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, 1999
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) 646-1100
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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, 1999
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Common Stock, $.01 par value 16,190,313
VICAL INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
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, 1999, and December 31, 1998............................3
Statements of Operations for the Three Months Ended March 31, 1999 and 1998...........4
Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998...........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............................................10
SIGNATURE.....................................................................................11
EXHIBIT LIST..................................................................................12
* No information provided due to inapplicability of item.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICAL INCORPORATED
BALANCE SHEETS
March 31,
1999 December 31,
(Unaudited) 1998
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ASSETS
Current Assets:
Cash and cash equivalents $ 9,817,013 $ 13,567,817
Marketable securities - available-for-sale 33,816,715 26,615,939
Receivables and other 2,364,335 1,432,711
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Total current assets 45,998,063 41,616,467
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Property and Equipment:
Equipment 5,049,508 5,139,944
Leasehold improvements 1,640,874 1,558,554
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6,690,382 6,698,498
Less--accumulated depreciation and amortization (5,083,086) (4,992,121)
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1,607,296 1,706,377
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Patent costs, net of accumulated amortization 1,443,922 1,387,936
Other assets 142,967 133,385
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$ 49,192,248 $ 44,844,165
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,861,662 $ 2,281,252
Current portion of capital lease obligations 478,005 473,466
Current portion of notes payable 213,773 213,773
Deferred revenue 1,183,334 250,000
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Total current liabilities 3,736,774 3,218,491
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Long-Term Obligations:
Long-term obligations under capital leases 651,200 747,807
Notes payable - 53,443
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Total long-term obligations 651,200 801,250
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Stockholders' Equity:
Preferred stock, $0.01 par value--5,000,000 shares authorized--
none outstanding - -
Common stock, $0.01 par value--40,000,000 shares authorized--
16,190,313 and 15,866,544 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 161,903 158,665
Additional paid-in capital 83,170,227 78,332,483
Accumulated other comprehensive income 17,353 69,440
Accumulated deficit (38,545,209) (37,736,164)
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Total stockholders' equity 44,804,274 40,824,424
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Total Liabilities and Stockholders' Equity $ 49,192,248 $ 44,844,165
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See accompanying notes.
3
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
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1999 1998
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Revenues:
License/royalty revenue $ 2,665,335 $ 2,531,975
Contract revenue 614,839 200,360
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3,280,174 2,732,335
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Expenses:
Research and development 3,614,228 3,094,838
General and administrative 1,012,942 967,066
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4,627,170 4,061,904
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Loss from operations (1,346,996) (1,329,569)
Interest income 571,174 651,725
Interest expense 33,223 43,224
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Net loss $ (809,045) $ (721,068)
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Net loss per share (basic and diluted--Note 2) $ (.05) $ (.05)
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Weighted average shares used in computing net loss per share
(Note 2) 15,952,678 15,753,191
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---------------- ---------------
See accompanying notes.
4
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
---------------------------------
1999 1998
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OPERATING ACTIVITIES:
Net loss $ (809,045) $ (721,068)
Adjustments to reconcile net loss to net cash provided from
(used in) operating activities:
Depreciation and amortization 242,647 236,382
Change in operating assets and liabilities:
Receivables and other (931,624) 80,012
Accounts payable and accrued expenses (419,589) 149,797
Deferred revenue 933,333 (178,261)
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Net cash used in operating activities (984,278) (433,138)
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INVESTING ACTIVITIES:
Marketable securities (7,252,863) 848,718
Capital expenditures (117,385) (2,246)
Deposits and other 19,418 (5,511)
Patent expenditures (78,750) (41,188)
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Net cash provided from (used in) investment
activities (7,429,580) 799,773
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FINANCING ACTIVITIES:
Principal payments under capital lease obligations (124,485) (126,757)
Principal payments on notes payable (53,443) (106,887)
Issuance of common stock, net 4,840,982 348,670
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Net cash provided from (used in) financing activities 4,663,054 115,026
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Net increase (decrease) in cash and cash equivalents (3,750,804) 481,661
Cash and cash equivalents at beginning of period 13,567,817 12,157,149
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Cash and cash equivalents at end of period $ 9,817,013 $ 12,638,810
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Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
Equipment acquired under capital leases $ 32,417 $ 47,539
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See accompanying notes.
5
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(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, 1999, and for the
three-month periods ended March 31, 1999 and 1998, 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, 1998, 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, 1999 and 1998, has been computed using the weighted average
number of common shares outstanding during the respective periods. 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, 1999 and
1998, other comprehensive loss was $52,087 and $725, respectively, and
total comprehensive loss was $861,132 and $721,793, respectively.
6
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 its research and development programs. The Company
is focusing its resources on the development of its direct gene transfer and
related technologies. The Company is developing its ALLOVECTIN-7, LEUVECTIN and
VAXID cancer product candidates internally, while developing vaccine product
candidates for infectious diseases primarily in collaboration with corporate
partners Merck & Co., Inc. ("Merck") and Pasteur Merieux Connaught ("PMC").
Vical and Centocor, Inc. have a license agreement allowing Centocor, Inc. to use
Vical's naked DNA technology to develop and market certain gene-based vaccines
for the potential treatment of certain types of cancer. The Company has an
agreement with Boston Scientific for the use of Vical's technology in
catheter-based intravascular gene delivery. Vical has an agreement with
Rhone-Poulenc Rorer to use its gene delivery technology to deliver certain
neurological proteins for neurodegenerative diseases. Vical also has agreements
with Pfizer Inc. for use of its technology for gene delivery of therapeutic
proteins in certain animal health applications and with Merial for use of its
technology for DNA vaccines in certain animal infectious disease targets.
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, 1999, the Company's accumulated deficit was approximately $38.5 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.
In May 1998, the Company initiated registration-supportive expanded Phase II
and Phase III multi-center clinical trials with ALLOVECTIN-7 in certain
patients with metastatic melanoma. Either or both of the pivotal trials could
support product registration if endpoints are achieved. Vical also has a
multi-center Phase II study underway with ALLOVECTIN-7 in patients with head
and neck cancer.
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.
In May 1998, the Company initiated a multicenter Phase II clinical trial using
LEUVECTIN in patients with metastatic renal cell carcinoma. In May 1999, data
were presented from a Phase I/II trial testing LEUVECTIN in patients with
prostate cancer. Based on this data, Vical intends to pursue additional clinical
development in prostate cancer.
In collaboration with Stanford University Medical Center, the Company is
conducting a Phase I/II clinical trial of VAXID, a naked DNA vaccine against
low-grade non-Hodgkin's B-cell lymphoma. VAXID contains a
7
gene that encodes the patient-specific idiotype (characteristic feature) of
cancerous B-cells. 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.
The National Cancer Institute (NCI) published data from a previous NCI clinical
trial indicating a 42 percent response rate in end-stage melanoma patients after
treatment with systemic IL-2 and a peptide-based vaccine using a modified gp100
protein developed at NCI. This Phase I/II study is being repeated at the
National Cancer Institute with a naked DNA version of the gp100 vaccine provided
by Vical.
Vical is collaborating with PMC and the U.S. Naval Medical Research Center
(NMRC) to develop a DNA vaccine against malaria. In July 1997, Vical and PMC
began a Phase I trial of an experimental vaccine against the parasite that
causes malaria. NMRC conducted the clinical trial with approximately twenty
volunteers. Trial results, reported in an October 1998 issue of SCIENCE,
indicated that subjects immunized with a potential malaria DNA vaccine
developed dose-related killer T-cell immune responses. As a result of these
data, further clinical development is planned.
In January 1999, Vical and Pfizer Inc. entered into a license and option
agreement granting Pfizer rights to use Vical's proprietary naked DNA
technologies to deliver therapeutic proteins for animal health applications. The
agreement resulted in a $1,000,000 license payment to Vical, a $6,000,000
investment in approximately 318,000 shares of Vical common stock at $18.87 per
share, and a commitment to fund Vical research for a total of $1,500,000 over
the next three years.
The Company's product candidates may not prove to be safe and effective in
clinical trials and no commercially successful products may 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, 1998, 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.
RESULTS OF OPERATIONS
Revenues of $3,280,000 were recorded for the quarter ended March 31, 1999. In
January 1999, Pfizer Inc. entered into a license and option agreement and a
stock purchase agreement with the Company. Under the terms of the agreements
Pfizer Inc. paid the Company $1,000,000 in license fees, $125,000 as an advance
for contract research and $6,000,000 for the purchase of approximately 318,000
shares of common stock at $18.87 per share, reflecting a 25% premium. The
license fee and the $1,200,000 premium on the purchase of stock were recognized
as revenue in the first quarter of 1999. License revenue also included
recognition of deferred license fees of $250,000 from the existing Merial
license agreement and royalty revenue of $215,000. In March 1999, the Company
received $1,100,000 from Merial for the extension to March 2000 of its option on
vaccine targets. This license fee will be recognized as revenue over the
twelve-month option period. In addition, for the quarter ended March 31, 1999,
the Company recognized net contract revenue of $615,000, primarily from a
contract entered into in September 1998 with the Office of Naval Research for
the development work on a potential naked DNA vaccine to prevent malaria. This
multi-year grant could provide up to $2,700,000 of funding to the Company, of
which $1,072,000 was recognized as revenue through March 31, 1999.
8
The Company had revenues of $2,732,000 for the quarter ended March 31, 1998.
License revenue of $2,532,000 was derived primarily from an initial payment of
$2,000,000 from Centocor under a license and option agreement and reimbursement
of certain costs. License revenue for the quarter ended March 31, 1998, also
included amortization of deferred license fees under earlier agreements with PMC
and Merial and royalty revenues totaling $332,000. Contract revenues were
primarily from PMC.
The Company's total operating expenses for the quarter ended March 31, 1999,
were $4,627,000 compared with $4,062,000 for the first quarter of 1998.
Research and development expenses increased to $3,614,000 for the three months
ended March 31, 1999, from $3,095,000 for the same period in 1998. The increase
in research and development expenses for the three months was generally due to
increased preclinical and clinical trial costs, and personnel related costs,
partially offset by lower license payments to third parties.
General and administrative expenses increased to $1,013,000 for the three months
ended March 31, 1999, from $967,000 for the same period in 1998. The increase
primarily is attributable to timing of when certain printing and annual meeting
related costs were incurred.
Investment income for the three-month periods ended March 31, 1999 and 1998, was
$571,000 and $652,000, respectively. The decrease primarily is a result of lower
investment balances and lower rates of return on investments.
The net loss was $.05 per share for the three months ended March 31, 1999,
compared with net loss per share of $.05 for the same period of 1998. The
Company expects to incur losses throughout the remainder of 1999 and to report a
net loss per share for the year ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Vical has financed its operations primarily through private
placements of preferred and common stock, three public offerings of common stock
and revenues from collaborative agreements. As of March 31, 1999, the Company
had working capital of approximately $42.3 million compared with $38.4 million
at December 31, 1998. Cash and marketable securities totaled approximately $43.6
million at March 31, 1999, compared with $40.2 million at December 31, 1998.
The Company expects to incur substantial additional research and development
expense and general and administrative expense, including continued increases in
personnel costs, costs related to preclinical testing and clinical trials,
outside services and facilities. 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 through public or private financing.
Additional funding may not be available on favorable terms or 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 at least 2000.
9
YEAR 2000 ISSUES
The Year 2000 problem is due to many computer systems using only two digits
rather than four to designate a specific year. As a result, many of these
systems may fail to function properly if a date beyond 1999 is entered. We have
completed our assessment of any potential Year 2000 issues for our internal
computer applications, including embedded control systems in equipment, to
determine whether they will function for the year 2000 and beyond and what
modifications, if any, would be required to ensure their continuing
functionality. We plan to upgrade our existing business applications software to
the latest Year 2000 compliant release of the software by June 1, 1999. We also
plan to implement a new financial and accounting system and related hardware to
meet our growing needs into the near future. This new system will be Year 2000
compliant and implemented prior to yearend. Given the relatively small size of
our systems and the predominantly new hardware, software and operating systems,
we do not anticipate any significant delays in becoming Year 2000 compliant. To
date our costs for Year 2000 compliance have been immaterial and we expect our
costs to finish becoming Year 2000 compliant to be immaterial.
We are unable to control whether our current and future strategic partners'
systems are Year 2000 compliant. The failure of systems maintained by our
strategic partners or suppliers could cause us to incur significant expenses to
remedy any problems, or otherwise seriously damage our business. We are
communicating with strategic partners to assess the risk of Year 2000 issues. We
have not completed the inquiries of the strategic partners. However, we are not
aware, at this time, of any material Year 2000 issues regarding our dealings
with our strategic partners. We anticipate that our assessment will be completed
by July 31, 1999.
At this time, we have no reason to believe that Year 2000 changes will have
a material impact on Vical's business, financial condition or results of
operations. Since no significant issues have been identified, we do not have a
comprehensive contingency plan to address any material Year 2000 issues. A
contingency plan, if required, will be developed for all applications and
systems that affect core business functions upon completion of our assessment of
Year 2000 issues. We do plan to perform backups of the existing and upgraded
versions of the computer system so that in the event our planned new financial
and accounting system and related hardware do not function properly we can
continue to operate under the old system. Vical has not identified what it
believes would be a reasonably likely worst case scenario with respect to Year
2000 failures.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) In January 1999 Vical sold approximately 318,000 shares of common
stock to Pfizer for $18.87 per share or $6,000,000 in the aggregate. Vical
relied on the exemption provided by Section 4(2) of the Securities Act of
1933 for this issuance given the nature of the purchaser.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
EXHIBIT 4.4 Stock Purchase Agreement Dated January 22, 1999 between the
Company and Pfizer Inc.
EXHIBIT 27 Financial Data Schedule
2. Reports on Form 8-K
None
10
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 13, 1999 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)
11
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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1. EXHIBIT 4.4 Stock Purchase Agreement Dated January 22, 1999 between the
Company and Pfizer Inc.
2. EXHIBIT 27 Financial Data Schedule
12