<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21088
VICAL INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 93-0948554
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9373 Towne Centre Dr., Suite 100, San Diego, California 92121
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(Address of principal executive offices) (Zip code)
(619) 453-9900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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 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 .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
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Common Stock, $.01 par value 15,771,712
<PAGE>
VICAL INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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COVER PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of March 31, 1998, and December 31, 1997 . . . . . . . . . . . . . 3
Statements of Operations for the Three Months Ended March 31, 1998 and 1997. . . . . 4
Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997. . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . *
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . *
ITEM 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . *
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . *
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
EXHIBIT LIST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
* No information provided due to inapplicability of item.
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICAL INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 12,638,810 $ 12,157,149
Marketable securities - available-for-sale 32,548,039 33,397,482
Receivables and other 1,486,520 1,566,532
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Total current assets 46,673,369 47,121,163
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Property and Equipment:
Equipment 4,878,400 4,966,955
Leasehold improvements 1,558,554 1,587,554
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6,436,954 6,554,509
Less-accumulated depreciation and amortization (4,419,398) (4,334,224)
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2,017,556 2,220,285
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Patent costs, net of accumulated amortization 1,275,379 1,247,059
Other assets 137,011 102,500
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$ 50,103,315 $ 50,691,007
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,574,400 $ 1,424,603
Current portion of capital lease obligations 459,181 448,261
Current portion of notes payable 213,773 213,773
Deferred revenue - 178,261
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Total current liabilities 2,247,354 2,264,898
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Long-Term Obligations:
Long-term obligations under capital leases 821,656 911,794
Notes payable 213,773 320,660
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Total long-term obligations 1,035,429 1,232,454
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Stockholders' Equity:
Preferred stock, $0.01 par value--5,000,000 shares authorized--
none outstanding - -
Common stock, $.01 par value--40,000,000 shares authorized--
15,771,712 and 15,731,316 shares issued and outstanding
at March 31, 1998, and December 31, 1997, respectively 157,717 157,313
Additional paid-in capital 77,616,237 77,267,971
Accumulated other comprehensive income 23,303 24,028
Accumulated deficit (30,976,725) (30,255,657)
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Total stockholders' equity 46,820,532 47,193,655
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Total Liabilities and Stockholders' Equity $ 50,103,315 $ 50,691,007
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</TABLE>
See accompanying notes. 3
<PAGE>
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1998 1997
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<S> <C> <C>
Revenues:
License/royalty revenue $ 2,531,975 $ 324,880
Contract revenue 200,360 801,575
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2,732,335 1,126,455
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Expenses:
Research and development 3,094,838 2,794,434
General and administrative 967,066 896,590
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4,061,904 3,691,024
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Loss from operations (1,329,569) (2,564,569)
Interest income 651,725 610,077
Interest expense 43,224 47,716
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Net loss $ (721,068) $ (2,002,208)
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Net loss per share (basic and diluted--Note 2) $ (.05) $ (.13)
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Weighted average shares used in computing net loss
per share (Note 2) 15,753,191 15,422,895
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</TABLE>
See accompanying notes. 4
<PAGE>
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (721,068) $ (2,002,208)
Adjustments to reconcile net loss to net cash provided from
(used in) operating activities:
Depreciation and amortization 236,382 218,140
Change in operating assets and liabilities:
Receivables and other 80,012 (232,343)
Accounts payable and accrued expenses 149,797 (264,541)
Deferred revenue (178,261) (278,261)
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Net cash used in operating activities (433,138) (2,559,213)
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INVESTING ACTIVITIES:
Marketable securities 848,718 (247,579)
Capital expenditures (2,246) (311,891)
Deposits and other (5,511) 204,105
Patent expenditures (41,188) (40,911)
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Net cash provided from (used in) investment activities 799,773 (396,276)
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FINANCING ACTIVITIES:
Principal payments under capital lease obligations (126,757) (117,848)
Payments on notes payable (106,887) -
Issuance of common stock, net 348,670 114,777
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Net cash provided from (used in) financing activities 115,026 (3,071)
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Net increase (decrease) in cash and cash equivalents 481,661 (2,958,560)
Cash and cash equivalents at beginning of period 12,157,149 12,609,277
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Cash and cash equivalents at end of period $12,638,810 $ 9,650,717
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Supplemental Disclosure of Non-cash Investing and Financing Activities:
Equipment acquired under capital leases $ 47,539 $ 115,969
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</TABLE>
See accompanying notes. 5
<PAGE>
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Vical was incorporated in April 1987 and has devoted substantially all of
its resources since that time to its research and development programs.
The Company is currently focusing its resources on the development of its
direct gene transfer and related technologies.
BASIS OF PRESENTATION
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. The information at March 31, 1998, and for the
three month periods ended March 31, 1998 and 1997, is unaudited. In the
opinion of management, the information reflects all adjustments necessary
to make the results of operations for the interim periods a fair statement
of such operations. All such adjustments are of a normal recurring nature.
Interim results are not necessarily indicative of results for a full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. For a presentation including all disclosures required by
generally accepted accounting principles, these financial statements should
be read in conjunction with the audited financial statements for the year
ended December 31, 1997, included in the Vical Incorporated Form 10-K filed
with the Securities and Exchange Commission.
2. NET LOSS PER SHARE
Net loss per share (basic and diluted) for the three month periods ended
March 31, 1998 and 1997, has been computed using the weighted average
number of common shares outstanding during the period. Diluted loss per
share does not include any assumed exercise of stock options as the effect
would be antidilutive.
3. COMPREHENSIVE INCOME
The Company implemented Statement of Financial Accounting Standards No. 130
"Comprehensive Income" effective January 1, 1998. This statement requires
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Accordingly, in addition to reporting net income (loss) under
the current rules, the Company is required to display the impact of any
unrealized gain or loss on marketable securities as a component of
comprehensive income and to display an amount representing total
comprehensive income for each period presented. In interim financial
results, this information is allowed to be presented in the notes to the
financial statements. For the three month periods ended March 31, 1998 and
1997, other comprehensive loss was $725 and $117,436, respectively, and
total comprehensive loss was $721,793 and $2,119,644, respectively.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Vical was incorporated in April 1987 and has devoted substantially all of its
resources since that time to research and development programs. The Company is
focusing on the development of its direct gene transfer and related
technologies. Currently, the Company is developing cancer product candidates
primarily internally, while developing infectious disease vaccine product
candidates primarily in collaboration with corporate partners Merck & Co., Inc.
("Merck") and Pasteur Merieux Connaught ("PMC"), and developing product
candidates for metabolic disorders primarily in collaboration with corporate
partners Merck and Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPR"). To date,
the Company has not received revenues from the sale of products. The Company
expects to incur substantial operating losses for at least the next several
years, due primarily to expansion of its research and development programs and
the cost of preclinical studies and clinical trials. As of March 31, 1998, the
Company's accumulated deficit was approximately $31.0 million.
Vical has formulated ALLOVECTIN-7, a complex containing the gene encoding a
particular human histocompatibility antigen, HLA-B7, and a lipid material to
facilitate gene uptake. After direct injection of ALLOVECTIN-7 into a tumor,
the Company believes that the HLA-B7 gene will cause the tumor cells to produce
the HLA-B7 antigen. This gene expression may then trigger a potent cellular
immune response against the tumor cells.
Vical has conducted several Phase I/II clinical trials and a multi-center Phase
II clinical trial with ALLOVECTIN-7 in patients with advanced metastatic
melanoma and other cancers. The Company concluded, based on Phase I/II trial
results, that ALLOVECTIN-7 was well-tolerated, and that gene transfer and
expression were detectable in the majority of patients, with measurable tumor
shrinkage observed in 13 of 36 patients with advanced metastatic melanoma. The
Company believes Phase II results confirmed the potential efficacy of
ALLOVECTIN-7 in treating melanoma patients, particularly those in whom tumors
had not yet metastasized to internal organs.
In 1996, Vical commenced additional multi-center Phase II clinical testing of
ALLOVECTIN-7 in approximately 50 advanced melanoma patients. The Company
expects to initiate further clinical trials in 1998 to support product license
approval submissions.
Results from another Phase I/II trial of ALLOVECTIN-7 suggested potential
efficacy in certain patients with unresectable head and neck cancer. A
multi-center Phase II trial with ALLOVECTIN-7 in approximately 25 patients with
unresectable head and neck cancer began in September 1997.
Vical is developing its second gene-based product candidate, LEUVECTIN, also
intended for direct injection into tumor lesions of cancer patients. LEUVECTIN
contains a gene that encodes the potent immunostimulator IL-2 and a lipid
material to facilitate gene uptake. The Company expects that LEUVECTIN, when
injected into tumors, will cause the malignant cells to produce and secrete IL-2
in the vicinity of the tumor, stimulating the patient's immune system to attack
and destroy tumor cells. Because LEUVECTIN is designed to deliver IL-2 only at
the site of tumor lesions, the Company believes that it may provide similar
efficacy with fewer side effects than systemic IL-2 therapy.
Upon completion of Phase I/II clinical trials designed primarily to test the
safety of LEUVECTIN at varying dosage levels and to assess IL-2 gene transfer
and expression, the Company initiated additional multi-center Phase I/II
clinical testing of higher doses of LEUVECTIN in approximately 45 patients with
advanced
7
<PAGE>
melanoma, renal cell carcinoma, and soft-tissue sarcoma. Of the 11 renal cell
carcinoma patients initially evaluable in the LEUVECTIN trials, 2 patients
achieved objective clinical partial responses persisting for more than six and
nine months, respectively, and 2 achieved stable disease. Responses appear to
be dose-related, and no serious treatment-related adverse events were reported,
even at the highest doses tested. The Company expects to initiate further
clinical trials in renal cell carcinoma patients in 1998. In June 1997, the
Company initiated a Phase I/II clinical trial with LEUVECTIN in approximately 18
prostate cancer patients.
In collaboration with Dr. Ronald Levy of Stanford University Medical Center, the
Company is developing a naked DNA anti-idiotype vaccine, VAXID, against
low-grade non-Hodgkin's B-cell lymphoma. VAXID is a DNA plasmid that encodes
the patient-specific idiotype of the B-cell tumor immunoglobulin. The Company
believes that immunization of post-chemotherapy patients with VAXID could result
in the elimination of residual disease and the prevention of the relapse of
disease. In October 1997, a Phase I/II clinical trial of VAXID began at the
Stanford University Medical Center under the direction of Dr. Levy.
In July 1997, the Company and PMC began a Phase I clinical trial of an
experimental naked DNA vaccine against the parasite that causes malaria. The
Company and PMC sponsored the trial under their Research, Collaboration and
License Agreement. The trial was conducted by the U.S. Naval Medical Research
Institute and the U.S. Army Medical Research Institute of Infectious Diseases.
Preliminary results from approximately 20 human participants in the trial
indicate that the vaccine was well-tolerated and safe. Preliminary analysis of
specimens from trial participants suggested a good cellular immune response with
features that the physicians conducting the trial believe may be important in
preventing the disease.
In September 1997, the Company entered into an agreement granting Merck the
rights to use the Company's naked DNA technology to deliver certain growth
factors as potential treatments for a range of applications including
revascularization. In October 1997, the Company entered into an agreement
granting RPR an exclusive worldwide license to use the Company's patented naked
DNA gene delivery technology to develop certain gene therapy products for
potential treatment of neurodegenerative diseases which involve the loss of
nerve cell function. In November 1997, the Company entered into an agreement
granting Merck certain rights to develop and market therapeutic vaccines against
the human immunodeficiency virus and hepatitis B virus using the Company's
patented naked DNA technology. In February 1998, Vical entered into a license
agreement allowing Centocor, Inc. to use Vical's naked DNA technology to develop
gene-based vaccines for the treatment of certain types of cancer.
There can be no assurance that the Company's product candidates will prove to be
safe and effective in clinical trials or that any commercially successful
products will ultimately be developed by the Company.
This Form 10-Q contains, in addition to historical information, forward-looking
statements. When used in this discussion, the words "expects," "anticipated"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, including
whether the Company's product candidates will be shown to be safe or efficacious
in clinical trials, whether the Company's corporate collaborations will be
successful, and whether the Company's product candidates will ultimately be
successfully developed or receive necessary regulatory approvals and other
matters discussed in Item 1 under the caption "Risk Factors" in the Company's
Form 10-K for the year ended December 31, 1997, filed with the Securities and
Exchange Commission, which could cause actual results to differ materially from
those projected. These forward-looking statements speak only as of the date
hereof. The Company undertakes no obligation to update these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
8
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RESULTS OF OPERATIONS
Revenues were $2,732,000 for the quarter ended March 31, 1998. License revenue
consisted primarily of an initial payment of $2,000,000 from Centocor, Inc.
("Centocor") for a license agreement entered into in February 1998 allowing
Centocor to use the Company's technology to develop and market certain
gene-based vaccines for the potential treatment of certain types of cancer.
Additionally, Centocor paid the Company $200,000 for reimbursement of certain
patent costs under the license agreement. License revenue also included
$178,000 of amortization of deferred license revenue from the PMC and Merial
agreements, and royalty revenue of $153,000. 1998 contract revenue of $200,000
represented reimbursement from PMC of costs associated with the development of a
potential DNA-based malaria vaccine. Revenues for the quarter ended March 31,
1997, were $1,126,000 and consisted of amortization of deferred license revenue
of $178,000 derived from the PMC and Merial agreements, contract revenues
totaling $802,000 from PMC and a Department of Defense grant, and royalties
amounting to $147,000.
The Company's total operating expenses for the quarter ended March 31, 1998,
were $4,062,000 compared with $3,691,000 for the first quarter of 1997.
Research and development expenses increased to $3,095,000 for the three months
ended March 31, 1998, from $2,794,000 for the same period in 1997. This
increase in research and development expenses was generally due to increased
clinical trial costs and royalties due to the Wisconsin Alumni Research
Foundation on the license agreement signed with Centocor, partially offset by
lower spending on external research.
General and administrative expenses increased to $967,000 for the three months
ended March 31, 1998, from $897,000 for the same period in 1997. The increase
is attributable to increasing operational expenses within the administrative
area in support of the Company's expanding research and development activities.
Investment income increased to $652,000 for the quarter ended March 31, 1998,
from $610,000 for the same quarter of 1997, primarily as a result of higher
rates of return on investments.
Net loss per share (basic and diluted) for the three months ended March 31,
1998, was $.05 per share compared with a net loss per share of $.13 for the same
quarter of 1997. The Company expects to incur losses throughout the remainder
of 1998 and to report a net loss for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Vical has financed its operations primarily through private
placements of preferred stock, three public offerings of common stock, revenues
from collaborative agreements and the investment by Merck for shares of Vical
common stock. As of March 31, 1998, the Company had working capital of
approximately $44.4 million compared with $44.9 million at December 31, 1997.
Cash and marketable securities totaled approximately $45.2 million at March 31,
1998, compared with $45.6 million at December 31, 1997.
The Company expects to incur substantial additional research and development
expense including continued increases in personnel costs and costs related to
preclinical testing and clinical trials. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in its research and development programs, the scope and results of
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
cost of manufacturing and scale-up, and commercialization activities and
arrangements. The Company intends to seek additional funding through research
and development relationships with suitable potential corporate collaborators or
9
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through public or private financing. There can be no assurance that additional
funding will be available on favorable terms, if at all.
If additional funding is not available, Vical anticipates that its available
cash and existing sources of funding will be adequate to satisfy its operating
needs through 1999.
YEAR 2000 ISSUES
The Company is currently developing a plan to insure that its systems and
software infrastructure are Year 2000 compliant. Key financial, information and
operational systems will be assessed and plans will be developed to address
required systems modifications. Given the relatively small size of the
Company's systems and the predominantly new hardware, software and operating
systems, management does not anticipate any significant delays in becoming Year
2000 compliant. However, the Company is unable to control whether its current
and future strategic partners' systems are Year 2000 compliant. To the extent
that strategic partners would be unable to procure clinical materials or
services provided by the Company, or otherwise manage their clinical trials and
research and development activities, or to pay invoices owed to the Company, or
to the extent that suppliers are unable to manufacture and ship materials or
provide requested contract services, the Company's operations could be affected.
However, at this time management has no reason to believe that Year 2000 changes
will have a material impact on the Company's business, financial condition or
results of operations.
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
EXHIBIT 27 Financial Data Schedule
2. Reports on Form 8-K
None
11
<PAGE>
VICAL INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Vical Incorporated
Date: May 11, 1998 By: /s/ MARTHA J. DEMSKI
--------------------
Martha J. Demski
Vice President and
Chief Financial Officer
(on behalf of the registrant and
as the registrant's Principal
Financial and Accounting
Officer)
12
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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<S> <C>
1. Exhibit 27 Financial Data Schedule
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF OPERATIONS AND BALANCE SHEETS FOR THE THREE MONTHS ENDED MARCH 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,639
<SECURITIES> 32,548
<RECEIVABLES> 1,487
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,673
<PP&E> 6,437
<DEPRECIATION> 4,419
<TOTAL-ASSETS> 50,103
<CURRENT-LIABILITIES> 2,247
<BONDS> 1,035
0
0
<COMMON> 158
<OTHER-SE> 46,663
<TOTAL-LIABILITY-AND-EQUITY> 50,103
<SALES> 0
<TOTAL-REVENUES> 2,732
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,095
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> (721)
<INCOME-TAX> 0
<INCOME-CONTINUING> (721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (721)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
