of HIV
is limited. Although our research has indicated that AIDSVAX contains a protein
that is critical in the infection process, other proteins may be necessary to
develop an effective vaccine.
Our success will depend entirely on the success of AIDSVAX. In particular,
we must be able to:
- establish the safety, purity and potency of AIDSVAX in humans;
- obtain regulatory approvals for AIDSVAX, including a preapproval of the
manufacturing facility; and
- successfully commercialize AIDSVAX through collaborative relationships.
If we are unable to commercialize AIDSVAX, we do not have other products
from which to derive revenue.
IF WE ARE NOT ABLE TO DEMONSTRATE THE EFFICACY OF AIDSVAX IN OUR CLINICAL
TRIALS OR OUR CLINICAL TRIALS ARE DELAYED, WE MAY NOT BE ABLE TO OBTAIN
REGULATORY CLEARANCE TO MARKET AIDSVAX IN THE UNITED STATES OR ABROAD ON A
TIMELY BASIS, OR AT ALL. Clinical testing is a long, expensive and uncertain
process. We cannot assure you that the data collected from our clinical trials
will be sufficient to support approval of AIDSVAX by the FDA or any foreign
regulatory authorities, that the clinical trials will be completed on schedule
or, even if the clinical trials are successfully completed and on schedule, that
the FDA or any foreign regulatory authorities will ultimately approve AIDSVAX
for commercial sale.
To gain FDA regulatory approval for the sale of AIDSVAX in the United
States, we believe, based on discussions with the FDA and the vote of its
Vaccine and Related Biological Products Advisory Committee, that we will need to
demonstrate that the AIDSVAX vaccine reduces the level of HIV infection by at
least 30% at a statistically significant level. These discussions and the vote
of the Vaccine and Related Biological Products Advisory Committee, however, are
not binding on the FDA. In the context of our United States clinical trial,
which represents a small sampling from the entire population, this means that in
order to establish 30% efficacy at a statistically significant level there must
be an observed reduction in the incidence of HIV in the group receiving the
vaccine compared to the control group of between 45% to 65%, or possibly a
higher percentage, depending on various factors that will have a bearing on the
statistical significance of the clinical trial results. These factors include
the number of patients ultimately enrolled in the study, the rate of HIV
infection in the control group and the length of time associated with the
clinical observation period. We anticipate that the efficacy required to obtain
regulatory approval to market AIDSVAX in foreign countries will vary from one
country to another and may differ significantly from that required by the FDA.
We cannot assure you that the data collected from our United States or Thai
clinical studies will demonstrate the required level of efficacy to permit the
commercialization of AIDSVAX in the Unites States, in Thailand or in any other
foreign country.
Our trials could be delayed for a variety of reasons, including:
- delays in enrolling volunteers;
- lower than anticipated retention rate of volunteers in the trial; or
- serious adverse events related to the vaccine.
8
<PAGE> 12
Results of previous animal trials may not be relevant for determining the
protective effect of AIDSVAX against HIV infection in humans. Preclinical and
clinical data can be interpreted in different ways, which could delay, limit or
prevent regulatory approval. Serious adverse events related to the vaccine
during our Phase III clinical trials could cause the trials to be prematurely
terminated. Negative or inconclusive results could cause the trials to be
unacceptable for submission to regulatory authorities.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS ENFORCED BY DOMESTIC AND
FOREIGN REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF AIDSVAX COULD BE
PREVENTED OR DELAYED. AIDSVAX is subject to extensive government regulations
related to development, clinical trials, manufacturing and commercialization.
The process of obtaining FDA and other regulatory approvals is costly, time
consuming, uncertain and subject to unanticipated delays.
The FDA may refuse to approve an application if it believes that any
applicable regulatory criteria are not satisfied. The FDA may also require
additional testing to establish the safety, purity and potency of AIDSVAX.
Moreover, if regulatory approval of a product is granted, the approval may be
limited to specific indications or limited with respect to its distribution. For
instance, the FDA may approve the licenses for only high risk populations.
Foreign regulatory authorities may apply similar limitations or may refuse to
grant any approval.
The FDA may refuse to approve an application if it believes that applicable
regulatory criteria are not satisfied. The FDA may also require additional
testing for safety and efficacy. Moreover, if regulatory approval of a product
is granted, the approval may be limited to specific indications or limited with
respect to its distribution. For instance, the FDA may approve the licenses for
only high risk populations. Foreign regulatory authorities may apply similar
limitations or may refuse to grant any approval.
There can be no assurance that the FDA will approve the AIDSVAX
manufacturing processes or that manufacturing facilities will pass an FDA
preapproval inspection for AIDSVAX. Should Genentech elect not to manufacture
AIDSVAX, we must secure a third party manufacturer. We cannot assure you that we
will successfully identify a third party manufacturer or that its facilities
will pass an FDA preapproval inspection for AIDSVAX. At a minimum, the FDA will
require equivalence testing between Genentech produced AIDSVAX and third party
produced AIDSVAX. Depending upon differences in manufacturing processes, the FDA
may also require additional clinical studies to establish the safety, purity and
potency of AIDSVAX. Any failure to obtain or delay in obtaining such approvals
would have a material adverse effect on our business, financial condition and
results of operation.
Even after United States regulatory approval for AIDSVAX is obtained, the
license will be subject to continual review, and newly discovered or developed
safely or efficacy data may result in revocation of the marketing license.
Moreover, if and when such approval is obtained, the marketing of AIDSVAX will
be subject to extensive regulatory requirements administered by the FDA and
other regulatory bodies, including adverse event reporting requirements and the
FDA's general prohibition against promoting products for unapproved or
"off-label" uses. The AIDSVAX manufacturing facilities are also subject to
continual review and periodic inspection and approval of manufacturing
modifications. Domestic manufacturing facilities are subject to biennial
inspections by the FDA and must comply with the FDA's Good Manufacturing
Practices regulations. In complying with these regulations, manufacturers must
spend funds, time and effort in the areas of production, record keeping,
personnel and quality control to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. Failure to comply
with any of these postapproval requirements can, among other things, result in
warning letters, product seizures, recalls, fines, injunctions, suspensions or
revocations of marketing licenses, operating restrictions and criminal
prosecutions. We plan to pursue marketing authorization in Thailand based on the
results from the Thai trial. The Thai government also has a regulatory process
that we will need to follow before we can commercialize AIDSVAX in that country.
No assurances can be given that we will obtain marketing authorization from the
Thai government. Any such enforcement action could harm our business.
Unanticipated changes in existing requirements or the adoption of new
requirements could also have a material adverse effect on VaxGen.
9
<PAGE> 13
VaxGen and the manufacturer of AIDSVAX also are subject to numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and hazardous substance disposal. There can be no assurance that we will
avoid incurring significant costs to comply with such laws and regulations in
the future, or that such laws or regulations will not have a material adverse
effect on VaxGen.
The European Union, Japan and other countries also extensively regulate
pharmaceuticals, including biological drug products. No assurance can be given
that we will be able to obtain other countries' approvals for AIDSVAX.
WE HAVE ONLY A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE
LOSSES. To date, we have engaged primarily in research, development and clinical
testing. At March 31, 1999, we had an accumulated deficit of approximately $18.1
million. We sustained net losses of approximately $2.1 million in 1996, $3.1
million in 1997 and $9.2 million in 1998, and $3.8 million for the three months
ended March 31, 1999. We expect to incur substantial losses for at least an
additional four to five years.
IF WE NEEDED ADDITIONAL FUNDS, AND ARE UNABLE TO RAISE THEM, WE WOULD HAVE TO
CURTAIL OR CEASE OPERATIONS. We cannot be certain that our existing capital
resources, together with the net offering proceeds and anticipated funding from
the Centers for Disease Control and Prevention and the National Institute of
Allergy and Infectious Diseases, will be sufficient to support our current and
planned operations through commercialization of AIDSVAX. We do not expect
AIDSVAX to be commercially available for at least four years. AIDSVAX has not
received regulatory approval for commercial sale. If taken to completion, the
Phase III clinical testing necessary before we can file an application with the
FDA for product approval will take at least 36 months from the date of this
prospectus. Once the testing is completed, we will need to analyze the data and
prepare our biologics license application for submission to the FDA, which
typically takes between three and six months to be accomplished. The FDA review
process could take at least an additional six months. We anticipate that it will
take at least six months after obtaining regulatory approval for Genentech or
another third party to begin commercialization of AIDSVAX. As a result, we do
not believe that AIDSVAX will be on the market before 2003.
We may need to raise additional funds if:
- AIDSVAX is not sufficiently safe, pure and potent to commercialize in its
current formulation;
- our Phase III clinical trials are delayed, are not successful or are more
costly than currently estimated;
- commercialization of AIDSVAX is delayed for any other reason;
- additional trials are required; or
- we do not receive the anticipated funding from the Centers for Disease
Control and Prevention or the National Institute of Allergy and
Infectious Diseases.
We cannot assure you that we will be able to raise sufficient funds in the
future. If we fail to raise sufficient funds, we would have to curtail or cease
operations.
WE RELY ON GENENTECH FOR THE MANUFACTURE OF AIDSVAX. OUR INABILITY TO
MANUFACTURE AIDSVAX, AND OUR DEPENDENCE ON GENENTECH, MAY DELAY OR IMPAIR OUR
ABILITY TO GENERATE REVENUES, OR ADVERSELY AFFECT OUR PROFITABILITY. We have no
manufacturing facilities. We are entirely dependent on third parties to produce
AIDSVAX. To date, we have relied on Genentech for this purpose. Genentech
currently has an exclusive option to manufacture AIDSVAX. We believe that
Genentech is the manufacturer best able to produce AIDSVAX. Our license
agreement with Genentech does not specify the price we will be required to pay
Genentech to manufacture AIDSVAX.
If Genentech does not manufacture AIDSVAX, we will need to locate and
engage another manufacturer. The cost and time to establish manufacturing
facilities to produce AIDSVAX would be substantial. As a result, using a
manufacturer other than Genentech could delay bringing AIDSVAX to market. This
delay could require us to raise additional funds.
10
<PAGE> 14
We cannot assure you that we will be able to enter into an agreement with a
third party to manufacture AIDSVAX. We also have no way to determine the price
we would be charged by a third party to manufacture AIDSVAX if Genentech does
not manufacture AIDSVAX. Any manufacturer other than Genentech would have to
prove both to us and to the FDA and to other regulatory authorities that its
manufacturing process, facilities, procedures, and personnel comply with
government regulations and that it consistently produces the same product that
was made by Genentech and tested in the Phase III clinical trials. If
manufacturing is done by a company other than Genentech, we may have to do
additional clinical trials to show the therapeutic equivalence of the product
made by the other company to the Genentech product.
WE RELY ON GENENTECH FOR THE SALE, MARKETING AND COMMERCIALIZATION OF AIDSVAX.
OUR LACK OF SALES AND MARKETING PERSONNEL, AND OF DISTRIBUTION RELATIONSHIPS,
MAY IMPAIR OUR ABILITY TO GENERATE REVENUES. We have no sales, marketing or
commercialization capability. Genentech currently has an exclusive option to
market and distribute AIDSVAX. We intend to rely on Genentech to provide an
established distribution system and sales force to market AIDSVAX. If Genentech
does not elect to exercise its option to market and distribute the product, we
will need to locate and engage another partner to market and commercialize
AIDSVAX. We cannot assure you that we will be able to establish marketing or
commercialization arrangements with third parties in a timely manner or on
favorable terms.
POLITICAL OR SOCIAL FACTORS MAY DELAY OR REDUCE REVENUES BY DELAYING OR
IMPAIRING OUR ABILITY TO MARKET AIDSVAX. Products developed for use in
addressing the HIV/AIDS epidemic have been, and will continue to be, subject to
competing and changing political and social pressures. The political and social
response to the HIV/AIDS epidemic has been highly charged and unpredictable.
These pressures can transcend national barriers. They may delay or cause
resistance to bringing our product to market or limit pricing of our product.
IF GENENTECH TERMINATES OUR LICENSE AGREEMENT, WE MAY NOT BE ABLE TO DEVELOP
OR MARKET AIDSVAX ON COMMERCIALLY REASONABLE TERMS, OR AT ALL. We cannot conduct
our business without the technology we license from Genentech. Our license
agreement with Genentech permits Genentech to terminate the agreement, or
terminate the exclusivity of our license, if we:
- fail to use due diligence in developing, seeking regulatory approval for,
marketing or commercializing products covered by the Genentech license
agreement;
- fail to file the first market approval application for AIDSVAX with the
FDA prior to May 2002, subject to potential extension for up to two years
in certain circumstances, any other extension being Genentech's sole
decision;
- breach the license agreement and fail to cure the breach within the time
period provided in the agreement;
and we are not able to cure these breaches within the period provided in the
Genentech license agreement. Genentech may also terminate the agreement at any
time if we fail to maintain a tangible net worth of at least $1 million.
FAILURE TO RETAIN KEY MANAGEMENT EMPLOYEES COULD ADVERSELY AFFECT OUR ABILITY
TO OBTAIN FINANCING, CONDUCT CLINICAL TRIALS, OR DEVELOP AIDSVAX. We are highly
dependent on our senior management and scientific staff, particularly Dr. Donald
Francis, our President, Dr. Robert Nowinski, our Chairman and Chief Executive
Officer, and Dr. Phillip Berman, our Senior Vice President, Research &
Development. These individuals have played a critical role in developing the
vaccine, raising financing and conducting clinical trials. The loss of the
services of any of these key members of senior management may prevent us from
achieving our business objectives.
11
<PAGE> 15
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE UNABLE TO
PREVENT OTHER COMPANIES FROM USING OUR TECHNOLOGY IN COMPETITIVE PRODUCTS. IF WE
INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE MAY BE PREVENTED FROM
DEVELOPING OR MARKETING AIDSVAX. We rely on patent and other intellectual
property protection to prevent our competitors from manufacturing and marketing
AIDSVAX. Our technology, including technology licensed from Genentech, will be
protected from unauthorized use by others only to the extent that it is covered
by valid and enforceable patents or effectively maintained as trade secrets. As
a result, our success depends on our ability, and Genentech's ability, to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from
Genentech will be enforceable and afford protection against competitors. We
cannot assure you that our operations or technology will not infringe
intellectual property rights of others. If we infringe the intellectual property
of others, there can be no assurance that we would be able to obtain licenses to
use the technology on commercially reasonable terms or at all.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, THEY MAY REDUCE DEMAND FOR
AIDSVAX OR RESULT IN DAMAGES THAT EXCEED OUR INSURANCE LIMITATION. We face an
inherent risk of exposure to product liability suits in connection with AIDSVAX
vaccines being tested in human clinical trials and products that may be sold
commercially. We may become subject to a product liability suit if AIDSVAX
causes injury, or if vaccinated individuals subsequently become infected with
HIV. Regardless of merit or eventual outcome, product liability claims may
result in decreased demand for a vaccine, injury to our reputation, withdrawal
of clinical trial volunteers and loss of revenues.
THIS OFFERING'S NET PROCEEDS MAY BE ALLOCATED IN WAYS WITH WHICH YOU AND OTHER
STOCKHOLDERS MAY NOT AGREE. Management will have significant flexibility in
applying the net proceeds of this offering and could be used for purposes other
than those contemplated at the time of the offering.
PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION. You will experience an immediate and substantial dilution
in net tangible book value of $8.44 per share, assuming an initial public
offering price of $14.00 per share.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD LOWER OUR STOCK
PRICE AND IMPAIR OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS. The market
price of our common stock could drop due to sales of a large number of shares of
our common stock or the perception that these sales could occur. These factors
could also make it more difficult to raise funds through future offerings of
common stock.
After this offering, we will have 10,785,161 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 11,250,161 shares outstanding. All shares of common stock sold in
this offering will be freely tradeable without restrictions under the securities
act, except for any shares purchased by one of our affiliates, which will be
limited by Rule 144 under the Securities Act. Our officers and directors and a
majority of stockholders holding common stock have entered into lock-up
agreements pursuant to which they have agreed not to offer or sell any shares of
common stock currently held by them for a period of 180 days after this
offering. Also, Prudential Securities may, at any time and without notice, waive
the terms of these lock-up agreements. Upon expiration of this lock-up period
shares may be sold in the future without registration. See Underwriting for a
more detailed discussion. The remaining 7,685,161 shares are "restricted
securities" within the meaning of Rule 144.
12
<PAGE> 16
USE OF PROCEEDS
The net proceeds to VaxGen from the sale of the common stock in this
offering, assuming a public offering price of $14.00 per share, are estimated to
be $39.1 million after deducting underwriting discounts and commissions and
offering expenses. If the underwriters exercise their over-allotment option in
full, this figure will increase to $45.1 million. We intend to use these net
proceeds as follows:
- to complete Phase III clinical trials of AIDSVAX, including the costs to
engage medical clinics to perform the clinical trials;
- development and operation of laboratory and data management systems;
- costs of obtaining regulatory approvals; and
- administrative costs and general corporate purposes.
We have not determined the amount of net proceeds to be used for each of
the specific purposes indicated. Accordingly, we will have broad discretion to
use the proceeds as we see fit. Pending such uses, we will invest the net
proceeds in short-term, investment grade, interest-bearing securities or
guaranteed obligations of the United States government.
DIVIDEND POLICY
We have not declared or paid dividends. We do not anticipate declaring or
paying dividends in the foreseeable future.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions about VaxGen, including, among other things:
- general economic and business conditions;
- our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
- anticipated trends in our business;
- existing and future regulations affecting our business; and
- other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect" and similar
expressions, as they relate to VaxGen, our business or our management, are
intended to identify forward-looking statements.
13
<PAGE> 17
DILUTION
Purchasers of common stock will experience immediate and substantial
dilution in the net tangible book value of the common stock from the initial
public offering price. Net tangible book value per share is equal to the amount
of total net tangible assets less total liabilities divided by the number of
outstanding shares. After giving effect to the application of the sale of
3,100,000 shares of common stock at an assumed initial public offering price of
$14.00 per share and after the deduction of underwriting discounts and
commissions and estimated offering expenses, VaxGen would have had a net
tangible book value at March 31, 1999 of $60.0 million, or $5.56 per share. This
is an immediate increase in net tangible book value of $2.84 per share to
existing stockholders and an immediate and substantial dilution of $8.44 per
share to new investors purchasing common stock in this offering. The following
table illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price.............................. $14.00
Net tangible book value at March 31, 1999................. $2.72
Increase attributable to new investors.................... 2.84
-----
Net tangible book value after the offering......................... 5.56
------
Dilution in net tangible book value to new investors............... $ 8.44
======
</TABLE>
The following table summarizes, at March 31, 1999, the differences between
existing stockholders and new investors in this offering with respect to the
number of shares of common stock purchased from VaxGen, the total consideration
paid to VaxGen, and the average consideration paid per share before the
deduction of underwriting discounts and commissions and estimated offering
expenses paid by VaxGen.
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION
----------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 7,685,161 71.3% $42,239,000 49.3% $ 5.50
New investors...................... 3,100,000 28.7% $43,400,000 50.7% $14.00
---------- ----- ----------- -----
Total.................... 10,785,161 100.0% $85,639,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) If the underwriters' over-allotment option is exercised in full, the number
of shares purchased by investors in the offering will be increased to
3,565,000.
(2) Reflects a one-for-two reverse stock split effective on April 9, 1999, and
does not include: (a) 891,671 shares of common stock issuable on exercise of
stock options outstanding at April 15, 1999 at a weighted average exercise
price of $8.33 per share; (b) 861,150 shares of common stock reserved for
future issuance under our 1996 stock option plan; (c) 28,929 shares of
common stock reserved for future issuances under our 1998 Director Stock
Option Plan; (d) 309,825 shares of common stock issuable on exercise of
warrants at April 15, 1999 at a weighted average exercise price of $7.73 per
share; and (e) exercise of the underwriters' over-allotment option.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth at March 31, 1999, the capitalization of
VaxGen on an actual basis and as adjusted to reflect the application of
estimated net proceeds of $39.1 million from the sale of 3,100,000 shares of
common stock offered by us at an assumed initial public offering price of $14.00
per share. This table should be read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and investment securities............ $ 20,607 $ 59,707
-------- --------
Long-term obligations....................................... 66 66
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized, none outstanding........................... -- --
Common stock, $0.01 par value, 20,000,000 shares
authorized, 7,685,161 shares issued and outstanding,
actual; 10,785,161 shares issued and outstanding, as
adjusted(1)............................................ 77 108
Additional paid-in capital................................ 38,886 77,955
Accumulated other comprehensive income.................... 28 28
Deficit accumulated during the development stage.......... (18,095) (18,095)
-------- --------
Total stockholders' equity.................................. 20,896 59,996
-------- --------
Total capitalization........................................ $ 20,962 $ 60,062
======== ========
</TABLE>
- ---------------
(1) Reflects a one-for-two reverse stock split effective on April 9, 1999, and
does not include: (a) 891,671 shares of common stock issuable on exercise of
stock options outstanding at April 15, 1999 at a weighted average exercise
price of $8.33 per share; (b) 861,150 shares of common stock reserved for
future issuance under our 1996 stock option plan; (c) 28,929 shares of
common stock reserved for future issuances under our 1998 Director Stock
Option Plan; (d) 309,825 shares of common stock issuable on exercise of
warrants at April 15, 1999 at a weighted average exercise price of $7.73 per
share; and (e) exercise of the underwriters' over-allotment option.
15
<PAGE> 19
SELECTED FINANCIAL DATA
This selected financial information should be read with the financial
statements, related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the balance sheet data at December 31, 1996, 1997 and 1998 are derived
from our audited financial statements. The statement of operations data and
balance sheet data for and at the periods ended December 31, 1995 and March 31,
1999 and for the period ended March 31, 1998 are derived from our unaudited
financial statements.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 27,
1995
(INCEPTION) THREE MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ---------------------------- -----------------
1995 1996 1997 1998 1998 1999
------------ ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses
Research and development........ $ (3) $(1,683) $(3,146) $ (6,831) $ (716) $(3,038)
General and administrative...... (27) (371) (800) (3,345) (447) (1,006)
---- ------- ------- -------- ------- -------
Loss from operations............... (30) (2,054) (3,946) (10,176) (1,163) (4,044)
Total other income (expense),
net............................. -- (28) 886 1,013 306 284
---- ------- ------- -------- ------- -------
Net loss........................... $(30) $(2,082) $(3,060) $ (9,163) $ (857) $(3,760)
==== ======= ======= ======== ======= =======
Net loss per share -- basic and
diluted......................... $ -- $ (1.90) $ (0.60) $ (1.48) $ (0.14) $ (0.49)
==== ======= ======= ======== ======= =======
Weighted average shares
outstanding -- basic and
diluted......................... -- 1,093 5,096 6,185 6,066 7,619
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
---------------------------------- MARCH 31,
1995 1996 1997 1998 1999
---- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investment
securities.................................. $ -- $ 38 $23,880 $19,468 $20,607
Working capital (deficiency).................. (15) (1,458) 19,843 17,866 19,318
Total assets.................................. 11 229 24,301 21,472 22,693
Long-term obligations......................... 15 795 -- -- 66
Total stockholders' equity (deficit).......... (30) (2,069) 19,882 19,398 20,896
</TABLE>
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the "Selected Financial Data," financial statements and related notes included
elsewhere in this prospectus.
OVERVIEW
Initial development of AIDSVAX was funded by Genentech at a cost of over
$50 million over a period of nearly ten years. In November 1995, we were formed
to continue development of AIDSVAX in partnership with Genentech. In connection
with our formation, Genentech licensed to us the technology necessary for
completing development and commercialization of AIDSVAX.
Since our formation, we have focused on developing and testing AIDSVAX. We
recently commenced two Phase III clinical trials, one principally in North
America and one in Thailand to determine efficacy of AIDSVAX. The North American
Phase III clinical trial is being conducted in 59 clinical centers and is
designed for 5,400 trial volunteers. The Thai Phase III clinical trial is being
conducted in 17 clinical centers in Bangkok and is designed for 2,500 trial
volunteers.
In 1996, we entered into two agreements with Genentech: a services
agreement and a license agreement. The services agreement defines the parties'
day-to-day working relationship. Pursuant to this agreement, Genentech provides
limited research and development, regulatory filings, and other administrative
assistance. The services agreement was extended in January 1999 for two years.
Under the license agreement, among other things, Genentech has committed to
make limited amounts of AIDSVAX, and may elect to manufacture more AIDSVAX.
Genentech has an option to manufacture AIDSVAX on specified financial terms. If
Genentech does not exercise its option to manufacture, then we have the right to
pursue third party manufacturing and marketing arrangements. Genentech also has
a marketing option to obtain an exclusive worldwide license to use, market and
sell AIDSVAX. The option is exercisable for 90 days after we submit our first
filing with the FDA to obtain a license for AIDSVAX.
If Genentech exercises the marketing option:
- Genentech is required to pay us a fee equal to 33% of our total
development costs including clinical testing, to date for the licensed
product; and
- we and Genentech will share net profits from sales of the licensed
products, 30% and 70%, respectively, for sales within the United States
and 70% and 30%, respectively, for sales outside the United States.
In the event that Genentech does not exercise the marketing option, we will
retain the right to market AIDSVAX and will pay Genentech a royalty on all sales
of licensed products equal to:
- 25% of our net sales and our sublicensees' net sales of the licensed
products worldwide, so long as any commercial vaccine component has been
manufactured and supplied by Genentech; or otherwise
- 15% of our total net sales and our sublicensees' net sales of the
licensed products worldwide.
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 five 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 March 31, 1999, we had a deficit
accumulated during the development stage of $18,095,000. We anticipate incurring
substantial losses over at least the next four to five years as we complete our
clinical trials, apply for regulatory approvals, continue development of our
technology and expand our operations.
17
<PAGE> 21
We believe that the net proceeds from this offering together with
anticipated funding from the Centers for Disease Control and Prevention and the
National Institute for Allergy and Infectious Diseases will be sufficient to
complete our Phase III clinical trials, apply for regulatory approval in the
United States and Thailand, and bring AIDSVAX to market. However, we may require
additional funds. We do not currently have other sources of financing. Our
future capital requirements depend on several factors, including:
- the progress of our 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
- whether the timing of revenue from AIDSVAX is delayed.
Our employment agreements with three of our executive 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 a one-time, non-cash expense equal
to the aggregate value of the shares on the date the $28.00 per share condition
is met.
In May 1999 we issued warrants to purchase common stock to an individual in
connection with settling a dispute over an employment agreement. As a result of
the warrant issuance, we will record a non-cash compensation expense of
approximately $2,000,000 in the second quarter of 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Research and development expense
Research and development expense increased 324% from $716,000 for the three
months ended March 31, 1998 to $3,038,000 for the three months ended March 31,
1999. This increase was primarily due to the ramping up of our North American
and Thai Phase III clinical trials, including fees paid to third parties
associated with conducting the trials and an increase in our internal staff for
the purposes of working on the trials.
General and administrative expense
General and administrative expense increased 125% from $447,000 for the
three months ended March 31, 1998 to $1,006,000 for the three months ended March
31, 1999. This increase was primarily due to additional personnel, professional
service fees and costs associated with maintaining our larger office facilities.
Total other income (expense), net
Other income (expense), net, consisting primarily of interest income,
decreased slightly from $306,000 for the three months ended March 31, 1998 to
$284,000 for the three months ended March 31, 1999. This was primarily
attributable to lower average balances of cash, cash equivalents and investment
securities.
18
<PAGE> 22
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Our activities in 1998 were focused on preparing for and commencing our
Phase III clinical trials of AIDSVAX, developing data management systems,
continuing research and development of AIDSVAX, and private financing
activities.
Research and development expense
Research and development expense increased 117% from $3,146,000 in 1997 to
$6,831,000 in 1998. This increase was primarily due to additional personnel,
retaining consultants and contracting with clinics to facilitate the North
American Phase III clinical trial that began in June 1998. The increase was
partially offset by decreased vaccine production costs, as no vaccine production
was required in 1998.
General and administrative expense
General and administrative expense increased 318% from $800,000 in 1997 to
$3,345,000 in 1998. This increase was primarily due to an additional $900,000 in
costs associated with efforts to increase public awareness of the North American
Phase III clinical trial, an additional $800,000 in compensation expense
associated with additional personnel and, an additional $345,000 in higher rent
and related insurance costs associated with our move to larger facilities in
September 1998.
Total other income (expense), net
Other income (expense), net, consisting primarily of interest income
increased 14% from $886,000 in 1997 to $1,013,000 in 1998. This increase was due
to higher average balances of cash, cash equivalents, and investment securities
throughout the year resulting from our private placement completed in May 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Our activities in 1997 were focused on working with Genentech to develop
and produce bivalent vaccine for use in our AIDSVAX clinical trials and on
private financing activities.
Research and development expense
Research and development expense increased 87% from $1,683,000 in 1996 to
$3,146,000 in 1997. This increase was primarily due to an additional $913,000 in
payments to Genentech for development and production of bivalent vaccine, an
additional $319,000 in compensation expense as we added clinical and data
management personnel in preparation of human clinical trials, and an additional
$155,000 in costs associated with Phase I and Phase II clinical trials for our
bivalent AIDSVAX vaccine.
General and administrative expense
General and administrative expense increased 116% from $371,000 in 1996 to
$800,000 in 1997. This increase was primarily due to higher compensation expense
associated with additional personnel necessary to support operations.
Total other income (expense), net
Other income (expense), net in 1996 of ($28,000) represents interest
expense on outstanding long term debt. In 1997, we earned other income
(expense), net of $886,000, which represents primarily income earned on
investments of cash, cash equivalents and investment securities.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities were $20,607,000 at March
31, 1999. We have financed our operations since inception through capital
commitments from Genentech and private placements of equity securities.
Genentech has provided us $1,000,000 since inception through a line of
19
<PAGE> 23
credit, which was subsequently converted to equity, and invested an additional
$1,002,000 through purchases of common stock in 1997. Genentech has no
obligation to fund our operations in the future. In the quarter ended March 31,
1999, we received net proceeds of $5,273,000 from private financing activities.
In 1998, we received net proceeds of $8,604,000 from private financing
activities. In 1997, we received net proceeds of $25,001,000 from private
financing activities including funds received from Genentech. To date, inflation
has not had a material effect on our business.
Since our inception, investing activities, other than purchases and sales
of investment securities, have consisted entirely of equipment acquisitions. At
March 31, 1999, our investment in equipment and leasehold improvements was
$1,508,000, and we had committed to the expenditure of more than $1,400,000 for
leasehold improvements and equipment to develop laboratory space. Net cash used
in the three months ended March 31, 1999 for operating activities was
$3,999,000. Net cash used in 1998 for operating activities was $11,810,000.
Expenditures in both periods were a result of increased research and development
costs and general and administrative expenses.
We anticipate that the net proceeds from this offering will enable us to
meet our anticipated expenditures over the next three years, including, among
other things:
- expanding our facilities;
- supporting our clinical trial efforts; and
- continuing internal research and development.
We anticipate receiving an aggregate of approximately $12,600,000 from the
Centers for Disease Control and Prevention and the National Institute for
Allergy and Infectious Diseases commencing in September 1999. We believe these
funds will enable us to meet anticipated operating expenditures for an
additional year. In addition to covering general operating expenditures, the
funds will be used to fund research costs and costs associated with obtaining
and storing clinical specimens, as part of the sponsored programs. These funds
would be received as reimbursements for expenses to be incurred over the
duration of the trials. The timing and procedures for payment are to be
determined pursuant to further discussions with each agency.
At December 31, 1998, we had net operating loss carryforwards of
approximately $14,000,000 to offset any future federal taxable income. If not
utilized, the tax net operating loss carryforwards will begin to expire in 2010.
We also had research and development tax credit carryforwards at December 31,
1998, of approximately $440,000 for federal income tax purposes.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept only two
digit entries in the date code field. Beginning in the year 2000 these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Systems that are not year 2000 compliant may cease to
function. As a result, in less than one year computer systems and software used
by many companies may need to be upgraded to be year 2000 compliant.
We have completed the process of determining whether there are any critical
areas of our business that are not year 2000 compliant. We presently estimate
that the total cost of addressing any year 2000 problems will be less than
$5,000. In arriving at this conclusion, we assumed that the year 2000
assessment, remediation and contingency plans of our third party suppliers will
be fulfilled in a timely manner and without significant cost to us.
Based on web site information published by Genentech, our only material
third party supplier, we do not believe that their year 2000 compliance will
have a material adverse effect on us.
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BUSINESS
We were formed in November 1995 to complete the development of, and
commercialize, AIDSVAX, a preventive HIV vaccine. The original AIDSVAX
technology was developed by Genentech and then licensed exclusively to us. We
are currently testing AIDSVAX in humans in two large-scale Phase III clinical
trials. These are the first Phase III clinical trials ever conducted for an HIV
vaccine. If the Phase III clinical trials are considered successful, we plan to
apply to the FDA and foreign regulatory authorities for licenses to manufacture
and sell AIDSVAX in the United States, Thailand and abroad.
Our vaccine is designed to prevent infection by HIV, rather than treat
established infection. AIDSVAX contains synthetic copies of the proteins from
the surface of HIV. Since the vaccine contains no genetic material, vaccination
with AIDSVAX is incapable of causing HIV infection. Instead, humans vaccinated
with AIDSVAX form antibodies against HIV. In laboratory tests these antibodies
bind to the virus and neutralize its infectivity. Vaccination with AIDSVAX
stimulates immune memory, training the immune system to mobilize rapidly upon
exposure to HIV.
We are conducting two Phase III clinical trials of AIDSVAX to determine if
AIDSVAX will prevent infection by HIV. Our North American Phase III clinical
trial of AIDSVAX is being conducted in 56 clinics across the United States, as
well as in one clinic in Puerto Rico, one clinic in Canada and one clinic in The
Netherlands. This trial is designed for 5,400 volunteers. In Thailand, we are
conducting a second Phase III clinical trial designed for 2,500 volunteers in 17
clinical sites in Bangkok. Based on meetings and documented discussions with the
FDA and its Vaccines and Related Biological Products Advisory Committee, we
believe that the requirement for regulatory approval is 30% efficacy, at
statistical significance, of HIV infection in volunteers vaccinated with
AIDSVAX.
Our strategy is to develop, test and obtain regulatory approval for various
formulations of AIDSVAX. The first two approvals we plan to obtain are in the
United States for the formulation being tested in the United States trial and in
Thailand for the formulation being tested in the Thai trial. We intend to use
Genentech as our partner for manufacturing and distribution. Genentech has
exclusive options to manufacture and market AIDSVAX products. If Genentech does
not exercise its options, we have the right to pursue third party arrangements,
with Genentech providing the transfer of technology necessary for manufacturing
the vaccine.
VACCINES
Vaccines are preventive, not curative. As a result, vaccines are
particularly suited to address epidemics, even those the magnitude of HIV/AIDS.
Vaccines prevent infection by activating the immune system to neutralize
infectious viruses. The immune system's initial response to a virus is to
produce antibodies. The antibodies bind to the virus and prevent it from
entering cells. If a virus cannot enter a cell, it is unable to multiply and
dies within a few hours in the host. This protection against infection is called
neutralization.
Most virus infections cause lifelong immunity after natural infection. This
is because the immune system remembers that it has encountered the virus before.
Upon a subsequent encounter, it mounts such a rapid immune response that it
kills the virus before it can establish a productive infection.
Vaccines also induce long term memory against viruses. The immune system is
trained by vaccination with viral proteins or live viruses to rapidly respond to
and prevent subsequent viral infection.
HIV AND AIDS
HIV is the virus that causes AIDS, a lethal disease characterized by the
gradual deterioration of the human immune system. Although the disease is
manifested in many ways, the problem common to all patients is the destruction
of essential immune cells known as T lymphocytes, or T cells. Destruction of
these T cells by HIV makes the body particularly vulnerable to opportunistic
infections and cancers that typify AIDS and ultimately cause death. Blocking HIV
infection would prevent AIDS.
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HIV is transmitted by three predominant means. One is sexual contact. The
second is exposure to blood from an infected person, such as sharing needles in
drug use. The third is transmission from infected mothers to their newborns.
The HIV/AIDS epidemic is one of the largest epidemics in human history. Its
spread across the world has been documented by UNAIDS and the World Health
Organization. According to UNAIDS and the World Health Organization:
- in 1998, 1.1% of the world's adult population was living with HIV/AIDS;
- approximately 16,000 new infections occur each day worldwide;
- in Sub Saharan Africa, 8.0% of the adult population is infected with HIV;
and
- in several African countries, HIV has infected between 20% and 26% of the
adult population.
In Thailand, initial infections with HIV were not reported until the
mid-1980s. It is now estimated that almost 800,000 people (2.3% of the country's
adult population) have already been infected. HIV infection has now penetrated
China, India and Indonesia, some of the most populated areas of the world. AIDS
is currently one of the top five fatal diseases worldwide.
An estimated 860,000 people in North America are currently infected with
HIV. In North America, 44,000 new infections occur each year. According to an
earlier independent report, AIDS is one of the leading causes of death in adults
ages 25 to 44 in the United States.
Table 1 presents the UNAIDS/WHO estimates on total population, adults, and
estimated number of HIV infections throughout the world. These statistics lead
us to believe that a market for an HIV vaccine could reach three billion people.
Should this market include pediatric use, the number could exceed four billion.
TABLE 1. REPORT ON GLOBAL HIV/AIDS EPIDEMIC
<TABLE>
<CAPTION>
POPULATION
----------------------------------------
ESTIMATED
CURRENT
ADULTS HIV
1997 TOTAL 15-49 INFECTION
---------- --------- -------------
(THOUSANDS)
<S> <C> <C> <C>
GEOGRAPHICAL AREA
North America.......................................... 302,000 156,000 860
Latin America.......................................... 455,000 241,000 1,300
Western Europe......................................... 400,000 201,000 480
Eastern Europe & Central Asia.......................... 373,000 193,000 190
East Asia & Pacific.................................... 1,452,000 815,000 420
South & Southeast Asia................................. 1,860,000 955,000 5,800
North Africa & Middle East............................. 322,000 164,000 210
Sub Saharan Africa..................................... 593,000 268,000 21,000
--------- --------- ------
WORLD TOTAL............................................ 5,757,000 2,993,000 30,260
========= ========= ======
</TABLE>
- ---------------
Source: "The Report on Global HIV Epidemic," UNAIDS, the Joint United Nations
Programme on HIV/AIDS and the World Health Organization, June 1998.
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Progress has recently been made in treating HIV infection. Current HIV
therapies slow multiplication of the virus and delay onset of AIDS. They do not
cure HIV infection or AIDS. Costs of these drugs generally exceed $12,000 per
year per patient. Considering costs, difficulties in compliance with complex
drug regimens and the development of resistance to these drugs, we believe such
therapies will be available only to a small fraction of the HIV-infected
population. Thus, we believe they will probably have a minimal impact on the
worldwide epidemic.
THE HIV INFECTION PROCESS
A virus cannot replicate without entering a host cell. To make new
infectious virus particles, a virus must enter a cell and overtake its metabolic
machinery. If a virus cannot gain entry into a cell, it is incapable of
surviving for more than a few hours in the body.
Viruses are varied in their structure and use different ways to enter
cells. HIV is a spherical virus that maintains its genetic information inside
its protein core. This core is surrounded by an outer coat called the envelope
(Figure 1). The envelope has protein projections, called glycoproteins, that
extend out from its surface. Glycoproteins enable HIV to bind to, and
subsequently enter, human cells. The principal glycoprotein on the envelope of
HIV is called gp120. To present the proper orientation for infection, the gp120
proteins are organized on the virus surface in clusters of three.
FIGURE 1. DIAGRAMMATIC REPRESENTATION OF HIV
[GRAPHIC DEPICTING HIV VIRUS WITH GP120 PROTEINS]
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HIV uses gp120 to bind to the surface of cells through a specific sequence
of interactions between the virus and its target cell (Figure 2). This involves
a two-step "lock and key" mechanism. The first step in this process involves the
attachment of gp120 onto a part of the target cell's surface called the CD4
receptor (Panel 2, below). A second step occurs soon thereafter, as the gp120
protein changes shape and then interacts with another target cell molecule
called the chemokine receptor (Panel 3). When this two-step process has been
completed, the virus gains entry by fusing through the target cell membrane
(Panel 4).
FIGURE 2. INFECTION OF CELLS BY HIV
[FOUR GRAPHICS DEPICTING THE STAGES OF INFECTION OF CELLS BY HIV]
Once inside the cell, the viral envelope opens and the core of the virus is
released. The release of the viral core into the cell initiates a replication
cycle that produces thousands of new virus particles per infected cell. As it
multiplies, HIV kills infected T cells and releases new infectious virus into
fluid or blood surrounding the cell. This cycle of:
- T cell infection;
- viral multiplication;
- T cell death; and
- re-infection of new T cells
leads to the destruction of an essential line of immunologic defense.
Substantial reduction of T cells ultimately causes increased susceptibility to
the opportunistic infections and cancers that are characteristic of AIDS.
In addition to T cells, HIV also infects, and may reside in, blood
scavenger cells called macrophages. While infection of macrophages is not a
primary cause of AIDS, it is important in the biology of HIV and in our strategy
to prevent infection by the virus.
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GENETIC VARIATION IN HIV
AIDS is a single disease throughout the world. At the beginning of the
epidemic, probably all HIV was limited to Africa. HIV, like any other virus,
underwent mutation to create distinct subtypes. People infected with a single
subtype of HIV then exported their infection to other places, such that
different subtypes became predominant in different geographical areas.
Subsequently, HIV underwent further mutation to create individual strains of
each subtype.
Although the potential genetic variation in HIV might appear limitless,
only a small number of mutations confer advantage to the virus. As a result,
there are a limited number of viral subtypes and strains. We believe these fall
into particular patterns providing a logical basis to formulating a vaccine for
HIV. We also believe that the major subtypes of gp120 have been identified.
Although minor subtypes are identified periodically, no new major subtypes have
been identified in the last 15 years.
SUBTYPES. There are five major subtypes of HIV. These are labeled "A"
through "E," according to their order of discovery. The major difference between
each subtype is a genetic variation in a region of the gp120 protein known as
the chemokine-binding site.
The major subtypes of HIV tend to be distributed along geographical lines.
This is consistent with the general understanding of how HIV has spread
throughout the world. Virtually all HIV in the Americas, Europe, the Caribbean
and Australia is subtype B. The vast majority of HIV in Thailand and in the
Pacific Rim countries is subtype E. Subtype C virus has emerged as the most
rapidly expanding HIV in Africa, China and India. The remaining subtypes A and D
occur primarily in Africa and in limited areas around the world.
STRAINS. Each subtype of HIV is further subdivided into strains. Four
strains arise from two mutations in specific regions of the gp120 protein: a
subregion in the chemokine-binding site and a subregion in the CD4-binding site.
These strains are of key importance in that they have different patterns of
infection and they each react with different antibodies.
- Chemokine-binding site. HIV has mutated at the chemokine-binding site to
yield two distinct strains, known as T-tropic and M-tropic. Each of these
strains binds to a chemokine receptor on a target cell. In the T-tropic
strains, the gp120 protein binds to a chemokine receptor on T cells. In
the M-tropic strains, the gp120 protein binds to a chemokine receptor
found on macrophages, as well as on T cells.
- CD4-binding site. HIV has also mutated at the CD4-binding site to yield
two additional strains: CD4(a) and CD4(b). Each of these strains binds
with slight differences to the CD4 receptor which occurs on human T
cells.
SUBTYPE/STRAIN COMBINATIONS. In summary, there are five major worldwide
subtypes of HIV: A through E. Each subtype has two different strains that bind
to chemokine receptors on T cells and macrophages. These strains are further
subdivided by two variations in the CD4-binding site on gp120. Each of these
strains requires different antibodies for neutralization.
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As shown in Figure 3, a single subtype of HIV may have at least four
different strains. We believe other subtypes of HIV have similar types of
variations at their receptor-binding sites.
FIGURE 3. GENETIC VARIATION IN SUBTYPE B HIV THAT INFLUENCE INFECTION
[Graphic depicting subtype B strains]
To construct a successful vaccine, we need to consider the entire range of
variation in gp120 and assure that we cover each of the sites on the gp120
protein that are open to attack by antibodies. Fortunately, as indicated above,
most of the variable sites on gp120 have only one or two principal forms. By
careful examination, we have been able to identify pairs of HIV viruses whose
gp120 proteins, when combined together in a vaccine, enhance the overall
antibody response. We believe this antibody response covers virtually the entire
range of HIV genetic variations currently known in North America and in
countries of South Asia and the Pacific Rim.
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THE DESIGN OF AIDSVAX
AIDSVAX is designed to stimulate antibodies to cell receptor-binding sites
on gp120. Figure 4 shows how we believe antibodies block the HIV infection
process. As depicted in Panels 2 and 3 below, there are several sites on gp120
that bind to individual cell receptors. The attachment of antibodies to these
specific gp120 sites blocks the binding of the virus to these receptors on the
cell surface (Panels 3 and 4). The result is that HIV cannot attach to the cell
surface and its infectivity is neutralized.
FIGURE 4. DEPICTION OF ANTIBODIES BLOCKING HIV INFECTION
[Four graphics depicting the stages of antibodies blocking HIV infection]
In 1992, Genentech genetically engineered a version of the gp120 protein.
Antibodies to this gp120 protein bound to a neutralizing site found on 65% of
subtype B viruses. This virus was labeled B(MN) and was believed to represent
the majority of HIV in the United States. Subsequently, synthetic gp120 of HIV
B(MN) was incorporated into a monovalent AIDSVAX formulation, designated AIDSVAX
B. The monovalent formulations contain synthetic gp120 of a single type of HIV.
Genentech used this AIDSVAX B formulation to vaccinate humans in Phase I
and Phase II clinical trials. Phase I trials were used to test for dosage and
safety. Phase II trials were used to determine whether the vaccine stimulated
the desired immune system response.
Antibodies obtained from 100% of those vaccinated with AIDSVAX B
neutralized the B(MN) virus in laboratory tests. Further tests demonstrated that
these antibodies bound to the gp120 protein of all HIV subtype B viruses tested.
However, in laboratory tests and Phase II clinical trials, antibodies to B(MN)
neutralized, to a greater extent, HIV of T-tropic strains as compared to HIV of
M-tropic strains.
To improve the breadth of the immune response, we identified a second
virus, B(GNE8), from the M-tropic strain, and a synthetic version of its gp120
protein was added to the vaccine. The resulting bivalent vaccine, AIDSVAX B/B',
which is designed to address two HIV strains, considerably expanded the
vaccine's breadth of neutralization. While the monovalent vaccine could
stimulate the production of four different types of antibodies that reacted with
binding-sites to cell receptors, the bivalent vaccine
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could stimulate the production of seven. We believe that these seven antibodies
cover virtually all known strains of HIV in North America.
As a general strategy, we plan to develop AIDSVAX formulations that will
stimulate antibodies against multiple binding sites on gp120. Our goal is to
expand the range of antibodies that are stimulated by a vaccine to neutralize a
broader group of HIV. A practical application of this strategy has been the
conversion of AIDSVAX from a monovalent to a bivalent formulation.
STATISTICAL MODEL OF MONOVALENT AND BIVALENT AIDSVAX
We generated a statistical model based on the known distribution of the
four receptor-binding sites on gp120 and their frequency in different HIV
strains in the United States (Figure 5). A comparison was then made between the
neutralizing antibodies which could be stimulated by vaccination with either a
monovalent or bivalent formulation of AIDSVAX.
FIGURE 5. RELATIVE ADVANTAGE OF BIVALENT VS. MONOVALENT VACCINES
[GRAPHIC DEPICTING NEUTRALIZATION OF MONOVALENT VACCINES (B(MN) AND B(GNE8)) AND
BIVALENT VACCINE (B(MN) PLUS B(GNE8))]
Each pie chart in Figure 5 represents the statistical equivalent of 100% of
currently known HIV, or the virus population, in the United States. Each chart
also reflects the calculated frequency at which antibodies stimulated by the
monovalent or bivalent vaccines would bind with HIV in this virus population.
According to this statistical model, the percentage of HIV in the virus
population that would fail to bind antibody is depicted by the white area. The
percentage of HIV which would bind one neutralizing antibody is lightly shaded,
while viruses which would bind two, three or four different neutralizing
antibodies are shown in darker shaded areas.
This analysis indicates that the monovalent B(MN) vaccine would fail to
stimulate antibodies against 14% of HIV in the statistical virus population. The
bivalent vaccine, which combines the gp120 proteins from B(MN) and B(GNE8),
covers more than 99% of the statistical virus population, with at least two
different neutralizing antibodies binding to each virus particle. According to
this model, over 50% of the HIV
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viruses would react with four neutralizing antibodies, each antibody stimulated
against different cell-binding sites on gp120 proteins.
While the statistical model indicates that bivalent AIDSVAX would induce a
broader range of antibodies than monovalent AIDSVAX, there can be no assurance
that the statistical model will predict the actual efficacy of AIDSVAX in human
trials.
FORMULATIONS OF AIDSVAX
AIDSVAX consists of two biologically active ingredients: antigens and an
adjuvant. An antigen is the ingredient in vaccines that activates the human
immune system response. The antigen in AIDSVAX is synthetic gp120 protein. An
adjuvant is an active ingredient in vaccines that improves the human immune
system response by attracting immune cells into the region where the vaccine is
injected. The adjuvant in AIDSVAX is alum, or aluminum hydroxide. Since the
vaccine contains only a synthetic fragment of the virus and no genetic material,
it is incapable of causing HIV infection.
Three different formulations of the AIDSVAX vaccine have been developed and
clinically tested in Phase I/II trials. These include: monovalent AIDSVAX B for
HIV infections in North America and Europe bivalent AIDSVAX B/B' for HIV
infections in North America and Europe, and bivalent AIDSVAX B/E for HIV
infections in Southeast Asia.
INITIAL TESTING OF AIDSVAX IN CHIMPANZEES
The chimpanzee is the only laboratory animal susceptible to HIV infection.
In the initial protection trials conducted by Genentech, chimpanzees were
vaccinated with three doses of monovalent AIDSVAX B. The vaccinated animals,
along with unvaccinated control animals, were then injected intravenously with
high doses of infectious HIV of the same strain that was used for the
preparation of the vaccine. None of the AIDSVAX vaccinated animals became
infected with HIV. All of the unvaccinated control chimpanzees became infected
with HIV.
In subsequent trials, chimpanzees were vaccinated with AIDSVAX B(MN) and
then infected with a different strain of HIV known as B(SF2). Despite this
difference, vaccination with AIDSVAX B(MN) conferred immunity and protection
against infection with the B(SF2) strain, while vaccination of control animals
with a placebo had no protective effect. The cross-protection observed in this
experiment documented that AIDSVAX could successfully protect animals from
infectious HIV having a genetic composition distinctly different from the virus
used to make the vaccine. Based on the results of the chimpanzee trials,
Genentech sought and received regulatory approval to commence human clinical
trials to test the safety and efficacy of AIDSVAX in humans.
HUMAN CLINICAL TRIALS
Human clinical trials for vaccines involve three steps:
- Phase I -- tests for dosage and safety;
- Phase II -- larger-scale tests for safety, as well as a determination
of whether the vaccine stimulates antibodies and immune memory; and
- Phase III -- multi-center, placebo-controlled, double-blind tests to
determine protection conferred by vaccination. These efficacy tests
are performed in volunteers who have a high risk of HIV infection.
PHASE I TRIALS -- DOSAGE AND SAFETY, MONOVALENT AIDSVAX B
Phase I trials with monovalent AIDSVAX B vaccine were conducted by
Genentech. AIDSVAX B was clinically evaluated in 671 HIV-negative volunteers and
662 HIV-positive volunteers. None of the vaccines had serious side effects. Some
vaccinees occasionally experienced pain at the injection site, as is common with
many vaccines.
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AIDSVAX B was tested at three doses: 100 [u]g, 300 eg and 600 [u]g of
gp120. The 300 [u]g dose was consistently found to be most effective,
stimulating a higher antibody response without serious side effects.
The clinical trial results also indicated that monovalent AIDSVAX B, at all
three doses tested, did not alter the progression of ongoing HIV infection. We
intend to apply to the FDA for broad use of the vaccine in high-risk groups
without prescreening for HIV infection.
PHASE II TRIALS -- ANTIBODY STIMULATION, MONOVALENT AIDSVAX B
One hundred forty HIV-negative volunteers were vaccinated and boosted three
times with monovalent AIDSVAX B vaccine. Vaccinations were given at time 0, 1
month and 6 months with an additional booster at 12 or 15 months. Antibodies
stimulated by vaccination with AIDSVAX B were measured for their ability to
neutralize HIV in culture tests. All of the vaccinated volunteers produced
antibody in their blood that neutralized infectivity of HIV B(MN), the strain
that was used for preparation of AIDSVAX. These neutralization tests were
considered of key importance since they measured the actual biological activity
of the vaccine-stimulated antibodies.
Memory of the immune response to HIV in the same volunteers was measured by
examination of neutralizing antibody levels stimulated by sequential booster
shots. All vaccine recipients produced high levels of neutralizing antibody with
boosting. These antibody levels gradually declined with time. Each booster shot,
however, resulted in a rapid antibody response of even higher concentration,
demonstrating a memory recall of the antibody response. This is strong evidence
of immune memory being stimulated by the vaccine. We believe that such memory
will be key for protection, enabling the educated immune system to ward off HIV
infection before it establishes itself.
PHASE I/II TRIALS -- BIVALENT AIDSVAX
We believe that, since an antibody to a single receptor-binding site can
cause neutralization, antibodies to multiple receptor-binding sites will result
in yet broader neutralization. On this basis we developed and tested two
formulations of bivalent AIDSVAX.
We conducted two Phase II trials in the United States and Thailand in 214
HIV-negative volunteers. The trials used two bivalent formulations of AIDSVAX.
The volunteers were vaccinated and then given one booster one month later. The
vaccine tested in the United States was AIDSVAX B/B'. The vaccine tested in
Thailand was AIDSVAX B/E. Each of the vaccines was selected for the known
prevalence of these virus subtypes in the particular countries tested. The
trials were also designed to compare the results of bivalent AIDSVAX to those of
monovalent AIDSVAX. Four factors were monitored:
- safety;
- dosage;
- antibody stimulation; and
- production of antibodies that would neutralize strains used in bivalent
AIDSVAX.
The vaccine did not cause any serious side effects. Vaccinees occasionally
experienced pain at the injection site, as is common with many vaccines. In a
dose response study, the bivalent AIDSVAX demonstrated the same results as those
observed with the monovalent vaccine.
The Phase II studies also demonstrated the stimulation of antibodies to
receptor-binding sites on gp120 proteins that were contained in the respective
vaccines. AIDSVAX B/B' stimulated antibodies to M-tropic and T-tropic HIV found
in the United States. AIDSVAX B/E stimulated antibodies to M-tropic and T-tropic
HIV found in Thailand. In contrast, the monovalent vaccine stimulated a narrower
range of antibodies, primarily to T-tropic strains.
We believe these findings support our hypothesis that a combination of
gp120 proteins in the bivalent vaccine would stimulate antibodies to a broader
range of HIV strains.
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PHASE III CLINICAL TRIALS FOR AIDSVAX
In June 1996, we met with the FDA and its Vaccine and Related Biological
Products Advisory Committee to review the statistical protocol and conduct of
our North American Phase III clinical trial. At this meeting, a discussion and
vote was conducted on the issue of whether the interim analysis could be used to
determine vaccine efficacy. By a vote of 12-0 in favor, it was agreed
". . . that the data safety monitoring board will . . . recommend that the study
be terminated if the trial detects an efficacy of greater than 30%." In such a
case, the halt of the trial would be followed by vaccination of the placebos and
application for licensure of the vaccine.
In May 1998, the FDA informed us that the data from our Phase I/II studies
were acceptable and that we could proceed to Phase III clinical trials
principally in North America. The first volunteers in the Phase III clinical
trial were vaccinated in June 1998.
The Thai FDA is the governmental body involved in final approval to
manufacture and market medical products. As part of the Thai FDA review, the
Thai Ministry of Public Health has several subcommittees involved in making key
decisions. In the area of HIV/AIDS, this includes the Technical Subcommittee on
AIDS Vaccine, the Ethical Review Committee of the Research Committee, Ministry
of Public Health, and the National Committee on Prevention and Reduction of
AIDS, which includes the Institutional Review Boards from the participating
institutions in the clinical trial.
In May 1998, we outlined our plans for Phase III clinical trials in
Thailand and in February 1999, we received an import license from the Thai FDA
with approval to begin Phase III clinical trials. In March 1999, the first
volunteers in Bangkok were vaccinated, initiating the Phase III clinical trial.
The formulation of AIDSVAX that we are testing in the United States is
different from the formulation being tested in Thailand. Different formulations
are necessary because the strains of HIV virus are different in the two
locations. The FDA has indicated that it may be possible to use data from a
successful outcome in the Thai study to support licensure of AIDSVAX in the
United States. It is currently unclear, however, how the data from the Thai
formulation of the vaccine will support licensure in the United States, if at
all.
Trial Design
We are currently conducting two large, placebo-controlled, double-blind,
Phase III clinical trials, one principally in North America and the other in
Thailand. A placebo-controlled, double-blind trial is one in which one group of
volunteers receives a placebo and the other group receives the experimental
vaccine, and neither the volunteers nor the clinicians knows whether a volunteer
is receiving the placebo or the experimental vaccine. The test group of
volunteers receives AIDSVAX while the placebo group receives a
comparable-appearing placebo containing alum alone. All vials of vaccine and
placebo are coded. During the trials, neither volunteers nor researchers know
which volunteers are given the vaccine or placebo until the Phase III clinical
trials are completed or stopped by the independent review board. Each volunteer
is vaccinated a total of seven times, including six boosters, during a 30-month
period. The purpose of the six boosters, one each six months, is to stimulate
high antibody levels throughout the entire trial period. During each visit, the
volunteers receive counseling on how to avoid the risk of HIV infection.
Follow-up with volunteers will continue for at least six months after the last
vaccination is administered.
Volunteers in North America consist of HIV-negative homosexual men and
HIV-negative women who have HIV-infected sexual partners or high risk sexual
behavior. Volunteers in Thailand consist of HIV-negative intravenous drug users
with a high risk for blood-borne transmission of HIV. In both North America and
Thailand, the volunteers are recruited, vaccinated and monitored by clinics with
HIV expertise and experience with these particular population groups.
The size of each Phase III clinical trial was established by a statistical
model that included: (1) the probability of demonstrating a 30% efficacy at
statistical significance in inhibiting HIV infection; (2) the rate of infection
of the volunteer group; and (3) assumptions concerning the rate of retention of
the volunteers in the trial for a 36 month clinical observation period.
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Within these parameters, the clinical trial in North America is designed
for 5,400 volunteers, randomized 2:1 for vaccine:placebo recipients. The trial
in Thailand is designed for 2,500 volunteers, randomized 1:1 for vaccine:placebo
recipients. The trial in North America is occurring in 56 clinical sites across
the United States. It is also being conducted in one clinic in Puerto Rico, one
clinic in Canada and one clinic in The Netherlands. The trial in Thailand is
occurring in 17 methadone clinics under direction of the Bangkok Metropolitan
Administration.
Each Phase III clinical trial is conducted in two overlapping steps: (1)
recruitment of volunteers during an estimated 12 to 14 month period; and (2) a
36 month clinical observation period. For each individual, the 36 month
observation period begins on the day of their first vaccination. As a result,
the entire clinical trial will be completed upon recruitment of the volunteers
and completion of their collective 36 month observation periods.
As part of the study design, an interim efficacy analysis will be performed
in each clinical trial. In the Thai trial, the interim analysis will be
conducted 18 months after recruitment has been completed. In our North American
trial, the interim analysis will be conducted 24 months after recruitment has
been completed (Figure 6). Under the current timetable, the interim analysis for
each clinical trial will be conducted in the second half of 2001.
FIGURE 6. DESIGN OF THE PHASE III CLINICAL TRIALS OF BIVALENT AIDSVAX
[GRAPHIC DEPICTING TIMING OF PHASE III CLINICAL TRIALS]
Enlistment of Clinical Sites and Volunteers
We enlist clinical sites based on their ability to perform clinical trials,
and to recruit the appropriate type and number of volunteers for the Phase III
clinical trials. Our North American trial calls for approximately 1,700
HIV-negative volunteers to be recruited from an already established group of
at-risk individuals at 12 clinical centers. These centers, currently sponsored
by the National Institutes of Health as part of a vaccine preparedness trial,
have over the past four years established a system for the
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recruitment of at-risk volunteers. The trial design further calls for the
remaining 3,700 HIV-negative volunteers to be recruited by the 47 additional
clinical sites. Based on experience at the 12 clinical centers, we are assuming
an incidence of 1.5% HIV infection per year, and a retention rate of at least
80% for volunteers for the entire 36 month observation period.
In Thailand, a group of injection drug users is being recruited through a
combined effort of the Bangkok Metropolitan Administration, Mahidol University
and the Centers for Disease Control and Prevention. The trial design calls for
an estimated 600 HIV-negative volunteers to be recruited from an already
established group and for the remaining 1,900 HIV-negative volunteers to be
recruited from injection drug users in the Bangkok population. Based on prior
experience, we are assuming a 6% to 8% incidence of HIV in these groups, with a
retention rate of over 75% during the 36 month observation period.
Conduct of the Phase III Clinical Trials
We have a clinical team of 24 full-time employees who assist and monitor
the 59 clinical sites that are engaged in the North American AIDSVAX trials.
This clinical team organizes and monitors:
- the clinical testing sites;
- data management;
- the central contract laboratory for HIV testing;
- sample handling and shipping; and
- biostatistics.
Audit and monitoring functions are conducted by an outside clinical research
organization, which audits the clinical sites for compliance with the Phase III
procedures, data recording, medical records and the use of good clinical
practice, as defined by the FDA.
In Thailand, we have employed or have on contract a full-time staff of
three. Our Bangkok office is directed by a project manager and a Thai physician
who provide interface between us and Thai institutions involved in the Phase III
clinical trials. An additional 51 people in Thailand are involved in
administration and conduct of the trials.
Each clinical site has agreed to conduct its activities according to the
United States and Thai FDA-reviewed Phase III protocol. The protocol sets
standard procedures for all sites and laboratories. Following each visit of
volunteers to the clinical site, data are recorded in both the volunteers'
permanent medical chart, as well as on a case report form, which is forwarded to
us. The trial design calls for over 600,000 case report forms to be gathered and
entered into the database for the North American Phase III clinical trial alone.
The Phase III protocol also requires clinical sites to report any serious
adverse event to us within 24-hours. Any serious adverse events are to be
immediately examined in detail by our clinical monitors. If deemed a serious
event related to the vaccine, the event is to be promptly reported to the FDA.
The protocol requires all other adverse events to be recorded on the case report
forms and provided to the FDA for review on a periodic basis.
Interim Analysis and Completion of the Phase III Clinical Trials
A single independent data and safety monitoring board oversees the clinical
trials in North America and Thailand. The ten-person monitoring board consists
of prominent clinicians, AIDS specialists, vaccinologists and statisticians. The
board contains seven members from the United States and three from Thailand. A
former Deputy Director of the Centers for Disease Control and Prevention serves
as Director of the monitoring board.
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The monitoring board will periodically evaluate the safety of the trial at
6, 12, 24 and 36 months. The initial six-month safety review was conducted in
March 1999. No serious adverse events related to the vaccine were observed.
The monitoring board will conduct an interim efficacy analysis
approximately midway through the observation period of each clinical trial.
If the trial results demonstrate 30% or greater efficacy, at statistical
significance, at the time of the interim analysis, the monitoring board will
recommend that we, and we will, terminate the trial. We will then vaccinate the
placebo group in order to conform with ethical requirements. We are in the
process of preparing the mandate for the monitoring board. If the interim
efficacy analysis does not demonstrate sufficient statistical power to halt the
trial, it will continue until its scheduled completion.
Following the close of the Phase III clinical trials, either at the time of
the interim efficacy analysis or at the conclusion of the complete trial, the
code for vaccine/placebo will be released. Analysis of the database will be
performed independently by the external statistician. In addition to examining
the data, the external statistician will prepare the final report which will be
entered into the biologics license application.
Determination of Efficacy
The primary endpoint of the Phase III clinical trials will be to determine
the quantitative effect of AIDSVAX in high risk volunteers. To gain FDA
regulatory approval for the sale of AIDSVAX in the United States, we believe,
based on discussions with the FDA and the recommendations of its Vaccine and
Related Biological Products Advisory Committee, that we will need to demonstrate
that the AIDSVAX vaccine reduces the level of HIV infection by at least 30% at a
statistically significant level. Statistical significance means that if the
clinical trial were repeated, an efficacy of greater than 30% would be observed
95 times out of 100. While these discussions and the vote of the Vaccine and
Related Biological Products Advisory Committee are not binding on the FDA, they
are generally followed. In the context of our United States clinical trial,
which represents a small sampling from the entire population, this means that in
order to establish a 30% efficacy at a statistically significant level there
must be an observed reduction in the incidence of HIV in the group receiving the
vaccine compared to the control group of between 45% to 65%, or possibly a
higher percentage, depending on various factors that will have a bearing on the
statistical significance of the clinical trial results. These factors include
the number of patients ultimately enrolled in the study, the rate of HIV
infection in the control group and the length of time associated with the
clinical observation period. We anticipate that the efficacy required to obtain
regulatory approval to market AIDSVAX in foreign countries will vary from one
country to another and may differ significantly from that required by the FDA.
A secondary endpoint of the Phase III clinical trials will be to determine
qualitative effects of AIDSVAX on potential HIV infections. This is performed in
case the vaccine induces meaningful immunity, but the immune response is not of
sufficient strength to fully prevent infection. For this purpose, multiple blood
samples are drawn from each volunteer throughout the Phase III clinical trials.
This allows us to determine more precisely the time of infection. Each of the
blood samples also can be examined for levels of circulating virus, or viral
load. From this, we can determine if vaccinated individuals have suppressed
their HIV infections relative to those in the placebo group.
If the infection is transient, or if the level of HIV is maintained in
vaccine recipients at low levels, this might indicate that the vaccine is
slowing the progression of HIV infection. In therapeutic studies it is known
that suppression of viral load correlates with an extension of life. Therefore,
should we find that AIDSVAX causes a qualitative reduction in HIV infection, we
might submit this data to support our primary regulatory application or, if
justified, as a stand-alone submission.
In addition to HIV antibody testing of all blood samples, a subset of
volunteers, 5% of the total, will be monitored throughout the trial period with
a variety of immunological tests. These tests will be performed to determine
details of the immune response, with the goal of identifying an immune correlate
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of protection against infection. Such a correlate might include, for example, a
determination of the minimum antibody level required to obtain protection. We
believe the finding of a correlate of protection both supports the scientific
rationale of the vaccine and provides a measurement by which the vaccine may be
improved. We believe finding a correlate of protection would be viewed favorably
in the context of any regulatory applications submitted to the FDA.
THE MARKET FOR AIDSVAX
We have developed formulations of AIDSVAX which focus on HIV found in some
of the major regions of the world. Our first bivalent vaccine, AIDSVAX B/B9, is
directed against the predominant HIV subtype in the Americas, Europe, the
Caribbean and Australia. Our second bivalent vaccine, AIDSVAX B/E, is directed
against the predominant HIV subtypes in Southeast Asia, the Pacific Rim,
Indonesia and southern portions of China (Figure 7). Based on the populations of
these regions, the market for the two current formulations of AIDSVAX could
cover approximately half of the world's population, or nearly three billion
people.
FIGURE 7. POTENTIAL MARKETS FOR THE AIDSVAX B/B' AND AIDSVAX B/E VACCINES
[GRAPHIC DEPICTING MAP OF THE WORLD AND WORLDWIDE MARKETS FOR AIDSVAX B/B' AND
AIDSVAX B/E]
We also have plans to develop two additional AIDSVAX vaccines -- one for
subtype C virus, which would be directed against viruses in China, India and
Africa, and one for subtype A and D viruses, which are commonly found in Sub
Saharan Africa and parts of South America. We believe that four vaccines
directed against the A, B, C, D and E subtypes of HIV would effectively address
the worldwide spread of the HIV/AIDS epidemic.
Influence of Vaccine Improvements
We believe we will be able to rapidly develop new formulations of AIDSVAX.
This would enhance our ability to address geographically defined markets. This
process provides for a continued basis of product improvement. We have
accomplished this with our two bivalent formulations of AIDSVAX. The change from
a monovalent to a bivalent formulation was accomplished in less than 24 months.
We expect successive formulations of AIDSVAX to improve product efficacy,
as well as the breadth of protection against different HIV subtypes. In
addition, we will seek to create vaccines that require fewer
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booster shots and that can be used over larger areas of the world. Thus, we
expect that an initial vaccine could be gradually enhanced, resulting in
corresponding increases in the size of the market for the vaccine.
On the basis of our ongoing discussions with the FDA, we believe that
improvements will be accomplished as amendments to our initial regulatory
license, rather than as applications for entirely new products. This approach,
if successful, would result in considerable savings of time and cost associated
with future product development.
Comparison to Other Vaccines
We believe that hepatitis B vaccine serves as a useful model to predict
demand for a prospective HIV vaccine. Hepatitis B is one of the most recent
vaccines to be introduced on a worldwide basis. The pattern of infection and the
at-risk groups with hepatitis B are comparable to those with HIV. Hepatitis B
and HIV are transmitted by sexual contact and blood products. In the United
States, the highest risk groups for hepatitis B and HIV are injection drug users
and homosexual men.
The hepatitis B vaccine received FDA approval in 1981. Since its
introduction, more than 20 million people in the United States and 500 million
worldwide have received the hepatitis B vaccine. Considering that hepatitis B
vaccination requires three doses for full immunization, we calculate that 1.5
billion doses of hepatitis B vaccine have been used worldwide. The Centers for
Disease Control and Prevention, the World Health Organization, the American
Medical Association and most other major health organizations have supported
adding a hepatitis B vaccine to the regimen of childhood vaccines. Forty-two
states in the United States now require it for school admission. Approximately
1.2 million people annually received hepatitis B shots in the United States,
with a cost for children of approximately $25.00 to $55.00 per dose, or $75.00
to $165.00 for the entire vaccination.
We believe that, given the relative healthcare needs, the market for an HIV
vaccine will be considerably larger than the market for hepatitis B vaccine.
Further, we believe that adoption of an HIV vaccine will occur more rapidly,
both domestically and worldwide. This conclusion is supported by a UNAIDS study,
which predicts that, within a decade, the worldwide need for HIV vaccine will
exceed 650 million doses annually.
SALES AND MARKETING
We intend to rely on third parties for sales and marketing of AIDSVAX. We
believe that our resources are better utilized developing new formulations of
AIDSVAX, rather than developing and maintaining a sales and marketing
organization. Genentech currently has an option to obtain an exclusive worldwide
license to use, market and sell AIDSVAX. If AIDSVAX is approved for sale and
Genentech does not exercise its option to market AIDSVAX, we intend to enter
into agreements for marketing and distribution with other partners and will pay
a predetermined royalty to Genentech.
We anticipate that AIDSVAX will be sold by Genentech or a licensed third
party through existing vaccine distribution channels in the United States and
the rest of the world. This would result in several tiers of pricing that range
from private reimbursement in the United States to government reimbursement in
Europe to purchase by the World Health Organization for distribution to nations
with underdeveloped economies. In the United States, vaccine distribution is
further divided among pediatricians, general practitioners and the public health
service.
Currently 83% of children worldwide receive the basic schedule of pediatric
vaccines through a network of for-profit and non-profit institutions. We expect
that an effective HIV vaccine will also be broadly distributed worldwide in a
similar manner.
Apart from distribution, a number of variables will influence price,
including:
- efficacy of the vaccine;
- safety;
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- manufacturing cost;
- recommendations from expert medical panels;
- the perceived need in a particular population; and
- in some cases, government regulations requiring vaccination.
Due to these and other factors, we have not yet determined a pricing schedule
for AIDSVAX.
Several non-profit and government organizations have begun efforts to
prepare for the eventual distribution of an HIV vaccine. For example, the State
of California passed a bill committing the state to spend $20 million to
purchase one million doses of HIV vaccine if and when developed. In addition,
the International AIDS Vaccine Initiative has started a campaign to fund the
development and purchase of an HIV vaccine for the developing world.
MANUFACTURING
We do not have any manufacturing facilities of our own. We intend to rely
on third parties to manufacture AIDSVAX. We believe that our resources are
better utilized developing new vaccines, rather than entering into the capital
intensive business of manufacturing.
Our license agreement with Genentech gives Genentech an option to
manufacture any AIDSVAX formulation supplied beyond those it has already agreed
to supply. If Genentech does not exercise its option to manufacture AIDSVAX, the
license agreement allows us to enter into manufacturing agreements with third
parties and pay a predetermined royalty to Genentech. If we utilize a third
party, the license agreement provides that Genentech must transfer the required
manufacturing technology and know-how to the third party.
Genentech has developed a proprietary method for producing synthetic gp120
protein. This method has enabled Genentech to clone and express gp120 genes from
two dozen HIV strains. Utilizing genetic engineering, a fragment of coding
information from HIV, consisting of the gp120 gene, is cloned from HIV into
mammalian cells. We have an exclusive license from Genentech to all of these
genes and the technical know-how to produce the synthetic gp120 proteins.
Specifically, for any formulation of AIDSVAX, the gp120 gene is inserted
into Chinese hamster ovary cells which act as cellular factories that can
produce commercial quantities, measured in kilograms, of gp120 protein. The
production of gp120 in Chinese hamster ovary cells assures both genetic
consistency and structural integrity of the synthetic product. As a result, the
synthetic form is virtually identical to the natural form of gp120 that occurs
in HIV viral particles. Since only a fragment of HIV is used in this process,
there is no production of infectious HIV, and the final product is incapable of
causing infection or disease.
LICENSE AND SERVICES AGREEMENTS WITH GENENTECH
We have entered into a license agreement with Genentech which in part
defines the working relationship between the companies. The licensed technology
relates to the development of a vaccine based on, containing, incorporating or
using the recombinant gp120 subunit protein developed by Genentech for use to
prevent, but not treat, HIV infection and/or AIDS. Genentech has granted us an
exclusive license to all patents and patent applications directly related to
this technology and proprietary know-how necessary for this technology that
Genentech is free to license or sublicense. Certain of the licensed technology
is sublicensed to us under licenses from third parties to Genentech. We, as the
exclusive licensee of Genentech, have assumed all of Genentech's obligations
under these third-party license agreements. The initial term of the license
agreement is 15 years from the commercial introduction date of a licensed
product and will be determined on a country-by-country, product-by-product
basis.
In addition to granting us rights to use Genentech's gp120 technology and
certain adjuvant technology for developing a licensed product, the license
agreement provides for Genentech to have rights to elect to
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manufacture and supply AIDSVAX for clinical testing and commercial sale. In
addition to its rights to elect to manufacture vaccine, Genentech supplied us,
cost-free, with its stock of approximately 300,000 doses of the B(MN) gp120
protein for testing in our Phase III clinical trials. We will use the B(MN)
gp120 protein following successful completion of formulation with alum, vialing
and quality assurance/control testing, for which we will bear Genentech's costs
and expenses. Genentech also supplied us with agreed-upon amounts of up to two
additional gp120 proteins, B(GNE8) and E(244) for use in combination with the
currently manufactured B(MN) gp120 for clinical trials. For the additional
antigens, we paid Genentech its fully burdened manufacturing costs.
The license agreement provides for flexibility related to manufacturing.
Should Genentech elect not to manufacture any vaccine supplies beyond those it
has already agreed to supply, we may elect to use a third party for our
manufacturing and marketing requirements. If we utilize a third party, Genentech
must transfer the required manufacturing technology and know-how to the third
party.
Genentech also has an option, to obtain an exclusive worldwide license to
use, market and sell licensed products. This option is exercisable for 90 days
after we make our first filing with the FDA for marketing approval of a licensed
product. If Genentech exercises the marketing option:
- Genentech is required to pay us a fee equal to 33% of our total
development costs including clinical testing, to date for the licensed
product;
- we and Genentech will share net profits from sales of the licensed
products, 30% and 70%, respectively, for sales within the United States
and 70% and 30%, respectively, for sales outside the United States;
- future developmental costs will be apportioned between the parties based
on their respective profit share in a particular country; and
- the parties will establish a committee with an equal number of
representatives from each company to oversee the development and
commercialization of additional licensed products.
While the agreement specifies the formula used to calculate net profits, the
calculation of individual components of the formula are subject to future
negotiations and/or determination.
In the event that Genentech does not exercise the marketing option, then,
in lieu of sharing net profits from the licensed products, we will pay Genentech
a royalty on all sales of licensed products equal to:
- 25% of our net sales and our sublicensees' net sales of the licensed
products worldwide, so long as any commercial vaccine component has been
manufactured and supplied by Genentech; or otherwise
- 15% of our total net sales and our sublicensees' net sales of the
licensed products worldwide.
Under the license agreement, we are required to use due diligence in
developing, seeking regulatory approval for, marketing and commercializing
licensed products. Development and commercialization of licensed products will
be our sole business goal. In connection with reaching this goal, we are
required to achieve the filing of the first market approval for a licensed
product with the FDA no later than the fifth anniversary of the closing of our
1997 private placement. If we are unable to meet this milestone due to certain
agreed-upon events or circumstances, we may request an extension from Genentech
and we and Genentech can agree to a new date for the milestone, subject to a
two-year limit on such extensions. If we are unable to meet a milestone for any
reason other than the agreed-upon events or circumstances, any extension granted
will be at Genentech's sole discretion. If we fail to exercise our due
diligence, Genentech has the right to convert our exclusive license to a
non-exclusive license, and may be entitled to terminate the license.
Either party may terminate the license agreement upon the other party's
default or bankruptcy. In addition, Genentech may terminate the license
agreement if we fail to:
- maintain a tangible net worth of at least $1 million; or
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- to meet a due diligence milestone within two years of the date originally
set for such milestone, unless Genentech waives such two-year limit in
its sole discretion.
We have also entered into a services agreement with Genentech pursuant to
which Genentech has agreed to provide us with administrative, research, process
science, manufacturing, clinical and regulatory support, primarily by making the
services of certain Genentech personnel available to us. We will reimburse
Genentech for all of Genentech's costs and expenses relating to the provision of
these services. Either party may terminate the services agreement upon a breach
which continues uncured for more than 60 days or upon the occurrence of
bankruptcy or similar events. In addition, the services agreement will
automatically terminate upon any termination of the license agreement. The term
of the services agreement was recently extended until December 31, 2000.
LICENSED PATENTS
Under the license agreement, we have licensed from Genentech exclusive
rights to a portfolio of United States and foreign patents. These patents cover
nine families of subject matter. We have six issued United States patents and
nine pending United States patent applications. With foreign filings, we have 82
issued patents and 38 are still pending. The technology claimed in these patents
and applications involves a range of HIV vaccine product development activities,
including the cloning and expression of recombinant virus glycoproteins for use
as vaccine products and sustained release formulations of HIV gp120. Also
claimed by patent filings are specific compositions of matter for the components
of our vaccine products, and proprietary production, recovery and purification
process technology. Together, these filings provide intellectual property that
we believe will enhance the value of our products.
Under the license agreement, Genentech has retained title to the licensed
patents and patent applications and other licensed technology previously owned
by Genentech, while we will retain title to any improvements developed by us.
Both parties will jointly own any improvements to the licensed patents and
patent applications or other licensed technology developed or invented jointly.
If Genentech exercises its marketing option under the license agreement,
Genentech will have a fully paid-up, non-exclusive, worldwide license under all
improvements to the licensed knowhow or patent rights that we own. Furthermore,
Genentech will have such a license if Genentech terminates the license agreement
before the expiration of the 15-year term or if we voluntarily terminate the
license agreement. Genentech will remain responsible for the filing, prosecution
and maintenance of all licensed patent rights, in consultation with us, at our
expense.
We have been informed that Chiron Corporation has filed oppositions against
two of Genentech's European patents that are licensed to us. Genentech, with our
assistance, has filed responses to both oppositions, but the outcome of each
opposition has yet to be determined. We have also been informed by the United
States Department of Health that we may need to obtain a license under one or
more of its United States and foreign patents involving molecular clones of
HIV-1 viral strains MN-STI and BA-L. We are currently exploring the advisability
of obtaining such a license. In the interim, we have recently filed an
opposition to a European equivalent of the United States Department of Health
patent and are awaiting the outcome of the opposition.
GOVERNMENT COLLABORATIONS
We have established collaborative relationships with two federal government
agencies: (1) The Centers for Disease Control and Prevention; and (2) National
Institute of Allergy and Infectious Diseases. We are in the process of
negotiating grants with both of these agencies.
Our collaboration with the Centers for Disease Control and Prevention would
be conducted in both the United States and Thailand. In the United States, the
Centers for Disease Control have proposed to co-sponsor our Phase III clinical
trial, starting in the Fall of 1999. The proposal provides that the Centers for
Disease Control would fund $8.0 million over four years to support our Phase III
clinical trial sites, as well as to provide funds for new research into our HIV
vaccine trials. In Thailand, the Centers for Disease Control are assisting in
the measurement of viral loads in vaccinees and placebos, as well as examining
HIV subtypes and strains in the at-risk population.
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The National Institute of Allergy and Infectious Diseases is forming a
collaboration with us to obtain and store clinical specimens from our North
American Phase III clinical trial. The proposal provides that it would fund $4.6
million for this program. We also have an ongoing collaboration with the AIDS
Vaccine Evaluation Group, a clinical consortium financed by the National
Institute of Allergy and Infectious Disease. In this collaboration we are
providing AIDSVAX to clinical sites for Phase I/II clinical trials of new
combination vaccines.
COMMERCIAL RELATIONSHIP WITH PASTEUR MERIEUX CONNAUGHT
On April 10, 1998, we signed a non-binding letter of intent with Pasteur
Merieux Connaught to co-develop an alternative vaccine regimen, called the
prime/boost. The letter of intent has recently been extended through November
1999. The prime/boost utilizes two independent vaccines administered
sequentially. A Pasteur Merieux Connaught vaccine would be administered
initially, followed by a bivalent gp120 vaccine. Should it prove efficacious,
the alternative vaccine regimen would be developed, clinically tested, and if
approved by regulatory agencies, marketed by Pasteur Merieux Connaught. We would
serve as a scientific co-developer and a source for bivalent formulations of
AIDSVAX, a critical component of the regimen. We would share significantly in
profits made from the sale of both vaccine components -- the Pasteur Merieux
Connaught vaccine, as well as AIDSVAX.
Phase I human trials of the initial Pasteur Merieux Connaught prime/boost
vaccine regimen have been conducted by the AIDS Vaccine Evaluation Group, an
NIH-sponsored clinical consortium. In early studies of the Pasteur Merieux
Connaught product, the combination vaccine incorporated monovalent gp120
provided by Chiron Vaccines as the boost. Subsequently, Pasteur Merieux
Connaught and the AIDS Vaccine Evaluation Group altered their plans and
requested us to provide our formulations of bivalent gp120 as a replacement for
the Chiron product. From this request arose the letter of intent and a plan to
co-develop a new vaccine regimen.
Currently, we and Pasteur Merieux Connaught are planning collaborative
studies with our respective vaccines. During this time we are also negotiating a
long-term co-development agreement with Pasteur Merieux Connaught. Should an
agreement be reached on final terms, we will supply 100% of Pasteur Merieux
Connaught's requirements for our bivalent gp120. Pasteur Merieux Connaught would
pay our fully burdened costs plus 10% for all vaccines purchased from us. In
addition, Pasteur Merieux Connaught would pay a royalty to us from Pasteur
Merieux Connaught's sales of both vaccines in the regimen.
Genentech holds exclusive options for the manufacture and marketing of
AIDSVAX. The non-binding letter of intent with Pasteur Merieux Connaught has
certain conflicts with our license agreement with Genentech. This conflict will
require resolution between us and Genentech. The issue is now under discussion,
and we will resolve it prior to our entering a final business agreement with
Pasteur Merieux Connaught. Upon resolution of the business issues with Genentech
and the Pasteur Merieux Connaught agreement, Genentech will then join us in
negotiations with Pasteur Merieux Connaught.
COMPETITION
We estimate that approximately 30 other companies have been engaged in
research to produce an HIV vaccine. Only AIDSVAX and a vaccine once developed by
our competitor, Chiron Vaccines, have progressed to, and completed, Phase II
testing. The Chiron subunit vaccine project was terminated in 1995.
Subsequently, a combination vaccine developed by Chiron Vaccines and Pasteur
Merieux Connaught, also competitors of ours, entered Phase I/II testing in 1997
in the United States. This effort, too, has been terminated. Chiron is currently
developing a DNA-based HIV vaccine that incorporates gp120.
Two other notable efforts at producing HIV vaccines have failed. A
collaboration between Merck & Co., Inc. and Repligen Corporation was terminated
because their vaccine failed to elicit HIV-neutralizing antibodies. Similarly,
MicroGeneSys, Inc. designed a vaccine that failed in early stage human testing.
It appears that the principal differences between these vaccines and ours has
been the choice of viral protein as antigen or the methods used for
manufacturing.
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We believe that we now lead all competitors worldwide in the development of
an HIV preventive vaccine. Of the two HIV vaccines that have reached human
clinical trials, we have full control of the leading product, AIDSVAX, and we
plan to become a partner in the second with Pasteur Merieux Connaught.
GOVERNMENT REGULATION
AIDSVAX is subject to federal regulation, by the federal government,
principally by the FDA under the Public Health Services Act, the Food, Drug and
Cosmetic Act and other laws, and by state and local governments. Such
regulations govern or influence, among other things, the testing, manufacture,
safety and efficacy requirements, labeling, storage, record keeping, licensing,
advertising, promotion, distribution and export of such products.
AIDSVAX is classified by the FDA as a biological drug product. The steps
ordinarily required before a biological drug product may be marketed in the
United States include:
- preclinical laboratory and animal testing;
- the submission to the FDA of an Investigational New Drug Application,
which must become effective before clinical trials may commence;
- adequate and well-controlled clinical trials to establish the safety,
purity and potency of the biological drug product and to characterize how it
behaves in the human body;
- the submission to the FDA of a biologics license application;
- FDA review of the biologics license application;
- satisfactory completion of an FDA preapproval inspection of the
manufacturing facilities; and
- FDA approval of the license application, including approval of all
product labeling.
In connection with obtaining approval to proceed with Phase III clinical
trials and in determining the trial protocol, VaxGen has met with the FDA and
its Vaccines and Related Biological Product Advisory Committee of the FDA. FDA's
advisory committees are composed of outside experts who assist FDA in product
reviews and provide advice on various issues. While the recommendations of these
committees are not binding on the FDA, they are commonly followed. In connection
with the Phase III clinical trials the FDA sought and received advice from the
Vaccines and Related Biological Products Advisory Committee regarding the
clinical development program and clinical study designs for AIDSVAX.
Preclinical testing includes laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety, purity and potency of each product. Preclinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding Good
Laboratory Practices. The results of the preclinical tests together with
manufacturing information and analytical data are submitted to the FDA as part
of the Investigational New Drug Application and are reviewed by the FDA before
the commencement of clinical trials. Unless the FDA objects to an
Investigational New Drug Application by placing the study on clinical hold, the
Investigational New Drug Application will become effective 30 days following its
receipt by the FDA. The FDA may suspend clinical trials at any time on various
grounds, including a finding that patients are being exposed to unacceptable
health risks. If the FDA does place the study on clinical hold, the sponsor must
usually resolve all of FDA's concerns before the study can proceed.
Clinical trials involve the administration of the investigational product
to humans under the supervision of qualified principal investigators. Clinical
trials are conducted in accordance with Good Clinical Practices under protocols
submitted to the FDA as part of the Investigational New Drug Application. In
addition, each clinical trial is approved and conducted under the auspices of an
institutional review board and with the patients' informed consent. The
institutional review board will consider, among other things, ethical factors,
the safety of human subjects and possibility of liability of the institutions
conducting the trial.
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Clinical trials are conducted in three sequential phases; however, the
phases may overlap. The goal of a Phase I clinical trial is to establish initial
data about safety and tolerance of the biological agent in humans. In Phase II
clinical trials, evidence is sought about the desired immune response of a
biological agent in a limited number of patients. Additional safety data and
dosing regimen information are also gathered from these studies. The Phase III
clinical trial program consists of expanded, large-scale, multi-center studies
of persons who are susceptible to the targeted disease. The goal of these
studies is to obtain sufficient evidence of the safety, purity and potency of
the proposed product. Our Phase III clinical trials of AIDSVAX are being
conducted on persons at risk for HIV infection but who test HIV negative prior
to enrollment in the trial. The FDA also frequently requests that sponsors
conduct Phase IV studies after licensing to gain additional information about
the biological drug product in a wider population.
All data obtained from this comprehensive program, in addition to detailed
information on the manufacture and composition of the product, are submitted in
a biologics license application to the FDA for review and approval for the
manufacture, marketing and commercial shipments of AIDSVAX. FDA approval of the
biologics license application is required before marketing may begin in the
United States. The FDA also may, at any time, require the submission of product
samples and testing protocols for lot-by-lot confirmatory testing by the FDA
prior to commercial distribution. This means a specific lot of vaccine cannot be
released for commercial distribution until the FDA has authorized such release.
Similar types of regulatory processes will be encountered as efforts are made to
market the vaccine internationally. We will be required to assure product
performance and manufacturing processes from one country to another.
For commercialization of AIDSVAX, the manufacturing processes described in
our biologics license application must receive FDA approval and the
manufacturing facility must successfully pass an inspection prior to approval of
AIDSVAX for sale within the United States. The pre-approved inspection assesses
whether, for example, the facility complies with the FDA's good manufacturing
practices. These practices include elaborate testing, control, documentation,
record keeping and other quality assurance procedures. If Genentech does not
exercise its option to manufacture AIDSVAX, we must pursue third party
manufacturing arrangements. For marketing outside the United States, we will be
subject to the regulatory requirements of other countries, which vary from
country to country, including marketing approval requirements. The regulatory
approval process in other countries includes requirements which vary from
country to country and the time needed to secure approval may be longer or
shorter from that required for FDA approval.
EMPLOYEES
As of April 15, 1999, we had 52 employees: 24 are clinical staff, 12 are
research and development staff and 16 are management/administration staff. None
of our employees is subject to a collective bargaining agreement, and we believe
that our relations with our employees are good.
FACILITIES
Our executive offices are located in Brisbane, California, in an office
building in which we lease approximately 16,000 square feet. The lease agreement
terminates in July 2005, and we have an option to renew for a successive
five-year period. We also lease approximately 10,000 square feet of laboratory
space in South San Francisco under a lease agreement that terminates in March
2006. We have an option to renew for a successive five-year period. We believe
that our facilities are sufficient to support our operations for at least the
next 24 months.
In Thailand, we lease office space at Mahidol University and at Taksin
Hospital in Bangkok. We will lease this space through the duration of the Thai
Phase III clinical trials.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings or claims.
42
<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTOR NOMINEES AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert C. Nowinski(1)(4)............... 52 Chairman, Chief Executive Officer
Donald P. Francis(1)(4)................ 56 President, Director
Phillip W. Berman(4)................... 49 Senior Vice President, Research &
Development -- Director
John G. Curd........................... 53 Senior Vice President, Medical Affairs
Carter A. Lee.......................... 46 Senior Vice President, Finance & Administration
Stephen C. Francis(3)(4)............... 58 Director
Roberta R. Katz(5)..................... 51 Director Nominee
Ruth B. Kunath(5)...................... 47 Director Nominee
William D. Young(1)(2)(3).............. 54 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Genentech Contract Committee
(5) The director nominees have agreed to join the board of directors shortly
after consummation of the offering. We anticipate that each director nominee
will become a member of the Compensation, Audit and Genentech Contract
Committees.
ROBERT C. NOWINSKI, PH.D. Dr. Nowinski co-founded VaxGen in November 1995
and has served as a director and Chairman of the Board since inception and our
Chief Executive Officer since April 1999. In 1991, Dr. Nowinski founded
PathoGenesis, Corporation, a publicly-held biotechnology company and served as
Chairman of the Board until 1995. In 1989, Dr. Nowinski founded ICOS
Corporation, a publicly-held biotechnology company, where, from 1989 through
1991, Dr. Nowinski served as Chief Executive Officer and President. In 1981, Dr.
Nowinski founded Genetic Systems Corporation, a publicly-held biotechnology
company, where, from 1981 to 1985, Dr. Nowinski held various executive positions
including Chairman of the Board, Chief Executive Officer, President and
Scientific Director. Following the merger of Genetic Systems Corporation with
Bristol-Myers Company, from 1988 to 1989, Dr. Nowinski served as Vice-President
of New Technology for Bristol-Myers Company at its headquarters in New York.
Prior to such time, Dr. Nowinski was a Professor of Microbiology and Immunology
at the University of Washington and Head of the Virology Program at the Fred
Hutchinson Cancer Research Center in Seattle, Washington. During his academic
career, Dr. Nowinski authored over 100 scientific publications. Dr. Nowinski
received a B.S. from Beloit College and a Ph.D. in immunology from Cornell
University Sloan-Kettering Division.
DONALD P. FRANCIS, M.D., D.SC. Dr. Francis co-founded VaxGen in November
1995 and has served as our President and as a director since inception. From
1993 to 1995, Dr. Francis directed HIV vaccine clinical research at Genentech.
Prior to joining Genentech, Dr. Francis served from 1973 to 1993 in various
positions at the Centers for Disease Control. During this period, Dr. Francis
established and directed the HIV laboratory for the Centers for Disease Control
and served as an Assistant Director, Viral Diseases Program. At that time, he
was also a principal investigator in one of the two Phase III clinical trials
that led to licensure of the hepatitis B vaccine in the United States. In 1976,
Dr. Francis was the lead epidemiologist on the first clinical team to encounter
and control Ebola virus. Prior to such time, Dr. Francis had a central role in
the World Health Organization's smallpox eradication program, which eradicated
smallpox from the world. Dr. Francis received an M.D. from Northwestern
University and completed his training in pediatrics at Los Angeles County/USC
Medical Center. Dr. Francis received a doctorate in virology from the Harvard
School of Public Health. Dr. Francis is the brother of Stephen Francis.
PHILLIP W. BERMAN, PH.D. Dr. Berman has served as our Senior Vice
President, Research & Development since April 1999. Dr. Berman served as our
Vice President of Research & Development from
43
<PAGE> 47
November 1997 to April 1999, and has served as a director since October 1997.
From 1982 to 1997, Dr. Berman served in various capacities with Genentech,
including Senior Scientist, Molecular Biology Department, and Staff Scientist,
Department of Immunology and also Department of Process Sciences. Since 1984,
Dr. Berman has had research responsibilities in Genentech's AIDS Vaccine Project
and is an inventor of AIDSVAX. Dr. Berman received an A.B. in biology from the
University of California, Berkeley, a Ph.D. in biochemistry from Dartmouth
College and performed post doctoral research at the Neurobiology Laboratory of
the Salk Institute and the Department of Biochemistry and Biophysics at the
University of California, San Francisco.
JOHN G. CURD, M.D. Dr. Curd has served as our Senior Vice President,
Medical Affairs, since April, 1999. From 1991 to April 1999, Dr. Curd held
various positions at Genentech, including Director,
Immunology/Oncology/Infectious Disease, Senior Director and Head of Clinical
Science and Vice President of Clinical Development. From 1978 to 1991, Dr. Curd
held several research and clinical positions at The Scripps Clinic, a
world-renowned research foundation and medical clinic, including Head, Division
of Rheumatology and Vice Chairman, Department of Medicine. He received a B.A.
from Princeton University and an M.D. from Harvard Medical School.
CARTER A. LEE Mr. Lee has served as General Manager and Senior Vice
President, Finance & Administration since September 1998. From 1991 to 1997, Mr.
Lee served as Senior Vice President and Chief Financial Officer of Diefenbach
Elkins International, Inc., a corporate branding consultancy. From 1990 to 1991,
Mr. Lee served as Vice President, Finance & Administration of EDAW, Inc., a
worldwide landscape architecture and planning firm for projects such as theme
parks and destination resorts. From 1987 to 1990, Mr. Lee served as Vice
President and Corporate Controller of Landor Associates, a strategic design
consulting firm. Prior to such time, Mr. Lee served in various positions at
Coopers & Lybrand, including Senior Accountant and Supervising Consultant. Mr.
Lee received a B.A. from the University of California, Berkeley, and an M.B.A.
from California State University, Hayward.
STEPHEN C. FRANCIS Mr. Francis has served as a director since October 1996.
Mr. Francis has served as Vice-Chairman and Chief Risk Oversight Officer at
Fischer, Francis, Trees & Watts, an investment management firm which he
co-founded in 1972. Mr. Francis is a member and former chairman of the Treasury
Borrowing Committee, which advises the United States Treasury, and is a member
of the Stanford University Graduate School of Business Advisory Council. Mr.
Francis received an A.B. from Dartmouth College and an M.B.A. from Stanford
University. Mr. Francis is the brother of Donald Francis.
ROBERTA R. KATZ Ms. Katz is a director nominee who has agreed to join the
board of directors shortly after consummation of the offering. Ms. Katz is the
Chief Executive Officer of The Technology Network. Ms. Katz joined Netscape
Communications Corporation in May 1995 as Vice President, General Counsel and
Secretary. From January 1996 to April 1999, Ms. Katz served as Senior Vice
President, General Counsel and Secretary of Netscape, where she was a member of
the team that negotiated the Netscape/ America Online merger. From March 1993
until joining Netscape, Ms. Katz served as Senior Vice President and General
Counsel of McCaw Cellular Communications, where she was a member of the team
that negotiated the AT&T/McCaw merger. In addition, from March 1992 until
joining Netscape, Ms. Katz served as Senior Vice President and General Counsel
of LIN Broadcasting Company, a subsidiary of McCaw. In March 1998, Ms. Katz was
named as one of the 50 Most Influential Women Attorneys in America by the
National Law Journal. She is an author of Justice Matters: Rescuing the Legal
System for the 21st Century. Ms. Katz received a B.A. from Stanford University,
a Ph.D. in anthropology from Columbia University and a J.D. from the University
of Washington School of Law.
RUTH B. KUNATH Ms. Kunath is a director nominee who has agreed to join the
board of directors shortly after consummation of the offering. Ms. Kunath has
managed the Vulcan Venture Biotechnology Portfolio, managing public and private
biotech and emerging healthcare investments since 1992. Prior to her employment
at Vulcan Ventures, Ms. Kunath managed Seattle Capital Management equity assets
as Senior Portfolio Manager for the healthcare sector of Bank of America Capital
Management. Ms. Kunath received a B.A. from DePauw University and is a Certified
Financial Analyst.
44
<PAGE> 48
WILLIAM D. YOUNG Mr. Young has served as a director since November 1995.
Since 1997, Mr. Young has served as the Chief Operating Officer of Genentech,
where he has been employed since 1980. Mr. Young serves on the board of
directors of IDEC Pharmaceuticals and Energy Biosystems Corp. He received a B.S.
in chemical engineering from Purdue University and an M.B.A. from Indiana
University.
BOARD OF DIRECTORS AND OFFICERS
The size of the board of directors is currently set at seven members.
Directors hold office until the next annual meeting at which time their terms
expire and their successors are elected. Officers are appointed by the board of
directors for one year terms.
AUDIT COMMITTEE
The audit committee makes recommendations to the board of directors about
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors, and evaluates our
internal controls. The audit committee consists of Mr. Stephen Francis and Mr.
William Young. Upon joining the board of directors, Ms. Katz and Ms. Kunath will
become members of this committee.
COMPENSATION COMMITTEE
The compensation committee reviews and approves the compensation and
benefits for our executive officers, administers our stock option plans and
makes recommendations to the board of directors about compensation matters. The
compensation committee consists of Mr. William Young. Upon joining the board of
directors, Ms. Katz and Ms. Kunath will become members of this committee.
EXECUTIVE COMMITTEE
The executive committee may act on behalf of the board of directors on all
matters except those concerning filling vacancies on the board, executive
compensation, audits or individual contracts or financial obligations exceeding
$3,000,000. The executive committee consists of Dr. Robert Nowinski, Dr. Donald
Francis and Mr. William Young.
GENENTECH CONTRACT COMMITTEE
The Genentech contract committee considers matters relating to agreements
with Genentech. The Genentech contract committee consists of Dr. Robert
Nowinski, Dr. Donald Francis, Dr. Phillip Berman and Mr. Stephen Francis. Upon
joining the board of directors, Ms. Katz and Ms. Kunath will become members of
this committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions about executive compensation are made by the compensation
committee. No member of the compensation committee or executive officer of
VaxGen has an interlocking relationship with executive officers or directors of
another company.
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<PAGE> 49
EXECUTIVE COMPENSATION
The following table depicts amounts paid during the last fiscal year as
compensation to our chief executive officer and our three most highly
compensated executive officers, other than the chief executive officer, who were
serving as executive officers at the end of fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------- --------------------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) SECURITIES UNDERLYING OPTIONS(#)
--------------------------- --------- -------- --------------------------------
<S> <C> <C> <C>
Robert C. Nowinski, Chairman(1)............. $250,000 $ -- 60,000
Donald P. Francis, President................ 250,000 75,000 15,000
Phillip W. Berman, Vice President, Research
& Development(2).......................... 175,000 35,000 15,000
Robert F. Pacquer, Vice President,
Finance(3)................................ 150,730 -- 200,000
</TABLE>
- ---------------
(1) Dr. Nowinski was appointed Chief Executive Officer on April 22, 1999.
(2) Dr. Berman was appointed Senior Vice President, Research & Development on
April 22, 1999.
(3) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
The following table depicts stock option plan activity during the fiscal
year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL
% OF TOTAL RATES OF
NUMBER OF OPTIONS EXERCISE STOCK PRICE
SECURITIES GRANTED TO OR APPRECIATION
UNDERLYING EMPLOYEES BASE FOR OPTION TERM
OPTIONS IN PRICE EXPIRATION ---------------------
NAME GRANTED(#) 1998 ($/SH) DATE 5%($) 10%($)
---- ------------------ ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Nowinski............... -- -- -- -- -- --
Donald P. Francis................ -- -- -- -- -- --
Phillip W. Berman................ -- -- -- -- -- --
Robert F. Pacquer(1)............. 200,000(2) 45.7 7.00 1/2/08 880,000 2,231,000
</TABLE>
- ---------------
(1) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
(2) Under the terms of Mr. Pacquer's employment agreement, he received an option
to purchase 200,000 shares. Under the terms of Mr. Pacquer's resignation,
this amount was reduced as follows: (a) as of March 15, 1999, 77,500 of Mr.
Pacquer's options were exercisable until March 31, 2000; and (b) if we
complete our initial public offering by September 1, 1999, an additional
10,000 shares will become exercisable until March 31, 2000. The balance of
Mr. Pacquer's options have terminated.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT
(#) FISCAL YEAR-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------------- -------------------------
<S> <C> <C>
Robert C. Nowinski............................ --/-- --/--
Donald P. Francis............................. --/-- --/--
Phillip W. Berman............................. 50,000/150,000 125,000/375,000
Robert F. Pacquer(1).......................... 50,000/150,000 125,000/375,000
</TABLE>
- ---------------
(1) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
46
<PAGE> 50
EMPLOYMENT AGREEMENTS
Dr. Nowinski's employment agreement provides for a base annual salary of
$250,000 through 2002. On April 22, 1999, our board of directors approved an
increase in Dr. Nowinski's annual salary to $300,000. Dr. Nowinski will receive
a performance bonus of 125,000 shares of common stock if either the market value
of our common stock reaches an average of $28.00 per share over a 30-day period
or we are acquired in an acquisition that results in a purchase price of at
least $28.00 per share. In the event of a change of control or termination prior
to the end of the term of his employment agreement, we may be required to pay
all salary due to Dr. Nowinski. Upon termination of employment, Dr. Nowinski has
agreed not to compete with us for one year.
Dr. Francis' employment agreement provides for a base salary of $250,000
through 2002. On April 22, 1999, our board of directors approved an increase in
Dr. Francis' annual salary to $275,000. Dr. Francis may receive an annual bonus
of up to 30% of his base salary as determined in the discretion of the board of
directors. Dr. Francis will also receive a performance bonus of 125,000 shares
of common stock if either the market value of our common stock reaches an
average of $28.00 per share over a 30-day period or we are acquired in an
acquisition that results in a purchase price of at least $28.00 per share. In
the event of a change of control or termination of employment prior to the end
of the five-year term, we may be required to pay all salary due to Dr. Francis.
Upon termination of employment, Dr. Francis has agreed not to compete with us
for one year.
Dr. Berman's employment agreement provides for a base salary of $175,000
through November 2000. On April 22, 1999, our board of directors approved an
increase in Dr. Berman's annual salary to $200,000. Dr. Berman may receive an
annual bonus of up to 20% of his base salary as determined in the discretion of
the board of directors. Dr. Berman will also receive a performance bonus of
75,757 shares of common stock if either the market value of our common stock
reaches an average of $28.00 per share over a 30-day period or we are acquired
in an acquisition that results in a purchase price of at lease $28.00 per share.
In the event of a change of control or termination of employment prior to the
expiration of the three-year term, we may be required to pay Dr. Berman's base
salary for twelve months following his termination. Upon termination of
employment, Dr. Berman has agreed not to compete with us for one year.
Dr. Curd's employment agreement provides for an annual base salary of
$225,000 through May 2003. Dr. Curd may also receive an annual bonus of up to
30% of his base salary and up to 10,000 shares of stock options with an exercise
price equal to fair market value, as determined in the discretion of the board
of directors. We have agreed to pay Dr. Curd a bonus of up to $50,000, to be
paid over the period of his four-year contract. We have also agreed to assume
Dr. Curd's loan for $96,822 outstanding with Genentech and accept an
interest-free promissory note from Dr. Curd. Dr. Curd agrees to retire the
outstanding loan by the termination of this agreement. Dr. Curd has received an
option to purchase up to 125,000 shares of common stock that vests over a
four-year period. In the event of a change of control, Dr. Curd may receive a
one-time bonus of 37,500 shares of common stock. In the event of termination
prior to the expiration of the four-year term, we may be required to pay Dr.
Curd's base salary for twelve months following his termination. Upon termination
of employment, Dr. Curd has agreed not to compete with us for one year.
Mr. Lee's employment agreement provides for a base salary of $185,000
through March 2003. Mr. Lee may also receive an annual bonus of up to 20% of his
base salary, and 10,000 shares of stock options with an exercise price equal to
fair market value, as determined in the discretion of the board of directors.
Mr. Lee has received an option to purchase up to 125,000 shares of common stock
that vests over a four-year period. In the event of a change of control, Mr. Lee
may receive a one-time bonus of 37,500 shares of common stock. In the event of
termination prior to the expiration of the four-year term, we may be required to
pay Mr. Lee's base salary for twelve months following his termination. Upon
termination of employment, Mr. Lee has agreed not to compete with us for one
year.
47
<PAGE> 51
DIRECTOR COMPENSATION
We reimburse directors for out-of-pocket and travel expenses incurred while
attending board of director and committee meetings. Directors are also paid
$1,000 per meeting attended in person and $500 for participation by conference
call. Directors who are not also employees receive an annual option to purchase
up to the lesser of: (1) $20,000 worth of common stock at an exercise price
equal to the fair market value of the stock on the date of grant; and (2) 2,857
shares of common stock. Employee directors are also eligible to receive option
grants.
1996 STOCK OPTION PLAN
We adopted a 1996 stock option plan for our officers, directors, key
employees and consultants. Options to purchase shares of common stock are
authorized to be issued to participants through either incentive stock options
or nonqualified stock options. On April 1, 1999, our shareholders approved an
increase of 1,250,000 in the number of shares reserved for issuance under the
1996 plan, to a total of 1,750,000 shares of common stock reserved for issuance;
options are subject to adjustment. The 1996 plan is administered by our board of
directors but may also be administered by a committee appointed by our board of
directors. The exercise price of options is not less than the fair market value
of the common stock on the date of grant, except that the exercise price of
nonqualified stock options shall not be less than 85% of the fair market value
at the date of the grant. Options granted under the 1996 plan have a maximum
term of ten years. Options vest at a rate of 25% per year over a four-year
period unless otherwise provided by the board of directors. In no event may the
board of directors specify a vesting schedule that permits an option to vest at
a rate less than 20% per year, however. Nonqualified stock options granted to
non-employee directors will vest at the rate of 40% on the date of grant and 60%
on the first anniversary of the date of grant. The 1996 plan expires ten years
from the date of adoption, unless sooner terminated by the board of directors.
As of April 15, 1999, there were a total of 883,100 options outstanding under
the 1996 plan.
1998 DIRECTORS STOCK OPTION PLAN
We adopted a 1998 director stock option plan for our non-employee
directors. The plan provides for the issuance of 37,500 shares of common stock
to non-employee directors through annual options. Options are subject to
adjustment. The plan provides for grant of initial options to non-employee
directors on May 6, 1998. Annual option grants will automatically be made to
non-employee directors on the annual meeting date in each subsequent year. The
exercise price of the initial options is $7.00 per share. The exercise price of
the each annual option is the fair market value of our common stock on the
annual grant date. Each initial option is fully vested upon grant. Each annual
option fully vests on the first anniversary of its grant date, subject to
certain meeting attendance requirements. The board of directors may terminate
the 1998 director plan at any time. As of April 15, 1999, there were a total of
8,571 options outstanding under the 1998 director plan.
401(k) PLAN
We maintain a 401(k) profit sharing benefit plan intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended. The plan covers
all employees who satisfy certain minimum age eligibility requirements. Under
the profit sharing portion of the plan, we may make an annual contributions for
the benefit of eligible employees in an amount determined by us. Under the
401(k) portion of the plan, eligible employees may make pretax elective
contributions of their compensation, subject to maximum limits on contributions
prescribed by law.
48
<PAGE> 52
CERTAIN TRANSACTIONS
The following is a summary of certain related party transactions since
January 1996 to which we were or are a party or in which certain of our
executive officers, directors or greater than 10% stockholders had or have a
direct or indirect material interest. We believe that each of these agreements
was made on terms at least as fair to us as could have been obtained from
unaffiliated third parties.
We entered into a credit agreement dated December 19, 1995 with Genentech
under which Genentech financed our formation by means of a $1,000,000 line of
credit. We borrowed $780,000 under the credit agreement in 1996 and $205,000 in
1997. Our obligations under the credit agreement were converted into 142,857
shares of common stock in March 1997 at a price of $7.00 per share.
We issued 1,150,000 shares of common stock to Genentech, 500,000 shares of
common stock to Dr. Donald P. Francis, and 250,000 shares of common stock to Dr.
Robert C. Nowinski on April 10, 1996 for a purchase price of $0.02 per share. We
also issued 133,333 shares of common stock to Dr. Francis, 66,666 shares of
common stock to Dr. Nowinski, and 20,000 shares of common stock to Stephen C.
Francis on October 29, 1996 for a purchase price of $0.02 per share.
We entered into a services agreement dated January 1, 1996 with Genentech
under which Genentech agreed to provide us with administrative and other
services. Under the services agreement Genentech has provided us with expertise
in process sciences, regulatory affairs, virology and the manufacturing of
clinical supplies of AIDSVAX. We paid Genentech $1,442,000, $2,352,000 and
$690,000 in years 1996-1998. The initial services agreement expired December 31,
1998 but was renewed through December 31, 2000.
We entered into a license agreement dated May 1, 1996 with Genentech under
which Genentech granted us an exclusive license to specified patents and
proprietary know-how relating to the development of a vaccine to prevent HIV
infection and/or AIDS. The Genentech license agreement is described in further
detail in "Business -- License and Services Agreement with Genentech."
We entered into a warrant agreement with Genentech on March 15, 1996 under
which Genentech could purchase that number of shares of our common stock
necessary to maintain Genentech's 25% ownership on a fully-diluted basis. The
purchase price for any shares purchased under this agreement would be market
price. The warrant expired January 11, 1999, at the completion of our 1998
private placement. We have granted Genentech registration rights with respect to
all of its securities. They do not hold any further rights to acquire our common
stock.
We issued 142,857 shares of common stock to Genentech in March 1997 in
connection with our 1997 private placement for a purchase price of $7.00 per
share.
We entered into a sublease agreement dated September 3, 1997 with Genentech
covering office space located on the premises leased by Genentech in South San
Francisco. We are no longer occupying this space. Under the sublease we paid
Genentech a monthly rental of $5,985 through September 1998.
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<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth information about the beneficial ownership
of common stock of:
- each director, director nominee, our chief executive officer and our
three most highly compensated executive officers;
- directors and executive officers as a group; and
- 5% beneficial owners.
The information is this table is as of April 15, 1999 and as adjusted to
reflect the sale of common stock in the offering.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED SHARES(1)
--------------------------------------
PRIOR TO OFFERING AFTER OFFERING
-------------------- --------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT PERCENT
------------------------------------ --------- ------- -------
<S> <C> <C> <C>
Genentech, Inc............................................. 1,522,354 19.8% 14.1%
1 DNA Way
South San Francisco, California 94080
Donald P. Francis.......................................... 633,333 8.2 5.9
c/o VaxGen, Inc.
1000 Marina Boulevard, Suite 200
Brisbane, California 94005
Robert C. Nowinski......................................... 309,166 4.0 2.9
Phillip W. Berman(2)....................................... 50,000 * *
Stephen C. Francis(3)...................................... 42,857 * *
Roberta R. Katz(4)......................................... -- -- --
Ruth B. Kunath(5).......................................... 263,158 3.4 2.4
William D. Young(6)........................................ 1,522,354 19.8 14.1
All executive officers and directors as a group (7
persons)(7).............................................. 2,820,868 36.5 26.0
</TABLE>
- ---------------
* Less than 1%.
(1) Includes shares underlying options or warrants exercisable within 60 days of
April 15, 1999. Except as indicated, persons named in the table have sole
voting and investment power with respect to all shares of common stock owned
by them.
(2) Includes 50,000 shares issuable on exercise of outstanding options
exercisable within 60 days of April 15, 1999.
(3) Includes 2,857 shares issuable upon exercise of outstanding options
exercisable within 60 days of April 15, 1999.
(4) Ms. Katz is a director nominee who has agreed to join the board of directors
shortly after consummation of the offering. Ms. Katz will be granted an
option to purchase up to 20,000 shares of common stock upon commencement of
service on the board of directors. The stock option vests over four years.
(5) Ms. Kunath is a director nominee who has agreed to join the board of
directors shortly after consummation of the offering. Ms. Kunath manages the
Vulcan Venture Biotechnology Portfolio as an employee of Vulcan Ventures,
Inc. Vulcan Ventures Inc. owns 263,158 shares of common stock. Ms. Kunath
disclaims any beneficial ownership of Vulcan Ventures shares except to the
extent of any pecuniary interest therein. Ms. Kunath will be granted an
option to purchase up to 20,000 shares of common stock upon commencement of
service on the board of directors. The stock option vests over four years.
(6) Mr. Young is Chief Operating Officer of Genentech. Mr. Young disclaims any
beneficial ownership of Genentech shares except to the extent of any
pecuniary interest therein.
(7) Includes an aggregate of 52,857 shares of common stock issuable on exercise
of outstanding options exercisable within 60 days of April 15, 1999.
50
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The following is a description of the material terms of our capital stock
and charter documents. While complete in material respects, this description is
nonetheless a summary and is qualified in each instance by reference to the full
text of these documents.
Our certificate of incorporation authorizes 40,000,000 shares of capital
stock, consisting of 20,000,000 shares of common stock, $0.01 par value, and
20,000,000 shares of preferred stock, $0.01 par value.
COMMON STOCK
We have 20,000,000 shares of common stock authorized, of which 7,685,161
shares are outstanding as of April 15, 1999. There are approximately 768
stockholders of record. Holders of common stock are entitled to one vote per
share. There are no cumulative voting or preemptive rights. Holders of common
stock are entitled to receive their share of any dividends declared by the board
of directors. In the event of liquidation, dissolution or winding up, holders of
common stock are entitled to their share of remaining assets following payment
to creditors. All the outstanding shares of common stock are fully paid, validly
issued and non-assessable. As of April 15, 1999, we had outstanding options to
purchase 891,671 shares of common stock.
PREFERRED STOCK
The board of directors is authorized to issue 20,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences and
privileges of those shares without further action by stockholders. Any shares of
preferred stock so issued may have priority over the common stock with respect
to dividend, liquidation and other rights. No preferred stock has been issued.
WARRANTS
As of April 15, 1999, there are outstanding warrants to purchase 309,825
shares of common stock. All of these warrants are currently exercisable.
In connection with our 1997 financing we granted a contractual right to one
private unaffiliated investor to maintain his proportionate stock ownership
position. This right will expire March 31, 2002.
ANTI-TAKEOVER PROVISIONS IN CHARTER DOCUMENTS
Our certificate of incorporation does not provide for cumulative voting in
connection with the election of directors. Genentech is currently our largest
single stockholder, owning approximately 20% of our common stock. Our officers
and directors as a group own approximately 37% of our common stock. While these
percentages will decrease after this offering, Genentech and our officers and
directors acting together could influence the direction and control of our
business.
Our bylaws provide that special meetings of stockholders may be called only
by the board of directors, the Chairman of the Board, the President, or any
holder or holders of at least 10% of our voting stock. The bylaws also provide
that stockholders seeking to bring business before an annual or special meeting
must provide timely notice in writing. To be timely, a stockholder's notice must
be transmitted: (1) not less than 20 days nor more than 60 days before a meeting
to act on a plan of merger or consolidation or a proposed sale, lease, exchange
or other disposition of our assets; or (2) not less than 10 days nor more than
60 days before any other meeting. The bylaws also contain specific requirements
for the form of a stockholder's notice. These provisions have anti-takeover
effects that may deter a change in control of us.
REGISTRATION RIGHTS
In connection with our prior private financings, we granted registration
rights with respect to (1) 3,607,047 shares of common stock sold in the 1997
private placement; (2) 1,570,010 shares of
51
<PAGE> 55
common stock sold in the 1998 private placement; and (3) 372,354 shares of
common stock sold to Genentech. These registration rights generally grant to the
holders up to three "piggyback" registrations and two "demand" registrations,
subject to customary cutback provisions.
DELAWARE LAW
VaxGen is subject to Section 203 of the Delaware General Corporation Law,
which prevents an "interested stockholder," defined as a person who owns or
within three years did own 15% or more of a corporation's outstanding voting
stock, from engaging in a business combination with a publicly-held Delaware
corporation for three years following the date that person became an interested
stockholder. An exception is made where the business combination is approved in
a prescribed manner. A corporation may at its option exclude itself from the
coverage of Section 203 by amending its certificate of incorporation or bylaws
by action or its stockholders. We did not elect to exclude ourselves.
DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation eliminates the personal liability of
directors to us or our stockholders for money damages resulting from breaches of
their fiduciary duty to the fullest extent permitted by Delaware General
Corporation Law. This provision does not eliminate the liability of directors
for (1) acts or omissions not in good faith that involve intentional misconduct
or a knowing violation of law; (2) improper declarations of dividends; (3)
transactions from which a director derived an improper personal benefit; or (4)
breaches of directors' duty of loyalty to us or our stockholders. Our bylaws
contain provisions requiring the indemnification of our directors to the fullest
extent permitted by applicable law. We also have the ability to indemnify
officers, employees and agents to the same extent as directors. Our bylaws also
permit us to secure insurance on behalf of any director, officer, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws permit such indemnification. The
employment agreements of Drs. Nowinski and Francis contain indemnification
provisions. We have entered into an indemnification agreement with Ms. Katz and
Ms. Kunath both director nominees, under which we have agreed to indemnify them
with respect to any liability in connection with this offering to the fullest
extent permitted by law.
TRANSFER AGENT
The transfer agent for the common stock is ChaseMellon Shareholder
Services, Seattle, Washington.
52
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 10,785,161 shares of common stock will be outstanding.
A total of 11,250,161 shares will be outstanding if the underwriters exercise
their over-allotment option in full. Of these shares, all of the shares sold in
this offering, including shares, if any, issued on exercise of the underwriter's
over-allotment option, will be freely tradable without restriction under the
Securities Act except for any shares purchased by "affiliates" of VaxGen as
defined in Rule 144 under the Securities Act. The remaining 7,685,161 shares are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
The restricted securities generally may not be sold unless they are registered
under the Securities Act or sold pursuant to an exemption from registration,
such as the exemption provided by Rule 144 under the Securities Act.
Our officers and directors and a majority of shareholders have entered into
lock-up agreements pursuant to which they have agreed not to offer or sell any
shares of common stock they currently own, for a period of 180 days after the
date of this prospectus without the prior written consent of Prudential
Securities, on behalf of the underwriters. In addition to the shares subject to
lock-up agreements, 1,319,497 shares of common stock may not be sold in
accordance on Rule 144 before December 1999. Prudential Securities may, at any
time and without notice, waive any of the terms of these lock-up agreements
specified in the underwriting agreement. Following the lock-up period, these
shares will not be eligible for sale in the public market without registration
under the Securities Act unless such sales meet the conditions and restrictions
of Rule 144 as described below.
In general, under Rule 144 as currently in effect, any person, or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of: (1)
1% of the then-outstanding shares of common stock; and (2) the average weekly
trading volume in the common stock during the four calendar weeks immediately
preceding the date on which the notice of such sale on Form 144 is filed with
the SEC. Sales under Rule 144 are also subject to certain provisions relating to
notice and manner of sale and the availability of current public information
about VaxGen. In addition, a person, or persons whose shares are aggregated, who
has not been an affiliate of VaxGen at any time during the 90 days immediately
preceding a sale, and who has beneficially owned the shares for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitation and other conditions described above. The foregoing
summary of Rule 144 is not intended to be a complete description.
As soon as practicable following the consummation of this offering, VaxGen
intends to file a registration statement under the Securities Act to register
the shares of common stock available for issuance pursuant to its stock option
plans after the effective date of such registration statement will be available
for sale in the open market subject to the lock-up period and, for affiliates of
VaxGen, subject to certain conditions and restrictions of Rule 144.
53
<PAGE> 57
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated and Punk, Ziegel & Company
L.P. are acting as representatives. We are obligated to sell, and the
underwriters are obligated to purchase, all of the shares offered on the cover
page of this prospectus, if any are purchased. Subject to conditions specified
in the underwriting agreement, each underwriter has severally agreed to purchase
the shares indicated opposite its name:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITERS ---------
<S> <C>
Prudential Securities Incorporated..........................
Punk, Ziegel & Company L.P..................................
---------
Total....................................................... 3,100,000
=========
</TABLE>
The underwriters may sell more than the total number of shares offered on
the cover page of this prospectus and they have, for a period of 30 days from
the date of this prospectus, an over-allotment option to purchase up to 465,000
additional shares from us. If any additional shares are purchased, the
underwriters will severally purchase the shares in the same proportion as per
the table above.
The representatives of the underwriters have advised us that the shares
will be offered to the public at the offering price indicated on the cover page
of this prospectus. The underwriters may allow to selected dealers a concession
not in excess of $ per share and these dealers may reallow a concession not
in excess of $ per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and the concessions. The representatives have informed us that the
underwriters do not intend to sell shares to any investor who has granted them
discretionary authority.
We have agreed to pay the underwriters the following fees, assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------------------
FEE WITHOUT EXERCISE OF FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us................................ $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $1,300,000 in
expenses for this offering. We have agreed to indemnify the underwriters against
liabilities, including liabilities under the Securities Act or contribute to
payments that the underwriters may be required to make in respect of these
liabilities.
We, our officers and directors, and a majority of shareholders of VaxGen
have entered into lock-up agreements, under which we and they agreed not to
offer or sell any shares of common stock or securities convertible into or
exchangeable or exercisable for shares of common stock for a period of 180 days
from the date of this prospectus without the prior written consent of Prudential
Securities on behalf of the underwriters. Prudential Securities may, at any time
and without notice, waive the terms of these lock-up agreements specified in the
underwriting agreement.
Prior to this offering, there has been no public market for the common
stock of VaxGen. The public offering price, negotiated between VaxGen and the
representatives, is based upon various factors such as our financial and
operating history and condition, its prospects, the prospects for the industry
we are in and prevailing market conditions.
54
<PAGE> 58
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
- Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities may elect to reduce this short
position by exercising some or all of the over-allotment option.
- Stabilizing and short covering: stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
- Penalty bids permitting the representatives to reclaim commissions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
Such activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, NYSE in the over-the-counter market
or otherwise.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- the Public Offers of Securities Regulations 1995;
- the Financial Services Act 1986; and
- the Financial Services Act 1986 (Investment Advertisements) (Exemptions),
Order 1996 (as amended).
We have asked the underwriters to reserve shares for sale at the same
offering price directly to our employees and other business affiliates or
related third parties. The number of shares available for sale to the general
public in the offering will be reduced to the extent such persons purchase the
reserved shares.
The Roman Arch Fund L.P. and The Roman Arch Fund II L.P., an internal
employee private equity fund of Prudential Securities Incorporated, own an
aggregate of 16,000 shares.
LEGAL MATTERS
Graham & James LLP/Riddell Williams P.S., Seattle, Washington, passed on
the validity of the shares. Principals of Graham & James LLP/Riddell Williams
P.S. beneficially own 22,000 shares. Cooley Godward LLP, Kirkland, Washington,
passed on legal matters for the underwriters.
EXPERTS
The financial statements of VaxGen as of December 31, 1997 and 1998, and
for each of the years in the three-year period ended December 31, 1998 and for
the period from November 27, 1995 (inception) through December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
55
<PAGE> 59
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement on Form S-1 with the SEC covering sale of
the common stock, of which this prospectus is a part. This prospectus does not
contain all of the information in the registration statement, portions of which
are omitted as permitted by SEC rules. Statements in this prospectus about
documents filed as exhibits, while complete in material respects, are
nonetheless summaries. Reference is made to each exhibit for a full description.
In each case, summary descriptions are qualified by reference to complete
exhibits. You may read or copy any document filed by us at the SEC's Public
Reference Room located at 450 5th Street, NW, Washington, D.C. 20549. You may
obtain information about the Public Reference Room by calling the SEC for
further information at 1-800-SEC-0330. Our filings are also available at the
SEC's web site at www.sec.gov.
56
<PAGE> 60
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit) and
Comprehensive Loss........................................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors
VaxGen, Inc.:
We have audited the accompanying balance sheets of VaxGen, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity (deficit) and comprehensive loss,
and cash flows for each of the years in the three-year period ended December 31,
1998 and the period from November 27, 1995 (inception) through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VaxGen, Inc. (a development
stage enterprise) as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998 and the period from November 27, 1995 (inception)
through December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Seattle, Washington
February 5, 1999, except as to note 9(b),
which is as of April 1, 1999
F-2
<PAGE> 62
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1997 1998 1999
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 641,000 $ 6,818,000 $ 7,931,000
Investment securities........................... 23,239,000 12,650,000 12,676,000
Interest receivable............................. 152,000 112,000 148,000
Prepaid expenses and other current assets....... 230,000 360,000 294,000
----------- ------------ ------------
Total current assets.................... 24,262,000 19,940,000 21,049,000
Property and equipment, net....................... 33,000 1,258,000 1,423,000
Other assets...................................... 6,000 274,000 221,000
----------- ------------ ------------
Total assets............................ $24,301,000 $ 21,472,000 $ 22,693,000
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Genentech............................ $ 3,792,000 $ 260,000 $ 500,000
Accounts payable................................ 237,000 1,483,000 248,000
Accrued liabilities............................. 390,000 331,000 963,000
Current portion of long-term obligations........ -- -- 20,000
----------- ------------ ------------
Total current liabilities............... 4,419,000 2,074,000 1,731,000
----------- ------------ ------------
Long-term obligations............................. -- -- 66,000
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized
20,000,000 shares; none issued or
outstanding.................................. -- -- --
Common stock, $0.01 par value. Authorized
20,000,000 shares; issued and outstanding
6,109,401 shares at December 31, 1997,
7,101,248 shares at December 31, 1998 and
7,685,161 shares at March 31, 1999........... 61,000 71,000 77,000
Additional paid-in capital...................... 24,985,000 33,619,000 38,886,000
Accumulated other comprehensive income --
unrealized gain on investment securities..... 8,000 43,000 28,000
Deficit accumulated during the development
stage........................................ (5,172,000) (14,335,000) (18,095,000)
----------- ------------ ------------
Total stockholders' equity.............. 19,882,000 19,398,000 20,896,000
Commitments and contingencies
----------- ------------ ------------
Total liabilities and stockholders'
equity................................ $24,301,000 $ 21,472,000 $ 22,693,000
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 63
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NOVEMBER 27, NOVEMBER 27,
1995 1995
(INCEPTION) THREE MONTHS (INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH ENDED MARCH 31, THROUGH
--------------------------------------- DECEMBER 31, ------------------------- MARCH 31,
1996 1997 1998 1998 1998 1999 1999
----------- ----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and development:
Genentech charges.......... $ 1,435,000 $ 2,348,000 $ 681,000 $ 4,467,000 $ 190,000 $ 240,000 $ 4,707,000
Other...................... 248,000 798,000 6,150,000 7,196,000 526,000 2,798,000 9,994,000
----------- ----------- ----------- ------------ ----------- ----------- ------------
(1,683,000) (3,146,000) (6,831,000) (11,663,000) (716,000) (3,038,000) (14,701,000)
General and administrative:
Genentech charges.......... 7,000 4,000 9,000 20,000 -- -- 20,000
Other...................... 364,000 796,000 3,336,000 4,523,000 447,000 1,006,000 5,529,000
----------- ----------- ----------- ------------ ----------- ----------- ------------
(371,000) (800,000) (3,345,000) (4,543,000) (447,000) (1,006,000) (5,549,000)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Loss from operations....... (2,054,000) (3,946,000) (10,176,000) (16,206,000) (1,163,000) (4,044,000) (20,250,000)
Other income (expense), net:
Investment income, net....... -- 905,000 1,013,000 1,918,000 306,000 285,000 2,203,000
Interest
expense -- Genentech....... (28,000) (19,000) -- (47,000) -- -- (47,000)
Interest expense -- other.... -- -- -- -- -- (1,000) (1,000)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total other income
(expense), net........... (28,000) 886,000 1,013,000 1,871,000 306,000 284,000 2,155,000
Net loss................... $(2,082,000) $(3,060,000) $(9,163,000) $(14,335,000) $ (857,000) $(3,760,000) $(18,095,000)
=========== =========== =========== ============ =========== =========== ============
Basic and diluted loss per
share........................ $ (1.90) $ (0.60) $ (1.48) $ (0.14) $ (0.49)
=========== =========== =========== =========== ===========
Weighted average shares used
in computing basic and
diluted loss per share....... 1,093,000 5,096,000 6,185,000 6,066,000 7,619,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 64
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE OTHER TOTAL
-------------------- PAID-IN DEVELOPMENT COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE INCOME EQUITY (DEFICIT)
--------- ------- ----------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception (November
27, 1995)..................... -- $ -- $ -- $ -- $ -- $ --
Net and total comprehensive loss
for the period from inception
to December 31, 1995.......... -- -- -- (30,000) -- (30,000)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1995.... -- -- -- (30,000) -- (30,000)
Shares issued at $0.02 per share
from April through October
1996:
Genentech for technology...... 1,150,000 11,000 12,000 -- -- 23,000
Other founders for cash....... 980,000 10,000 10,000 -- -- 20,000
Net and total comprehensive
loss.......................... -- -- -- (2,082,000) -- (2,082,000)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1996.... 2,130,000 21,000 22,000 (2,112,000) -- (2,069,000)
Sale of shares in private
placement at $7.00 per share
from March through June 1997
for cash, net of issue costs
of $2,248,000................. 3,607,047 36,000 22,965,000 -- -- 23,001,000
Sale of shares to Genentech
concurrent with private
placement in March 1997 at
$7.00 per share for cash...... 285,714 3,000 1,997,000 -- -- 2,000,000
Genentech exercise of warrants
at $0.02 per share in October
1997 for cash................. 86,640 1,000 1,000 -- -- 2,000
Comprehensive loss:
Net loss...................... -- -- -- (3,060,000) -- (3,060,000)
Unrealized gain on investment
securities.................. -- -- -- -- 8,000 8,000
--------- ------- ----------- ------------ -------- -----------
Total comprehensive
loss.................. -- -- -- -- -- (3,052,000)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1997.... 6,109,401 61,000 24,985,000 (5,172,000) 8,000 19,882,000
Exercise of employee stock
options at $7.00 per share in
June and July 1998 for cash... 5,750 -- 40,000 -- -- 40,000
Sale of shares in private
placement in December 1998 at
$9.50 per share for cash, net
of issue costs of $764,000.... 986,097 10,000 8,594,000 -- -- 8,604,000
Comprehensive loss:
Net loss...................... -- -- -- (9,163,000) -- (9,163,000)
Unrealized gain on investment
securities.................. -- -- -- -- 35,000 35,000
--------- ------- ----------- ------------ -------- -----------
Total comprehensive
loss.................. -- -- -- -- -- (9,128,000)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1998.... 7,101,248 71,000 33,619,000 (14,335,000) 43,000 19,398,000
Sale of shares in private
placement in January 1999 at
$9.50 per share for cash, net
of issue costs of $264,000
(unaudited)................... 583,913 6,000 5,267,000 -- -- 5,273,000
Comprehensive loss (unaudited):
Net loss...................... -- -- -- (3,760,000) -- (3,760,000)
Net unrealized loss on
investment securities....... -- -- -- -- (15,000) (15,000)
--------- ------- ----------- ------------ -------- -----------
Total comprehensive
loss.................. -- -- -- -- -- (3,775,000)
--------- ------- ----------- ------------ -------- -----------
Balance at March 31, 1999
(unaudited)................... 7,685,161 $77,000 $38,886,000 $(18,095,000) $ 28,000 $20,896,000
========= ======= =========== ============ ======== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 65
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NOVEMBER 27, NOVEMBER 27,
1995 1995
(INCEPTION) THREE MONTHS (INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH ENDED MARCH 31, THROUGH
----------------------------------------- DECEMBER 31, ------------------------- MARCH 31,
1996 1997 1998 1998 1998 1999 1999
----------- ------------ ------------ ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(2,082,000) $ (3,060,000) $ (9,163,000) $(14,335,000) $ (857,000) $(3,760,000) $(18,095,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........ 3,000 4,000 92,000 99,000 4,000 80,000 179,000
Amortization of
discounts on
investment
securities.......... -- (229,000) (154,000) (383,000) (75,000) (39,000) (422,000)
Changes in assets and
liabilities:
Interest
receivable........ -- (152,000) 40,000 (112,000) (5,000) (36,000) (148,000)
Prepaid expenses and
other current
assets............ (2,000) (228,000) (130,000) (360,000) 35,000 66,000 (294,000)
Other assets........ -- (1,000) (150,000) (162,000) -- 53,000 (109,000)
Payable to
Genentech......... 1,442,000 2,350,000 (3,532,000) 260,000 (3,608,000) 240,000 500,000
Accounts payable and
accrued
liabilities....... 35,000 566,000 1,187,000 1,814,000 1,644,000 (603,000) 1,211,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
Net cash used in
operating
activities........ (604,000) (750,000) (11,810,000) (13,179,000) (2,862,000) (3,999,000) (17,178,000)
----------- ------------ ------------ ------------ ----------- ----------- ------------
Cash flows from investing
activities:
Purchases of investment
securities.............. -- (28,957,000) (25,600,000) (54,557,000) (4,996,000) (3,097,000) (57,654,000)
Sales of investment
securities.............. -- 5,955,000 36,378,000 42,333,000 7,883,000 3,095,000 45,428,000
Purchases of property and
equipment............... -- (34,000) (1,315,000) (1,349,000) (44,000) (159,000) (1,508,000)
Long-term lease
deposits................ -- -- (120,000) (120,000) -- -- (120,000)
----------- ------------ ------------ ------------ ----------- ----------- ------------
Net cash provided by
(used in)
investing
activities........ -- (23,036,000) 9,343,000 (13,693,000) 2,843,000 (161,000) (13,854,000)
----------- ------------ ------------ ------------ ----------- ----------- ------------
Cash flows from financing
activities:
Stock issuances:
Issued to Genentech..... 23,000 1,002,000 -- 1,025,000 -- -- 1,025,000
Issued to other
founders.............. 15,000 5,000 -- 20,000 -- -- 20,000
Private placements...... -- 25,249,000 9,368,000 34,617,000 -- 5,537,000 40,154,000
Issuance costs of
private placements.... (176,000) (2,072,000) (764,000) (3,012,000) -- (264,000) (3,276,000)
Exercise of employee
stock options......... -- -- 40,000 40,000 -- -- 40,000
Loans from Genentech...... 780,000 205,000 -- 1,000,000 -- -- 1,000,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
Net cash provided by
financing
activities........ 642,000 24,389,000 8,644,000 33,690,000 -- 5,273,000 38,963,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
Increase in cash and
cash
equivalents....... 38,000 603,000 6,177,000 6,818,000 (19,000) 1,113,000 7,931,000
Cash and cash equivalents at
beginning of period....... -- 38,000 641,000 -- 641,000 6,818,000 --
----------- ------------ ------------ ------------ ----------- ----------- ------------
Cash and cash equivalents at
end of period............. $ 38,000 $ 641,000 $ 6,818,000 $ 6,818,000 $ 622,000 $ 7,931,000 $ 7,931,000
=========== ============ ============ ============ =========== =========== ============
Supplemental schedule of
noncash financing
activities:
Issuance of stock through
conversion of Genentech
note payable............ $ -- $ 1,000,000 $ -- $ 1,000,000 $ -- $ -- $ 1,000,000
=========== ============ ============ ============ =========== =========== ============
Equipment acquired through
capital leases
(unaudited)............. $ -- $ -- $ -- $ -- $ -- $ 86,000 $ 86,000
=========== ============ ============ ============ =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 66
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF DEVELOPMENT STAGE ACTIVITIES
VaxGen, Inc. ("Company") is a development stage biotechnology company
formed to develop a vaccine (AIDSVAX) intended to eradicate HIV. The Company was
incorporated on November 27, 1995 and since that date its principal activities
have included defining and conducting research programs, conducting animal and
human clinical trials, raising capital and recruiting scientific and management
personnel.
The Company's development activities involve inherent risks. These risks
include, among others, dependence on key personnel and determination of
patentability of the Company's products and processes. The Company is dependent
on Genentech to provide certain research and development support and vaccine
production (note 4). In addition, the Company has only one product candidate
which has not yet obtained Food and Drug Administration approval. Successful
future operations depend upon the Company's ability to obtain approval for and
commercialize AIDSVAX.
(b) INTERIM FINANCIAL STATEMENTS
The financial information as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited. These interim financial statements
have been prepared on substantially the same basis as the audited financial
statements and in the opinion of management, contain all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial information set forth therein.
(c) CASH EQUIVALENTS
All short-term investments with an original maturity at date of purchase of
three months or less are considered to be cash equivalents. Cash equivalents
consisting of commercial paper amounted to $572,000 and $6,490,000 at December
31, 1997 and 1998, respectively.
(d) INVESTMENT SECURITIES
Investment securities are classified as available-for-sale and carried at
market value with unrealized gains and losses excluded from the statement of
operations and reported as other comprehensive income. Realized gains and losses
on sales of investment securities are determined on the specific identification
method and are included in investment income, net.
(e) PROPERTY AND EQUIPMENT
Equipment, consisting of computers and other office equipment, is
depreciated using the straight-line method over the assets' estimated useful
lives of three to ten years. Leasehold improvements are amortized using the
straight-line method over the shorter of the assets' estimated useful lives or
the remaining term of the lease.
(f) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
F-7
<PAGE> 67
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(g) INCOME TAXES
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates that are expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is established to reduce deferred tax assets to the amount expected to
be realized.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments other than cash and investment
securities, consisting of interest receivable, accounts payable, and a payable
to Genentech. The fair value of these financial instruments approximates their
carrying amount due to their short-term nature.
(i) STOCK-BASED COMPENSATION
The Company accounts for its stock option plans for employees and
non-employee members of the Board of Directors in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Accordingly, compensation expense
related to employee stock options is recorded if, on the date of grant, the fair
value of the underlying stock exceeds the exercise price. It is expected that an
interpretation of APB 25 will be issued which will require that non-employee
director stock option grants be accounted for using a fair-value based method of
accounting similar to Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, with a resulting charge to
compensation expense. It is expected that such interpretation will impact
options granted to non-employee directors after December 15, 1998. No options
were granted to non-employee directors from December 16, 1998 to March 31, 1999.
The Company applies the disclosure only requirements of SFAS No. 123, which
allows entities to continue to apply the provisions of APB 25 for transactions
with employees, and to provide pro forma results of operations disclosures for
employee stock option grants as if the fair-value-based method of accounting in
SFAS 123 had been applied to these transactions.
(j) COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (Statement 130),
which establishes new rules for the reporting and display of comprehensive
income and its components. Statement 130 requires companies to report, in
addition to net income or loss, other components of comprehensive income or
loss. Unrealized gain on securities included in comprehensive loss for 1998 is
net of the reclassification adjustment for realized losses included in net loss
of $6,000. Adoption of Statement 130 had no effect on the Company's results of
operations or financial position as reported in the financial statements.
(k) LOSS PER SHARE
Basic loss per share is computed on the basis of the weighted average
number of shares outstanding for the reporting period. Diluted loss per share is
computed on the basis of the weighted average number of common shares plus
dilutive potential common shares outstanding using the treasury stock method.
Potential dilutive common shares consist of shares issuable to holders of
unexercised employee stock options and warrants outstanding. Options and
warrants to purchase, in the aggregate, approximately
F-8
<PAGE> 68
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
419,000, 751,000, 419,000 and 751,000 shares of common stock outstanding at
December 31, 1997 and 1998 and March 31, 1998 and 1999 (unaudited),
respectively, were not included in the calculation of diluted loss per share
because the representative share increments would be antidilutive. No options or
warrants were outstanding at December 31, 1996.
(l) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(m) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the discounted future cash flows expected to be
generated by such assets. Assets to be disposed of are reported at the lower of
their carrying amount or fair market value less costs to sell.
(n) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
(o) BUSINESS SEGMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires an enterprise to report segment information based
on how management internally evaluates the operating performance of its business
units (segments). The Company's operations are confined to one business segment,
the discovery and development of vaccines that immunize against certain
infectious diseases.
(2) INVESTMENT SECURITIES
The following summarizes the Company's investment securities at December
31:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1997:
Commercial paper............................ $17,733,000 $ 4,000 $-- $17,737,000
Government obligations...................... 5,498,000 4,000 -- 5,502,000
----------- ------- --- -----------
$23,231,000 $ 8,000 $-- $23,239,000
=========== ======= === ===========
1998:
Commercial paper............................ $ 3,962,000 $ 4,000 $-- $ 3,966,000
Government obligations...................... 8,645,000 39,000 -- 8,684,000
----------- ------- --- -----------
$12,607,000 $43,000 $-- $12,650,000
=========== ======= === ===========
</TABLE>
F-9
<PAGE> 69
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Amortized cost and market value of investment securities at December 31,
1998 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepare
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED MARKET
MATURITIES COST VALUE
---------- ----------- -----------
<S> <C> <C>
Due in 1 year or less..................................... $10,613,000 $10,637,000
Due between 1 year to 5 years............................. 1,994,000 2,013,000
----------- -----------
$12,607,000 $12,650,000
=========== ===========
</TABLE>
Investment income, net, includes interest of $0, $905,000 and $1,005,000
earned on investments and gains of $0, $0 and $8,000 realized upon the sale of
investments for 1996, 1997 and 1998, respectively.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- ----------
<S> <C> <C>
Furniture and equipment..................................... $34,000 $1,057,000
Leasehold improvements...................................... -- 292,000
------- ----------
34,000 1,349,000
Less accumulated depreciation and amortization.............. 1,000 91,000
------- ----------
$33,000 $1,258,000
======= ==========
</TABLE>
(4) RELATIONSHIP WITH GENENTECH
The Company was founded in 1995 to develop and commercialize an HIV vaccine
in partnership with Genentech. In 1996, in return for an equity interest
(1,150,000 shares or 54% of the then outstanding and subscribed shares) in the
Company, rights to maintain 25% ownership of the Company's common stock (through
common stock warrants), a seat on the Board of Directors and certain
manufacturing and marketing rights to the vaccine, Genentech granted the Company
an exclusive license to certain technology.
Genentech financed the formation of the Company by means of a $1,000,000
line of credit. Additionally, Genentech and the Company entered into an
agreement whereby Genentech could convert the line of credit plus additional
capital totaling $2,000,000 into shares of the Company's common stock concurrent
with an initial private placement in March 1997. The conversion resulted in the
issuance of 285,714 shares of common stock. Upon the final closing of the
private placement, Genentech exercised its option to retain a 25% common stock
ownership interest and thereby acquired an additional 86,640 shares of common
stock for cash. At December 31, 1998, Genentech retained warrants for the
exercise of additional common stock in the event of a second private placement
in excess of $10 million or an Initial Public Offering (IPO). Such warrants were
exercisable at the issue price per share of the additional capital raised and
would allow Genentech to maintain its 25% ownership interest. The warrants
expired unexercised at the completion of the Company's 1998 private placement in
January 1999. Genentech has no rights beyond the second financing (whether by
private placement or IPO) to maintain its 25% ownership position.
The license agreement between the Company and Genentech, in part, defines
the working relationship between the companies. Genentech has granted the
Company an exclusive license to all patents and proprietary know-how that
Genentech is free to license or sublicense related to the development of a
F-10
<PAGE> 70
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
vaccine to prevent HIV infection. Certain of the licensed technology is
sublicensed or assigned to the Company under licenses from third parties to
Genentech. The Company, as the exclusive licensee of Genentech, has assumed all
of Genentech's obligations under these third-party license agreements. Such
obligations consist primarily of royalties on product sales. However, the
vaccine in its current form does not incorporate any technology sublicensed or
assigned to the Company for which there is an obligation under licenses from
third parties. The initial term of the license agreement is 15 years from the
commercial introduction date of a licensed product and will be determined on a
country-by-country, product-by-product basis. In addition, upon entering the
agreement, Genentech transferred to the Company 300,000 doses of the vaccine.
Under the license agreement, the Company is required to use due diligence in
developing, seeking regulatory approval for, and marketing and commercializing
the vaccine. Due diligence is defined in the agreement as meaning that the
development and commercialization of the vaccine will be the Company's sole
business goal, with an expenditure of time, effort and funding that is
commensurate with such goal.
In connection with reaching this goal, the Company is required to achieve
the filing of the first market approval for a product with the FDA not later
than the fifth anniversary of the closing of the 1997 private placement, which
occurred in 1997. The Company and Genentech can agree to extend this
requirement, subject to a two-year limit. If the Company fails to exercise due
diligence, Genentech has the right to convert the exclusive license to a
non-exclusive license, and may be entitled to terminate the license. Genentech
may terminate the license agreement if the Company fails to: (1) maintain a
tangible net worth of at least $1,000,000; or (2) meet certain due diligence
milestones within two years of the date originally set for such milestones.
As part of the license agreement, Genentech has an option to manufacture
the vaccine and a one-time option to be responsible for marketing the vaccine
worldwide. Should Genentech exercise its marketing option, Genentech will pay a
license fee to the Company equal to 33% of the Company's developmental costs of
the initial AIDSVAX product (including the Phase III clinical trials and
regulatory submissions), as well as a percentage of ongoing profits on the sales
of the vaccine. If Genentech does not elect its marketing option, it will
receive a royalty on product sales; the royalty rate depends on whether
Genentech elects to manufacture the vaccine being sold commercially.
The Company has a service contract with Genentech originally expiring
December 31, 1998, whereby Genentech supplies research, vaccine production, and
administrative and regulatory support to the Company. Expenses incurred by
VaxGen for 1996, 1997 and 1998 were $1,442,000, $2,352,000 and $690,000,
respectively, under the contract. In excess of 95% of costs represent research
and development expenses in each period and the remainder are general and
administrative expenses. The contract has been extended under similar terms
through December 31, 2000.
Prior to September 1998, the Company leased office space from Genentech.
Rent expense under this lease was $0, $18,000, and $80,000 in 1996, 1997, and
1998, respectively.
Management believes that the terms of the agreement provide Genentech full
reimbursement for specifically identified actual direct costs as well as
indirect and overhead costs incurred related to the Company. Charges for
indirect and overhead costs are based upon a percentage of direct costs.
Management believes this method results in a reasonable allocation of costs to
the Company.
(5) PRIVATE PLACEMENT STOCK OFFERINGS
In 1997, the Company completed a private placement sale of 3,607,047 shares
of its common stock at a price of $7.00 per share resulting in proceeds of
$23,001,000, net of issuance costs of $2,248,000. A total of 149,270 shares in
this private placement were sold to related parties. In conjunction with the
1997
F-11
<PAGE> 71
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
private placement and under agreements with the Company, Genentech converted a
$1,000,000 line of credit with the Company and invested an additional $1,000,000
in the Company in return for 285,714 shares of the Company's common stock.
Additionally, in October 1997, Genentech exercised its option to maintain a 25%
ownership interest in the Company (note 4) which resulted in the issuance of
86,640 shares of the Company's common stock in October 1997.
In 1998, the Company initiated a second private placement sale of its
common stock at a price of $9.50 per share. The first closing and issuance of
common shares in the private placement was completed in December 1998 and
resulted in the sale of 986,097 shares of the Company's common stock and
proceeds of $8,604,000, net of issuance costs of $764,000. A total of 33,629
shares in the first closing were sold to related parties. The second closing and
issuance of common shares in the private placement was completed in January 1999
(note 9).
(6) STOCK OPTIONS AND WARRANTS
(a) STOCK OPTION PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the Plan) has 500,000 shares of
common stock reserved for grant. Options granted under the Plan may be
designated as qualified or nonqualified at the discretion of the compensation
committee of the Board of Directors. At December 31, 1998, 61,750 shares were
available for grant under the Plan.
Generally, options granted under the Plan vest and may be exercised over a
four-year period in increments of 25% each year beginning one year from the date
of grant; however, options can vest upon grant. All options expire no later than
ten years from the date of grant. Qualified stock options are exercisable at not
less than the fair market value of the stock at the date of grant and
nonqualified stock options are exercisable at prices determined at the
discretion of the Board of Directors, but not less that 85% of the fair market
value of the stock at the date of grant. All Board approved options have been
granted at an exercise price of $7.00 per share.
1998 Director Stock Option Plan
In 1998, the Board of Directors approved the 1998 Director Stock Option
Plan (the Director Plan) for nonemployee directors. Under the Director Plan,
37,500 shares of common stock are reserved for grant. On May 6, 1998,
nonemployee directors were granted options to purchase 8,571 shares of the
Company's common stock at an exercise price of $7.00 per share. Such options
vested immediately. Under the Director Plan, options will automatically be
granted to nonemployee directors on the date of the annual shareholders'
meeting. The exercise price of each annual option grant is to be the fair market
value of the Company's common stock on the grant date. Each annual option grant
fully vests on the first anniversary of its grant date, subject to certain
meeting attendance requirements. At December 31, 1998, 28,929 shares were
available for grant under the Director Plan.
F-12
<PAGE> 72
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option plans follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
-------------------------
WEIGHTED
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------- --------------
<S> <C> <C>
Outstanding at
December 31, 1996......................................... -- $ --
Granted................................................... 200,000 7.00
Exercised................................................. -- --
Canceled.................................................. -- --
------- -----
Outstanding at
December 31, 1997......................................... 200,000 7.00
Granted................................................... 271,071 7.00
Exercised................................................. (5,750) 7.00
Canceled.................................................. (24,250) 7.00
------- -----
Outstanding at
December 31, 1998......................................... 441,071 $7.00
======= =====
</TABLE>
At December 31, 1998, options to purchase 116,696 shares were vested and
exercisable under stock option plans. The weighted average remaining contractual
life of stock options outstanding at December 31, 1998 is 9.0 years.
Had compensation cost pursuant to the plans been determined consistent with
SFAS 123, the Company's net loss and loss per share would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net loss -- as reported................................... $(3,060,000) $(9,163,000)
Net loss -- pro forma..................................... $(3,005,000) $(9,333,000)
Loss per share -- basic and diluted, as reported.......... $(0.60) $(1.48)
Loss per share -- basic and diluted, pro forma............ $(0.60) $(1.51)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants in 1997
and 1998: expected dividend yield of 0%; expected volatility of 0%; risk-free
interest rate of 6.0%; and expected lives of four years. Using these
assumptions, the fair value of options granted in 1997 and 1998 was estimated as
$0.74 per share.
During 1998, the Board of Directors approved for grant options to purchase
174,925 shares of the Company's common stock at an exercise price of $7.00 per
share and 302,900 shares at an exercise price of $9.50 per share. However, since
the grant of such options would cause the number of shares outstanding to exceed
the number of shares reserved for grant under the Plan, the Company's
shareholders must approve an increase in the number of shares reserved for grant
under the Plan. Because the shareholders must first approve an increase in the
number of shares reserved for grant, the financial effect of the grants, if any,
has not been reported in these financial statements (note 9b).
F-13
<PAGE> 73
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(b) COMMON STOCK WARRANTS
In connection with the Company's 1997 private placement, certain
consultants were issued warrants to purchase approximately 219,000 shares of the
Company's common stock exercisable at $7.00 per share through June 2007. No
warrants have been exercised to date.
The Company similarly agreed to issue warrants to purchase approximately
91,000 shares of the Company's common stock exercisable at $9.50 per share to
certain consultants in connection with the Company's 1998 private placement.
Such warrants were earned in December 1998 and January 1999. The warrants are to
be exercisable through 2009. No warrants have been exercised to date.
Additionally, in connection with the 1997 private placement, the Company
granted an unrelated party a first option to maintain its approximately 4.8%
interest in the Company. Such right allows the party the option to acquire a
proportionate number of shares at an equivalent price to maintain its ownership
percentage through March 31, 2002. The party exercised its option in connection
with the 1998 private placement.
(7) INCOME TAXES
The Company has reported no income tax benefits due to limitations on the
recognition of deferred tax assets for financial reporting purposes.
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Research and experimentation credit carryforwards......... $ 195,000 $ 440,000
Net operating loss carryforwards.......................... 1,705,000 4,758,000
Other..................................................... 49,000 50,000
---------- ----------
Total gross deferred tax assets................... 1,949,000 5,248,000
Less valuation allowance.................................. 1,949,000 5,248,000
---------- ----------
Net deferred tax assets........................... $ -- $ --
========== ==========
</TABLE>
Based on the weight of available evidence, including cumulative losses
since inception and expected future losses, the Company has determined that it
is more likely than not the entire deferred tax asset amount will not be
realized and, therefore, a valuation allowance has been provided on all gross
deferred tax assets.
The increases in the valuation allowance for deferred tax assets of
$1,203,000 in 1997 and $3,299,000 in 1998 are primarily attributable to
increases in net operating loss and tax credit carryforwards.
At December 31, 1998 the Company had net operating loss carryforwards of
approximately $13,995,000 and research and experimentation credit carryforwards
of approximately $440,000 which are available to offset future Federal taxable
income and income taxes, respectively, if any, and expire beginning in 2010.
(8) COMMITMENTS
(a) LEASES
The Company leases office facilities under cancelable operating leases,
which expire from 1999 to 2005. Until September 1998, the Company also leased
office space from Genentech.
F-14
<PAGE> 74
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In August 1998, the Company commenced a lease for office space at Mahidol
University in Bangkok, Thailand, ending at the conclusion of Phase III clinical
trials in Thailand. The lease requires monthly payments of $2,000. Additionally,
the Company began renovation of project office space at Taksin Hospital, also in
Bangkok. The Company is required to pay up to $100,000 for renovations, for
which the Company will receive use of the facility for a five-year term at no
additional cost.
The Company entered into a 62-month laboratory lease commencing January 1,
1999 which requires the Company to expend a minimum of $500,000 in leasehold
improvements, in addition to its scheduled lease payments.
Minimum annual payments, excluding required leasehold improvements and
renovations, under the foregoing leases, are as follows:
<TABLE>
<S> <C>
1999...................................................... $571,000
2000...................................................... 625,000
2001...................................................... 650,000
2002...................................................... 652,000
2003...................................................... 677,000
Thereafter................................................ 877,000
</TABLE>
Rent expense for 1996, 1997 and 1998 was $12,000, $66,000 and $353,000,
respectively.
(b) EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain members of management
ending from 2000 to 2003. Such agreements provide for discretionary bonuses and
annual increases in compensation as determined by the Board of Directors.
Minimum compensation under these contracts aggregates $1,085,000 annually. The
employment contracts with three members of management also provide for the
issuance of an aggregate of 325,757 shares of the Company's common stock to
these individuals if the Company is acquired in an acquisition that results in a
purchase price of at least $28.00 per share or once the per share value of the
Company's common stock has attained an average price of $28.00 over a 30 day
period. This represents four times the per share value of the Company's common
stock based on the 1997 private placement. If the shares are issued as a result
of the common stock reaching an average value of $28.00 per share, the Company
will record an immediate non-cash charge to expense equal to the per share value
of the common stock to be issued. For example, if the per share value of the
stock upon issuance is $28.00, the charge to expense will be $9,100,000.
(c) CLINICAL TRIALS
In connection with Phase III clinical trials, the Company has contracted
with or will contract for the services of 50 to 60 medical clinics. The clinics
will provide the location, clinicians, oversight, and volunteers for the three
year testing of the Company's vaccine. Payment will be made over the period
based on the number of volunteers vaccinated, the number of return visits and
the subsequent testing and follow-up of these volunteers. Total commitments are
estimated to aggregate approximately $25,000,000, of which the Company had paid
approximately $2,400,000 as of December 31, 1998. Estimated future payments are
as follows:
<TABLE>
<S> <C>
1999........................................................ $7,900,000
2000........................................................ 5,450,000
2001........................................................ 5,350,000
2002........................................................ 3,900,000
</TABLE>
F-15
<PAGE> 75
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) SUBSEQUENT EVENTS
(a) In connection with the Company's 1998 private placement, the final
closing and issuance of 583,913 shares of common stock for proceeds of
$5,273,000, net of issue costs of $264,000, occurred on January 11, 1999. A
total of 2,000 shares were sold to related parties in the final closing.
(b) On April 1, 1999, the shareholders concurrently approved a one-for-two
reverse split of the number of shares of issued and outstanding common stock of
the Company effective April 9, 1999 and a reduction in the number of common
shares authorized from 30,000,000 to 20,000,000. These financial statements and
the notes thereto reflect these changes for all periods presented.
Additionally, on April 1, 1999, the shareholders of the Company approved an
increase in the number of shares reserved for grant under the 1996 stock option
plan to 1,750,000 shares. This represents the measurement date for previously
granted but unapproved options (note 6a). As a result, the Company recorded
deferred compensation in the amount of $2,587,000 representing the excess of the
fair market value of the common shares on April 1, 1999 ($14.00 per share) over
the exercise price of the options. Additionally, the Company recorded an
immediate charge to expense of $456,000 for the portion of the vesting period
elapsed at April 1. The deferred compensation will be amortized to expense over
the remaining vesting period.
F-16
<PAGE> 76
- --------------------------------------------------------------------------------
Until ___ , all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
[VAXGEN LOGO]
PRUDENTIAL SECURITIES
PUNK, ZIEGEL & COMPANY
- --------------------------------------------------------------------------------
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee*........ $ 14,866
NASD filing fee............................................. 5,848
Nasdaq listing fee.......................................... 78,875
Legal fees and expenses..................................... 300,000
Accountants' fees and expenses.............................. 100,000
Printing and engraving expenses............................. 150,000
Transfer agent and registrar fees........................... 10,000
Directors' and officers' insurance expenses................. $ 412,000
Miscellaneous expenses...................................... $ 228,411
----------
Total............................................. $1,300,000
==========
</TABLE>
- ---------------
* All expenses other than the SEC registration fee, the NASD filing fee and the
Nasdaq listing fee are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Our amended and restated
certificate of incorporation and amended and restated bylaws provide for
indemnification of directors, officers, employees and other agents to the
maximum extent permitted by Delaware General Corporation Law. The underwriting
agreement also provides for cross-indemnification among VaxGen and the
underwriters with respect to certain matters, including matters arising under
the federal securities laws. We have entered into an indemnification agreement
with Ms. Katz, a director nominee, under which we have agreed to indemnify Ms.
Katz with respect to any liability in connection with this offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since November 27, 1995, we have issued and sold the following unregistered
securities (adjusted to reflect the one-for-two reverse split):
(1) On April 10, 1996, we issued 1,150,000 shares of common stock to
Genentech, 500,000 shares of common stock to Donald P. Francis, and 250,000
shares of common stock to Robert C. Nowinski, at a purchase price of $0.02
per share for an aggregate purchase price of $38,000. Each of these
purchases are insiders of VaxGen. We relied on Section 4(2) and Rule 701
for exemption.
(2) On October 29, 1996, we issued an aggregate of 230,000 shares of
common stock to certain accredited investors at a purchase price of $0.02
per share for an aggregate purchase price of $4,600; including 133,333
shares to Donald P. Francis, 66,666 shares to Robert C. Nowinski, and
20,000 shares to Stephen C. Francis. We relied on Section 4(2) and Rule 506
for exemption.
(3) From March 12, 1997 through December 31, 1997, we issued an
aggregate of 3,607,047 shares of common stock to certain accredited
investors at a price of $7.00 per share for an aggregate amount of
$25,249,329; including 6,414 shares to Robert C. Nowinski. We also issued
an aggregate of 372,354 shares of common stock to Genentech at an average
price of $5.38 per share for an aggregate amount of $2,002,000. We relied
on Section 4(2) and Rule 506 for exemption.
II-1
<PAGE> 78
(4) From December 4, 1998 through January 11, 1999, we issued an
aggregate of 1,570,010 shares of common stock to certain accredited
investors at a price of $9.50 per share for an aggregate amount of
$14,915,095; including 20,000 shares to Stephen C. Francis. We relied on
Section 4(2) and Rule 506 for exemption.
(5) From November 17, 1997 through April 30, 1998, we granted options
to employees under the 1996 stock option plan to purchase an aggregate of
637,425 shares of common stock at an exercise price of $7.00 per share. We
relied on Rule 701 for exemption.
(6) From January 1, 1999 through April 15, 1999, we granted options to
employees and consultants under the 1996 stock option plan to purchase an
aggregate of 452,875 shares of common stock at an exercise price of $9.50
per share. We relied on Rule 701 for exemption.
(7) On April 1, 1999 we granted options to employees under the 1996
stock option plan to purchase an aggregate of 8,000 shares of common stock
at an exercise price of $13.40 per share. We relied on Rule 701 for
exemption.
(8) On May 6, 1998 we granted options to three directors under the
1998 director stock option plan to purchase an aggregate of 8,571 shares of
common stock at an exercise price of $7.00 per share. We relied on Rule 701
for exemption.
(9) On July 25, 1997 we issued aggregate warrants to purchase up to
218,947 shares of common stock in connection with our 1997 private
placement. We relied on Section 4(2) and Rule 506 for exemption.
(10) We issued aggregate warrants to purchase up to 90,878 shares of
common stock in connection with our 1998 private placement to consultants.
We relied on Section 4(2) and Rule 506 for exemption.
(11) On May 14, 1999 we issued warrants to one individual to purchase
up to 150,000 shares of common stock at an exercise price of $7.00 per
share. We relied on Section 4(2) for exemption.
(12) As of June 7, 1999 we have issued an aggregate of 5,750 shares of
common stock to employees on exercise of options. We received an
consideration of $40,250 for such shares. We relied on Rule 701 for
exemption.
No underwriters were engaged in connection with these issuances and sales.
II-2
<PAGE> 79
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 Specimen stock certificate
5.1 Opinion of Graham & James LLP/Riddell Williams P.S.
10.1+ Registration Rights Agreement between VaxGen and Genentech,
dated as of May 5, 1997
10.2+ 1996 Registration Rights Agreement between VaxGen and
certain stockholders
10.3+ 1998 Registration Rights Agreement between VaxGen and
certain stockholders
10.4+ 1996 Stock Option Plan
10.5+ 1998 Director Stock Option Plan
10.6+ Form of stock option agreement
10.7+ Form of common stock warrant
10.8+ Right of First Option Agreement between VaxGen and Leon A.
Greenblatt, dated March 14, 1997
10.9+ Amended and Restated Employment Agreement between VaxGen and
Robert C. Nowinski, dated January 1, 1998
10.10+ Amended and Restated Employment Agreement between VaxGen and
Donald P. Francis, dated January 1, 1998
10.11+ Employment Agreement between VaxGen and Phillip W. Berman,
dated as of October 10, 1997
10.12+ Employment Agreement between VaxGen and John G. Curd, dated
as of May 3, 1999
10.13+ Employment Agreement between VaxGen and Carter A. Lee, dated
as of April 1, 1999
10.14+ License Agreement with Genentech, dated as of May 1, 1996
10.15+ Services Agreement with Genentech, dated as of January 1,
1999
10.16+ Letter of Intent for Supply Development Agreement between
VaxGen and Pasteur Merieux Serums et Vaccins (Pasteur
Merieux Connaught), dated April 10, 1998
10.16.1+ Amendment to Letter of Intent for Supply Development
Agreement between VaxGen and Pasteur Merieux Serums et
Vaccins (Pasteur Merieux Connaught), dated May 3, 1999
10.17+ Form of trial clinic agreement
10.18+ Lease Agreement between VaxGen and Oyster Point Tech Center
LLC, dated October 26, 1998
10.19+ Lease Agreement between VaxGen and Spieker Properties, L.P.,
dated May 20, 1998.
23.1+ Consent of Graham & James LLP/Riddell Williams P.S.
(included in Exhibit 5.1)
23.2+ Consent of KPMG LLP
23.3+ Consent of Roberta R. Katz
23.4 Consent of Ruth B. Kunath
24.1+ Power of attorney (included on page II-5)
27.1+ Financial data schedule
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
II-3
<PAGE> 80
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Seattle, Washington
on June 11, 1999.
VAXGEN, INC.
By: /s/ Robert C. Nowinski
------------------------------------
Robert C. Nowinski, Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert C. Nowinski Chairman of the Board and June 11, 1999
- ----------------------------------------------------- Chief Executive Officer
Robert C. Nowinski (Principal Executive
Officer)
/s/ Donald P. Francis+ President and Director June 11, 1999
- -----------------------------------------------------
Donald P. Francis
/s/ Carter A. Lee+ Senior Vice President, June 11, 1999
- ----------------------------------------------------- Finance & Administration
Carter A. Lee (Principal Financial
Officer)
/s/ Phillip W. Berman+ Senior Vice President, June 11, 1999
- ----------------------------------------------------- Research & Development,
Phillip W. Berman Director
/s/ Stephen C. Francis+ Director June 11, 1999
- -----------------------------------------------------
Stephen C. Francis
/s/ William D. Young+ Director June 11, 1999
- -----------------------------------------------------
William D. Young
+By: /s/ Robert C. Nowinski
------------------------------------------------
Robert C. Nowinski
Attorney-in-fact
</TABLE>
II-5
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement..............................
3.1+ Amended and Restated Certificate of Incorporation...........
3.2 Amended and Restated Bylaws.................................
4.1 Specimen stock certificate..................................
5.1 Opinion of Graham & James LLP/Riddell Williams P.S. ........
10.1+ Registration Rights Agreement between VaxGen and Genentech,
dated as of May 5, 1997.....................................
10.2+ 1996 Registration Rights Agreement between VaxGen and
certain stockholders........................................
10.3+ 1998 Registration Rights Agreement between VaxGen and
certain stockholders........................................
10.4+ 1996 Stock Option Plan......................................
10.5+ 1998 Director Stock Option Plan.............................
10.6+ Form of stock option agreement..............................
10.7+ Form of common stock warrant................................
10.8+ Right of First Option Agreement between VaxGen and Leon A.
Greenblatt, dated March 14, 1997............................
10.9+ Amended and Restated Employment Agreement between VaxGen and
Robert C. Nowinski, dated January 1, 1998...................
10.10+ Amended and Restated Employment Agreement between VaxGen and
Donald P. Francis, dated January 1, 1998....................
10.11+ Employment Agreement between VaxGen and Phillip W. Berman,
dated as of October 10, 1997................................
10.12+ Employment Agreement between VaxGen and John G. Curd, dated
as of May 3, 1999...........................................
10.13+ Employment Agreement between VaxGen and Carter A. Lee, dated
as of April 1, 1999.........................................
10.14+ License Agreement with Genentech, dated as of May 1, 1996...
10.15+ Services Agreement with Genentech, dated as of January 1,
1999........................................................
10.16+ Letter of Intent for Supply Development Agreement between
VaxGen and Pasteur Merieux Serums et Vaccins (Pasteur
Merieux Connaught), dated April 10, 1998....................
10.16.1+ Amendment to Letter of Intent for Supply Development
Agreement between VaxGen and Pasteur Merieux Serums et
Vaccins (Pasteur Merieux Connaught), dated May 3, 1999......
10.17+ Form of trial clinic agreement..............................
10.18+ Lease Agreement between VaxGen and Oyster Point Tech Center
LLC, dated October 26, 1998.................................
10.19+ Lease Agreement between VaxGen and Spieker Properties, L.P.,
dated May 20, 1998..........................................
23.1+ Consent of Graham & James LLP/Riddell Williams P.S.
(included in Exhibit 5.1)...................................
23.2 Consent of KPMG LLP.........................................
23.3+ Consent of Roberta R. Katz..................................
23.4 Consent of Ruth B. Kunath...................................
24.1+ Power of attorney (included on page II-5)...................
27.1+ Financial data schedule.....................................
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
VAXGEN, INC.
3,100,000 Shares(1)
COMMON STOCK
UNDERWRITING AGREEMENT
________ ___, 1999
PRUDENTIAL SECURITIES INCORPORATED
Punk, Ziegel & Company LLP
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Ladies and Gentlemen:
VaxGen, Inc., a Delaware corporation (the "Company"), hereby confirms
its agreement with the several underwriters named in Schedule 1 hereto (the
"Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacities, the "Representatives"), as set forth below.
If you are the only Underwriters, all references herein to the Representatives
shall be deemed to be to the Underwriters.
1. Securities. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to the several Underwriters an aggregate of
3,100,000 shares (the "Firm Securities") of the Company's Common Stock, par
value $0.01 per share ("Common Stock"). The Company also proposes to issue and
sell to the several Underwriters not more than _______________ additional shares
of Common Stock if requested by the Representatives as provided in Section 3 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities", and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities".
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each of the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-78065)
with respect to the Securities, including a prospectus subject to completion,
has been filed by the Company with
- --------
(1) Plus an option to purchase from VaxGen, Inc. up to ____________
additional shares to cover over-allotments.
1.
<PAGE> 2
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act"), and one or more amendments to such
registration statement may have been so filed. After the execution of this
Agreement, the Company will file with the Commission either (i) if such
registration statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, either (A) if the Company relies on
Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the
Securities, that shall identify the Preliminary Prospectus (as hereinafter
defined) that it supplements containing such information as is required or
permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does
not rely on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of
this sentence as have been provided to and approved by the Representatives prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this Agreement. The
Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Securities, which registration shall be effective upon filing with
the Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the registration statement (as
hereinafter defined) and any Preliminary Prospectus or prospectus (as
hereinafter defined) incorporated therein at the time such Registration
Statement becomes effective); the term "Registration Statement" includes both
the Original Registration Statement and any Rule 462(b) Registration Statement;
the term "Preliminary Prospectus" means each prospectus subject to completion
filed with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time it was or is declared effective); the term
"Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b) under
the Act; or
(C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement at the
time the Registration Statement is declared effective by the Commission;
2.
<PAGE> 3
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or
suspending use of any Preliminary Prospectus. When any Preliminary Prospectus
was filed with the Commission it (i) contained all statements required to be
stated therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not required to be
so filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective) and
on the Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectus, as amended or supplemented at any such time, (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement has not been declared effective (i) the
Company has filed a Rule 462(b) Registration Statement in compliance with and
that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (ii) the Company has given irrevocable
instructions for transmission of the applicable filing fee in connection with
the filing of the Rule 462(b) Registration Statement, in compliance with Rule
111 promulgated under the Act or the Commission has received payment of such
filing fee.
(d) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware and is
duly qualified to transact business as a foreign corporation and is in good
standing under the laws of all other jurisdictions where the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified does not amount to a
material liability or disability to the Company.
3.
<PAGE> 4
(e) The Company has full corporate power to own or lease its
properties and conduct its business as described in the Registration Statement
and the Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full corporate power to enter into
this Agreement and to carry out all the terms and provisions hereof to be
carried out by it.
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued, are
fully paid and nonassessable, were issued in compliance with all applicable
federal and state securities laws and were not issued in violation of or subject
to any preemptive rights or other rights to subscribe for or purchase
securities. The Firm Securities and the Option Securities have been duly
authorized and at the Firm Closing Date or the related Option Closing Date (as
the case may be), after payment therefor in accordance herewith, will be validly
issued, fully paid and nonassessable. Except as described in the Prospectus, no
holders of outstanding shares of capital stock of the Company are entitled as
such to any preemptive or other rights to subscribe for any of the Securities,
and no holder of securities of the Company has any right which has not been
fully exercised or waived to require the Company to register the offer or sale
of any securities owned by such holder under the Act in the public offering
contemplated by this Agreement.
(g) The capital stock of the Company conforms to the description
thereof contained in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus.
(h) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company convertible into or
exchangeable for any capital stock of the Company, (B) warrants, rights or
options to subscribe for or purchase from the Company any such capital stock or
any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(i) The financial statements and schedules of the Company
included in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) fairly present the
financial position of the Company and the Company's results of operations and
changes in financial condition as of the dates and periods therein specified.
Such financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein). The selected financial
data set forth under the caption "Selected Financial Data" in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present, on the basis stated in the Prospectus (or such
Preliminary Prospectus), the information included therein.
(j) KPMG LLP, who have certified certain financial statements of
the Company and delivered their report with respect to the audited financial
statements and schedules included in the Registration Statement and the
Prospectus (or, if the Prospectus is not
4.
<PAGE> 5
in existence, the most recent Preliminary Prospectus), are independent public
accountants as required by the Act and the applicable rules and regulations
thereunder.
(k) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
(l) No legal or governmental proceedings are pending to which the
Company is a party or to which the property of the Company is subject that are
required to be described in the Registration Statement or the Prospectus and are
not described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and no such proceedings have been threatened
against the Company or with respect to any of its properties; and no contract or
other document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) or filed as required.
(m) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (ii) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company is a party or by which the Company or any of
its properties are bound and which is required to be filed as an exhibit to the
Registration Statement, or the charter documents or by-laws of the Company, or
any statute or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator applicable to the Company.
(n) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus, the Company has not
sustained any material loss or interference with its business or properties from
fire, flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding and
there has not been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth, or results of the operations of the
Company, except in each case as described in or contemplated by the Prospectus
or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus.
(o) The Company has not, directly or indirectly, (i) taken any
action designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement
5.
<PAGE> 6
(A) sold, bid for, purchased, or paid anyone any compensation for soliciting
purchases of, the Securities or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(p) The Company has not distributed and, prior to the later of
(i) the Closing Date and (ii) the completion of the distribution of the
Securities, will not distribute any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or other materials, if any, permitted by (and in
compliance with) the Act.
(q) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), (i) the Company has
not incurred any material liability or obligation, direct or contingent, nor
entered into any material transaction not in the ordinary course of business;
(ii) the Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind on its
capital stock; and (iii) there has not been any material change in the capital
stock, short-term debt or long-term debt of the Company, except in each case as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(r) The Company has good and marketable title in fee simple to
all material items of real property and marketable title to all material
personal property owned by it, in each case free and clear of any security
interests, liens, encumbrances, equities, claims and other defects, except such
as do not materially and adversely affect the value of such property and do not
interfere with the use made or proposed to be made of such property by the
Company, and any real property and buildings held under lease by the Company are
held under valid, subsisting and enforceable leases, with such exceptions as are
not material and do not interfere with the use made or proposed to be made of
such property and buildings by the Company, in each case except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(s) No labor dispute with the employees of the Company exists or
to the Company's knowledge is threatened or imminent that could result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(t) The Company owns, possesses or licenses, or can acquire on
reasonable terms, all material patents, patent applications, trademarks, service
marks, trade names, licenses, copyrights and proprietary or other confidential
information currently employed by it in connection with its business, and the
Company has not received any notice of infringement of or conflict with asserted
rights of any third party with respect to any of the foregoing which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
6.
<PAGE> 7
(u) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the business in which it is engaged; the Company has not been
refused any insurance coverage sought or applied for; and the Company has no
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(v) The Company possesses all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, and the Company has not received
any notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). The Company is not in
violation of any foreign, state or local law, order, rule, regulation, writ,
injunction or decree of any court or governmental agency or body, including, but
not limited to, the United States Food and Drug Administration (the "FDA"). All
of the descriptions in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) of the
legal and governmental proceedings involving the Company by or before the FDA or
any foreign, state or local government body exercising comparable authority are
true, complete and accurate in all material respects.
(w) The Company will conduct its operations in a manner that will
not subject it to registration as an investment company under the Investment
Company Act of 1940, as amended, and this transaction will not cause the Company
to become an investment company subject to registration under such Act.
(x) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company) and has paid all taxes required to be paid by it
and any other assessment, fine or penalty levied against it, to the extent that
any of the foregoing is material, due and payable, except for any material
assessment, fine or penalty that is currently being contested in good faith or
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(y) The Company is not in violation of any federal or state law
or regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic materials and the Company has
received all permits, licenses or other approvals required of it under
applicable federal and state occupational safety and health and environmental
laws and regulations to conduct its business, and the Company is in compliance
with all terms and conditions of any such permit, license or approval, except
any such violation of law or regulation, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals which would not,
7.
<PAGE> 8
singly or in the aggregate, result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(z) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(aa) The Company does not own any shares of stock or any other
equity securities of any corporation or have any equity interest in any firm,
partnership, association or other entity.
(bb) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(cc) The Company is not in default under, and to its knowledge,
no other party is in default, and no default exists, and no event has occurred
which, with notice or lapse of time or both, would constitute a default by the
Company and to its knowledge by any other party in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which the Company is a party
or by which the Company or any of its properties is bound and which is required
to be filed as an exhibit to the Registration Statement or may be affected in
any material adverse respect with regard to property, business or operations of
the Company.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, agreements
and covenants herein contained and subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to each of the Underwriters, and
each of the Underwriters, severally and not jointly, agrees to purchase from the
Company, at a purchase price of $________ per share, the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule 1 hereto.
One or more certificates in definitive form for the Firm Securities that the
several Underwriters have agreed to purchase hereunder, and in such denomination
or denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company to the Representatives
for the respective accounts of the Underwriters, against payment by or on behalf
of the Underwriters of the purchase price therefor by wire transfer in same-day
funds (the "Wired Funds") to the account of the Company. If the Representatives
so elect, delivery of the Firm Securities may be made by credit through full
fast transfer at the Depository Trust Company designated by the Representatives.
Such delivery of and payment for the Firm
8.
<PAGE> 9
Securities shall be made at the offices of Cooley Godward LLP, 4205 Carillon
Point, Kirkland, Washington 98033, at 9:30 A.M., West Coast time, on __________,
1999, or at such other place, time or date as the Representatives and the
Company may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date". The Company will make such certificate
or certificates for the Firm Securities, if any, available for checking and
packaging by the Representatives at the offices in New York, New York of the
Company's transfer agent or registrar or of Prudential Securities Incorporated
at least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of this
Section 3. The option granted hereby may be exercised as to all or any part of
the Option Securities from time to time within 30 days after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such option. The Representatives
may from time to time exercise the option granted hereby by giving notice in
writing or by telephone (confirmed in writing) to the Company setting forth the
aggregate number of Option Securities as to which the several Underwriters are
then exercising the option and the date and time for delivery of and payment for
such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and Company
may agree upon or as the Representatives may determine pursuant to Section 9
hereof, is herein called the "Option Closing Date" with respect to such Option
Securities. Upon exercise of the option as provided herein, the Company shall
become obligated to sell to each of the several Underwriters, and, subject to
the terms and conditions herein set forth, each of the Underwriters (severally
and not jointly) shall become obligated to purchase from the Company, the same
percentage of the total number of the Option Securities as to which the several
Underwriters are then exercising the option as such Underwriter is obligated to
purchase of the aggregate number of Firm Securities, as adjusted by the
Representatives in such manner as they deem advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities (or credit for such certificates pursuant to full fast transfer), and
payment therefor, shall be delivered on the related Option Closing Date in the
manner, and upon the terms and conditions, set forth in paragraph (a) of this
Section 3, except that reference therein to the Firm Securities and the Firm
Closing Date shall be deemed, for purposes of this paragraph (b), to refer to
such Option Securities and Option Closing Date, respectively.
(c) The Company hereby acknowledges that the wire transfer by or
on behalf of the Underwriters of the purchase price for any Shares does not
constitute closing of a purchase and sale of the Shares. Only execution and
delivery of a receipt for Shares by the Underwriters indicates completion of the
closing of a purchase of the Shares from the Company. Furthermore,
9.
<PAGE> 10
in the event that the Underwriters wire funds to the Company prior to the
completion of the closing of a purchase of Shares, the Company hereby
acknowledges that, until the Underwriters execute and deliver a receipt for the
Shares, by facsimile or otherwise, the Company will not be entitled to the Wired
Funds and shall return the Wired Funds to the Underwriters as soon as
practicable (by wire transfer of same-day funds) upon demand. In the event that
the closing of a purchase of Shares is not completed and the Wired Funds are not
returned by the Company to the Underwriters on the same day the Wired Funds were
received by the Company, the Company agrees to pay to the Underwriters in
respect of each day the Wired Funds are not returned by it, in same-day funds,
interest on the amount of such Wired Funds in an amount representing the
Underwriters' cost of financing as reasonably determined by Prudential
Securities Incorporated.
(d) It is understood that either of you, individually and not as
one of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of the
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
5. Covenants of the Company. The Company covenants and agrees with
each of the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as promptly as
possible. If required, the Company will file the Prospectus or any Term Sheet
that constitutes a part thereof and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rules 434 and
424(b) under the Act. During any time when a prospectus relating to the
Securities is required to be delivered under the Act, the Company (i) will
comply with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented, and
(ii) will not file with the Commission the prospectus, Term Sheet or the
amendment referred to in the second sentence of Section 2(a) hereof, any
amendment or supplement to such Prospectus, Term Sheet or any amendment to the
Registration Statement or any Rule 462(b) Registration Statement unless (a) the
Representatives previously have been advised of such proposed filing and
furnished with a copy for a reasonable period of time prior to the proposed
filing and (b) as to which filing the Representatives have given their consent.
The Company will prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be necessary or advisable upon recommendation of Underwriters' counsel in
connection with the distribution of the Securities by the several Underwriters,
and will use its best efforts to cause any such amendment to the Registration
Statement to be declared effective by the Commission as promptly as possible.
The Company will advise the Representatives, promptly after receiving notice
thereof, of the time when the
10.
<PAGE> 11
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence satisfactory to the Representatives of each such
filing or effectiveness.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
(ii) the suspension of the qualification of the Securities for offering or sale
in any jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Original Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the
Securities for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate to the extent necessary to
offer and sell the Securities in such state and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities, provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when
a prospectus relating to the Securities is required to be delivered under the
Act or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a conformed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, (ii) to each other Underwriter, a conformed copy of
such registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representatives may reasonably request; without
limiting the application of clause (iii) of this sentence, the Company, not
later than
11.
<PAGE> 12
(A) 6:00 P.M., New York City time, on the date of determination of the public
offering price, if such determination occurred at or prior to 10:00 A.M., New
York City time, on such date or (B) 2:00 P.M., New York City time, on the
business day following the date of determination of the public offering price,
if such determination occurred after 10:00 A.M., New York City time, on such
date, will deliver to the Underwriters, without charge, as many copies of the
Prospectus and any amendment or supplement thereto as the Representatives may
reasonably request for purposes of confirming orders that are expected to settle
on the Firm Closing Date.
(f) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives an earnings
statement of the Company that satisfies the provisions of Section 11(a) of the
Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 180 days after the date hereof, except pursuant to this Agreement
and except for issuances pursuant to the exercise of warrants and stock options
outstanding on the date hereof and the grant of stock options to employees and
directors, and the shares issuable upon exercise of such options.
(i) The Company will not, directly or indirectly, (i) take any
action designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.
(j) The Company will use its best efforts to obtain the
agreements described in Section 7(h) hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the
Registration Statement becomes effective or the period prior to the Option
Closing Date, any rumor, publication or event relating to or affecting the
Company shall occur as a result of which in your opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after notice from you advising
the Company to the effect set forth above, consult with you concerning the
dissemination of a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication or
event.
(l) If the Company elects to rely on Rule 462(b), the Company
shall both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and
12.
<PAGE> 13
pay the applicable fees in accordance with Rule 111 promulgated under the Act by
the earlier of (i) 10:00 P.M. Eastern time on the date of this Agreement and
(ii) the time confirmations are sent or given, as specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for
quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") prior to the Firm Closing Date. The Company will use its best efforts
to ensure that the Securities remain included for quotation on the Nasdaq
National Market following the Firm Closing Date.
6. Expenses. The Company will pay all costs and expenses incident
to the performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the Securities, (vii) any
quotation of the Securities in the Nasdaq National Market, (viii) the Company's
expenses associated with any meetings with prospective investors in the
Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters) and (ix) advertising
relating to the offering of the Securities (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11(a), (a)(i) or (a)(ii) hereof or because of any failure,
refusal or inability on the part of the Company to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder in
each case other than by reason of a default by any of the Underwriters, the
Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities. The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions covered
by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company of its covenants and
agreements hereunder and to the following additional conditions:
13.
<PAGE> 14
(a) If the Original Registration Statement or any amendment
thereto filed prior to the Firm Closing Date has not been declared effective as
of the time of execution hereof, the Original Registration Statement or such
amendment and, if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have been declared effective not later than
the earlier of (i) 11:00 A.M., New York time, on the date on which the amendment
to the registration statement originally filed with respect to the Securities or
to the Registration Statement, as the case may be, containing information
regarding the initial public offering price of the Securities has been filed
with the Commission and (ii) the time confirmations are sent or given as
specified by Rule 462(b)(2), or with respect to the Original Registration
Statement, or such later time and date as shall have been consented to by the
Representatives; if required, the Prospectus or any Term Sheet that constitutes
a part thereof and any amendment or supplement thereto shall have been filed
with the Commission in the manner and within the time period required by Rules
434 and 424(b) under the Act; no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or, to the
knowledge of the Company or the Representatives, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Graham & James LLP/Riddell Williams P.S., counsel for the
Company, to the effect that:
(i) the Company has been duly organized and is validly
existing as a corporation in good standing under the laws of its jurisdiction of
incorporation and is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of all other jurisdictions
where the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified does
not amount to a material liability or disability to the Company;
(ii) the Company has corporate power to own or lease its
properties and conduct its business as described in the Registration Statement
and the Prospectus, and the Company has corporate power to enter into this
Agreement and to carry out all the terms and provisions hereof to be carried out
by it;
(iii) to the best of such counsel's knowledge, the Company
does not own any shares of stock or any other equity securities of any
corporation or have any equity interest in any firm, partnership, association or
other entity;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with the
registration requirements of all applicable federal securities laws and to the
best of such counsel's knowledge were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities;
the Firm Securities have been duly authorized by all necessary corporate action
of the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will
14.
<PAGE> 15
be validly issued, fully paid and nonassessable; the Securities have been duly
included for trading in the Nasdaq National Market; no holders of outstanding
shares of capital stock of the Company are entitled as such to any preemptive or
other rights to subscribe for any of the Securities; and to the best of such
counsel's knowledge no holders of securities of the Company are entitled to have
such securities registered under the Registration Statement which are not so
registered;
(v) the statements set forth under the heading
"Description of Capital Stock" in the Prospectus, insofar as such statements
purport to summarize certain provisions of the capital stock of the Company,
provide a fair summary of such provisions; and the statements set forth under
the headings "Risk Factors - ______" "Business - _______" "Management -
Employment Agreements," "Management - Director Compensation," "Management - 1996
Stock Option Plan," "Management - 1998 Directors Stock Option Plan," "Certain
Transactions," and "Shares Eligible For Future Sale" in the Prospectus, insofar
as such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a fair summary of such legal matters,
documents and proceedings;
(vi) the execution and delivery of this Agreement have
been duly authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company;
(vii) (A) no legal or governmental proceedings are pending
to which the Company is a party or to which the property of the Company is
subject that are required to be described in the Registration Statement or the
Prospectus and are not described therein, and, to the best knowledge of such
counsel, no such proceedings have been threatened against the Company or with
respect to any of its properties and (B) no contract or other document is
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement that is not described
therein or filed as required;
(viii) the issuance, offering and sale of the Securities
to the Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the consummation of
the other transactions herein contemplated do not (A) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained and such as may be
required under state securities or blue sky laws, or (B) conflict with or result
in a breach or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument, known to such counsel, to which the Company is a party or by
which the Company or any of its properties are bound, or the charter documents
or by-laws of the Company, or any statute or any judgment, decree, order, rule
or regulation of any court or other governmental authority or any arbitrator
known to such counsel and applicable to the Company;
(ix) the Registration Statement is effective under the
Act; any required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner and
within the time period required by Rules 434 and 424(b); and no stop order
suspending the effectiveness of the Registration Statement or any
15.
<PAGE> 16
amendment thereto has been issued, and no proceedings for that purpose have been
instituted or threatened or, to the best knowledge of such counsel, are
contemplated by the Commission;
(x) the Registration Statement originally filed with
respect to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than the
financial statements and other financial information contained therein, as to
which such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder;
(xi) if the Company elects to rely on Rule 434, the
Prospectus is not "materially different", as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including such
information that is permitted to be omitted pursuant to Rule 430A); and
(xii) the Company is not subject to registration as an
investment company under the Investment Company Act of 1940, as amended, and
this transaction will not cause the Company to become an investment company
subject to registration under such Act.
(xiii) to the best of counsel's knowledge the statements
made in the Prospectus and Registration Statement are accurate and complete with
regard to the Company's trademarks.
Such counsel shall also state that they have no reason to believe that
the Registration Statement, as of its effective date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements made therein not
misleading in light of the circumstances under which they were made or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, with the exception and
to the extent of patent and FDA matters.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives shall have received an opinion, dated the
Firm Closing Date, of McCutchen, Doyle, Brown & Enersen, LLP, special
intellectual property counsel for the Company, stating that such counsel
represents Genentech, Inc. in certain matters relating to patents and patent
applications licensed to the Company and to the effect that:
(i) such counsel is generally familiar with the technology
contained in the patents and patent applications identified in section
(7)(c)(iii) below and has read the portions of the Registration Statement and
the Prospectus entitled "Risk Factors - We rely of Genentech for the manufacture
of AIDSVAX; - We rely on Genentech for the sale, marketing and
16.
<PAGE> 17
commercialization of AIDSVAX; - If we lose our license agreement with Genentech,
our business will be adversely affected; - We may not be able to protect our
intellectual property or operate our business without infringing the
intellectual property rights of others" and "Business - License and Services
Agreements with Genentech; - Licensed Patents; these portions of the
Registration Statement and the Prospectus are collectively the "Intellectual
Property Portion, with the following limitations: in the portion of the
Registration Statement and the Prospectus entitled "Risk Factors - We rely on
Genentech for the manufacture of AIDSVAX," the Intellectual Property Portion
consists only of the following statements: "Genentech currently has an exclusive
option to manufacture AISDVAX" and "Our license agreement with Genentech does
not specify the price we will be required to pay Genentech for AIDSVAX;" in the
portion of the Registration Statement and the Prospectus entitled "Risk Factors
- - We rely on Genentech for the sale, marketing and commercialization of
AIDSVAX," the Intellectual Property Portion consists only of the statement that
"Genentech currently has an exclusive option to market and distribute AIDSVAX;"
(ii) to the best of such counsel's knowledge, the
statements in the Intellectual Property Portion of the Registration Statement
are fair and accurate summaries of the matters set forth therein;
(iii) the following patent applications, which are
licensed to the Company and are being prosecuted on behalf of Genentech, Inc. in
the United States are, and to the best of such counsel's knowledge, the
corresponding patent applications of Genentech filed outside of the United
States are, being actively prosecuted. Genentech is the Assignee of record of
the inventions described therein and, to our knowledge, has not assigned or
licensed any rights in such inventions, with the exception of the rights
licensed to the Company under the license agreement dated May 1, 1996; and under
this license agreement, such inventions are licensed to the Company to the
extent that such inventions relate directly to preventative HIV and/or AIDS
vaccines based on recombinant gp120 protein(s) [list of patent applications that
McCutchen is prosecuting]; and
(iv) to the best of such counsel's knowledge, there is no
pending or threatened action, suit, proceeding or claim by governmental
authorities or others relating to any patent rights of the Company, except for
oppositions to Genentech's patents EP 187,401 and EP 527,760 which have been
filed by Chiron Corporation in Europe.
Such counsel shall also state that they have no reason to believe that
the Intellectual Property Portion of the Registration Statement, as of its
effective date, contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Intellectual Property Portion of
the Prospectus, as of its date or the date of such opinion, included or includes
any untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
17.
<PAGE> 18
References to the Registration Statement and the Prospectus in this
paragraph (c) shall include any amendment or supplement thereto at the date of
such opinion.
(d) The Representatives shall have received an opinion, dated the
Firm Closing Date, of ___________, special FDA regulatory counsel for the
Company, stating that such counsel represents the Company in certain matters
relating to the United States Federal Food Drug and Cosmetic Act (the "FFDC
Act") and related government regulatory matters and to the effect that:
(i) such counsel is familiar with the technology used by
the Company in its business and the manner of its use and has read the
Registration Statement and the Prospectus, including particularly the portions
of the Registration Statement and the Prospectus referring to regulatory
matters; and
(ii) such counsel is familiar with the technology of the
Company and has read the portions of the Registration Statement and the
Prospectus entitled "Risk Factors - _______," "Business - Human Clinical
Trials," "Business - Phase I Trials - Safety, Monovalent AIDSVAX B," "Business -
Phase II Trials - Antibody Stimulation, Monovalent AIDSVAX B," "Business Phase
I/II Trials - Bivalent AIDSVAX," "Business - Phase III Clinical Trials for
AIDSVAX" and "Business - Governmental Regulation" (the "Regulatory Portion"),
and in such counsel's opinion, the Regulatory Portion, insofar as such
statements constitute descriptions of federal statutes, laws, regulations or
proceedings, are accurate and complete in all material respects.
Such counsel shall also state that they have no reason to believe that
the Regulatory Portion of the Registration Statement, as of its effective date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Regulatory Portion of the Prospectus, as of
its date or the date of such opinion, included or includes any untrue statement
of a material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinion.
(e) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Cooley Godward LLP, counsel for the Underwriters, with
respect to the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as such counsel may reasonably request for the
purpose of enabling them to pass upon such matters.
18.
<PAGE> 19
(f) The Representatives shall have received from KPMG LLP a
letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent accountants with respect to the
Company within the meaning of the Act and the applicable rules and regulations
thereunder;
(ii) in their opinion, the audited financial statements
and schedules examined by them and included in the Registration Statement and
the Prospectus comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iii) on the basis of a reading of the latest available
interim unaudited financial statements of the Company, carrying out certain
specified procedures (which do not constitute an examination made in accordance
with generally accepted auditing standards) that would not necessarily reveal
matters of significance with respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the stockholders, the board of directors
and any committees thereof of the Company, and inquiries of certain officials of
the Company who have responsibility for financial and accounting matters,
nothing came to their attention that caused them to believe that:
(A) the unaudited financial statements of the Company included
in the Registration Statement and the Prospectus do not comply in form
in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations thereunder or
are not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement and the
Prospectus; and
(B) at a specific date not more than five business days prior to
the date of such letter, there were any changes in the capital stock or
long-term debt of the Company or any decreases in net current assets or
stockholders' equity of the Company, in each case compared with amounts
shown on the March 31, 1999 unaudited balance sheet included in the
Registration Statement and the Prospectus, or for the period from the
date of such balance sheet to such specified date there were any
decreases in revenue or increases in operating loss, net loss or basic
and diluted loss per common share of the Company as compared with the
quarterly period ending as of the date of such balance sheet, except in
all instances for changes, decreases or increases set forth in such
letter.
(iv) they have carried out certain specified procedures,
not constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records of
the Company and are included in the Registration Statement and the Prospectus
under the captions "Prospectus Summary - Summary Financial Information," "Risk
Factors - _________," "Use of Proceeds," "Capitalization," "Dilution," "Selected
Financial Data," "Management's Discussion And Analysis Of Financial Condition
And Results Of Operation," "Business - _________," "Management - Executive
19.
<PAGE> 20
Compensation," "Management - Employment Agreements," "Management - 1996 Stock
Option Plan," "Management - 1998 Directors Stock Option Plan," "Certain
Transactions," "Principal Stockholders," "Description of Capital Stock" and
"Shares Eligible For Future Sale" and in Exhibit 11 to the Registration
Statement, and have compared such amounts, percentages and financial information
with such records of the Company and with information derived from such records
and have found them to be in agreement, excluding any questions of legal
interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (f) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(g) The Representatives shall have received a certificate, dated
the Firm Closing Date, of the principal executive officer and the principal
financial or accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date, does
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, does not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on its part
to be performed or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the best
of the Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not sustained any material loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or any
development involving a prospective material adverse change, in the condition
(financial or otherwise), management, business prospects, net worth or results
of operations of the Company,
20.
<PAGE> 21
except in each case as described in or contemplated by the Prospectus (exclusive
of any amendment or supplement thereto).
(h) The Representatives shall have received from each person who
is a director, officer or stockholder of the Company an agreement to the effect
that such person will not, directly or indirectly, without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock for a period of 180
days after the date of this Agreement.
(i) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(j) Prior to the commencement of the offering of the Securities,
the Securities shall have been approved for trading on the Nasdaq National
Market subject to notice of issuance.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934 (the "Exchange Act"), against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or such controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon:
(i) any untrue statement or alleged untrue statement made
by the Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based
21.
<PAGE> 22
upon written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the securities or blue sky
laws thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading or,
(iv) any untrue statement or alleged untrue statement of
any material fact contained in any audio or visual materials provided by the
Company or in written information furnished by or on behalf of the Company
including, without limitation, slides, videos, films, tape recordings, used in
connection with the marketing of the Securities, including, without limitation,
statements communicated to securities analysts employed by the Underwriters, but
excluding information received solely and exclusively from the Underwriters,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein; and provided, further,
that the Company will not be liable to any Underwriter or any person controlling
such Underwriter with respect to any such untrue statement or omission made in
any Preliminary Prospectus that is corrected in the Prospectus (or any amendment
or supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Securities from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company with Section 5(d) and (e) of this
Agreement. This indemnity agreement will be in addition to any liability which
the Company may otherwise have. The Company will not, without the prior written
consent of the Underwriter or Underwriters purchasing, in the aggregate, more
than fifty percent (50%) of the Securities, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
22.
<PAGE> 23
(b) Each Underwriter, severally and not jointly, will indemnify
and hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein: and, subject to the limitation set forth
immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the
23.
<PAGE> 24
same jurisdiction arising out of the same general allegations or circumstances,
designated by the Representatives in the case of paragraph (a) of this Section
8, representing the indemnified parties under such paragraph (a) who are parties
to such action or actions) or (ii) the indemnifying party does not promptly
retain counsel satisfactory to the indemnified party or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. After such notice from the indemnifying party
to such indemnified party, the indemnifying party will not be liable for the
costs and expenses of any settlement of such action effected by such indemnified
party without the consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 8 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (or actions in
respect thereof) in such proportion as is appropriate to reflect (i) the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party on the other from the offering of the Securities or
(ii) if the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total proceeds from the offering (before deducting expenses) received by
the Company bear to the total underwriting discounts and commissions received by
the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters, the parties'
relative intents, knowledge, access to information and opportunity to correct or
prevent such statement or omission, and any other equitable considerations
appropriate in the circumstances. The Company and the Underwriters agree that it
would not be equitable if the amount of such contribution were determined by pro
rata or per capita allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation that does not take
into account the equitable considerations referred to above in this paragraph
(d). Notwithstanding any other provision of this paragraph (d), no Underwriter
shall be obligated to make contributions hereunder that in the aggregate exceed
the total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section II (f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall
24.
<PAGE> 25
have the same rights to contribution as such Underwriter, and each director of
the Company, each officer of the Company who signed the Registration Statement
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company.
9. Default of Underwriters. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters as
described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the several Underwriters set forth in this Agreement or made by or
on behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, any Underwriter or any
controlling person referred to in Section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the
25.
<PAGE> 26
event that the Company shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder at or prior thereto or, if at or prior to the Firm Closing Date or
such Option Closing Date, respectively,
(i) the Company shall have, in the sole judgment of the
Representatives, sustained any material loss or interference with its business
or properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding or there shall have been any material adverse change, or
any development involving a prospective material adverse change (including
without limitation a change in management or control of the Company), in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company, except in each case as described in or contemplated
by the Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended
by the Commission or the Nasdaq National Market;
(iii) trading in securities generally on the New York
Stock Exchange or Nasdaq National Market shall have been suspended or minimum or
maximum prices shall have been established on either such exchange;
(iv) a banking moratorium shall have been declared by New
York or United States authorities; or
(v) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an outbreak or
escalation of any other insurrection or armed conflict involving the United
States or (C) any other calamity or crisis or material adverse change in general
economic, political or financial conditions having an effect on the U.S.
financial markets that, in the sole judgment of the Representatives, makes it
impractical or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement, as amended as
of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11
shall be without liability of any party to any other party except as provided in
Section 10 hereof.
12. Information Supplied by Underwriters. The statements set forth
under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus
(to the extent such statements relate to the Underwriters) constitute the only
information furnished by any Underwriter through the Representatives to the
Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters confirm
that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing and,
if sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Company at
1000 Marina Boulevard, Suite 200, Brisbane, California 94005.
26.
<PAGE> 27
14. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company contained in Section 8 of this Agreement shall
also be for the benefit of any person or persons who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
and (ii) the indemnities of the Underwriters contained in Section 8 of this
Agreement shall also be for the benefit of the directors of the Company, the
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, the Company accepts for itself and
in connection with its properties, generally and unconditionally, the
nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. The Company designates and appoints
___________________, and such other persons as may hereafter be selected by the
Company irrevocably agreeing in writing to so serve, as its agent to receive on
its behalf service of all process in any such proceedings in any such court,
such service being hereby acknowledged by the Company to be effective and
binding service in every respect. A copy of any such process so served shall be
mailed by registered mail to Prudential Securities Incorporated at its address
provided in Section 13 hereof; provided, however, that, unless otherwise
provided by applicable law, any failure to mail such copy shall not affect the
validity of service of such process. If any agent appointed by the Company
refuses to accept service, the Company hereby agrees that service of process
sufficient for personal jurisdiction in any action against the Company in the
State of New York may be made by registered or certified mail, return receipt
requested, to the Company at its address provided in Section 13 hereof, and the
Company hereby acknowledges that such service shall be effective and binding in
every respect. Nothing herein shall affect the right to serve process in any
other manner permitted by law or shall limit the right of any Underwriter to
bring proceedings against the Company in the courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
27.
<PAGE> 28
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and each of the
several Underwriters.
Very truly yours,
VAXGEN, INC.
By:
-------------------------------
Robert C. Nowinski
Chief Executive Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
PRUDENTIAL SECURITIES INCORPORATED
Punk, Ziegel & Company LLP
By PRUDENTIAL SECURITIES INCORPORATED
By:
-------------------------------
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Representatives.
28.
<PAGE> 29
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF FIRM SECURITIES TO BE PURCHASED
----------- -----------------------------------------
<S> <C>
Prudential Securities Incorporated.......
Punk, Ziegel & Company LLP...............
[insert names of other Underwriters
alphabetically by bracket or in other
order determined by Prudential
Securities Incorporated -
Equity Transactions Group]
Total
</TABLE>
29.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
VAXGEN, INC.
JUNE 8, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 OFFICES.................................................................. 2
1.1 Business Office............................................................. 2
1.2 Registered Office........................................................... 2
ARTICLE 2 STOCKHOLDERS............................................................. 2
2.1 Annual Meetings............................................................. 2
2.2 Business Conducted at Annual Meeting........................................ 2
2.3 Special Meetings............................................................ 4
2.4 Notice of Meetings.......................................................... 4
2.5 Form of Notice.............................................................. 4
2.6 Waiver of Notice............................................................ 4
2.7 Quorum and Adjourned Meetings............................................... 5
2.8 Proxies..................................................................... 5
2.9 Voting Record............................................................... 5
2.10 Conduct of Meetings......................................................... 6
2.11 Voting of Shares............................................................ 6
2.12 Inspectors of Election...................................................... 6
2.13 Record Date................................................................. 7
ARTICLE 3 BOARD OF DIRECTORS....................................................... 7
3.1 General Powers.............................................................. 7
3.2 Number...................................................................... 7
3.3 Tenure and Qualifications................................................... 7
3.4 Vacancies................................................................... 7
3.5 Resignation................................................................. 8
3.6 Removal of Directors........................................................ 8
3.7 Director Compensation....................................................... 8
3.8 Committees of Directors..................................................... 8
3.9 Committee Minutes........................................................... 9
3.10 Meetings and Actions of Committees.......................................... 9
ARTICLE 4 BOARD MEETINGS........................................................... 9
4.1 Annual and Regular Meetings................................................. 9
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
4.2 Special Meetings............................................................ 9
4.3 Notice of Special Meetings.................................................. 9
ARTICLE 5 ACTIONS AT BOARD MEETINGS................................................ 10
5.1 Business Considered......................................................... 10
5.2 Quorum and Voting........................................................... 10
5.3 Presumption of Assent....................................................... 10
5.4 Actions by Written Consent.................................................. 11
5.5 Meetings by Conference Telephone............................................ 11
ARTICLE 6 OFFICERS................................................................. 11
6.1 Officers Designated......................................................... 11
6.2 Appointment and Term of Office.............................................. 11
6.3 Designations................................................................ 11
6.4 Chairman.................................................................... 11
6.5 President................................................................... 12
6.6 Vice Presidents............................................................. 12
6.7 Secretary................................................................... 12
6.8 Treasurer................................................................... 12
ARTICLE 7 CONDUCT OF CORPORATE BUSINESS............................................ 12
7.1 Contracts................................................................... 12
7.2 Banking Matters............................................................. 12
7.3 Copies of Resolutions....................................................... 13
ARTICLE 8 STOCK CERTIFICATES....................................................... 13
8.1 Issuance of Shares.......................................................... 13
8.2 Certificates of Stock....................................................... 13
8.3 Stock Records............................................................... 13
8.4 Restrictions on Transfer.................................................... 13
8.5 Transfers................................................................... 14
ARTICLE 9 INDEMNIFICATION.......................................................... 14
9.1 Third Party Actions......................................................... 14
9.2 Actions by or in the Right of the Corporation............................... 14
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
9.3 Successful Defense.......................................................... 15
9.4 Determination of Conduct.................................................... 15
9.5 Payment of Expenses in Advance.............................................. 15
9.6 Indemnity not Exclusive; Effect of Indemnification Agreements............... 16
9.7 Insurance Indemnification................................................... 16
9.8 The Corporation............................................................. 16
9.9 Employee Benefit Plans...................................................... 16
9.10 Indemnity Fund.............................................................. 16
9.11 Indemnification of Other Persons............................................ 17
9.12 Savings Clause.............................................................. 17
9.13 Continuation of Indemnification and Advancement of Expenses................. 17
ARTICLE 10 AMENDMENT................................................................ 17
</TABLE>
iii
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
VAXGEN, INC.
Article 1
OFFICES
1.1 BUSINESS OFFICE. The principal office of the corporation may be
located at any place either within or outside the state of Delaware. The
corporation may have, either within or outside the state of Delaware, its
principal office and such other offices as its Board of Directors may designate
or as the business of the corporation may require from time to time.
1.2 REGISTERED OFFICE. The registered office of the corporation shall be
located within the state of Delaware. It may, but need not, be identical with
the principal office of the corporation if located in the state of Delaware. The
registered agent shall have a business office identical with such registered
office. The registered agent and location of the registered office may each be
changed from time to time. Such a change will be effective upon filing of a
certificate of the same as required by the Delaware General Corporation Law.
Article 2
Stockholders
2.1 ANNUAL MEETINGS. The annual meeting of the stockholders of this
corporation, for the purpose of election of directors and such other business as
may come before it, shall be at the date, time and place determined by the Board
of Directors. In the event a date fixed for the annual meeting is a legal
holiday in the state of Delaware, the meeting shall be held at the same hour and
place on the next succeeding day not a holiday.
2.2 BUSINESS CONDUCTED AT ANNUAL MEETING.
(a) At an annual meeting of stockholders, an item of business may
be conducted, and a proposal may be considered and acted upon, only if such item
or proposal is brought before the meeting (i) by, or at the direction of, the
Board of directors, or (ii) by any stockholder of the corporation who is
entitled to vote at the meeting and who complies with the procedures set forth
in the remainder of this Section 2.2. This Section 2.2 shall not apply to
matters of procedure that, pursuant to Section 2.10 of these Bylaws, are subject
to the authority of the chairman of the meeting.
<PAGE> 6
(b) For an item of business or proposal to be brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to, or mailed and received at, the
principal office of the corporation (a) not less than one hundred twenty (120)
days prior to the first anniversary of the date that the corporation's proxy
statement was first released to stockholders in connection with the previous
year's annual meeting; (b) a reasonable time before the corporation begins to
print and mail its proxy materials if the date of the current year's annual
meeting has been changed by more than thirty (30) days from the date of the
previous year's meeting; or (c) not more than seven (7) days following the
mailing to stockholders of the notice of annual meeting with respect to the
current year's annual meeting, if the corporation did not release a proxy
statement to stockholders in connection with the previous year's annual meeting,
or if no annual meeting was held during such year.
(c) A stockholder's notice to the Secretary under Section 2.2(b)
shall set forth, as to each item of business or proposal the stockholder intends
to bring before the meeting (i) a brief description of the item of business or
proposal and the reasons for bringing it before the meeting, (ii) the name and
address, as they appear on the corporation's books, of the stockholder and of
any other stockholders that the stockholder knows or anticipates will support
the item of business or proposal, (iii) the number and class of shares of stock
of the corporation that are beneficially owned on the date of such notice by the
stockholder and by any such other stockholders, and (iv) any financial interest
of the stockholder or any such other stockholders in such item of business or
proposal.
(d) The Board of Directors, or a designated committee thereof,
may reject a stockholder's notice that is not timely given in accordance with
the terms of Section 2.2(b). If the Board of Directors, or a designated
committee thereof, determines that the information provided in a timely
stockholder's notice does not satisfy the requirements of Section 2.2(c) in any
material respect, the Secretary of the corporation shall notify the stockholder
of the deficiency in the notice. The stockholder shall have an opportunity to
cure the deficiency by providing additional information to the Secretary within
such period of time, not to exceed five (5) days from the date such deficiency
notice is given to the stockholder, as the Board of Directors or such committee
shall reasonably determine. If the deficiency is not cured within such period,
or if the Board of Directors or such committee determines that the additional
information provided by the stockholder, together with information previously
provided, does not satisfy the requirements of Section 2.2(c) in any material
respect, then the Board of Directors or such committee may reject the
stockholder's notice.
(e) Notwithstanding the procedures set forth in Section 2.2(d),
if a stockholder desires to bring an item of business or proposal before an
annual meeting, and neither the Board of Directors nor any committee thereof has
made a prior determination of whether the stockholder has complied with the
procedures set forth in this Section 2.2 in connection with such item of
business or proposal, then the chairman of the meeting shall determine and
declare at the meeting whether the stockholder has so complied. If the chairman
determines that the stockholder has so complied, then the
3
<PAGE> 7
chairman shall so state and ballots shall be provided for use at the meeting
with respect to such item of business or proposal. If the chairman determines
that the stockholder has not so complied, then, unless the chairman, in his sole
and absolute discretion, determines to waive such compliance, the chairman shall
state that the stockholder has not so complied and the item of business or
proposal shall not be brought before the meeting.
This Section 2.2 shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, directors and
committees of the Board of Directors, but, in connection with such reports, no
item of business may be conducted, and no proposal may be considered and acted
upon, unless there has been compliance with the procedures set forth in this
Section 2.2 in connection therewith.
2.3 SPECIAL MEETINGS. Special meetings of the stockholders may be called
at any time and for any purpose by the Chairman, President or the Board of
Directors. Pursuant to Article 6 of the corporation, stockholders of the
corporation do not have the right to call special meetings of stockholders. No
business shall be transacted at any special meeting of stockholders except as is
specified in the notice calling for the meeting. The date, time and place of a
special meeting shall be determined by the person or group convening the
meeting.
2.4 NOTICE OF MEETINGS. Written notice of annual or special meetings of
stockholders, stating the date, time and place of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given by or at the direction of the Secretary to each stockholder of
record entitled to vote at the meeting. Notice of a meeting to act on (a) a plan
of merger or consolidation or (b) a proposed sale, exchange or other disposition
of all or substantially all of the assets of the corporation other than in the
usual or regular course of business shall be given not less than 20 days nor
more than 60 days before the meeting date. Notice of any other meeting shall be
given not less than 10 nor more than 60 days prior to the meeting date.
2.5 FORM OF NOTICE. Notice may be transmitted by mail, private carrier,
personal delivery, telegraph, teletype, or communications equipment which
transmits a facsimile of the notice to like equipment which receives and
reproduces the notice. If mailed, such notice shall be deemed effective when
deposited in the United States mail, with first-class postage prepaid, addressed
to the stockholder at such stockholder's address as it appears on the stock
transfer records of the corporation. Notice given in any other manner shall be
deemed effective when dispatched to the stockholder's address, telephone number
or other number appearing on the records of the corporation.
2.6 WAIVER OF NOTICE. Any required notice of the date, time, place or
purpose of a meeting may be waived by a stockholder if done in writing and
signed by the stockholder, either before or after the meeting. A stockholder's
attendance at the meeting, in person or by proxy, (a) waives all required notice
of date, time and place of the meeting unless at the beginning of the meeting
the stockholder objects to holding or transacting business at the meeting, and
(b) waives any required notice of the purpose
4
<PAGE> 8
of the meeting unless at the time a particular matter not within the purpose or
purposes of the meeting stated in the notice is first considered the stockholder
objects to consideration of the matter. Any stockholder so waiving notice shall
be bound by the proceedings of the meeting in all respects as if due notice of
the meeting had been given.
2.7 QUORUM AND ADJOURNED MEETINGS. A majority of the votes entitled to
be cast on a matter by the holders of shares that, pursuant to the Certificate
of Incorporation or Delaware General Corporation Law, are entitled to vote and
be counted collectively upon such matter, represented in person or by proxy,
shall constitute a quorum of such shares at a meeting of stockholders. A
majority of the shares represented at a meeting, even if less than a quorum, may
adjourn the meeting from time to time without further notice. In the case of any
meeting of stockholders that is adjourned more than once because of the failure
of a quorum to attend, those who attend the third convening of such meeting,
although less than a quorum, shall nevertheless constitute a quorum for the
purpose of electing directors, provided that the percentage of shares
represented at the third convening of such meeting shall not be less than
one-third of the shares entitled to vote. At such reconvened meeting at which a
quorum is represented, any business may be transacted which might have been
transacted at the meeting as originally called. Once a share is represented for
any purpose at a meeting, other than solely to object to holding or transacting
business at the meeting, it is deemed present for quorum purposes for the
remainder of the meeting and any adjournment of it (unless a new record date is
or must be set for the adjourned meeting), notwithstanding the withdrawal from
the meeting of the person through whom the share was represented.
2.8 PROXIES. At all meetings of stockholders, a stockholder may vote in
person or by proxy. A stockholder may appoint a proxy by signing an appointment
form. An appointment form shall be deemed signed if the stockholder's name is
placed on the form (whether by manual signature, typewriting, facsimile
transmission or otherwise) by the stockholder or his or her attorney-in-fact or
agent. An appointment shall cease to be valid three years after it is made
unless otherwise provided in the appointment form. Unless by its terms it is
stated to be irrevocable, an appointment is deemed revoked by (a) action of the
stockholder revoking the appointment or making a subsequent appointment in the
same manner required for the original appointment, (b) presence of and voting by
the stockholder at the meeting for which a proxy had been appointed, or (c)
notice to the corporation of the death or disability of the stockholder making
the appointment. Appointment or revocation of a proxy shall be effective from
and after the time of the appointment or revocation form, or notice of the
presence and voting or death or disability of the stockholder, is received by
the Secretary of the corporation or other officer or agent authorized to
tabulate votes. A proxy appointed for a specified meeting may vote throughout
that meeting, even if the meeting is reconvened one or more times, until final
adjournment of the meeting.
2.9 VOTING RECORD. After fixing a record date for a stockholders'
meeting, the corporation shall prepare an alphabetical list of the names of all
stockholders on the record date who are entitled to notice of the stockholders'
meeting. The list shall be
5
<PAGE> 9
arranged by voting group, and within each voting group by class or series of
shares, and show the address of and number of shares held by each stockholder. A
stockholder, stockholder's agent, or a stockholder's attorney may inspect the
stockholder's list, beginning 10 days prior to the stockholders' meeting and
continuing through the meeting, at the corporation's principal office or at a
place identified in the meeting notice in the city where the meeting will be
held. Inspection must occur during regular business hours and will be at the
stockholder's expense. The stockholders' list shall be kept open for inspection
during the meeting and any adjournment.
2.10 CONDUCT OF MEETINGS. Meetings of stockholders shall be conducted
pursuant to such rules and procedures as may be established from time to time by
or at the direction of the Board of Directors. These rules and procedures may be
established either prior to or during a meeting, and, subject to Section 2.2,
may encompass such matters as form and prior submission requirements for
stockholder proposals, nominations of Directors and rules of order for meetings
themselves. The Chairman or, in his or her absence, such other person as may
have been or be designated by the Chairman or the Board, shall be the chairman
of the meeting. Except as otherwise provided by the Board, the chairman of the
meeting shall be conclusively deemed to be acting at the direction of the Board
when establishing rules and procedures for or at a meeting.
2.11 VOTING OF SHARES. Except as otherwise provided in the Certificate
of Incorporation, each outstanding share entitled to vote with respect to a
matter submitted to a meeting of stockholders shall be entitled to one vote upon
such matter. If a quorum exists, action on a matter is approved by a voting
group of stockholders if the votes cast within the voting group favoring the
action exceed the votes cast within the voting group opposing the action, unless
the Certificate of Incorporation or the Delaware General Corporation Law require
a greater number of affirmative votes.
2.12 INSPECTORS OF ELECTION. Either before or during any stockholders'
meeting, the Board or chairman of the meeting may, and on request of any
stockholder the chairman of the meeting shall, appoint one or more persons who
are not nominees for office to act as voting proctors and, if there is to be an
election, inspectors of election at the meeting. Alternate proctors may be
appointed by the chairman of the meeting to fill vacancies occurring from
failures or refusals to serve or as otherwise may be required. The duties of
proctors are to:
(a) determine the number of shares outstanding in each class or
group, the voting rights of each class or group of shares, the shares
represented at the meeting, the existence of a quorum, the authenticity and
validity of proxy appointments, and the authority of each proxy;
(b) hear and determine all challenges and issues relating to
voting rights;
(c) determine when polls should close and voting cease;
6
<PAGE> 10
(d) receive, count and tabulate all ballots or votes otherwise
properly cast;
(e) determine the result or results of the voting; and
(f) otherwise take such actions as will reasonably assure the
fairness to all stockholders of the election or other vote.
2.13 RECORD DATE. The Board of Directors may fix in advance a record
date for purposes of determining stockholders (a) entitled to (i) notice of or
to vote at any meeting or adjourned and reconvened meeting of stockholders or
(ii) receive payment of any dividend or other distribution, or (b) for any other
purpose. Such a record date shall not be more than 60 or less than 10 days prior
to the day on which the particular action requiring such determination of
stockholders is to be taken. If the record date is not otherwise fixed, it shall
be (x) the day before the date on which notice of the meeting is mailed in the
case of determining stockholders entitled to notice of or to vote at a meeting
of stockholders, or (y) the date on which a resolution of the Board of Directors
declaring a dividend or other distribution is adopted in the case of determining
stockholders entitled to receive payment of a distribution. When a determination
of stockholders entitled to vote at any meeting of stockholders has been made as
provided in this Section 2.12, such determination shall apply to any adjournment
of the meeting, unless the Board of Directors fixes a new record date, which it
must do if the meeting is adjourned to a date more than 120 days after the date
fixed for the original meeting.
Article 3
BOARD OF DIRECTORS
3.1 GENERAL POWERS. All corporate powers shall be exercised by or under
the authority, and the business and affairs of the corporation shall be managed
under the direction, of the Board of Directors, except as limited by the
Certificate of Incorporation.
3.2 NUMBER. The number of Directors of the corporation shall be seven.
That number may be increased or decreased from time to time by resolution of the
Board of Directors. A decrease shall not shorten the term of any incumbent
Director.
3.3 TENURE AND QUALIFICATIONS. Despite the expiration of a Director's
term, each Director shall continue to serve until the Director's successor has
been elected and qualified or until there is a decrease in the number of
Directors. Directors need not be residents of the state of Delaware or
stockholders of the corporation.
3.4 VACANCIES. In case of any vacancy in the Board of Directors,
including a vacancy resulting from an increase in the number of Directors, the
vacancy may be filled by the Board of Directors, a majority of the remaining
Directors (if they do not constitute a quorum) or the stockholders. A Director
elected to fill a vacancy shall hold office for the remainder of the term of the
previously vacant position.
7
<PAGE> 11
3.5 RESIGNATION. A Director may resign at any time by delivering written
notice to the Board of Directors, Chairman, President or Secretary. A
resignation shall be effective when the notice is delivered unless the notice
specifies a later effective date.
3.6 REMOVAL OF DIRECTORS. At a meeting of stockholders called expressly
for that purpose, the entire Board of Directors, or any member of the Board, may
be removed prior to expiration of the Director's or Directors' terms.
3.7 DIRECTOR COMPENSATION. Directors may be paid their expenses, if any,
of attendance at meetings of the Board. In addition, Directors may be
compensated in such manner as the Board deems appropriate for attendance at
meetings of the Board and other service as Directors. Such compensation shall
not preclude any Director from serving the corporation in any other capacity and
receiving compensation for doing so.
3.8 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution
passed by a majority of the whole board, designate one or more committees, with
each committee to consist of one or more of the directors of the corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors or in the Bylaws of the
corporation, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority to (i) amend the Certificate of Incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the Board of Directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designation
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), (ii) adopt an
agreement of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease
or exchange of all or substantially all of the corporation's property and
assets, (iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the Bylaws of the corporation; and,
unless the board resolution establishing the committee, the Bylaws or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
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<PAGE> 12
3.9 COMMITTEE MINUTES. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
3.10 MEETINGS AND ACTIONS OF COMMITTEES. Meetings and actions of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article 4 of these Bylaws, with such changes in the context of
that Article as are necessary to substitute the committee and its members for
the Board of Directors and its members; provided, however, that the time of
regular meetings of committees may be determined either by resolution of the
Board of Directors or by resolution of the committee, that special meetings of
committees may also be called by resolution of the Board of Directors and that
notice of special meetings of committees shall also be given to all alternate
members, who shall have the right to attend all meetings of the committee. The
Board of Directors may adopt rules for the government of any committee not
inconsistent with the provisions of these Bylaws.
Article 4
BOARD MEETINGS
4.1 ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of
Directors shall be held immediately after, and at the same place as, the annual
stockholders' meeting, unless another place or time has been previously
determined by the Directors. Notice of the annual meeting of the Board shall not
be necessary. By resolution, the Board, or any committee of the Board, may
specify the time and place either within or outside the state of Delaware for
holding its regular meetings. Other than for the resolution, notice of such
regular meetings shall not be required.
4.2 SPECIAL MEETINGS. Special meetings of the Board, or any committee of
the Board, may be called at any time by or at the request of the Chairman,
President or Secretary. In addition, in the case of a special Board meeting, any
two Directors may call a meeting, and in the case of a committee, any member of
the committee may call a meeting.
4.3 NOTICE OF SPECIAL MEETINGS. Notice of the date, time and place of a
special meeting may be given orally and shall be given by or on behalf of the
Secretary or other person or persons calling the meeting. Neither the business
to be transacted at nor the purpose of the meeting need be specified in the
notice. If notice to a Director is delivered or given by:
(a) personal delivery, the notice will be effective if delivered
to the Director at least 48 hours before the meeting;
(b) mail, the notice will be effective if deposited in the
official governmental least five days before the meeting, addressed to the
Director at his or her address on the records of the corporation, with postage
prepaid;
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<PAGE> 13
(c) private carrier, the notice will be effective if dispatched
to the Director at his or her address shown on the records of the corporation so
as to be delivered there at least 48 hours before the meeting;
(d) wire or wireless equipment which transmits a facsimile of
the notice, the notice will be effective if dispatched to the Director at least
48 hours before the meeting at his or her facsimile number appearing on the
records of the corporation or otherwise known to the sender;
(e) telegraph, the notice will be effective if its contents are
delivered to the telegraph company at least 72 hours before the meeting with
instructions for immediate delivery to the Director at his or her address shown
on the records of the corporation; and
(f) oral communication, the notice will be effective if
personally communicated to the Director at least 48 hours before the meeting.
Article 5
ACTIONS AT BOARD MEETINGS
5.1 BUSINESS CONSIDERED. At any meeting of the Board of Directors, any
and all business may be transacted and the Board may exercise any or all of its
powers.
5.2 QUORUM AND VOTING. A majority of the number of Directors specified
in Section 3.2 of these Bylaws shall constitute a quorum. A lesser number may
adjourn any meeting from time to time until a quorum is obtained. Notice or
further notice of the meeting need not be given. If a quorum is present when a
vote is taken, the affirmative vote of a majority of the Directors present at
the meeting is the act of the Board of Directors.
5.3 PRESUMPTION OF ASSENT. A Director of the corporation who is present
at a meeting of the Board at which action on any corporate matter is taken shall
be presumed to have assented to the action taken unless:
(a) The Director objects at the beginning of the meeting, or
promptly upon the Director's arrival, to holding or transacting business at the
meeting;
(b) The Director's dissent or abstention from the action taken
is entered in the minutes of the meeting; or
(c) The Director delivers written notice of the Director's
dissent or abstention to the presiding officer of the meeting before its
adjournment or to the corporation within a reasonable time after adjournment of
the meeting.
The right of dissent or abstention is not available to a Director who
votes in favor of the action taken.
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<PAGE> 14
5.4 ACTIONS BY WRITTEN CONSENT. Any corporate action required or
permitted by the Certificate of Incorporation, Bylaws, or Delaware General
Corporation Law to be voted upon or approved at a duly called meeting of the
Directors or committee of Directors may be accomplished without a meeting if one
or more unanimous written consents of the respective directors, setting forth
the actions so taken, shall be signed, either before or after the action taken,
by all the Directors or committee members, as the case may be. Action taken by
unanimous written consent is effective when the last Director or committee
member signs the consent, unless the consent specifies a later effective date.
5.5 MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors
or a committee of Directors may participate in their respective meetings by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time. Participation in a meeting by such means shall constitute presence in
person at such meeting.
Article 6
OFFICERS
6.1 OFFICERS DESIGNATED. The officers of the corporation shall be a
President, one or more Vice Presidents (their number, titles, designations and
relative authority to be as determined by the Directors), Secretary and
Treasurer, each of whom shall be appointed by the Board. There also shall be a
Chairman of the Board, appointed by the Board, who may be an officer if the
Board so determines. Each of these officers, including the Chairman even if not
an officer, and the Board may appoint additional officers or assistant officers.
Any two or more offices may be held by the same person. Subject to the
limitations of the Delaware General Corporation Law and the provisions of these
Bylaws, the corporation's officers and assistant officers shall have the rights,
designations, responsibilities and authority and perform the duties prescribed
by the Board or other authority appointing them.
6.2 APPOINTMENT AND TERM OF OFFICE. Each of the officers designated in
the first sentence of Section 6.1 of the Bylaws and the Chairman shall be
appointed annually by the Board at its annual meeting. Other officers and
assistant officers shall hold office until their respective appointments are
terminated by the authority appointing them. In any case, an officer shall
continue to serve until his or her successor has been appointed or service is
otherwise terminated.
6.3 DESIGNATIONS. In addition to the rifles and duties set forth below,
the Board may designate one or more of the officers whom it appoints as the
corporation's chief executive officer, chief operating officer and chief
financial officer, with such additional duties as are customary for these
positions or may be prescribed by the Board.
6.4 CHAIRMAN. The Chairman must be a member of the Board. He or she may
preside at meetings of the Directors and stockholders and shall report to and
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<PAGE> 15
consult with the Board. The Chairman shall have such other authority and duties
as the Board may prescribe from time to time.
6.5 PRESIDENT. Subject to the control of the Board of Directors, the
President shall in general direct, supervise, have responsibility for and
control all of the business and affairs of the corporation. Unless the Board
determines otherwise, the President will be the chief executive officer of the
corporation. In the absence or with the approval of the Chairman, the President
may preside at meetings of the stockholders and, if a member, the Board.
6.6 VICE PRESIDENTS. In the absence of the President or his or her
inability to act, the Vice President shall have and may exercise the authority
of the President, except as limited or otherwise changed by the Board. In the
event there is more than one Vice President, they shall have and may exercise in
such circumstances such authority of the President as has been allocated to them
by the Board.
6.7 SECRETARY. The Secretary shall supervise and otherwise have
responsibility for (a) keeping minutes of meetings of stockholders, Directors
and committees of Directors; (b) providing all notices to stockholders and
Directors which are required by the Certificate of Incorporation, Bylaws or
Delaware General Corporation Law; (c) custody of corporate records and the seal
of the corporation, if any; (d) keeping a register of the address of each
stockholder as furnished by the stockholders; and (e) execution and delivery of
certificates for shares of the corporation and other documents and records
respecting share ownership and transfer.
6.8 TREASURER. Subject to control and direction of the Board and
President, the Treasurer shall have charge and custody of and be responsible for
all funds and securities of the corporation, including their receipt and
disbursement.
Article 7
CONDUCT OF CORPORATE BUSINESS
7.1 CONTRACTS. The Board by resolution may authorize any one or more
officers or agents to enter into contracts and execute and deliver documents and
instruments for and on behalf and in the name of the corporation. Loans shall
not be contracted on behalf of the corporation and evidences of indebtedness
shall not be issued in its name unless authorized by resolution of the Board.
The authority granted by the Board in these circumstances may be general or
confined to specific instances.
7.2 BANKING MATTERS. All checks, drafts or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of the
corporation shall be signed by such officers or agents of the corporation and in
such manner as is from time to time determined by resolution of the Board. Funds
of the corporation not otherwise employed shall be deposited from time to time
to the credit of the corporation in such banks, trust companies or other
depositories as the Board by resolution may
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<PAGE> 16
select. The determinations and selections by the Board in these circumstances
may be general or confined to specific instances.
7.3 COPIES OF RESOLUTIONS. Any person dealing with the corporation may
rely upon a copy of any of the records of the proceedings, resolutions, or votes
of the Directors, committee of the Directors or stockholders when certified by
or at the direction of the President or Secretary.
Article 8
STOCK CERTIFICATES
8.1 ISSUANCE OF SHARES. No shares of the corporation shall be issued
unless authorized by the Board of Directors, which authorization shall include
the maximum number of shares to be issued, the consideration to be received for
each share, and, if the consideration is in a form other than cash, the
determination of the value of the consideration.
8.2 CERTIFICATES OF STOCK. All shares of the corporation shall be
represented by certificates in such form, not inconsistent with the Certificate
of Incorporation, as the Board of Directors may from time to time prescribe.
Certificates of stock shall be issued in numerical order, and each shareholder
shall be entitled to a certificate signed by the Chairman, the President or a
Vice President, attested to by the Secretary or an Assistant Secretary, and
sealed with the corporate seal, if any. If any certificate is manually signed by
a transfer agent or a transfer clerk and by a registrar, the signatures of the
President, Vice President, Secretary, Assistant Secretary, Treasurer or
Assistant Treasurer upon that certificate may be facsimiles that are engraved or
printed. If any person who has signed or whose facsimile signature has been
placed on a certificate no longer is an officer when the certificate is issued,
the certificate may nevertheless be issued with the same effect as if the person
were still an officer at the time of its issue.
8.3 STOCK RECORDS. The corporation or its agent shall maintain at the
registered office or principal office of the corporation, or at the office of
the transfer agent or registrar of the corporation, if one be designated by the
Board of Directors, a record of its stockholders, in a form that permits
preparation of a list of the names and addresses of all stockholders in
alphabetical order by class of shares showing the number and class of shares
held by each. The person in whose name shares stand on the books of the
corporation shall be deemed by the corporation to be the owner thereof for all
purposes.
8.4 RESTRICTIONS ON TRANSFER. The Board of Directors shall have the
authority to issue shares of the capital stock of this corporation and the
certificates therefor subject to such transfer restrictions and other
limitations as it may deem necessary to promote compliance with applicable
federal and state securities laws, and to regulate the transfer thereof in such
manner as may be calculated to promote such compliance or to further any other
reasonable purpose.
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<PAGE> 17
8.5 TRANSFERS. Shares of stock may be transferred by delivery of the
certificates therefor, accompanied by:
(a) an assignment in writing on the back of the certificate, or
an assignment separate from certificate, or a written power of attorney to sell,
assign, and transfer the same, signed by the record holder of the certificate;
and
(b) such additional documents, instruments, and other items of
evidence as may be reasonably necessary to satisfy the requirements of any
transfer restrictions applicable to such shares, whether arising under
applicable securities or other laws, or by contract, or otherwise.
Except as otherwise specifically provided in these Bylaws, no shares of
stock shall be transferred on the books of the corporation until the outstanding
certificate therefor has been surrendered to the corporation. All certificates
surrendered to the corporation for transfer shall be canceled, and no new
certificate shall be issued until the former certificate for a like number of
shares shall have been surrendered and canceled, except that, in case of a lost,
destroyed, or mutilated certificate, a new one may be issued therefor upon such
terms (including indemnity to the corporation) as the Board of Directors may
prescribe.
Article 9
INDEMNIFICATION
9.1 THIRD PARTY ACTIONS. Subject to the provisions of this Article 9,
the corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director, officer or employee of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the corporation,
which approval shall not be unreasonably withheld) actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of the corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
9.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. Subject to the
provisions of this Article 9, the corporation shall indemnify any person who was
or is a party or is
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<PAGE> 18
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer or employee of the
corporation, or is or was serving at the request of the corporation as a
director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Notwithstanding any other provision of this
Article 9, no person shall be indemnified hereunder for any expenses or amounts
paid in settlement with respect to any action to recover short-swing profits
under Section 16(b) of the Securities Exchange Act of 1934, as amended.
9.3 SUCCESSFUL DEFENSE. To the extent that a director, officer or
employee of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Sections 9.1 and 9.2,
or in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.
9.4 DETERMINATION OF CONDUCT. Any indemnification under Sections 9.1 and
9.2 (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that the indemnification of
the director, officer or employee is proper in the circumstances because he has
met the applicable standard of conduct set forth in Sections 9.1 and 9.2. Such
determination shall be made (i) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding or (ii) if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (iii) by the stockholders. Notwithstanding the foregoing, a
director, officer or employee of the corporation shall be entitled to contest
any determination that the director, officer or employee has not met the
applicable standard of conduct set forth in Sections 9.1 and 9.2 by petitioning
a court of competent jurisdiction.
9.5 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending a
civil or criminal action, suit or proceeding, by an individual who may be
entitled to indemnification pursuant to Section 9.1 or 9.2, shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer or employee to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the corporation as authorized in
this Article 9.
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9.6 INDEMNITY NOT EXCLUSIVE; EFFECT OF INDEMNIFICATION AGREEMENTS. The
provisions of a written indemnification agreement between the corporation and
any person subject to indemnity under this Article 9 shall control over the
provisions of this Article 9, which shall not apply to the corporation and the
person subject to indemnity under the written agreement. The indemnification and
advancement of expenses provided by or granted pursuant to the other sections of
this Article 9 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
9.7 INSURANCE INDEMNIFICATION. The corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer or employee of the corporation, or is or was serving at the
request of the corporation, as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of this
Article 9.
9.8 THE CORPORATION. For purposes of this Article 9, references to the
"corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors and officers, so that
any person who is or was a director, officer or employee of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under and
subject to the provisions of this Article 9 (including, without limitation, the
provisions of Section 9.4) with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
9.9 EMPLOYEE BENEFIT PLANS. For purposes of this Article 9, references
to "other enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with respect to an
employee benefit plan; and references to "serving at the request of the
corporation" shall include any service as a director, officer or employee of the
corporation which imposes duties on, or involves services by, such director,
officer or employee with respect to an employee benefit plan, its participants,
or beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
9.
9.10 INDEMNITY FUND. Upon resolution passed by the Board, the
corporation may establish a trust or other designated account, grant a security
interest or use other means (including, without limitation, a letter of credit),
to ensure the payment of certain
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of its obligations arising under this Article 9 and/or agreements which may be
entered into between the corporation and its officers and directors from time to
time.
9.11 INDEMNIFICATION OF OTHER PERSONS. The provisions of this Article 9
shall not be deemed to preclude the indemnification of any person who is not a
director or officer of the corporation or is not serving at the request of the
corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, but whom the corporation
has the power or obligation to indemnify under the provisions of the General
Corporation Law of the State of Delaware or otherwise. The corporation may, in
its sole discretion, indemnify an employee, trustee or other agent as permitted
by the General Corporation Law of the State of Delaware. The corporation shall
indemnify an employee, trustee or other agent where required by law.
9.12 SAVINGS CLAUSE. If this Article 9 or any portion thereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each person entitled to indemnification
hereunder against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement with respect to any action, suit, proceeding or
investigation, whether civil, criminal or administrative, and whether internal
or external, including a grand jury proceeding and an action or suit brought by
or in the right of the corporation, to the full extent permitted by any
applicable portion of this Article that shall not have been invalidated, or by
any other applicable law.
9.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article 9 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer or employee and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
Article 10
AMENDMENT
Except for Article 9 and this Article 10 of the Bylaws, both the Board
of Directors and the stockholders are authorized to amend or repeal these
Bylaws, or adopt new Bylaws to the extent such amendment, repeal or adoption is
not inconsistent with the Delaware General Corporation Law or the corporation's
Certificate of Incorporation. Articles 10 and 11 of the Bylaws may be amended or
repealed only by the stockholders.
I HEREBY CERTIFY that the preceding Amended and Restated Bylaws were
adopted by the Board of Directors of the corporation on June 8, 1999.
/s/ RALPH M. PAIS
-------------------------------
Ralph M. Pais, Secretary
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<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
VXG
VAXGEN
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, AND PRIVILEGES OF SHARES
CUSIP 922390 20 8
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE OF $0.01 PER
SHARE, OF
VAXGEN, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ Ralph M. Pais /s/ Robert C. Nowinski
- --------------------- ----------------------
SECRETARY CHAIRMAN OF THE BOARD
VAXGEN, INC.
CORPORATE
SEAL
NOV 27,
1995
DELAWARE
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
---------------------------
AUTHORIZED SIGNATURE
<PAGE> 2
VAXGEN, INC.
The Corporation is authorized to issue two classes of stock, Common Stock
and Preferred Stock. The Board of Directors of the Corporation has authority to
fix the number of shares and the designation of any series of Preferred Stock
and to determine or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued series of Preferred Stock.
A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares and upon
the holders, thereof as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, and the
number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Corporation at its principal office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ________________ Custodian __________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of
survivorship and not as tenants under Uniform Gifts to Minors
in common Act _____________________________
(State)
UNIF TRF MIN ACT -- _________________ Custodian (until age ______)
(Cust)
_____________________ under Uniform Transfers
(Minor)
to Minors Act _______________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
___________________________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
__________________________________________________________________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
Dated _________________________________
__________________________________________________________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF
NOTICE: THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
Signature(s) Guaranteed WHATEVER.
By ________________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
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Exhibit 5.1
[GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S. LETTERHEAD]
June 10, 1999
VaxGen, Inc.
1000 Marina Boulevard, Suite 200
Brisbane, CA 94005
RE: 3,100,000 SHARES OF COMMON STOCK OF VAXGEN, INC.
Ladies and Gentlemen:
We have acted as counsel for VaxGen, Inc. (the "Company"), a Delaware
corporation, in connection with (i) the authorization and issuance of 3,100,000
shares of common stock of the Company (the "Issuer Shares"), (ii) the sale of up
to an additional 465,000 shares of common stock of the Company by the Company
pursuant to an over-allotment option granted to the underwriters (the "Option
Shares"), and (iii) the preparation of a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended. We have
examined the Registration Statement and such other documents as we deem
necessary for the purpose of this opinion.
Based on the foregoing, we are of the opinion that:
1. The Issuer Shares will, upon due execution by the Company and the
registration by its registrar of the certificates for such shares and
issuance thereof by the Company and receipt by the Company of the
consideration from the sale of such shares as contemplated by the
Registration Statement, be duly authorized, validly issued, fully paid
and non-assessable.
2. The Option Shares will, upon due execution by the Company and the
registration by its registrar of the certificates for such shares and
issuance thereof by the Company and receipt by the Company of the
consideration from the sale of such shares as contemplated by the
Registration Statement, be duly authorized, validly issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the Registration
Statement under the caption "Legal Matters."
Very truly yours,
/s/ GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S.
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S.
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EXHIBIT 23.2
[KPMG LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
VaxGen, Inc. :
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Seattle, Washington
June 9, 1999
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EXHIBIT 23.4
CONSENT TO BE NAMED
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, the undersigned hereby consents to be named as a person about to become
a director in the registration statement on Form S-1 and amendments to be filed
on June 11, 1999, in connection with the registration of shares of common
stock of VaxGen, Inc., a Delaware corporation.
DATED this 8th day of June, 1999.
/s/ Ruth B. Kunath
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Ruth B. Kunath
