Spencer Capital has filed preliminary proxy documents to remove the board of VaxGen Inc (OTC:VXGN). In the documents, Spencer Capital, which leads a group of investors calling themselves “Value Investors for Change,” call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:
VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.
We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.
VXGN has now also attracted the attention of BA Value Investors, which has disclosed an activist holding and called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”
VXGN is up 25.0% since we initiated the position. At its $0.60 close yesterday, it has a market capitalization of $19.9M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year ajudge VXGN’s liquidation value to be significantly higher at $2.12 per share:
Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.
Spencer Capital’s proxy solicitation is a welcome relief, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, or by Value Investors for Change.
The preliminary proxy statement sets out the Value Investors for Change group’s “Reasons for the solicition” thus:
Even though VaxGen does not have substantial operations, Value Investors for Change believes that the Company has valuable assets, consisting of cash and net operating loss carryforwards (“NOLs”). We believe these assets should be unlocked for the benefit of shareholders, rather than consumed over time by the current Board.
We do not believe the members of the current Board are acting in the best interests of stockholders. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. Instead, the Board has overseen the consumption of a large portion of the Company’s assets while paying itself exorbitant compensation. In addition, the Board’s interests are not aligned with the stockholders, as displayed by their miniscule equity stake in the Company.
Consumption of Assets
Since discontinuing its operations, the Company has consumed a significant amount of assets. According to its most recent quarterly report on Form 10-Q, since June 30, 2008, the Company’s assets have decreased by $31.7 million, or 45%. Since December 31, 2008, the Company’s assets have decreased by over $3.5 million, or 8.4%.
In addition, the Company recorded $3.6 million in general and administrative expenses during the six month period ended June 30, 2009. Much of this expense consisted of cash compensation to the Board.
Exorbitant Board Compensation
Despite the relatively simple task of overseeing a shell company and conducting an ordinary sale process, the Board has paid itself inordinately high compensation. The table below describes the principal executive officer’s 2009 cash compensation and the director cash compensation scheme for the VaxGen Board, as described in the Company’s 2008 annual report on Form 10-K:
(This table has been modified from the original to fit this space)
* Consists of $195,000 annual base salary for 25 hours per week employment and a $193,050 lump sum payment. The lump sum payment was approved by the Board in consideration for Mr. Panek’s agreement not to resign for “good reason” under his employment agreement.
** VaxGen announced in its quarterly report for the period ended June 30, 2009 that, effective September 1, 2009, it had disbanded the Strategic Transactions Committee and that, following its disbandment, Board members would no longer receive additional compensation for service thereon.
While it is difficult to envision the rationale for the high cash compensation awarded to the Chairman Kevin Reilly and Franklin Berger, the most excessive portion of the director compensation consisted of the payments to the non-employee members of the Strategic Transactions Committee. Beginning in May 2008, Board members Lori F. Rafield and Paul DeStefano received $20,000 per month and $15,000 per month, respectively, for service on the Strategic Transactions Committee, which was formed to identify, review and evaluate potential strategic transactions and alternatives. Within a few months, these directors increased their compensation to $32,000 and $27,000 per month, respectively. This compensation is extraordinarily excessive.
Insignificant Board Equity Ownership
The members of the Board hold very few shares of the Company’s common stock. Most of the Board’s beneficial ownership holdings consist of underwater stock options. The following table describes the stockholdings of the Board, as set forth in the 2008 annual report, excluding options.
This Board has failed to take the steps we believe are necessary to preserve and enhance stockholder value. We believe the actions taken by the Board indicate that they are more interested in acting in their own self-interest rather than in the best interests of stockholders.
Value Investors for Change urges you to vote FOR the Fund’s proposal to elect the Nominees on the enclosed WHITE proxy card, thereby ending this disregard for stockholder interests. Vote to elect a new slate of directors who are willing to stand up for the interests of all stockholders and work to maximize stockholder value.
The members of the Board hold very few shares of the Company’s common stock. Most of the Board’s beneficial ownership holdings consist of underwater stock options. The following table describes the stockholdings of the Board, as set forth in the 2008 annual report, excluding options.
Hat tip bellamyj and matt.jensen08.
[Full Disclosure: We have a holding in VXGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
[…] nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the […]
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[…] nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the […]
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What happens to the lease if the company were to liquidate? Who would assume the lease? Are we assuming the facility will be sold with the lease intact and that at worst the value of facility less lease is zero?
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[…] Inc (OTC:MRVC) is an activist play with Value Investors for Change – who recently filed proxy documents in relation to VXGN – seeking to replace the “current, ineffective board of directors” with a new […]
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Spencer is also involved in proxy at TRID where I believe they own no shares, good to have someone challenging the VXGN board but Spencer is not the strongest dissident group in the world…
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You all do know they only own 1000 shares? I wouldn’t say they have a vested interest in following this through.
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so what would their motivation be for spending the time to prep and send this proxy solicitation if they only have 1k shares?
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the compensation to the board is beyond excessive its almost criminal. hopefully Spencer Capital is successful. What a waste of $.
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The shareholders’ meeting is on December 27th.
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amazing compensation, i often wonder what sort of corruption even “earned” them that sort of pay for virtually zero work.
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Can’t wait to see these guys kicked out. Complete crooks.
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When is the annual meeting? I can’t find it.
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“Spencer Capital’s proxy solicitation is a welcome relief, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, or by Value Investors for Change.”
But won’t we have to wait until the annual meeting?
P.S. Your coverage of this has been singular. Thank You!
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Ha! I guess “soon” is a relative concept.
Thank you for the kind words.
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