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Archive for August, 2009

Axcelis Technologies Inc (NASDAQ:ACLS) has filed its 10Q for the period ended June 30, 2009.

We started following ACLS on January 8 this year (see our post archive here) because it is an undervalued asset play with an activist investor, Sterling Capital Management, holding 10.7% of its outstanding stock. ACLS has completed the sale of its 50% interest in SEN Corporation, its joint venture with Sumitomo Heavy Industries, Ltd. (SHI) to SHI for proceeds of $122.3 million. ACLS received around $35.9M in cash after applying $86.4M of the proceeds to meet obligations to the holders of the company’s 4.25% Convertible Senior Subordinated Notes, upon which ACLS defaulted in January. We last estimated ACLS’s liquidation value at around $117.8M or $1.14 per share. Following our review of the 10Q, we’ve reduced our estimate to $113.6M or $1.10, which is around 80% higher than its $0.60 close yesterday. Cash burn is a significant issue for ACLS. At the current rate of cash burn, we estimate the company has around six months before its liquidation value meets its current price, and around a year before it’s worthless.

The value proposition updated

During the three months ended June 30, 2009, ACLS continued to burn cash in its operations, which it attributes to the depressed semiconductor equipment market and the resultant decline in revenues. Cash and cash equivalents at June 30, 2009 were $56.8M, compared to $71.2M at March 31, 2009. The company attributes the $21.4M decrease in cash and cash equivalents to the cash used in operations and payments of fees and other costs associated with the sale of the investment in SEN. The company anticipates net cash outflows from operations in the remainder of 2009. Set out below is our adjusted balance sheet for ACLS (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

ACLS Summary 2009 6 30

We’ve been quite kind to ACLS by assuming only $50M of cash burn over the next twelve months. On its current form, $80M would have been closer to the mark. We’re assuming management takes some action to staunch the flow, but an assumptions like that might make us look like fools.

Conclusion

ACLS has made substantial operating losses over the last two years, and it is likely to be continue to do so. While its liquidation value of around $113.6M or $1.10 per share is more than 80% higher than its close yesterday of $0.60, it is likely to deteriorate while it continues its operating losses. ACLS continues to be our problem child, and we don’t think there is any good news on the horizon near-term, but we find it difficult to exit the position while it’s trading at a such a large discount to its (albeit deteriorating) liquidation value. Accordingly, we’re going to hold on for the moment, and see how the position plays out. If we get an opportunity to exit at close to value, however, we’ll take it. If the position hasn’t improved by the next Q, we’re likely sellers.

[Full Disclosure:  We have a holding in ACLS. 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.]

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Updated.

Megan McArdle has written an article for The Atlantic, What Would Warren Do?, on Warren Buffett and the development of value investing, arguing that better information, more widely available, will erode the “modest advantage” value investors have over “a broader market strategy” and Warren Buffett’s demise will be the end of value investment. We respectfully disagree.

The article traces the evolution of value investing from Benjamin Graham’s “arithmetic” approach to Buffett’s “subjective” approach. McCardle writes that the rules of value investing have changed as Buffett – standard bearer for all value investors – has “refined and redefined” them for “a new era”:

When Benjamin Graham and David L. Dodd wrote the value-investing urtext, Security Analysis, in 1934, the rules were more hard-and-fast. Graham and Dodd looked for companies whose price was less than their intrinsic value, and offered various formulas for divining this value.

Buying stock in firms where the intrinsic value of the assets is higher than the market capitalization worked well in the depths of the Great Depression, when investors were wary of holding equity. Between 1929 and 1932, the Dow lost just about 90 percent of its value, bottoming out at 41.22. What economists call the “equity premium”—the extra return that investors demand to compensate for the risk of holding stocks—has never since been so high. That’s why Graham and Dodd could find companies whose liquidation value offered a substantial “margin of safety” for people who bought their equity.

Moreover, book value and other balance-sheet-based metrics have become less useful, as the market, and the economy, have changed. Persistent inflation means that the historical cost of the assets on the balance sheet in many cases bears only passing resemblance to their actual worth. Meanwhile, firms get more and more of their value from intangible assets, like intellectual property or strong brands, that don’t show up in the financial statements. Geico, one of Buffett’s crown jewels, gets much of its value not from physical equipment or even investment savvy, but from a sterling brand name built on relentless advertising.

McCardle says that the rules have changed so much that Graham’s approach no longer offers any competitive advantage:

Much of what Graham and Dodd did so well was simply hard coolie labor. In an era before spreadsheets or financial databases, they looked at company reports and painstakingly did the arithmetic to see where a company stood. That effort offers no competitive advantage in today’s information-saturated market. So while value investors still hew to the core notion of determining a company’s intrinsic value, waiting for the market to misprice the stock, and then buying on the cheap, nowadays that determination has much more of a subjective skill element.

As proof of this assertion, McCardle offers this:

Well, for starters, the market still hasn’t fallen to Graham-and-Dodd levels; most of the managers I talked to groused that they were finding few real bargains. The market was irrational enough to drag down their investment results, but too rational to offer stocks at deep discounts from intrinsic value. Meanwhile, many of their potential investors had just lost half their money.

Value investors love to deride academics and the efficient-market hypothesis, but they can’t deny that stock-screening tools and other analytics have taken away many of the best bargains. At least some managers have lost the will to wait patiently for superdeals and have taken on more risk to get more return. As we walked to dinner through the soft Omaha twilight, a fund manager I had encountered at a “meet and greet” suddenly said, “The only way to make money these days is leverage.”

And my dinner companion seemed to be saying that value managers couldn’t compete with other funds without taking at least some of those bets.

McCardle concludes with the following:

Right now, the academic literature suggests that value investing has a modest advantage over a broader market strategy. Better information, more widely available, may continue to erode that edge. But the principles of prudence, patience, and thrift will always, in the end, offer a better chance at outsize returns. The question is whether, once Saint Warren passes, his followers will find the courage to stick to them.

In response, we’d like to make the following observations:

Better information, more widely available, will not erode value’s edge

There are as many different styles of value investment as there are value investors, the uniting element being an adherence to the concept of “intrinsic value,” which is simply defined as a measure of value distinct from price. Many investors describing themselves as value investors have subtly different measures of intrinsic value, from liquidation value, to asset value, to earning power, to private market value and, if the fund manager McCardle met at the twlight “meet and greet” is an indication, some of the investors wearing the “value” badge do nothing of the sort. While investors of the same stripe often coalesce around the same opportunity, there are so many different perspectives that one type (say, the liquidation value investor) could easily sell to another (say, the earning power investor), and both could be right in their assessment of the intrinsic value of the stock, and have made money in the process. This means that diffusion of information won’t cause the value opportunities to disappear, because the interpretation of that information is the key step. As Shai points out in the comments with his Klarman quote, value investment is as much about attititude as it is about intellect or access to information. Being smart, having five screens and a Bloomberg terminal won’t get you close to Walter Schloss’ record, which he achieved with a borrowed copy of Value Line working 9.30am to 4.30pm.

Buffett has not rejected Graham, and has not redefined value

Graham’s contribution was to establish the value investment framework – the concept of intrinsic value – and to describe how one could operate successfully as an investor, most notably through the concept of margin of safety. Graham discussed a number of ideas about the manner in which intrinsic value could be assessed, and was so expansive in his teaching that he left very little ground uncovered for future value investors. It is a tribute to Buffett’s genius that he was able to find new ground within Graham’s framework, which he did by blending Phil Fisher’s philosophy with Graham’s. Buffett’s divergence from Graham’s methods was not, however, a rejection of Graham’s philosophy. Buffett has said on occassions too numerous to quote that he still works within Graham’s framework and has said that his change was a function of the increasingly large sums of capital he had to invest, and not a problem with Graham’s approach. In a June 23, 1999 Business Week article, Buffett said:

If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

When asked in 2005 what his approach would be if he had to invest less than $10M, Buffett still indicated that he preferred Graham style securities. That’s not a rejection of Graham’s investment philosophy, or his approach.

Don’t bother looking for Graham-style opportunities, they’ve disappeared

Leave them all for us. If there was ever an investment style that should suffer from too many practioners, Graham’s “net current asset value” proxy for liquidation value investing is it. NCAV investing is about as simple as investing gets, and a free screen is all that an investor requires to find NCAV opportunities. Yet our research demonstrates that even this strategy continues to outperform the market. We probably can’t run a multi-billion dollar portfolio on the basis of a simple NCAV screen, but we’ll cross that bridge when we get to it. For the average investor, investing in Graham-style NCAV opportunities is all we’ll ever need. You say those opportunities have disappeared? Have a look at the screens on our blogroll. There are plenty there. When those opportunities do disappear – and they will eventually – it won’t be because of all those supercomputers chasing them, it’ll be a function of valuation. Prices go up, and prices come down. When they’re up, it’s hard to find investable opportunities, and when they come down, it’s easier to do so. It has always been thus, and it will always be so. When there aren’t many opportunities around, that’s a signal from the market. It’s telling you to wait. As a friend of Greenbackd says, “Patience can be a bitter plant, but it has sweet fruit.”

There are other value practitioners who will carry the torch forward

Klarman, Tweedy Browne, Greenblatt, Tilson, Dreman, Gabelli, Miller, Price, Whitman, Pabrai, Biglari (please insert any names I’ve forgotten into the comments) and a host of others toiling away in obscurity will carry the torch forward. Value investment is in good hands.

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Avigen Inc (NASDAQ:AVGN) has filed its 10Q for the period ended June 30, 2009.

One interesting aspect of the 10Q is the cost the company attributes to responding to the proxy fight and hostile tender offer:

Operating Activities. Net cash used in operating activities was $8.2 million during the six months ended June 30, 2009. Net cash used in operating activities during this period was primarily used to fund costs associated with our response to a proxy fight and hostile tender offer, and winding down clinical research and development activities, including non-clinical studies and clinical trials performed by third parties.

$8.2M? That’s $0.27 per share! Granted, some of it went to other activities, but presumably costs associated with “response to a proxy fight and hostile tender offer” was the larger portion of the $8.2M and that’s why it was listed first. It’s galling what directors are allowed to spend fighting off shareholders.

We started following AVGN in December last year (see archived posts here) because it was a net cash stock and specialist biotechnology investor Biotechnology Value Fund (BVF) was pushing it to liquidate and return its cash to shareholders. Despite BVF’s failure to remove the board, we continued to maintain our position in AVGN because BVF won a number of important concessions from the board that made AVGN a much more attractive stock than it was when we started following it. AVGN is now back in negotiations with MediciNova, Inc. regarding a proposed acquisition by MediciNova. The consideration for the deal is AVGN’s “net cash liquidation value plus $3 million” and “a contingent payment right for a specific product program milestone payment associated with Avigen’s Assignment Agreement with Genzyme Corporation, potentially subject to certain adjustments.” The stock price reflects this: AVGN closed yesterday at $1.34, up 106.2% from our $0.65 purchase price. We last estimated the net cash liquidation value at around $34M or $1.14 per share. We’ve now updated our estimate to $35M or $1.17 per share. Including the $3M from MediciNova would increase that value to around $38M or $1.27per share. We believe that there is a reasonable chance that AVGN will yield more than its current $1.34 share price when the “contingent payment right” capturing the near term payments from Genzyme is taken into account. AVGN shareholders also have an option-like exposure to any value in AVGN’s AV411 assets and program, although we cannot estimate the value of this with any certainty.

The value proposition updated

Set out below is our adjusted balance sheet for AVGN (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

AVGN Summary 2009 6 30

Conclusion

While BVF’s slate was unsuccessful at the special meeting, AVGN’s board has developed its own plan of liquidation, which should put a floor on AVGN’s stock at around its net cash value of $34M or $1.14 per share less wind down costs. There exists a good chance that AVGN will yield considerably more than its net cash value. The net cash estimate does not take into account AVGN’s AV411 assets and program or near term payments from Genzyme. With the downside protected, and a good chance at some upside from here, we think AVGN still represents good value, and we’re going to maintain our position accordingly.

[Full Disclosure: We have a holding in AVGN. 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.]

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Steel Partners has increased its holding in CoSine Communications Inc (OTC:COSN) from 44.9% to 47.5% at an average purchase price of $1.97 per share according to the fund’s most recent 13D notice.

We’ve been following COSN (see our COSN post archive) because it is a cash box controlled by activist investor Steel Partners. Steel Partners own 47.5% of the stock and sits on the board. The stock is up 16% since our initial post to close Friday at $2.03. We estimate the net cash value to be around $22.2M or $2.20 per share. The net cash value has remained stable through 2006, 2007, 2008 and 2009. COSN presents an opportunity to invest alongside Steel Partners at a discount to net cash in a company with substantial NOLs.

Hat tip FF.

[Full Disclosure:  We do not have a holding in COSN. 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.]

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Two VaxGen Inc (OTC:VXGN) shareholders have sent a letter to the board of directors of the company claiming that the directors have failed in their fiduciary duties to shareholders. After reading the “list of grievances and imponderables over the actions of VaxGen’s Board and Management” laid out in the letter, you’ll find it hard to disagree. C. Fred Toney and Ruediger Naumann-Etienne, Ph.D., the authors of the letter, “seek an immediate change to the mode of operations and the composition of the Board” and implore the Board to make “drastic changes,” which include paying a $0.50 per share dividend. The letter is of epic, Tolstoyesque proportions, but we thoroughly recommend you read it if you hold stock in VXGN.

About our position in VXGN

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.” 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.

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 20.8% since we initiated the position. At its $0.58 close yesterday, it has a market capitalization of $19.2M. 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 the letter 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.

The letter from C. Fred Toney and Ruediger Naumann-Etienne, Ph.D.

Here is the press release announcing the letter (via CentreDaily):

July 14, 2009

Mr. Kevin L. Reilly

VaxGen Corporation

349 Oyster Point Blvd.

South San Francisco, CA 94080

VaxGen’s Board of Directors:

Kevin L. Reilly, Chairman

James P. Panek

Franklin M. Berger, CFA

Lori F. Rafield, Ph.D.

Paul DeStefano

Re: Letter from Shareholders of VaxGen Corporation

Dear Mr. Reilly and Members of the Board of Directors:

The current modus operandi is untenable. Although there are no agreements, arrangements or understandings with any other shareholders, it is clear that a substantial portion of the shareholders of VaxGen Corporation (“VaxGen” or the “Company”) oppose the actions of the Board of Directors (the “Board”). We seek an immediate change to the mode of operations and the composition of the Board. The Board and Management spend the Company’s valuable precious resources of cash every day, lavishly on themselves and to maintain some semblance of operations even though there has been no product development or business operations for more than 18 months. Furthermore, since March 2008, for 15 months the Company has purportedly sought out a partner, merger or sale, but after more than 60 Company Board and Committee meetings during 2008 alone and at least four offers of terms, none has been shared with the shareholders of the Company for consideration.

Worse yet, there appears to be no plan by the Board or Management to change the status quo and each day the Board, Management and others consume the remaining valuable resources. In short, that appears to be the plan.

As a brief overview, the Management and Board have embarked upon a failed merger that garnered virtually no support from its shareholders, and was opposed by ISS, and continued on that path until the date of the special shareholders meeting and scheduled vote, spending lavishly in a failed effort to close it; attempted to implement substantial new options to itself, a plan opposed by ISS and the shareholders, which was withdrawn; continually paid itself outrageous sums of the shareholders money over the past three years; rejected highly qualified outside board members with deep, broad healthcare company experience supported by its shareholders; held many Board and Committee meetings with nothing to show for it; formed a new Strategic Transactions Committee that is highly paid but that has produced no deals for the shareholders to consider or for any outside valuation experts to formally review; spent lavishly on accountants, auditors and counsel; failed to successfully hire any outside professional negotiators and finally extinguish or remove the outstanding lease obligations; distributed no cash to the shareholders despite holding excess amounts; formed no special purpose entity to hold any royalty and milestone rights and payments for the benefit of its shareholders; and thus generally failed in its fiduciary duties to shareholders.

The list of grievances and imponderables over the actions of VaxGen’s Board and Management in the past 24 months is long, and only partially reviewed in more depth here:

1) In 2007, the Board signed a letter of intent and announced its intentions to present to shareholders for a vote to merge with Raven biotechnologies inc. (“Raven”). There is no evidence ever shown to shareholders that validate any broad support for this merger at any time by any large percentage of shares owned. However, the Board and Management vigorously promoted and supported this merger; they went on road shows, held private and public meetings, and espoused the benefits of such a merger. Raven was a very early development stage biotechnology that had been in business for 9 years with little to show for it. It had burned through over $100 million of cash. It possessed one product candidate that had completed a Phase I clinical trial, and Raven, according to its public statements, intended to partner this candidate if it ever showed further positive clinical trial results. All other product development work being conducted by Raven involved preclinical (i.e. non-human) testing and this was the focus on the Raven presentation describing the company. In informal discussions with large VaxGen shareholders it was hard to find any one who supported the proposed transaction, yet the Board and Management continued to pursue it, preparing for a proxy vote in February or March 2008. Management publicly stated many times that they had the support of the shareholders for approval of the transaction, and maintained this position until the proxy vote was to be counted, making many public statements regarding the supposed broad support. On the morning of the special shareholders meeting and vote, March 28, 2008, Management and the Board decided to remove its recommendation for the merger since their was not sufficient support for such a transaction—in fact, the proxies for voting that had already been submitted overwhelmingly voted against the transaction as outlined by Management at that meeting. Management also indicated at that time that the Company would undertake the repayment of more than $5 million in bridge loans that had already been forwarded to Raven in cash. Raven, we understand but have not been able to definitely confirm, was subsumed into another biotechnology company for less than $10 million – a value that would have all but wiped out VaxGen’s shareholders’ value along with VaxGen’s cash and assets. While it cannot definitely be established, we are left to believe that a motivating factor of the proposed merger with Raven was the future management team of the combined companies that would have left many of the VaxGen Management in lucrative positions. Institutional Shareholder Services (“ISS”) issued its unbiased well-researched report publicly recommending a vote against the merger. Without broad support, Management and the Board continued to spend valuable resources to seek to gain approval for the Raven merger. The Company states, “the process of identifying, negotiating and seeking stockholder approval to the proposed Raven merger was time consuming and expensive. For example, we recorded $2.3 million of costs, primarily professional fees, related to the proposed merger with Raven, during the year ended December 31, 2008.” These do not include the Company’s remaining cash burn during this period of time, which we will see was, and remains, substantial.

2) Management and the Board added a second provision for shareholders to vote on in its proxy vote for the Raven merger—a new option pool that equated to 22% new dilution to VaxGen shareholders, not including any new dilution from the proposed Raven merger. ISS issued its unbiased well-researched report publicly recommending a vote against this proposal as well, citing the violation of the VaxGen articles of incorporation that limited any new option pool to a lower percentage in any year. Management and the Board had ignored that provision and sought out shareholder approval anyway, which was never brought to a formal vote as per the above events outlined.

3) To retain Management during the undertaking of the Raven merger and beyond, in 2008 alone, retention cash payments were made to the Company’s three chief officers totaling $388,000 (Panek, Pfeffer, Whitehead). Furthermore, total compensation of these three officers alone totaled $5.3 million in 2006-2008 ($1.9 million CEO, $1.7 million CFO, $1.6 million Corporate/Business Development); these figures exclude compensation and severance to the prior CEO, who resigned with large cash severances in 2007, and all other Management or Board Members.

a. The Company’s President & CEO (and Board Member) received a cash payment of $193,050 in 2009 and resigned his position as CEO but remains President and a Board Member still earning $193,050 annually and is eligible for severance payments. His total compensation in 2008 was $667,000 (including a $209,000 option award and a $58,500 bonus), in 2007 was $777,000 (including a $147,000 option award and a $230,500 bonus), and in 2006 was $487,000 (including a $79,000 option award and a $45,750 bonus).

b. Total compensation for the Senior Vice President & CFO in 2008 was $577,000 (including a $88,000 option award and a $400,979 cash severance), in 2007 was $754,000 (including a $280,000 option award and a $165,000 bonus), and in 2006 was $414,000 (including a $154,000 option award and a $41,250 bonus). After payout of a large severance, he was employed by another public biotechnology company in less than 30 days of resigning from VaxGen.

c. Total compensation for the Vice President, Corporate & Business Development in 2008 was $613,000 (including a $75,000 option award and a $377,737 cash severance), in 2007 was $544,000 (including a $60,000 option award and a $195,000 bonus), and in 2006 was $442,000 (including a $80,000 option award and a $40,000 bonus).

4) The Board of Directors annual compensation is similarly high for a company with no ongoing operations. In 2008, the compensation for only those members of the Board that are both compensated as members and still remained on the Board at year end (which includes four members and excludes the three members that resigned as well as the President & CEO who is not compensated as a Board member) aggregates to $552,623 (of which $44,665 was an option award and the remaining $508,000 was cash). Surprisingly, the cash compensation of these same Board members has increased for 2009 to $878,000, or 73%. A portion of this increase is a full year of service as compared to a partial year, but certain Board members actually received a substantial cash compensation increase—a raise—in August 2008. In fact, one Board member received a 60% raise and another received an 80% raise, both of which serve on the Strategic Transactions Committee and were already the two highest compensated members. In the most conservative accounting, for the entire compensation of the Board of Directors (7 compensated members during 2008) the cash portion was $612,597 in 2008 and is slated to be at minimum of $878,000 in 2009 (just 4 compensated members), a 37% aggregate increase.

5) The Board formally rejected a highly qualified Board candidate with broad healthcare and life science board of director experience, including the current Chairmanship of a public company and current service on two other public-company boards, who was strongly supported by major shareholders. The Board’s stated reasoning for rejection was a lack of biotechnology company experience, which appears irrelevant to this holding company at the time of rejection and in its current form.

6) The Board has apparently been very busy with little to show for it. There were 62 full Board or Board Committee meetings held just in 2008. Of these, 34 of them were full Board meetings, 13 were Audit Committee meetings, 8 were Compensation Committee meetings and 7 were Nominating and Governance Committee meetings. The Board’s Strategic Transactions Committee was formed to take advantage of the valuable assets of the Company to secure a transaction to create greater value for its shareholders. It only holds ad hoc meetings, so those meetings were not included in the totals above. However, despite all of these meetings (the expenses for which Board members are compensated), there have been zero transactions for the shareholders to consider or even discuss presented in the past 15 months.

7) The Strategic Transactions Committee currently receives annual compensation totaling $708,000, but at the same time this Committee has not produced any possible transactions scenarios to be made public to the shareholders over the past 15 months. Management stated publicly at the most recent annual shareholders meeting in December 2008 that 4 formal transactions had been proposed in the year between March and December 2008—the shareholders have not been made aware what those transaction terms are nor what outside valuation analyses were performed for the Board, as required. Rather, these transactions, as well as any others discussed since, have all been rendered not acceptable by the Board or Special Committee. The Board has determined that doing nothing has been better than any other alternative. The Board has stated that it initially only sought out biotech companies for interest; later it expanded this search to diagnostic and medical technology companies; but it never opened the search to all types of companies, without any viable reason for failing to do so. With cash and milestone/royalties as the sole assets of the Company, limiting the type of company sought out for a transaction appears wholly insufficient.

8) To our knowledge, the Board has not hired a professional lease termination negotiator (other than outside corporate counsel or real estate agency) in order to negotiate an end to the remaining lease obligations. This task was left primarily to the President whose training is in other areas of expertise. Consequently, nothing has been accomplished regarding the termination of its existing lease obligations to date, which remains problematic.

9) Presumably to maintain its status as a public company entity with no operating business, Management and the Board have deemed it necessary to spend $2.7 million in audit and tax fees in 2007, and continue this in 2008 by spending an additional $666,000. It continues to retain the same audit and tax accountants.

In spite of these actions, substantial value remains in VaxGen today, but it continues to be squandered quickly and surgically. The Company burned $2.2 million in cash during just the first three months of 2009. At this current rate the Company will burn $0.27 per share in cash just this year, which is more than 50% of the Company’s current market value. As of April 1, 2009, the Company has valuable assets remaining in its cash and cash equivalents, investment securities, assets held for sale, and restricted cash, which total $39.0 million ($37.9 million of Financial Assets, as defined by the Company); the Company has Current Liabilities of $0.7 million. The remaining other long-term liabilities are its lease obligations, which are approximately $2.4 million per year through 2013 and approximately $2.6 million per year thereafter until expiration in 2016.

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. The current trading price of the Company’s stock is $0.50 per share (and the 52 week range is $0.33-0.79)—this definitively implies no confidence in the current Board or Management to maximize the value of VaxGen for its shareholders as it spends the remaining assets.

In a tip to the possible plans of the current Management and Board, the Company states most recently that, “we may use some or all of our remaining resources, including available cash, while we seek to identify a strategic transaction; we may fail to identify an appropriate transaction…we may use a portion or all of our remaining resources seeking to identify and complete a strategic transaction, but ultimately be unable to do so. Even if completed, such a transaction may not provide us with a pipeline or return value to stockholders, and either outcome could cause our stockholders to lose some or all of their investment in our common stock.”

The shareholders of VaxGen implore the Board that drastic changes must now occur. In late 2008 assurance were given by Management to us that dramatic actions would be taken within a matter of two months, but this has not occurred. No longer can the status quo suffice and the outflow of the remaining cash be squandered in payments to the Management & Board or to any outside service providers.

We, as shareholders, owners of the business, demand that the Board take the following actions within the next 20 calendar days:

1) Each member of the Board of Directors, regardless of Committee participation or Chairmanship, immediately agree to lower total compensation to $1 per year per person, retroactive to January 1, 2009 or accept the resignation of each non-participating Board member in the new plan. Welcome at least two new board members ready to serve for $1 per year in total compensation, who are highly qualified to address the current situation and who are proposed and supported by the shareholders signing here.

2) Immediately hire at least one new highly qualified professional lease termination negotiator or mediator (other than Company’s outside counsel or outside commercial real estate firm) to resolve an exit to the remaining lease within 30 days.

3) Immediately establish a Special Purpose Entity (“SPE”) that will contain upon transfer all of the rights, royalties, milestones and other payments from Emergent Biosolutions (“EBS”) for the sale of the rPA product candidate, structured such that it could be dividended out to shareholders. Also, in agreement with the public comments at the most recent annual meeting by Management, file and make public the EBS contract and all of its terms without redactions so that the potential future cash payments may be precisely calculated by its owners.

4) Make no further cash payments for any retention, severance or exit, or otherwise of any kind, to any member of the Board or Management.

5) Immediately distribute a minimum of $0.50 per share in cash to shareholders in a Special Dividend—announce the form of plan within 10 days.

Management and the Board may spend additional precious cash and assets to defend its actions, but we sincerely do not wish them to do so, nor do we believe this is the best use of the Company’s resources. In summary, many of the prior actions of the Board and Management do not appear to be in the best interests of the shareholders of the Company, with whom your fiduciary responsibilities reside.

Change is inevitable, either through pursuing the shareholders’ interest as outlined herewith, or by changing the Board of Directors to represent the owners of VaxGen, its shareholders, who have been ignored too long. We are open to meeting with you at any time you are available to further discuss these or other topics. We can be reached to schedule a meeting at 415-495-1010.

Sincerely,

C. Fred Toney

VaxGen shareholder

Ruediger Naumann-Etienne, Ph.D.

VaxGen shareholder

cc: Pat McBaine – Gruber & McBaine Capital Management

Mark Boyer, Mitch Soboleski – ROI Capital

Evan McCulloch – Franklin Advisors

Jonathan Harris – Morgan Stanley Smith Barney

Robert Andreatta, Steve Krognes – Genentech, Inc.

Dan Weston – WestCap Management

Steven Bronson – BA Value Investors

David Sandberg – Red Oak Partners

Kalimah Salahuddin, Luke Evnin, Ph.D. – MPM Capital

Steve Schatz

Allan Reine

John Plexico, Tim Lynch – Stonepine Capital

Daniel Gold – QVT Financial

Hat tip bellamyj

[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.]

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OrthoLogic Corporation (NASDAQ:CAPS) has filed its 10Q for the quarter ended June 30, 2008.

We’ve been following CAPS (see our post archive here) because it trades below its net cash value and Biotechnology Value Fund (BVF) has a 13.42% holding. It’s an unusual holding for us because BVF’s holding is passive. CAPS is a development stage company that is spending its cash on the development and commercialization of two product platforms: AZX100 and Chrysalin® (TP508). Ordinarily, we wouldn’t touch a position like this with a ten-foot pole. We entered into it because we’ve had some success in the past with BVF, particularly with our AVGN position. As BVF’s holding in CAPS is passive, BVF seems to be punting on the return from the product platforms and doesn’t view this as a liquidation play. We’ve got no insight into the value of those product platform assets, so our holding in CAPS is tenuous. We’ll exit if the share price gets near the net cash value, or the cash burn reduces the net cash value to the share price. At CAPS’s $0.70 close yesterday, our position is up 16.7% since we initiated it. We last estimated CAPS’s net cash value at $43.8M or $1.07 per share. We’ve now adjusted that valuation to down $37.8 or $0.92 per share. At the current cash burn rate, we estimate that CAPS has six months before the cash burn reduces the net cash value to around the current share price.

The value proposition updated

The summary of our estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

CAPS Summary 2009 06 30Off-balance sheet arrangements and Contractual obligations

There is no discussion in the 10K about CAPS’s off-balance sheet arrangements. CAPS’s only contractual obligation disclosed in 10K is for the company’s Tempe, Arizona facility and is $1.3M through 2012.

Conclusion

At its $0.70 close Friday, CAPS is trading at 76% of our estimate of its $0.92 per share net cash value.  We’ll exit if the share price gets near the net cash value, or the cash burn reduces the net cash value to the share price. At the current cash burn rate, we estimate that CAPS has six months before the cash burn reduces the net cash value to around the current share price.

[Full Disclosure:  We do not have a holding in CAPS. 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.]

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Robert L. Chapman, Jr. recently resigned as Chief Executive Officer of EDCI Holdings Inc (NASDAQ:EDCI) to focus on Chapman Capital in what he says “may be the most dynamic passive investment environment of a lifetime.” In the announcement to the market, said Chapman in his inimitable style:

Having ablated and amputated certain incontinent expenditures, and set EDCI on a prudent, judicious course of balanced scrutiny of acquisition vs. recapitalization, in addition to orchestrating EDC’s Blackburn-Hannover consolidation plan, I avidly look forward to shifting all my attention to Chapman Capital and related investment portfolios during what may be the most dynamic passive investment environment of a lifetime.

We’ve written previously about Chapman’s fondness for “asset-rich companies with battered stock prices,” which sees him frequently operating in the universe of stocks trading below liquidation value. We think it’s a good sign for sub-liquidation value investors like us that Chapman is back.

Read the announcement here:

EDCI Holdings, Inc. Announces Resignation of Robert L. Chapman, Jr. as Chief Executive Officer

NEW YORK, July 2 /PRNewswire-FirstCall/ — EDCI Holdings, Inc. (Nasdaq: EDCI – News; “EDCI”), the holding company for Entertainment Distribution Company, Inc., the majority shareholder of Entertainment Distribution Company, LLC (“EDC”), a European provider of supply chain services to the optical disc market, today announced the resignation of Robert L. Chapman, Jr. as Chief Executive Officer. Mr. Chapman, who also has resigned from EDCI’s Board of Directors, had replaced Interim Chief Executive Officer Clarke H. Bailey, who himself now replaces Mr. Chapman as EDCI Chief Executive Officer and EDC Interim Chief Executive Officer, effective July 2, 2009.

Mr. Chapman commented, “When I accepted the invitation six months ago from EDCI and EDC’s Boards of Directors to lead these companies through the difficult industry and global recessionary environment that characterized the first half of 2009, I conceived and preached the mantra of ‘Don’t Burn It & Don’t Blow It’ as it related to preserving EDCI’s sacred cash holdings. Furthermore, the seemingly constant headwinds of operating in the disc manufacturing and distribution business, with Universal Music Group as EDC’s supermajority customer, required immediate countermeasures to bolster EDC’s liquidity and longevity. Having ablated and amputated certain incontinent expenditures, and set EDCI on a prudent, judicious course of balanced scrutiny of acquisition vs. recapitalization, in addition to orchestrating EDC’s Blackburn-Hannover consolidation plan, I avidly look forward to shifting all my attention to Chapman Capital and related investment portfolios during what may be the most dynamic passive investment environment of a lifetime.”

Horace Sibley, Chairman of EDCI’s Governance Committee, commented, “In the CEO position at EDCI and EDC, Bob has demonstrated the fortitude to make tough decisions to solve tough problems. Over just a few months, Bob has reformulated the culture and streamlined the cost structure in ways that should benefit both EDCI and EDC for years to come. While the Boards of both EDCI and EDC were disappointed to learn of Bob’s decision to re-focus all his energy on his investment business, there can be no doubt that Clarke Bailey, Chairman of the Board, is the ideal leader to whom the baton should be handed to serve as CEO once again.”

Mr. Chapman joined EDCI’s Board of Directors as an independent director in November 2007, and is the Managing Member of Chapman Capital L.L.C., an investment advisor focusing on activist investing and turnaround investing. Prior to founding Chapman Capital in 1996, Mr. Chapman co-managed the Value Group within Scudder Stevens & Clark, which followed employment with NatWest Securities USA and Goldman, Sachs & Co.

Mr. Bailey joined EDCI’s Board of Directors in December 1990. From September 2008 to January 2009, he served as EDCI’s Interim Chief Executive Officer, after serving as EDCI’s Chief Executive Officer from October 2003 to November 2006 and from December 1990 to March 1994. Mr. Bailey has served as Chairman EDCI’s Board of Directors since October 1999, following his service as EDCI’s Vice Chairman from November 1992 to June 1996. Currently, Mr. Bailey serves as a director on the Boards of Directors of both Iron Mountain Incorporated and ACT Teleconferencing, Inc.

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