<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26483
VAXGEN, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
94-3236309
(I.R.S. Employer Identification Number)
1000 MARINA BLVD., SUITE 200
BRISBANE, CALIFORNIA 94005
(Address of Principal Administrative Offices) (Zip Code)
(650) 624-1000
(Registrants Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(g) of the
Securities Exchange Act of 1934:
Common Stock ($.01 par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The issuer has one class of common stock with 11,250,152 shares outstanding as
of October 29, 1999
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VAXGEN, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements:
Condensed Balance Sheets........................................ 1
Statements of Operations........................................ 2
Statements of Cash Flows........................................ 3
Notes to Condensed Financial Statements......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Overview........................................................ 6
Results of Operations........................................... 8
Liquidity and Capital Resources................................. 9
Year 2000 Compliance............................................ 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk.......... 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 13
Item 6. Exhibits and Reports on Form 8-K................................. 14
Signature........................................................ 15
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
VAXGEN, INC.
(A Development Stage Enterprise)
Condensed Balance Sheets
(Unaudited)
Item 1. Financial Statements
<TABLE>
<CAPTION>
9/30/99 12/31/98
---------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 590,000 $ 6,818,000
Investment Securities 51,031,000 12,650,000
Interest Receivable 312,000 112,000
Prepaid Expenses and Other Current Assets 1,294,000 310,000
---------------------------------
TOTAL CURRENT ASSETS 53,227,000 19,890,000
Property and Equipment, net 2,758,000 1,258,000
Other Assets 321,000 324,000
---------------------------------
TOTAL ASSETS $ 56,306,000 $ 21,472,000
=================================
CURRENT LIABILITIES:
Payable to Genentech $ 858,000 $ 260,000
Accounts Payable 258,000 1,483,000
Accrued Liabilities 2,688,000 331,000
Current Portion of Long Term Obligations 31,000 --
---------------------------------
TOTAL CURRENT LIABILITIES 3,835,000 2,074,000
LONG TERM OBLIGATIONS 94,000 --
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value. 20,000,000 shares
authorized; none issued or outstanding -- --
Common Stock, $0.01 par value. 20,000,000 shares
authorized; 11,250,152 and 7,101,248 shares issued
and outstanding at September 30, 1999 and
December 31, 1998, respectively 113,000 71,000
Additional Paid-In Capital 86,424,000 33,619,000
Deferred Stock Compensation (2,433,000) --
Accumulated Other Comprehensive Income -
Unrealized Gain on Investment Securities 229,000 43,000
Deficit Accumulated During the Development Stage (31,956,000) (14,335,000)
---------------------------------
TOTAL STOCKHOLDERS' EQUITY 52,377,000 19,398,000
---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,306,000 $ 21,472,000
=================================
</TABLE>
See accompanying notes to condensed financial statements.
1
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VAXGEN, INC.
(A Development Stage Enterprise)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
QUARTER QUARTER NINE NINE INCEPTION
Ended Ended Months Ended Months Ended (11/27/95) to
9/30/99 9/30/98 9/30/99 9/30/98 9/30/99
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT:
Genentech Charges $ 424,000 $ 127,000 $ 819,000 $ 437,000 $ 5,286,000
Other 5,238,000 1,900,000 12,077,000 3,394,000 19,273,000
-------------------------------------------------------------------------------
TOTAL RESEARCH AND DEVELOPMENT 5,662,000 2,027,000 12,896,000 3,831,000 24,559,000
GENERAL AND ADMINISTRATIVE:
Genentech Charges -- -- -- -- 20,000
Other 1,145,000 864,000 5,948,000 2,504,000 10,471,000
-------------------------------------------------------------------------------
TOTAL GENERAL AND ADMINISTRATIVE 1,145,000 864,000 5,948,000 2,504,000 10,491,000
LOSS FROM OPERATIONS (6,807,000) (2,891,000) (18,844,000) (6,335,000) (35,050,000)
OTHER INCOME (EXPENSE), NET:
Investment Income, net 711,000 234,000 1,229,000 803,000 3,147,000
Interest Expense - Genentech -- -- -- -- (47,000)
Interest Expense - Other (5,000) -- (6,000) -- (6,000)
-------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE), NET 706,000 234,000 1,223,000 803,000 3,094,000
-------------------------------------------------------------------------------
NET LOSS $(6,101,000) $(2,657,000) $(17,621,000) $(5,532,000) $(31,956,000)
===============================================================================
BASIC AND DILUTED LOSS PER SHARE $ (0.55) $ (0.43) $ (2.00) $ (0.91)
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED LOSS PER SHARE 11,156,000 6,115,000 8,831,000 6,111,000
===============================================================================
</TABLE>
See accompanying notes to condensed financial statements.
2
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VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE NINE INCEPTION
Months Ended Months Ended (11/27/95) to
9/30/99 9/30/98 9/30/99
---------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (17,621,000) $ (5,532,000) $ (31,956,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and Amortization 323,000 28,000 422,000
Amortization of Premiums/(Discounts) on Investment Securities 186,000 104,000 (197,000)
Stock Compensation Expense 3,124,000 -- 3,124,000
Changes in Assets and Liabilities:
Interest Receivable (200,000) 64,000 (312,000)
Prepaid Expenses and Other Current Assets (984,000) (114,000) (1,344,000)
Other Assets 3,000 (48,000) (159,000)
Payable to Genentech 598,000 (3,650,000) 858,000
Accounts Payable and Accrued Liabilities 1,132,000 334,000 2,946,000
---------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (13,439,000) (8,814,000) (26,618,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investment Securities (48,148,000) (8,629,000) (102,705,000)
Sale of Investment Securities 9,767,000 21,367,000 52,100,000
Purchase of Property and Equipment (1,685,000) (781,000) (3,034,000)
Long Term Lease Deposits -- -- (120,000)
---------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (40,066,000) 11,957,000 (53,759,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments Under Capital Lease Obligations (13,000) -- (13,000)
Stock Issued to Genentech -- -- 1,025,000
Stock Issued to Other Founders -- -- 20,000
Stock Issued in Private Placements 5,537,000 40,000 40,154,000
Stock Issued in Initial Public Offering 46,345,000 -- 46,345,000
Issuance Costs of Private Placements (264,000) (26,000) (3,276,000)
Issuance Costs of Initial Public Offering (4,328,000) -- (4,328,000)
Exercise of Employees Stock Options -- -- 40,000
Loans from Genetech -- -- 1,000,000
---------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,277,000 14,000 80,967,000
---------------------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (6,228,000) 3,157,000 590,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,818,000 641,000 --
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 590,000 $ 3,798,000 $ 590,000
===================================================
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:
Issuance of Stock through Conversion of Genetech Note Payable $ -- $ -- $ 1,000,000
Equipment Acquired through Capital Leases $ 138,000 $ -- $ 138,000
</TABLE>
See accompanying notes to condensed financial statements.
3
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VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed financial statements of VaxGen, Inc. (the "Company")
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information or
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of the Company,
the accompanying unaudited condensed financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial information included therein. While the Company
believes that the disclosures are adequate to make the information not
misleading, it is suggested that these financial statements should be read in
conjunction with the Company's audited financial statements contained in its
registration statement declared effective on June 29, 1999.
2. NON-CASH COMPENSATION
The Company recorded non-cash compensation expense of $2,360,000 in the second
quarter in connection with the resolution of two employment-related matters.
This expense consists of the fair market value of the warrants issued to one
individual and compensation expense resulting from extending the expiration date
of options issued to another individual.
On April 1, 1999, the shareholders of the Company approved an increase in the
number of shares reserved for grant under the Company's 1996 Stock Option Plan
to 1,750,000 shares. This represents the measurement date for stock options
granted to employees earlier in 1999 and in 1998, which were granted subject to
stockholder approval of the plan amendment. As a result, the Company recorded
deferred compensation in the amount of $3,223,000, representing the excess of
fair market value of the common shares on April 1, 1999, $13.00 per share, over
the exercise price of the options on the date stockholder approval was obtained.
The Company has recorded charges to non-cash compensation expense of $765,000
for the portion of the vesting period lapsed at September 30, 1999. The balance
of deferred compensation is being amortized to expense over the remaining
vesting period of the options.
4
<PAGE> 7
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
3. SUBSEQUENT EVENTS
In October 1999, the Company entered into a definitive agreement with Vulcan
Ventures, Inc. ("Vulcan") for a private placement of common stock. This will
enable the Company to commence development of AIDSVAX vaccines designed to
prevent infection by the other known major subtypes of HIV, including those
found in Africa, China, India and South America. Currently, the Company has
developed formulations of AIDSVAX, which focus on the predominant HIV type in
the Americas, Europe, the Caribbean, and Australia (subtype B) and the
predominant HIV subtype in Southeast Asia and Pacific Rim countries (subtype E).
Vulcan is the investment organization of Paul G. Allen, Chairman of Vulcan and
co-founder of Microsoft Corporation. The private placement consists of 2,174,000
shares of common stock at $11.50 per share, and will result in proceeds, net of
commissions and private placement expenses, to the Company of approximately
$24,000,000. The funds are being held in escrow subject only to meeting certain
closing conditions.
4. LOSS PER SHARE
Excluded from the computation of basic and diluted loss per share, were stock
options and warrants outstanding totaling 2,000,096 and 660,018 as of September
30, 1999 and September 30, 1998, respectively, because the representative share
increments would be antidilutive.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with our condensed
financial statements and related notes thereto appearing in Item 1 of this
report. In addition to historical information, this report contains
"forward-looking statements" that are within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, and that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The words "believe", "expect", "intend",
"anticipate", and similar expressions are used to identify forward-looking
statements, but their absence does not mean that such statement is not
forward-looking. Many factors could affect the Company's actual results,
including those factors described under "Risk Factors" and "Business" contained
in the Company's registration statement declared effective June 29, 1999. These
risk factors, among others, could cause results to differ materially from those
presently anticipated by the Company. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date of this report or to reflect the
occurrence of anticipated events.
OVERVIEW
In November 1995, VaxGen was formed to continue development of AIDSVAX 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 have
developed formulations of AIDSVAX, which focus on the predominant HIV subtype in
the Americas, Europe, the Caribbean, and Australia (subtype B) and the
predominant HIV subtype in Southeast Asia and Pacific Rim countries (subtype E).
We have commenced two Phase III clinical trials, one principally in North
America and one in Thailand to determine the efficacy of AIDSVAX. We recently
completed the initial inoculation and enrollment of over 5,400 trial volunteers
for the North American Phase III clinical trial, which is being conducted in 61
clinical centers. The Thai Phase III clinical trial is being conducted in 17
clinical centers in Bangkok and is designed for 2,500 trial volunteers.
To date, we have generated no operating revenues. We anticipate only modest
revenues from government or other grants or from collaborations with other
entities over the next three to 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 September 30, 1999, we had a
deficit accumulated during the development stage of
6
<PAGE> 9
$31,956,000. 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.
We believe that our current resources, together with anticipated funding from
the Centers for Disease Control and Prevention (the "CDC") and the National
Institute for Allergy and Infectious Diseases ("NIAID") along with the net
proceeds from the private placement with Vulcan Ventures, Inc. 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:
o The progress of our Phase III clinical trials;
o The progress of other internal research and development projects;
o The need for leasehold improvements to facilities and the purchase of
additional capital equipment;
o The availability of government research grants; and
o The timing of revenue, if any, from AIDSVAX.
In the future, we may have additional non-cash compensation expense based on
employment agreements we have with three of our executive officers. Our
employment agreements with these officers provide for issuance of an aggregate
of 325,757 shares of common stock if:
o Our stock trades at an average price of $28.00 per share over a 30-day
period; or
o We are acquired in a transaction at a price greater than $28.00 per share.
If the shares are issued, we will record non-cash compensation expense equal to
the aggregate value of shares on the date the $28.00 per share condition is met.
On April 1, 1999, the shareholders of the Company approved an increase in the
number of shares reserved for grant under the Company's 1996 Stock Option Plan
to 1,750,000 shares. This represents the measurement date for stock options
granted to employees earlier in 1999 and in 1998, which were granted subject to
stockholder approval of the plan amendment. As a result, we recorded deferred
compensation, representing the excess of fair market value of the common shares
on April 1, 1999, $13.00 per share, over the exercise price of the options on
the date stockholder approval was obtained. We will continue to incur non-cash
compensation expense as the balance of deferred compensation is being amortized
to expense over the remaining vesting period of the options.
7
<PAGE> 10
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 237% from $3,831,000 for the nine
months ended September 30, 1998 to $12,896,000 for the nine months ended
September 30, 1999. The increase in research and development expenses was due
primarily to the ramping up of our North American and Thai Phase III clinical
trials. These expenses consisted principally of the cost for additional
personnel, recruiting costs for the enrollment of the clinical trials, non-cash
compensation expense related to vesting of stock options, the establishment of a
new research laboratory facility, and increases in the fees paid to third
parties associated with conducting the clinical trials.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 138% from $2,504,000 for the nine
months ended September 30, 1998 to $5,948,000 for the nine months ended
September 30, 1999. The increase in general and administrative expenses was due
primarily to non-cash compensation expense for the issuance of warrants and
modification of the terms of options in connection with resolving two employment
matters, salaries and benefits associated with additional personnel hired to
support the growing infrastructure, and costs associated with maintaining larger
office facilities.
OTHER INCOME, NET
Other income, net, consisting primarily of interest income, increased by 52%
from $803,000 for the nine months ended September 30, 1998 to $1,223,000 for the
nine months ended September 30, 1999. This was primarily attributed to higher
average balances of cash, cash equivalents and investment securities as a result
of funds received from the public offering completed during the third quarter.
NET LOSS
Net loss for the nine months ended September 30, 1999, was $17,621,000 compared
to a loss of $5,532,000 for the nine months ended September 30, 1998. The
increase in net loss was due to the increase in expenses as noted above.
8
<PAGE> 11
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 179% from $2,027,000 for the three
months ended September 30, 1998 to $5,662,000 for the three months ended
September 30, 1999. The increase in research and development expenses was due
primarily to the ramping up of the North American and Thai clinical trials.
These expenses included the cost for additional personnel, recruiting costs for
the enrollment of the clinical trials, non-cash compensation expense related to
vesting of stock options, the establishment of a new research laboratory
facility and increases in the fees paid to third parties associated with
conducting the clinical trials.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 33% from $864,000 for the three
months ended September 30, 1998 to $1,145,000 for the three months ended
September 30, 1999. The increase in general and administrative expenses was due
primarily to additional personnel hired to support the growing infrastructure,
and costs associated with maintaining larger office facilities.
OTHER INCOME, NET
Other income, net, consisting primarily of interest income, increased by 202%
from $234,000 for the three months ended September 30, 1998 to $706,000 for the
three months ended September 30, 1999. This was primarily attributed to higher
average balances of cash, cash equivalents and investment securities as a result
of funds received from the public offering completed during the third quarter.
NET LOSS
Net loss for the three months ended September 30, 1999, was $6,101,000 compared
to a loss of $2,657,000 for the comparable period in 1998. The increase in net
loss was due to the increase in expenses as noted above.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities were $51,621,000 at September
30, 1999. We have financed our operations since inception through capital
provided by Genentech and sales of our common stock. Genentech has no obligation
to provide future funding to the Company. During the three months ended
September 30, 1999, we received $42,017,000, net of underwriters' fees and other
offering expenses, from the offering of 3,565,000 shares of common stock,
including the exercise of the underwriters'
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over-allotment option. In the nine months ended September 30, 1999, we received
net proceeds of $5,273,000 from private placement financing activities, all of
which were completed prior to the initial public offering.
In October 1999, we entered into a definitive agreement with Vulcan Ventures,
Inc. for a private placement of common stock. The private placement
will result in net proceeds of approximately $24,000,000, which will enable us
to commence development of AIDSVAX vaccines designed to prevent infection by the
other known major subtypes of HIV. The funds are being held in escrow subject
only to meeting certain closing conditions.
Since our inception, investing activities, other than purchases and sales of
investment securities, have consisted entirely of equipment acquisitions and
leasehold improvements. From inception through September 30, 1999, our
investment in equipment and leasehold improvements was $3,034,000. The increase
in equipment and leasehold improvements has been primarily due to the
development of our research and development laboratory and the establishment of
larger office facilities. Net cash used for operating activities for the nine
months ended September 30, 1999 was $13,439,000 representing expenditures for
research and development costs and general and administrative expenses.
The CDC has agreed to pay $8,000,000, over the next four years, to five of the
56 clinics in the United States currently conducting Phase III clinical trials
of our AIDSVAX vaccine. These payments are intended to support research related
to the clinical trials at these sites. The funds from the CDC would cover
clinical costs at the selected sites, which we would otherwise have been
obligated to pay. The contract with the CDC requires each participating site to
continue to implement our Phase III protocol, as well as conduct additional
research. Any data resulting from the additional research would be shared by the
CDC and us.
We anticipate receiving approximately $4,600,000 from NIAID, which will be used
to fund research costs and costs associated with obtaining and storing clinical
specimens. These funds would be received as reimbursements for expenses to be
incurred over the duration of the clinical trials. The timing and procedures for
payment are to be determined pursuant to further discussions with NIAID.
We believe that our existing cash and cash equivalents, investment securities,
net proceeds of the private placement with Vulcan Ventures, Inc., investment
income and anticipated grant and contract revenue, will enable us to meet our
forecasted expenditures over the next three years, including, among other
things:
o supporting our clinical trial efforts;
o continuing internal research and development;
o expanding our facilities; and
o maintaining our management and administrative infrastructure necessary to
function effectively as an independent publicly-owned company.
10
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Our exposure to market rate changes are related primarily to our debt securities
included in our investment portfolio. We do not have any derivative financial
instruments. By policy, we invest in debt instruments of the U. S. Government
and high-quality corporate issuers, limit the amount of credit exposure to any
one issuer, limit duration by restricting the term, and hold investments to
maturity except under rare circumstances. Investments in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate risk.
Fixed rate securities may have their fair market value adversely impacted due to
a rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell securities, which
have declined in market value due to changes in interest rates. At September 30,
1999, we held government debt instruments in the principal amount of
$23,534,000. If market interest rates were to increase immediately and uniformly
by 10% from levels at September 30, 1999, the fair value of our portfolio would
decline by an immaterial amount. Our exposure to losses as a result of interest
rate changes is managed through investing primarily in securities that mature in
a period of one year or less.
Our exposure to foreign exchange rate risk is primarily related to our
conducting clinical trials in Thailand. Thailand is currently considered an
emerging economy. A sudden decrease in Thailand's currency exchange rate versus
the U.S. Dollar could have an adverse impact on our expenses. The majority of
our contracts associated with conducting clinical trials in Thailand are priced
in Baht. At the time these contracts were written, the Thailand exchange rate
was 37.5 Baht per one U. S. Dollar. As of September 30, 1999, we have incurred
$27,000 in foreign exchange losses. We are currently hedging our foreign
currency exposure in Thai Baht by purchasing forward foreign exchange contracts.
We anticipate that we will not record any material foreign exchange gains or
losses due to transactions in Thai Baht in the fourth quarter of 1999.
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 three months computer systems and software
used by many companies may need to be upgraded to be Year 2000 compliant.
Because we have been in business for a relatively short time, our exposure to
the Year 2000 issue is limited in comparison to more established companies.
Based on a recently completed assessment, we believe that we will not be
required to undertake any major activities or incur any significant costs
related to the Year 2000 issue. We completed our assessment phase in the first
quarter of 1999 and finished the remediation phase in the third quarter of 1999.
During the assessment phase, we assessed our key financial and operating
systems, data management systems, biostatistical systems, desktop computers
11
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and network hardware/software for Year 2000 compliance. The assessment included
identifying all critical information technology systems and non-information
technology critical systems on which we rely and testing Year 2000 compliance of
such systems. Upon completion of our assessment and remediation, we concluded
that substantially all our systems are Year 2000 compliant. We presently
estimate that the total cost of addressing any Year 2000 problems will be less
than $5,000. We are on schedule to complete our internal Year 2000 compliance
plan before year-end.
Based on the 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. We are also monitoring information about
the Year 2000 compliance status of our outside suppliers and other third parties
with which we have relationships. To date, we are not aware of any outside
supplier or other third party with a Year 2000 issue that would materially
impact our business operations. However, there can be no assurance that our
outside suppliers and other third parties will be successful in their Year 2000
compliance efforts.
We believe that the most reasonable worst-case scenario arising from the Year
2000 issue is impact to our operations resulting from non-compliant systems of
third parties. Where needed, we will establish formal and informal contingency
plans based on results of our evaluation and assessment of our internal
operations risks and risks associated with external third parties. We anticipate
the majority of our contingency plans to be in place during the fourth quarter
of 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the caption "Liquidity and Capital Resources" in Part I,
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings or claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's Registration Statement under the Securities Act of 1933 (File No.
333-78065) became effective June 29, 1999. Offering proceeds, net of aggregate
expenses of approximately $4,300,000, were approximately $42,000,000. All of the
expenses related to the offering were direct or indirect payments to others and
not payments to our directors or officers (or their associates) or to our
affiliates or 10% shareholders. The Company has invested the entire net proceeds
from the offering in short-term investments such as commercial paper,
government obligations and high quality corporate debt instruments. The Company
has not used any of the net offering proceeds for construction of plant,
building or facilities, purchases of real estate, acquisition of other
businesses or repayment of indebtedness.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
13
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 and Regulation S-K:
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 of Amendment No. 2 to the Company's
Registration Statement on Form S-1, filed June 25, 1999, File
No. 333-78065).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 of Amendment No. 2 to the Company's Registration
Statement on Form S-1, filed June 25, 1999, File No.
333-78065).
10.1 VaxGen, Inc. Amended and Restated 1996 Stock Option Plan
(incorporated by reference to Exhibit 99.1 of the Company's
Registration Statement on Form S-8, filed August 17, 1999, File
No. 333-85391).
10.2 Amended and Restated Employment Agreement between VaxGen, Inc.
and Donald P. Francis (incorporated by reference to Exhibit
99.3 of the Company's Registration Statement on Form S-8, filed
August 17, 1999, File No. 333-85391).
10.3 Amended and Restated Employment Agreement between VaxGen, Inc.
and Robert C. Nowinski (incorporated by reference to Exhibit
99.4 of the Company's Registration Statement on Form S-8, filed
August 17, 1999, File No. 333-85391).
10.4 Amended and Restated Employment Agreement between VaxGen, Inc.
and Phillip W. Berman (incorporated by reference to Exhibit
99.5 of the Company's Registration Statement on Form S-8, filed
August 17, 1999, File No. 333-85391).
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information purposes
only and is not deemed filed.
(b) Reports on Form 8-K:
None.
14
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VaxGen, Inc.
(Registrant)
Dated: November 10, 1999 By: /s/ Carter A. Lee
--------------------------------
Carter A. Lee
Senior Vice President
Finance & Administration
(Principal Finance Officer)
15
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