As filed with the Securities and Exchange Commission on December 23, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HYBRIDON, INC.
(Exact name of registrant as specified in its charter)
Delaware 2836 04-3072298
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation
or organization)
155 Fortune Blvd., Milford, Massachusetts 01757
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
E. ANDREWS GRINSTEAD III
Chairman of the Board, President and Chief Executive Officer
HYBRIDON, INC.
155 Fortune Blvd.
Milford, Massachusetts 01757
(508) 482-7500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copy to:
MONICA C. LORD, ESQ.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
---------------
Approximate date of commencement of proposed sale to the public:
From time to time after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
|_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================================
Proposed
Title of Each Class Proposed Maximum Maximum
of Securities to be Registered Amount to be Offering Price Per Aggregate Amount of
(1) Registered Share Offering Price Registration Fee
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Convertible Preferred
Stock, $.01 par value 641,259 $ 100 (3) $64,125,900 $19,430.15
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value 10,195,175 1.15625(4) 11,788,171 3,571.82
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
issuable upon conversion of
Series A Convertible Preferred
Stock 15,088,200(2) -- (5) -- --
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
issuable upon exercise of Class A
Warrants 3,002,958(2) 4.25 (2)(6) 12,762,571 3,867.05
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
issuable upon exercise at Class B
Warrants 1,752,945(2) 2.40 (2)(6) 4,207,068 1,274.74
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
issuable upon exercise of Class C
Warrants 904,274(2) 2.40 (2)(6) 2,170,257 657.88
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
issuable upon exercise of Class D
Warrants 672,267(2) 2.40 (2)(6) 1,613,441 488.87
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par
value, issuable upon exercise
of Forum Warrants 1,197,429 2.40 (2)(6) 1,462,065 443.01
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par
value, issuable upon exercise
of Forum Warrants 588,235 4.25 (2)(6) 2,499,999 757.50
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par
value, issuable upon exercise
of Pillar Investments Warrants 1,111,630 2.40 (2)(6) 2,667,912 808.38
==============================================================================================================
</TABLE>
(1) This Registration Statement is deemed to cover the registration of (i) up
to 641,259 shares (the "Convertible Preferred Shares") of Series A
Convertible Preferred Stock, $.001 per share par value (the "Convertible
Preferred Stock") and 23,729,701 shares (the "Common Shares" and, together
with the Convertible Preferred Shares, the "Securities") of Common Stock,
$.01 per share par value (the "Common Stock") of Hybridon, Inc., a Delaware
corporation (the "Company"), for sale by the holders thereof (the "Selling
Securityholders"), subject to certain contractual restrictions applicable
to certain of the Selling Securityholders that limit the time periods
during which such Selling Securityholders may sell Securities. Such
restrictions are described more fully in the Prospectus that forms a part
of this Registration Statement.
(2) Pursuant to Rule 416 there are also being registered such additional shares
of Common Stock as may become issuable pursuant to applicable anti-dilution
provisions.
(3) Estimated solely for purposes of calculating the registration fee using the
proposed offering price of the Series A Convertible Preferred Stock as
required by Rule 457(i).
Does not include any shares of Series A Preferred that may be issued in the
future as a dividend, which shares are expressly excluded from this
Registration Statement pursuant to Rule 416(b) under the Securities Act.
(4) Estimated solely for purposes of calculating the Registration Fee using the
average of the bid and ask price for the Common Stock on December 17, 1998
as required by Rule 457(c).
(5) Pursuant to Rule 457(i) no additional registration fee required.
(6) Estimated solely for purposes of calculating the Registration Fee using the
exercise price of the Warrants, as required by Rule 457(g)(1).
---------------
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<PAGE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
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<PAGE>
Subject to Completion; Dated December 23, 1998
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
HYBRIDON, INC.
155 Fortune Boulevard
Milford, Massachusetts 01757
Secondary Offering Prospectus
641,259 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK
AND
33,924,878 SHARES OF COMMON STOCK
Hybridon, Inc. ("Hybridon" or the"Company"), established in 1989, is engaged in
the discovery and development of novel genetic medicines based primarily on
antisense technology. This Registration Statement is being filed on behalf of
certain securityholders of Hybridon who previously purchased Hybridon's shares
in private offerings. The selling price of the shares to the public will be
determined independently by the securityholders who seek to sell their shares.
No underwriter has been employed to assist in the distribution. Hybridon will
not receive any of the offering proceeds (other than proceeds upon exercise of
certain Hybridon Warrants).
-----
Common* Stock Trading Symbol:
NASDAQ Over-the-Counter-Bulletin-Board: HYBN
(*Prior to this offering there has been no public
market for the Series A Convertible
Preferred Stock.)
-----
Investment in the securities being offered involves a high degree of risk. You
should purchase the securities only if you can afford a complete loss. See "Risk
Factors" beginning on page 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The selling securityholders have contractual limitations on their ability to
sell their securities. See "Certain Restrictions on Transfer" beginning on page
96.
The date of this Prospectus is ________ ___, 1998.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this Prospectus and in the documents incorporated
herein constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For
this purpose, any statements contained herein or incorporated herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "plans,"
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements. These factors include those set forth in "Risk Factors" herein.
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<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus. It
does not contain all of the information you need to consider in making your
investment decision. To understand all of the terms of the offering of the
Series A Convertible Preferred Stock and the Common Stock, you should read this
entire Prospectus carefully.
Overview of the Company
General
The Company, established in 1989, is a leader in the discovery and
development of novel genetic medicines. These novel medicines use antisense
technology to selectively inhibit the production of disease-causing proteins at
the genetic level. The Company's leadership position is based on its development
and therapeutic application of proprietary advanced antisense chemistries and
the establishment of a manufacturing business for the large-scale synthesis of
RNA and DNA (oligonucleotides) under good manufacturing practices ("GMP")
prescribed by the U.S. Food and Drug Administration. See "The Company".
The Company believes it is the only company with
systemically-administered advanced chemistry antisense compounds in clinical
development. To date, the Company has initiated clinical development of three
compounds based on its proprietary advanced chemistries and has several
additional compounds in preclinical development.
In addition, the Company believes it is the only large-scale GMP
manufacturer of oligonucleotides, with approximately 50 customers representing
three distinct and diverse business areas: therapeutics, diagnostics and
genomics. Finally, the Company has significant scale-up ability (with a
relatively low additional capital investment) in its manufacturing facility,
thereby providing the capability to respond to the Company's, its collaborators'
and its clients' potential needs for large-scale production of oligonucleotides
for use in these diverse business areas.
The Company's efforts in the antisense field are based on an integrated
antisense technology platform combining patented and proprietary medicinal
chemistries, synthetic DNA manufacturing technology and analytical processes.
The Company's strategy is to leverage this technology platform by applying its
antisense oligonucleotides against a range of genetic targets associated with
major diseases, by manufacturing oligonucleotides for its own internal use and
on a custom contract basis for sale to third parties and by entering into
collaborations with large pharmaceutical company partners for the development
and commercialization of antisense oligonucleotide drugs directed against these
genetic targets.
The Company is focusing its efforts on drug development programs
involving advanced chemistry antisense compounds based on the Company's
proprietary advanced mixed backbone chemistries. The Company believes that
antisense compounds based on advanced chemistries may demonstrate favorable
pharmaceutical attributes and may provide flexibility in addressing many
biological targets.
An important part of the Company's business strategy is to enter into
research and development collaborations, licensing agreements and other
strategic alliances with third parties, primarily biotechnology and
pharmaceutical corporations, for the development and commercialization of its
products, and to engage in spin-outs of certain technology of the Company to
minority-owned subsidiaries in order to obtain alternative financing for such
technology. The Company is a party to a corporate collaboration with G.D. Searle
& Co. ("Searle"), a subsidiary of Monsanto Company, in the fields of cancer,
cardiovascular disease and inflammation/immunomodulation. In addition, the
Company has licensed certain advanced chemistry compounds based on proprietary
genetic targets with respect to DNA methyltransferase to a Quebec company,
MethylGene, Inc. ("MethylGene") in exchange for a minority equity interest in
MethylGene, and is currently in the process of licensing certain advanced
chemistry compounds based on proprietary genetic targets with respect to the
human papilloma virus and hepatitis B virus
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<PAGE>
genomes to another Quebec company, OriGenix Technologies Inc. ("OriGenix"), in
exchange for a minority equity interest in OriGenix. The licensing of these
programs will require the prior approval of the Lender under the Bank Credit
Facility. See "Description of Capital Stock and Indebtedness -- Indebtedness --
Bank Credit Facility."
The Company's plan is to seek corporate collaborations with respect to
each of its compounds in development. The Company intends to proceed with its
GEM 231 clinical program through Phase II clinical trials, at which time it may
seek a corporate collaborator. The Company generally does not anticipate
proceeding with any of its other programs beyond their current stages of
development without a collaborative arrangement with a corporate partner. There
can be no assurance that the Company will enter into any collaborative
arrangements with third parties with respect to these or any ofthe Company's
future programs, nor can there be any assurance as to what the terms of such
collaborative arrangements will be. See "Risk Factors -- Need to Establish
Collaborative Commercial Relationships; Dependence on Partners."
Overview of the Securities
This prospectus (the "Prospectus") relates to the offer and sale of 641,259
shares (the "Convertible Preferred Shares") of Series A convertible preferred
stock, $.01 par value per share (the "Convertible Preferred Stock"), and
33,924,878 shares (the "Common Shares" and, together with the Convertible
Preferred Shares, the "Securities") of the common stock, $.001 par value per
share (the "Common Stock"), of Hybridon, Inc., a Delaware corporation (the
"Company"), by certain securityholders of the Company (the "Selling
Securityholders").
Of the 641,259 Convertible Preferred Shares offered hereby,
o an aggregate of 510,505 Convertible Preferred Shares were issued,
together with the Company's Class A warrants to purchase Common Stock
(the "Class A Warrants"), on May 5, 1998, in a registered exchange offer
(the "Exchange Offer") for certain 9% convertible subordinated notes of
the Company (the "9% Notes");
o an aggregate of 114,285 Convertible Preferred Shares were issued and
sold, together with the Company's Class D warrants to purchase Common
Stock (the "Class D Warrants") to certain investors in a private
placement (the "Regulation D Preferred Offering") under Regulation D
("Regulation D") promulgated under the Securities Act, the final closing
of which occurred on May 5, 1998; and
o an aggregate of 16,472 Convertible Preferred Shares were issued as a
dividend to holders of Convertible Preferred Shares on September 30,
1998.
Of the 33,924,878 Common Shares offered hereby,
o an aggregate of 6,380,322 shares were issued and sold, together with the
Company's Class B warrants to purchase Common Stock (the "Class B
Warrants"), in offshore transactions (the "Regulation S Offerings")
under Regulation S ("Regulation S") promulgated under the Securities
Act, the final closing of which occurred on May 5, 1998;
o an aggregate of 3,217,154 shares were issued, together with the
Company's Class C warrants to purchase Common Stock (the "Class C
Warrants"), to certain investors in a private placement (the "Regulation
D Offering");
o an aggregate of 1,111,630 shares are issuable upon exercise of warrants
granted to Pillar Investments Ltd. ("Pillar Investments") as
compensation for advisory and placement agent services rendered in
connection with the Regulation S Offering;
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<PAGE>
o an aggregate of 3,002,958 shares are issuable upon exercise of the Class
A Warrants, 1,752,945 shares are issuable upon exercise of the Class B
Warrants, 904,274 shares are issuable upon exercise of the Class C
Warrants and 672,267 shares are issuable upon exercise of the Class D
Warrants;
o an aggregate of 597,699 shares were issued and an additional 1,197,429
shares are issuable upon exercise of certain warrants (the "Forum
Warrants") granted to Forum Capital Markets LLC ("Forum"); and
o 15,088,200 shares are issuable upon conversion of the Convertible
Preferred Stock.
In this Prospectus, the Class A Warrants, the Class B Warrants, the Class C
Warrants, the Class D Warrants, the Forum Warrants and the Pillar Warrants are
collectively referred to as the "Warrants." The shares of Common Stock that will
be issued upon exercise of the Warrants are referred to as the "Warrant Shares."
The shares of Common Stock that will be issued upon conversion of the
Convertible Preferred Stock are referred to as the "Conversion Shares." The
shares of Common Stock that were issued in the Regulation S Offering are
referred to as the "Regulation S Shares." The shares of Common Stock that were
issued in the Regulation D Offering are referred to as the "Regulation D
Shares." The Preferred Shares, Warrant Shares, Conversion Shares, Regulation S
Shares and Regulation D Shares are collectively referred to as the "Securities."
This Prospectus is intended for use by the Selling Securityholders of the
Securities in resale transactions registered under the Securities Act. The
Company will not receive any proceeds from the sale of the Securities (other
than proceeds upon exercise of the Warrants). See "Selling Securityholders" and
"Use of Proceeds."
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
The Offering
Common Stock........................ 33,924,878 shares of Common Stock (plus
an indeterminate number of additional
shares of Common Stock that may be
issued by the Company upon conversion of
the Convertible Preferred Stock,
including any Convertible Preferred
Stock issued as dividends on the
Convertible Preferred Stock, and
exercise of the Warrants pursuant to
antidilution provisions). See
"Description of Securities."
Common Stock to be outstanding
after the offering.................. Approximately 33,924,878 shares
(assuming exercise of all Warrants and
further assuming that the Convertible
Preferred
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Stock and any Convertible Preferred
Stock issued as of the date hereof as
dividends on the Convertible Preferred
Stock thereon, are converted into Common
Stock at the maximum rate allowable by
the terms of the agreements relating to
the issuance of the Convertible
Preferred Stock).
NASD OTC BULLETIN BOARD SYMBOL
For Common Stock.................... HYBN
Convertible Preferred Stock......... 641,259 shares of Convertible Preferred
Stock (plus an indeterminate number of
additional shares that may be issued as
dividends on the Convertible Preferred
Stock).
Terms of Convertible Preferred:
Dividend.................... 6.5% per annum, payable on April 1 and
October 1. The dividend may be paid with
either cash or additional shares of
Convertible Preferred Stock, at the
option of Hybridon.
Liquidation Preference...... $100.00 per share plus accrued but
unpaid dividends.
Ranking..................... The Convertible Preferred Stock ranks,
as to dividends and liquidation
preference, senior to the Hybridon
Common Stock.
Conversion.................. The Convertible Preferred Stock is
convertible into Hybridon Common Stock
beginning on May 5, 1999.
The initial conversion price of the
Convertible Preferred Stock (the
"Conversion Price") is $4.25 (subject to
antidilution adjustments set forth in
the Certificate of Designation for the
Convertible Preferred Stock).
Mandatory Conversion or
Redemption.................. At any time after May 4, 1999 (but only
after April 1, 2000 in the case of
clause (ii) below), if the closing bid
price of the Hybridon Common Stock is at
least 250% of the then applicable
conversion price of the Convertible
Preferred Stock for 20 trading days in
any 30 consecutive trading day period
ending three days prior to the date of
notice of conversion or redemption, as
the
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<PAGE>
case may be, Hybridon may (i) cause the
Convertible Preferred Stock to be
converted, in whole or in part, into
Hybridon Common Stock at $4.00 per share
or (ii) redeem the Convertible Preferred
Stock for cash in an amount equal to
$100.00 per share (subject to
appropriate adjustment to reflect any
stock split, reclassification or
reorganization of the Convertible
Preferred Stock) plus any accrued but
unpaid dividends (provided that holders
will have the right to convert into
Hybridon Common Stock, at the Conversion
Price, any shares so called for
mandatory conversion or redemption).
Class Voting Rights......... Hybridon shall not, without the
affirmative vote or consent of the
holders of at least 50% of all
outstanding Convertible Preferred Stock,
voting separately as a class, (i) amend,
alter or repeal any provision of the
Certificate of Incorporation or the
By-Laws of Hybridon so as adversely to
affect the relative rights, preferences,
qualifications, limitations or
restrictions of the Convertible
Preferred Stock (with the issuance of
securities ranking prior to, or pari
passu with, the Convertible Preferred
Stock (A) upon a Liquidation Event (as
defined in the Certificate of
Designation for Series A Preferred
Stock) or (B) with respect to the
payment of dividends or distributions,
not being considered to so adversely
affect), or (ii) authorize or issue, or
increase the authorized amount of, the
Convertible Preferred Stock, subject to
certain exceptions.
Use of Proceeds..................... The Company will receive no proceeds
from the sale of the Securities by the
Selling Shareholders (other than
proceeds upon exercise of certain
Hybridon warrants).
Restrictions on Transfer............ Most of the Securities offered hereby
are subject to certain restrictions on
transfer. These restrictions differ
depending on the type of security and
the transaction pursuant to which the
Securities were purchased. See "Certain
Restrictions on Transfer."
Risk Factors........................ Investment in the Securities involves a
high degree of risk. See "Risk Factors."
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SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
-----------------------------------------------------------
1995 1996 1997 1997 1998
(In thousands, except per share data)(Unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Research and development............ $ 1,186 $ 1,419 $ 945 $ 980 $ 950
Product and service revenue......... -- 1,080 1,877 1,232 2,353
Royalty income...................... -- 62 48 33 --
Interest income..................... 219 1,447 1,079 898 106
--- ----- ----- --- -------
1,405 4,008 3,949 3,143 3,409
Operating Expenses
Research and development............ 29,685 39,390 46,828 37,785 17,181
General and administrative.......... 6,094 11,347 11,026 9,012 5,218
Interest............................ 173 124 4,536 3,223 2,880
Restructuring....................... -- -- 11,020 3,100 --
------ ------ ------ ------ ------
Total operating expenses........ 35,952 50,861 73,410 53,120 25,279
------ ------ ------ ------ ------
Loss from operations.................... (34,547) (46,853) (69,461) (49,977) (21,870)
Extraordinary item:
Gain on conversion of 9% convertible --
subordinated notes payable.......... -- -- -- 8,877
------ ------ ------ ------ ------
Net Loss................................ (34,547) (46,853) (69,461) (49,977) (12,993)
Accretion of preferred stock dividend... -- -- -- -- 1,647
------ ------ ------ ------ ------
Net loss to common stockholders......... $(34,547)$(46,853)$(69,461) $(49,977) $(14,640)
====== ====== ====== ====== ======
Basic and diluted net loss per per
common share from:
Operations.......................... $ (94.70) $(10.24) $(13.76) $ (9.90) $ (2.21)
Extraordinary gain.................. -- -- -- -- 0.83
------ ------ ------ ------ ------
Net loss........................ $ (94.70) $(10.24) $(13.76) $ (9.90) $ (1.37)
===== ===== ===== ==== ====
Shares Used in Computing Basic and
Diluted Net Loss per Common Share(1).. 365 4,576 5,050 5,047 10,648
=== ===== ===== ===== ======
Other Financial Data:
Ratio of earnings to fixed charges(2) --- --- --- --- ---
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
Balance Sheet Data: (Unaudited)
Cash, cash equivalents and short-term
investments(3)...................... $ 16,419 $ 2,202 $ 883
Working capital (deficit)............... 8,888 (24,100) (2,815)
Total assets............................ 41,537 35,072 18,399
Long-term debt and capital lease
obligations, net of current portion. 9,032 3,282 573
9% Convertible Subordinated
Notes Payable........................... -- 50,000 1,306
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December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
(Unaudited)
Deficit accumulated in the
development stage................... (149,194) (218,655) (233,295)
Total stockholders' equity (deficit).... 22,855 (46,048) 6,097
------ ------ -----
</TABLE>
(1) Computed on the basis described in Notes 2(b) and 19(c) of Notes to
Consolidated Financial Statements appearing elsewhere in this Prospectus.
(2) For the purpose of calculating the ratio of earnings to fixed charges,
earnings represent the Company's loss from continuing operations before
income taxes plus fixed charges. Fixed charges consist of interest expense
on all indebtedness plus the interest portion of rental expense on
non-cancelable leases and amortization of debt issuance costs and debt
discount. The Company's earnings have been inadequate to meet its fixed
charges in 1995, 1996 and 1997 and for the nine months ended September 30,
1997 and 1998 by $33.9 million, $46.4 million, $64.7 million, $46.6 million
and $8.4 million, respectively.
(3) Short-term investments consisted of U.S. government securities with
maturities greater than three months but less than one year from the
purchase date.
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In addition to the other information contained in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing the Securities offered
by this Prospectus.
Early Stage of Development; Technological Uncertainty. The Company's
potential pharmaceutical products are at various stages of research, preclinical
testing or clinical development. There are a number of technological challenges
that the Company must successfully address to complete any of its development
efforts. To date, most of the Company's resources have been dedicated to
applying oligonucleotide chemistry and cell biology to the research and
development of potential pharmaceutical products based upon antisense
technology. As in most drug discovery programs, the results of in vitro, tissue
culture and preclinical studies by the Company may be inconclusive and may not
be indicative of results that will be obtained in human clinical trials. In
addition, results obtained in early human clinical trials by the Company may not
be indicative of results that will be obtained in later clinical trials. The
Company has not successfully completed human clinical trials of a product based
on antisense technology, and there can be no assurance that any of the Company's
products will be successfully developed.
The success of any of the Company's potential pharmaceutical products
depends in part on the molecular target on the genetic material chosen as the
site of action of the oligonucleotide. There can be no assurance that the
Company's choice will be appropriate for the treatment of the targeted disease
indication in humans or that mutations in the genetic material will not result
in a reduction in or loss of the efficacy or utility of a Company product.
Uncertainty Associated with Clinical Trials. Before obtaining regulatory
approvals for the commercial sale of any of its pharmaceutical products under
development, the Company must undertake extensive and costly preclinical studies
and clinical trials to demonstrate that such products are safe and efficacious.
The results from preclinical studies and early clinical trials are not
necessarily predictive of results that will be obtained in later stages of
testing or development, and there can be no assurance that the Company's
clinical trials will demonstrate the safety and efficacy of any pharmaceutical
products or will result in pharmaceutical products capable of being produced in
commercial quantities at reasonable cost or in a marketable form.
In July 1997, the Company discontinued the development of GEM 91, its
first generation antisense drug for the treatment of AIDS and HIV infection
based on a review of data from an open label Phase II clinical trial of patients
with advanced HIV infection. In the Phase II trial, three of the nine subjects
tested experienced decreases in platelet counts that required dose interruption.
In addition, a review of the data showed inconsistent responses to the treatment
and failed to confirm the decrease in cellular viremia observed in an earlier
clinical trial.
Although the Company is conducting clinical trials of certain advanced
chemistry oligonucleotide compounds and is developing several oligonucleotide
compounds on which it plans to file IND applications with the U.S. Food and Drug
Administration (the "FDA") and equivalent filings outside of the United States,
there can be no assurance that necessary preclinical studies on these compounds
will be completed satisfactorily or that the Company otherwise will be able to
make its intended filings. Further, there can be no assurance that the Company
will be permitted to undertake and complete human clinical trials of any of the
Company's potential products, either in the United States or elsewhere, or, if
permitted, that such products will not have undesirable side effects or other
characteristics that may prevent or limit their commercial use.
The rate of completion of the Company's human clinical trials, if
permitted, will be dependent upon, among other factors, the rate of patient
enrollment. Patient enrollment is a function of many factors, including the size
of the patient population, the nature of the protocol, the availability of
alternative treatments, the proximity to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment might result in
increased costs and delays, which could have a material adverse effect on the
Company. The Company or the FDA or other regulatory agencies may suspend
clinical trials at any time if the subjects or patients participating in such
trials are being exposed to unacceptable health risks.
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Future Capital Needs; Uncertainty of Additional Funding; Risk of
Insolvency. The Company has extremely limited cash resources and substantial
obligations to lenders, real estate landlords and trade creditors. The Company
will be required to raise substantial additional funds through external sources,
including through collaborative relationships and public or private financings.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Except for research and development funding from G.D. Searle & Co.
("Searle"), a subsidiary of Monsanto Company (which is subject to early
termination in certain circumstances), certain research and development funding
expected to be received from MethylGene, Inc. ("MethylGene") and sales of DNA
and products and reagents manufactured on a custom contract basis by the
Hybridon Specialty Products Division ("HSP Division"), Hybridon has no current
external sources of capital, and expects no revenues from therapeutic products
that it is developing for at least several years. No assurance can be given that
additional financing will be available, or, if available, that it will be
available on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders will result.
Additionally, the terms of any such additional financing may adversely affect
the holdings or rights of then existing stockholders. If adequate funds are not
available, the Company may be required to (i) further curtail significantly one
or more of its research, drug recovery or development programs, (ii) obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products which the Company would otherwise pursue on its own or
(iii) terminate operations.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research, drug discovery and
development programs, the magnitude of these programs, progress with preclinical
and clinical trials, sales of DNA products and reagents to third parties
manufactured on a custom contract basis by the HSP Division and the margins on
such sales, 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 ability of the Company to establish
and maintain collaborative academic and commercial research, development and
marketing relationships, the ability of the Company to obtain third-party
financing for leasehold improvements and other capital expenditures and the
costs of manufacturing scale-up and commercialization activities and
arrangements.
The Company has been informed by Arthur Andersen LLP, its independent
public accountants, that their reports on the Company's December 31, 1998
financial statements will contain an explanatory fourth paragraph addressing the
significant uncertainty regarding the Company's ability to continue operating as
a going concern unless the Company is able to raise sufficient capital to fund
operations for 1999 prior to the release of the audit report.
Bank Facility. The Company is a party to a credit facility (the "Bank
Credit Facility") incurred to finance the leasehold improvements of its Milford
manufacturing facility. The Bank Credit Facility contains certain financial
covenants, including minimum liquidity and net worth requirements, and prohibits
issuance of additional indebtedness and the payment of dividends. The
indebtedness due under the Bank Credit Facility is subject to acceleration upon
the occurrence of certain Events of Default set forth in Section 8 of the Loan
and Security Agreement governing the Bank Credit Facility, which has been filed
as an exhibit to the Registration Statement. The Company has secured its
obligations under the Bank Credit Facility with a lien on all of its assets
(including cash, deposit accounts and other cash equivalents, copyrights,
patents and trademarks). There can be no assurance that the Company will not be
required to prepay the Bank Credit Facility as a result of the occurrence of any
Events of Default. See "Description of Capital Stock and Indebtedness --
Indebtedness -- Bank Credit Facility."
History of Operating Losses. The Company has incurred net losses since
its inception. At September 30, 1998, the Company had incurred cumulative losses
of approximately $231.6 million. Such losses have resulted principally from
costs incurred in the Company's research and development programs and from
general and administrative costs associated with the Company's development. No
revenues have been generated from sales of pharmaceutical products developed by
the Company and no revenues from the sale of such products are anticipated for a
number of years, if ever. The Company expects to incur additional operating
losses over the next several years and expects cumulative losses to increase as
the Company's research and development and clinical trial efforts continue. The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. Although the Company's HSP Division has begun
to generate revenues from the sale of synthetic DNA products and reagents
manufactured by it on a custom contract basis, there can be no assurance that
demand for and margins on these products will not be lower than anticipated. The
Company's ability to achieve profitability is dependent in part on obtaining
regulatory approvals for its pharmaceutical products and entering into
agreements for drug discovery, development and commercialization. There can be
no assurance that the Company will obtain
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required regulatory approvals, enter into any additional agreements for drug
discovery, development and commercialization or ever achieve drug sales or
profitability.
Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on
Liquidity for the Company's Securities. Since neither the Convertible Preferred
Stock nor the Common Stock is listed on a national securities exchange or on a
qualified automated quotation system, they are subject to Rule 15g-9 under the
Exchange Act, which imposes additional sales practice requirements on
broker-dealers that sell such securities. Rule 15g-9 defines a "penny stock" to
be any equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions including those described below. For transactions covered
by this rule, a broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale.
The foregoing required penny stock restrictions would not apply to the
Company's securities if those securities were listed on the Nasdaq National
Market or SmallCap Market or on another national securities exchange or if the
Company met certain minimum net tangible assets or average revenue criteria. The
Company's securities do not currently qualify for exemption from the penny stock
restrictions. There can be no assurance that either the Convertible Preferred
Stock or the Common Stock will qualify for listing on the Nasdaq or on another
national securities exchange in the foreseeable future, if at all. In any event,
even if the Company's securities were exempt from such restrictions, the Company
would remain subject to Section 15(b)(6) of the Exchange Act, which gives the
Securities and Exchange Commission (the "Commission") the authority to restrict
any person from participating in a distribution of penny stock, if the
Commission finds that such a restriction would be in the public interest.
The market liquidity for the Company's securities is likely to be
materially adversely affected by these requirements. In addition, such rules are
likely to adversely affect the Company's ability to raise funds in the future,
the ability of broker-dealers to sell the Company's securities and the ability
of purchasers to sell any of the securities in the secondary market.
Patents and Proprietary Rights. The Company's success will depend in
part on its ability to develop patentable products and obtain and enforce patent
protection for its products both in the United States and in other countries.
The Company has filed and intends to file applications as appropriate for
patents covering both its products and processes. However, the patent positions
of pharmaceutical and biotechnology firms, including Hybridon, are generally
uncertain and involve complex legal and factual questions. No assurance can be
given that patents will issue from any pending or future patent applications
owned by or licensed to Hybridon. Since patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, the Company cannot be certain that it was the
first creator of inventions covered by pending patent applications or that it
was the first to file patent applications for such inventions. Further, there
can be no assurance that the claims allowed under any issued patents will be
sufficiently broad to protect the Company's technology. In addition, no
assurance can be given that any issued patents owned by or licensed to the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company.
The commercial success of the Company will also depend in part on its
neither infringing patents issued to competitors or others nor breaching the
technology licenses upon which the Company's products might be based. The
Company's licenses of patents and patent applications impose various
commercialization, sublicensing, insurance and other obligations on the Company.
Failure of the Company to comply with these requirements could result in
termination of the applicable license. The Company is aware of patents and
patent applications belonging to competitors and others and it is uncertain
whether these patents and patent applications will require the Company to alter
its products or processes, pay licensing fees or cease certain activities. In
particular, competitors of the Company and other third parties hold issued
patents and pending patent applications relating to antisense and other gene
expression modulation technologies which may result in claims of infringement
against the Company or other patent litigation. There can be no assurance that
the Company will be able successfully to obtain a license to any technology that
it may require or that, if obtainable, such technology can be licensed at a
reasonable cost or on an exclusive basis.
The pharmaceutical and biotechnology industries have been characterized
by extensive litigation regarding patents and other intellectual property
rights. Litigation, which could result in substantial cost to the Company, may
be necessary to enforce any patents issued or licensed to the Company and/or to
determine the scope and validity of others' proprietary rights. The Company also
may have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office, which could result in substantial cost to the Company, to
determine the
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priority of inventions. Furthermore, the Company may have to participate at
substantial cost in International Trade Commission proceedings to abate
importation of products which would compete unfairly with products of the
Company.
Hybridon engages in collaborations, sponsored research agreements and
other agreements with academic researchers and institutions and government
agencies. Under the terms of such agreements, third parties may have rights in
certain inventions developed during the course of the performance of such
collaborations and agreements.
The Company relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
Attraction and Retention of Key Employees and Scientific Collaborators;
Employment Agreements. The Company is highly dependent on the principal members
of its management and scientific staff, including E. Andrews Grinstead III, the
Company's Chairman of the Board, President and Chief Executive Officer, and
Sudhir Agrawal, the Company's Senior Vice President of Discovery and Chief
Scientific Officer, the loss of whose services could have a material adverse
effect on the Company. The Company has executed Employment Agreements with
Messrs. Grinstead and Agrawal. Mr. Grinstead's agreement provides for an
employment term ending on June 30, 2001 (unless sooner terminated in accordance
with the provisions of the agreement), and Mr. Agrawal's agreement provides for
an employment term ending on June 30, 2000 (unless sooner terminated in
accordance with the agreement). Among other provisions, the agreements provide
for severance payments in certain circumstances. See "Executive Compensation."
From June 30, 1997 to December 1, 1998, the number of employees of the Company
has decreased from 213 to 50. As a result, the Company has lost significant
expertise and will be required to recruit and retain new personnel in order to
perform its operations. In addition, any growth or expansion of the Company will
require recruiting and retaining qualified scientific personnel to perform
research and development work. There can be no assurance that under either
circumstance the Company will be able to attract and retain such personnel on
acceptable terms given the competition for experienced scientists among numerous
pharmaceutical, biotechnology and health care companies, universities and
non-profit research institutions. In addition, the Company's anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, governmental approvals, production and marketing, are expected
to require the addition of new management personnel and the development of
additional expertise by existing management personnel. The failure to acquire
such services or to develop such expertise could have a material adverse effect
on the Company.
The Company's success will depend in part on its continued ability to
develop and maintain relationships with independent researchers and leading
academic and research institutions. The competition for such relationships is
intense, and there can be no assurance that the Company will be able to develop
and maintain such relationships on acceptable terms. The Company has entered
into a number of such collaborative relationships relating to specific disease
targets and other research activities in order to augment its internal research
capabilities and to obtain access to the specialized knowledge or expertise of
its collaborative partners. The loss of any such collaborative relationship
could have an adverse effect on the Company's ability to conduct research and
development in the area targeted by such collaboration.
Risks Associated with the HSP Division. Through its HSP Division, the
Company manufactures oligonucleotide compounds on a custom contract basis for
third parties. The results of operations of the HSP Division will be dependent
upon the demand for and margins on these products, which may be lower than
anticipated by the Company. The results of operations of the HSP Division also
may be affected by the price and availability of raw materials. It is possible
that Hybridon's manufacturing capacity may not be sufficient for production of
oligonucleotides both for the Company's internal needs and for sale to third
parties. The Company's manufacturing facility must comply with current good
manufacturing practices ("GMP") and other FDA regulations.
See "Risk Factors -- Limited Manufacturing Capability."
The Company believes that it is currently manufacturing oligonucleotides
in substantial compliance with FDA requirements for manufacturing in compliance
with GMP, although its facility and procedures have not been formally inspected
by the FDA and the procedures and documentation followed may have to be enhanced
in the future as the Company expands its oligonucleotide production activities.
Failure to establish to the FDA's satisfaction compliance with GMP can result in
the FDA denying authorization to initiate or continue clinical trials, to
receive approval of a product or to begin or to continue commercial marketing.
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The Company will be competing against a number of third parties, as well
as the possibility of internal production by the Company's customers, in
connection with the operations of the HSP Division. Many of these third parties
are likely to have greater financial, technical and human resources than the
Company. Key competitive factors will include the price and quality of the
products as well as manufacturing capacity and ability to comply with
specifications and to fulfill orders on a timely basis. The Company may be
required to reduce the cost of its product offerings to meet competition. See
"Risk Factors -- Competition." Failure to manufacture oligonucleotide compounds
in accordance with the purchaser's specifications could expose the Company to
breach of contract and/or product liability claims from the purchaser or the
purchaser's customers. The Company has limited experience in sales, marketing
and distribution and is relying in part upon the efforts of a third party,
Perkin-Elmer, in connection with the marketing and sale of products by the HSP
Division. See "Risk Factors -- Absence of Sales and Marketing Experience."
Need to Establish Collaborative Commercial Relationships; Dependence on
Partners. Hybridon's business strategy includes entering into strategic
alliances or licensing arrangements with corporate partners, primarily
pharmaceutical and biotechnology companies, relating to the development and
commercialization of certain of its potential products. Although the Company is
a party to a corporate collaboration with Searle, a subsidiary of Monsanto
Company, in the fields of cancer, cardiovascular disease and
inflammation/immunomodulation and Medtronic relating to Alzheimers, there can be
no assurance that these collaborations will be scientifically or commercially
successful, that the Company will be able to negotiate additional
collaborations, that such collaborations will be available to the Company on
acceptable terms or that any such relationships, if established, will be
scientifically or commercially successful. The Company expects that under
certain of these arrangements, the collaborative partner will have the
responsibility for conducting human clinical trials and the submission for
regulatory approval of the product candidate with the FDA and certain other
regulatory agencies. Should the collaborative partner fail to develop a
marketable product, the Company's business may be materially adversely affected.
There can be no assurance that the Company's collaborative partners will not be
pursuing alternative technologies or developing alternative compounds either on
their own or in collaboration with others, including the Company's competitors,
as a means for developing treatments for the diseases targeted by these
collaborative programs. The Company's business will also be affected by the
performance of its corporate partners in marketing any successfully developed
products within the geographic areas in which such partners are granted
marketing rights. The Company's plan is to retain manufacturing rights for many
of the products it may license pursuant to arrangements with corporate partners.
However, there can be no assurance that the Company will be able to retain such
rights on acceptable terms, if at all, or that the Company will have the ability
to produce the quantities of product required under the terms of such
arrangements.
No Assurance of Regulatory Approval; Government Regulation. The
Company's preclinical studies and clinical trials, as well as the manufacturing
and marketing of the potential products being developed by it and the products
sold by the HSP Division, are subject to extensive regulation by numerous
federal, state and local governmental authorities in the United States. Similar
regulatory requirements exist in other countries where the Company intends to
test and market its drug candidates. Satisfaction of these requirements, which
include demonstrating to the satisfaction of the FDA and foreign regulatory
agencies that the product is both safe and effective, typically takes several
years or more and can vary substantially based upon the type, complexity and
novelty of the product. There can be no assurance that such testing will show
any product to be safe or efficacious. Preclinical studies of the Company's
product development candidates are subject to Good Laboratory Practices ("GLP")
requirements and the manufacture of any products by the Company, including
products developed by the Company and products manufactured for third parties on
a custom contract basis by the HSP Division, will be subject to GMP requirements
prescribed by the FDA. See "The Company -- Government Regulation."
The regulatory process, which includes preclinical studies, clinical
trials and post-clinical testing of each compound to establish its safety and
effectiveness, takes many years and requires the expenditure of substantial
resources. Delays may also be encountered and substantial costs incurred in
foreign countries. There can be no assurance that, even after the passage of
such time and the expenditure of such resources, regulatory approval will be
obtained for any drugs developed by the Company. Data obtained from preclinical
and clinical activities are subject to varying interpretations which could
delay, limit or prevent regulatory approval by the FDA or other regulatory
agencies. The Company, an independent Institutional Review Board (an "IRB"), the
FDA or other regulatory agencies may suspend clinical trials at any time if the
participants in such trials are being exposed to unacceptable health risks.
Moreover, if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Failure to
comply with applicable regulatory requirements can, among other things, result
in fines, suspension of regulatory approvals, product recalls, seizure of
products, operating restrictions and criminal prosecutions. FDA policy may
change and additional government
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regulations may be established that could prevent or delay regulatory approval
of the Company's potential products. Even if initial regulatory approvals for
the Company's product candidates are obtained, the Company, its products and its
manufacturing facilities would be subject to continual review and periodic
inspection. Moreover, additional government regulation from future legislation
or administrative action may be established which could prevent or delay
regulatory approval of the Company's products or further regulate the prices at
which the Company's proposed products may be sold. The regulatory standards for
manufacturing are applied stringently by the FDA. In addition, a marketed drug
and its manufacturer are subject to continual review and any subsequent
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on such product or manufacturer, including withdrawal of
the product from the market and withdrawal of the right to manufacture the
product. All of the foregoing regulatory matters also will be applicable to
development, manufacturing and marketing undertaken by any strategic partners or
licensees of the Company.
Competition. There are many companies, both private and publicly traded,
that are conducting research and development activities on technologies and
products similar to or competitive with the Company's antisense technologies and
proposed products. For example, many other companies are actively seeking to
develop products, including antisense oligonucleotides, with disease targets
similar to those being pursued by the Company. Some of these competitive
products are in clinical trials and one antisense product for the treatment of
cytomegalovirus has received FDA approval and is being commercialized. The
Company believes that the industry-wide interest in investigating the potential
of gene expression modulation technologies will continue and will accelerate as
the techniques which permit the design and development of drugs based on such
technologies become more widely understood. There can be no assurance that the
Company's competitors will not succeed in developing products based on
oligonucleotides or other technologies, existing or new, which are more
effective than any that are being developed by the Company, or which would
render Hybridon's antisense technologies obsolete and noncompetitive. Moreover,
there currently are commercially available products for the treatment of many of
the disease targets being pursued by the Company.
Competitors of the Company engaged in all areas of biotechnology and
drug discovery in the United States and other countries are numerous and
include, among others, pharmaceutical and chemical companies, biotechnology
firms, universities and other research institutions. Many of the Company's
competitors have substantially greater financial, technical and human resources
than the Company. In addition, many of these competitors have significantly
greater experience than the Company in undertaking preclinical studies and human
clinical trials of new pharmaceutical products and obtaining FDA and other
regulatory approvals of products for use in health care. Furthermore, if the
Company is permitted to commence commercial sales of products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it has limited or no experience. Accordingly, the Company's
competitors may succeed in obtaining FDA or other regulatory approvals for
products or in commercializing such products more rapidly than the Company.
Limited Manufacturing Capability. While the Company believes that its
existing production capacity will be sufficient to enable it to satisfy its
current research needs and to support the Company's preclinical and clinical
requirements for oligonucleotide compounds, the Company will need to purchase
additional equipment to expand its manufacturing capacity in order to satisfy
its future requirements, subject to obtaining regulatory approvals, for
commercial production of its product candidates. In addition, the HSP Division
is using the Company's existing production capacity to custom contract
manufacture synthetic DNA products for commercial sale. As a result, depending
on the level of sales by the HSP Division, and the success of the Company's
product development programs, Hybridon's manufacturing capacity may not be
sufficient for production for both its internal needs and sales to third
parties. In addition, in order successfully to commercialize its product
candidates or achieve satisfactory margins on sales, the Company may be required
to reduce further the cost of production of its oligonucleotide compounds, and
there can be no assurance that the Company will be able to do so.
The manufacture of the Company's products is subject to GMP requirements
prescribed by the FDA or other standards prescribed by the appropriate
regulatory agency in the country of use. There can be no assurance that the
Company will be able to manufacture products in a timely fashion and at
acceptable quality and price levels, that it or its suppliers can manufacture in
compliance with GMP or other regulatory requirements or that it or its suppliers
will be able to manufacture an adequate supply of product. The Company has in
the past relied in part, and may in the future rely, upon third party
contractors in connection with the manufacture of some compounds. Reliance on
such third parties entails a number of risks, including the possibility that
such third parties may fail to perform on an effective or timely basis or fail
to abide by regulatory or contractual restrictions applicable to the Company.
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There are extremely limited sources of supply for the nucleotide
building blocks used by the Company in its current oligonucleotide manufacturing
process. This process is covered by issued patents either held by or licensed to
these suppliers. Therefore, these suppliers are likely the sole suppliers to
Hybridon of these nucleotide building blocks. There can be no assurance that
nucleotide building blocks will be obtainable at acceptable costs, if at all.
The inability of Hybridon to obtain these nucleotide building blocks from one of
these suppliers, or to obtain them at an acceptable cost, could have a material
adverse effect on Hybridon.
Absence of Sales and Marketing Experience. The Company may eventually
market and sell certain of its prospective therapeutic products directly and
certain of its prospective therapeutic products through co-marketing or other
licensing arrangements with third parties. The Company has limited experience in
sales, marketing or distribution, and would not expect to establish a sales and
marketing plan or direct sales capability with respect to the therapeutic
products being developed by it until such time as one or more of such products
approaches marketing approval, if at all. In addition, although the Company does
have a limited direct sales capability with respect to the sales of custom
contract manufactured DNA products to third parties by the HSP Division, the
Company has entered into a sales and marketing arrangement with Perkin-Elmer
Corporation ("Perkin-Elmer") with respect to such products and is reliant in
part on the efforts of Perkin-Elmer to promote these products. In order to
market the therapeutic products being developed by it directly, the Company
would be required to develop a substantial marketing staff and sales force with
technical expertise and with supporting distribution capability. There can be no
assurance that the Company would be able to build such a marketing staff or
sales force, that the cost of establishing such a marketing staff or sales force
would be justifiable in light of any product revenues or that the Company's
direct sales and marketing efforts would be successful. In addition, if the
Company succeeds in bringing one or more therapeutic products to market, it may
compete with other companies that currently have extensive and well-funded
marketing and sales operations. There can be no assurance that the Company's
marketing and sales efforts would enable it to compete successfully against such
other companies. To the extent the Company enters into co-marketing or other
licensing arrangements, any revenues received by the Company for its therapeutic
products will be dependent in part on the efforts of third parties and there can
be no assurance that such efforts will be successful.
No Assurance of Market Acceptance. Pharmaceutical products, if any,
resulting from the Company's research and development programs are not expected
to be commercially available for a number of years. There can be no assurance
that, if approved for marketing, such products will achieve market acceptance.
The degree of market acceptance will depend upon a number of factors, including
the receipt of regulatory approvals, the establishment and demonstration in the
medical community of the clinical efficacy and safety of the Company's products
and their potential advantages over existing treatment methods and reimbursement
policies of government and third-party payors. There is no assurance that
physicians, patients, payors or the medical community in general will accept or
utilize any products that may be developed by the Company.
Product Liability Exposure and Insurance. The use of any of the
Company's potential products in clinical trials and the commercial sale of any
products, including the products being developed by it and the DNA products and
reagents manufactured and sold on a custom contract basis by the HSP Division,
may expose the Company to liability claims. These claims might be made directly
by consumers, health care providers or by pharmaceutical and biotechnology
companies or others selling such products. Hybridon has product liability
insurance coverage, and such coverage is subject to various deductibles. Such
coverage is becoming increasingly expensive, and no assurance can be given that
the Company will be able to maintain or obtain such insurance at reasonable cost
or in sufficient amounts to protect the Company against losses due to liability
claims that could have a material adverse effect on the Company.
Hazardous Materials. The Company's research and development and
manufacturing activities involves the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could have a
material adverse effect on the Company.
Uncertainty of Pharmaceutical Pricing and Adequate Reimbursement. The
Company's ability to commercialize its pharmaceutical products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of such products and related treatment are obtained from government
authorities, private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Third-party payors are increasingly
challenging the prices charged for medical products and services. There can be
no assurance
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that any of the Company's potential products will be considered cost-effective
or that adequate third-party reimbursement will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investments. Also the trend towards managed health care in the United States
and the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products, as
well as legislative proposals to reduce government insurance programs, may all
result in lower prices for the Company's products. The cost containment measures
that health care providers are instituting could affect the Company's ability to
sell its products and may have a material adverse effect on the Company.
Uncertainty of Health Care Reform Measures. Federal, state and local
officials and legislators (and certain foreign government officials and
legislators) have proposed or are reportedly considering proposing a variety of
reforms to the health care systems in the United States and abroad. The Company
cannot predict what health care reform legislation, if any, will be enacted in
the United States or elsewhere. Significant changes in the health care system in
the United States or elsewhere are likely to have a substantial impact over time
on the manner in which the Company conducts its business. Such changes could
have a material adverse effect on the Company. The existence of pending health
care reform proposals could have a material adverse effect on the Company's
ability to raise capital. Furthermore, the Company's ability to commercialize
its potential products may be adversely affected to the extent that such
proposals have a material adverse effect on the business, financial condition
and profitability of other companies that are prospective corporate partners
with respect to certain of the Company's proposed products.
Possible Volatility of Share Price. Investors should be aware that
market prices for securities of companies such as Hybridon are highly volatile.
Factors such as the results of preclinical studies and clinical trials by the
Company or its competitors, fluctuations in the Company's operating results,
announcements of technological innovations or new commercial therapeutic
products by the Company or its competitors, governmental regulation,
developments in patent or other proprietary rights, of the Company or its
competitors, including litigation, public concern as to the safety of drugs
developed by the Company and general market conditions may have a significant
effect on the market price of the Company's Common Stock.
Antitakeover Provisions. The Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law. Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock. The existence of this provision can be expected to
deter certain business combinations, including transactions that might otherwise
result in holders of voting stock being paid a premium over the market price for
their shares.
The Restated Certificate of Incorporation of the Company (the "Restated
Certificate of Incorporation") provides for the division of the Board of
Directors into three classes as nearly equal in size as possible with staggered
three-year terms. In addition, the Restated Certificate of Incorporation
provides that directors may be removed only for cause by the affirmative vote of
the holders of at least two-thirds of the shares of capital stock of the
corporation entitled to vote. Under the Restated Certificate of Incorporation,
any vacancy on the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may be filled only by vote of a
majority of the directors then in office. The classification of the Board of
Directors and the limitations on the removal of directors and filling of
vacancies could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of the
Company.
The Restated Certificate of Incorporation also requires that any action
required or permitted to be taken by the stockholders of the Company at an
annual meeting or special meeting of stockholders may only be taken if it is
properly brought before such meeting and may not be taken by written action in
lieu of a meeting and will require reasonable advance notice by a stockholder of
a proposal or director nomination which such stockholder desires to present at
any annual or special meeting of stockholders. The Restated Certificate of
Incorporation further provides that special meetings of the stockholders may be
called only by the Chief Executive Officer or, if none, the President of the
Company or by the Board of Directors. Under the Company's Amended and Restated
By-Laws (the "By-Laws"), in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with certain requirements
regarding advance notice to the Company. The foregoing provisions could have the
effect of delaying until the next stockholders meeting stockholder actions which
are favored by the holders of a majority of the outstanding voting securities of
the Company. These provisions may also discourage another
17
<PAGE>
person or entity from making a tender offer for the Company's Common Stock,
because such person or entity, even if it acquired a majority of the outstanding
voting securities of the Company, would be able to take action as a stockholder
(such as electing new directors or approving a merger) only at a duly called
stockholders meeting, and not by written consent.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Restated Certificate of Incorporation and
the By-Laws require the affirmative vote of the holders of at least 75% of the
shares of capital stock of the Company issued and outstanding and entitled to
vote to amend or repeal any of the provisions described in the prior two
paragraphs. Moreover, the Board of Directors has the authority, without further
action by the stockholders, to fix the rights and preferences of, and to issue
shares of, Preferred Stock. In addition to these provisions of Delaware law, the
Restated Certificate of Incorporation and the Company's By-Laws, the terms of
the Company's outstanding 9% Notes, which were issued in the aggregate original
principal amount of $50.0 million and of which approximately $1.3 million in
principal amount remains outstanding, require the Company, upon a Change of
Control of the Company (as defined in the indenture for the 9% Notes (the
"Indenture"), to offer to repurchase the 9% Notes at a repurchase price equal to
150% of the principal amount thereof, plus accrued and unpaid interest to the
date of repurchase. Pursuant to the terms of the Convertible Preferred Stock the
Company may, at its election, pay dividends either in cash or in additional
shares of the Convertible Preferred Stock. The Company does not anticipate
paying any dividends on the Convertible Preferred Stock in the future. This
provision, together with the provisions of the Restated Certificate of
Incorporation described above and other provisions of the Restated Certificate
of Incorporation, may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these provisions may limit
the ability of stockholders to approve transactions that they may deem to be in
their best interests.
No Dividends On Common Stock or Cash Dividends on Preferred Stock
Anticipated in the Foreseeable Future. The Company has not paid any cash
dividends on the Common Stock since its inception and does not anticipate paying
any cash dividends on its Common Stock in the future. Pursuant to the terms of
the Convertible Preferred Stock the Company may, at its election, pay dividends
either in cash or in additional shares of the Convertible Preferred Stock. The
Company does not anticipate paying any cash dividends on the Convertible
Preferred Stock in the future. Declaration of dividends on the Common Stock, or
payment of cash dividends on this Convertible Preferred Stock, will depend upon,
among other things, future earnings, the operating and financial condition of
the Company, its capital requirements and general business conditions. However,
the Indenture pursuant to which the 9% Notes were issued limits the Company's
ability to pay dividends or make other distributions on its Common Stock or to
pay cash dividends on the Convertible Preferred Stock, and the Company is
currently prohibited from paying cash dividends under the Bank Credit Facility.
Liquidation Put Right. The initial purchasers (the "Liquidation Put
Holders") of certain of the shares (the "Put Shares") of Common Stock sold in
the Regulation S and the Regulation D Offerings have the right to put (the
"Liquidation Put") those shares back to the Company upon the liquidation of the
Company, but only after all other indebtedness and obligations of the Company
and all rights of any holders of any capital stock ranking prior and senior to
the Common Stock with respect to liquidation have been satisfied in full. The
Liquidation Put is not transferrable, however. Purchasers of Common Stock
pursuant to this Prospectus will therefore not be able to exercise the
Liquidation Put with respect to those shares. Any Liquidation Put Holders that
have not sold or otherwise transferred any Put Shares will, however, be able to
exercise the Liquidation Put with respect to those Put Shares upon a liquidation
of the Company. In such circumstances, holders of shares of the Company's Common
Stock that are not subject to the Liquidation Put right may receive smaller
liquidation distributions per share than they would have had no Liquidation Put
Holders exercised the Liquidation Put. As of December 1, 1998, there were
9,597,476 Put Shares outstanding.
Certain Federal Income Tax Consequences to the Company. For Federal
income tax purposes, net operating loss and tax credit carryforwards as of
December 31, 1997 are approximately $205,997,000 and $3,436,000, respectively.
These carryforwards will expire beginning on December 31, 2005. The Tax Reform
Act of 1986 provided for a limitation on the annual use of net operating loss
and tax credit carryforwards following certain ownership changes. The Company
believes that the securities offerings conducted by the Company are likely to
restrict severely the Company's ability to utilize its net operating losses and
tax credits in any particular year. Additionally, because the U.S. tax laws
limit the time during which net operating loss and tax credit carryforwards
18
<PAGE>
may be applied against future taxable income and tax liabilities, respectively,
the Company may never be fully able to use its net operating loss and tax
credits for federal income tax purposes.
Year 2000 Compliance. As has been widely publicized, many computer
systems and microprocessors are not programmed to accommodate dates beyond the
year 1999. The Company's exposure to this year 2000 ("Y2K") problem comes not
only from its own internal computer systems and microprocessors, but also from
the systems and microprocessors of its key suppliers, including utility
companies and payroll services.
The Company is currently evaluating all of its internal computer systems
and microprocessors in light of the Y2K problem. Testing of all its internal
computer systems and microprocessors should be completed by the end of the first
quarter of 1999. The Company does not expect the cost of bringing all the
Company's systems and microprocessors into Y2K compliance will be material. The
Company currently believes that all of its internal systems will be Y2K
compliant by the end of the third quarter of 1999.
The Company is not currently able to assess the Y2K readiness of its
research partners, or the potential impact, if any, of a research partner's
failure to be Y2K compliant. With regard to potential supplier Y2K problems, the
Company has compiled a list of its critical suppliers, and has sent a Y2K
questionnaire to each of them in order to permit the Company to ascertain the
Y2K compliance status of each. The Company is awaiting the return of these
questionnaires. The Company does not currently know of any key supplier Y2K
problems that could have a material effect on the Company's business. If through
a Y2K questionnaire or otherwise the Company becomes aware of any such problems
and is not satisfied that those problems are being adequately addressed, it will
take appropriate steps to find alternative suppliers.
It has been acknowledged by governmental authorities that Y2K problems
have the potential to disrupt global economies, that no business is immune from
the potentially far-reaching effects of Y2K problems, and that it is difficult
to predict with certainty what will happen after December 31, 1999.
Consequently, it is possible that Y2K problems will have a material effect on
the Company's business even if the Company takes all appropriate measures to
ensure that it and its key suppliers are Y2K compliant.
It is possible that the conclusions reached by the Company from its
analysis to date will change, which could cause the Company's Y2K cost estimates
and target completion dates to change.
Concentration of Ownership by Directors and Executive Officers. The
Company's directors and executive officers and their affiliates beneficially own
a significant percentage of the Company's outstanding Common Stock and
Convertible Preferred Stock. See "Security Ownership of Certain Beneficial
Owners and Management." As a result, these stockholders, if acting together, may
have the ability to influence the outcome of corporate actions requiring
stockholder approval. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company.
19
<PAGE>
THE COMPANY
Available Information About The Company
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the Commission's regional offices located at Seven World Trade
Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
also may be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Company is required to file electronic versions of these documents through the
Commission's Electronic Data Gathering, Analysis and Retrieval system (EDGAR).
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company has filed with the Commission a Registration Statement on
Form S-1 (together with all amendments, supplements, exhibits and schedules
thereto, the "Registration Statement") under the Securities Act, with respect to
the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, as certain items are
omitted in accordance with the rules and regulations of the Commission. For
further information pertaining to the Company and the Securities, reference is
made to such Registration Statement. Statements contained in this Prospectus
regarding the contents of any agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such agreement
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement may be inspected without charge at the office of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from the Commission at prescribed rates.
General
The Company, established in 1989, is a leader in the discovery and
development of novel genetic medicines. These novel medicines use antisense
technology (see "Technology Overview") to selectively inhibit the production of
disease-causing proteins at the genetic level. The Company's leadership position
is based on its development and therapeutic application of proprietary advanced
antisense chemistries and the establishment of a manufacturing business for the
large-scale synthesis of RNA and DNA (oligonucleotides) under GMP.
The Company believes it is the only company with
systemically-administered advanced chemistry antisense compounds in clinical
development. To date, the Company has initiated clinical development of three
compounds based on its proprietary advanced chemistries and has several
additional compounds in preclinical development.
The Company believes it is the only large-scale GMP manufacturer of
oligonucleotides, with approximately 50 customers representing three distinct
and diverse business areas: therapeutics, diagnostics and genomics. In addition,
the Company has significant scale-up ability (with a relatively low additional
capital investment) in its manufacturing facility, thereby providing the
capability to respond to the Company's, its collaborators' and its clients'
potential needs for large-scale production of oligonucleotides for use in these
diverse business areas.
The Company's efforts in the antisense field are based on an integrated
antisense technology platform combining patented and proprietary medicinal
chemistries, synthetic DNA manufacturing technology and analytical processes.
The Company's strategy is to leverage this technology platform by applying its
antisense oligonucleotides against a range of genetic targets associated with
major diseases, by manufacturing oligonucleotides for its own internal use and
on a custom contract basis for sale to third parties and by entering into
collaborations with large pharmaceutical company partners for the development
and commercialization of antisense oligonucleotide drugs directed against these
genetic targets.
In particular, the Company believes that these advanced chemistries
provide the potential for reduced side effects and enhanced metabolic stability,
which may result in less frequent dosing and therefore lower costs per
treatment, as well as the potential for oral administration. The Company has
three compounds in clinical development (one with two formulations using
different routes of administration) and several other compounds in advanced
preclinical development. The compounds in the clinical phase of drug development
are:
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- - GEM 231 for the treatment of a variety of cancers (gene target is
protein kinase A), which is currently in Phase II clinical trials in
patients with solid tumors who are no longer benefited by other
treatments;
- - GEM 92 for the treatment of HIV infection and AIDS, which has completed
a pilot Phase I clinical study in Europe. The Company believes this was
the first oral administration of antisense molecules to humans; and
- - GEM 132 for the treatment of systemic cytomegalovirus ("CMV") infections
and retinitis, which is now in Phase I/II clinical trials in the United
States and Canada. The Company believes these clinical trials are the
first clinical trials involving administration of a second-generation
chemistry oligonucleotide into humans.
The Company's compounds in preclinical development include a series of
antisense oligonucleotides with potential to reduce the production of vascular
endothelial growth factor ("VEGF"), which has been implicated in diseases of the
retina (e.g., diabetic retinopathy; age-related macular degeneration) related to
the abnormal formation of new blood vessels in the eye. These antisense
compounds targeting VEGF are also potential therapies for solid tumors. The
Company has completed some work on the use of VEGF antisense compounds in
psoriasis. Using antisense technology, the Company has also developed lead
compounds for the treatment of hepatitis C, and research compounds targeting
amyloid proteins for the treatment of Alzheimer's disease. See "Risk Factors --
Early Stage of Development; Technological Uncertainty" and "Risk Factors --
Uncertainty Associated with Clinical Trials."
An important part of the Company's business strategy is to enter into
research and development collaborations, licensing agreements and other
strategic alliances with third parties, primarily biotechnology and
pharmaceutical corporations, for the development and commercialization of its
products, and to engage in spin-outs of certain technology of the Company to
minority-owned subsidiaries in order to obtain alternative financing for such
technology. The Company is a party to a corporate collaboration with Searle, a
subsidiary of Monsanto Company, in the fields of cancer, cardiovascular disease
and inflammation/immunomodulation. Research compounds targeting the MDM-2
protein for the treatment of cancer have been developed by the Company; further
development of these compounds falls under the Searle collaboration. In
addition, the Company has out-licensed certain advanced chemistry compounds
based on proprietary genetic targets with respect to DNA methyltransferase to a
Quebec company, MethylGene, in exchange for a minority equity interest in
MethylGene, and is currently in the process of out-licensing certain advanced
chemistry compounds based on proprietary genetic targets with respect to the
human papilloma virus and hepatitis B virus genomes to another Quebec company,
OriGenix Technologies Inc. ("OriGenix"), in exchange for a minority equity
interest in OriGenix. The licensing of these programs will require the prior
approval of the Lender under the Bank Credit Facility. See "Description of
Capital Stock and Indebtedness -- Indebtedness -- Bank Credit Facility."
The Company's plan is to seek corporate collaborations with respect to
each of its compounds in development. The Company intends to proceed with its
GEM 231 clinical program through Phase II clinical trials, at which time it may
seek a corporate collaborator. The Company generally does not anticipate
proceeding with any of its other programs beyond their current stages of
development without a collaborative arrangement with a corporate partner. There
can be no assurance that the Company will enter into any collaborative
arrangements with third parties with respect to these or any of the Company's
future programs, nor can there be any assurance as to what the terms of such
collaborative arrangements will be. See "Risk Factors -- Need to Establish
Collaborative Commercial Relationships; Dependence on Partners."
In 1996, the Company formed its HSP Division to manufacture highly
purified oligonucleotide compounds both for the Company's internal use and on a
custom contract basis for sale to third parties, including the Company's
collaborative partners. The Company is manufacturing oligonucleotides in
compliance with GMP at its 36,000 square foot leased facility in Milford,
Massachusetts. The HSP Division first began production of oligonucleotide
compounds for sale to third parties in June 1996 and had revenues of
approximately $1.1 million in 1996, approximately $1.9 million in 1997 and
approximately $2.1 million through the third quarter of 1998. The HSP Division
also has received orders to provide analytical services and plans to expand its
product offerings to include proprietary intermediates used in the manufacture
of oligonucleotides. The Company has entered into a sales and supply agreement
with Applied Biosystems Division of Perkin-Elmer under which Perkin-Elmer refers
potential customers to the Company. See "Risk Factors -- Limited Manufacturing
Capability," "Risk Factors --Risks Associated with the HSP Division," and "Risk
Factors -- Patents and Proprietary Rights."
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Restructuring and Certain Other Developments
In July 1997, the Company terminated the development of GEM 91, its
first generation antisense drug for the treatment of AIDS and HIV infection,
based on a review of new data from an open label Phase II clinical trial of
patients with advanced HIV infection.
During the second half of 1997, following termination of the GEM 91
program, the Company implemented a restructuring plan to reduce expenditures on
a phased basis over the balance of 1997 and into 1998 in an effort to conserve
its cash resources. As part of this restructuring plan, in addition to
terminating the clinical development of GEM 91, the Company reduced or suspended
programs unrelated to its core advanced chemistry antisense drug development
programs. In addition, the Company substantially reduced the number of its
employees and substantially reduced operations at its Paris, France office. As
part of this restructuring, the Company reviewed all outside testing, public
relations, travel and entertainment and consulting arrangements and terminated
or renegotiated various of these arrangements.
In December 1997, because of the Company's failure to satisfy the
minimum net tangible assets criteria of the Nasdaq National Market, the
Company's Common Stock was delisted from the Nasdaq National Market and began
being quoted on the NASD OTC Bulletin Board. In addition, in December 1997, the
Company effected a one-for-five reverse stock split of its Common Stock. All per
share Common Stock information contained in the Registration Statement of which
this Prospectus is a part (other than in the Exhibit Index) has been adjusted to
reflect this reverse split.
On February 6, 1998, the Company commenced the Exchange Offer to the
holders of the 9% Notes to exchange the 9% Notes for Convertible Preferred Stock
and certain warrants of the Company. On May 5, 1998, noteholders holding $48.7
million of principal and $2,361,850 of accrued interest tendered such principal
and accrued interest to the Company for 510,505 shares of Convertible Preferred
Stock and Class A Warrants to purchase 3,002,956 shares of Common Stock with an
exercise price of $4.25 per share.
On May 5, 1998, the Company completed a private offering of equity
securities raising total gross proceeds of approximately $27.3 million from the
issuance of 9,597,476 shares of Common Stock, 114,285 shares of Convertible
Preferred Stock and Warrants to purchase 3,329,486 shares of Common Stock at
$2.40 per share. The gross proceeds included the conversion of approximately
$6.2 million of accounts payable, capital lease obligations and other
obligations into Common Stock. The Company incurred approximately $2.6 million
of cash expenses related to the private offering and issued 597,699 shares of
Common Stock and Warrants to purchase 1,720,825 shares of common stock at $2.40
per share, subject to adjustment, to the placement agents, as more fully
described below. See also "Certain Relationships and Related Transactions" for
information concerning compensation paid to the placement agents.
This restructuring of the Company, together with employee attrition,
resulted in a reduction in (a) the number of the Company's employees from 213 at
June 30, 1997 to 102 at December 31, 1997 and 50 at December 1, 1998, (b) the
subleasing of an aggregate of approximately 61,000 square feet of space, (c) the
relocation of its headquarters from Cambridge, Massachusetts (the "Cambridge
Facility") to its manufacturing facility in Milford, Massachusetts, (d) the
termination of its lease for the Cambridge Facility, (e) the sale of its limited
partner interest in Charles River Limited Partnership, the former owner of the
Cambridge Facility, and (f) the termination of its office lease in Paris,
France. As a result, the Company has significantly scaled back the level and
scope of its operations since mid-1997. The restructuring has now been
completed. The Company is continuing to explore opportunities to reduce
operating expenses in an effort to conserve its cash resources.
TECHNOLOGY OVERVIEW
Introduction
Antisense technology involves the use of synthetic segments of DNA to
interact at the genetic level with target messenger RNA, which codes for the
production of proteins. In contrast to traditional drugs, which are designed to
interact with protein molecules associated with diseases, antisense drugs work
at the genetic level to interrupt the process by which disease-causing proteins
are produced. The Company believes that drugs based on antisense technology may
have broader applicability, greater efficacy and fewer side effects than
conventional drugs
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because antisense compounds are designed to intervene early in the disease
process at the genetic level and in a highly specific fashion.
Proteins play a central role in virtually every aspect of human
metabolism. Almost all human diseases are the result of inappropriate protein
production or performance. Traditional drugs are designed to interact with
protein molecules that support or create diseases. Antisense drugs work at the
genetic level to interrupt the process by which disease-causing proteins are
produced.
The information necessary to produce a specific protein is encoded in a
specific gene. The information required to produce all human proteins is
contained in the human genome and its collection of more than 100,000 genes.
Each gene is made up of DNA, which is a duplex of entwined strands -- a "double
helix." In each duplex, the building blocks of DNA, called nucleotides, are
bound or "paired" with complementary nucleotides on the other strand. The
precise sequence of a nucleotide chain that is the blueprint for the information
that is used during protein production is called the "sense" sequence. The
sequence of a nucleotide chain that is precisely complementary to a given sense
sequence is called its "antisense" sequence.
Protein production, also called synthesis or expression, typically
involves a two-phase process. First, the information contained in the gene is
transcribed from the sense strand of DNA into one or more molecules of messenger
RNA. Second, the information encoded in the messenger RNA is translated into the
sequence of amino acids that comprise the protein. The information contained in
a single gene is often repeatedly transcribed into multiple copies of messenger
RNA, which in turn are repeatedly translated, giving rise to multiple copies of
the same protein.
Conventional Drugs
Most drugs are chemicals designed to induce or inhibit the function of a
target molecule, typically a protein, with as few unwanted side effects as
possible. However, conventional drugs are not available for the treatment of
many diseases because of their relatively low level of selectivity. The
selectivity of conventional drugs is usually determined by only a few, generally
two or three, points of interaction at the binding site of the target molecule.
Frequently, sites on other non-target molecules resemble the target binding site
sufficiently to permit the conventional drug to bind to some degree. This lack
of selectivity may result in decreased efficacy, unwanted side effects or a need
to administer the drug in less than optimal dosages due to toxicity concerns. In
addition, the development of conventional drugs is generally time consuming and
expensive, as thousands of compounds must be synthesized to find one with the
right efficacy and side effect profile.
Gene Expression Modulation
In contrast to conventional drugs, which usually interact with
disease-associated proteins after they have been produced, gene expression
modulation technology is intended to regulate the production of
disease-associated proteins, thus targeting an earlier biochemical process.
Advances in genomic science have identified many targets for gene expression
modulation products. Once a gene that codes for a disease-associated protein is
identified, an oligonucleotide based on the complementary sequence for the
selected site can be synthesized and its pharmaceutical properties optimized by
chemical modification. These chemically-modified oligonucleotides may be
composed of DNA, RNA or a combination of the two.
Chemically-modified oligonucleotides can be designed to attack a disease
at the genetic level by binding to messenger RNA or DNA to prevent production of
disease-associated proteins. Binding to messenger RNA generally is used in the
"antisense" approach to gene expression modulation.
In the antisense approach to gene expression modulation,
chemically-modified oligonucleotides, which consist of the antisense sequence to
a selected region on a target messenger RNA, are used to inhibit the synthesis
of a particular protein. Because the sequence of nucleic acid bases of a
chemically-modified antisense oligonucleotide is complementary to its target
sequence on a messenger RNA, the antisense oligonucleotide forms a large number
of bonds at the target site, typically between 15 and 30, greatly increasing the
probability that the oligonucleotide will hybridize (bind) tightly to the
selected type of messenger RNA. Since a single messenger RNA may be translated
repeatedly into a protein, a single chemically-modified antisense
oligonucleotide may inhibit the synthesis of many copies of a protein. Moreover,
in vitro tests have shown that chemically-modified antisense oligonucleotides
form complexes with their target messenger RNAs. These complexes, which contain
certain chemically-modified antisense oligonucleotides activate RNase H, a
cellular enzyme, in a manner that destroys the
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messenger RNA to which the oligonucleotide is bound, without destroying the
oligonucleotide itself, thus freeing the oligonucleotide to bind with another
identical messenger RNA.
HYBRIDON ANTISENSE TECHNOLOGY
Hybridon has developed an integrated antisense technology platform
based on proprietary medicinal chemistries, analytical chemistry and
manufacturing technology. The development of Hybridon's antisense chemistry has
been directed by Dr. Sudhir Agrawal, the Company's Chief Scientific Officer, and
builds on the pioneering work in the antisense field begun in the 1970s by Dr.
Paul C. Zamecnik, a founder and director of the Company, at the Massachusetts
General Hospital ("MGH") and continued by Dr. Zamecnik at the Worcester
Foundation for Biomedical Research, Inc., which has since merged into the
University of Massachusetts (the "Worcester Foundation"). Currently, Dr.
Zamecnik is affliated with MGH. He continues to serve as a Director of, and
consultant to, Hybridon.
Medicinal Chemistries. Hybridon's scientists have designed and
synthesized over 20 proprietary families of synthetic antisense oligonucleotide
chemistries including DNA/RNA hybrids, also called mixed backbone chemistries.
The Company believes that antisense compounds based on these chemistries may
demonstrate a range of favorable pharmaceutical attributes, including: reduced
side effects, increased duration of action, increased potency and susceptibility
to lower dosing, less frequent dosing, controlled release formulation and
alternative routes of administration, including oral administration. Hybridon
designed its first generation phosphorothioate oligonucleotides to increase
their resistance to enzymatic degradation and their biological activity and to
act catalytically by triggering RNase H. GEM 91 was such a
phosphorothioate-modified oligonucleotide. Hybridon has used the insights gained
by it in the human clinical trials of GEM 91 in the design of its more advanced
oligonucleotide chemistries.
Manufacturing Technology. The Company's expertise in chemically-modified
oligonucleotides has served as the foundation of its manufacturing technology
and know-how. The Company has developed proprietary technology to increase the
purity of oligonucleotide products, enhance the efficiency of the production
process and increase the scale of production. In 1996, the Company completed
development of two separate commercial scale oligonucleotide synthesizers, one
in an internal program and one in a collaboration with Pharmacia Biotech, Inc.
The synthesizer developed by Hybridon is capable of producing advanced chemistry
antisense oligonucleotides. In addition, the Company has implemented proprietary
purification processes, which use water in place of organic solvents,
simplifying environmental compliance and permitting purification of kilogram
batches of oligonucleotides. The Company has also developed proprietary chemical
synthesis processes and novel reagents used in the synthesis process, which the
Company believes may further decrease the cost of production of its modified
oligonucleotides.
Proprietary Analytical Tools and Processes. The Company has established
proprietary analytical tools and processes that enable it to analyze
oligonucleotide compounds with greater speed and accuracy when compared to
traditional methods. Hybridon has developed a novel method of determining
antisense purity that is sensitive to a single DNA base difference; this method
is significantly more accurate than traditional chromatography methods. The
Company uses the information that it obtains with its proprietary analytical
tools and processes to improve production quality control, to comply with
regulatory requirements and to monitor the pharmacokinetic behavior of its
oligonucleotide compounds in preclinical studies and clinical trials.
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS
The Company is focusing its efforts on drug development and discovery
programs involving antisense compounds based on the Company's proprietary mixed
backbone advanced chemistries. These compounds are directed towards diseases in
the three major therapeutic areas of oncology, virology and opthalmology. In the
table set forth below, the compounds are grouped according to their stage of
development.
The Company's plan is to seek corporate collaborations with respect to
each of its compounds in development. The Company intends to proceed with its
GEM 231 clinical program through Phase II clinical trials, at which time it may
seek a corporate collaborator. The Company generally does not anticipate
proceeding with any of its other programs described below beyond their current
stages of development without a collaborative arrangement with a corporate
partner.
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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Primary Therapeutic
Target Indication(s) Status(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLINICAL PROGRAMS
Protein Kinase A Cancer GEM 231 - (Intravenous
Formulation) - Phase II/Seeking
Partner
HIV-1 HIV-1 Infection and GEM 92 - (Intravenous and
AIDS Oral Formulations) - Pilot
Phase I/Seeking Partner
Cytomeglavirus CMV Retinitis GEM 132 for Intravitreal
Injection - Phase I/II/Seeking
Partner
CMV (Systemic) GEM 132 for Systemic
Injection - Phase I/II/Seeking
Partner
PRECLINICAL PROGRAMS
MDM-2 Cancer Research Compounds/Searle
Collaboration
Vascular Endothelial Growth Cancer Angiogenesis Preclinical/Seeking Partner
Factor
Retinopathies (e.g. GEM 220 - Preclinical/Seeking
macular degeneration and Partner
diabetic retinopathy)
Psoriasis Preclinical/Seeking Partner
Hepatitis C Virus Hepatitis; Liver Cancer Lead Compounds/Seeking
Partner (2)
Amyloid Proteins Alzheimer's Research Compounds/Seeking
Partner
DRUG DEVELOPMENT PROGRAMS IN HYBRIDON SPINOUTS
DNA Methyltransferase Cancer Phase I/MethylGene Inc. (4)
Human Papilloma Viruses Genital Warts Preclinical (2)(3)
Hepatitis B Virus Hepatitis; Liver Cancer Research Compounds (2)(3)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Phase II clinical trials: The product is administered to a limited patient
population to (i) evaluate the effectiveness for specific indications and
(ii) identify possible short-term adverse effects and safety risks.
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Phase I clinical trials: The product is administered to a limited number of
healthy human subjects or patients and tested for pharmacokinetics
(absorption, metabolism, distribution and excretion), pharmacologic action,
dose response, safety and, if possible, early evidence of effectiveness.
Pilot Phase I Study: The product is administered to a small number of
patients to assess safety, pharmacokinetics and other data on a preliminary
basis.
Preclinical: Compounds are undergoing additional testing and alternative
chemistries are being evaluated in biological assays and/or appropriate
animal models in order to assess efficacy, toxicology and pharmacokinetics
and to select particular chemistries with optimal pharmaceutical
attributes. If these procedures are completed satisfactorily and other
scientific and financial criteria are met, the Company may initiate
IND-enabling Good Laboratory Practices ("GLP") studies and begin
preparation of an IND application.
Lead Compounds: One or more antisense compounds have demonstrated
biological activity for a particular gene target in a specific and relevant
biological assay.
Research Compounds: Appropriate target gene(s) and sequence(s) are being
determined; antisense compounds are being synthesized and screened for
biological activity.
(2) Developed as part of the Company's collaboration with Roche, which was
terminated by Roche as of February 28, 1998. All rights relating to the
hepatitis B program have reverted to the Company. Roche has agreed to
assign all rights to the hepatitis C and human papilloma virus programs to
the Company in connection with such termination.
(3) The Company is in the process of licensing its hepatitis B and HPV programs
to OriGenix, a Quebec corporation, in exchange for a minority equity
interest in OriGenix. The licensing of these programs will require the
prior approval of the Lender under the Bank Credit Facility. See
"Description of Capital Stock and Indebtedness -- Indebtedness -- Bank
Credit Facility."
(4) Technology relating to target has been licensed to and is being developed
by MethylGene, a Canadian company co-founded by the Company and in which
the Company owns a minority interest. Two IND applications were filed in
December 1998 in Canada (and one is expected to be filed in the United
States in late December 1998). Phase I trials are expected to commence
after the mandatory waiting periods have expired.
CLINICAL PROGRAMS
Protein Kinase A
An increased propensity for cell proliferation is a critical feature of
cancer cells. This increased proliferation can result from changes in
signal-transduction pathways or alterations in components controlling the cell
cycle. The signal transduction molecule Protein Kinase A ("PKA") has been
implicated in the formation and proliferation of various solid tumors (including
colon, breast, ovarian and lung). In addition, a number of tissue culture and
animal studies have shown a correlation between PKA inhibition and anti-cancer
activity.
Specifically, expression of the RI[alpha] subunit of PKA has been shown
to play a role in the transformation and maintenance of cancerous cells. The
RI[alpha] subunit is found in type I PKA. Variations in the ratio of type I and
type II PKA isoforms have been linked with cell growth and differentiation.
Specifically, increased expression of type I has been associated with cell
growth and cell de-differentiation, or transformation, while type II is
associated with cessation of growth and cell differentiation.
The Company has identified an antisense inhibitor of the PKA RI[alpha]
subunit, GEM 231, based on its proprietary advanced chemistry. Administration of
GEM 231 orally or by injection has been shown to inhibit tumor growth in
multiple mouse xenograft models of human solid tumors. In addition, in certain
mouse xenograft models, the efficacy of GEM 231 has been shown to be effective
alone and in combination with several chemotherapy agents commonly used in the
treatment of solid tumors. Clinical studies with GEM 231 have shown
significantly improved safety over first generation antisense drugs.
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GEM 231 is proposed for use in breast cancer, colon cancer and
non-small cell lung cancer ("NSCLC"), among others. Of these, the Company
believes that the highest unmet need is for first-line therapy for Stage III and
IV NSCLC. Lung cancer is the number one cause of cancer death in the United
States. This is due to many factors, including high incidence, poor screening
and limited effectiveness of current chemotherapeutic agents. Surgery is an
effective treatment for NSCLC at stages I and II, but is much less effective for
Stage III and beyond. Unfortunately, only 10-30% of the 133,000 new cases of
NSCLC in the United States in 1996 were diagnosed at an early stage of the
disease. For the remaining 70-90% of new cases, surgery in combination with
adjuvant chemotherapy, or chemotherapy alone, will result in a statistical
5-year survival rate of only 15-25% in stage III and 3% in stage IV NSCLC
patients.
Current chemotherapy agents have several dose-limiting toxicities,
including effects on bone marrow, renal, neural and gastrointestinal function,
and therefore require 3 to 4 week treatment holidays. Due to the specificity of
the GEM 231 target, it is anticipated that GEM 231 will be better tolerated in
human patients than traditional chemotherapeutic agents. In preclinical toxicity
studies as well as the Company's recently completed Phase I clinical trial, GEM
231 did not exhibit any of the dose-limiting toxicities found in current
chemotherapeutic agents. GEM 231, an advanced chemistry antisense molecule, has
also been shown to have a significantly improved safety profile relative to
first generation oligonucleotides.
In January 1998, the Company initiated a Phase I dose-escalation trial
of GEM 231 in patients with solid tumors which had not been cured by prior
therapy ("refractory solid tumors"). The objective of this trial was to
determine the maximum tolerated dose of GEM 231 when administered as a
twice-weekly, two-hour continuous infusion. Single doses of 360 mg/m2 have been
established as safe; the maximum tolerated dose for repeated administration is
240 mg/m2. After continuous dosing on this schedule, GEM 231 demonstrated a
significantly improved safety compared to the Company's first generation
antisense drug, GEM 91. In this trial, thirteen patients received escalating
doses of 20, 40, 80, 160, 240 and 360 mg/m2. Tumor histologies included NSCLC
(4), renal cell carcinoma (3), sarcoma (2) and others (4). Of the 13 patients,
one with colorectal cancer whose serum concentration of carcinoembryonic antigen
(CEA) was rapidly increasing had a slight decrease in CEA at the end of 8 weeks
of GEM 231 treatment at 360 mg/m2. There were no other examples of possible
clinical benefit among this group of heavily pre-treated patients with diverse
tumor types.
GEM 231 was well tolerated in this study. In particular, there was no
drug-related decrease in platelet counts and complement activation did not
occur, although high plasma concentrations of GEM 231 (up to72 ug/mL) were
achieved at the end of the two-hour infusion. Two patients complained of fatigue
and were found to have low-grade fever during and shortly after the initial
infusion. One of these patients had bacterial infection related to catheter
sepsis, which the Company believes was the probable cause of fever and symptoms.
The most common abnormality related to GEM 231 administration was mild to
moderate elevation of certain liver enzymes in the blood, usually after 4 to 7
weeks of continuous twice-weekly dosing. When GEM 231 was discontinued, in all
cases, these findings rapidly reverted toward or to normal. This is the only
example of an expected oligonucleotide-related adverse effect, but it occured at
a higher dose, and after a larger systemic exposure to drug, than was the
experience with a first-generation molecule, GEM 91.
In December 1998, the Company initiated a Phase II dose-escalation
trial of GEM 231 in patients with refractory solid tumors. The objectives of
this trial are to determine the safety of GEM 231 when administered as a
once-weekly, twenty-four hour continuous infusion. It is anticipated that the
24-hour infusion will result in lower steady-state GEM 231 plasma concentrations
than those achieved in plasma following two-hour infusion delivering the same
daily dose. Consequently, concentration-related safety issues are not expected
with this revised infusion schedule. The safety focus involves possible effects
associated with effectively down regulating the genetic target (PKA RI[alpha])
or the effects of unanticipated cumulative toxicities from repeated
administration of the drug.
The Company also plans to initiate Pilot Phase II studies of 15-to-20
patients each in at least two relevant tumor types and Phase I/II studies using
GEM 231 in combination with other antitumor agents in 1999.
HIV-1 and AIDS
AIDS is caused by infection with HIV and leads to severe,
life-threatening impairment of the immune system. HIV causes immunosuppression
by attacking and destroying T-cells, which coordinate much of the network of
normal immune responses. HIV infection usually leads to AIDS, although
progression to symptomatic disease may take many years. The process of HIV
replication involves the integration of a DNA copy of the viral RNA
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into the human genome, the transcription of the DNA copy into messenger RNA
("reverse transcription") and the synthesis of viral proteins and copies of
viral RNA for packaging into new virus particles that may infect other cells.
By the end of 1998, according to new estimates from the Joint United
Nations Programme on HIV/AIDS ("UNAIDS") and the World Health Organization
("WHO"), the number of people living with HIV will have grown to 33.4 million,
10% more than just one year ago. Altogether, since the start of the epidemic
about two decades ago, HIV has infected more than 47 million people. Although it
is a slow-acting virus that can take a decade or more to cause severe illness
and death, HIV has already cost the lives of nearly 14 million adults and
children. An estimated 2.5 million of these deaths occurred during 1998, more
than ever before in a single year.
Many drugs for the treatment of HIV infection and AIDS have received
marketing approval from the FDA and from other regulatory authorities. The use
of two to four of these agents in combination, Highly Active Anti-Retroviral
Therapy ("HAART therapy"), has demonstrated prolonged benefit on surrogate
markers (viral RNA and CD4+ lymphocyte counts) and on sustained clinical
remission. The standard HAART therapy involves treatment with a protease
inhibitor in conjunction with two inhibitors of reverse transcriptase. While use
of these regimens has been associated with decreased mortality rates and
important improvements in the quality of life for patients with AIDS, there are
increasing reports of failure of HAART therapy to sustain the initially-achieved
viral suppression and clinical benefit. The Company believes that these reports
underscore the need for new antiretroviral therapies, preferably active against
targets other than protease or reverse transcriptase.
The Company has completed a pilot Phase I clinical study in Europe of
GEM 92, the Company's advanced chemistry compound for the treatment of HIV-1
infection and AIDS. This study was designed to explore the safety and to provide
information on the pharmacokinetics of GEM 92 after oral and intravenous dosing.
All doses administered in the pilot study were well tolerated and GEM 92 was
detected in the blood after both oral and intravenous dosing. The Company
believes this was the first oral administration of antisense molecules to
humans.
The Company developed GEM 92 using insights gained in the development
and the clinical trials of GEM 91, which was discontinued based on preliminary
data from a Phase II clinical trial in which three of the nine subjects treated
had experienced decreases in platelet counts that required dose interruption.
GEM 92 differs from GEM 91 in that GEM 92 is based on the Company's advanced
chemistries, which the Company believes provide the potential for enhanced
safety and metabolic stability compared to the first-generation GEM 91. The
Company believes that this improved safety and stability may make it possible to
achieve clinical efficacy without dose-limiting side effects and may make oral
dosing feasible.
Cytomegalovirus
Cytomegalovirus ("CMV") is a member of the herpes virus family which
exists latently in approximately 60% of the general population in the United
States and in approximately 90% of the HIV/AIDS population. Because of their
immunocompromised state, AIDS patients often suffer from active CMV infection.
In this patient population, CMV may be manifested as retinal, gastrointestinal,
hepatic, pulmonary and/or neurological disease. The most frequent manifestation
of CMV infection in AIDS patients is CMV retinitis, in which lesions in the eye
progress rapidly and can result in blindness if left untreated. CMV infection is
also a medical problem in other immunocompromised patients, such as those who
have undergone organ transplantation The Company does not anticipate proceeding
further with the development of GEM 92 until a collaborative arrangement is
established with a corporate partner.
Although the market for CMV drugs is currently relatively small, the
Company expects the market to grow due to (i) possible failures of HAART therapy
and (ii) CMV breakthrough during HAART therapy at CD4+ lymphocyte counts above
100/mm3. Failures of HAART therapy may occur as a result of development of
resistance, intolerance and lack of compliance due to complex dosing regimens
involving multiple products.
GEM 132, the Company's advanced chemistry antisense oligonucleotide for
the treatment of CMV infection, has demonstrated significant inhibition of the
replication of CMV in tissue culture assays. GEM 132 has demonstrated activity
in cell culture against both clinical isolates and laboratory stains which have
become resistant to current therapies, such as ganciclovir. In cell culture
studies, GEM 132 has demonstrated significantly more potent anti-viral activity
than the two existing therapies against which it has been tested, ganciclovir
and foscarnet.
The Company has conducted Phase I and Phase I/II clinical trials of GEM
132. In these trials, the Company studied two different routes of
administration. In an escalating dose, Phase I/II multicenter trial in the
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United States and Canada, in which GEM 132 was administered by injection into
the vitreous of the eye, the Company studied the safety and activity of GEM 132
in patients with CMV retinitis who are no longer able to benefit from marketed
therapies. In Phase I trials in normal volunteers, the Company has administered
a series of single and multiple dose regimens, employing two-hour intravenous
infusions of up to 150 mg/dose at weekly intervals over four weeks. In Phase
I/II studies involving patients infected both with HIV and CMV, the Company
evaluated the effects of multiple two-hour intravenous infusions, given at
weekly or biweekly intervals, on the quantities of CMV cultured from the semen
as a measure of antiviral activity. All doses studied to date in these clinical
trials were well tolerated. No clinical studies with GEM 132 are on-going and no
additional clinical studies of GEM 132 are currently planned.
A competitor of the Company has recently received FDA approval to
market an antisense therapeutic for the treatment of CMV. See "Risk Factors --
Competition."
PRECLINICAL PROGRAMS
Angiogenesis
Under normal conditions, angiogenesis (formation of new blood vessels)
is tightly regulated and occurs only during physiological conditions such as
wound healing, embryonic development and the menstrual cycle. There are
currently no effective treatments for the aberrant angiogenesis associated with
certain pathological conditions, such as tumor growth, ocular
neovascularization, psoriasis and rheumatoid arthritis.
Vascular Endothelial Growth Factor ("VEGF") is a protein which has been
shown to contribute to new blood vessel growth. VEGF has been shown to be a
tumor angiogenesis factor, contributing to new vessel growth. The clinical
relevance of VEGF is suggested by its angiogenesis-associated expression in
glioblastoma multiforme, a form of malignant brain tumor, in vivo. Several
studies in experimental animal model systems have shown that inhibition of VEGF
will inhibit tumor vascularization. In addition, VEGF has been shown to provide
an autocrine growth stimulus for some tumor cell lines, including multiple colon
carcinoma, melanoma and glioblastoma multiforme cell lines.
Hybridon has identified specific sequences on the VEGF messenger RNA as
targets for antisense oligonucleotides. Several advanced chemistry compounds
have been synthesized, including GEM 220, that inhibit the expression of the
VEGF gene in tissue culture assays.
Ophthalmology. Overexpression of VEGF has also been implicated in four
major causes of blindness: late stage, age-related macular degeneration, which
afflicts approximately 5,000,000 people in the United States; proliferative
diabetic retinopathy, the major cause of blindness in diabetics which affects
approximately 500,000 people in the United States; central retinal vein
occlusion, which afflicts approximately 200,000 people in the United States; and
retinopathy of prematurity, which affects approximately 10,000 premature
newborns annually in the United States Hybridon has identified specific
sequences on the VEGF messenger RNA as targets for chemically-modified antisense
oligonucleotides and is synthesizing chemically-modified antisense
oligonucleotides designed to inhibit the expression of the VEGF gene in retinal
cells. These oligonucleotides have been shown in an animal model of retinopathy
to inhibit vascular proliferation and prevent aberrant angiogenesis in the
retinas of mice in a model for retinopathy of prematurity.
Oncology. Angiogenesis is a key prerequisite for solid tumor growth and
may also constitute an early event in tumorigenesis. In order for tumor cell
masses to grow beyond a few millimeters in size, additional vascularization is
needed. In fact, tumor growth has been shown to slow or stop in direct
proportion to blood supply. GEM 220 has been shown to inhibit tumor
vascularization in animal tumor models. The Company hopes to identify antisense
inhibitors of VEGF that inhibit tumor growth as well.
A VEGF inhibitor would have application in all solid tumors. In
particular, the Company hopes its VEGF product will be an effective treatment
for advanced and metastatic prostate cancer. 15% of new patients, or 46,500 new
cases in 1996, are first diagnosed with metastatic prostate cancer. The
prognosis at this stage is poor, with a statistical 5-year survival rate of only
30%.
Dermatology. VEGF, in association with its role in angiogenesis, has
recently been implicated in psoriasis, which currently afflicts more than
6,000,000 people in the United States with between 150,000 and 260,000 new
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cases in the United States each year. Hybridon has identified specific sequences
on the VEGF messenger RNA as targets for chemically-modified antisense
oligonucleotides and has synthesized advanced chemistry antisense
oligonucleotides that have inhibited the expression of the VEGF gene in tissue
culture assays. The Company has explored optimal forms of topical delivery of
oligonucleotides to the basal layers of the epidermis, where VEGF has been found
to be overexpressed in psoriasis.
Hepatitis C Virus
There are approximately 3,900,000 people in the United States carrying
the hepatitis C virus, and approximately 28,000 individuals in the United States
become infected with hepatitis C each year. Approximately 60% of those who
contract the virus each year develop chronic hepatitis C infections which is
correlated with liver failure, cirrhosis and liver cancer. Chronic infection due
to hepatitis C is a significant disease in Japan and other Pacific Rim
countries, and has been linked to the development of primary liver cancer.
Pursuant to its collaboration with Roche, the Company identified through joint
research with Roche specific sequences on the messenger RNA as targets for
chemically modified antisense oligonucleotides and synthesized a lead compound
that inhibited hepatitis C viral gene expression in tissue culture assays. In
September 1997, the Company received notification from F. Hoffman-La Roche Ltd.
("Roche") that Roche had decided not to pursue further its antisense
collaboration with the Company and was terminating the collaboration effective
February 28, 1998. As part of this termination, Roche has agreed to assign its
patent rights in this program to the Company.
Murine Double Minute-2
MDM-2 is a human oncogene which has been shown in vitro studies to
encode a protein that binds to and inactivates tumor suppressor genes p53 and
Rb. Recent studies by a number of academic institutions have suggested that
overexpression of the MDM-2 gene is present in approximately 70% of all breast
cancers and correlates with increased malignancy as well as drug resistance. The
Company, in collaboration with two academic institutions, has identified
specific sequences on the messenger RNA as targets for chemically-modified
antisense oligonucleotides and have synthesized chemically-modified antisense
oligonucleotides that inhibit MDM-2 production in tissue culture assays. The
Company has an exclusive license to these sequences. Preliminary studies are
being conducted in animal models. The MDM-2 program is being further developed
in collaboration with Searle.
Amyloid Proteins
Alzheimer's disease is a neurodegenerative disease which is the most
common cause of dementia in the elderly. It is estimated to affect approximately
4,000,000 individuals in the United States. The presence of amyloid precursor
protein ("APP") in the brain at abnormal sites and in abnormal amounts has been
reported to be associated with Alzheimer's disease. Hybridon has identified a
specific sequence on the messenger RNA as a target for chemically-modified
antisense oligonucleotides and has synthesized chemically-modified antisense
oligonucleotides that inhibit APP production in tissue culture assays.
Other Cancer Targets
The Company believes there are significant addtional opportunities for
the use of antisense for the treatment of cancer. Antisense provides (1)
genetically-directed therapy for contemporary cancer treatments; (2) rapid
development of anti-cancer agents targetting newly discovered genetic defects;
and (3) potentially low toxicity, supporting long term therapy for single agent
or combination use. For these reasons, the Company is exploring new antisense
targets relevant to the treatment of cancer.
DRUG DEVELOPMENT PROGRAMS IN HYBRIDON SPINOUTS
MethylGene, Inc.
DNA Methyltransferase. DNA methyltransferase is a regulatory protein
that has been implicated in the processes of cell growth and differentiation and
has been shown to be overexpressed in some tumors, such as small cell lung
cancer, colon cancer and breast cancer. The Company has identified specific
sequences on the messenger RNA as targets for chemically-modified antisense
oligonucleotides and has synthesized chemically-modified antisense
oligonucleotides that alter DNA methylation of cultured human cancer cells.
These compounds inhibit the ability of such cells to grow in cell culture and
their ability to form tumors in mice. The Company has licensed the
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technology relating to the development of this compound to MethylGene, which is
currently developing this technology.
OriGenix Technologies, Inc.
Human Papilloma Viruses. Human papilloma viruses are associated with a
variety of warts, including benign genital warts which, if untreated, can lead
to cervical cancer. Each year, condyloma acuminata (genital warts) are diagnosed
in approximately 750,000 patients in the United States and accounts for more
than 2,000,000 visits to health care providers in the United States. HPV
infections are the most common sexually transmitted diseases in the world today,
with an estimated 11 to 46 percent of sexually active women having DNA evidence
of HPV infection. Traditional therapies include wart removal through
cryotherapy, laser therapy or excisional surgery; topical application of
formulations of podophyllotoxin, trichloroacetic acid and salicylic acid or 5-
fluorouracil, or alternatively, direct injections of interferon into the wart.
While existing therapies may help eliminate the warts, none of them eradicates
the virus. Consequently, recurrence of genital warts, as well as transmission of
the virus, remains a significant problem.
Pursuant to its collaboration with Roche, the Company identified through
joint research with Roche specific sequences on the messenger RNA of the
papilloma virus as targets for chemically-modified antisense oligonucleotides
and synthesized an advanced chemistry lead compound that inhibited human
papilloma virus gene expression in an animal model of wart-like tissue
proliferation. In connection with Roche's termination of its collaboration with
the Company, Roche has agreed to assign all of its rights to the lead compound
to the Company. The Company is currently in the process of licensing this
technology to OriGenix in exchange for a minority equity interest in OriGenix.
The licensing of this technology to OriGenix will require the prior approval of
the Lender under the Bank Credit Facility. See "Description of Capital Stock and
Indebtedness -- Indebtedness -- Bank Credit Facility."
Hepatitis B Virus. Hepatitis B is a major health problem throughout the
world, with endemic infection in some less developed countries. Hepatitis B
infections can lead to liver cirrhosis and cancer of the liver. The WHO
estimates there are more than 1,000,000 new cases of hepatitis B infection
annually in developed countries and 350 million chronically infected carriers
worldwide. Based on data from the Center for Disease Control, an estimated 30
percent of these will progress to symptomatic acute infections while a total of
10 to 15 percent will become chronic hepatitis B carriers at risk of chronic
liver disease and progression to cirrhosis or liver cancer.
Approximately 1,200,000 individuals in the United States carry the
hepatitis B virus. There are an estimated 200,000 to 300,000 new hepatitis B
infections in the United States each year. Pursuant to its collaboration with
Roche, Hybridon identified through joint research with Roche specific sequences
on the messenger RNA as targets for chemically-modified antisense
oligonucleotides and synthesized chemically-modified antisense oligonucleotides
that inhibit the expression of hepatitis B virus in cell cultures. Although
Roche determined not to pursue this program, the Company is continuing its
development efforts. All rights relating to the Roche-sponsored research with
respect to hepatitis B reverted to the Company when Roche determined not to
pursue the program. The Company is currently in the process of licensing this
technology to OriGenix in exchange for a minority equity interest in OriGenix.
The licensing of this technology to OriGenix will require the prior approval of
the Lender under the Bank Credit Facility. See "Description of Capital Stock and
Indebtedness -- Indebtedness -- Bank Credit Facility."
CORPORATE COLLABORATIONS
An important part of Hybridon's business strategy is to enter into
research and development collaborations, licensing agreements or other strategic
alliances with third parties, primarily biotechnology and pharmaceutical
corporations, for the development and commercialization of certain products. As
of the date hereof, the Company is a party to corporate collaborations with
Searle and Medtronic, all as summarized below. The Company intends to retain
manufacturing rights for many of the products, if any, it may license pursuant
to these collaborations.
G.D. Searle & Co.
In January 1996, the Company and Searle entered into a collaboration
relating to research and development of therapeutic antisense compounds directed
at up to eight molecular targets in the fields of cancer, cardiovascular disease
and inflammation/immunomodulation (the "Searle Field").
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Pursuant to the collaboration, the parties are currently conducting
research and development relating to a compound directed at MDM-2. In this
project, Searle is funding certain research and development efforts by the
Company, and each of Searle and the Company have committed certain of its own
personnel to the collaboration. The initial phase of research and development
activities relating to the initial target will be conducted through the earlier
of (i) the achievement of certain product candidate milestones and (ii) January
31, 2000, subject to early termination by Searle. The parties may extend the
initial collaboration by mutual agreement, including agreement as to additional
research funding by Searle.
In addition, under the collaboration Searle has the right, at its
option, to designate up to six additional molecular targets in the Searle Field
(the "Additional Targets") for collaborative research and development with
Hybridon on terms substantially consistent with the terms of the collaboration
applicable to the initial molecular target. This right is exercisable by Searle
with respect to each of the Additional Targets upon the payment by Searle of
certain specified cash amounts (beyond the project specific research payments
relating to the particular Additional Target) and the purchase of additional
Common Stock from the Company by Searle (at the then fair market value),
totalling $10,000,000 per Additional Target. In the event that Searle designates
all of the Additional Targets, the aggregate amount to be paid by Searle in cash
payments will be $24,000,000 and the aggregate amount to be paid by Searle in
equity investment will be $36,000,000. If Searle has not designated all of the
Additional Targets by the time it advances the product candidate for the initial
molecular target to certain stages of preclinical development, Searle will be
required to purchase up to an additional $10,000,000 of Common Stock (at the
then fair market value) upon completion of certain milestones in order to
maintain its right to designate any of the Additional Targets that it has not
yet designated. The payment for any such Common Stock will be creditable against
the equity investment portion of the payments to be made by Searle with respect
to the designation of any of the Additional Targets that Searle has not yet
designated.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle determines, in its sole discretion, to
commercialize a product, Searle will fund and perform preclinical tests and
clinical trials of the product candidate and will be responsible for regulatory
approvals for and marketing of the product. In certain instances and for
specified periods of time, the Company has agreed to perform research and
development work in the Searle Field relating to inflamation or immunomodulation
exclusively with Searle. In addition, as to each product candidate, the Company
will be entitled to milestone payments from Searle totalling up to an aggregate
of $10,000,000 upon the achievement of certain development benchmarks. The
Company also will be entitled to royalties from net sales of products resulting
from the collaboration. Subject to satisfying certain conditions relating to its
manufacturing capacities and capabilities, the Company will retain manufacturing
rights, and Searle will be required to purchase its requirements of products
from the Company on an exclusive basis at specified transfer prices. Upon a
change in control of the Company, Searle would have the right to terminate the
Company's manufacturing rights, although the royalty payable in respect of net
sales would be increased in such event.
Under the collaboration, in the event that Searle designates (and makes
the required payments and equity investments for) all of the Additional Targets
or in certain other instances relating to the Company's failure to satisfy
certain requirements relating to its manufacturing capacities and capabilities,
Searle will have the right, exercisable in its sole discretion, to require the
Company to form a joint venture with Searle for the development of products in
the Searle Field (other than products relating to molecular targets that have
already been designated by Searle) to which each party will contribute
$50,000,000 in cash, although the Company's cash contribution would be reduced
by the value of the technology and other rights contributed by Hybridon to the
joint venture. The Company and Searle would each own 50% of the joint venture,
although Searle's ownership interest in the joint venture would increase based
upon a formula to up to a maximum of 75% if the joint venture is established in
certain instances relating to the Company's failure to satisfy certain
requirements relating to its manufacturing capacities and capabilities.
Under the collaboration, Searle also purchased 200,000 shares of Common
Stock in the Company's initial public offering.
Medtronic, Inc.
In May 1994, the Company and Medtronic entered into a collaboration
involving the testing of a drug delivery device for use in delivering Hybridon's
antisense oligonucleotides for the treatment of Alzheimer's disease. Hybridon
will be responsible for the development of, and hold all rights to, any drug
developed pursuant to this collaboration, and Medtronic will be responsible for
the development of, and hold all rights to, any delivery system
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developed pursuant to this collaboration. The parties may extend this
collaboration by mutual agreement to other neurodegenerative disease targets.
The research and development to be conducted is determined and supervised by a
committee comprised of an equal number of designees of the Company and
Medtronic.
As part of the collaboration, Medtronic purchased an aggregate of
131,667 shares of the Company's Common Stock.
FINANCIAL COLLABORATIONS
In order to maintain financial flexibility, Hybridon considers
innovative arrangements to finance certain applications of its proprietary
antisense technology, particularly applications that it would not develop in the
near term without external funding. The Company has entered into one such
arrangement with MethylGene, Inc., which is summarized below. The Company is in
the process of completing a transaction similar in structure to the MethylGene
arrangement with Origenix for its hepatitis B and HPV programs.
In 1996, the Company and certain Canadian institutional investors formed
MethylGene to develop and market (i) antisense compounds to inhibit DNA
methyltransferase for the treatment of cancers, (ii) other methods of inhibiting
DNA methyltransferase for the treatment of any indications and (iii) antisense
compounds to inhibit a second molecular target other than DNA methyltransferase
for the treatment of cancers, to be agreed upon by Hybridon and MethylGene (such
three product areas being referred to herein as the "MethylGene Fields"). In
December 1997, Hybridon and MethylGene expanded the MethylGene Fields to include
(a) antisense compounds to inhibit DNA methyltransferase for any indication and
(b) antisense compounds to inhibit a second and third molecular target for any
indications, as may be selected by MethylGene, so long as such molecular targets
are not bona fide targets under investigation by the Company on or prior to the
date that MethylGene notifies the Company of the identity of such second or
third molecular target.
Hybridon initially acquired a 49% minority interest in MethylGene for
approximately CDN$1,000,000, and the Canadian investors acquired a majority
interest in MethylGene for a total of approximately CDN$7,500,000. On March 4,
1998, MethylGene raised an additional CDN$15,800,000 from the private placement
of securities. As a result of such financing, Hybridon now owns an approximately
30% interest in MethylGene.
The Canadian investors who initially invested in the Company continue to
have the right to exchange all (but not less than all) of the shares of stock in
MethylGene that they initially purchased for shares of Common Stock of Hybridon
on the basis of 37.5 MethylGene shares (for which they paid approximately US
$56.25) for one share of Hybridon Common Stock (subject to adjustment for stock
splits, stock dividends and the like). This option is exercisable only during a
90-day period commencing on the earlier of the date five years after the closing
of the Canadian investors' investment in MethylGene or the date on which
MethylGene ceases operations, and terminates sooner if MethylGene satisfies
certain conditions.
Hybridon has granted to MethylGene exclusive worldwide licenses and
sublicenses in respect of certain technology relating to the MethylGene Fields.
In addition, Hybridon and MethylGene have entered into a supply agreement
pursuant to which MethylGene is obligated to purchase from Hybridon all required
formulated bulk oligonucleotides at specified transfer prices. The Company is
also performing drug development advisory and other services in connection with
MethylGene's preparation of an IND for its first compound.
THE HYBRIDON SPECIALTY PRODUCTS DIVISION
In 1996, Hybridon formed the HSP Division to manufacture highly purified
oligonucleotide compounds both for Hybridon's internal use and for sale to third
parties. The Company believes that the industry-wide interest in investigating
the potential of gene expression modulation technologies will continue and will
accelerate as the techniques which permit the design and development of drugs
based on such technologies become more widely understood. The Company's strategy
is to position its HSP Division to take advantage of the potential growth in the
demand for large-scale, GMP oligonucliotide synthesis resulting from present and
future applications of these gene expression modulation technologies. There can
be no assurance that such strategy will be successful or that industry growth
will be as anticipated. See "Risk Factors -- Risks Associated with the HSP
Division" and "Risk Factors -- Competition." However, the Company is attempting
to minimize this risk by manufacturing oligonucleotides for diverse applications
at different stages of commercialization. The HSP Division currently is
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manufacturing DNA-probes for diagnostic applications, and the genomics field, as
well as for antisense and non-antisense oligonucleotide therapeutics. The HSP
Division's customers are supporting the preclinical and clinical development of
over 20 oligonucleotide therapeutic agents.
The Company is manufacturing oligonucleotides at its 36,000 square foot
leased facility, which the Company believes is the first and only
commercial-scale synthetic DNA production facility with a fully integrated
manufacturing technology platform, including large-scale synthesis, purification
and proprietary analytical support. The Company first began production of
oligonucleotide compounds for sale to third parties in June 1996 and had
revenues of approximately $1.1 million in 1996, approximately $1.9 million in
1997 and approximately $2.1 million through September 30, 1998. The Company's
principal customers include Genta/JBL Scientific, La Jolla Pharmaceuticals, Inc.
and MethylGene.
The Company has developed a manufacturing technology platform which
integrates key elements of the manufacturing process to increase the purity of
oligonucleotide products, enhance the efficiency of the production process and
increase the scale of production. The Company has developed two separate
commercial scale oligonucleotide synthesizers. One of these machines was
developed in an internal program and the other in a collaboration with Pharmacia
Biotech. Both machines are designed with a capacity of up to 100 millimoles
(approximately 300 grams per batch), although the Company believes that these
machines may be able to exceed such capacity. Pharmacia has retained the right
to sell the machine developed under the collaboration to third parties, subject
to an obligation to pay Hybridon royalties on such third party sales. The
Company believes that its machines are the first commercial scale
oligonucleotide synthesizers designed for more advanced chemistries. In
addition, the Company has implemented proprietary purification processes, which
use water in place of chemical solvents, simplifying environmental compliance
and permitting purification of kilogram batches of oligonucleotides. The Company
has also developed proprietary chemical synthesis processes and novel reagents
used in the synthesis process, which the Company believes may further decrease
the cost of production of advanced oligonucleotides.
In order to strengthen the marketing of the HSP Division's products, in
1996 the Company entered into a four-year sales and supply agreement with the
Applied Biosystems Division of Perkin-Elmer. Under the agreement, Perkin-Elmer
agreed to refer potential customers for the custom contract manufacture of
oligonucleotides to Hybridon, and Hybridon agreed to purchase amidites from
Perkin-Elmer for the manufacture of oligonucleotides sold to such customers and
to pay Perkin-Elmer a percentage of the sales price paid by such customers. In
addition, Perkin-Elmer licensed to Hybridon its oligonucleotide synthesis
patents.
The HSP Division is targeting three market areas: therapeutics,
diagnostics and genomics. Within these areas there is substantial product
diversification and the HSP Division is currently manufacturing oligonucleotides
for antisense, toleragens, aptamers, and immunomodulators within the therapeutic
segment. In the diagnostic market, the HSP Division is manufacturing
oligonucleotides for viral and bacterial detection and branched DNA tests.
The production of antisense compounds is similar to the chemical
synthesis used in the production of conventional pharmaceuticals, but in
contrast with typical biopharmaceuticals, it does not involve any fermentation
processes or living cells. Moreover, unlike many conventional drugs, antisense
compounds targeted at different diseases can be manufactured with the same
nucleotide building blocks and using the same manufacturing processes and
equipment with minimal adjustments. As a result, the knowledge and experience
that the Company obtains in the manufacture of one compound is substantially
applicable to the manufacture of other oligonucleotide compounds for the
treatment of other diseases and results in other manufacturing efficiencies.
This also allows multiple compounds to be manufactured in one facility,
potentially reducing capital expenditures required in the future.
The Company may need to further increase its manufacturing capacity
through the purchase or construction of additional large-scale oligonucleotide
synthesizers in order to satisfy its anticipated future requirements for its
product candidates and in order to manufacture oligonucleotides on a custom
contract basis for sale to third parties on a large scale. In addition, in order
to successfully commercialize its product candidates or achieve satisfactory
margins on sales, the Company may be required to reduce further the cost of
production of its oligonucleotide compounds. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company believes that it is currently manufacturing oligonucleotides
in substantial compliance with FDA requirements for manufacturing in compliance
with GMP, although its facility and procedures have not been formally inspected
by the FDA and the procedures and documentation followed may have to be enhanced
in the future as the Company expands its oligonucleotide production activities.
In 1997, the HSP Division was one of
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two biotechnology companies chosen to participate in the FDA's Biotechnology PAI
Pilot Initiative. This is a pilot program that allows regulatory officials to
provide critical feedback on GMP compliance before companies submit drug
approval filings, facilitating the exchange of information prior to a formal FDA
site inspection. Failure to establish to the FDA's satisfaction compliance with
GMP can result in the FDA denying authorization to initiate or continue clinical
trials, to receive approval of a product or to begin or to continue commercial
marketing.
In addition, the Company's manufacturing processes are subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of certain materials and waste products.
MARKETING STRATEGY
Hybridon plans to market the pharmaceutical products it is developing
either directly or through co-marketing, licensing, distribution or other
arrangements with pharmaceutical and biotechnology companies. One potential
strategy with respect to these products in development is to build a
hospital-targeted direct sales group for products for market areas that can be
accessed with a small to medium size sales force. Implementation of this
strategy would depend on many factors, including the market potential of any
such products the Company develops as well as on the Company's financial
resources. The Company does not expect to establish a direct sales capability
with respect to such products until such time as one or more of such products
approach marketing approval. To market those products that will serve a large,
geographically diverse patient population, the Company expects to enter into
licensing, distribution or partnering agreements with pharmaceutical and
biotechnology companies that have large, established sales organizations. To the
extent the Company enters into marketing arrangements with third parties, any
revenues received by the Company will be dependent on the efforts of such third
parties, and there can be no assurance that such efforts will be successful.
While the Company has developed general marketing strategies, it has not begun
the implementation of any of these strategies with respect to any of these
potential therapeutic products.
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon enters into collaborative research agreements relating to
specific disease targets and other research activities in order to augment its
internal research capabilities and to obtain access to the specialized knowledge
or expertise of its collaborative partners. With respect to certain of the
Company's drug development programs, the Company relies primarily upon outside
collaborators. Accordingly, termination of the Company's collaborative research
agreements with any of these collaborators could result in the termination of
the related research program.
In general, the Company's collaborative research agreements require the
payment by Hybridon of various amounts in support of the research to be
conducted. The Company usually provides the collaborator with selected
oligonucleotides, which the collaborator then tests in his or her assay systems.
If the collaborator creates any invention during the course of his or her
efforts, solely or jointly with the Company, Hybridon generally has an option to
negotiate an exclusive, worldwide, royalty-bearing license of the collaborator's
rights in the invention for the purpose of commercializing any product
incorporating such invention. Inventions developed solely by Hybridon's
scientists as part of the collaboration generally are owned exclusively by
Hybridon. Most of these collaborative agreements are non-exclusive and can be
cancelled on relatively short notice.
Since July 1997, the Company has allowed a number of its collaborative
research agreements to expire and has terminated certain others. The Company
has, however, maintained the research agreements which it has determined are
appropriate to support its current drug development programs. For example, the
Company is a party to a Cooperative Research and Development Agreement with the
National Cancer Institute with respect to its PKA program.
DRUG DEVELOPMENT SERVICES
The Drug Development Department of the Company has had experience in the
design and conduct of preclinical studies and in the preparation and submission
of reports and other regulatory documents for the Company's three advanced
chemistry antisense compounds which have successfully entered Phase I studies in
humans. This development expertise is being leveraged through a contract with
MethylGene under which the Company's Drug Development Department has designed
and monitored the preclinical studies for the MethylGene
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antisense compound, MG98, leading to the submission of an Investigational New
Drug ("IND") application in Canada. The Company anticipates submitting an IND
application in the United States in late December 1998. MethylGene compensated
the Company for these services. The Company expects to enter into a similar
contract with OriGenix upon completion of the proposed spin-out transaction.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's product candidates, processes
and know-how is important to Hybridon's business. Thus, the Company plans to
prosecute and enforce aggressively its patents and proprietary technology. The
Company's policy is to file patent applications to protect technology,
inventions and improvements that are considered important to the development of
its business. Hybridon seeks to establish a comprehensive proprietary position
through a "layered" patent strategy covering the Company's families of
oligonucleotide chemistries, the antisense sequences of the Company's
oligonucleotide compounds and the overall chemical compositions of these
oligonucleotide compounds. The Company believes that this approach may provide
it with at least three independent levels of protection. Hybridon also seeks to
protect its proprietary analytical and manufacturing processes. The patents and
patent applications owned or exclusively licensed by the Company also are
directed to many aspects of the Company's proprietary oligonucleotide production
and analysis technology and ribozyme technology. The Company also relies upon
trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
As of December 1, 1998, Hybridon owned or exclusively licensed 60 issued
U.S. patents, 8 issued foreign patents, 8 allowed U.S. patent applications, 2
allowed foreign applications and 55 other U.S. and 80 other non-U.S. patent
applications. The patents and applications owned or exclusively licensed by the
Company cover various chemically advanced oligonucleotides, proprietary target
sequences, specific preferred oligonucleotide products, methods for making and
purifying oligonucleotides, analytical methods and methods for
oligonucleotide-based therapeutic treatment of various diseases. The U.S.
patents owned or exclusively licensed by Hybridon expire at various dates
ranging from 2006 to 2015.
Under the terms of a license agreement with the Worcester Foundation
(the "Foundation License"), Hybridon is the worldwide, exclusive licensee under
several U.S. issued or allowed patents and various patent applications owned by
the Worcester Foundation relating to oligonucleotides and their production and
use. Many of these patents and patent applications have corresponding
applications on file or corresponding patents in other major industrial
countries.
One of the issued U.S. patents (the "HIV Patent") and one of the issued
European patents licensed from the Worcester Foundation broadly claim antisense
oligonucleotides as new compositions of matter for inhibiting the replication of
HIV. The other issued U.S. patents include claims covering composition and uses
of oligonucleotides based on the Company's advanced chemistries, methods of
oligonucleotide synthesis that are potentially applicable to large-scale
commercial production, compositions of certain modified oligonucleotides that
are useful for diagnostic tests or assays and methods of purifying full-length
oligonucleotides after synthesis. The earliest expiration of the patents
licensed to the Company by the Worcester Foundation is 2006, when the HIV Patent
expires.
The Company also is the exclusive licensee under various other U.S. and
foreign patents and patent applications, including two U.S. patent applications
owned by McGill University relating to oligonucleotides and DNA
methyltransferase. The Company and MGH jointly own one issued U.S. patent
directed to compositions of antisense oligonucleotides applicable to Alzheimer's
disease. The Company holds an exclusive license to MGH's interests under such
patent.
The Company is a non-exclusive licensee of certain patents held by the
NIH relating to oligonucleotide phosphorothioates and a non-exclusive licensee
of an NIH patent covering the phosphorothiolation of oligonucleotides. The field
of each of these licenses extends to a wide variety of genetic targets. If
certain of the claims of the NIH patents non-exclusively licensed to Hybridon
are valid, certain of the Company's products in development would infringe these
patents in the absence of the license.
The U.S. Patent and Trademark Office (the "U.S. PTO") has informed
Hybridon that certain otherwise allowable patent applications exclusively
licensed by the Company from the Worcester Foundation have been submitted to the
Board of Patent Appeals and Interferences to determine whether an interference
should be declared with issued U.S. patents held by the NIH relating to
oligonucleotide phosphorothioates. An interference proceeding
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is an inter-parties proceeding in the U.S. PTO to determine who is the first to
invent a claimed invention, and thus who is entitled to a patent for the claimed
invention. McDonnell Boehnen Hulbert & Berghoff, the Company's U.S. patent
counsel, is of the opinion that the Worcester Foundation patent application has
a prima-facie case for priority against the NIH for an invention that includes
phosphorothioate-modified oligonucleotides. However, there can be no assurance
an interference can be declared, or if declared, as to the outcome thereof. An
adverse outcome in the interference would not affect the non-exclusive license
from the NIH to Hybridon of the NIH phosphorothioate patents. The U.S. PTO has
also declared a four-way interference involving two additional U.S. patents
relating to the Company's chimeric oligonucleotides which Hybridon exclusively
licenses from the Worcester Foundation. There can be no assurance as to the
outcome of this interference.
Under the licenses to which it is a party, the Company is obligated to
pay royalties on net sales by the Company of products or processes covered by a
valid claim of a patent or patent application licensed to it. The Company also
is required in some cases to pay a specified percentage of any sublicense income
that the Company may receive. These licenses impose various commercialization,
sublicensing, insurance and other obligations on the Company. Failure of the
Company to comply with these requirements could result in termination of the
license. The Foundation License also grants the Company a right of first refusal
to certain technology developed by the Worcester Foundation.
The patent positions of pharmaceutical and biotechnology firms,
including Hybridon, are generally uncertain and involve complex legal and
factual questions. Consequently, even though Hybridon and its licensors are
currently prosecuting their respective patent applications with the U.S. Patent
and Trademark Office and certain foreign patent authorities, the Company does
not know whether any of its applications or those of third parties under which
the Company has or may obtain a license will result in the issuance of any
patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. Since patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature tend
to lag behind actual discoveries by several months, Hybridon cannot be certain
that it, or any licensor of patents to it, as the case may be, was the first
creator of inventions claimed by pending patent applications or that Hybridon or
any licensor, as the case may be, was the first to file patent applications for
such inventions. See "Risk Factors -- Patents and Proprietary Rights."
Competitors of the Company and other third parties hold issued patents
and pending patent applications relating to antisense and other gene expression
modulation technologies, and it is uncertain whether these patents and patent
applications will require the Company to alter its products or processes, pay
licensing fees or cease certain activities. See "Risk Factors -- Patents and
Proprietary Rights." In particular, the Company is aware of a European patent
granted to a third party relating to certain types of stabilized synthetic
oligonucleotides for use as therapeutic agents for selectively blocking the
translation of a messenger RNA into a targeted protein by binding with a portion
of the messenger RNA to which the stabilized synthetic oligonucleotide is
substantially complementary. This European patent was revoked in entirety in an
opposition proceeding before the European Patent Office in September 1995. The
holder of this patent has appealed such decision.
Hybridon's practice is to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with Hybridon is to be kept confidential and not
disclosed to third parties, subject to a right to publish certain information in
the scientific literature in certain circumstances and subject to other specific
exceptions. In the case of employees, the agreements provide that all inventions
conceived by the individual shall be the exclusive property of the Company.
There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or adequate remedies in
the event of unauthorized use or disclosure of such information.
Hybridon engages in collaborations and sponsored research agreements and
enters into preclinical and clinical testing agreements with academic and
research institutions and U.S. government agencies, such as the NIH, to take
advantage of their technical expertise and staff and to gain access to clinical
evaluation models, patients, and related technology. Consistent with
pharmaceutical industry and academic standards, and the rules and regulations
under the Federal Technology Transfer Act of 1986, these agreements may provide
that developments and results will be freely published, that information or
materials supplied by Hybridon will not be treated as confidential and that
Hybridon may be required to negotiate a license to any such developments and
results in order to commercialize products incorporating them. There can be no
assurance that the Company will be able successfully to obtain any
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such license at a reasonable cost or that such developments and results will not
be made available to competitors of the Company on an exclusive or nonexclusive
basis. See "Business -- Academic and Research Collaborations."
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research
and development activities are subject to regulation for safety, effectiveness
and quality by numerous governmental authorities in the United States and other
countries. The Company believes that it is in material compliance with all
federal, state and foreign legal and regulatory requirements under which it
operates. However, there can be no assurance that such legal or regulatory
requirements will not be amended or that new legal or regulatory requirements
will not be adopted, any one of which could have a material adverse effect on
the Company's business or results of operations.
FDA Approval
In the United States, pharmaceutical products intended for therapeutic
or diagnostic use in humans are subject to rigorous FDA regulation. The process
of completing clinical trials and obtaining FDA approvals for a new drug is
likely to take a number of years and requires the expenditure of substantial
resources. There can be no assurance that any product will receive such approval
on a timely basis, if at all. See "Risk Factors -- No Assurance of Regulatory
Approval; Government Regulation."
The steps required before a new oligonucleotide-based pharmaceutical
product for use in humans may be marketed in the United States include (i)
preclinical tests, (ii) submission to the FDA of an IND application, which must
become effective before human clinical trials commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and effectiveness
of the product, (iv) submission of a New Drug Application ("NDA") to the FDA,
and (v) FDA approval of the NDA prior to any commercial sale or shipment of the
product.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
effectiveness of the product. Compounds must be manufactured according to GMP
and preclinical safety tests must be conducted by laboratories that comply with
FDA regulations regarding GLP. The results of the preclinical tests are
submitted to the FDA as part of an IND and are reviewed by the FDA prior to the
commencement of human clinical trials. Unless the FDA objects to, or makes
comments or raises questions concerning, an IND, the IND will become effective
30 days following its receipt by the FDA. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials.
Clinical trials involve the administration of the investigational new
drug to healthy volunteers and to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with FDA
regulations regarding Good Clinical Practices under protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
effectiveness criteria to be evaluated. Each protocol must be submitted to the
FDA as part of the IND. Further, each clinical study must be conducted under the
auspices of an independent Institutional Review Board (an "IRB"). The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, the investigational new drug
usually is administered to healthy human subjects and is tested for safety
(adverse effects), dosage, tolerance, metabolism, distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited
patient population to (i) determine the effectiveness of the investigational new
drug for specific indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. When an
investigational new drug is found to be effective and to have an acceptable
safety profile in Phase II evaluation, Phase III trials are undertaken to
further evaluate clinical effectiveness and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
There can be no assurance that Phase I, Phase II or Phase III testing will be
completed successfully within any specified time period, if at all, with respect
to any of the Company's products subject to such testing. Furthermore, the
Company, an IRB or the FDA may suspend clinical trials at any time if it is felt
that the participants are being exposed to an unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. In any event, the
FDA may deny an NDA
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if applicable regulatory criteria are not satisfied. Moreover, if regulatory
approval of a product is granted, such approval may require postmarketing
testing and surveillance to monitor the safety of the product or may entail
limitations on the indicated uses for which it may be marketed. Finally, product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.
In addition to product approval, the Company may be required to obtain a
satisfactory inspection by the FDA covering the Company's manufacturing
facilities before a product manufactured by the Company can be marketed in the
United States. The FDA will review the Company's manufacturing procedures and
inspect its facilities and equipment for compliance with GMP and other
applicable rules and regulations. Any material change by the Company in its
manufacturing process, equipment or location would necessitate additional FDA
review and approval.
Foreign Regulatory Approval
Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable governmental regulatory authorities in
foreign countries must be obtained prior to the commencement of clinical trials
and subsequent marketing of such product in such countries. The approval
procedure varies from country to country, and the time required may be longer or
shorter than that required for FDA approval.
Under European Union ("EU") law, either of two approval procedures may
apply to the Company's products: a centralized procedure, administered by the
EMEA (the European Medicines Evaluation Agency); or a decentralized procedure,
which requires approval by the medicines agency in each EU Member State where
the Company's products will be marketed. The centralized procedure is mandatory
for certain biotechnology products and available at the applicant's option for
certain other products. Whichever procedure is used, the safety, efficacy and
quality of the Company's products must be demonstrated according to demanding
criteria under EU law and extensive nonclinical tests and clinical trials are
likely to be required. In addition to premarket approval requirements, national
laws in EU Member States will govern clinical trials of the Company's products,
adherence to good manufacturing practice, advertising and promotion and other
matters. In certain EU Member States, pricing or reimbursement approval may be a
legal or practical precondition to marketing.
Other Regulation
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health Act and other
present and potential future federal, state or local regulations. Furthermore,
because the Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds, the
Company's operations are subject to U.S. Department of Transportation and
Environmental Protection Agency requirements and other federal, state and
foreign laws and regulations regarding hazardous waste disposal, air emissions
and wastewater discharge, including without limitation the Environmental
Protection Act, the Toxic Substances Control Act and the Resource Conservation
and Recovery Act. Although the Company believes that its procedures for handling
and disposing of such materials comply with the standards prescribed by
applicable regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could have a material adverse effect on the Company.
COMPETITION
The Company's products under development are expected to address several
different markets defined by the potential indications for which such products
are developed and ultimately approved by regulatory authorities. For several of
these indications, the Company's proposed products will be competing with
products and therapies either currently existing or expected to be developed,
including antisense oligonucleotides developed by third parties. Competition
among these products will be based, among other things, on product efficacy,
safety, reliability, availability, price and patent position. An important
factor will be the timing of market introduction of the Company's or competitive
products. Accordingly, the relative speed with which Hybridon can develop
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor. The Company's competitive position will also
depend upon its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise develop proprietary products or processes, and to
secure sufficient capital resources for the often substantial period between
technological conception and commercial sales.
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There are a number of companies, both privately and publicly held, that
are conducting research and development activities on technologies and products
aimed at therapeutic modulation of gene expression. The Company believes that
the industry-wide interest in these technologies and products will continue and
will accelerate as the techniques which permit their application to drug
development become more widely understood. There can be no assurance that the
Company's competitors will not succeed in developing products based on
oligonucleotides or other technologies that are more effective than any which
are being developed by the Company or which would render the Company's
technology and products obsolete and noncompetitive prior to recovery by the
Company of the research, development and commercialization expenses incurred
with respect to those products. One competitor of the Company has recently
received FDA approval to market on antisense therapeutic product for the
treatment of CMV. Furthermore, because of the fundamental differences between
gene expression modulation and other technologies, there may be indications for
which such other technologies are superior to gene expression modulation. The
development by others of new treatment methods not based on gene expression
modulation technology for those indications for which the Company is developing
compounds could render the Company's compounds noncompetitive or obsolete.
Competitors of the Company engaged in all areas of drug discovery in the
United States and other countries are numerous and include, among others, major
pharmaceutical and chemical companies, biotechnology firms, universities and
other research institutions. Many of these competitors have substantially
greater financial, technical and human resources than the Company. In addition,
many of these competitors have significantly greater experience than the Company
in undertaking preclinical studies and human clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. Accordingly, the Company's competitors may
succeed in obtaining FDA or other regulatory approvals for products more rapidly
than the Company. One competitor of the Company has recently received FDA
approval to market an antisense therapeutic product for the treatment of CMV.
Furthermore, if the Company is permitted to commence commercial sales of
products, it will also be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which it has limited or no experience.
In its HSP Division operations, the Company competes against a number of
third parties, and there is the possibility of internal production by the
Company's customers. Many of these third parties and customers have greater
financial, technical and human resources than the Company. Key competitive
factors will include the price and quality of the products as well as
manufacturing capacity and ability to comply with specifications and to fulfill
orders on a timely basis. The Company may be required to reduce the cost of its
product offerings to meet competition. See "Risk Factors -- Competition."
EMPLOYEES
As of December 1, 1998, Hybridon employed 50 individuals full-time, of
whom 21 held advanced degrees. Sixteen of these employees are engaged in
research and development activities and nine are employed in finance, corporate
development and legal and general administrative activities. In addition,
twenty-four of these employees are employees of the HSP Division, of whom five
are employed in quality control. Many of the Company's management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical products companies. None of the Company's employees is
covered by collective bargaining agreements, and management considers relations
with its employees to be good.
PROPERTIES
The Company leases its 36,000 square foot facility in Milford,
Massachusetts under a lease which expires in 2004. The term of the lease may be
extended at Hybridon's option for two additional five-year terms.
In addition, the Company leases supplemental laboratory space in
Cambridge, Massachusetts comprising approximately 26,000 square feet for a term
expiring April 30, 2007 at an annual rent of approximately $23 per square foot.
The Company is currently subleasing approximately 20,000 square feet of this
facility to a third party under a sublease expiring September 30, 2000.
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LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have
a material adverse effect on the Company or its business.
RECENT DEVELOPMENTS
The Company has been informed by Arthur Andersen LLP, its independent
public accountants, that their report on the Company's December 31, 1998
financial statements will contain an explanatory fourth paragraph addressing the
significant uncertainty regarding the Company's ability to continue operating as
a going concern unless the Company is able to raise sufficient capital to fund
operations for 1999 prior to the release of the audit report.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From January 24, 1996 until December 2, 1997, the Company's Common Stock
was traded on the Nasdaq National Market under the symbol "HYBN." Prior to
January 24, 1996, there was no established public trading market for the
Company's Common Stock.
On December 2, 1997, the Company's Common Stock was delisted from the
Nasdaq National Market and began being quoted on the NASD OTC Bulletin Board.
Prices reflected on the NASD OTC Bulletin Board may reflect inter-dealer prices,
without retail mark-up, mark-downs or commissions and may not necessarily
represent actual transactions.
On December 10, 1997 the Company effected a one-for-five reverse stock
split of its Common Stock. As a result of the reverse stock split, each five
shares of Common Stock was automatically converted into one share of Common
Stock, with cash paid in lieu of any fractional shares.
The following table sets forth for the periods indicated the high and
low sales prices per share of the Common Stock during each of the quarters set
forth below as reported on the Nasdaq National Market and the NASD OTC Bulletin
Board since January 24, 1996 and as adjusted to reflect the December 1997
reverse stock split.
HIGH LOW
---- ---
1996
- ----
First Quarter (from January 24, 1996)........ $71.250 $43.750
Second Quarter............................... 59.375 25.625
Third Quarter................................ 59.375 33.125
Fourth Quarter............................... 43.125 26.250
1997
- ----
First Quarter................................ $43.125 $28.125
Second Quarter............................... 35.625 25.000
Third Quarter................................ 28.125 7.500
Fourth Quarter............................... 4.859 2.609
1998
- ----
First Quarter................................ 3.359 1.000
Second Quarter............................... 2.75 1.609
Third Quarter................................ 2.516 1.125
The reported closing bid price of the Common Stock on the NASD OTC
Bulletin Board on December 17, 1998 was $1.0625 per share. The number of Common
Stockholders of record on November 13, 1998 was 360.
41
<PAGE>
DIVIDEND POLICY
The Convertible Preferred Stock dividend rate is 6.5% per annum, payable
semi-annually in arrears. These dividends may be paid either in cash or in
additional shares of Convertible Preferred Stock, at the discretion of the
Company.
The Company has never declared or paid cash dividends on its capital
stock, and the Company does not expect to pay any dividends on its Common Stock
or any cash dividends on the Convertible Preferred Stock in the foreseeable
future. The Indenture under which the Company issued the 9% Notes on April 2,
1997 limits the Company's ability to pay dividends or make other distributions
on its Common Stock or to pay cash dividends on the Convertible Preferred Stock.
As of September 30, 1998, $1.3 million in aggregate principal amount of the 9%
Notes remained outstanding.
In addition, the Company is currently prohibited from paying cash
dividends under the Bank Credit Facility, which has been purchased by affiliates
of two members of the Company's Board of Directors.
42
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the
Securities by the Selling Securityholders or their transferees (other than
proceeds upon exercise of certain Hybridon warrants).
The funds that may be received by the Company upon the exercise in full
of the outstanding Warrants will be added to the Company's general working
capital.
CAPITALIZATION
The following table sets forth as of September 30, 1998 the actual
capitalization of the Company. See the Company's unaudited Consolidated
Financial Statements as of September 30, 1998, included elsewhere in this
Registration Statement (in thousands, except share data.)
<TABLE>
<CAPTION>
<S> <C>
Current portion of long-term debt and capital lease obligations ......... $ 3,031
==========
Long-term debt and capital lease obligations, net of current portion .... $ 573
9% Convertible Subordinated Notes due 2004 .............................. 1,306
Stockholders' Equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding................................. ----------
Series A Convertible Preferred Stock, $.01 par value, 5,000,000 shares
authorized; 624,790 shares issued and outstanding....................... 6
Common Stock, $.001 par value, 100,000,000 shares authorized;
15,254,825 shares issued and outstanding (1)............................ 15
Additional Paid-In-Capital ......................................... 240,301
Deficit accumulated during the development stage ................... (233,294)
Deferred Compensation .............................................. (931)
-----------
Total Stockholders' Equity ............................... 6,097
-----------
Total Capitalization ............................... $ 7,976
==========
- --------------
(1) Excludes an aggregate of 12,568,143 shares of Common Stock issuable upon
exercise of options and warrants outstanding as of September 30, 1998, at a
wieghted average exercise price of $5.45 per share.
</TABLE>
43
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated balance sheet data set forth below, as of
December 31, 1996 and 1997, and the consolidated statements of operations data
for each of the three years in the period December 31, 1997, are derived from
the Company's Consolidated Financial Statements which have been audited by
Arthur Andersen LLP, independent public accountants, and which are included
elsewhere in this Prospectus. The selected consolidated financial data as of
December 31, 1993, 1994 and 1995 and for the years ended December 31, 1993 and
1994 are derived from the Company's Consolidated Financial Statements not
included in this Prospectus, all of which have been audited by Arthur Andersen
LLP, independent public accountants. The selected financial data as of September
30, 1998 and for the nine months ended September 30, 1997 and 1998 and for the
period from inception (May 25, 1989) to September 30, 1998 are derived from the
Company's unaudited Consolidated Financial Statements which are included
elsewhere in this Prospectus and which include, in the opinion of the Company,
all adjustments (consisting only of normal recurring adjustments) that are
necessary for a fair presentation of its financial position and the results of
its operations for those periods. Operating results for the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1998. The selected consolidated
financial data should be read in conjunction with, and are qualified by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Company's Consolidated Financial Statements and
notes thereto and the Report of Independence Public Accountants included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
May 25, 1989
Years Ended December 31, Nine Months Ended (inception) through
September 30, September 30,
---------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Research and development............ $ 917 $ 1,032 $ 1,186 $ 1,419 $ 945 $ 980 $ 950 $6,449
Product and service revenue......... -- -- -- 1,080 1,877 1,232 2,353 5,311
Royalty income...................... -- -- -- 62 48 33 -- 110
Interest income..................... 267 135 219 1,447 1,079 898 106 3,327
--- --- --- ----- ----- --- ------- -------
1,184 1,167 1,405 4,008 3,949 3,143 3,409 15,197
Operating Expenses
Research and development............ 16,168 20,024 29,685 39,390 46,828 37,785 17,181 182,641
General and administrative.......... 4,372 6,678 6,094 11,347 11,026 9,012 5,218 53,034
Interest............................ 380 69 173 124 4,536 3,223 2,880 9,026
Restructuring....................... -- -- -- -- 11,020 3,100 -- 11,020
------ ------ ------ ------ ------ ------ ------ -------
Total operating expenses........ 20,920 26,771 35,952 50,861 73,410 53,120 25,279 255,721
------ ------ ------ ------ ------ ------ ------ -------
Loss from operations.................... (19,736) (25,604) (34,547) (46,853) (69,461) (49,977) (21,870) (240,524)
Extraordinary item:
Gain on conversion of 9% convertible
subordinated notes payable.......... -- -- -- -- -- -- 8,877 8,877
------ ------ ------ ------ ------ ------ ------ -------
Net Loss................................ (19,736) (25,604) (34,547) (46,853) (69,461) (49,977) (12,993) (231,647)
Accretion of preferred stock dividend... -- -- -- -- -- -- 1,647 1,647
Net loss to common stockholders......... $(19,736) $(25,604) $(34,547) $(46,853) $(69,461) $(49,977) $(14,640) $233,294
====== ====== ====== ====== ====== ====== ====== =======
Basic and diluted net loss per per
common share from:
Operations.......................... $ (55.80) $ (70.77) $ (94.70) $ (10.24) $ (13.76) $ (9.90) $ (2.21)
Extraordinary gain.................. -- -- -- -- -- -- 0.83
------ ------ ------ ------ ------ ------ ------
Net loss........................ $ (55.80) $ (70.77) $ (94.70) $ (10.24) $ (13.76) $ (9.90) $ (1.37)
Shares Used in Computing Basic and
Diluted Net Loss per Common Share(1).. 354 362 365 4,576 5,050 5,047 10,648
=== === === ===== ===== ===== ======
44
<PAGE>
Other Financial Data:
Ratio of earning to fixed charges(3) -- -- -- -- -- -- --
December 31, September 30,
-------------------------------------------------- -------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
(Unaudited)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments(2)...................... $ 8,767 $ 3,396 $ 5,284 $ 16,419 $ 2,202 $ 883
Working capital (deficit)............... 8,357 (1,713) 210 8,888 (24,100) (2,815)
Total assets............................ 15,243 11,989 19,618 41,537 35,072 18,399
Long-term debt and capital lease
obligations, net of current portion. 79 1,522 1,145 9,032 3,282 573
9% Convertible Subordinated
Notes Payable........................... -- -- -- -- 50,000 1,306
Deficit accumulated in the
development stage (42,190) (67,794) (102,341)(149,194) (218,655) (233,295)
Total stockholders' equity (deficit).... 12,178 4,774 12,447 22,855 (46,048) 6,097
------ ----- ------ ------ ------ -----
</TABLE>
(1) Computed on the basis described in Notes 2(B) and 19(C) of Notes to
Consolidated Financial Statements attached as APPENDIX A hereto.
(2) Short-term investments consisted of U.S. government securities with
maturities greater than three months but less than one year from the
purchase date.
(3) For the purpose of calculating the ratio of earnings to fixed charges,
earnings represent the Company's loss from continuing operations before
income taxes plus fixed charges. Fixed charges consist of interest expense
on all indebtedness plus the interest portion of rental expense on
non-cancelable leases and amortization of debt issuance costs and debt
discount. The Company's earnings have been inadequate to meet its fixed
changes in 1993, 1994, 1995, 1996 and 1997 and for the nine months ended
September 30, 1997 and 1998 by $19.1 million, $25.2 million, $33.9 million,
$46.4 million, $64.7 million, $46.6 million and $8.4 million, respectively.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Selected Consolidated Financial Data and Consolidated Financial Statements of
the Company and related notes thereto appearing elsewhere in this Prospectus.
General
The Company is engaged in the discovery and development of genetic
medicines based on antisense technology. The Company commenced operations in
February 1990 and since that time has been engaged primarily in research and
development efforts, development of its manufacturing capabilities and
organizational efforts, including recruitment of scientific and management
personnel, and raising capital. To date, the Company has not received revenue
from the sale of therapeutic products developed by it. In order to commercialize
its own therapeutic products, the Company will need to address a number of
technological challenges and comply with comprehensive regulatory requirements.
Accordingly, it is not possible to predict the amount of funds that will be
required or the length of time that will pass before the Company receives
revenues from sales of any of these products. All revenues received by the
Company to date have been derived from collaborative agreements, interest on
invested funds and revenues from the custom contract manufacturing of synthetic
DNA and reagent products by the HSP Division.
In the Report of Independent Public Accountants set forth in the
Consolidated Financial Statements of the Company, Arthur Andersen LLP, the
Company's independent public accountants, state that there is substantial doubt
about the Company's ability to continue as a going concern.
The Company has been informed by Arthur Andersen LLP, its independent
public accountants, that their reports on the Company's December 31, 1998
financial statements will contain an explanatory fourth paragraph addressing the
significant uncertainty regarding the Company's ability to continue operating as
a going concern unless the Company is able to raise sufficient capital to fund
operations for 1999 prior to the release of the audit report.
The Company has incurred cumulative losses from inception through
September 30, 1998 of approximately $231.6 million. In the second half of 1997,
the Company commenced a restructuring program that has significantly reduced the
Company's operating expenses and cost requirements in 1998 from 1997 levels.
However, the Company expects that its research and development expenses will
continue to be significant in the fourth quarter of 1998 and in future years as
it pursues its core drug development programs and expects to continue to incur
operating losses and have significant capital requirements that it will not be
able to satisfy with internally generated funds. The Company continues to
explore opportunities to reduce operating expenses in an effort to conserve its
cash resources. The number of employees has continued to decline through
attrition; as of December 1, 1998, the Company had 50 full-time employees. In
connection with the ongoing restructuring, the Company completed the relocation
of its corporate headquarters to Milford, Massachusetts, the site of the HSP
Division.
This Registration Statement on Form S-1 contains forward-looking
statements. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting, the foregoing, the words "believes," "anticipates," "plans,"
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth herein under the caption "Risk Factors."
Restructuring Plan
During the second half of 1997, the Company implemented a restructuring
plan to reduce expenditures on a phased basis over the balance of 1997 and into
the first half of 1998 in an effort to conserve its cash resources. The
restructuring plan was completed in 1998. As part of this restructuring plan, in
addition to terminating the clinical development of GEM 91, the Company reduced
or suspended selected programs unrelated to its core
46
<PAGE>
advanced chemistry antisense drug development programs, substantially reduced
the number of its employees in 1997 and substantially reduced operations at its
Paris, France office. As part of the restructuring, the Company reviewed all
outside testing, public relations, travel and entertainment and consulting
arrangements and terminated or renegotiated various of these arrangements.
As part of the restructuring, the Company subleased one facility in
Cambridge, Massachusetts and a substantial portion of its corporate headquarters
located at 620 Memorial Drive, Cambridge, Massachusetts. The Company incurred
expenses relating to these subleases for broker fees and renovation expenses
incurred in preparing the Memorial Drive space for the new tenant. In addition,
the Company accrued the estimated lease loss of subleasing the remaining space
at its corporate headquarters. The Company has accrued the remaining lease costs
prior to terminating the lease for its offices in Paris, France effective March
31, 1998. The Company subsequently terminated its leasehold interest in the
Cambridge Facility and consolidated its operations in its Milford, Massachusetts
facility during the third quarter of 1998.
Because of the significant costs involved in terminating employees,
subleasing its facilities, terminating research contracts, suspending or
cancelling research programs and substantially reducing operations, the Company
did not begin to experience a material decrease in its expenditure rate until
the fourth quarter of 1997. The Company recorded a restructuring charge of $11.0
million for the actions that occurred in 1997.
Results of Operations
Nine Months Ended September 30, 1998 and 1997
The Company had total revenues of $3,410,000 and $3,143,000 in the nine
months ended September 30, 1998 and 1997, respectively. Revenues from research
and development collaborations were $950,000 and $980,000 for the nine months
ended September 30, 1998 and 1997, respectively.
Product and service revenue from the HSP Division was $2,353,000 and
$1,231,000 for the nine months ended September 30, 1998 and 1997, respectively.
Included in the nine months ended September 30, 1998 was $250,000 of revenue
received under its License Agreement with MethylGene for certain services
provided. The increase in product and service revenue in 1998 was a result of an
expansion in the customer base and increasing sales to existing customers and
revenue earned under the License Agreement with MethylGene.
Interest income was $106,000 and $898,000 for the nine months ended
September 30, 1998 and 1997, respectively. The decrease in interest income is
attributable to the decrease in cash and investments held by the Company in 1998
as compared to 1997.
The Company had research and development expenses of $17,181,000 and
$37,785,000 for the nine months ended September 30, 1998 and 1997, respectively.
The decrease in research and development expenses in 1998 reflects the
restructuring program that was commenced during the second half of 1997 and
completed in the third quarter of 1998. The restructuring included the
discontinuation of operations at the Company's facilities in Europe, termination
of the clinical development of GEM 91 and the reduction or suspension of
selected programs unrelated to the Company's core advanced chemistry antisense
drug development program, including the termination of its ribozyme program. The
restructuring resulted in significant reductions in employee-related expenses,
clinical and outside testing, consulting, materials and lab expenses. The
Company's facility costs in 1998 were also reduced by the income received from
subleasing its underutilized facilities. The Company has now relocated its
headquarters to its manufacturing facility, which is located in Milford,
Massachusetts, and has terminated the lease to the Cambridge Facility, which
should significantly reduce facilities costs in future periods.
The Company had general and administrative expenses of $5,218,000 and
$9,012,000 for the nine months ended September 30, 1998 and 1997, respectively.
The decrease in general and administrative expenses in 1998 resulted primarily
from the Company's restructuring program initiated during the second half of
1997 and its effect on employee-related expenses, consulting and net facilities
costs.
47
<PAGE>
The Company had interest expense of $2,880,000 and $3,223,000 for the
nine months ended September 30, 1998 and 1997, respectively. The decrease in
interest expense in 1998 is mainly attributable to the conversion of
approximately $48.7 million of the 9% Notes, issued in the second quarter of
1997, to Series A Convertible Preferred Stock on May 5, 1998.
As a result of the above factors, the Company incurred losses from
operations of $21,869,000 and $49,977,000 for the nine months ended September
30, 1998 and 1997, respectively.
The Company had extraordinary income of $8,877,000 for the nine months
ended September 30, 1998 resulting from the conversion of the 9% Notes to Series
A Convertible Preferred Stock in the second quarter of 1998. See "Financial
Statements -- Notes to Consolidated Condensed Financial Statements" for a
discussion of the Company's extraordinary income. As a result of this
transaction, the Company reduced its net loss to $12,993,000 for the nine months
ended September 30, 1998.
Years ended December 31, 1997, 1996 and 1995
Revenues
--------
The Company had total revenues of $3.9 million in 1997, $4.0 million in
1996 and $1.4 million in 1995. During 1997, 1996 and 1995, the Company received
revenues from research and development collaborations of $945,000, $1.4 million
and $1.2 million, respectively. Research and development collaboration revenues
decreased in 1997 from 1996 because the research funding, which the Company had
been receiving under the Company's collaboration with Roche in 1996 and 1995,
was terminated by Roche as of March 31, 1997. Research and development
collaboration revenues increased in 1996 from 1995 because collaboration
revenues in 1996 included revenues earned under a collaborative agreement with
Searle, which the Company entered into in January 1996.
Revenues from the custom contract manufacturing of synthetic DNA and
reagent products by the HSP Division were $1.9 million in 1997 and $1.1 million
in 1996. The HSP Division had no revenues in 1995. The increase in revenues in
1997 resulted from a full year of operations for the HSP Division, which
commenced operations in the third quarter of 1996. This increase in revenues in
1997 was significantly lower than the Company had anticipated.
Revenues from interest income were $1.1 million in 1997, $1.4 million in
1996 and $219,000 in 1995. The decrease in interest income in 1997 from 1996 was
the result of lower cash balances available for investment in 1997 than in 1996.
The increase in interest income in 1996 from 1995 was the result of
substantially higher cash balances available for investment as a result of the
Company's initial public offering, which was completed on February 2, 1996.
Research and Development Expenses
---------------------------------
During 1997, 1996 and 1995, the Company expended $46.8 million, $39.4
million and $29.7 million, respectively, on research and development activities
The increases in research and development expenses in 1997 and 1996 reflected
increasing expenses related primarily to ongoing clinical trials of the
Company's product candidates, including clinical trials of two different
formulations of GEM 132, which were first initiated during the third quarter of
1996 and the first quarter of 1997, clinical trials of GEM 92, which were
initiated in the third quarter of 1997 and clinical trials of GEM 91, which were
initiated in France in October 1993 and in the United States in May 1994 and
terminated in July 1997. Clinical expenses related to GEM 91 decreased
significantly during the second half of 1997 after the Company elected to
terminate development of this compound.
Research and development expenses also increased in 1997 and 1996 due to
significant increases in preclinical expenses incurred to meet the filing
requirements to initiate the domestic clinical trials of the Company's product
candidates.
48
<PAGE>
The facilities expense related to the research and development area
increased significantly in 1997 as a result of the relocation of the corporate
offices to Cambridge, Massachusetts.
Research and development salaries and related costs remained at
approximately the same level in 1997 as 1996 because of the costs involved in
terminating employees in 1997. Research and development salaries and related
costs increased significantly in 1996 over 1995 as the number of employees
engaged in research and development increased to 206 at December 31, 1996 from
124 at December 31, 1995.
Patent expenses also remained at approximately the same level in 1997 as
1996 as the Company limited the scope of patent protection that it sought as
part of its effort to conserve its cash resources. Patent expenses increased in
1996 as compared to 1995, as the Company continued to develop a patent portfolio
both domestically and internationally.
General and Administrative Expenses
-----------------------------------
The Company incurred general and administrative expenses of $11.0
million in 1997, $11.3 million in 1996, and $6.1 million in 1995, respectively.
The facilities expense related to the general and administrative area
increased significantly in 1997 as a result of the relocation of the corporate
offices to Cambridge, Massachusetts. However, as a result of the implementation
of the restructuring plan in the second half of 1997, such increase was offset
by decreases in general and administrative salaries and related costs and in
consulting expenses in the second half of 1997. As part of the restructuring,
approximately 11 general and administrative positions were eliminated. General
and administrative expenses related to business development, public relations
and legal expenses remained at approximately the same level in 1997 as 1996.
The increase in general and administrative expenses in 1996 from 1995
was primarily attributable to an increase in expenses for business development
activity, public relations and legal expenses incurred primarily as a result of
being a public company and salaries and related costs.
Interest Expense
----------------
Interest expense was $4.5 million in 1997, $124,000 in 1996 and $173,000
in 1995. The increase in interest expense in 1997 from 1996 reflected an
increase in the Company's debt outstanding associated with the Company's
issuance of $50,000,000 of 9% Notes in 1997 and interest incurred on borrowings
to finance the purchase of property and equipment. The decrease in interest
expense in 1996 from 1995 reflected a decrease in the outstanding balance of
borrowings to finance the purchase of property and equipment.
Restructuring Charge
--------------------
In connection with the implementation of the restructuring plan in the
second half of 1997, the Company recorded a restructuring charge of $11.0
million for the actions that occurred in 1997. The Company made cash payments of
approximately $1.5 million in 1997 and expects to make additional cash payments
of approximately $3.7 million in 1998 in connection with the restructuring.
Net Loss
--------
As a result of the above factors, the Company incurred net losses of
$69.5 million in 1997, $46.9 million in 1996 and $34.5 million in 1995.
49
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
General
From inception through September 30, 1998, the Company financed its
operations, including capital expenditures, through a public offering of common
stock, private placements of equity securities and the 9% Notes in 1997 and the
exercise of stock options and warrants with aggregate gross proceeds totalling
$230.5 million, as well as through bank and other borrowings of $10.1 million,
capital leases of $5.6 million, research and development and milestone payments
and license fees from corporate collaborators totalling $6.4 million and sales
of synthetic DNA and reagent products by the HSP Division totalling $5.1
million. Through September 30, 1998, the Company utilized approximately $196.4
million to fund operating activities and $29.7 million to finance capital
expenditures, including leasehold improvements at the Company's former Cambridge
Facility at its facility in Milford, Massachusetts.
During the nine months ended September 30, 1998, the Company's net cash
used in operating activities amounted to $17,444,000. The Company's operating
cash requirements were funded primarily through the utilization of existing cash
and proceeds raised in private equity offerings conducted in the first half of
1998, the collection of its accounts receivable from sales and services provided
by the Company, collaborative payments received, the rental payments from its
underutilized facilities, and the sale of equipment. The primary use of cash for
operating activities was to fund the Company's cash operating loss (before the
extraordinary gain) of $21.9 million. The Company expects to purchase a minimal
amount of capital equipment in the remainder of 1998 as part of its effort to
conserve cash resources.
The Company's existing capital resources include the following amounts
received in the fourth quarter of 1998. First, $6,163,000 was received in
connection with relocation of the Company's corporate headquarters to Milford,
Massachusetts, and the sale of the Company's interest in the Charles River
Building Limited Partnership, which owned the Company's former headquarters
facility; this amount includes a portion of the security deposit relating to the
Company's lease to its former headquarters facility and the release of $660,000
in restricted cash. Second, $254,000 was received in connection with the sale in
October 1998 of certain equipment and furniture. Third, approximately $3.2
million was received in December 1998 as an additional advance under the Bank
Credit Facility (as described below).
The Company had cash and cash equivalents of $883,000 at September 30,
1998 and approximately $6.0 million as of December 15, 1998, which the Company
estimates will last into the first quarter of 1999. The working capital deficit
at December 15, 1998 was $ .8 million.
The Company's expected capital resources include committed collaborative
research and development payments from Searle, research and development funding
expected from MethylGene and the profit margins on anticipated sales by the HSP
Division.
In June 1998, the Company relocated its headquarters from Cambridge,
Massachusetts to its manufacturing facility in Milford, Massachusetts. The
Cambridge Facility was re-leased in September 1998 to a third party, subject to
a sublease of a portion of the facility. As a result, the Company was relieved
of its substantial lease obligations for the Cambridge Facility, subject to a
contingent continuing liability for any defaults which may arise under the
sublease.
The Company is currently undergoing a sales and use tax audit by the
Massachusetts Department of Revenue. The amount of the final assessment, while
currently unknown, may be material.
Forum and Pecks Management Partners Ltd. ("Pecks" and, together with
Forum, the "Lender"), affiliates of two members of the Company's Board of
Directors, have purchased the Bank Credit Facility, the outstanding principal
amount of which, as of November 15, 1998, was approximately $2.8 million. In
connection with the purchase of the Bank Credit Facility, in December 1998, the
Lender lent an additional amount to the Company, increasing the outstanding
principal amount of the Loan to $6.0 million. See "Description of Common Stock
and Indebtedness -- Indebtedness -- Bank Credit Facility."
The Company will be required to raise substantial additional funds
through external sources, including through collaborative relationships and
public or private financings, to support its operations. Except for research and
development funding from Searle (which is subject to early termination in
certain circumstances), revenue expected to be received from MethylGene and sale
of DNA products and reagents manufactured on a custom
50
<PAGE>
contract basis by the HSP Division, the Company has no current external sources
of capital, and, as discussed above, expects no product revenues for at least
several years from sales of therapeutic products that it is developing.
No assurance can be given that such additional funds will be available
to fund the Company's operations or, if available, that such funds will be
available on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders will result.
Additionally, the terms of any such additional financing may adversely affect
the holdings or rights of then existing stockholders.
If adequate funds are not available, the Company may be required to
further curtail significantly one or more of its core drug development programs,
obtain funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products which the Company would otherwise pursue on its own or
terminate operations.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research, drug discovery and
development programs, the magnitude of these programs, progress with preclinical
and clinical trials, sales of DNA products and reagents to third parties by the
HSP Division and the margins on such sales, 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
ability of the Company to establish and maintain collaborative academic and
commercial research, development and marketing relationships, the ability of the
Company to obtain third-party financing for leasehold improvements and other
capital expenditures and the costs of manufacturing scale-up and
commercialization activities and arrangements.
9% Notes
On April 2, 1997, the Company issued $50.0 million of the 9% Note with a
maturity date of April 1, 2004, Under the terms of the 9% Notes the Company is
required to make semiannual interest payments on the outstanding principal
balance of the9% Notes on April 1 and October 1 of each year during which the 9%
Notes are outstanding. The outstanding principal balance of the 9% Notes will
become due on the maturity date. The Company made the first interest payment of
$2.3 million at the beginning of October 1997. On February 6, 1998, the Company
commenced an exchange offer to the holders of the 9% Notes offering to issue to
such holders shares of Series A Convertible Preferred Stock and Class A Warrants
to purchase shares of Common Stock in exchange for such 9% Notes, as described
below under the caption "1998 Financing Activities." As of September 30, 1998,
approximately $48.7 million in aggregate principal amount of 9% Notes had been
tendered to the Company in the Exchange Offer.
Bank Credit Facility
In December 1996, the Company entered into a five-year $7.5 million
credit facility to finance the leasehold improvements of the Company's
manufacturing facility. See "Description of Capital Stock and Indebtedness --
Indebtedness -- Bank Credit Facility."
Facility Leases
The Company entered into a lease for its corporate headquarters and
primary research and development laboratories in Cambridge, Massachusetts and
moved its operations to this facility in the first quarter of 1997. The
Company's facilities costs increased significantly upon occupying the Cambridge
Facility. As part of the lease agreement, the Company elected to treat $5.5
million of payments to the landlord (primarily related to tenant improvements)
as contributions to the capital of the Cambridge landlord in exchange for a
limited partnership interest in the Cambridge landlord. All other expenses
incurred to equip and build-out the facility in excess of $5.5
51
<PAGE>
million were included in leasehold improvements and were not exchangeable for a
partnership interest under the lease. The Cambridge landlord is an affiliate of
three directors of the Company. During July 1998, the Company's operations were
relocated to its facility in Milford, Massachusetts. In September 1998, the
Company terminated the lease for its Cambridge Facility and the facility was
re-leased to a third party, subject to a sublease of a portion of the facility.
As a result, the Company was relieved of its substantial lease obligations for
the Cambridge Facility, subject to a contingent continuing liability for any
defaults which may arise under the sublease.
The Company is a party to leases for its facility in Milford,
Massachusetts and the ancillary facility in Cambridge, Massachusetts, under
which it has significant payment obligations. Effective March 31, 1998, the
Company has terminated the lease for its office space in Paris, France.
Effective September 16, 1998 the Company terminated the lease for its office
space in Cambridge, Massachusetts, as described above. At November 30, 1998 the
Company had facility lease commitments amounting to approximately $6.3 million,
which last until April 2007.
As of December 31, 1997, the Company had approximately $206 million and
$3.4 million of net operating loss and tax credit carryforwards, respectively.
The Tax Reform Act of 1986 (the "Tax Act") contains certain provisions that may
limit the Company's ability to utilize net operating loss and tax credit
carryforwards in any given year if certain events occur, including cumulative
changes in ownership interests in excess of 50% over a three-year period. The
Company has completed several financings since the effective date of the Tax
Act, which, as of December 31, 1997, have resulted in ownership changes in
excess of 50%, as defined under the Tax Act.
Year 2000 Compliance
As has been widely publicized, many computer systems and microprocessors
are not programmed to accommodate dates beyond the year 1999. The Company's
exposure to Y2K problem comes not only from its own internal computer systems
and microprocessors, but also from the systems and microprocessors of its key
suppliers, including utility companies and payroll services.
The Company currently believes that all of its internal systems will be
Y2K compliant by the end of the third quarter of 1999. The Company is currently
evaluating all of its internal computer systems and microprocessors in light of
the Y2K problem. As part of this process, the Company is conducting an inventory
of its automated instruments and other computerized equipment and will be
contacting applicable vendors for information regarding Y2K compliance. The
Company will then upgrade or otherwise modify its internal computer systems and
microprocessors, to the extent necessary. Testing of all its internal computer
systems and microprocessors should be completed by the end of the first quarter
of 1999. The Company does not expect the cost of bringing all the Company's
systems and microprocessors into Y2K compliance will be material.
The Company's Y2K compliance efforts are in addition to other planned
information technology ("IT") projects. While these efforts have caused and may
continue to cause delays in other IT projects, the Company does not expect that
any of these delays will have a significant effect on the Company's business or
that any of the Company's other IT projects will be canceled or postponed to pay
for the Y2K upgrades.
The Company is not currently able to asses the Y2K readiness of its
research partners, or the potential impact, if any, of a research partners
failure to be Y2K compliant. With regard to potential supplier Y2K problems, the
Company has compiled a list of its critical suppliers, and has sent a Y2K
questionnaire to each of them in order to permit the Company to ascertain the
Y2K compliance status of each. The Company is awaiting the return of these
questionnaires. The Company does not know of any key supplier Y2K problems that
could have a material effect on the Company's business. If through a Y2K
questionnaire or otherwise the Company becomes aware of any such problems and is
not satisfied that those problems are being adequately addressed, it will take
appropriate steps to find alternative suppliers.
It has been acknowledged by governmental authorities that Y2K problems
have the potential to disrupt global economies, that no business is immune from
the potentially far-reaching effects of Y2K problems, and that it is difficult
to predict with certainty what will happen after December 31, 1999.
Consequently, it is possible that Y2K problems will have a material effect on
the Company's business even if the Company takes all appropriate measures to
ensure that it and its key suppliers are Y2K compliant.
52
<PAGE>
It is possible that the conclusions reached by the Company from its
analysis to date will change, which could cause the Company's Y2K cost estimates
and target completion dates to change.
DIRECTORS, EXECUTIVE OFFICERS
AND CERTAIN SIGNIFICANT EMPLOYEES OF THE COMPANY
Set forth below is certain information regarding all of the persons
currently serving as members of the Board of Directors or as Executive Officers
of the Company, including his principal occupation and business experience for
the past five years, the name of other publicly held companies of which he
serves as a director and his age and length of service as a director of the
Company. No director or executive officer is related by blood, marriage or
adoption to any other director or executive officer.
<TABLE>
<CAPTION>
DIRECTORS OF THE COMPANY
DIRECTOR PRINCIPAL OCCUPATION, OTHER
BUSINESS EXPERIENCE DURING PAST
FIVE YEARS AND OTHER DIRECTORSHIPS
NAME AGE SINCE
DIRECTORS WHOSE TERMS EXPIRE IN 1999 (CLASS I DIRECTORS)
<S> <C> <C> <C>
Nasser Menhall................ 42 1992 Member of the Board of Directors and Chief Executive
Officer of the WorldCare Group, a teleradiology
company, since 1993; President of Pillar Limited, a
private investment and management consulting firm,
since 1990; President of Biomedical Associates, a private
investment firm, since 1990.
Arthur W. Berry............... 56 1998 Chairman and Managing Partner of Pecks Management
Partners, since 1990; Vice President and Co-Manager of
the Alliance Convertible Securities Group and President
of the Alliance Convertible Fund from 1985 to 1990;
prior to joining Alliance, Vice President and Head of
Special Funds Section and Manager of the Harris
Convertible Fund at Harris Bank and Senior Portfolio
Manager in the bank's Individual Investment
Management Group. Member of the Board of Directors
of Intellicorp, Inc.
Harold L. Purkey.............. 54 1998 President of Forum Capital Markets LLC; Senior
Managing Director of Convertible Securities at Smith
Barney Shearson from 1990 to 1994; Senior Executive
Vice President of Drexel Burnham Lambert from 1982
to 1989. Member of the Board of Directors of
Richardson Electronics.
DIRECTORS WHOSE TERMS EXPIRE IN 2000 (CLASS II DIRECTORS)
Mohamed A. El-Khereiji........ 44 1993 Chairman of the International Centre for Commerce and
Contracting, a contracting and trading company, since
1979; Chairman of Faisal Investment E.C., a leasing
company, since 1989.
53
<PAGE>
James B. Wyngaarden, M.D...... 73 1990 Vice Chairman of the Board of Directors of the
Company since February 1997; Foreign Secretary of the
National Academy of Sciences and the Institute of
Medicine of the National Academy of Sciences from
1990 to 1994; Council member of the Human Genome
Organization from 1990 to 1993 and Director from 1990
to 1991; Director of the National Institutes of Health
from 1982 to 1989; Member of the Board of Directors
of Human Genome Sciences, Inc. and Magainin
Pharmaceuticals, Inc.
Paul C. Zamecnik, M.D......... 85 1990 Principal Scientist at the Worcester Foundation for
Biomedical Research, Inc. (the "Worcester Foundation")
from 1979 to 1996; Collis P. Huntington Professor of
Oncologic Medicine Emeritus at the Harvard Medical
School since 1979; Senior Scientist and Honorary
Physician at MGH.
DIRECTORS WHOSE TERMS EXPIRE IN 2001 (CLASS III DIRECTORS)
Sudhir Agrawal, D. Phil....... 45 1993 Senior Vice President of the Company since March
1994; Chief Scientific Officer of the Company since
January 1993; Vice President of Discovery of the
Company from December 1991 to January 1993;
Principal Research Scientist of the Company from
February 1990 to January 1993.
Youssef El-Zein............... 49 1992 Vice Chairman of the Board of Directors of the
Company since February 1997; Executive Officer of
Pillar S.A., a private investment and management
consulting firm, since 1991; Chairman of the WorldCare
Group since 1993; Member of the Board of Directors of
Pillar Investment Limited, a private investment and
management consulting firm, since 1991.
E. Andrews Grinstead III .... 53 1991 Chairman of the Board and Chief Executive Officer of
the Company since 1991; President of the Company
since 1993; Member of the Board of Directors of
EcoScience Corporation, Pharmos Corporation and
Meridian Medical Technologies.
</TABLE>
Effective February 17, 1997, Dr. Andre L. Lamotte, a Class I Director
of the Company, resigned from the Board of Directors of the Company. Effective
July 29, 1997, Jerry A. Weisbach, a Class II Director of the Company, resigned
from the Board of Directors of the Company. Effective August 11, 1997, J. Robert
Buchanan, A Class I Director of the Company, resigned from the Board of
Directors of the Company.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
NAME AGE POSITION
<S> <C> <C>
E. Andrews Grinstead III............. 53 Chairman of Board of Directors, President and Chief
Executive Officer
Sudhir Agrawal, D. Phil............... 45 Senior Vice President of Discovery, Chief Scientific
Officer and Director
</TABLE>
54
<PAGE>
Mr. Grinstead joined the Company in June 1991 and was appointed
Chairman of the Board and Chief Executive Officer in August 1991 and President
in January 1993. He has served on the Board of Directors since June 1991. Prior
to joining the Company, Mr. Grinstead served as Managing Director and Group Head
of the life sciences group at PaineWebber, Incorporated, an investment banking
firm, from 1987 to October 1990; Managing Director and Group Head of the life
sciences group at Drexel Burnham Lambert, Inc., an investment banking firm, from
1986 to 1987; and Vice President at Kidder, Peabody & Co. Incorporated, an
investment banking firm, from 1984 to 1986, where he developed the life sciences
corporate finance specialty group. Mr. Grinstead served in a variety of
operational and executive positions with Eli Lilly and Company ("Eli Lilly"), an
international pharmaceutical company, from 1976 to 1984, most recently as
General Manager of Venezuelan Pharmaceutical, Animal Health and Agricultural
Chemical Operations and at Lilly Corporate Staff as Administrator, Strategic
Planning and Acquisitions. Since 1991, Mr. Grinstead has served as a director of
EcoScience Corporation, a development stage company engaged in the development
of biopesticides, and as a director of Pharmos Corporation, a development stage
company engaged in the development of novel pharmaceutical compounds and drug
delivery systems. Mr. Grinstead also serves as a director of Meridian Medical
Technologies, Inc., a pharmaceutical and medical device company. Mr. Grinstead
was appointed to The President's Council of the National Academy of Sciences and
the Institute of Medicine in January 1992 and the Board of the Massachusetts
Biotech Council in 1997. Since 1994, Mr. Grinstead has served as a member of the
Board of Trustees of the Albert B. Sabin Vaccine Foundation, a charitable
foundation dedicated to disease prevention. Mr. Grinstead received an A.B. from
Harvard College in 1967, a J.D. from the University of Virginia School of Law in
1974 and an M.B.A. from the Harvard Graduate School of Business Administration
in 1976.
Dr. Agrawal joined the Company in February 1990 and served as Principal
Research Scientist from February 1990 to January 1993 and as Vice President of
Discovery from December 1991 to January 1993 prior to being appointed Chief
Scientific Officer in January 1993 and Senior Vice President of Discovery in
March 1994. He has served on the Board of Directors since March 1993. Prior to
joining the Company, Dr. Agrawal served as a Foundation Scholar at the Worcester
Foundation from 1987 through 1991. Dr. Agrawal served as a Research Associate at
Research Council Laboratory of Molecular Biology in Cambridge, England, from
1985 to 1986, studying synthetic oligonucleotides. Dr. Agrawal received a B.Sc.
in chemistry, botany and zoology in 1973, an M.Sc. in organic chemistry in 1975
and a D. Phil. in chemistry in 1980 from Allahabad University in India.
For information relating to shares of Common Stock owned by each of the
directors and executive officers of the Company, see "Security Ownership of
Certain Beneficial Owners and Management."
55
<PAGE>
EXECUTIVE COMPENSATION
Compensation of Executive Officers
Summary Compensation Table.
The following table sets forth the compensation for services in all
capacities to the Company for the fiscal years ended December 31, 1997 ("fiscal
1997"), December 31, 1996 and December 31, 1995 for the Company's Chief
Executive Officer and up to four of the other most highly compensated executive
officers who were serving as executive officers at December 31, 1997 whose total
annual salary and bonus exceeded $100,000 in fiscal 1997 and up to two
additional individuals who would have been among such other four most highly
compensated executive officers if such individuals had been serving as executive
officers at December 31, 1997 (the Chief Executive Officer and such other
executive officers are hereinafter referred to as the "Named Executive
Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
E. Andrews Grinstead III .......1997 $375,000 0 $72,486(1) 66,806 $75,048(2)(3)
Chairman of the Board, 1996 $375,000 $225,000 $82,386(6) 50,000 $43,527(7)(8)
President and Chief Executive 1995 $270,000 $235,000 $19,655(9) 119,846 $118,332(10)(11)
Officer
Anthony J. Payne.................1997 $172,656 0 $47,778(1) 31,316 $158,628(2)(3)(4)
Former Senior Vice President 1996 $243,750 $107,000 $45,616(6) 25,000 $ 14,853(7)(8)
of Finance and Administration, 1995 $175,000 $137,500 $30,469(9) 43,162 $ 45,250(10)(11)
Chief Financial Officer,
Treasurer and Secretary(12)
Sudhir Agrawal, D. Phil..........1997 $250,000 0 0 32,263 $ 22,757(3)(6)
Senior Vice President of 1996 $250,000 $100,000 0 25,000 $ 28,676(5)(8)
Discovery, Chief Scientific 1995 $178,250 $114,125 0 32,263 $ 38,523(5)(11)
Officer and Director
</TABLE>
(1) Includes $51,386 and $33,817 paid by the Company to Messrs. Grinstead and
Payne, respectively, in lieu of employee benefits in 1998.
(2) Includes $37,748 and $972 paid by the Company to Messrs. Grinstead and
Payne, respectively, during 1997 with respect to life insurance for the
benefit of the Named Executive Officer.
(3) Includes $37,300, $15,468 and $18,269 paid by the Company to Mr. Grinstead,
Mr. Payne and Dr. Agrawal, respectively, in connection with the surrender
of accrued but unused vacation days during 1997.
(4) Includes $142,188 paid by the Company to Mr. Payne in connection with the
termination of his employment during 1997.
(5) Includes $4,500, $4,277 and $4,488 contributed by the Company on behalf of
Dr. Agrawal pursuant to the Company's 401(k) Plan in 1995, 1996 and 1997
respectively.
(6) Includes $76,017 and $36,938 paid by the Company to Messrs. Grinstead and
Payne, respectively, in lieu of employee benefits in 1997.
(7) Includes $11,364 and $3,134 paid by the Company to Messrs. Grinstead and
Payne, respectively, during 1996 with respect to life insurance for the
benefit of the Named Executive Officer.
(8) Includes $32,163, $11,719 and $24,399 paid to Mr. Grinstead, Mr. Payne, and
Dr. Agrawal, respectively, in consideration of the surrender of accrued but
unused vacation days during 1996.
(9) Includes $12,510 and $23,594 paid by the Company to Messrs. Grinstead and
Payne, respectively, in lieu of employee benefits in 1996.
56
<PAGE>
(10) Includes $34,345 and $4,531 paid by the Company to Messrs. Grinstead and
Payne, respectively, during 1995 with respect to life insurance for the
benefit of the Named Executive Officer.
(11) Includes $83,987, $40,719 and $34,023 paid to Mr. Grinstead, Mr. Payne, and
Dr. Agrawal in consideration of the surrender of accrued but unused
vacation days during the period from the commencement of such Named
Executive Officer's employment with the Company through December 31, 1995.
(12) Mr. Payne's employment with the Company terminated as of September 15,
1997.
Option Grants Table
The following table sets forth certain information concerning grants of
stock options made during fiscal 1997 to each of the executive officers named in
the Summary Compensation Table:
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
OPTION GRANTS IN LAST FISCAL YEAR PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERMS(2)
----------------- ---------------
PERCENTAGE
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES PRICE
OPTIONS IN FISCAL PER EXPIRATION
GRANTED YEAR SHARE DATE(1) 5% 10%
------- ------- ----- ------- -- ---
<S> <C> <C> <C> <C> <C> <C>
E. Andrews Grinstead 16,806(3) 5.32% $31.25 2/19/07 $330,246 $ 839,959
38,000(4) 12.04 30.00 4/09/07 716,300 1,818,400
12,000(5) 3.80 31.88 5/21/07 240,300 609,900
Sudhir Agrawal....... 7,323(3) 2.30 31.25 2/19/07 142,722 361,707
19,000(4) 6.02 30.00 4/09/07 358,150 908,200
6,000(5) 1.90 31.88 5/21/07 120.150 304,950
Anthony J. Payne..... 6,316(3) 2.00 31.25 2/19/07 124,113 314,547
19,000(4) 6.02 30.00 4/09/07 358,150 908,200
6,000(5) 1.90 31.88 5/21/07 120,150 304,950
</TABLE>
(1) The expiration date of an option is the tenth anniversary of the date on
which the option was originally granted.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. these gains are based on assumed rates of stock appreciation of 5%
and 10%, compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
optionholders' continued employment through the option period, and the date
on which the options are exercised. As of December 1, 1998, the last sale
price of the Common Stock of the Company was significantly lower that the
exercise price of the options reflected in this table.
(3) These stock options are immediately exercisable with respect to 40% of the
shares covered thereby and will become exercisable with respect to the
remaining 60% of the shares covered thereby in three equal installments in
arrears commencing on February 19, 1999.
(4) These stock options are immediately exercisable with respect to 40% of the
shares covered thereby and will become exercisable with respect to the
remaining 60% of the shares covered thereby in four equal annual
installments in arrears commencing on April 9, 1999.
(5) These stock options are immediately exercisable with respect to 20% of the
shares covered thereby and will become exercisable with respect to the
remaining 80% of the shares covered thereby in four equal annual
installments in arrears commencing on May 21, 1998.
57
<PAGE>
Aggregated Option Exercises and Fiscal Year-End Option Value Table.
The following table sets forth certain information concerning each
exercise of a stock option during fiscal 1997 by each of the Named Executive
Officers and the number and value of unexercised options held by each of the
Named Executive Officers on December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
NUMBER OF VALUE OF
SHARES UNEXERCISED
UNDERLYING IN THE MONEY
OPTIONS AT OPTIONS AT FISCAL
FISCAL YEAR-END YEAR-END(1)
--------------- -----------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
------------- -------------
E. Andrews Grinstead III........ 191,874/71,445 $ -- / --
Anthony J. Payne(2)............. 70,592/40,053 -- / --
Sudhir Agrawal.................. 80,453/37,811 17,500
- ----------------------------
(1) The closing price for the Common Stock as reported by the Nasdaq OTC
Bulletin Board on December 31, 1997 (the last day of trading) in 1997 was
$3.00. Value is calculated on the basis of the difference between the
option exercise price and $3.00, multiplied by the number of shares of
Common Stock underlying the option.
(2) Mr. Payne's employment with the Company terminated as of September 15,
1997.
Compensation of Directors
Each non-employee director is paid $1,500 for personal or telephonic
attendance at a Boardof Directors or committee meeting. Other directors are not
entitled to compensation in their capacities as directors. All of the directors
are reimbursed for their expenses incurred in connection with their attendance
at Board of Directors and committee meetings. In addition, Drs. Wyngaarden and
Zamecnik received compensation in the amounts of $49,250 and $58,000,
respectively, in 1997 in connection with the provision of certain consulting
services to the Company and for serving on the Company's Scientific and/or
Clinical Advisory Boards. The Company also is a party to various consulting,
advisory and other arrangements with affiliates of Messrs. El-Khereiji, El-Zein
and Menhall. For a description of the foregoing arrangements with the Company
and certain other transactions between the Company and affiliates of certain
directors, see "Certain Relationships and Related Transactions."
In October 1995, the Company adopted the 1995 Director Stock Option
Plan (the "Director Plan"). Under the terms of the Director Plan, options to
purchase 1,000 shares of Common Stock were granted to each director of the
Company other than Mr. Grinstead and Dr. Agrawal as of January 30, 1996 at an
exercise price of $65.625 per share, and options to purchase 1,000 shares of
Common Stock were granted to each director other than Mr. Grinstead and Dr.
Agrawal as of May 1, 1997 at an exercise price of $27.50 per share. The Director
Plan also provides that options to purchase 1,000 shares of Common Stock will be
granted to each new director upon his or her initial election to the Board of
Directors. Annual options to purchase 1,000 shares of Common Stock will be
granted to each eligible director on May 1 of each year. All options will vest
on the first anniversary of the date of grant (or, in the case of annual
options, on April 30 of each year with respect to options granted in the
previous year); provided, that the exercisability of these options will be
accelerated upon the occurrence of a change in control (as defined in the
Director Plan). A total of 50,000 shares of Common Stock may be issued upon the
exercise of stock options granted under the Director Plan. The exercise price of
options granted under the Director Plan will equal the closing price of the
Common Stock on the date of grant. As of November 30, 1998, options to purchase
an aggregate of 21,000 shares of Common Stock were outstanding under the
Director Plan.
58
<PAGE>
Non-employee directors also have received options to purchase Common
Stock of the Company under the Company's 1997 Stock Option Plan (the "1997
Plan") and the Company's 1995 Stock Option Plan (the "1995 Plan"). In
particular, in 1998, the Board of Directors voted to grant an option to purchase
50,000 shares of Common Stock at $2.00 per share to Dr. Wyngaarden and Mr.
El-Zein, in recognition of their services as Vice Chairmen of the Board of
Directors during the previous twelve months. Mr. El-Zein declined this grant.
In addition, in 1998, the Board of Directors voted to grant 50,000
shares of Common Stock of the Company to Dr. Zamecnik in recognition of his
outstanding contributions to the Company.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
The Company is party to an employment agreement with Mr. Grinstead for
the period commencing July 1, 1996 and ending June 30, 2001. Under this
agreement, Mr. Grinstead is currently entitled to receive an annual base salary
of $375,000. Mr. Grinstead also is eligible to receive (i) a cash bonus each
year related to the attainment of management objectives specified by the Board
of Directors and (ii) additional payments of $16,000 in 1997 and 1998. In the
event Mr. Grinstead's employment is terminated by the Company without cause (as
defined) or by him for good cause (as defined), the Company will pay Mr.
Grinstead during the 24-month period following his termination a monthly amount
equal to one-twelfth of the sum of Mr. Grinstead's annual base salary as of the
date of termination and the average bonus paid to him during the three years
preceding his termination (the "Average Bonus Amount"). The Company also will
continue Mr. Grinstead's benefits for such period, subject to earlier
termination under certain circumstances. If his employment is terminated by the
Company for failure to perform his assigned duties, he will continue to receive
his annual base salary and benefits during the six-month period following such
termination. Notwithstanding the foregoing, in the event that Mr. Grinstead's
employment is terminated for any of the above reasons within 12 months following
a Change in Control (as defined) of the Company, Mr. Grinstead will be entitled
to receive, in lieu of the payments described above, a lump sum payment equal to
300% of the sum of his annual base salary and his Average Bonus Amount.
In accordance with the terms of Mr. Grinstead's previous employment
agreement, the Company loaned $190,000 to Mr. Grinstead in December 1992
pursuant to the terms of a promissory note bearing simple interest at a rate of
6% per year, which originally provided for the payment of principal and all
accrued interest on the earlier of December 23, 1995 or the expiration or
termination of Mr. Grinstead's employment by the Company, but is currently
payable on demand. Such loan remained outstanding as of September 30, 1998, at
which date the total unpaid balance of principal and interest was $255,800.
The Company is party to an employment agreement with Dr. Agrawal for
the period commencing July 1, 1996 and ending June 30, 2000. Under this
agreement, Dr. Agrawal serves as Senior Vice President of Discovery and Chief
Scientific Officer of the Company and is currently entitled to receive an annual
base salary of $250,000. Dr. Agrawal is eligible to receive a cash bonus each
year related to the attainment of management objectives specified by the Chief
Executive Officer and the Board of Directors. In the event Dr. Agrawal's
employment is terminated by the Company without cause (as defined) or by him for
good cause (as defined), the Company will pay Dr. Agrawal during the 24-month
period following his termination a monthly amount equal to one-twelfth of the
sum of Dr. Agrawal's annual base salary as of the date of termination and the
average bonus paid to him during the three years preceding his termination (the
"Average Bonus Amount"). The Company will also continue Dr. Agrawal's benefits
for such period, subject to earlier termination under certain circumstances. If
his employment is terminated by the Company for failure to perform his assigned
duties, he will continue to receive his annual base salary and benefits during
the six-month period following such termination. Notwithstanding the foregoing,
in the event that Dr. Agrawal's employment is terminated for any of the above
reasons within 12 months following a Change in Control (as defined) of the
Company, Dr. Agrawal will be entitled to receive, in lieu of the payments
described above, a lump sum payment equal to 300% of the sum of his annual base
salary and his Average Bonus Amount.
The employment agreements entered into between the Company and each of
Mr. Grinstead and Dr. Agrawal also provide that all stock options held by any of
the Named Executive Officers (including existing options and options to be
granted in the future) shall include terms providing (i) that in the event that
such Named Executive
59
<PAGE>
Officer's employment is terminated by the Company without cause or by him for
good cause the exercisability of such stock options will be accelerated by two
years and such stock options will be exercisable for a two-year period following
termination and (ii) that in the event of certain changes in control of the
Company, its liquidation or the sale of all or substantially all of its assets,
all such stock options not then exercisable will vest and become immediately
exercisable. The Company is also a party to registration rights agreements with
Mr. Grinstead that provide that in the event the Company proposes to register
any of its securities under the Securities Act, at any time, with certain
exceptions, Mr. Grinstead shall be entitled to include the shares of Common
Stock held by him in such registration, subject to the right of the managing
underwriter of any underwritten offering to exclude from such registration for
marketing reasons some or all of such shares. The Company also is a party to
indemnification agreements with Mr. Grinstead pursuant to which the Company has
agreed to indemnify him for certain liabilities, including liabilities arising
under the Securities Act.
Mr. Payne's employment with the Company terminated as of September 15,
1997. The Company is party to an agreement with Mr. Payne regarding the
termination of his employment. Pursuant to this agreement, options to purchase
an aggregate of 62,493 shares of Common Stock were amended to provide for the
acceleration by two years of the exercisability of such options and to extend
the period during which such options may be exercised until the second
anniversary of the termination of Mr. Payne's employment. In addition, under
this agreement, the Company agreed to pay Mr. Payne during the 12-month period
following his termination a monthly amount equal to one-sixth of the sum of Mr.
Payne's annual base salary as of September 15, 1997. Under this agreement, Mr.
Payne agreed to repay a personal loan form the Company in the amount of
$221,521.25 upon his acceptance of employment by a third party, at which time
the remaining severance payments would be applied to the loan balance. As of
March 31, 1998, such loan had been repaid in full and the Company's obligation
to continue making severance payments to Mr. Payne had terminated. The Company
has also agreed to continue Mr. Payne's benefits for a two-year period, subject
to earlier termination under certain circumstances.
Stock options to purchase an aggregate of 261,841 shares of Common
Stock granted to the Named Executive Officers pursuant to the 1990 Plan provide
that, upon a change in control (as defined in the 1990 Plan), all options
granted thereunder will become fully exercisable. In addition, pursuant to the
terms of the employment agreements entered into between the Company and each of
the Named Executive Officers described above (i) in April 1997, stock options to
purchase an aggregate of 130,386 shares of Common Stock granted to the Named
Executive Officers under the Company's 1995 Plan were amended to provide that
such options will become fully exercisable upon a change in control of the
Company, and (ii) all stock options granted to the Named Executive Officers
after March 1, 1997 will provide that such options will become fully exercisable
upon a change of control of the Company.
Compensation Committee Interlocks and Insider Participation
The Board of Directors did not have a compensation committee during its
fiscal year ended December 31, 1997. The Board of Directors as a whole,
including Mr. Grinstead and Dr. Agrawal, who are employees of the Company,
performed equivalent functions. None of the directors or executive officers of
the Company had any "interlock" relationships to report during the Company's
fiscal year ended December 31, 1997.
On June 16, 1998 the Board of Directors established a Compensation
Committee consisting of Mr. El-Zein, Mr. Berry and Dr. Wyngaarden.
Since January 1, 1997, the Company has entered into or engaged in
certain transactions with Pillar S.A., Pillar Investment, Pillar Limited and
Charles River Building Limited Partnership (the "Cambridge Landlord"), entities
of which Messrs. El-Zein and Menhall are affiliates and with Pecks, an entity of
which Mr. Berry is an affiliate. See "Certain Relationships and Related
Transactions."
60
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31,
1998 with respect to the beneficial ownership of shares of Common Stock by each
person known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock.
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP(1)
--------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF PERCENT OF
- ------------------------------------ SHARES CLASS
- ------------------------------------ ------ -----
5% STOCKHOLDERS
Intercity Holdings Ltd. .............. 2, 216,666 (2) 13.88%
c/o Cuson Milner House
18 Parliament Street
Hamilton, Bermuda
Abdelah Bin Mahfouz
c/o SEDCO
P.O. Box 4384
Jeddah 21491
Saudi Arabia ......................... 2,216,666 (3) 13.88%
Forum Capital Markets LLC............. 1,206,893 (4) 9.38%
53 Forest Ave.
Old Greenwich, CT 06870
Yahia M. Bin Laden.................... 1,373,977 (5) 8.87%
2 rue Charles Bonnet
1206 Geneva, Switzerland
Nicris Limited........................ 1,360,644 (6) 8.78%
c/o Magnin Dunand & Associes
2 rue Charles Bonnet
1206 Geneva, Switzerland
Youssef El-Zein....................... 1,439,722 (7) 8.71%
28 Avenue de Messine
75008 Paris, France
Nasser Menhall........................ 1,417,734 (8) 8.59%
28 Avenue de Messine
75008 Paris, France
Pillar Investment Limited............. 1,317,173 (9) 8.03%
28 Avenue de Messine
75008 Paris, France
Faisal Finance Switzerland SA......... 1,043,113 (10) 6.73%
84 Ave Louis Casi
1216 Geneva, Switzerland
Finova Technology Finance Inc. ....... 896,875 (11) 5.79%
10 Waterside Drive
Farmington, CT 06032
- -----------------------------
(1) The number of shares beneficially owned by each director and executive
officer is determined under rules promulgated by the Securities and
Exchange Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment power and also any shares which the individual
has the right to acquire within 60 days after March 31, 1998 through the
exercise of any stock option or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares. Unless
otherwise indicated, each person or entity named in the table has sole
voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as owned by such
person or entity.
(2) Includes 375,000 shares issuable upon the exercise of Class B warrants held
by Intercity Holdings Ltd.
(3) Includes 1,841,666 shares held by Intercity Holdings Ltd. and 375,000
shares issuable upon exercise of Class B Warrants held by Intercity
Holdings. Mr. Mahfouz, a controlling stockholder of Interncity Holdings
Ltd., may be considered a beneficial owner of the shares beneficially owned
by such entity.
(4) Includes (a) 328,677 shares issuable upon exercise of Class B warrants and
(b) 280,517 shares issuable upon the exercise of Class C warrants held by
Forum Capital Markets LLC. Mr. Harold Purkey, a Director of Hybridon, is an
affiliate of Forum Capital Markets LLC.
(5) Includes 1,125,880 shares held by Nicris Limited and 234,764 shares
issuable upon the exercise of Class B warrants held by Nicris Limited. Mr.
Bin Laden, a controlling stockholder of Nicris, may be considered a
beneficial owner of the shares beneficially owned by such entity.
(6) Includes 234,764 shares issuable upon the exercise of Class B warrants held
by Nicris Limited.
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<PAGE>
(7) Includes (a) 82,183 shares issuable upon the exercise of warrants held by
Mr. El-Zein, (b) 366 shares issuable upon the exercise of warrants held by
Pillar Associated, (c) 20,000 shares issuable upon the exercise of warrants
held by Pillar S.A., (d) 20,000 shares issuable upon the exercise of
warrants held by Pillar S.A.R.L., (e) 37,500 shares issuable upon the
exercise of Class C warrants held by Pillar Investment Limited, (f) 473,598
issuable upon the exercise of advisory warrants held by Pillar Investment
Limited, (g) 638,032 shares issuable upon the exercise of placement
warrants held by Pillar Investment Limited, (h) 5,243 shares issuable upon
the exercise of other warrants held by Pillar Investment Limited, and (i)
162,800 shares held by Pillar Investment Limited. Mr. El-Zein, an affiliate
of Pillar Associated, Pillar S.A., Pillar S.A.R.L., and Pillar Investment
Limited, may be considered a beneficial owner of the shares beneficially
owned by such entities.
(8) Includes (a) 60,195 shares issuable upon the exercise of warrants held by
Mr. Menhall, (b) 366 shares issuable upon the exercise of warrants held by
Pillar Associated, (c) 20,000 shares issuable upon the exercise of warrants
held by Pillar S.A., (d) 20,000 shares issuable upon the exercise of
warrants held by Pillar S.A.R.L., (e) 37,500 shares issuable upon the
exercise of Class C warrants held by Pillar Investment Limited, (f) 473,598
issuable upon the exercise of advisory warrants held by Pillar Investment
Limited, (g) 638,032 shares issuable upon the exercise of placement
warrants held by Pillar Investment Limited, (h) 5,243 shares issuable upon
the exercise of other warrants held by Pillar Investment Limited, and (i)
162,800 shares held by Pillar Investment Limited. Mr. Menhall, an affiliate
of Pillar Associated, Pillar S.A., Pillar S.A.R.L., and Pillar Investment
Limited, may be considered a beneficial owner of the shares beneficially
owned by such entities.
(9) Includes (a) 37,500 shares issuable upon the exercise of Class C warrants
held by Pillar Investment Limited, (c) 473,598 issuable upon the exercise
of advisory warrants held by Pillar Investment Limited, (c) 638,032 shares
issuable upon the exercise of placement warrants held by Pillar Investment
Limited, and (d) 5,243 shares issuable upon the exercise of other warrants
held by Pillar Investment Limited.
(10) Includes 233,026 shares issuable upon the exercise of Class B warrants held
by Faisal Finance Switzerland SA.
(11) Includes 259,375 shares issuable upon the exercise of Class C warrants held
by Finova Technology Finance Inc.
The following table sets forth certain information as of December 1, 1998 with
respect to the beneficial ownership of shares of Common Stock and Series A
Preferred Stock by (i) the directors of the Company and (ii) the Chief Executive
Officer and other Named Executive Officers, and (iii) the directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK PREFERRED STOCK
------------ ---------------
Amount and Nature Percent of Amount and Nature of Percent of
NAME OF BENEFICIAL OWNER Beneficial Ownership Class Beneficial Ownership Class
Directors
- ---------
<S> <C> <C> <C> <C>
Youssef El-Zein.................. 1,439,722 (2) 8.71% 0 0
Nasser Menhall................... 1,417,734 (3) 8.59% 0 0
E. Andrews Grinstead III ........ 558,815 (4) 3.54% 0 0
Sudhir Agrawal................... 408,663 (5) 2.61% 0 0
Mohamed A. El-Khereiji........... 362,414 (6) 2.35% 0 0
Paul Z. Zamecnik................. 284,670 (7) 1.86% 0 0
James B. Wyngaarden.............. 65,100 (8) * 0 0
Arthur W. Berry.................. 0 0 184,784 (9) 30.37%
Harold L. Purkey................. 1,206,893(10) 9.38% 82,025(11) 12.79%
Other Executive Officers
- ------------------------
Anthony Payne.................... 92,250(12) * 0 0
All directors and executive officer
as a group (10 persons)........... 4,478,712(13) 24.29% 266,809 41.61%
</TABLE>
- -----------------------------
(1) The number of shares beneficially owned by each director and executive
officer is determined under rules promulgated by the Securities and
Exchange Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment power and also any shares which the individual
has the right to acquire within 60 days after March 31, 1998 through the
exercise of any stock option or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares. Unless
otherwise indicated, each person or entity named in the table has sole
voting power and
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<PAGE>
investment power (or shares such power with his or her spouse) with respect
to all shares of capital stock listed as owned by such person or entity.
(2) Includes (a) 82,183 shares issuable upon the exercise of warrants held by
Mr. El-Zein, (b) 366 shares issuable upon the exercise of warrants held by
Pillar Associated, (c) 20,000 shares issuable upon the exercise of warrants
held by Pillar S.A., (d) 20,000 shares issuable upon the exercise of
warrants held by Pillar S.A.R.L., (e) 37,500 shares issuable upon the
exercise of Class C warrants held by Pillar Investment Limited, (f) 473,598
issuable upon the exercise of advisory warrants held by Pillar Investment
Limited, (g) 638,032 shares issuable upon the exercise of placement
warrants held by Pillar Investment Limited, (h) 5,243 shares issuable upon
the exercise of other warrants held by Pillar Investment Limited, and (i)
162,800 shares held by Pillar Investment Limited. Mr. El-Zein, an affiliate
of Pillar Associated, Pillar S.A., Pillar S.A.R.L., and Pillar Investment
Limited, may be considered a beneficial owner of the shares beneficially
owned by such entities.
(3) Includes (a) 60,195 shares issuable upon the exercise of warrants held by
Mr. Menhall, (b) 366 shares issuable upon the exercise of warrants held by
Pillar Associated, (c) 20,000 shares issuable upon the exercise of warrants
held by Pillar S.A., (d) 20,000 shares issuable upon the exercise of
warrants held by Pillar S.A.R.L., (e) 37,500 shares issuable upon the
exercise of Class C warrants held by Pillar Investment Limited, (f) 473,598
issuable upon the exercise of advisory warrants held by Pillar Investment
Limited, (g) 638,032 shares issuable upon the exercise of placement
warrants held by Pillar Investment Limited, (h) 5,243 shares issuable upon
the exercise of other warrants held by Pillar Investment Limited, and (i)
162,800 shares hold by Pillar Investment Limited. Mr. Menhall, an affiliate
of Pillar Associated, Pillar S.A., Pillar S.A.R.L., and Pillar Investment
Limited, may be considered a beneficial owner of the shares beneficially
owned by such entities.
(4) Includes 511,235 shares subject to outstanding stock options which are
exercisable within the 60-day period following December 1, 1998.
(5) Includes 390,903 shares subject to outstanding stock options which are
exercisable within the 60-day period following December 1, 1998.
(6) Includes (a) 88,414 shares issuable upon the exercise of warrants held by
Mr. El-Khereiji, (b) 228,345 shares held by Solter Corporation and (c)
45,242 shares issuable upon the exercise of Class B warrants held by Solter
Corporation. Mr. El-Khereiji, an affiliate of Solter Corporation, may be
considered a beneficial owner of the shares beneficially owned by such
entity.
(7) Includes (a) 26,000 shares subject to outstanding stock options which are
exercisable within the 60-day period following December 1, 1998 and (b)
31,250 shares issuable upon the exercise of Class C warrants.
(8) Includes (a) 60,000 shares subject to outstanding stock options which are
exercisable within the 60-day period following December 1, 1998 and (b) 700
shares held by Mr. Wyngaarden's children.
(9) Includes (a) 20,313 shares held by Declaration of Trust for the Defined
Benefit Plan of ICI America Holdings, Inc., (b) 9,372 shares held by J.W.
McConnell Family Foundation, (c) 71,221 shares held by Delaware State
Employees Retirement Fund, (d) 2,164 held by Hillside Capital Corporation,
(e) 5,732 shares held by Thermo Electron Balanced Investment Fund, and (f)
85,982 shares held by General Motors Employees Domestic Group Trust. Mr.
Berry, a principal of Pecks Management Partners Ltd., and investment
advisor of which the foregoing entities are clients, may be considered a
beneficial owner of the shares beneficially owned by such entities.
(10) Includes (a) 328,677 shares issuable upon the exercise of Class B warrants
held by Forum (b) 280,517 shares issuable upon the exercise of Class C
warrants held by Forum and (c) 597,699 shares held by Forum. Mr. Purkey, an
affiliate of Forum, may be considered a beneficial owner of the shares
beneficially owned by such entity.
(11) Includes (a) 865 shares held by Forest Alternative Strategies Fund II, L.P.
Series A51, (b) 433 shares held by Forest Alternative Strategies Fund II,
L.P. Series A5M, (c) 131 shares held by Forest Alternative Strategies Fund
II, L.P. Series B3, (d) 3,515 shares held by Forest Fulcrum Ltd., (e) 4,326
shares held by Forest Global Convertible Fund Series A5, (f) 1,082 shares
held by Forest Global Convertible Fund Series B 1, (g) 1,082 shares held by
Forest Greyhound, (h) 682 shares held by Forest Performance Fund, (i) 865
shares held by LLT, Ltd., and (j) 69,044 shares held by Forum. Mr. Purkey,
an affiliate of such entities, may be considered a beneficial owner of the
shares beneficially owned by such entities.
(12) Includes 82,355 shares subject to outstanding stock options which are
exercisable within the 60-day period following December 31, 1998. Mr.
Payne's employment with the Company terminated on September 15, 1997.
(13) Includes (a) 1,070,483 shares subject to outstanding stock options which
are exercisable within the 60-day period following December 1, 1998 and (b)
2,111,217 shares issuable upon the exercise of warrants within the 60-day
period following December 1, 1998.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1997, the Company has entered into or engaged in the
following transactions with the following directors, officers, stockholders who
beneficially own more than 5% of the outstanding Common Stock of the Company
("5% Stockholders") and affiliates or immediate family members of such
directors, officers and 5% Stockholders.
Transactions with Pillar S.A. and Certain of its Affiliates
Since January 1, 1997, the Company has entered into or engaged in
certain transactions with Pillar S.A., Pillar Investments and the Cambridge
Landlord. Pillar S.A. and Pillar Investments are affiliates of Messrs. El-Zein
and Menhall, two directors of the Company. The Cambridge Landlord is an
affiliate of Messrs. El-Zein and Menhall and Mr. El-Khereiji, a third director
of the Company. The following is a summary of these transactions.
In 1997, the Company was a party to a consulting agreement (the "1994
Pillar Consulting Agreement") with Pillar S.A., dated as of March 1, 1994,
pursuant to which Pillar S.A. provided the Company with financial advisory and
managerial services in connection with the Company's overseas operations,
including support services in connection with contracts and agreements. Under
the terms of the 1994 Pillar Consulting Agreement, the Company paid Pillar S.A.
continuing consulting fees of $60,000 per month and $23,000 per month for
overhead costs, and reimbursement of certain authorized out-of-pocket expenses.
The 1994 Pillar Consulting Agreement expired on February 28, 1998.
Pursuant to the 1994 Pillar Consulting Agreement, the Company issued to
Pillar S.A. two five-year warrants to purchase an aggregate of 40,000 shares of
Common Stock of the Company.
On July 8, 1995, the Company entered into an additional agreement (the
"Pillar Europe Agreement") with Pillar S.A. pursuant to which Pillar S.A. agreed
to provide to the Company certain consulting, advisory and related services (in
addition to the services to be provided pursuant to the 1994 Pillar Consulting
Agreement) and serve as the Company's exclusive agent in connection with
potential corporate partnerships in Europe and as a non-exclusive placement
agent of the Company in connection with private placements of securities of the
Company for a period of two years. On November 1, 1995, the Pillar Europe
Agreement was amended to provide that (i) Pillar S.A. would cease to serve as
the Company's executive agent in connection with potential corporate
partnerships in Europe, but would continue to serve as a non-exclusive agent in
such respect, (ii) Pillar S.A. would receive a retainer of $26,470 per month for
the balance of the term of the Pillar Europe Agreement (April 1, 1997) (iii) the
fees set forth in the Pillar Europe Agreement would only be payable to Pillar
S.A. in connection with potential collaborations with any French pharmaceutical
company with which the Company engaged in discussions during the 12-month period
ended November 1, 1995 as a result of introductions by Pillar S.A. and (iv) any
compensation payable to Pillar S.A. in connection with its services with respect
to other corporate collaborations or any placements of securities would be
negotiated on a case-by-case basis and would be subject to the approval of the
independent members of the Board of Directors of the Company. The Pillar Europe
Agreement expired on April 1, 1997.
During the year ended December 31, 1997, the Company paid Pillar S.A.
an aggregate of $998,000 under the 1994 Pillar Consulting Agreement and the
Pillar Europe Agreement, as amended. In 1998, the Company paid Pillar
Investments an aggregate of $300,000 under such agreements, which was paid by
the issuance of 150,000 shares of Common Stock and warrants to purchase 37,500
shares of Common Stock, at an exercise price of $2.40 per share, subject to
adjustment, in lieu of cash.
The Company has retained Pillar Investments, as a placement agent of
the Company in connection with the private placements of securities of the
Company in offshore transactions in reliance upon an exemption from registration
under Regulation S promulgated under the Securities Act (the "Regulation S
Offerings"). Pillar Investments received fees consisting of (i) 9% of the gross
proceeds of each Regulation S Offering, (ii) a non-accountable expense allowance
equal to 4% of such gross proceeds, (iii) the right to purchase, for nominal
64
<PAGE>
consideration, warrants (the "Pillar Warrants") to purchase 473,598 shares of
Common Stock, at an exercise price of $2.40 per share, subject to adjustment,
(iv) the right to purchase, for nominal consideration, warrants to purchase such
number of shares of the Common Stock of the Company equal to 10% of the
aggregate number of shares of Common Stock sold by the Company for which Pillar
Investments acted as placement agent, exercisable at 120% of the relevant Common
Stock offering price, for a period of five years (resulting, as of the date
hereof, in the right to receive warrants to purchase 638,032 shares at $2.40 per
share, subject to adjustment), and (v) a consulting/restructuring fee of
$960,000 payable in Common Stock of the Company valued at the market price and
payable in three equal installments as net proceeds of $25,000,000, $30,000,000
and $35,000,000 are received in the aggregate from private placements effected
by the Company in 1998 to the extent contemplated by the Consent and Waiver (the
"Consent") dated as of January 12, 1998 given by certain beneficial holders of
the 9% Notes of the Company, or otherwise to the extent contemplated by the
Placement Agency Agreement between the Company and Pillar Investments, subject
to the Company's receipt of a fairness opinion with regard thereto, provided,
however, that in no event shall Pillar Investments be permitted to receive
compensation in excess of the level which was approved by the holders of the 9%
Notes. Through the date of this Prospectus, Pillar Investments has received
$1,635,400 in cash pursuant to these arrangements and Pillar Warrants to
purchase 1,111,630 shares of Common Stock.
In addition, in connection with the Regulation S Offerings, the Company
and Pillar Investments have entered into an advisory agreement dated May 5, 1998
(the "Financial Advisory Agreement") pursuant to which Pillar Investments acts
as the Company's non-exclusive financial advisor, which agreement provides that
an affiliate of Pillar Investments receive a monthly retainer of $5,000 (with a
minimum engagement of 24 months beginning on May 5, 1998), and further provides
that Pillar Investments is entitled to receive (i) out-of-pocket expenses, (ii)
subject to the Company's receipt of a fairness opinion with respect thereto,
300,000 shares of Common Stock in connection with Pillar Investments' efforts in
assisting the Company in restructuring its balance sheet, and (iii) certain cash
and equity success fees in the event Pillar Investments assists the Company in
connection with certain financial and strategic transactions.
Transactions with the Cambridge Landlord
From February 4, 1997 to September 16, 1998, the Company was a party to
a lease (the "Cambridge Lease") with the Cambridge Landlord. The Cambridge Lease
originally provided for an annual rent equal to $30 per square foot on a triple
net basis for the first five years, $33 per square foot on a triple net basis
for the next five years and the greater of $30 per square foot on a triple net
basis or the then market value of leased property for each of the five-year
renewal terms. In connection with the Company's election to acquire an interest
in the Cambridge Landlord described below, the annual rent due under the
Cambridge Lease was increased for the first five years of the lease term to $38
per square foot on a triple net basis and for the second five years to $42 per
square foot on a triple net basis and for the third five years to $47 per square
foot on a triple net basis.
On July 1, 1996, the Company elected to fund approximately $5.5 million
of the costs (primarily relating to tenant improvements) of the construction of
the leased premises through contributions to the capital of the Cambridge
Landlord in exchange for a limited partnership interest in the Cambridge
Landlord (the "Partnership Interest"). The Partnership Interest entitled the
Company to an approximately 32% interest in the Cambridge Landlord. The Company
had the right, for a period of three years ending February 2000, to sell the
Partnership Interest back to certain limited partners of the Cambridge Landlord
for a price equal to the greater of (i) the aggregate cash contribution made by
Hybridon to the Cambridge Landlord or (ii) the fair market value of the
Partnership Interest at the time.
In 1997, the Company had on deposit with Bank Fur Vermogensanlagen Und
Handel ("BVH") the amount of $1,034,618. In November, 1997, German banking
authorities imposed a moratorium on BVH and closed BVH for business. Pursuant to
an agreement dated November 28, 1997, the Cambridge Landlord agreed to assume
the risk for the BVH deposit and to pay to the Company the amount of $75,000 a
month after each rent payment under the Cambridge Lease was made until such time
as $1,000,000 had been paid to the Company or the BVH deposit was released.
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<PAGE>
In June 1998, the Company relocated its headquarters from the Cambridge
Facility to its facility in Milford, Massachusetts. The Cambridge Facility was
re-leased in September 1998 to a third party, subject to a sublease of a portion
of the facility. As a result, the Company terminated the Cambridge Lease and was
relieved of its substantial lease obligations under the Cambridge Lease, subject
to a contingent continuing liability for any defaults which may arise under the
sublease. Further, in November 1998 the Company completed the sale of its
Partnership Interest. As a result of these transactions, the Company received
$6,163,000 from the Cambridge Landlord, which included payment for the
Partnership Interest, the return of a portion of the security deposit required
under the Cambridge Lease, and payment in full of the BVH deposit.
Transactions with Forum Capital Markets LLC and Pecks Management Partners Ltd.
In 1998, the Company entered into certain transactions with Forum, an
affiliate of Mr. Purkey, a director of the Company.
The Company retained Forum as a placement agent of the Company in
connection with the Company's 1998 Regulation D Offering of Series A Preferred
Stock and Class D Warrants (the "Regulation D Offering") in the United States.
As of the date of this prospectus, Forum has received as compensation for its
services as placement agent with regard to the Regulation D Offering and its
assistance with the Exchange Offer, 597,699 shares of Common Stock and warrants
( the "1998 Forum Warrants") to purchase an aggregate of 609,194 shares of
Common Stock exercisable at $2.40 per share, in each case subject to adjustment,
until May 4, 2003. In addition, in consideration of the agreements made by Forum
consenting to the Company's 1998 Regulation D Offerings and waiving certain
obligations of the Company to Forum, the Company agreed to amend Forum's warrant
(the "1997 Forum Warrant", and together with the 1998 Forum Warrants, the "Forum
Warrants") dated as of April 2, 1997, to purchase up to 71,301 shares of Common
Stock of the Company so that the exercise price will be equal to $4.25 per
share, subject to adjustment, and the number of shares of Common Stock
purchasable upon exercise thereof will be increased to 588,235, in each case
subject to adjustment; provided, however, that the 1997 Forum Warrant will also
be amended to provide that such 1997 Forum Warrant may not be exercised until
May 5, 1999 and the transactions contemplated by such private placements and by
the Exchange Offer will not trigger any anti-dilution adjustments to the
exercise price thereof or the number of shares of Common Stock subject thereto.
In November 1998, Forum and Pecks, an affiliate of Mr. Berry, a
director of the Company purchased the loan made by the Bank. In connection with
the purchase of the Bank Credit Facility, the purchasing entitites advanced an
additional amount to the Company so as to increase the outstanding principal
amount of the Loan to $6,000,000. In addition, the purchasing entities agreed to
amend the terms of the Loan. See "Description of Capital Stock and Indebtedness
- -- Indebtedness -- Bank Credit Facility."
In connection with the purchase of the Loan, Forum will receive a fee
of $400,000, which will be reinvested by Forum by purchasing from the Company
either (i) shares of Common Stock or shares of Preferred Stock of the Company
and accompanying warrants on the same terms as they are sold to investors in the
Company's next equity offering to occur after November 13, 1998 (the "Placement
Price"), or (ii) if no equity offering is consummated prior to May 1, 1999,
160,000 shares of Common Stock at $3.00 per share and warrants to purchase an
additional 40,000 shares of Common Stock at $3.00 per share. In addition, Forum
will receive warrants exercisable until maturity of the Loan to purchase
$400,000 of shares of Common Stock priced at the Placement Price or, if no
equity offering is consummated prior to May 1, 1999, at $3.00 per share. These
shares and warrants will be issued as soon as practicable following satisfaction
of Section 4.10 of the Indenture dated as of March 26, 1997, governing the 9%
Notes.
The Company maintains an investment account at Forum.
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<PAGE>
Other Transactions
Certain persons and entities (the "Rightsholders"), including Dr.
Zamecnik, Pillar S.A., Pillar Limited, Intercity Holdings, Mr. Bin Laden and
Nicris, are entitled to certain rights with respect to the registration under
the Securities Act of certain shares of the Company's Common Stock (the
"Registrable Shares"), including shares of Common Stock that may be acquired
pursuant to the exercise of options or warrants, under the terms of agreements
among the Company and the Rightsholders (the "Registration Agreements"). The
Registration Agreements generally provide that in the event the Company proposes
to register any of its securities under the Securities Act at any time, with
certain exceptions, the Rightsholders, including Pillar S.A., Pillar Limited,
Intercity Holdings, Mr. Bin Laden and Nicris, but excluding, among others, Dr.
Zamecnik, have the additional right under certain Registration Agreements to
require the Company to prepare and file registration statements under the
Securities Act, if such Rightsholders holding specified percentages of the
Registrable Shares so request, and the Company is required to use its best
efforts to effect such registration, subject to certain conditions and
limitations.
For a description of certain employment and other arrangements between
the Company and its executive officers, see "Compensation of Executive Officers"
above. For a description of stock options granted to certain directors of the
Company, see "Director Compensation" above.
The Company believes that the terms of the transactions described above
were no less favorable than the Company could have obtained from unaffiliated
third parties.
67
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth, to the knowledge of the Company, certain
information as of December 1, 1998 with respect to the Selling Securityholders
for whom the Company is registering the Securities for resale to the public. The
Company will not receive any of the proceeds from the sale of the Securities
(other than proceeds upon exercise of the Warrants).
To the Company's knowledge, except as described below, none of the
Selling Securityholders holds any position or office with, has been employed by,
or has otherwise had a material relationship with the Company or any of its
subsidiaries within the past three years.
<TABLE>
<CAPTION>
Number of Number of
Percentage of Shares of Number of Shares of Percentage of
Number of Number of Number of Shares of Series A Shares of Series A Shares of Series
Shares of Shares of Shares of Common Convertible Series A Convertible A Convertible
Common Stock Common Common Stock Stock Preferred Convertible Preferred Preferred
Beneficially Stock Beneficially Beneficially Beneficially Preferred Beneficially Beneficially
Name of Selling Owned Prior to Offered Owned After Owned After Owned Prior Offered Owned After Owned After
Securityholder Offering Hereby Offering Offering to Offering Hereby Offering Offering
-------------- -------- ------ -------- -------- ----------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fouad M.O. Tawfig 47,543 6,250 41,293 0 0 0 0 0
and Hanan H.
Zagzoug/1/
Torben Duer/1/ 26,750 18,750 8,000 0 0 0 0 0
Thomas Fr. Duer/1/ 62,500 62,500 0 0 0 0 0 0
Darier Hentsch & Cie 312,500 312,500 0 0 0 0 0 0
/1/
Finn Trunk Black/1/ 3,750 3,750 0 0 0 0 0 0
MM Pictet & Cie/1/ 750,000 750,000 0 0 0 0 0 0
Nicris Limited/1//16/ 1,360,644 1,050,644 310,000 0 0 0 0 0
Raji Abou Hadar/1/ 62,500 62,500 0 0 0 0 0 0
Intercity Ltd./1/ 2,216,000 1,875,000 341,666 0 0 0 0 0
Clapham Investments 125,500 125,000 500 0 0 0 0 0
Ltd./1/
LGT Bank in 312,500 312,500 0 0 0 0 0 0
Liechtenstein AG/1/
Participations 125,000 125,000 0 0 0 0 0 0
Besancon/1/
Loxhall Limited/1/ 62,500 62,500 0 0 0 0 0 0
MicroTech Software
a/s/1/ 33,000 31,250 11,750 0 0 0 0 0
JSP Holdings ApS/1/ 24,500 12,500 12,000 0 0 0 0 0
Jan Poulson/1/ 18,750 18,750 0 0 0 0 0 0
Mr. Mohamad Hassan 67,717 67,717 0 0 0 0 0 0
Abdul Ghani/2/
Dr. Khaled M.R. 135,435 135,435 0 0 0 0 0 0
Abdul Ghani/2/
Mr. Imad Mustapha 67,717 67,717 0 0 0 0 0 0
Mansour/2/
Mr. Malek Salam/2/ 88,023 88,023 0 0 0 0 0 0
68
<PAGE>
Number of Number of
Percentage of Shares of Number of Shares of Percentage of
Number of Number of Number of Shares of Series A Shares of Series A Shares of Series
Shares of Shares of Shares of Common Convertible Series A Convertible A Convertible
Common Stock Common Common Stock Stock Preferred Convertible Preferred Preferred
Beneficially Stock Beneficially Beneficially Beneficially Preferred Beneficially Beneficially
Name of Selling Owned Prior to Offered Owned After Owned After Owned Prior Offered Owned After Owned After
Securityholder Offering Hereby Offering Offering to Offering Hereby Offering Offering
-------------- -------- ------ -------- -------- ----------- ------ -------- --------
Faisal Finance 1,043,113 1,009,779 33,334 0 0 0 0 0
(Switzerland) S.A./2/
Darier Hentsch 338,588 338,588 0 0 0 0 0 0
& Cie/2/
Mr. Guy Semon/2/ 22,149 22,149 0 0 0 0 0 0
Mrs. Francoise 22,149 22,149 0 0 0 0 0 0
Semon/2/
Mr. Le Pelley 22,149 22,149 0 0 0 0 0 0
Dumanoir/2/
Mr. Moh'd Abdo 67,119 67,119 0 0 0 0 0 0
Sweidan/2/
Mr. Isam Moh'd 67,119 67,119 0 0 0 0 0 0
Khairy Kabbani/2/
Dr. Essam Ahmad 201,357 201,357 0 0 0 0 0 0
Jawadm Alamdar/2/
Arab Islamic Bank 503,394 503,394 0 0 0 0 0 0
(E.C.)/2/
Mr. Sobbi Adra/2/ 23,492 23,492 0 0 0 0 0 0
Mr. Mansour S.M.A. 65,972 65,972 0 0 0 0 0 0
Al-Sharif/2/
Mr. Nafez M.M. Al- 65,972 65,972 0 0 0 0 0 0
Jindi/2/
Solter Corporation 217,345 196,047 21,298 0 0 0 0 0
/2/ /17/
Carset Overseas 176,375 176,375 0 0 0 0 0 0
Corporation/2/
Mr. Ali A. Bajrai/2/ 163,310 163,310 0 0 0 0 0 0
Pillar Investment 1,317,173 1,299,130 18,043 0 0 0 0
Limited/3/
Bioreliance 16,697 16,697 0 0 0 0 0 0
Corporation/4/
Chestnut Partners/4/ 62,500 62,500 0 0 0 0 0 0
Datamonitor/4/ 62,500 62,500 0 0 0 0 0 0
Finova Technology 896,875 896,875 0 0 0 0 0 0
Finance, Inc./5/
HPC America, Inc./4/ 218,750 218,750 0 0 0 0 0 0
Hyal Pharmaceutical 17,500 17,500 0 0 0 0 0 0
/1/
Corporation/4/
SEIF Foundation2/4/ 119,725 119,725 0 0 0 0 0 0
Janitronics/4/ 45,724 45,725 0 0 0 0 0 0
Kinetic Systems,Inc. 163,238 163,238 0 0 0 0 0 0
/4/
69
<PAGE>
Number of Number of
Percentage of Shares of Number of Shares of Percentage of
Number of Number of Number of Shares of Series A Shares of Series A Shares of Series
Shares of Shares of Shares of Common Convertible Series A Convertible A Convertible
Common Stock Common Common Stock Stock Preferred Convertible Preferred Preferred
Beneficially Stock Beneficially Beneficially Beneficially Preferred Beneficially Beneficially
Name of Selling Owned Prior to Offered Owned After Owned After Owned Prior Offered Owned After Owned After
Securityholder Offering Hereby Offering Offering to Offering Hereby Offering Offering
-------------- -------- ------ -------- -------- ----------- ------ -------- --------
Massachusetts Eye & 62,500 62,500 0 0 0 0 0 0
Ear Infirmary/4/
Norwegian Radium 37,500 37,500 0 0 0 0 0 0
Hospital Research
Foundation/4/
Susan and Anthony 62,500 62,500 0 0 0 0 0 0
Russo/4/
Pharmakinetics 55,803 55,803 0 0 0 0 0 0
Laboratories, Inc./4/
The Perkin Elmer 205,377 205,377 0 0 0 0 0 0
Corporation/4/
Primedica 364,418 364,418 0 0 0 0 0 0
Corporation/4/
Quintiles 379,175 379,175 0 0 0 0 0 0
Transnational Corp./4/
Siena Construction 31,250 31,250 0 0 0 0 0 0
Corporation/4/
Sierra Biomedical, 189,203 189,203 0 0 0 0 0 0
Inc./4/
SP Pharmaceuticals 115,985 115,985 0 0 0 0 0 0
LLC/4/
Southern Research 68,860 68,860 0 0 0 0 0 0
Institute/4/
Transamerica Business 468,750 468,750 0 0 0 0 0 0
Credit Corporation/4/
Triumvirate 19,138 19,138 0 0 0 0 0 0
Enviornmental, Inc./4/
University of Kansas 29,260 29,260 0 0 0 0 0 0
University of 84,450 84,450 0 0 0 0 0 0
Massachusetts/4/
Paul C. Zamecnik 284,670 156,250 128,420 0 0 0 0 0
and Mary V. Zamecnik,
JTWROS/6/
Allstate Insurance 0 92,977/7/ 0 0 16,223 16,223 0 0
Company
Angelo Gordon & 0 21,695/7/ 0 0 3,785 3,785 0 0
Co., L.P.
Michael Angelo, L.P. 0 58,886/7/ 0 0 10,275 10,275 0 0
Ramius Fund Ltd. 0 43,390/7/ 0 0 7,570 7,570 0 0
Raphael, L.P. 0 58,886/7/ 0 0 10,257 10,257 0 0
Medici Partners, L.P. 0 18,596/7/ 0 0 3,244 3,244 0 0
CNA Income Shares, 0 92,977/7/ 0 0 16,223 16,223 0 0
Inc.
70
<PAGE>
Number of Number of
Percentage of Shares of Number of Shares of Percentage of
Number of Number of Number of Shares of Series A Shares of Series A Shares of Series
Shares of Shares of Shares of Common Convertible Series A Convertible A Convertible
Common Stock Common Common Stock Stock Preferred Convertible Preferred Preferred
Beneficially Stock Beneficially Beneficially Beneficially Preferred Beneficially Beneficially
Name of Selling Owned Prior to Offered Owned After Owned After Owned Prior Offered Owned After Owned After
Securityholder Offering Hereby Offering Offering to Offering Hereby Offering Offering
-------------- ------------- ------ -------- -------- ----------- ------ -------- --------
Forest Alternative 0 4,959/8/ 0 0 865 865 0 0
Strategies Fund II,
L.P. Series A5I
Forest Alternative 0 2,479/8/ 0 0 433 433 0 0
Strategies Fund II,
L.P. Series A5M
Forest Alternative 0 744/8/ 0 0 131 131 0 0
Strategies Fund II,
L.P. Series B-3
Forest Fulcrum Ltd. 0 20,145/8/ 0 0 3,515 3,515 0 0
Forest Global 0 24,794/8/ 0 0 4,326 4,326 0 0
Convertible Fund2
Series A5
Forest Global2 0 6,199/8/ 0 0 1,082 1,082 0 0
Convertible Fund
Series B1
Forest Greyhound 0 6,199/8/ 0 0 1,082 1,082 0 0
Forest Performance 0 3,905/8/ 0 0 682 682 0 0
Fund
LLT Ltd. 0 4,959/8/ 0 0 865 865 0 0
Forum Capital 2,192,840 2,192,840/9/ 0 0 69,044 69,044 0 0
Markets LLC
Providian Life & 0 148,345/7/ 0 0 25,884 25,884 0 0
Health
Commonwealth Life 0 148,345/7/ 0 0 25,884 25,884 0 0
Insurance Co.
The Guardian Pension 0 18,596/7/ 0 0 3,244 3,244 0 0
Trust Fund
Harris Investment 0 17,206/7/ 0 0 3,002 3,002 0 0
Management
Offshore Strategies 0 61,989/7/ 0 0 10,816 10,816 0 0
Ltd.
Libertyview Plus Fund 0 30,993/7/ 0 0 5,408 5,408 0 0
Libertyview Fund 0 15,496/7/ 0 0 2,704 2,704 0 0
LLC
CPR (USA) 0 77,482/7/ 0 0 13,519 13,519 0 0
Lincoln National Life 0 238,023/7/ 0 0 41,531 41,531 0 0
Insurance Co.
Lincoln National 0 92,359/7/ 0 0 16,115 16,115 0 0
Convertible Securities
Fund
Weirton Trust 0 26,965/7/ 0 0 4,705 4,705 0 0
Walker Art Center 0 10,230/7/ 0 0 1,785 1,785 0 0
71
<PAGE>
Number of Number of
Percentage of Shares of Number of Shares of Percentage of
Number of Number of Number of Shares of Series A Shares of Series A Shares of Series
Shares of Shares of Shares of Common Convertible Series A Convertible A Convertible
Common Stock Common Common Stock Stock Preferred Convertible Preferred Preferred
Beneficially Stock Beneficially Beneficially Beneficially Preferred Beneficially Beneficially
Name of Selling Owned Prior to Offered Owned After Owned After Owned Prior Offered Owned After Owned After
Securityholder Offering Hereby Offering Offering to Offering Hereby Offering Offering
-------------- -------- ------ -------- -------- ----------- ------ -------- --------
United National 0 4,342/7/ 0 0 757 757 0 0
Insurance Co.
Equi Select Growth & 0 30,995/7/ 0 0 5,394 5,394 0 0
Income Fund
Zazove Convertible 0 29,761/7/ 0 0 5,177 5,177 0 0
Fund, L.P.
Lois Wilkens 0 1,189/7/ 0 0 207 207 0 0
Winchester 0 24,176/7/ 0 0 4,218 4,218 0 0
Convertible Plus Ltd.
Foundation Account 0 13,018/7/ 0 0 2,271 2,271 0 0
No. 1
LLC Account No. 1 0 6,199/7/ 0 0 1,082 1,082 0 0
GPS Fund Limited 0 18,594/7/ 0 0 3,244 3,244 0 0
Telefix (First Delta) 0 3,100/7/ 0 0 541 541 0 0
Guardian Life 0 605,417/10/ 0 0 105,634 105,634 0 0
Insurance Co. of
America
Declaration of Trust 0 116,418/11/ 0 0 20,313 20,313 0 0
for the Defined
Benefits Plan of ICI
America Holdings,
Inc.
J.W. McConnell 0 53,706/12/ 0 0 9,372 9,372 0 0
Family Foundation
Delaware State 0 408,189/13/ 0 0 71,221 71,221 0 0
Employees Retirement
Fund
General Motors 0 492,783/14/ 0 0 85,982 85,982 0 0
Employees Domestic
Group Trust
Zeneca Holdings 0 78,642/15/ 0 0 13,720 13,720 0 0
Hillside Capital 0 12,400/14/ 0 0 2,164 2,164 0 0
Incorporated
Thermo Electron 0 32,853/14/ 0 0 5,732 5,732 0 0
Balanced Investment
Fund
</TABLE>
72
<PAGE>
/1/ 20% of the Common Stock represented here are issuable upon exercise of
Class B Warrants. To calculate the exact number of Warrants, divide the
given number by 5. The quotient is equal to the number of Warrants that a
given security holder owns.
/2/ 23% of the Common Stock represented here are issuable upon the exercise of
Class B Warrants. To calculate the exact number of Warrants, divide the
given number by 4.33. The quotient is equal to the number of Warrants that
a given security holder owns.
/3/ Includes 37,500 shares issuable upon exercise of Class B Warrants, 473,598
shares issuable upon exercise of Advisory Warrants and 638,032 shares
issuable upon exercise of Placement Warrants. Mr. Nasser Menhall and Mr.
Youssef El-Zein, Hybridon Directors, are principals of Pillar Investment
Limited.
/4/ 25% of the Common represented here are issuable upon exercise of Class C
Warrants. To calculate the exact number of Warrants, divide the given
number by 5. The quotient is equal to the number of Warrants that a given
security holder owns.
/5/ Includes 259,375 shares issuable upon exercise of Class C Warrants.
/6/ Includes 31,250 shares issuable upon exercise of Class C Warrants. Dr.
Zamecnik is a Director of and consultant to Hybridon.
/7/ All shares of Common Stock represented here are issuable upon exercise of
Class A Warrants, which are not exercisable until May 5, 1999.
/8/ All shares of Common Stock represented here are issuable upon exercise of
Class A Warrants, which are not exercisable until May 5, 1999. Mr. Purkey,
a Hybridon director, is an affiliate of this stockholder.
/9/ Includes 397,712 shares issuable upon exercise of Class A Warrants, 328,677
shares issuable upon exercise of Class B Warrants and 280,517 shares
issuable upon exercise of Class C Warrants. Class A Warrants are not
exercisable until May 5, 1999. Also includes 588,235 shares issuable upon
the exercise of additional warrants held by Forum; those warrants are not
exerciasable until May 5, 1999. Mr. Purkey, a Hybridon director, is the
President and a 10% owner of Forum Capital Markets.
/10/ Includes 353,316 shares issuable upon exercise of Class A Warrants and
252,101 shares issuable upon exercise of Class D Warrants. The Class A
Warrants and the Class D Warrants are not exercisable until May 5, 1999.
/11/ Includes 42,153 shares issuable upon exercise of Class A Warrants and
74,265 shares issuable upon exercise of Class D Warrants. The Class A
Warrants and the Class D Warrants are not exercisable until May 5, 1999.
Arthur W. Berry, a Hybridon director, serves as investment advisor to ICI
American.
/12/ Includes 27,894 shares issuable upon exercise of Class A Warrants and
25,812 shares issuable upon exercise of Class D Warrants. The Class A
Warrants and the Class D Warrants are not exercisable until May 5, 1999.
Arthur W. Berry, a Hybridon director, serves as investment advisor to the
J.W. McConnell Family Foundation.
/13/ Includes 137,918 shares issuable upon exercise of Class A Warrants and
270,271 shares issuable upon exercise of Class D Warrants. The Class A
Warrants and the Class D Warrants are not exercisable until May 5,
73
<PAGE>
1999. Arthur W. Berry, a Hybridon director, serves as investment advisor to
the Delaware State Employees Retirement Fund.
/14/ All shares of Common Stock represented here are issuable upon exercise of
Class A Warrants, which are not exercisable until May 5, 1999. Arthur W.
Berry, a Hybridon director, serves as investment advisor to this
stockholder.
/15/ Includes 28,824 shares issuable upon exercise of Class A Warrants and
49,818 shares issuable upon exercise of Class D Warrants. The Class A
Warrants and the Class D Warrants are not exercisable until May 5, 1999.
Arthur W. Berry, a Hybridon director, serves as investment advisor to
Zeneca Holdings.
/16/ Includes 234,764 shares issuable upon exercise of Class B Warrants.
/17/ Mohamed El-Khereiji is a controlling stockholder of Solter Corporation and
a Hybridon director.
74
<PAGE>
DESCRIPTION OF CAPITAL STOCK AND INDEBTEDNESS
CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000
shares of Common Stock and 5,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"), of which 1,500,000 have been designated as
Series A Convertible Preferred Stock. As of the date hereof there are 15,256,825
shares of Common Stock and 641,259 shares of Convertible Preferred Stock issued
and outstanding.
The following descriptions of the Common Stock and the Convertible
Preferred Stock do not purport to be complete and are qualified in their
entirety by reference to the Restated Certificate of Incorporation of the
Company, including the Certificate of Designation for the Series A Convertible
Preferred Stock (the "Certificate of Designation"), which is filed as an exhibit
to the Registration Statement.
Common Stock
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock or other securities. Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding Preferred Stock and to the Liquidation Put Right described in
the next paragraph. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock which the
Company may designate and issue in the future and the rights of creditors of the
Company.
Pursuant to the terms of the Unit Purchase Agreement, the initial
purchasers (the "Liquidation Put Holders") of certain of the shares (the "Put
Shares") of Common Stock sold in the Regulation S and the Regulation D Offerings
have the right to put (the "Liquidation Put") those shares back to the Company
upon the liquidation of the Company, but only after all other indebtedness and
obligations of the Company and all rights of any holders of any capital stock
ranking prior and senior to the Common Stock with respect to liquidation have
been satisfied in full. The Liquidation Put is not transferrable, however.
Purchasers of Common Stock pursuant to this Prospectus will therefore not be
able to exercise the Liquidation Put with respect to those shares. Any
Liquidation Put Holders that have not sold or otherwise transferred any Put
Shares will, however, be able to exercise the Liquidation Put with respect to
those Put Shares upon a liquidation of the Company. In such circumstances,
holders of shares of the Company's Common Stock that are not subject to the
Liquidation Put right may receive smaller liquidation distributions per share
than they would have had no Liquidation Put Holders exercised the Liquidation
Put. As of December 1, 1998, there were 9,597,476 Put Shares outstanding.
Preferred Stock
The Restated Certificate of Incorporation authorizes the issuance of up
to 5,000,000 shares of Preferred Stock. Under the terms of the Restated
Certificate of Incorporation, the Board of Directors is authorized, subject to
any limitations prescribed by law, without stockholder approval, to issue such
shares of Preferred Stock in one or more series. Each such series of preferred
stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors. 1,500,000 shares of Preferred Stock have been designated Series A
Convertible Preferred Stock.
75
<PAGE>
Convertible Preferred Stock
1. Definitions. As used in this description of the Convertible Preferred
Stock, except as otherwise provided in Subsection 4(c), the following terms
shall have the following meanings:
(a) The "Closing Bid Price" for any security for each trading day
shall be the reported per share closing bid price of such security regular
way on the Stock Market on such trading day, or, if there were no
transactions on such trading day, the average of the reported closing bid
and asked prices, regular way, of such security on the relevant Stock
Market on such trading day.
(b) "Fair Market Value" of any asset (including any security) means
the fair market value thereof as mutually determined by the Company and the
holders of a majority of the Convertible Preferred Stock then outstanding.
If the Company and the holders of a majority of the Convertible Preferred
Stock then outstanding are unable to reach agreement on any valuation
matter, such valuation shall be submitted to and determined by a nationally
recognized independent investment bank selected by the Board of Directors
and the holders of a majority of the Convertible Stock then outstanding
(or, if such selection cannot be agreed upon promptly, or in any event
within ten days, then such valuation shall be made by a nationally
recognized independent investment banking firm selected by the American
Arbitration Association in New York City in accordance with its rules), the
costs of which valuation shall be paid for by the Company.
(c) "Market Price" shall mean the average Closing Bid Price for twenty
(20) consecutive trading days, ending with the trading day prior to the
date as of which the Market Price is being determined (with appropriate
adjustments for subdivisions or combinations of shares effected during such
period), provided that if the prices referred to in the definition of
Closing Bid Price cannot be determined on any trading day, the Closing Bid
Price for such trading day will be deemed to equal Fair Market Value of
such security on such trading day.
(d) "Registered Holders" shall mean, at any time, the holders of
record of the Convertible Preferred Stock.
(e) The "Stock Market" shall mean, with respect to any security, the
principal national securities exchange on which such security is listed or
admitted to trading or, if such security is not listed or admitted to
trading on any national securities exchange, shall mean The Nasdaq National
Market System ("NNM") or The Nasdaq SmallCap Market ("SCM" and, together
with NNM, "Nasdaq") or, if such security is not quoted on Nasdaq, shall
mean the OTC Bulletin Board or, if such security is not quoted on the OTC
Bulletin Board, shall mean the over-the-counter market as furnished by any
NASD member firm selected from time to time by the Company for that
purpose.
(f) A "trading day" shall mean a day on which the relevant Stock
Market is open for the transaction of business.
2. Dividends. The holders, as of the Dividend Record Date (as defined
below), of the Convertible Preferred Stock shall be entitled to receive
semi-annual dividends on their respective shares of Convertible Preferred Stock
(aggregating, for this purpose, all shares of Convertible Preferred Stock held
of record or, to the Company's knowledge, beneficially by such holder), payable,
at the option of the Company, in cash or additional shares of Convertible
Preferred Stock, at the rate of 6.5% per annum (computed on the basis of a
360-day year of twelve 30 day months) of the Dividend Base Amount (as defined
below), payable semi-annually in arrears; provided that, to the extent the
declaration or payment of such dividend is prohibited by applicable law, such
dividend need not be paid but shall nevertheless accrue and shall be paid
promptly when applicable law permits. Such dividends shall accrue from the date
of issuance of such share and shall be paid semi-annually on April 1 and October
1 of each year or, if any such day is not a business day, on the next succeeding
business day. Such dividends shall be paid, at the election of the Company,
either in cash or additional duly authorized, fully paid and non assessable
shares of Convertible Preferred Stock. In calculating the number of shares of
Convertible Preferred Stock to be paid with respect to each dividend, the
Convertible Preferred Stock shall be valued at $100.00 per share (subject to
76
<PAGE>
appropriate adjustment to reflect any stock split, combination, reclassification
or reorganization of the Convertible Preferred Stock). Notwithstanding the
foregoing, the Company shall not be required to issue fractional shares of
Convertible Preferred Stock; the Company may elect, in its sole discretion,
independently for each holder, whether such number of shares (on an aggregated
basis) will be rounded to the nearest whole share (with .5 of a share rounded
upward) or whether such holder will be given cash in lieu of any fractional
shares. The "Dividend Base Amount" of a share of Convertible Preferred Stock
shall be $100.00 plus all accrued but unpaid dividends (subject to appropriate
adjustment to reflect any stock split, combination, reclassification or
reorganization of the Convertible Preferred Stock). The "Dividend Record Date"
shall mean, for each semi-annual dividend, the March 15 or September 15, as the
case may be, immediately preceding the dividend payment date.
3. Liquidation Preference. (a) In the event of a (i) liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, (ii)
a sale or other disposition of all or substantially all of the assets of the
Company or (iii) any consolidation, merger, combination, reorganization or other
transaction in which the Company is not the surviving entity or shares of Common
Stock constituting in excess of 50% of the voting power of the Company are
exchanged for or changed into stock or securities of another entity, cash and/or
any other property (a "Merger Transaction") (items (i), (ii) and (iii) of this
sentence being collectively referred to as a "Liquidation Event"), after payment
or provision for payment of debts and other liabilities of the Company, the
holders of the Convertible Preferred Stock then outstanding shall be entitled to
be paid out of the assets of the Company available for distribution to its
stockholders, whether such assets are capital, surplus, or earnings, before any
payment or declaration and setting apart for payment of any amount shall be made
in respect of any Junior Stock of the Company, an amount equal to the Dividend
Base Amount at such time; provided, however, in the case of a Merger
Transaction, such payment may be made in cash, property (valued as provided in
Subsection 3(b)) and/or securities (valued as provided in Subsection 3(b)) of
the entity surviving such Merger Transaction. In the case of property or in the
event that any such securities are subject to an investment letter or other
similar restriction on transferability, the value of such property or securities
shall be determined by agreement between the Company and the holders of a
majority of the Convertible Preferred Stock then outstanding. If upon any
Liquidation Event, whether voluntary or involuntary, the assets to be
distributed to the holders of the Convertible Preferred Stock shall be
insufficient to permit the payment to such shareholders of the full preferential
amounts aforesaid, then all of the assets of the Company to be distributed shall
be so distributed ratably to the holders of the Convertible Preferred Stock on
the basis of the number of shares of Convertible Preferred Stock held.
Notwithstanding item (iii) of the first sentence of this Subsection 3(a), any
consolidation, merger, combination, reorganization or other transaction in which
the Company is not the surviving entity but the stockholders of the Company
immediately prior to such transaction own in excess of 50% of the voting power
of the corporation surviving such transaction and own amongst themselves such
interest in substantially the same proportions as prior to such transaction,
shall not be considered a Liquidation Event provided that the surviving
corporation shall make appropriate provisions to ensure that the terms of the
Certificate of Designation survive any such transaction. All shares of
Convertible Preferred Stock shall rank as to payment upon the occurrence of any
Liquidation Event senior to the Common Stock and, unless the terms of such
series shall provide otherwise, senior to all other series of the Company's
preferred stock.
(b) Any securities or other property to be delivered to the holders of
the Convertible Preferred Stock pursuant to Subsection 3(a) shall be valued as
follows:
i. Securities not subject to an investment letter or other
similar restriction on free marketability:
(1) If actively traded on a Stock Market, the per share
value shall be deemed to be the Market Price of such securities
as of the third day prior to the date of valuation.
(2) If not actively traded on a Stock Market, the value
shall be the Fair Market Value of such securities.
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ii. For securities for which there is an active public market but
which are subject to an investment letter or other restrictions on
free marketability, the value shall be the Fair Market Value thereof,
determined by discounting appropriately the per share Market Price
thereof.
iii. For all other securities, the value shall be the Fair Market
Value thereof.
4. Conversion
(a) Right of Conversion. Commencing after May 6, 1999, but not
prior thereto, the shares of Convertible Preferred Stock shall be convertible,
in whole or in part, at the option of the holder thereof and upon notice to the
Company as set forth herein, into fully paid and nonassessable shares of Common
Stock and such other securities and property as hereinafter provided. The
initial conversion price per share of Common Stock (the "Conversion Price"),
shall be $4.25, and shall be subject to adjustment as provided herein. The rate
at which each share of Convertible Preferred Stock is convertible at any time
into Common Stock (the "Conversion Rate") shall be determined by dividing the
then existing Conversion Price (determined in accordance herewith, including the
last paragraph hereof) into the Dividend Base Amount.
(b) Conversion Procedures. Any holder of shares of Convertible
Preferred Stock desiring to convert such shares into Common Stock shall
surrender the certificate or certificates evidencing such shares of Convertible
Preferred Stock at the office of the transfer agent for the Convertible
Preferred Stock, which certificate or certificates, if the Company shall so
require, shall be duly endorsed to the Company or in blank, or accompanied by
proper instruments of transfer to the Company or in blank, accompanied by
irrevocable written notice to the Company that the holder elects so to convert
such shares of Convertible Preferred Stock and specifying the name or names
(with address) in which a certificate or certificates evidencing shares of
Common Stock are to be issued. The Company need not deem a notice of conversion
to be received unless the holder complies with all the provisions hereof. The
Company will instruct the transfer agent (which may be the Company) to make a
notation of the date that a notice of conversion is received, which date of
receipt shall be deemed to be the date of receipt for purposes hereof.
The Company shall, as soon as practicable after such deposit of
certificates evidencing shares of Convertible Preferred Stock accompanied by
written notice and compliance with any other conditions herein contained,
deliver at such office of such transfer agent to the person for whose account
such shares of Convertible Preferred Stock were so surrendered, or to the
nominee or nominees of such person, certificates evidencing the number of full
shares of Common Stock to which such person shall be entitled as aforesaid,
subject to Section 4(d). Subject to the following provisions of this paragraph,
such conversion shall be deemed to have been made as of the date of such
surrender of the shares of Convertible Preferred Stock to be converted, and the
person or persons entitled to receive the Common Stock deliverable upon
conversion of such Convertible Preferred Stock shall be treated for all purposes
as the record holder or holders of such Common Stock on such date; provided,
however, that the Corporation shall not be required to convert any shares of
Convertible Preferred Stock while the stock transfer books of the Corporation
are closed for any purpose, but the surrender of Convertible Preferred Stock for
conversion during any period while such books are so closed shall become
effective for conversion immediately upon the reopening of such books as if the
surrender had been made on the date of such reopening, and the conversion shall
be at the conversion rate in effect on such date. No adjustments in respect of
any dividends on shares surrendered for conversion or any dividend on the Common
Stock issued upon conversion shall be made upon the conversion of any shares of
Convertible Preferred Stock.
The Company shall at all times, reserve and keep available out of
its authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Convertible Preferred Stock, such
number of shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Convertible Preferred
Stock.
All notices of conversion shall be irrevocable; provided,
however, that if the Company has sent notice of an event pursuant to Section
4(g), a holder of Convertible Preferred Stock may, at its election, provide in
its notice of conversion that the conversion of its shares of Convertible
Preferred Stock shall be contingent upon
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the occurrence of the record date or effectiveness of such event (as specified
by such holder), provided that such notice of conversion is received by the
Company prior to such record date or effective date, as the case may be.
(c) Adjustment of Conversion Rate and Conversion Price.
(i) As used in this paragraph (c), the following terms shall have
the following meanings:
"Capital Stock" of any Person means the Common Stock or Preferred
Stock of such Person. Unless otherwise stated herein or the context
otherwise requires, "Capital Stock" means Capital Stock of the
Company;
"Common Stock" of any Person other than the Company means the
common equity (however designated), including, without limitation,
common stock or partnership or membership interests of, or
participation or interests in such Person (or equivalents thereof).
"Common Stock" of the Company means the Common Stock, par value $.001
per share, of the Company, any successor class or classes of common
equity (however designated) of the Company into or for which such
Common Stock may hereafter be converted, exchanged or reclassified and
any class or classes of common equity (however designated) of the
Company which may be distributed or issued with respect to such Common
Stock or successor class of classes to holders thereof generally.
Unless otherwise stated herein or the context requires otherwise,
"Common Stock" means Common Stock of the Company;
"Current Market Price" means, when used with respect to any
security as of any date, the last sale price, regular way, or, in case
no such sale takes place on such date, the average of the closing bid
and asked prices, regular way, of such security in either case as
reported for consolidated transactions on the New York Stock Exchange
or, if such security is not listed or admitted to trading on the New
York Stock Exchange, as reported for consolidated transactions with
respect to securities listed on the principal national securities
exchange on which such security is listed or admitted to trading or,
if such security is not listed or admitted to trading on any national
securities exchange, as reported on the Nasdaq National Market, or, if
such security is not listed or admitted to trading on the Nasdaq
National Market, as reported on the Nasdaq SmallCap Market, or if such
security is not listed or admitted to trading on any national
securities exchange or the Nasdaq National Market or the Nasdaq
SmallCap Market, the average of the high bid and low asked prices of
such security in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations
System or such other system then in use or, if such security is not
quoted by any such organization, the average of the closing bid and
asked prices of such security furnished by an NASD member firm
selected by the Company. If such security is not quoted by any such
organization and no such NASD member firm is able to provide such
prices, the Current Market Price of such security shall be the Fair
Market Value thereof;
"Fair Market Value" means, at any date as to any asset, Property
or right (including without limitation, Capital Stock of any Person,
evidence of indebtedness or other securities, but excluding cash), the
fair market value of such item as determined in good faith by the
Board of Directors, whose determination shall be conclusive; provided,
however, that such determination is described in an Officers'
Certificate filed with the transfer agent and that, if there is a
Current Market Price for such item on such date, "Fair Market Value"
means such Current Market Price (without giving effect to the last
sentence of the definition thereof);
"GAAP" means, as of any date, generally accepted accounting
principles in the United States and does not include any
interpretations or regulations that have been proposed but that have
not become effective;
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"Officer" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer, the Treasurer, any Assistant
Treasurer, the Controller, the Secretary, any Assistant Secretary or
any Vice President of such Person;
"Officers' Certificate" means a certificate signed on behalf of
the Corporation by two Officers, one of whom must be the Chairman of
the Board, the President, the Treasurer or a Vice-President of the
Corporation;
"Person" means any individual, corporation, partnership,
association, trust or any other entity or organization, including a
government or political subdivision or any agency or instrumentality
thereof;
"Preferred Stock" of any Person means the class or classes of
equity, ownership or participation interests (however designated) in
such Person, including, without limitation, stock, share, partnership
and membership interests, which are preferred as to the payment of
dividends or distributions by, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of, such
Person (or equivalent thereof) over interests of any other class of
interests of such Person. Unless otherwise stated herein or the
context otherwise requires, "Preferred Stock" means Preferred Stock of
the Company;
"Property" of any Person means any and all types of real,
personal, tangible, intangible or mixed property owned by such Person
whether or not included on the most recent consolidated balance sheet
of such Person in accordance with GAAP;
"Subsidiary" of a Person on any date means any other Person of
whom such Person owns, directly or indirectly through a Subsidiary or
Subsidiaries of such Person, Capital Stock with voting power, acting
independently and under ordinary circumstances, entitling such person
to elect a majority of the board of directors or other governing body
of such other Person. Unless otherwise stated herein or the context
otherwise requires, "Subsidiary" means a Subsidiary of the Company.
(ii) If the Company shall (i) pay a dividend or other
distribution, in Common Stock, on any class of Capital Stock of the
Company, (ii) subdivide the outstanding Common Stock into a greater
number of shares by any means or (iii) combine the outstanding Common
Stock into a smaller number of shares by any means including, without
limitation, a reverse stock split), then in each such case the
Conversion Price in effect immediately prior thereto shall be adjusted
so that the Registered Holder of any shares of Convertible Preferred
Stock thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock that such Registered
Holder would have owned or have been entitled to receive upon the
happening of such event had such Convertible Preferred Stock been
converted immediately prior to the relevant record date or, if there
is no such record date, the effective date of such event. An
adjustment made pursuant to this paragraph (c)(ii) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and
shall become effective immediately after the effective date of such
subdivision or combination, as the case may be.
(iii) If the Company shall (i) issue or distribute (at a price
per share less than the Current Market Price per share of such Capital
Stock on the date of such issuance or distribution) Capital Stock
generally to holders of Common Stock or to holders of any class or
series of Capital Stock which is convertible into or exchangeable or
exercisable for Common Stock (excluding an issuance or distribution of
Common Stock described in paragraph (c)(ii)) or (ii) issue or
distribute generally to such holders rights, warrants, options or
convertible or exchangeable securities entitling the holder thereof to
subscribe for, purchase, convert into or exchange for Capital Stock at
a price per share less than the Current Market Price per share of such
Capital Stock on the date
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of issuance or distribution, then, in each such case, at the earliest
of (A) the date the Company enters into a firm contract for such
issuance or distribution, (B) the record date for the determination of
stockholders entitled to receive any such Capital Stock or any such
rights, warrants, options or convertible or exchangeable securities or
(C) the date of actual issuance or distribution of any such Capital
Stock or any such rights, warrants, options or convertible or
exchangeable securities, the Conversion Price shall be reduced by
multiplying the Conversion Price in effect immediately prior to such
earliest date by:
(A) if such Capital Stock is Common Stock, a fraction the
numerator of which is the number of shares of Common Stock
outstanding, on such earliest date plus the number of shares of
Common Stock which could be purchased at the Current Market Price
per share of Common Stock on the date of such issuance or
distribution with the aggregate consideration (based on the Fair
Market Value thereof) received or receivable by the Company
either (A) in connection with such issuance or distribution or
(B) upon the conversion, exchange, purchase or subscription of
all such rights, warrants, options or convertible or exchangeable
securities (the "Aggregate Consideration"), and the denominator
of which is the number of shares of Common Stock outstanding on
such earliest date plus the number of shares of Common Stock to
be so issued or distributed or to be issued upon the conversion,
exchange, purchase or subscription of all such rights, warrants,
options or convertible or exchangeable securities; or
(B) if such Capital Stock is other than Common Stock, a
fraction the numerator of which is the Current Market Price per
share of Common Stock on such earliest date minus an amount equal
to (A) the difference between (1) the Current Market Price per
share of such Capital Stock multiplied by the number of shares of
such Capital Stock to be so issued and (2) the Aggregate
Consideration, divided by (B) the number of shares of Common
Stock outstanding on such date, and the denominator of which is
the Current Market Price per share of Common Stock on such
earliest date.
Such adjustment shall be made successively whenever any such Capital
Stock, rights, warrants, options or convertible or exchangeable
securities are so issued or distributed. In determining whether any
rights, warrants, options or convertible or exchangeable securities
entitle the holders thereof to subscribe for, purchase, convert into
or exchange for shares of such Capital Stock at less than such Current
Market Price, there shall be taken into account the Fair Market Value
of any consideration received or receivable by the Company for such
rights, warrants, options or convertible or exchangeable securities.
If any right, warrant,option or convertible or exchangeable security,
the issuance of which resulted in an adjustment in the Conversion
Price pursuant to this Subsection (4)(c)(iii), shall expire and shall
not have been exercised, the Conversion Price shall immediately upon
such expiration be recomputed to the Conversion Price which would have
been in effect if such right, warrant, option or convertible or
exchangeable securities had never been distributed or issued.
Notwithstanding anything contained in this paragraph to the contrary,
(i) the issuance of Capital Stock upon the exercise of such rights,
warrants or options or the conversion or exchange of such convertible
or exchangeable securities will not cause an adjustment in the
Conversion Price if no such adjustment would have been required at the
time such right, warrant, option or convertible or exchangeable
security was issued or distributed; provided, however, that, if the
consideration payable upon such exercise, conversion or exchange
and/or the Capital Stock receivable thereupon are changed after the
time of the issuance or distribution of such right, warrant, option or
convertible or exchangeable security then such change shall be deemed
to be the expiration thereof without having been exercised and the
issuance or distribution of new options, rights, warrants or
convertible or exchangeable securities and (ii) the issuance of
convertible preferred stock of the Company as a dividend on
convertible preferred stock of the Corporation will not cause an
adjustment in the Conversion Price if no such adjustment would have
been required at the time such underlying convertible preferred stock
was issued (or as a result of any subsequent modification to the terms
thereof) and the conversion provisions of such
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convertible stock so issued as a dividend are the same as in such
underlying convertible preferred stock.
Notwithstanding anything contained in the Certificate of Designation
to the contrary, options, rights or warrants issued or distributed by the
Company, including options, rights or warrants distributed prior to the
date of filing of the Certificate of Designation, to holders of Common
Stock generally which, until the occurrence of a specified event or events
(a "Trigger Event"), (i) are deemed to be transferred with Common Stock,
(ii) are not exercisable and (iii) are also issued on a pro rata basis with
respect to future issuances of Common Stock, shall be deemed not to have
been issued or distributed for purposes of this Subsection 4(c) (and no
adjustment to the Conversion Price under this Subsection 4(c) will be
required) until the occurrence of the earliest Trigger Event. Upon the
occurrence of a Trigger Event, such options, rights or warrants shall
continue to be deemed not to have been issued or distributed for purposes
of this Subsection 4(c) (and no adjustment to the Conversion Price under
this Subsection 4(c) will be required) if and for so long as each
Registered Holder who thereafter converts such Registered Holder's
Convertible Preferred Stock shall be entitled to receive upon such
conversion, in addition to the shares of Common Stock issuable upon such
conversion, a number of such options, rights or warrants, as the case may
be, equal to the number of options, rights or warrants to which a holder of
the number of shares of Common Stock equal to the number of shares of
Common Stock issuable upon conversion of such Registered Holder's
Convertible Preferred Stock is entitled to receive at the time of such
conversion in accordance with the terms and provisions of, and applicable
to, such options, rights or warrants. Upon the expiration of any such
options, rights or warrants or at such time, if any, as a Registered Holder
is not entitled to receive such options, rights or warrants upon conversion
of such Registered Holder's Convertible Preferred Stock, an adjustment (if
any is required) to the Conversion Price shall be made in accordance with
this paragraph (c)(iii) with respect to the issuance of all such options,
rights and warrants as of the date of issuance thereof, but subject to the
provisions of the preceding paragraph, if any such option, right or
warrant, including any such options right or warrants distributed prior to
the date of filing of the Certificate of Designation, are subject to
events, upon the occurrence of which such options, rights or warrants
become exercisable to purchase different securities, evidence of
indebtedness, cash, Properties or other assets or different amounts
thereof, then, subject to the preceding provision of this paragraph, the
date of the occurrence of any and each such event shall be deemed to be the
date of distribution and record date with respect to new options, right or
warrants with such new purchase rights (and a termination or expiration of
the existing options, rights or warrants without exercise thereof). In
addition, in the event of any distribution (or deemed distribution) of
options, rights or warrants, or any Trigger Event or other event of the
type described in the preceding sentence, that required (or would have
required but for the provisions of paragraph (c)(vi) or this paragraph) an
adjustment to the Conversion Price under this paragraph (c) and such
options, rights or warrants shall thereafter have been redeemed or
repurchased without having been exercised, then the Conversion Price shall
be adjusted upon such redemption or repurchase to give effect to such
distribution, Trigger Event or other event, as the case may, as though it
had instead been a cash distribution, equal on a per share basis to the
result of the aggregate redemption or repurchase price received by holders
of such options, rights or warrants divided by the number of shares of
Common Stock outstanding as of the date of such repurchase or redemption,
made to holders of Common Stock generally as of the date of such redemption
or repurchase.
(iv) If the Company shall pay or distribute, as a dividend or
otherwise, generally to holders of Common Stock or any class or series of
Capital Stock which is convertible into or exercisable or exchangeable for
Common Stock any assets, Properties or rights (including, without
limitation, evidences of indebtedness of the Company, any Subsidiary or any
other Person, cash or Capital Stock or other securities of the Company, any
Subsidiary or any other Person, but excluding payments and distributions as
described in Subsections 4(c)(ii) or 4(c)(iii), dividends and distributions
in connection with a Liquidation Event and distributions consisting solely
of cash
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described in Subsection 4(c)(v)), then in each such case the Conversion
Price shall be reduced by multiplying the Conversion Price in effect
immediately prior to the date of such payment or distribution by a
fraction, the numerator of which is the Current Market Price per share of
Common Stock on the record date for the determination of stockholders
entitled to receive such payment or distribution less the Fair Market Value
per share of Common Stock on such record date of the assets, Properties or
rights so paid or distributed, and the denominator of which is the Current
Market Price per share of Common Stock on such record date. Such adjustment
shall become effective immediately after such record date. For purposes of
this Subsection 4(c)(iv), such Fair Market Value per share shall equal the
aggregate Fair Market Value on such record date of the assets, Properties
or rights so paid or distributed divided by the number of shares of Common
Stock outstanding on such record date. For all purposes, adjustments to any
security's conversion or exercise price pursuant to such security's
original terms shall not be deemed a distribution or dividend to holders
thereof.
(v) If the Company shall, by dividend or otherwise, make a
distribution (other than in connection with the liquidation, dissolution or
winding up of the Company in its entirety), generally to holders of Common
Stock or any class or series of Capital Stock which is convertible into or
exercisable or exchangeable for Common Stock, consisting solely of cash
where (x) the sum of (i) the aggregate amount for such cash plus (ii) the
aggregate amount of all cash so distributed (by dividend or otherwise) to
such holders within the 12-month period ending on the record date for
determining stockholders entitled to receive such distribution with respect
to which no adjustment has been made to the Conversion Price pursuant to
this paragraph (c)(v) exceeds (y) 10% of the result of the multiplication
of (1) the Current Market Price per share of Common Stock on such record
date times (2) the number of shares of Common Stock outstanding on such
record date, then the Conversion Price shall be reduced, effective
immediately prior to the opening of business on the day following such
record date, by multiplying the Conversion Price in effect immediately
prior to the close of business on the day prior to such record date by a
fraction, the numerator of which is the Current Market Price per share of
Common Stock on such record date less the aggregate amount of cash per
share so distributed and the denominator of which is such Current Market
Price; provided, however, that, if the aggregate amount of cash per share
is equal to or greater than such Current Market Price, then, in lieu of the
foregoing adjustment, adequate provisions shall be made so that each
Registered Holder shall have the right to receive upon conversion (with
respect to each share of Common Stock issued upon such conversion and in
addition to the Common Stock issuable upon conversion) the aggregate amount
of cash per share such Registered Holder would have received had such
Registered Holder's Convertible Preferred Stock been converted immediately
prior to such record date\. In no event shall the Conversion Price be
increased pursuant to this paragraph (c)(v); provided, however, that if
such distribution is not so made, the Conversion Price shall be adjusted to
be the Conversion Price which would have been in effect if such
distribution had not been declared. For purposes of this Subsection
4(c)(v), such aggregate amount of cash per share shall equal such sum
divided by the number of shares of Common Stock outstanding on such record
date.
(vi) The provisions of this Subsection 4(c) shall similarly apply to
all successive events of the type described in this Subsection 4(c).
Notwithstanding anything contained in the Certificate of Designation to the
contrary, no adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least 1% in the
Conversion Price then in effect; provided, however, that any adjustments
which by reason of this Subsection 4(c)(vi) are not required to be made
shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this section shall be made by the
Company and shall be made to the nearest cent or to the nearest one
hundredth of a share, as the case may be, and the transfer agent shall be
entitled to rely conclusively thereon. Except as provided in this Section
4, no adjustment in the Conversion Price will be made for the issuance of
Common Stock or any securities convertible into or exchangeable for Common
Stock or carrying the right to purchase Common Stock or any securities so
convertible or exchangeable.
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(vii) Whenever the Conversion Price is adjusted as provided herein,
the Company shall promptly file with the transfer agent an Officers'
Certificate setting forth the Conversion Price in effect after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. Promptly after delivery of such Officers' Certificate, the
Company shall give or cause to be given to each Registered Holder a notice
of such adjustment of the Conversion Price setting forth the adjusted
Conversion Price and the date on which such adjustment becomes effective.
(viii) Notwithstanding anything contained in the Certificate of
Designation to the contrary, in any case in which this Subsection 4 (c)
provides that an adjustment in the Conversion Price shall become effective
immediately after a record date for an event, the Company may defer until
the occurrence of such event (i) issuing to the Registered Holder of any
Convertible Preferred Stock converted after such record date and before the
occurrence of such event the additional shares of Common Stock issuable
upon such conversion by reason of the adjustment required by such event
over and above the number of shares of Common Stock issuable upon such
conversion before giving effect to such adjustment and (ii) paying to such
Registered Holder any amount in cash in lieu of any fractional share of
Common Stock pursuant to Subsection 4(d).
(ix) Notwithstanding any other provision of the Certificate of
Designation, no adjustment to the Conversion Price shall be made upon the
issuance or exercise or conversion of (1) options or warrants to purchase,
in the aggregate, up to 25% of the securities sold in the offerings of
securities of the Corporation described in the Original Offer to Exchange
or any options or warrants described in the Amendment in respect of the
Alternative Equity Offering, in each case issued to (or to the designee of)
any placement agent or financial advisor (such options or warrants, the
"Offering Warrants"), (2) any equity securities or warrants of the
Corporation (including, without limitation, the Convertible Preferred
Stock, warrants and equity securities underlying warrants) issued in
exchange for 9% Convertible Subordinated Notes due 2004 (the "9% Notes") of
the Corporation or accrued interest thereon or pursuant to the conversion
or exercise provisions thereof, (3) any warrants issued in connection with
the offerings described in the Original Offer to Exchange or the Amendment
(collectively, the "Offering"), (4) any warrants issued to Forum in
exchange for or in addition to, or any amendment to, any warrants held by
Forum, in each case, pursuant to a letter agreement dated January 5, 1998,
between the Corporation and Forum, and any other warrants to purchase
Common Stock or shares of Common Stock issued to Forum or its designee, (5)
any Convertible Preferred Stock issued in the Offering, (6) any Capital
Stock issued or cash paid as dividends on the Convertible Preferred Stock
or (7) any Capital Stock issued or cash paid upon the mandatory conversion
or redemption of any Convertible Preferred Stock in accordance with Section
5 of the Certificate of Designation.
(d) No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of Convertible
Preferred Stock. If more than one certificate evidencing shares of Convertible
Preferred Stock shall be surrendered for conversion at one time by the same
holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Convertible Preferred
Stock so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable upon conversion of such aggregate number of shares
of Convertible Preferred Stock, the Company may elect, in its sole discretion,
independently for each holder, whether such number of shares of Common Stock
will be rounded to the nearest whole share (with a .5 of a share rounded upward)
or whether such holder will be given cash, in lieu of any fractional share, in
an amount equal to the same fraction of the Market Price of the Common Stock as
of the close of business on the day of conversion.
(e) [Reserved]
(f) Reservation of Shares; Transfer Taxes, Etc. The Company shall at
all times reserve and keep available, out of its authorized and unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
Convertible Preferred Stock, such number of shares of its Common Stock free of
preemptive rights as shall be sufficient to effect the conversion of all shares
of Convertible Preferred Stock from time to time
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outstanding. The Company shall use its best efforts from time to time, in
accordance with the laws of the State of Delaware to increase the authorized
number of shares of Common Stock if at any time the number of shares of
authorized, unissued and unreserved Common Stock shall not be sufficient to
permit the conversion of all the then-outstanding shares of Convertible
Preferred Stock.
The Company shall pay any and all issue or other taxes (excluding any
income taxes) that may be payable in respect of any issue or delivery of shares
of Common Stock on conversion of the Convertible Preferred Stock. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue or delivery of Common Stock (or other
securities or assets) in a name other than that in which the shares of
Convertible Preferred Stock so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Company the amount of such tax or has established, to the
satisfaction of the Company, that such tax has been paid or need not be paid.
(g) Prior Notice of Certain Events. In case:
i. the Company shall declare any dividend (or any other
distribution); or
ii. the Company shall authorize the granting to the holders of
Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights or warrants; or
iii. of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a
change in par value, or from par value to no par value, or from no par
value to par value); or
iv. of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company shall
be required, or of the sale or transfer of all or substantially all of
the assets of the Company or of any compulsory share exchange whereby
the Common Stock is converted into other securities, cash or other
property; or
v. of any Liquidation Event;
then the Company shall cause to be filed with the transfer agent for the
Convertible Preferred Stock, and shall cause to be mailed to the Registered
Holders, at their last addresses as they shall appear upon the stock transfer
books of the Company, at least 20 days prior to the applicable record date
hereinafter specified, a notice stating (x) the date on which a record (if any)
is to be taken for the purpose of such dividend. distribution or granting of
rights or warrants or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend, distribution,
rights or warrants are to be determined and a description of the cash,
securities or other property to be received by such holders upon such dividend,
distribution or granting of rights or warrants or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share exchange or
Liquidation Event is expected to become effective, the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such exchange or Liquidation Event and the consideration, including securities
or other property, to be received by such holders upon such exchange; provided,
however, that no failure to mail such notice or any defect therein or in the
mailing thereof shall affect the validity of the corporate action required to be
specified in such notice.
(h) Other Changes in Conversion Rate. The Company from time to time may
increase the Conversion Rate by any amount for any period of time if the period
is at least 20 days and if the increase is irrevocable during the period.
Whenever the Conversion Rate is so increased, the Company shall mail to the
Registered Holders a notice of the increase at least 15 days before the date the
increased Conversion Rate takes effect, and such notice shall state the
increased Conversion Rate and the period it will be in effect.
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The Company may make such increases in the Conversion Rate, in
addition to those required or allowed by this Section 4, as shall be determined
by it, as evidenced by a resolution of the Board of Directors, to be advisable
in order to avoid or diminish any income tax to holders of Common Stock
resulting from any dividend or distribution of stock or issuance of rights or
warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
Notwithstanding anything to the contrary in the Certificate of
Designation, in no case shall the Conversion Price be adjusted to an amount less
than $.001 per share, the current par value of the Common Stock into which the
Convertible Preferred Stock is convertible.
(i) Ambiguities/Errors. The Board of Directors of the Company
shall have the power to resolve any ambiguity or correct any error in the
provisions relating to the convertibility of the Convertible Preferred Stock,
and its actions in so doing shall be final and conclusive.
5. Mandatory Conversion and Redemption. (a) At any time after May 6,
1998, the Company at its option, may cause the Convertible Preferred Stock to be
converted in whole or in part, on a pro rata basis, into fully paid and
nonassessable shares of Common Stock using a conversion price equal to $4.00
(200% of the Stated Common Price) if the Closing Bid Price (or, if the price
referenced in the definition of Closing Bid Price cannot be determined, the Fair
Market Value) of the Common Stock shall have equalled or exceeded 250% of the
Conversion Price for at least 20 trading days in any 30 consecutive trading day
period ending three days prior to the date of notice of conversion (such event,
the "Market Trigger"). Any shares of Convertible Preferred Stock so converted
shall be treated as having been surrendered by the holder thereof for conversion
pursuant to Section 4 on the date of such mandatory conversion (unless
previously converted at the option of the holder).
(b) At any time after April 1, 2000, the Company, at its option,
may redeem the Convertible Preferred Stock for cash equal to the Dividend Base
Amount at such time, if the Market Trigger has occurred in the period ending
three days prior to the date of notice of redemption (unless previously
converted at the option of the holder).
(c) No greater than 60 nor fewer than 20 days prior to the date
of any such mandatory conversion or redemption, notice by first class mail,
postage prepaid, shall be given to the holders of record of the Convertible
Preferred Stock to be converted or redeemed, addressed to such holders at their
last addresses as shown on the stock transfer books of the Company. Each such
notice shall specify the date fixed for conversion or redemption, the place or
places for surrender of shares of Convertible Preferred Stock and the then
effective Conversion Rate pursuant to Section 4.
Any notice which is mailed as provided in the Certificate of
Designation shall be conclusively presumed to have been duly given by the
Company on the date deposited in the mail, whether or not the holder of the
Convertible Preferred Stock receives such notice; and failure properly to give
such notice by mail, or any defect in such notice, to the holders of the shares
to be converted or redeemed shall not affect the validity of the proceedings for
the conversion or redemption of any other shares of Convertible Preferred Stock.
On or after the date fixed for conversion or redemption (the "Take-Out Date") as
stated in such notice, each holder of shares called to be converted or redeemed
shall surrender the certificate evidencing such shares to the Company at the
place designated in such notice for conversion or redemption. After the mailing
of such notice, but before the Take-Out Date as stated therein, all rights
whatsoever with respect to the shares so called for conversion or redemption
(except the right of the holders to convert such shares pursuant to Section 4
and to have such shares converted or redeemed, as the case may be, upon
surrender of their certificates therefor, pursuant to this Section 5) shall
terminate. On or after the Take-Out Date, notwithstanding that the certificates
evidencing any shares properly called for conversion or redemption shall not
have been surrendered, such shares shall no longer be deemed outstanding and all
rights whatsoever with respect to the shares so called for conversion or
redemption (except the right of the holders to have such shares converted or
redeemed, as the case may be, upon surrender of their certificates therefor,
pursuant to this Section 5) shall terminate.
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6. Outstanding Shares. A share of Convertible Preferred Stock, when
issued, shall be deemed outstanding except (i) from the date, or the deemed
date, of surrender of certificates evidencing shares of Convertible Preferred
Stock, all shares of Convertible Preferred Stock converted into Common Stock or
redeemed pursuant to Section 5 and (ii) from the date of registration of
transfer, all shares of Convertible Preferred Stock held of record by the
Company or any subsidiary of the Company.
7. Class Voting Rights. The Company shall not, without the affirmative
vote or consent of the holders of at least 50% of all outstanding Convertible
Preferred Stock, voting separately as a class, (i) amend, alter or repeal any
provision of the Certificate of Incorporation or the Bylaws of the Company so as
adversely to affect the relative rights, preferences, qualifications,
limitations or restrictions of the Convertible Preferred Stock (it being
understood that the issuance of securities ranking prior to, or pari passu with,
the Convertible Preferred Stock (A) upon a Liquidation Event or (B) with respect
to the payment of dividends or distributions shall not be considered adversely
to affect such relative rights, preferences, qualifications, limitations or
restrictions); or (ii) authorize or issue, or increase the authorized amount of,
Convertible Preferred Stock, other than Convertible Preferred Stock issuable as
dividends on Convertible Preferred Stock.
8. Status of Acquired Shares. Shares of Convertible Preferred Stock
received upon conversion or redemption pursuant to Section 4 or Section 5 or
otherwise acquired by the Company will be restored to the status of authorized
but unissued shares of Preferred Stock, without designation as to class, and may
thereafter be issued, but not as shares of Convertible Preferred Stock.
9. Preemptive Rights. The Convertible Preferred Stock is not entitled to
any preemptive or subscription rights in respect of any securities of the
Company.
10. Restrictions on Change of Control. Notwithstanding anything to the
contrary contained in the Certificate of Designation, without the prior written
consent of the Company, so long as any 9% Notes remain outstanding under that
certain Indenture dated as of March 26, 1997 (as amended, the "Indenture") in
respect of the 9% Notes, no holder of Convertible Preferred Stock shall have
voting rights granted hereunder, be entitled to receive any voting securities of
the Company pursuant hereto or be entitled to exercise any of the conversion
rights set forth in the Certificate of Designation (each, a "Restricted Event"),
to the extent that any such Restricted Event could, in the Company's reasonable
judgment, either alone or in conjunction with other issuances or holdings of
capital stock, warrants or convertible securities of the Company, result in a
Change of Control (as defined in the Indenture).
WARRANTS AND OPTIONS
Warrants
The Company has the following exercisable warrants outstanding for the
purchase of common stock at September 30, 1998:
Exercise Price
Expiration Date Shares Per Share
November 2, 1998-October 25, 2000 503,001 $50.00
February 28, 2000 20,000 37.50
December 31, 2001 13,000 34.49
April 2, 2002-May 4, 2003 8,641,510 2.40-4.25
---------- ---------
Average per share exercise price 9,227,511 $3.13
- -------------------------------- ========= =====
As a component of the sale of Preferred Stock in 1994 and 1995, the
Company issued to the investors in such offering warrants for the purchase of
585,425 shares of Common Stock at $40.00 to $50.00 per share.
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Warrants to purchase 331,382 shares of Common Stock at an exercise price of
$50.00 per share expired on March 31, 1998, and the remaining warrants for the
purchase of 254,043 shares of Common Stock at an exercise price of $40.00 per
share expired on October 25, 1997.
Five-year warrants to purchase 368,620 shares of common stock at $50.00
per share were issued in 1994 and 1995 as a component of the compensation for
services of several placement agents of the Company's convertible preferred
stock. Of these warrants, 304,335 were issued to a company that is controlled by
two directors of the Company. The remaining 64,285 warrants were issued to
various other companies that acted as placement agents.
Certain Terms of the Warrants
The following descriptions of certain of the terms of the Class A
Warrants, Class B Warrants, Class C Warrants, Class D Warrants, Forum Warrants
and Pillar Warrants do not purport to be complete and are qualified in their
entirety by the terms of the agreements pursuant to which they were issued, each
of which is filed as an exhibit to this Registration Statement.
Class A Warrants
As of December 1, 1998, there were 3,002,958 Class A Warrants issued and
outstanding. The Class A Warrants were issued, together with shares of the
Convertible Preferred Stock, in the Exchange Offer. Each Class A Warrant
initially entitles the holder to purchase one (1) share of Common Stock at an
exercise price of $4.25 per share. By their terms, the Class A Warrants are
exercisable from May 5, 1999 until May 4, 2003, subject to any additional
restrictions on transfer that the holders thereof have agreed to. See "Certain
Restrictions on Transfer --Convertible Preferred Stockholders."
The number of shares of Common Stock issuable upon exercise of the Class
A Warrants, the purchase price to be paid upon such exercise, and the number of
Class A Warrants outstanding are subject to anti-dilution adjustment for stock
splits, stock dividends, and certain other events.
Class B Warrants
As of December 1, 1998, there were 1,752,945 Class B Warrants issued and
outstanding. The Class B Warrants were issued, together with shares of Common
Stock, in the 1998 Regulation S Offering. Each Class B Warrant initially
entitles the holder to purchase one (1) share of Common Stock at an exercise
price of $2.40 per share. By their terms, the Class B Warrants were immediately
exercisable from May 5, 1998 until May 4, 2003, subject to any additional
restrictions on transfer that the holders thereof have agreed to. See "Certain
Restrictions on Transfer -- Regulation S Offering."
The number of shares of Common Stock issuable upon exercise of the Class
B Warrants, the purchase price to be paid upon such exercise, and the number of
Class B Warrants outstanding are subject to anti-dilution adjustment for stock
splits, stock dividends, and certain other events.
Class C Warrants
As of December 1, 1998, there were 904,274 Class C Warrants issued and
outstanding. The Class C Warrants were issued, together with shares of Common
Stock, in the 1998 Regulation D Offering. Each Class C Warrant initially
entitled the holder to purchase one (1) share of Common Stock at an exercise
price of $2.40 per share. By their terms, the Class C Warrants were immediately
exercisable from May 5, 1998 until May 4, 2003, subject to any additional
restrictions on transfer that the holders thereof have agreed to. See "Certain
Restrictions on Transfer -- Regulation D Offering."
The number of shares of Common Stock issuable upon exercise of the Class
C Warrants, the purchase price to be paid upon such exercise, and the number of
Class C Warrants outstanding are subject to anti-dilution adjustment for stock
splits, stock dividends, and certain other events.
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Class D Warrants
As of December 1, 1998, there were 672,267 Class D Warrants issued and
outstanding. The Class D Warrants were issued, together with shares of the
Convertible Preferred Stock, in the Regulation D Preferred Offering. Each Class
D Warrant initially entitles the holder to purchase one (1) share of Common
Stock at an exercise price of $2.40. By their terms, the Class D Warrants are
exercisable from May 5, 1999 until May 4, 2003, subject to any additional
restrictions on transfer that the holders thereof have agreed to. See "Certain
Restrictions on Transfer -- Convertible Preferred Stockholders."
The number of shares of Common Stock issuable upon exercise of the Class
D Warrants, the purchase price to be paid upon such exercise, and the number of
Class D Warrants outstanding are subject to anti-dilution adjustment for stock
splits, stock dividends, and certain other events.
Forum
The Company retained Forum as a placement agent of the Company in
connection with the Regulation D Offering in the United States. As of the date
hereof, Forum has received as compensation for its services as placement agent
with regard to the Regulation D Offering and its assistance with the Exchange
Offer, 597,699 shares of Common Stock and Forum Warrants to purchase 609,195
shares of Common Stock exercisable at $2.40 per share, in each case subject to
adjustment, until May 4, 2003. In addition, in consideration of the agreements
made by Forum consenting to the Company's 1998 private placements and waiving
certain obligations of the Company to Forum, the Company agreed to amend the
1997 Forum Warrant to purchase up to 71,301 shares of Common Stock of the
Company so that the exercise price will be equal to $4.25 per share, and the
number of shares of Common Stock purchasable upon exercise thereof will be
increased to 588,235, in each case subject to adjustment; provided, however,
that such warrant will also be amended to provide that such warrant may not be
exercised until May 5, 1999 and the transactions contemplated by such private
placements and by the Exchange Offer will not trigger any anti-dilution
adjustments to the exercise price thereof or the number of shares of Common
Stock subject thereto.
Pillar Investments
The Company retained Pillar Investments as a placement agent of the
Company in connection with the private placements of securities of the Company
in the Regulation S Offerings. Pillar Investments is entitled to receive fees
consisting of (i) 9% of the gross proceeds of each Regulation S Offering, (ii) a
non-accountable expense allowance equal to 4% of such gross proceeds, (iii) the
right to purchase, for nominal consideration, warrants to purchase 473,598
shares of Common Stock, at an exercise price of $2.40 per share, (iv) the right
to purchase, for nominal consideration, warrants to purchase such number of
shares of Common Stock of the Company equal to 10% of the aggregate number of
shares of Common Stock sold by the Company for which Pillar Investments acted as
placement agent, exercisable at 120% of the relevant Common Stock offering
price, for a period of five years (resulting, as of the date hereof, in the
right to receive warrants to purchase 638,032 shares at $2.40 per share, subject
to adjustment), and (v) a consulting/restructuring fee of $960,000 payable in
Common Stock of the Company valued at the market price and payable in three
equal installments as net proceeds of $25,000,000, $30,000,000 and $35,000,000
are received in the aggregate from private placements effected by the Company in
1998 to the extent contemplated by the Consent dated as of January 12, 1998
given by certain 9% Noteholders of the Company, or otherwise to the extent
contemplated by the Placement Agency Agreement between the Company and Pillar
Investments, subject to the Company's receipt of a fairness opinion with regard
thereto, provided however, that in no event shall Pillar Investments be
permitted to receive compensation in excess of the level which was approved by
the holders of the 9% Notes. Through the date hereof, Pillar Investments has
received $1,635,400 in cash pursuant to these arrangements and Pillar Warrants
to purchase 1,111,630 shares of Common Stock.
The Company and Pillar Investments have entered into an advisory
agreement pursuant to which Pillar Investments acts as the Company's
non-exclusive financial advisor, which agreement provided that an affiliate of
Pillar Investments receive a monthly retainer of $5,000 (with a minimum
engagement of 24 months beginning on May 5, 1998), and further provides that
Pillar Investments is entitled to receive (i) out-of pocket expenses, (ii)
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subject to the Company's receipt of a fairness opinion with respect thereto,
300,000 shares of Common Stock in connection with Pillar Investments' efforts in
assisting the Company in restructuring its balance sheet, and (iii) certain cash
and equity success fees in the event Pillar Investments assists the Company in
connection with certain financial and strategic transactions.
Purchasers of the Warrants are also bound by certain contractual
restrictions on their ability to transfer those Warrants and the shares of
Common Stock issuable upon exercise thereof. See "Certain Restrictions on
Transfer."
Stock Option Plans
In 1990 and 1995, the Company established the 1990 Stock Option Plan
(the 1990 Option Plan) and the 1995 Stock Option Plan (the 1995 Option Plan),
respectively, which provide for the grant of incentive stock options and
nonqualified stock options. Options granted under these plans vest over various
periods and expire no later than 10 years from the date of grant. However, under
the 1990 Option Plan in the event of a change in control (as defined in the 1990
Plan), the exercise dates of all options then outstanding shall be accelerated
in full and any restrictions on exercising outstanding options issued pursuant
to the 1990 Option Plan shall terminate. In October 1995, the Company terminated
the issuance of additional options under the 1990 Option Plan. As of September
30, 1998, options to purchase a total of 529,414 shares of common stock remained
outstanding under the 1990 Option Plan.
A total of 700,000 shares of common stock may be issued upon the
exercise of options granted under the 1995 Option Plan. The maximum number of
shares with respect to which options may be granted to any employee under the
1995 Option Plan shall not exceed 500,000 shares of common stock during any
calendar year. The Compensation Committee of the Board of Directors has the
authority to select the employees to whom options are granted and determine the
terms of each option, including (i) the number of shares of common stock subject
to the option; (ii) when the option becomes exercisable; (iii) the option
exercise price, which, in the case of incentive stock options, must be at least
100% (110% in the case of incentive stock options granted to a stockholder
owning in excess of 10% of the Company's common stock) of the fair market value
of the common stock as of the date of grant; and (iv) the duration of the option
(which, in the case of incentive stock options, may not exceed 10 years). As of
September 30, 1998, options to purchase a total of 573,418 shares of common
stock remained outstanding under the 1995 Option Plan.
In October 1995, the Company adopted the 1995 Director Stock Option
Plan (the Director Plan). A total of 50,000 shares of common stock may be issued
upon the exercise of options granted under the Director Plan. Under the terms of
the Director Plan, options to purchase 1,000 shares of common stock were granted
to eligible directors upon the closing of the Company's initial public offering
at the fair market value of the common stock on the date of the closing.
Thereafter, options to purchase 1,000 shares of common stock will be granted to
each eligible director on May 1 of each year commencing in 1997. All options
will vest on the first anniversary of the date of grant or, in the case of
annual options, on April 30 of each year with respect to options granted in the
previous year. As of September 30, 1998, options to purchase a total of 21,000
shares of common stock remained outstanding under the Director Plan.
In May 1997, the Company adopted the 1997 Stock Option Plan (the 1997
Option Plan), which provides for the grant of incentive and non-qualified stock
options. A total of 600,000 shares of common stock may be issued upon the
exercise of options granted to any employee under the 1997 Option Plan. The
maximum number of shares with respect to which options may be granted to any
employee under the 1997 Option Plan shall not exceed 500,000 shares of common
stock during any calendar year. The Compensation Committee of the Board of
Directors has the authority to select the employees to whom options are granted
and determine the terms of each option, including (i) the number of shares of
common stock subject to the option; (ii) when the option becomes exercisable;
(iii) the option exercise price, which, in the case of incentive stock options,
must be at least 100% (110% in the case of incentive stock) of the fair market
value of the common stock as of the date of grant; and (iv) the duration of the
option (which, in the case of incentive stock options, may not exceed ten
years). As of September 30, 1998, options to purchase a total of 2,216,800
shares of common stock remained outstanding under the 1997 Option Plan.
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INDEBTEDNESS
The following descriptions of the 9% Notes and the Bank Facility do not
purport to be complete and are qualified in their entirety by reference to the
Indenture and the Loan and Security Agreement, each of which is filed as an
exhibit to the Registration Statement.
9% CONVERTIBLE SUBORDINATED NOTES DUE 2004
On April 2, 1997, the Company sold $50.0 million principal amount of its
9% Notes pursuant to the Indenture. The 9% Notes bear interest at a rate of 9%
per annum and have a maturity date of April 1, 2004. Under the 9% Notes, the
Company is required to make semi-annual interest payments on the outstanding
principal balance through the maturity date of April 1, 2004. The Indenture
contains various covenants on the part of the Company and Events of Default,
which should be carefully reviewed by prospective investors. The 9% Notes are
unsecured and subordinated to "Senior Indebtedness" (as defined in Section 1.1
of the Indenture), which includes substantially all of the Company's existing
indebtedness. The 9% Notes are convertible at the option of the holder into the
Company's Common Stock at any time prior to maturity, unless previously redeemed
or repurchased by the Company under certain specified circumstances, at a
conversion price of $35.0625 per share (subject to adjustment). Upon a Change of
Control of the Company (as defined in the Indenture), the Company would be
required to offer to repurchase the 9% Notes at 150% of the principal amount
thereof plus accrued and unpaid interest to the date of repurchase. Potential
purchasers are urged to review carefully the definition of Change of Control set
forth in Section 1.1 of the Indenture, which includes, inter alia, any person or
entity (including a "person" or "group" within the meaning of Section 13(d) or
14(d) of the Exchange Act) becoming the direct or indirect beneficial owner of
shares of Capital Stock (as defined therein and which includes preferred stock)
representing greater than 50% of the combined voting power of all outstanding
shares of Capital Stock entitled to vote in the election of directors under
ordinary circumstances.
In the first quarter of 1998, the Company commenced an exchange offer
(the "Exchange Offer") to all of the holders of 9% Notes whereby the Company
offered to exchange shares of Convertible Preferred Stock and warrants to
purchase Common Stock for the 9% Notes. On May 5, 1998, the Company accepted
approximately $48.7 million in principal amount of 9% Notes tendered in the
Exchange Offer in exchange for approximately 510,000 shares of Convertible
Preferred Stock and warrants to purchase approximately 3,000,000 shares of
Common Stock at $4.25 per share. As a result of the Exchange Offer, there is
approximately $1.3 million in principal amount of 9% Notes outstanding.
BANK CREDIT FACILITY
In December 1996, the Company entered into a five-year $7.5 million
credit facility with Silicon Valley Bank (the "Bank") to finance the leasehold
improvements of the Company's manufacturing facility the outstanding principal
balance of which was approximately $2.8 million at November 15, 1998. The Bank
Credit Facility, as amended, contains certain financial covenants that require
the Company to maintain minimum tangible net worth (as defined) and minimum
liquidity (as defined) and prohibits the payment of dividends. The Company has
secured its obligations with a lien on all of its assets. If, at specified
times, the Company's Minimum Liquidity (as defined) is less than $4.0 million,
or its tangible net worth (as defined) is less than $6 million, the Company is
required to prepay the Bank Credit Facility in full.
In November 1998, Forum and Pecks, affiliates of two members of the
Company's Board of Directors, purchased the loan made by the Bank. In connection
with the purchase of the Bank Credit Facility, the purchasers (the "Lender")
have advanced an additional amount to the Company so as to increase the
outstanding principal amount of the Loan to $6,000,000. In addition, the Lender
has agreed to amend the terms of the Loan as follows: (i) the maturity will be
extended to November 30, 2003; (ii) the interest rate will be decreased to 8%;
(iii) interest will be payable monthly in arrears, with the principal due in
full at maturity of the Loan; (iv) the Loan will be convertible, at the Lender's
option, in whole or in part, into shares of common stock, par value $.001 per
share, of the Company ("Common Stock") at a rate equal to $2.40 per share; (v)
the threshold of the Minimum Liquidity
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covenant will be reduced from $4,000,000 to $2,000,000; and (vi) the Loan may
not be prepaid, in whole or in part, at any time prior to December 1, 2000.
In connection with the purchase of the Loan, Forum will receive certain
fees. See "Certain Relationships and Related Transactions." For additional
description of the Bank Credit Facility see Notes 6(a) and 19(h) of "Notes to
Consolidated Financial Statements."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED
CERTIFICATE OF INCORPORATION, BY-LAWS AND INDEBTEDNESS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock. The existence of this provision can be expected to
deter certain business combinations, including transactions that might otherwise
result in holders of voting stock being paid a premium over the market price for
their shares.
The Restated Certificate of Incorporation provides for the division of
the Board of Directors into three classes as nearly equal in size as possible
with staggered three-year terms. In addition, the Restated Certificate of
Incorporation provides that directors may be removed only for cause by the
affirmative vote of the holders of at least two-thirds of the shares of capital
stock of the corporation entitled to vote. Under the Restated Certificate of
Incorporation, any vacancy on the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the Board, may filled only
by vote of a majority of the directors then in office. The classification of the
Board of Directors and the limitations on the removal of directors and filling
of vacancies could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of the
Company.
The Restated Certificate of Incorporation also requires that any action
required or permitted to be taken by the stockholders of the Company at an
annual meeting or special meeting of stockholders may be taken only if it is
properly brought before such meeting and may not be taken by written action in
lieu of a meeting and will require reasonable advance notice by a stockholder of
a proposal or director nomination which such stockholder desires to present at
any annual or special meeting of stockholders. The Restated Certificate of
Incorporation further provides that special meetings of the stockholders may be
called only by the Chief Executive Officer or, if none, the President of the
Company or by the Board of Directors. Under the Company's By-Laws (the
"By-Laws"), in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with certain requirements regarding advance
notice to the Company. The foregoing provisions could have the effect of
delaying until the next stockholders meeting stockholder actions which are
favored by the holders of a majority of the outstanding voting securities of the
Company. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
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unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Restated Certificate of Incorporation and
the By-Laws require the affirmative vote of the holders of at least 75% of the
shares of capital stock of the Company issued and outstanding and entitled to
vote to amend or repeal any of the provisions described in the prior two
paragraphs. Moreover, the Board of Directors has the authority, without further
action by the stockholders, to fix the rights and preferences of, and to issue
shares of, Preferred Stock.
In addition to these provisions of Delaware law, the Restated Certificate
of Incorporation and the By-Laws, the terms of the Company's outstanding 9%
Notes, which were issued in the aggregate original principal amount of $50.0
million and of which approximately $1.3 million in principal amount remains
outstanding, require the Company, upon a Change of Control of the Company (as
defined in the indenture for the 9% Notes), to offer to repurchase the 9% Notes
at a repurchase price equal to 150% of the principal amount thereof, plus
accrued and unpaid interest to the date of repurchase. This provision, together
with the provisions of the Restated Certificate of Incorporation described above
and other provisions of the Restated Certificate of Incorporation, may have the
effect of deterring hostile takeovers or delaying or preventing changes in
control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain U.S. federal income tax
consequences to purchasers of Securities from Selling Securityholders of owning
Securities as capital assets. The discussion is based on the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and
proposed Treasury Regulations thereunder, and administrative and judicial
interpretations thereof, all as in effect as of the date hereof, and all of
which are subject to change (perhaps retroactively) by legislation,
administrative action or judicial decision. There can be no assurance that the
Internal Revenue Service (the "Service") will not challenge one or more of the
tax consequences described herein, and no opinion of counsel or ruling from the
Service has been or will be requested as to any of such tax consequences. The
following discussion does not include all matters that may be relevant to any
particular holder in light of such holder's particular circumstances. Certain
holders, including financial institutions, broker-dealers, tax-exempt entities
and insurance companies, may be subject to special treatment not described
below.
For purposes of this discussion, a "U.S. Holder" means a purchaser of
Securities from Selling Securityholders that is, for U.S. federal income tax
purposes, a citizen or resident of the United States, a corporation, partnership
or other entity (other than a trust) created or organized in or under the laws
of the United States or any political subdivision thereof, an estate whose
income is subject to U.S. federal income tax regardless of its source or a trust
if, in general, a court within the United States is able to exercise primary
supervision over its administration and one or more U.S. persons have authority
to control all of its substantial decisions. As used in this section, a non-U.S.
Holder is a purchaser of Securities from Selling Securityholders that is not a
U.S. Holder.
THE FEDERAL INCOME TAX CONSEQUENCES OF OWNING SECURITIES ARE COMPLEX. ALL
HOLDERS OF SECURITIES ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF
SECURITIES, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL AND FOREIGN
TAX LAWS.
U.S. Holders
Dividends. Dividends paid on Preferred Stock or on Common Stock
(whether in cash or in kind) should be taxable to a U.S. Holder as ordinary
income, to the extent paid out of the Company's current or accumulated earnings
and profits. Any amounts distributed in excess of such earnings and profits
should be treated first as a
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nontaxable return of capital that reduces the U.S. Holder's basis in the stock
to the extent thereof and then as capital gain from the sale or exchange of
property. Any such gain should be long-term capital gain if the U.S. Holder's
holding period for the stock was more than one year.
Subject to certain restrictions, dividends received by a corporate U.S.
Holder generally should be eligible for the 70% dividends-received-deduction,
provided the stock is held for more than 45 days (not counting days in which the
U.S. Holder's risk of loss is diminished) during the 90 day period beginning 45
days before the applicable ex-dividend date and various other conditions are
met. Special holding period requirements apply with respect to dividends on
Preferred Stock attributable to periods aggregating in excess of 366 days. The
aggregate dividends-received-deductions allowed may not exceed 70% of a
corporate U.S. Holder's taxable income (with certain adjustments). In addition,
the dividends-received-deduction is proportionately reduced to the extent that a
corporate U.S. Holder incurs indebtedness directly attributable to an investment
in the Preferred Stock or Common Stock. Special rules may apply to corporate
U.S. Holders upon the receipt of any "extraordinary dividends" with respect to
the Preferred Stock or Common Stock.
Sale. A U.S. Holder of Preferred Stock or Common Stock who sells or
otherwise disposes of such stock in a taxable transaction should recognize
capital gain or loss equal to the difference between the cash and the fair
market value of any property received on such sale or disposition and the U.S.
Holder's tax basis in such stock. Such gain or loss should be long term gain or
loss if the holding period for such stock was more than one year.
Redemption. A redemption by the Company of some or all of a U.S. Holder's
Preferred Stock or Common Stock should be treated as a dividend to the redeeming
U.S. Holder to the extent of the Company's current or accumulated earnings and
profits unless the redemption meets one of the tests under Section 302(b) of the
Code. If one of the tests under Section 302(b) of the Code is met, the
redemption should be treated as an exchange giving rise to capital gain or loss
as described above, except to the extent of declared but unpaid dividends. U.S.
Holders should consult their tax advisors as to the application of Section
302(b) of the Code to their particular circumstances.
Conversion of Preferred Stock. A U.S. Holder generally should not
recognize gain or loss upon the conversion of Preferred Stock into Common Stock
(except to the extent that any cash paid in lieu of a fractional share exceeds
the U.S. Holder's tax basis in the Preferred Stock allocable to such fractional
share). A U.S. Holder's tax basis in the Common Stock received upon the
conversion should be the same as the U.S. Holder's adjusted tax basis in the
Preferred Stock converted (reduced by the portion of such basis allocable to any
fractional shares for which the U.S. Holder receives a cash payment from the
Company). The holding period of Common Stock received in the conversion should
include the holding period of the Preferred Stock converted.
Adjustments to Conversion Price. Pursuant to Treasury Regulations
promulgated under Section 305 of the Code, a U.S. Holder of Preferred Stock may
be treated as having received a constructive distribution from the Company upon
an adjustment in the conversion price of the Preferred Stock if (i) as a result
of such adjustment, the proportionate interest of such U.S. Holder in the assets
or earnings and profits of the Company is increased and (ii) the adjustment is
not made pursuant to a bona fide, reasonable, anti-dilution formula. An
adjustment to compensate for certain taxable distributions with respect to the
Common Stock is not made pursuant to such a formula. Thus, under certain
circumstances, a decrease in the conversion price of the Preferred Stock may be
taxable to a holder of Preferred Stock as a dividend to the extent of the
current or accumulated earnings and profits of the Company. In addition, the
failure to adjust fully the conversion (or exercise) price of the Preferred
Stock (or the Exchange Warrants) to reflect distributions of stock dividends
with respect to the Common Stock may result in a taxable dividend to the holders
of Common Stock.
Non-U.S. Holders
Dividends. In general, dividends paid to a non-U.S. Holder of Preferred
Stock or Common Stock should be subject to U.S. federal income tax withholding
at a 30% rate unless such rate is reduced by an applicable income tax treaty.
Dividends received that are effectively connected with the conduct by the
non-U.S. Holder of a trade or business within the United States or, if a tax
treaty applies, attributable to a permanent establishment or a fixed base of
such non-U.S. Holder in the United States ("United States trade or business
income") generally should be
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subject to U.S. federal income tax at regular U.S. income tax rates, but
generally should not be subject to the 30% withholding tax if the non-U.S.
Holder files an appropriate form with the payer. Any U.S. trade or business
income received by a non-U.S. Holder that is a corporation may also, under
certain circumstances, be subject to a "branch profits tax" at a 30% rate, or
such lower rate as may be applicable under an income tax treaty.
Dividends paid to an address in a foreign country are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding tax discussed above and, under the current
interpretation of Treasury Regulations, for purposes of determining the
applicability of a tax treaty rate. Under new Treasury Regulations, however, for
payments made after December 31, 1999, a non-U.S. Holder who wishes to claim the
benefit of an applicable tax treaty rate would be required to satisfy applicable
certification and other requirements, which would include filing a form that
contains the non-U.S. Holder's name and address and an official statement by the
competent authority in the foreign country (as designated in the applicable tax
treaty) attesting to the non-U.S. Holder's status as a resident thereof. A
non-U.S. Holder of the Preferred Stock or Common Stock that is eligible for a
reduced rate of U.S. federal withholding tax pursuant to an income tax treaty
may obtain a refund of any excess amounts withheld by filing an appropriate
claim for refund with the Service.
Sale or Redemption. A non-U.S. Holder generally should not be subject to
U.S. federal withholding or income tax on any gain or income realized in
connection with the sale, exchange, redemption (other than a redemption that is
treated as a dividend under Section 302 of the Code, as discussed above) or
other disposition of Preferred Stock or Common Stock, unless (i) the gain is
U.S. trade or business income, (ii) the non-U.S. Holder is an individual who is
present in the United States for 183 days or more in the taxable year of the
disposition and certain other requirements are met or (iii) the non-U.S. Holder
is subject to tax pursuant to the provisions of U.S.tax law applicable to
certain U.S. expatriates.
Information Reporting and Backup Withholding
The Company will, where required, report to holders and to the Service
the amount of any dividends paid (and other reportable payments, if any) and the
amount of taxes withheld, if any, with respect to such payments.
A holder of Preferred Stock or Common Stock may, under certain
circumstances, be subject to "backup withholding" at the rate of 31% with
respect to dividends, the proceeds of a sale, exchange or redemption or cash
payments received in lieu of fractional shares of Common Stock upon conversion
of Preferred Stock, unless such holder (i) is a corporation or a non-U.S. Holder
or comes within certain other exempt categories and, when required, demonstrates
this fact or (ii) provides a correct taxpayer identification number, certifies
that such holder is not subject to backup withholding and otherwise complies
with applicable requirements of the backup withholding provisions. A holder who
does not, when required, provide a correct taxpayer identification number may be
subject to penalties imposed by the Service. Any amount withheld under these
rules will be creditable against the holder's federal income tax liability.
PLAN OF DISTRIBUTION
The Securities offered hereby may be sold from time to time by the
Selling Shareholders or their pledgees, donees, transferees or other successors
in interest. Such sales may be effected on NASD OTC Electronic Bulletin Board or
any national securities exchange or automated quotation system upon which the
Securities are then listed or traded, in negotiated transactions or otherwise,
at prices then prevailing or related to the then current market price, or at
negotiated prices. The Securities may be sold directly or through brokers or
dealers. The methods by which the sales may be sold include: (i) block trades in
which the broker or dealer so engaged will attempt to sell shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction; (ii) purchases by a broker or dealer as principal and resales by
such broker or dealer for its own account pursuant to this Prospectus; (iii)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; and (iv) privately negotiated transactions. In effecting sales,
brokers and dealers engaged by Selling Securityholders may arrange for other
brokers or dealers to participate. Brokers or dealers may receive commissions or
discounts
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from Selling Securityholders (or, if any such broker or dealer acts as agent for
the purchaser of such Securities, from such purchaser) in amounts to be
negotiated. Broker-dealers may agree with the Selling Securityholders to sell a
specified number of such Securities at a stipulated price per share, and, to the
extent such broker-dealer is unable to do so acting as agent for a Selling
Securityholder, to purchase as principal any unsold Securities at the price
required to fulfill the broker-dealer commitment to such Selling Securityholder.
Broker-dealers who acquire Securities as principal may thereafter resell such
Securities in transactions from time to time in transactions (which may involve
crosses and block transactions and sales to and through other broker-dealers,
including transactions of the nature described above) in the over-the-counter
market or otherwise at prices and on terms then prevailing at the time of sale,
at prices related to the then-current market price or in negotiated transactions
and, in connection with such resales, may pay to or receive from the purchasers
of such Securities Commissions as described above.
The Selling Securityholders and any broker-dealers participating in the
distributions of the Securities may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any profit on the sale of
Securities by the Selling Securityholders and any commissions or discounts given
to any such broker-dealer may be deemed to be underwriting commissions or
discounts under the Securities Act. In addition, any of the Securities covered
by this Prospectus which qualify for sale pursuant to Rule 144 may be sold under
Rule 144 rather than pursuant to this Prospectus.
The Company has agreed to indemnify certain of the Selling
Securityholders, each underwriter of certain of the Securities, and each person
controlling certain of the Selling Securityholders within the meaning of Section
15 of the Securities Act, against certain liabilities in connection with the
offer and sale of the Securities, including liabilities under the Securities
Act, and to contribute to payments such persons may be required to make in
respect thereof. Certain of the Selling Securityholders have agreed to indemnify
in certain circumstances the Company against certain liabilities in connection
with the offer and sale of the Securities, including liabilities under the
Securities Act, and to contribute to payments such persons may be required to
make in respect thereof.
CERTAIN RESTRICTIONS ON TRANSFER
Sales of the Securities offered hereby are restricted by certain
contractual obligations entered into by the purchasers of those Securities in
the different transactions whereby such Securities were purchased. (The summary
of such restrictions that is set forth below does not purport to be complete and
is qualified in its entirety by reference to the agreements pursuant to which
such restrictions are created, copies of which have been filed as exhibits to
the Registration Statement.) Such restrictions are as follows:
Regulation S Offering. Selling Securityholders who participated
in the Regulation S Offering agreed that for a period of nine (9)
months after , 1998 (the effective date of this Registration
Statement, the "Effective Date") they shall not, without the
prior written consent of the Placement Agent, offer, sell,
contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, 75% of the Common Stock they
purchased in the Regulation S Offering or 75% of the Common Stock
issuable upon exercise of the Class B Warrants they purchased in
the Regulation S Offering; provided, however, that following each
three month period after the Effective Date, an amount of such
securities equal to 25% of the total amount purchased by each
purchaser in the Regulation S Offering shall become exempt from
the lock-up provisions contained in this sentence. Thus, 25% of
such securities are not subject to any such restriction, and
another 25% of such securities may be sold free from such
restrictions on each of ________, 1998, _________, 1998, and
________, 1999. All such securities are also subject to certain
restrictions on transfer related to Regulation S, which
restrictions terminated on the Effective Date.
Furthermore, each such Selling Securityholder has agreed
that such Selling Securityholder shall not, until the last date
upon which such Selling Securityholder holds any of the
securities such Selling Securityholder purchased in the
Regulation S Offering, including the Common Stock and Class B
Warrants that made up the Units purchased in such offering and
the Common Stock
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issuable upon exercise of those Class B Warrants, (i) sell
"short" or "short against the box" (as those terms are generally
understood) any equity security of the Company or (ii) otherwise
engage in any transaction which involves hedging of such Selling
Securityholder's position in the securities of the Company.
Regulation D Offering. Selling Securityholders who purchased
Common Stock and Class C Warrants in the Regulation D Offering
agreed that the Common Stock they purchased and the Common Stock
underlying the Class C Warrants they purchased (collectively, the
"Lock-up Securities") will be subject to a "lock-up" for a period
ending on May 5, 1999 (the one-year anniversary of the closing
date of such offering), except to the extent such securities are
sold or transferred pursuant to the Registration Statement. In
addition, such purchasers agreed that for a period of nine (9)
months after , 1998 (the effective date of the Registration
Statement, the "Effective Date") they shall not, offer, sell,
contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, 75% of the Common Stock they
purchased in the Regulation D Offering or 75% of the Common Stock
issuable upon exercise of the Class C Warrants they purchased in
the Regulation D Offering; provided, however that following each
three month period after the Effective Date, an amount of such
Securities equal to 25% of the total amount purchased by each
purchaser in the Regulation D Offering shall become exempt from
the lock-up provisions contained in this sentence. Thus, 25% of
such securities are not subject to any such restriction, and
another 25% of such securities may be sold free from such
restrictions on each of ________, 1998, ________, 1998, and
________, 1999.
Furthermore, each such Selling Securityholder has agreed
that such Selling Securityholder shall not, until the last date
upon which such Selling Securityholder holds any of the
securities such Selling Securityholder purchased in the Creditor
Offering, including the Common Stock and Class C Warrants that
made up the Units purchased in such offering and the Common Stock
issuable upon exercise of those Class C Warrants, (i) sell
"short" or "short against the box" (as those terms are generally
understood) any equity security of the Company or (ii) otherwise
engage in any transaction which involves hedging of such Selling
Securityholder's position in the securities of the Company.
Convertible Preferred Stockholders. Pursuant to Section 4(a) of
the Certificate of Designations, the Convertible Preferred Stock
is not convertible into Common Stock until May 5, 1999 (twelve
months after the Closing Date). The shares of Common Stock
underlying such Convertible Preferred Stock that are being
registered on the Registration Statement will therefore not be
issued before that date. Moreover, pursuant to Section 11 of the
Certificate of Designation, without the prior written consent of
the Company, so long as any 9% Notes remain outstanding under
that certain Indenture, dated as of March 26, 1997 (as amended,
the "Indenture") in respect of the 9% Notes, no holder of the
Convertible Preferred Stock shall be entitled to exercise any of
the conversion rights set forth in the Certificate of
Designation, to the extent that such conversion could, in the
Company's reasonable judgment, either alone or in conjunction
with other issuances or holdings of capital stock, warrants or
convertible securities of the Company, result in a Change of
Control (as defined in the Indenture).
Pursuant to the terms of the Class A Warrant Agreement and
the Class D Warrant Agreement, the Class A and Class D Warrants
may not be exercised until May 5, 1999 (twelve months after the
Closing Date). Furthermore, each Selling Securityholder that
received shares of Convertible Preferred Stock and Class D
Warrants in the Regulation D Preferred Offering, has agreed that
such Selling Securityholder shall not, until the last date upon
which such Selling Securityholder holds any of the securities
such Selling Securityholder purchased in the Regulation D
Preferred Offering, including the Convertible Preferred Stock and
Class D Warrants that made up the Units purchased in such
offering and the Common Stock issuable upon conversion of the
Convertible Preferred Stock or upon exercise of those Class D
Warrants, (i) sell "short" or "short against the box" (as those
terms are generally understood) any equity security of the
Company or
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(ii) otherwise engage in any transaction which involves hedging
of such Selling Securityholder's position in the securities of
the Company; provided, however, that such Selling Shareholder may
have an aggregate short position covering any number of shares of
the Company's Common Stock fewer than the quotient of (a) the
product of (x) the number of shares of Convertible Preferred
Stock held by such Selling Securityholder multiplied by (y) the
Dividend Base Amount (as defined in the Certificate of
Designation), divided by (b) the conversion price of the
Convertible Preferred Stock as in effect from time to time.
Furthermore, each Selling Securityholder that received
Convertible Preferred Stock and Class A Warrants in the Exchange
Offer has agreed that such Selling Securityholder shall not, (i)
sell "short" or "short against the box" (as those terms are
generally understood) any security of the Company or (ii)
otherwise engage in any transaction which involves hedging of
such Selling Securityholder's position in the securities of the
Company; provided, however, that such Selling Shareholder may
have an aggregate short position covering any number of shares of
the Company's Common Stock fewer than the quotient of (a) the
product of (x) the number of shares of Convertible Preferred
Stock held by such Selling Securityholder multiplied by (y) the
Dividend Base Amount (as defined in the Certificate of
Designation), divided by (b) the conversion price of the
Convertible Preferred Stock as in effect from time to time.
Forum Warrants. Forum has agreed that it will not exercise the
1997 Forum Warrant before May 5, 1999 (one year after the Closing
Date).
Furthermore, Forum has agreed that it shall not (i) sell
"short" or "short against the box" (as those terms are generally
understood) any security of the Company or (ii) otherwise engage
in any transaction, except for a transaction approved by the
Company in writing, that involves hedging Forum's position in any
security of the Company; provided, however, that at any time that
the 1997 Forum Warrant is exercisable, Forum may have an
aggregate short position covering any number of shares of Common
Stock fewer than the number of shares of Common Stock for which
such Warrant is exercisable at such time.
Pillar Warrants. There are no lock-up provisions or restrictions
on transfer of the Pillar Warrants.
LEGAL MATTERS
The validity of the Securities offered by this Prospectus will be passed
upon for the Company by Kramer Levin Naftalis & Frankel LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997 and for each of the three years ended December 31, 1997 included
in this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report included herein, which report includes a paragraph stating that there is
substantial doubt about the Company's ability to continue as a going concern,
and are included herein in reliance on the authority of said firm as experts
giving said reports.
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<TABLE>
<CAPTION>
HYBRIDON, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Page
Report of Independent Public Accountants ........................................................................................F-2
Consolidated Balance Sheets as of December 31, 1996, December 31,
1997 and September 30, 1998 (Unaudited)..........................................................................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995,
December 31, 1996 and December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (Unaudited) and for the period from inception
(May 25, 1989) to September 30, 1998 (Unaudited) ................................................................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from
inception (May 25, 1989) to September 30,
1998 (Unaudited).................................................................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
December 31, 1996 and December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (Unaudited) and for the period from inception (May 25, 1989)
to September 30, 1998 (Unaudited) ..............................................................................................F-11
Notes to Financial Statements ..................................................................................................F-12
</TABLE>
F - 1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hybridon, Inc.:
We have audited the accompanying consolidated balance sheets of Hybridon, Inc.
(a Delaware corporation in the development stage) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hybridon, Inc. and subsidiaries
as of December 31, 1996 and 1997 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred significant losses which it has funded through the issuance of equity
securities, debt issuances and through research and development collaborations
and licensing agreements. As of December 31, 1997, the Company had a working
capital deficit of $24.1 million and a stockholders' deficit of $46.0 million.
Subsequent to December 31, 1997, the Company has raised $4.8 million through the
equity financing discussed in Note 1, as of March 30, 1998. There is substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. See Note 1 for management's plans.
Boston, Massachusetts ARTHUR ANDERSEN LLP
March 18, 1998 (except with respect to
the matters discussed in Note 1 and
Note 6(a) as to which the date is
March 30, 1998)
F - 2
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
HYBRIDON, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 12,633,742 $ 2,202,202 $ 882,875
SHORT-TERM INVESTMENTS 3,785,146 - -
ACCOUNTS RECEIVABLE 573,896 529,702 825,668
ACCOUNTS RECEIVABLE RELATED TO REAL ESTATE
LIMITED PARTNERSHIP - - 5,450,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS 1,545,324 1,005,825 448,372
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 18,538,108 3,737,729 7,606,865
PROPERTY AND EQUIPMENT AT COST:
LEASEHOLD IMPROVEMENTS 9,257,516 16,027,734 11,422,505
LABORATORY EQUIPMENT 5,884,861 6,770,402 7,721,239
EQUIPMENT UNDER CAPITAL LEASES 2,904,688 4,879,190 1,460,326
OFFICE EQUIPMENT 1,496,639 1,947,818 1,466,259
FURNITURE AND FIXTURES 499,957 645,264 809,449
CONSTRUCTION IN PROGRESS 2,193,400 45,409 45,409
- ------------------------------------------------------------------------------------------------------------------------------------
22,237,061 30,315,817 22,925,187
LESS - ACCUMULATED DEPRECIATION AND AMORTIZATION 6,596,293 11,085,013 13,972,070
- ------------------------------------------------------------------------------------------------------------------------------------
15,640,768 19,230,804 8,953,117
OTHER ASSETS:
RESTRICTED CASH 437,714 3,050,982 659,618
NOTES RECEIVABLE FROM OFFICERS 317,978 247,250 255,800
DEFERRED FINANCING COSTS AND OTHER ASSETS 1,152,034 3,354,767 923,162
INVESTMENT IN REAL ESTATE PARTNERSHIP 5,450,000 5,450,000 -
- ------------------------------------------------------------------------------------------------------------------------------------
7,357,726 12,102,999 1,838,580
------------- ------------- ------------
$ 41,536,602 $ 35,071,532 $18,398,562
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS $ 1,308,511 $ 7,868,474 $ 3,030,981
ACCOUNTS PAYABLE 4,064,419 8,051,817 4,387,353
ACCRUED EXPENSES 4,190,766 11,917,298 3,003,934
DEFERRED REVENUE 86,250 - -
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 9,649,946 27,837,589 10,422,268
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION 9,031,852 3,282,123 573,017
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE - 50,000,000 1,306,000
- ------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS (NOTES 10 AND 15 and 19(m))
(STOCKHOLDERS' EQUITY (DEFICIT):
PREFERRED STOCK, $.01 PAR VALUE -
AUTHORIZED - 5,000,000 SHARES
ISSUED AND OUTSTANDING - NONE - - -
SERIES A CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE -
AUTHORIZED - 5,000,000 SHARES
ISSUED AND OUTSTANDING - 624,790 SHARES AT
SEPTEMBER 30, 1998 - - 6,248
COMMON STOCK, $.001 PAR VALUE -
AUTHORIZED - 100,000,000 SHARES
ISSUED AND OUTSTANDING - 5,029,315, 5,059,650
AND 15,254,825 SHARES AT DECEMBER 31, 1996 AND 1997
AND SEPTEMBER 30, 1998, RESPECTIVELY 5,029 5,060 15,255
ADDITIONAL PAID-IN CAPITAL 173,247,476 173,695,698 240,301,274
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (149,193,775) (218,655,101) (233,294,707)
DEFERRED COMPENSATION (1,203,926) (1,093,837) (930,793)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 22,854,804 (46,048,180) 6,097,277
------------ ------------- ----------
$ 41,536,602 $ 35,071,532 $18,398,562
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
HYBRIDON, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
CUMULATIVE FROM
INCEPTION
(MAY 25, 1989)
NINE MONTHS ENDED TO
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Research and development $ 1,186,124 $ 1,419,389 $ 945,000 $ 980,150 $ 949,915 $6,449,178
Product and service revenue - 1,080,175 1,876,862 1,231,226 2,353,435 5,310,472
Royalty income - 62,321 48,000 33,218 - 110,321
Interest income 218,749 1,446,762 1,079,122 898,160 106,457 3,327,196
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,404,873 4,008,647 3,948,984 3,142,754 3,409,807 15,197,167
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 29,684,707 39,390,525 46,827,915 37,784,718 17,180,927 182,640,742
General and administrative 6,094,085 11,346,670 11,026,748 9,011,879 5,217,864 53,034,480
Interest 172,757 124,052 4,535,647 3,223,473 2,880,307 9,026,337
Restructuring - - 11,020,000 3,100,000 - 11,020,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 35,951,549 50,861,247 73,410,310 53,120,070 25,279,098 255,721,559
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from operations (34,546,676) (46,852,600) (69,461,326) (49,977,316) (21,869,291) (240,524,392)
- ------------------------------------------------------------------------------------------------------------------------------------
Extraordinary Item:
Gain on conversion of 9%
convertible subordinated
notes payable - - - - 8,876,685 8,876,685
- ------------------------------------------------------------------------------------------------------------------------------------
Net Loss $(34,546,676) $(46,852,600) $(69,461,326) $(49,977,316) $(12,992,606) $(231,647,707)
- ------------------------------------------------------------------------------------------------------------------------------------
Accretion of preferred stock dividends - - - - (1,647,000) (1,647,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss to common stockholders $(34,546,676) $(46,852,600) $(69,461,326) $(49,977,316) $(14,639,606) $(233,294,707)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per
common share from:
Net loss from operations including
accretion of preferred stock $(94.70) $(10.24) $(13.76) $(9.90) $(2.21)
Extraordinary gain - - - - 0.83
-------------------------------------- ---------------------
NET LOSS $(94.70) $(10.24) $(13.76) $(9.90) $(1.37)
====================================== =====================
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER COMMON SHARE 364,810 4,575,555 5,049,840 5,046,806 10,648,116
====================================== =======================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
HYBRIDON, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
NUMBER OF NUMBER OF $.01 PAR NUMBER $.001 PAR
SHARES $.01 PAR VALUE SHARES VALUE OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
Initial Issuance of Common Stock - $ - - $ - $ 133,700 $ 134
Issuance of Series A convertible preferred stock, net
of cash issuance costs of $18,000 175,000 1,750 - - - -
Issuance of Series B convertible preferred stock, net
of cash issuance costs of $11,900 129,629 1,296 - - - -
Issuance of common stock - - - - 133,460 133
Net loss - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1990 304,629 3,046 - - 267,160 267
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $23,197 104,000 1,040 - - - -
Repurchase of common stock - - - - (52,500) (53)
Deferred compensation related to restricted stock awards - - - - - -
Amortization of deferred compensation - - - - - -
Compensation expense related to stock option grants - - - - - -
Net loss - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991 408,629 4,086 - - 214,660 214
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $20,291 184,000 1,840 - - - -
Issuance of common stock related to restricted stock
awards - - - - 100,053 100
Issuance of common stock related to the exercise of
stock options - - - - 34,615 35
Issuance of warrants - - - - - -
Deferred compensation related to stock options and
restricted stock awards - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 592,629 5,926 - - 349,328 349
Issuance of Series D convertible preferred stock in
exchange for convertible promissory notes payable,
including accrued interest, net of cash issuance
costs of $113,955 378,351 3,784 - - - -
Issuance of Series E convertible preferred stock, net
of cash issuance costs of $61,251 275,862 2,759 - - - -
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $2,097,604 407,800 4,078 - - - -
Issuance of common stock related to the exercise of
stock options - - - - 8,725 9
Reduction in deferred compensation due to stock
option termination prior to vesting - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F - 5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
HYBRIDON, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE STOCKHOLDERS'
PAID-IN DEVELOPMENT DEFERRED EQUITY
CAPITAL STAGE COMPENSATION (DEFICIT)
<S> <C> <C> <C>
Initial Issuance of Common Stock $ 535 $ - $ - $ 669
Issuance of Series A convertible preferred stock, net
of cash issuance costs of $18,000 855,250 - - 857,000
Issuance of Series B convertible preferred stock, net
of cash issuance costs of $11,900 1,736,801 - - 1,738,097
Issuance of common stock 534 - - 667
Net loss - (1,110,381) - (1,110,381)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1990 2,593,120 (1,110,381) - 1,486,052
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $23,197 2,575,763 - - 2,576,803
Repurchase of common stock (210) - - (263)
Deferred compensation related to restricted stock awards 2,328,764 - (2,328,764) -
Amortization of deferred compensation - - 727,738 727,738
Compensation expense related to stock option grants 669,433 - - 669,433
Net loss - (6,648,899) - (6,648,899)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991 8,166,870 (7,759,280) (1,601,026) (1,189,136)
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $20,291 4,577,869 - - 4,579,709
Issuance of common stock related to restricted stock awards 122,644 - - 122,744
Issuance of common stock related to the exercise of
stock options 3,303 - - 3,338
Issuance of warrants 2,776,130 - - 2,776,130
Deferred compensation related to stock options and
restricted stock awards 2,249,428 - (2,249,428) -
Amortization of deferred compensation - - 1,332,864 1,332,864
Net loss - (14,694,693) - (14,694,693)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 17,896,244 (22,453,973) (2,517,590) (7,069,044)
Issuance of Series D convertible preferred stock in exchange
for convertible promissory notes payable, including accrued
interest, net of cash issuance costs of $113,955 9,596,767 - - 9,600,551
Issuance of Series E convertible preferred stock, net
of cash issuance costs of $61,251 9,935,988 - - 9,938,747
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $2,097,604 18,288,318 - - 18,292,396
Issuance of common stock related to the exercise of
stock options 26,679 - - 26,688
Reduction in deferred compensation due to stock
option termination prior to vesting (290,287) - 290,287 -
Amortization of deferred compensation - - 1,124,839 1,124,839
Net loss - (19,736,365) - (19,736,365)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
HYBRIDON, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
NUMBER OF NUMBER OF
SHARES $.01 PAR VALUE SHARES $.01 PAR VALUE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 1,654,642 $ 16,547 -- $ --
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $79,677 116,900 1,169 -- --
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $1,006,841 318,302 3,183 -- --
Issuance of common stock related to the exercise of
stock options -- -- -- --
Cancellation of warrants -- -- -- --
Reduction in deferred compensation due to stock
option termination prior to vesting -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,089,844 20,899 -- --
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $2,409,926 1,106,591 11,066 -- --
Issuance of common stock related to the exercise of
stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 3,196,435 31,965 -- --
Issuance of common stock related to initial public
offering, net of issuance costs of $5,268,756 -- -- -- --
Conversion of convertible preferred stock to common
stock (3,196,435) (31,965) -- --
Issuance of common stock related to the exercise of
stock options -- -- -- --
Issuance of common stock related to the exercise of
warrants -- -- -- --
Deferred compensation related to grants of common
stock options to nonemployees -- -- -- --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- -- -- --
Net loss -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- -- --
Issuance of common stock related to the exercise of
stock options -- -- -- --
Issuance of common stock related to the exercise of
warrants -- -- -- --
Issuance of common stock for services rendered -- -- -- --
Deferred compensation related to grants of common
stock options to nonemployees -- -- -- --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- -- -- --
Net loss -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
NUMBER OF $.001 PAR
SHARES VALUE
Balance, December 31, 1993 358,053 $ 358
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $79,677 -- --
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $1,006,841 -- --
Issuance of common stock related to the exercise of
stock options 4,800 5
Cancellation of warrants -- --
Reduction in deferred compensation due to stock
option termination prior to vesting -- --
Amortization of deferred compensation -- --
Net loss -- --
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1994 362,853 363
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $2,409,926 -- --
Issuance of common stock related to the exercise of
stock options 5,880 6
Amortization of deferred compensation -- --
Net loss -- --
- -----------------------------------------------------------------------------------------------
Balance December 31, 1995 368,733 369
Issuance of common stock related to initial public
offering, net of issuance costs of $5,268,756 1,150,000 1,150
Conversion of convertible preferred stock to common
stock 3,371,330 3,371
Issuance of common stock related to the exercise of
stock options 57,740 58
Issuance of common stock related to the exercise of
warrants 81,512 81
Deferred compensation related to grants of common
stock options to nonemployees -- --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- --
Net loss -- --
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,029,315 5,029
Issuance of common stock related to the exercise of
stock options 25,005 26
Issuance of common stock related to the exercise of
warrants 330 --
Issuance of common stock for services rendered 5,000 5
Deferred compensation related to grants of common
stock options to nonemployees -- --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- --
Net loss -- --
- -----------------------------------------------------------------------------------------------
</TABLE>
F - 7
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
HYBRIDON, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT
CAPITAL STAGE
------- -----
<S> <C> <C>
Balance, December 31, 1993 55,453,709 (42,190,338)
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $79,677 5,764,154 --
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $1,006,841 11,722,072 --
Issuance of common stock related to the exercise of stock options 13,395 --
Cancellation of warrants (68,000) --
Reduction in deferred compensation due to stock
option termination prior to vesting (14,062) --
Amortization of deferred compensation -- --
Net loss -- (25,604,161)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 72,871,268 (67,794,499)
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $2,409,926 41,842,632 --
Issuance of common stock related to the exercise of stock options 41,944 --
Amortization of deferred compensation -- --
Net loss -- (34,546,676)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 114,755,394 (102,341,175)
Issuance of common stock related to initial public
offering, net of issuance costs of $5,268,756 52,230,094 --
Conversion of convertible preferred stock to common stock 28,594 --
Issuance of common stock related to the exercise of stock options 1,089,618 --
Issuance of common stock related to the exercise of warrants 3,176,660 --
Deferred compensation related to grants of common
stock options to nonemployees 1,967,116 --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- --
Net loss -- (46,852,600)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 173,247,476 (149,193,775)
Issuance of common stock related to the exercise of stock options 86,300 --
Issuance of common stock related to the exercise of warrants 9,075 --
Issuance of common stock for services rendered 146,869 --
Deferred compensation related to grants of common
stock options to nonemployees 205,978 --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees --
Net loss -- (69,461,326)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL
STOCKHOLDERS'
DEFERRED EQUITY
COMPENSATION (DEFICIT)
------------ ---------
Balance, December 31, 1993 (1,102,464) 12,177,812
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $79,677 -- 5,765,323
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $1,006,841 -- 11,725,255
Issuance of common stock related to the exercise of stock options -- 13,400
Cancellation of warrants -- (68,000)
Reduction in deferred compensation due to stock
option termination prior to vesting 14,062 --
Amortization of deferred compensation 764,228 764,228
Net loss -- (25,604,161)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 (324,174) 4,773,857
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $2,409,926 -- 41,853,698
Issuance of common stock related to the exercise of stock options -- 41,500
Amortization of deferred compensation 324,174 324,174
Net loss -- (34,546,676)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- 12,446,553
Issuance of common stock related to initial public
offering, net of issuance costs of $5,268,756 -- 52,231,244
Conversion of convertible preferred stock to common stock -- -
Issuance of common stock related to the exercise of stock options 1,089,676
Issuance of common stock related to the exercise of warrants -- 3,176,741
Deferred compensation related to grants of common
stock options to nonemployees -- --
---------------
Amortization of deferred compensation relating to
grants of common stock options to nonemployees 763,190 763,190
Net loss -- (46,852,600)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 (1,203,926) 22,854,804
Issuance of common stock related to the exercise of stock options -- 86,326
Issuance of common stock related to the exercise of warrants -- 9,075
Issuance of common stock for services rendered -- 146,874
Deferred compensation related to grants of common
stock options to nonemployees (205,978) --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees 316,067 316,067
Net loss -- (69,461,326)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F - 8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Balance, December 31, 1997 5,059,650
Issuance of Series A Convertible Preferred Stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable -- -- 510,505 5,105
Issuance of common stock and attached warrants in
exchange for conversion of accounts payable and
other lease obligations -- -- -- --
Issuance of Series A Convertible Preferred Stock, net of
issuance costs of $1,761,656 -- -- 114,285 1,143
Issuance of common stock, net issuance costs of
$1,069,970 -- -- -- --
Issuance of common stock to placement agents -- -- -- --
Accretion of Series A convertible preferred stock dividends -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
-------- -------- ----------- ---------
Balance, September 30, 1998 (Unaudited)
-- $ -- 624,790 $6,248
======== ======== ======= ======
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 5,060
Issuance of Series A Convertible Preferred Stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable -- --
Issuance of common stock and attached warrants in
exchange for conversion of accounts payable and
other lease obligations 3,217,154 3,217
Issuance of Series A Convertible Preferred Stock, net of
issuance costs of $1,761,656 - --
Issuance of common stock, net issuance costs of
$1,069,970 6,380,322 6,380
Issuance of common stock to placement agents 597,699 598
Accretion of Series A convertible preferred stock dividends --
Amortization of deferred compensation -- --
Net loss -- --
------------ ----------
Balance, September 30, 1998 (Unaudited)
15,254,825 $15,255
========== =======
- -----------------------------------------------------------------------------------------------
F - 9
<PAGE>
<S> <C> <C> <C> <C>
Balance, December 31, 1997 173,695,698 (218,655,101) (1,093,837) (46,048,180)
Issuance of Series A Convertible Preferred Stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable 39,924,887 -- -- 39,929,992
Issuance of common stock and attached warrants in
exchange for conversion of accounts payable and
other lease obligations
Issuance of Series A Convertible Preferred Stock, net of 5,931,341 -- -- 5,934,538
issuance costs of $1,761,565
6,237,252 -- -- 6,238,395
Issuance of common stock, net of issuance of cost of $1,069,970 11,670,296 -- -- 11,676,676
Issuance of common stock to placement agents 1,194,800 -- -- 1,195,398
Accretion of Series A convertible preferred stock dividends 1,687,000 (1,647,000) -- -
Amortization of deferred compensation -- -- 163,044 168,044
Net loss -- 12,992,600) - (12,992,606
------------ ------------ ---------- ------------
Balance, September 30, 1998 (Unaudited) $240,301,274 $233,294,707) ($930,793)) $ 6,097,277
============ ============ =========== ============
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F - 10
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
HYBRIDON, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
Years Ended December 31,
1995 1996 1997
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (34,546,676) $ (46,852,600) $ (69,461,326)
Adjustments to reconcile net loss to net
cash used in operating activities -
Extraordinary gain on conversion of
9% convertible subordinated
notes payable -- -- --
Depreciation and amortization 2,023,553 2,393,751 4,488,719
Loss on disposal of fixed assets -- -- --
Issuance of common stock for services
rendered -- -- 146,874
Compensation on grant of stock
options, warrants and restricted stock 324,174 763,190 316,067
Amortization of discount on convertible -- -- --
promissory notes payable
Amortization of deferred financing costs -- -- 479,737
Write-down of assets related to
restructuring -- -- 600,000
Noncash interest on convertible
promissory notes payable -- -- --
Changes in assets and liabilities -
Accounts receivable -- (573,896) 44,194
Prepaid expenses and other current assets (769,562) (593,797) 539,499
Notes receivable from officers 8,446 (9,845) 70,728
Accounts payable and accrued expenses 483,585 2,747,122 11,713,930
Deferred revenue -- -- (86,250)
Amounts payable to related parties (80,351) (12,500) --
------------ ------------ ------------
Net cash used in operating
activities (32,556,831) (42,138,575) (51,147,828)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in short-term investments -- (3,785,146) 3,785,146
Purchases of property and equipment (4,889,624) (8,902,989) (7,509,755)
Proceeds from sale of fixed assets -- -- --
Investment in real estate partnership (1,698,448) (3,751,552) --
----------- ------------- -----------
Net cash (used in) provided
by investing activities (6,588,072) (16,439,687) (3,724,609)
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred stock 41,853,698 -- --
Proceeds from issuance of common stock
related to stock options and restricted
stock grants 41,500 1,089,676 86,326
Net proceeds from issuance of common stock -- 52,231,244 --
Repurchase of common stock -- -- --
Proceeds from notes payable -- 7,500,000 --
Proceeds from issuance of convertible
promissory notes payable -- -- 50,000,000
Proceeds from long-term debt -- -- --
Proceeds from issuance of common stock
related to stock warrants -- 3,176,741 9,075
Proceeds from sale/leaseback of fixed assets -- 1,722,333 1,205,502
Payments on long-term debt and capital Leases (537,977) (446,163) (1,564,268)
(Increase) decrease in restricted cash and
other assets (44,912) 401,990 (2,474,948)
(Increase) decrease in deferred financing costs (278,927) 251,921 (2,820,790)
------------- ---------- ------------
Net cash provided by
financing activities 41,033,382 65,927,742 44,440,897
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
Equivalents 1,888,479 7,349,480 (10,431,540)
Cash and cash equivalents, beginning of Period 3,395,783 5,284,262 12,633,742
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,284,262 $ 12,633,742 $ 2,202,202
- ------------------------------------------------------------------------------------------------------------
Cumulative from
Inception (May 25,
Nine Months Ended 1989)
September 30, to
September 30,
1997 1998 1998
- -------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (49,977,316) $ (12,992,606) $ (231,647,707)
Adjustments to reconcile net loss to net
cash used in operating activities -
Extraordinary gain on conversion of
9% convertible subordinated
notes payable -- (8,876,685) (8,876,685)
Depreciation and amortization 4,081,720 2,419,269 13,605,723
Loss on disposal of fixed assets -- 424,675 424,675
Issuance of common stock for services
rendered 146,875 1,195,398 1,342,273
Compensation on grant of stock
options, warrants and restricted stock 261,519 163,044 8,286,842
Amortization of discount on convertible -- -- 690,157
promissory notes payable
Amortization of deferred financing costs 358,904 240,611 937,080
Write-down of assets related to
restructuring 331,000 6,600,000 7,200,000
Noncash interest on convertible
promissory notes payable -- -- 260,799
Changes in assets and liabilities -
Accounts receivable 276,545 (295,966) (825,668)
Prepaid expenses and other current assets (541,718) 557,703 (448,122)
Notes receivable from officers 55,952 (8,550) (255,800)
Accounts payable and accrued expenses 3,349,962 (6,871,326) 13,097,789
Deferred revenue (86,250) -- --
Amounts payable to related parties -- -- (200,000)
------------ ------------ -------------
Net cash used in operating
activities (41,742,807) (17,444,433) (196,708,644)
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in short-term investments (5,113,569) -- --
Purchases of property and equipment (6,645,439) (340,507) (29,652,972)
Proceeds from sale of fixed assets -- 460,000 460,000
Investment in real estate partnership -- -- (5,450,000)
------------ ------- -------------
Net cash (used in) provided
by investing activities (11,759,008) 119,493 (34,642,972)
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred stock -- 6,804,562 103,388,716
Proceeds from issuance of common stock
related to stock options and restricted
stock grants 83,327 -- 1,260,928
Net proceeds from issuance of common stock -- 6,876,676 59,232,000
Repurchase of common stock -- -- (263)
Proceeds from notes payable -- -- 9,450,000
Proceeds from issuance of convertible
promissory notes payable 50,000,000 4,233,832 63,425,576
Proceeds from long-term debt -- -- 662,107
Proceeds from issuance of common stock
related to stock warrants 9,075 -- 3,185,816
Proceeds from sale/leaseback of fixed assets 1,165,236 -- 4,001,018
Payments on long-term debt and capital Leases (1,169,656) (4,236,693) (7,602,573)
(Increase) decrease in restricted cash and
other assets (626,985) 2,327,186 (1,811,945)
(Increase) decrease in deferred financing costs (2,699,957) -- (3,256,939)
----------- ---------- ------------
Net cash provided by
financing activities 46,761,040 16,005,563 231,934,441
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
Equivalents (6,740,775) (1,319,377) 882,825
Cash and cash equivalents, beginning of Period 2,633,742 2,202,202 --
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,892,967 $ 882,825 $ 882,825
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F - 11
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
(1) ORGANIZATION
Hybridon, Inc. (the Company) was incorporated in the State of
Delaware on May 25, 1989. The Company is engaged in the discovery and
development of novel genetic medicines based primarily on antisense technology.
The Company is in the development stage. Since inception, the Company
has devoted substantially all of its efforts toward product research and
development and raising capital. Management anticipates that substantially all
future revenues will be derived from the sale of proprietary biopharmaceutical
products under development or to be developed in the future, and custom contract
manufacturing of synthetic DNA products and reagent products (by the Hybridon
Specialty Products Division (HSPD)), as well as from research and development
revenues and fees and royalties derived from licensing of the Company's
technology. Accordingly, although the Company has begun to generate revenues
from its custom contract manufacturing business, the Company is dependent on the
proceeds from possible future sales of equity securities, debt financings and
research and development collaborations in order to fund future operations.
On December 3, 1997, the Company was delisted from the Nasdaq Stock
Market, Inc. (NASDAQ) because the Company was not in compliance with the
continued listing requirements of the NASDAQ National Market. The Company is
currently trading on the NASDAQ OTC Bulletin Board.
As of December 31, 1997, the Company had a working capital deficit of
$24.1 million and a stockholders' deficit of $46.0 million. Although the Company
has raised approximately $4.8 million in gross proceeds from the 1998 Unit
Financing, subsequent to December 31, 1997, the Company continues to have very
limited cash resources and substantial obligations to lenders. The Company's
ability to continue operations in 1998 depends on its success in raising new
funds. There is substantial doubt concerning the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. If the
Company is unable to obtain a substantial amount of additional funding in April
1998, it will be required to terminate its operations of seek relief under
applicable bankruptcy law by the end of April 1998. Management's plans to obtain
additional financing are described below. (See Note 19 for subsequent financings
and status of operations).
On January 22, 1998, the Company commenced a private placement (the
1998 Unit Financing) of units consisting of notes (the 1998 Unit Notes) and
warrants to issue common stock. The 1998 Unit Financing is being offered through
Pillar Investments Ltd., an entity with which two directors of the Company are
affiliated and which is a significant shareholder of the Company (the placement
agent), as the Company's placement agent, on a best effort basis. As
consideration for these services, Pillar Investments Ltd., will receive fees
consisting of 9% of the gross proceeds of the 1998 Unit Financing, a
non-accountable expense allowance equal to 4% of the gross proceeds of the 1998
Unit Financing and warrants to purchase common stock. The 1998 Unit Notes bear
interest at a rate of 14% per annum; provided that if the 1998 Unit Financing is
terminated before the Mandatory Conversion Event (as defined below) has
occurred, the interest rate shall increase to 18% per annum. The Company is
required to make semi-annual interest payments on the outstanding principal
balance of the 1998 Unit Notes on April 1 and October 1 of each year during
which such 1998 Unit Notes are outstanding, with the first such payment being
due on April 1, 1998, which interest payment obligation may be satisfied through
the issuance of additional 1998 Unit Notes valued at their principal amount. The
Company plans to satisfy the interest payment due April 1, 1998 by issuing 1998
Unit Notes. The outstanding principal balance of the 1998 Unit Notes will become
due on December 31, 2007. The 1998 Unit Notes are secured by substantially all
of the Company's assets, subject to the lien on the Company's assets held by the
Bank, are subordinate to the Company's existing indebtedness to the Bank, are
senior to approximately 80% of the 9.0% Convertible Subordinated Notes (the 9%
Notes), see Note 6(d) to the extent provided in a subordination agreement
executed by certain holders of the 9% Notes and, except as otherwise provided in
this sentence, rank on a parity with the 9% Notes.
The 1998 Unit Notes are not convertible at the option of the holder,
but will automatically convert into a new issue of Series B Convertible
Preferred Stock of the Company if the aggregate net proceeds from the 1998 Unit
Financing exceeds $20.0 million and the holders of at least 80% of the aggregate
principal amount of the 9% Notes have exchanged such Notes described in the
following paragraph (such two conditions, the Mandatory Conversion
Event). The Series B Convertible Preferred Stock underlying the 1998 Unit Notes
would rank as to liquidation junior to the Series A Convertible Preferred Stock
issuable in the Exchange Offer.
F - 12
<PAGE>
Each Unit includes warrants to purchase 15% (or, in certain
circumstances, 20%) of the number of shares of common stock underlying the
Series B Convertible Preferred Stock underlying the 1998 Unit Notes included in
such Unit and may include additional warrants in certain circumstances described
below. The Series B Convertible Preferred Stock, if issued, and warrants are
convertible into, and exercisable for, common stock at a conversion or exercise
price equal to the lowest of (i) 80% of the average closing bid price of the
Company's common stock for the 30 consecutive trading days immediately preceding
any closing in the 1998 Unit Financing or (ii) 80% of the average closing bid
price of the Company's common stock for the five consecutive trading dates
immediately preceding any closing in the 1998 Unit Financing; provided, however,
that if on the termination date of the 1998 Unit Financing the Company has not
received at least $20,000,000 in net proceeds from the 1998 Unit Financing or
the holders of less than $40,000,000 in principal amount of the 9% Notes accept
the Exchange Offer, holders of Units will be entitled to receive additional
warrants to purchase, at an exercise price of $.001 per share, a number of
shares of common stock equal to 100% of the common stock then issuable upon
conversion of the Series B Convertible Preferred Stock then issuable upon
conversion of the 1998 Unit Notes purchased by such investors, in which case the
1998 Unit Notes will not be convertible into equity securities. If the market
price of the common stock is less than 125% of the conversion price of the
Series B Convertible Preferred Stock will be further adjusted (the Series B
Reset) to the greater of (a) the market price of the common stock at such time
divided by 1.25 and (b) 50% of the conversion price of the Series B Convertible
Preferred Stock at such time, and holders of the Series B Convertible Preferred
Stock will also be entitled to receive additional warrants to purchase a number
of shares of common stock equal to 50% of the additional number of shares of
common stock issuable upon conversion of the Series B Convertible Preferred
Stock following the Series B Reset. As of March 30, 1998, the Company has
received $4.8 million of gross proceeds from the 1998 Unit Financing.
On February 6, 1998, the Company commenced an Exchange Offer to the
holders of the 9% Notes to exchange the 9% Notes for Series A Convertible
Preferred Stock and certain warrants of the Company. In the Exchange Offer, each
$1,000 of principal amount and accrued but unpaid interest on the 9% Notes may
be exchanged, upon the terms and subject to the conditions set forth in the
Exchange Offer documents, for 10 shares of Series A Convertible Preferred Stock,
stated value $100 per share, and warrants to purchase such a number of shares of
common stock of the Company equal to 15% of the number shares of common stock
into which such Series A Convertible Preferred Stock would be convertible at
212.5% of the initial conversion price of the Series B Convertible Preferred
Stock (the Stated Price). Such Series A Convertible Preferred Stock would have a
liquidation preference of $100 per share plus accrued but unpaid dividends and
would bear a dividend of 6.5% per annum, payable on April 1 and October 1 of
each year in cash or additional Series A Preferred Stock , at the option of the
Company. The conversion price would be $35 per share of common stock through
April 1, 2000 and the Stated Price thereafter, which conversion price would be
reset upon the occurrence of any Series B Reset to 212.5% of the reset Series B
conversion price. Exchange holders of the 9% Notes will be granted the right to
designate the nominee to the Board of Directors of the Company (the Designated
Director). As part of the Exchange Offer, approximately 82% of the 9% Note
holders have consented as of March 30, 1998 to defer the interest payment due on
April 1, 1998 to October 1, 1998. There can be no assurance that the Exchange
Offer will be successful.
On March 30, 1998, the Company amended its Exchange Offer to provide
that the terms of the Series A Convertible Preferred Stock and warrants issuable
in the Exchange Offer would be revised as described below if the following
conditions (the Equity Conditions) had been met no later than the date the
Company accepts for exchange in the Exchange Offer at least $40 million
principal amount of the 9% Notes: (i) the Company consummates an offering, the
size of which is acceptable to the Designated Director, of units consisting of
common stock priced (the Common Stock Offering Price ) at the greater of $2.00
and 85% of the Market Price (as defined below) of the common and warrants to
purchase a number of shares of common stock equal to 25% of such Common Stock
sold at an exercise price equal to 120% of the Common Stock Offering Price (the
120% Exercise Price); (ii) the Company consummates an offering, with gross
proceeds of at least $10 million, of Units consisting of shares of preferred
stock having the same terms as the preferred stock issuable in the amended
Exchange Offer, and warrants with the same 25% coverage as the warrants issuable
in the amended Exchange Offer, as described in the following paragraph, but at
the 120% Exercise Price (which shares are expected to be sold at a 30% discount
from stated value); and (iii) all 1998 Note Units previously sold and accrued
interest thereon are exchanged for common stock and warrants to purchase a
number of shares of common stock equal to 30% of the common stock issued in such
1998 Note Unit exchange, such common stock and warrants to be valued, and to
have the terms, described in clause (i) above. Market Price means the average
reported closing bid price of the common stock for the five consecutive trading
days immediately preceding the closing date.
The amended Exchange Offer provides that if the Equity Conditions are
met, (a) the conversion terms of the Series A Convertible Preferred will be
revised as follows: (i) the conversion price will be 212.5% of the Common Stock
Offering Price described above; (ii) such Series A Convertible Preferred Stock
will not be
F - 13
<PAGE>
convertible for one year following the closing; and (iii) such Series A
Convertible Preferred Stock will have no conversion price reset mechanism and
(b) the warrant coverage will increase from 15% to 25% of the number of shares
of common stock underlying the Series A Convertible Preferred Stock (such
warrants being exercisable at 212.5% of the Common Stock Offering Price) and
will not have any conversion price reset provisions.
See Note 19 for subsequent events relevant to the 1998 Unit Financing
and the Exchange Offer.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates in the Preparation of Financial Statements
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
disclosure 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.
(b) Net Loss per Common Share
Effective December 31, 1997 the Company adopted SFAS No 128, Earnings
per Share. Under SFAS No. 128, basic net loss per common share is computed using
the weighted average number of shares of common stock outstanding during the
period. Diluted net loss per common share is the same as basic net loss per
common share as the effects of the Company's potential common stock equivalents
are antidilutive. The Company has applied the provisions of SFAS No. 128
retroactively to all periods presented. In accordance with Staff Accounting
Bulletin (SAB) No. 98, the Company has determined that there were no nominal
issuances of capital in the period prior to the Company's initial public
offering (IPO). Antidilutive securities which consist of stock options and
warrants that are not included in diluted net loss per common share were
2,441,436, 2,595,496, and 2,404,561 for 1995, 1996, and 1997, respectively.
Calculations of net loss per common share and potential common shares are as
follows:
<TABLE>
<CAPTION>
December 31, 1995 1996 1997
----------------------------------------------------------
<S> <C> <C>
Net loss $ (34,546,676) $(46,852,600) $ (69,461,326)
============== ============= ============
Weighted average
shares outstanding 364,810 4,575,555 5,049,840
======== ========== ==========
Basic and diluted
net loss per share $ (94.70) $ (10.24) $ (13.76)
========== ============ ==========
</TABLE>
(c) Principles of Consolidation
The accompanying consolidated financial statements include the
results of the Company and its subsidiaries, Hybridon S.A. (Europe), a French
corporation and Hybridon Canada, Inc. (an inactive majority-owned subsidiary).
The consolidated financial statements also reflect the Company's 49% interest in
MethylGene, Inc. (MethylGene), a Canadian corporation which is accounted for
under the equity method (see Note 13 and 19(i). All material intercompany
balances and transactions have been eliminated in consolidation.
(d) Cash Equivalents and ShortTerm Investments
The Company applies SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Under SFAS No. 115, debt securities that the
Company has the positive intent and ability to hold to maturity are reported at
amortized cost and are classified as held-to-maturity securities. These
securities include cash equivalents, short term investments and restricted cash.
At December 31, 1996 and 1997, the Company has
F - 14
<PAGE>
classified all investments as held-to-maturity. The Company considers all highly
liquid investments with maturities of three months or less when purchased to be
cash equivalents. Short-term investments mature within one year of the balance
sheet date. Cash and cash equivalents, short-term investments and restricted
cash at December 31, 1996 and 1997, consisted of the following (at amortized
cost, which approximates fair market value):
<TABLE>
<CAPTION>
December 31, 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents -
Cash and money market funds $10,144,367 $1,702,272
Corporate bond - 499,930
U.S. government securities 2,489,375 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents $12,633,742 $2,202,202
========== =========
Short-term investments -
U.S. government securities $ 3,785,146 $ -
=========== =============
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted cash (Note 5) -
Certificates of deposit $ 437,714 $2,016,364
Savings account - 1,034,618
---------- ----------
$ 437,714 $3,050,982
=========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
(e) Depreciation and Amortization
Depreciation and amortization are computed using the straight-line
method based on the estimated useful lives of the related assets as follows:
Asset Classification Estimated Useful Life
- ------------------------------------------------------------------------------------------------------------------------------------
Leasehold improvements Life of lease
Laboratory equipment 5 years
Equipment under capital lease 5 years
Office equipment 3-5 years
Furniture and fixtures 5 years
(f) Accrued Expenses
Accrued expenses on the accompanying consolidated balance sheets
consist of the following:
December 31, 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring $ - $ 8,316,148
Interest - 1,125,000
Payroll and related costs 1,593,451 742,452
Outside research and clinical costs 1,381,124 1,231,818
Professional fees 390,440 150,000
Other 825,751 351,880
------------- -------------
$4,190,766 $11,917,298
</TABLE>
(g) Revenue Recognition
The Company has recorded research and development revenue under the
consulting and research agreements discussed in Notes 7 and 8. Revenue is
recognized as earned on a straightline basis over the term of the agreement,
which approximates when work is performed and costs are incurred. Revenues from
product sales are recognized when the products are shipped. Product revenue
during 1996 and 1997 represents revenues from the sale of oligonucleotides
manufactured on a custom contract basis by HSPD.
(h) Research and Development Expenses
The Company charges research and development expenses to operations
as incurred.
(i) Patent Costs
The Company charges patent expenses to operations as incurred.
F - 15
<PAGE>
(j) Reclassifications
Certain amounts in the prior periods consolidated financial
statements have been reclassified to conform with the current periods
presentation.
(k) New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure
of all components of comprehensive income on an annual basis and interim basis.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. For all periods presented in the accompanying consolidated
statements of operations, comprehensive income (loss) did not differ from
reported net loss.
In July 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and interim
basis for each reportable segment of an enterprise. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. Unless impracticable,
companies would be required to restate prior period information upon adoption.
The Company does not expect this accounting pronouncement to materially effect
its financial statements.
(3) RESTRUCTURING
Beginning in July 1997, the Company implemented a restructuring plan
to reduce expenditures on a phased basis over the balance of 1997 in an effort
to conserve its cash resources. As part of this restructuring plan, in addition
to terminating the clinical development of GEM 91, the Company's first
generation antisense drug for the treatment of AIDS and HIV infection, the
Company reduced or suspended selected programs unrelated to its core advanced
chemistry antisense drug development programs, including its ribozyme program.
In connection with the reduction in programs, the Company has accrued
termination fees related to research contracts and has incurred restructuring
charges related to programs that have been suspended or cancelled. As part of
the restructuring, all outside testing, public relations, travel and
entertainment and consulting arrangements were reviewed and where appropriate
the terms were renegotiated, contracts cancelled or the terms were significantly
reduced. In addition, the Company terminated the employment of 84 employees at
its Cambridge and Milford, Massachusetts facilities since July of 1997 and
substantially reduced operations at its Paris, France office and terminated 10
employees at that location in August 1997.
In connection with the restructuring the Company entered into two
different subleasing arrangements. The Company has sub-leased one facility in
Cambridge, Massachusetts and a portion of its headquarters located at 620
Memorial Drive, Cambridge, Massachusetts. The Company incurred expenses relating
to these sub-leases for broker fees and renovation expenses incurred in
preparing the Memorial Drive space for the new tenant. In addition, the Company
has accrued the estimated lease loss of subleasing 620 Memorial Drive. The
Company has accrued the remaining lease costs of its Paris, France office prior
to terminating the lease effective March 31, 1998.
See Notes 19(e and g) for subsequent events.
F - 16
<PAGE>
The following are the significant components of the charge for
restructuring:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Estimated loss on facility leases $ 6,930,000
Employee severance, benefits and related costs 2,579,000
Writedown of assets to net realizable value 600,000
Termination costs of certain development programs 911,000
------------
$11,020,000
============
</TABLE>
(4) NOTES RECEIVABLE FROM OFFICERS
At December 31, 1996 and 1997, the Company had notes receivable,
including accrued interest, from officers of $317,978 and $247,250,
respectively. As of December 31, 1997 one note remains outstanding with an
interest rate of 6.0% per annum and matures in April 2001.
(5) RESTRICTED CASH
Restricted cash on the accompanying consolidated balance sheets
consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capital lease obligations (Note 6(c)) $437,714 $ 257,822
Note payable to a bank (Note 6(a)) - 1,758,542
Foreign bank account - 1,034,618
$437,714 $3,050,982
======== ==========
</TABLE>
In November 1997, the Company was notified by Bank Fur
Vermogensanlagen Und Handel AG (BVH) that the Federal Banking Supervisory Office
(BAKred) in Germany had imposed a moratorium, effective as of August 19, 1997 on
BVH and had closed BVH for business. Accordingly, the Company classified its
deposit with BVH as restricted cash. The Company has contacted BVH and is
actively pursuing the release of its deposit or sale of the deposit to a third
party, including possibly an entity affiliated with a director of the Company.
The Company expects to recover substantially all of its deposit in BVH through
such means. However, the timing of recovery may be over a period of up to one
year. There can be no assurance that the Company will be able to recover all of
its deposit or that the Company will not be required to write off a portion of
the $1,034,618. Through March 18, 1998, the Company had recovered $250,000 of
the BVH deposit. See Note 19(d) and (e) for subsequent events.
(6) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(a) Note Payable to a Bank
In December 1996, the Company entered into a five year $7,500,000
note payable with a bank. The note contains certain financial covenants that
require the Company to maintain minimum tangible net worth and minimum liquidity
and prohibits the payment of dividends. On January 15, 1998 and March 30, 1998,
the Company received waivers from the bank which included the following terms:
(i) a waiver of any event of default that would otherwise arise as a result of
the 1998 Unit Financing discussed in Note 1 and Note 19; (ii) a requirement that
the Company deposit at least 50% of its unencumbered cash with the bank,
including proceeds raised from the 1998 Unit Financing discussed in Note 1;
(iii) in an event of default, a requirement that all net cash proceeds of any
dispositions of assets of the Company permitted by the bank, as defined, shall
be applied as a prepayment against the note (if the Company is not in default,
only 50% of the net proceeds will be applied against the note); (iv) a waiver of
covenants of non-compliance through March 31, 1998 and (v) an increase in the
interest rate to the bank's prime rate plus 5%. Prior to the amendment the note
bore interest at either the bank's prime rate plus 1% or LIBOR plus 3.5% (9.5%
at December 31, 1997), at the Company's election. The Company has secured the
obligations under the note with a lien on all of its assets, including
intellectual property. The note is payable in 59 equal installments of $62,500
commencing on February 1, 1997 with a balloon payment of the then remaining
outstanding balance, due on January 1, 2002. Prior to the amendments discussed
above, if at specified times, the Company's minimum liquidity is less than
$15,000,000, $10,000,000 or $5,000,000, the Company is required to pledge cash
collateral to the bank equal to 25%, 50% or 100%, respectively, of the then
outstanding balance under the note, pursuant to a cash pledge agreement. During
1997, the Company's minimum liquidity had fallen below
F - 17
<PAGE>
$15,000,000 and the Company deposited $1,758,542 as collateral under the cash
pledge agreement. The Company has classified the outstanding balance of
$6,873,332 at December 31, 1997, as a current liability in the accompanying
balance sheet as it does not currently have the financing to remain in
compliance with the financial covenants. Also, in connection with the note, the
Company issued 5 year warrants to purchase 13,000 shares of common stock at an
exercise price of $34.49 per share. These warrants are fully exercisable at
December 31,1997. See Note 19(h) for subsequent events.
(b) Note Payable to Landlord
In December 1994, the Company issued a $750,000 promissory note to
its landlord to fund specific construction costs associated with the development
of its manufacturing plant in Milford, Massachusetts. The promissory note bears
interest at 13% per annum and is to be paid in equal monthly installments of
principal and interest over the remainder of the 10-year lease term.
(c) Capital Lease Obligations
The Company has entered into various capital leases for equipment. In
1994, the Company received $1,073,000 as a part of a sale/leaseback transaction
with a leasing company. These lease amounts are subject to interest at an
effective rate of 4.29% and are being paid in equal installments of
approximately $24,000 over 48 months through June 1998. In connection with this
lease agreement, the Company is required to maintain a certain amount of cash in
escrow as collateral. At December 31, 1997, the Company had $257,822 in escrow
related to the agreement.
In December 1996, the Company sold certain laboratory equipment to a
leasing company, at its original cost of $1,722,333. In connection with this
transaction, the Company entered into a capital lease to lease the equipment
from this leasing company for 48 monthly payments ranging from $36,000 to
$50,000. The sale of the equipment resulted in a gain of $291,960 which has been
offset against the cost of the asset in the accompanying consolidated balance
sheet and is being amortized over the life of the lease. In June 1997, the
Company sold additional laboratory equipment to the leasing company, at its
original cost of $1,205,502. In connection with this transaction, the Company
entered into a capital lease to lease the equipment from this leasing company
for 24 monthly payments ranging from $24,000 to $34,000. The sale of the
equipment resulted in a gain of $127,378, which has been offset against the cost
of the asset in the accompanying consolidated balance sheet and is being
amortized over the life of the lease.
In January 1997, the Company entered into a five year $1,169,000
lease with a leasing company to finance certain furniture and fixtures in the
Cambridge facility. The lease bears interest at a rate of 13.7% and is payable
in 60 equal monthly installments of approximately $26,000 through February 2002.
Future minimum payments due under various notes payable and capital
lease obligations, excluding the 9% Notes due April 1, 2004, are as follows at
December 31, 1997:
<TABLE>
<CAPTION>
Years Ended December 31, Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $ 8,206,684
1999 1,404,777
2000 1,324,184
2001 601,038
2002 136,000
Thereafter 195,881
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt and capital lease obligations 11,868,564
Less - amount representing interest 717,967
- ------------------------------------------------------------------------------------------------------------------------------------
Principal obligations 11,150,597
Less - current portion 7,868,474
- ------------------------------------------------------------------------------------------------------------------------------------
$ 3,282,123
===========
</TABLE>
F - 18
<PAGE>
(d) 9.0% Convertible Subordinated Notes
On April 2, 1997, the Company issued $50,000,000 of the 9% Notes.
Under the terms of the 9% Notes, the Company must make semiannual interest
payments on the outstanding principal balance through the maturity date of April
1, 2004. If the 9% Notes are converted prior to April 1, 2000, the Noteholders
are entitled to receive accrued interest from the date of the most recent
interest payment through the conversion date. The 9% Notes are subordinate to
substantially all of the Company's existing indebtedness. The 9% Notes are
subordinate to substantially all of the Company's existing indebtedness. The 9%
Notes are convertible at any time prior to the maturity date at a conversion
price equal to $35.0625 per share, subject to adjustment under certain
circumstances, as defined.
Beginning April 1, 2000, the Company may redeem the 9% Notes at its
option for a 4.5% premium over the original issuance price, provided that from
April 1, 2000 to March 31, 2001, the 9% Notes may not be redeemed unless the
closing price of the common stock equals or exceeds 150% of the conversion price
for a period of at least 20 out of 30 consecutive trading days and the 9% Notes
redeemed within 60 days after such trading period. The premium decreases by 1.5%
each year through March 31, 2003. Upon a change of control of the Company, as
defined, the Company will be required to offer to repurchase the 9% Notes at
150% of the original issuance price. See Note 19(f) for subsequent events.
(7) G.D. SEARLE & CO. AGREEMENT
In January 1996, the Company and G.D. Searle & Co. (Searle) entered
into a collaboration relating to research and development of therapeutic
antisense compounds directed at up to eight molecular targets in the field of
inflammation/immunomodulation (the Searle Field).
Pursuant to the collaboration, the parties are conducting research
and development relating to a compound directed at a molecular target in the
Searle Field designated by Searle. In this project, Searle is funding certain
research and development efforts by the Company, and each of Searle and the
Company have committed certain of its own personnel to the collaboration. The
initial phase of research and development activities relating to the initial
target will be conducted through the earlier of (i) the achievement of certain
product candidate milestones or (ii) 36 months after commencement of the
collaboration, subject to early termination by Searle (although in any event
Searle is required to pay 18 months of research and development funding). The
parties may extend the initial collaboration by mutual agreement, including
agreement as to additional research funding by Searle.
In addition, Searle has the right, at its option, to designate up to
six additional molecular targets in the Searle Field (the Additional Targets)
for collaborative research and development with the Company on terms
substantially consistent with the terms of the collaboration applicable to the
initial molecular target. This right is exercisable by Searle with respect to
each of the Additional Targets upon the payment by Searle of certain research
payments (beyond the projectspecific payments relating to the particular
Additional Target) and the purchase of additional common stock from the Company
by Searle (at the then fair market value). The aggregate amount to be paid by
Searle for such research payments and equity investment in order to designate
each of the Additional Targets is $10,000,000 per Additional Target. In the
event that Searle designates all of the Additional Targets, the aggregate amount
to be paid by Searle for research payments will be $24,000,000, and the
aggregate amount to be paid by Searle in equity investment will be $36,000,000.
If Searle has not designated all of the Additional Targets by the time it
advances the product candidate for the initial molecular target to certain
stages of preclinical development, Searle will be required to purchase an
additional $10,000,000 of common stock (at the then fair market value) on
specified dates in order to maintain its right to designate any of the
Additional Targets that it has not yet designated. The payment for any such
common stock will be creditable against the equity investment portion of the
payments to be made by Searle with respect to the designation of any of the
Additional Targets that Searle has not yet designated.
Searle has exclusive rights to commercialize any products resulting
from the collaboration. If Searle determines, in its sole discretion, to
commercialize a product, Searle will fund and perform preclinical tests and
clinical trials of the product candidate and will be responsible for regulatory
approvals for and marketing of the product. In certain instances and for
specified periods of time, the Company has agreed to perform research and
development work in the Searle Field exclusively with Searle. In addition, as to
each product candidate, the Company will be entitled to milestone payments from
Searle totaling up to an aggregate of $10,000,000 upon the achievement of
certain development benchmarks. The Company also will be entitled to royalties
from net sales of products resulting from the collaboration. Subject to
satisfying certain conditions relating to its manufacturing
F - 19
<PAGE>
capacities and capabilities, the Company will retain manufacturing rights, and
Searle will be required to purchase its requirements of products from the
Company on an exclusive basis at specified transfer prices. Upon a change in
control of the Company, Searle would have the right to terminate the Company's
manufacturing rights, although the royalty payable would be increased in such
event.
Under the collaboration, in the event that Searle designates (and
makes the required payments and equity investments for) all of the Additional
Targets or in certain other instances relating to Hybridon's failure to satisfy
certain requirements relating to its manufacturing capacities and capabilities,
Searle will have the right, exercisable in its sole discretion, to require
Hybridon to form a joint venture with Searle for the development of products in
the Searle Field (other than products relating to molecular targets that have
already been designated by Searle) to which each party will contribute
$50,000,000 in cash, although the Company's cash contribution would be reduced
by the value of the technology and other rights contributed by the Company to
the joint venture. The Company and Searle would each own 50% of the joint
venture, although Searle's ownership interest in the joint venture would
increase based upon a formula to up to a maximum of 75% if the joint venture is
established in certain instances relating to the Company's failure to satisfy
certain requirements relating to its manufacturing capacities and capabilities.
During 1996 and 1997, the Company earned $400,000 and $600,000,
respectively, in research and development revenues from Searle. Under the
collaboration, Searle also purchased 200,000 shares of common stock in the
Company's initial public offering of common stock at the initial public offering
price as discussed in Note 14(b).
(8) F. HOFFMANN-LA ROCHE LTD. COLLABORATION
In December 1992, the Company and Roche entered into a collaboration
involving the application of Hybridon's antisense oligonucleotide chemistry to
the development of compounds for the treatment of hepatitis B, hepatitis C and
human papilloma virus.
Under this collaboration, Roche funded research and development
efforts relating to the collaboration and committed personnel of its own to the
collaboration. In 1995, Roche notified the Company that it had selected an
antisense oligonucleotide directed at hepatitis C as a lead compound for further
development and made a milestone payment to the Company in connection with such
designation. In the third quarter of 1996, Roche notified the Company that it
had selected an antisense oligonucleotide directed at human papilloma virus as a
lead compound for further development, and in the fourth quarter of 1996, made a
milestone payment to the Company in connection with such designation. At such
time, Roche also notified the Company that Roche had elected not to continue the
hepatitis B program under the research and development collaboration. In
addition, Roche notified the Company that Roche was exercising its option to
terminate the entire research and development phase of the collaboration as of
March 31, 1997. On September 3, 1997, Roche notified the Company that it had
decided not to pursue further collaboration with the Company and was terminating
the collaboration effective February 28, 1998.
The Company has recorded $1,186,124, $1,019,389 and $345,000 of
research and development revenue related to this collaboration in 1995, 1996 and
1997, respectively.
In conjunction with the Roche Collaboration, Roche purchased 163,678
shares of common stock for $6,000,000. Roche was also issued five year warrants
for the purchase of 110,345 shares of common stock at an initial price of $57.50
per share, such exercise price increases commencing on August 12, 1995 on an
annual basis at a compound rate of 25%. The warrants expired on February 12,
1998.
(9) MEDTRONIC, INC. COLLABORATIVE STUDY AGREEMENT
In May 1994, the Company and Medtronic, Inc. (Medtronic) entered into
a collaborative study agreement (the Medtronic Agreement) involving the
development of antisense compounds for the treatment of Alzheimer's disease and
a drug delivery system to deliver such compounds into the central nervous
system. The Company will be responsible for the development of, and hold all
rights to, any drug developed pursuant to this collaboration, and Medtronic will
be responsible for the development of, and hold all rights to, any delivery
system developed pursuant to this collaboration. The parties may extend this
collaboration by mutual agreement to other neurodegenerative disease targets.
The research and development to be conducted is determined and supervised by a
committee
F - 20
<PAGE>
comprised of an equal number of designees of the Company and Medtronic. As part
of the Medtronic Agreement, Medtronic purchased 131,667 shares of common stock
for $5,000,000.
(10) LICENSING AGREEMENT
The Company has entered into a licensing agreement with the Worcester
Foundation for Biomedical Research, Inc., which merged in 1997 into the
University of Massachusetts Medical Center (the Foundation License), under which
the Company has received exclusive licenses to technology in certain patents and
patent applications. The Company is required to make royalty payments based on
future sales of products employing the technology or falling under claims of a
patent, as well as a specified percentage of sublicense income received related
to the licensed technology. Additionally, the Company is required to pay an
annual maintenance fee through the life of the patents.
(11) PHARMACIA BIOTECH, INC. AGREEMENT
In December 1994, the Company and Pharmacia Biotech, Inc. (Pharmacia)
entered into a collaboration involving the design and development of a
largescale oligonucleotide synthesis machine. Following completion of the
machine, the collaboration expired in December 1996, and Pharmacia retained the
right to sell the machine to third parties, subject to an obligation to pay the
Company royalties on such third party sales. During 1996 and 1997, the Company
has received $62,321 and $48,000, respectively, of royalty income related to
such third party sales.
(12) PERKIN-ELMER CORPORATION SUPPLY AGREEMENT
In September 1996 the Company and the Applied Biosystems Division of
Perkin-Elmer signed a four year sales and supply agreement under which
Perkin-Elmer agreed to refer potential customers to HSPD for the manufacture of
custom oligonucleotides and the Company agreed that amidites for the manufacture
of these oligonucleotides would be purchased from Perkin-Elmer and a percentage
of the sales price would be paid to Perkin-Elmer. In addition, Perkin-Elmer
licensed to the Company its oligonucleotide synthesis patents.
(13) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and certain institutional investors
formed a Quebec company, MethylGene, Inc. (MethylGene) to develop and market
certain compounds and procedures to be agreed upon by the Company and
MethylGene.
The Company has granted to MethylGene exclusive worldwide licenses
and sublicenses in respect of certain technology relating to the methylgene
fields. These fields are defined as (i) antisense compounds to inhibit DNA
methyltransferase for the treatment of cancers, (ii) other methods of inhibiting
DNA methyltransferase for the treatment of any indications, and (iii) antisense
compounds to inhibit a second molecular target other than DNA methyltransferase
for the treatment of cancers, to be agreed upon by the Company and MethylGene.
In December 1997, the Company and MethylGene expanded the methylgene fields to
include (a) antisense compounds to inhibit DNA methyltransferase for any
indication and (b) antisense compounds to inhibit a second and third molecular
target for any indications, as may be selected by MethylGene, so long as such
molecular targets are not already targeted by the Company. In addition, the
Company and MethylGene have entered into a supply agreement pursuant to which
MethylGene is obligated to purchase from the Company all required formulated
bulk oligonucleotides at specified transfer prices.
The Company acquired a 49% interest in MethylGene for approximately
$734,000, and the Canadian investors acquired a 51% interest in MethylGene for a
total of approximately $5,500,000 (the Institutional Investors). The
Institutional Investors have the right to exchange (the MethylGene Exchange) all
(but not less than all) of their shares of stock in MethylGene for an aggregate
of 100,000 shares of Hybridon common stock (subject to adjustment for stock
splits, stock dividends and the like). This option is exercisable only during a
90-day period commencing on the earlier of the date five years after the closing
of the Institutional Investors' investment in MethylGene or the date on which
MethylGene ceases operations. This option terminates sooner if MethylGene raises
certain additional amounts of equity or debt financing or if MethylGene enters
into a corporate collaboration
F - 21
<PAGE>
that meets certain requirements. Subsequent to December 31, 1997, MethylGene
raised additional proceeds from outside investors that decreased the Company's
interest to 30%, which did not terminate the MethylGene Exchange available to
the Institutional Investors. The Company is accounting for its investment in
MethylGene under the equity method and, due to the existence of the investors
exchange rights, the Company has recorded, up to its original investment, 100%
of MethylGene's losses in the accompanying consolidated statement of operations.
See Note 19(i) for subsequent events.
(14) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Common Stock
The Company has 100,000,000 authorized shares of common stock, $.001
par value, of which 5,059,650 and 15,254,825 shares were issued and outstanding
at December 31, 1997 and September 30, 1998, respectively.
(b) Initial Public Offering
On February 2, 1996, the Company completed its initial public
offering of 1,150,000 shares of common stock at $50.00 per share. The sale of
common stock resulted in net proceeds to the Company of approximately
$52,231,000 after deducting expenses related to the offering.
(c) Reverse Stock Split
On December 10, 1997, the Board of Directors declared a one-for-five
reverse split of its common stock. Share quantities and related per share
amounts have been retroactively restated to reflect the stock split.
(d) Warrants
The Company has the following exercisable warrants outstanding for
the purchase of common stock at December 31, 1997:
<TABLE>
<CAPTION>
Exercise Price
Expiration Date Shares Per Share
---------- ---------
<S> <C> <C>
February 12, 1998 110,345 $112.30
March 31, 1998 - October 25, 2000 953,936 50.00
February 28, 2000 20,000 37.50
December 31, 2001 13,000 34.49
April 2, 2002 71,301 35.06
----------- -----
Average per share exercise price 1,168,582 $54.59
========= ======
</TABLE>
As a component of the sale of preferred stock in 1994 and 1995, the
Company issued to the investors in such offering warrants for the purchase of
585,425 shares of common stock at $40.00 to $50.00 per share. Warrants to
purchase 331,382 shares of common stock at an exercise price of $50.00 per share
expired on March 31, 1998, and the remaining warrants for the purchase of
254,043 shares of common stock at an exercise price of $40.00 per share expired
on October 25, 1997.
Five year warrants to purchase 368,620 shares of common stock at
$50.00 per share were issued in 1994 and 1995 as a component of the compensation
for services of several placement agents of the Company's convertible preferred
stock. Of these warrants, 304,335 were issued to a company that is controlled by
two directors of the Company (see Note 15(a)). The remaining 64,285 warrants
were issued to various other companies that acted as placement agents.
(e) Stock Options
In 1990 and 1995, the Company established the 1990 Stock Option Plan
(the 1990 Option Plan) and the 1995 Stock Option Plan (the 1995 Option Plan),
respectively, which provide for the grant of incentive stock options and
nonqualified stock options. Options granted under these plans vest over various
periods and expire no later than
F - 22
<PAGE>
10 years from the date of grant. However, under the 1990 Option Plan in the
event of a change in control (as defined in the 1990 Plan), the exercise dates
of all options then outstanding shall be accelerated in full and any
restrictions on exercising outstanding options issued pursuant to the 1990
Option Plan shall terminate. In October 1995, the Company terminated the
issuance of additional options under the 1990 Option Plan. As of December 31,
1997 options to purchase a total of 604,863 shares of common stock remained
outstanding under the 1990 Option Plan.
A total of 700,000 shares of common stock may be issued upon the
exercise of options granted under the 1995 Option Plan. The maximum number of
shares with respect to which options may be granted to any employee under the
1995 Option Plan shall not exceed 500,000 shares of common stock during any
calendar year. The Compensation Committee of the Board of Directors has the
authority to select the employees to whom options are granted and determine the
terms of each option, including (i) the number of shares of common stock subject
to the option; (ii) when the option becomes exercisable; (iii) the option
exercise price, which, in the case of incentive stock options, must be at least
100% (110% in the case of incentive stock options granted to a stockholder
owning in excess of 10% of the Company's common stock) of the fair market value
of the common stock as of the date of grant; and (iv) the duration of the option
(which, in the case of incentive stock options, may not exceed 10 years). As of
December 31, 1997, options to purchase a total of 534,914 shares of common stock
remained outstanding under the 1995 Option Plan.
In October 1995, the Company adopted the 1995 Director Stock Option
Plan (the Director Plan). A total of 50,000 shares of common stock may be issued
upon the exercise of options granted under the Director Plan. Under the terms of
the Director Plan, options to purchase 1,000 shares of common stock were granted
to eligible directors upon the closing of the Company's initial public offering
at the fair market value of the common stock on the date of the closing.
Thereafter, options to purchase 1,000 shares of common stock will be granted to
each eligible director on May 1 of each year commencing in 1997. All options
will vest on the first anniversary of the date of grant or, in the case of
annual options, on April 30 of each year with respect to options granted in the
previous year. As of December 31, 1997, options to purchase a total of 14,000
shares of common stock remained outstanding under the Director Plan.
In May 1997, the Company adopted the 1997 Stock Option Plan (the 1997
Option Plan), which provides for the grant of incentive and nonqualified stock
options. A total of 600,000 shares of common stock may be issued upon the
exercise of options granted to any employee under the 1997 Option Plan. The
maximum number of shares with respect to which options may be granted to any
employee under the 1997 Option Plan shall not exceed 500,000 shares of common
stock during any calendar year. The Compensation Committee of the Board of
Directors has the authority to select the employees to whom options are granted
and determine the terms of each option, including (i) the number of shares of
common stock subject to the option; (ii) when the option becomes exercisable;
(iii) the option exercise price, which, in the case of incentive stock options,
must be at least 100% (110% in the case of incentive stock) of the fair market
value of the common stock as of the date of grant; and (iv) the duration of the
option (which, in the case of incentive stock options, may not exceed ten
years). As of December 31, 1997, options to purchase a total of 36,720 shares of
common stock remained outstanding under the 1997 Option Plan.
F - 23
<PAGE>
All stock option activity since inception is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number Exercise Price Average
of Shares Per Share Per Share
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Options granted 66,940 $ .01 $ .01
Options exercised (33,460) .01 .01
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1990 33,480 .01 .01
Options granted 1,700 .01 .01
Options terminated (540) .01 .01
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1991 34,640 .01 .01
Options granted 192,540 1.25 - 25.00 9.90
Options exercised (34,615) .01 - 5.00 .10
Options terminated (4,865) 2.50 - 5.00 2.80
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1992 187,700 .01 - 25.00 10.05
Options granted 288,108 17.50 - 62.50 41.90
Options exercised (8,725) .01 - 5.00 3.05
Options terminated (25,275) .01 - 50.00 3.95
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1993 441,808 .01 - 62.50 31.30
Options granted 134,500 25.00 - 35.00 26.65
Options exercised (4,800) .01 - 5.00 2.80
Options terminated (15,000) .01 - 25.00 19.15
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1994 556,508 .01 - 62.50 30.50
Options granted 407,108 37.50 - 50.00 37.75
Options exercised (5,880) 2.50 - 25.00 7.05
Options terminated (219,528) 2.50 - 62.50 49.10
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995 738,208 .01 - 50.00 29.15
Options granted 476,020 25.00 - 65.60 49.55
Options exercised (57,740) .01 - 37.50 18.85
Options terminated (20,100) 25.00 - 57.85 40.20
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1996 1,136,388 1.25 - 65.60 38.05
Options granted 315,675 27.50 - 32.50 30.75
Options exercised (25,005) 1.25 - 40.00 12.60
Options terminated (236,561) 2.50 - 65.60 40.35
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1997 1,190,497 $1.25 - $65.60 $36.38
- -----------------------------------------------------------------------------------------------------------------------------------
Exercisable, December 31, 1997 740,780 $1.25 - $65.60 $35.10
</TABLE>
The range of exercise prices for options outstanding and options
excercisable at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C>
$1.25 - 2.50 28,000 4.18 $2.05 28,000 $2.05
5.00 5,600 4.75 5.00 5,600 5.00
17.50 - 27.50 214,481 4.80 23.42 193,581 23.16
28.10 - 40.60 699,561 6.72 35.29 386,110 36.84
43.75 - 65.63 242,855 6.77 55.64 127,489 56.54
--------- ----- ------- -----
1,190,497 $36.38 740,780 $35.10
========= ====== ======= ======
</TABLE>
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair
value of stock options or warrants to be included in the statement of operations
or disclosed in the notes to financial statements. The Company has determined
that it will continue to account for stock-based compensation for employees
under Accounting Principles Board Opinion No. 25 and elect the disclosure only
alternative under SFAS No. 123.
F - 24
<PAGE>
In 1996 and 1997, the Company recorded $1,967,116 and $205,978 of
deferred compensation related to grants to nonemployees which will be amortized
over the vesting period of the options. The Company has recorded compensation
expense of $763,190 and $316,067 in 1996 and 1997, respectively.
The Company has computed the pro forma disclosures required by SFAS
No. 123 for all stock options and warrants granted after January 1, 1995 using
the Black-Scholes option pricing model. The assumptions used are as follows:
<TABLE>
<CAPTION>
December 31, 1995 1996 1997
- ------------ ---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 6.41% 6.14% 6.22%
Expected dividend yield - - -
Expected lives 6 years 6 years 6 years
Expected volatility 60% 60% 60%
</TABLE>
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option pricing models require the input
of highly subjective assumptions including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>
December 31, 1995 1996 1997
- ------------ ---- ---- ----
<S> <C> <C> <C>
Net loss, as reported: $(34,546,676) $(46,852,600) $(69,461,326)
Pro forma net loss: $(41,447,381) $(52,890,455) $(73,402,170)
Basic and diluted net loss
As reported $(94.70) $(10.24) $(13.76)
Pro forma $(113.61) $(11.56) $(14.54)
</TABLE>
(f) Employee Stock Purchase Plan
In October 1995, the Company adopted the 1995 Employee Stock Purchase
Plan (the Purchase Plan), under which up to 100,000 shares of common stock may
be issued to participating employees of the Company or its subsidiaries. All
full-time employees of the Company, except those who would immediately after the
grant own 5% or more of the total combined voting power or value of the stock of
the Company or any subsidiary, are eligible to participate.
On the first day of a designated payroll deduction period (the
Offering Period), the Company will grant to each eligible employee who has
elected to participate in the Purchase Plan an option to purchase shares of
common stock as follows: the employee may authorize an amount (a whole
percentage from 1% to 10% of such employee's regular pay) to be deducted by the
Company from such pay during the Offering Period. On the last day of the
Offering Period, the employee is deemed to have exercised the option, at the
option exercise price, to the extent of accumulated payroll deductions. Under
the terms of the Purchase Plan, the option price is an amount equal to 85% of
the fair market value per share of the common stock on either the first day or
the last day of the Offering Period, whichever is lower. In no event may an
employee purchase in any one Offering Period a number of shares which is more
than 15% of the employee's annualized base pay divided by 85% of the market
value of a share of common stock on the commencement date of the Offering
Period. The Compensation Committee may, in its discretion, choose an Offering
Period of 12 months or less for each of the Offerings and choose a different
Offering Period for each Offering. No shares have been issued under the Plan.
F - 25
<PAGE>
(g) Preferred Stock
The Certificate of Incorporation of the Company permits its Board of
Directors to issue up to 5,000,000 shares of preferred stock, par value $ .01
per share (the Preferred Stock), in one or more series, to designate the number
of shares constituting such series, and fix by resolution, the powers,
privileges, preferences and relative, optional or special rights thereof,
including liquidation preferences and dividends, and conversion and redemption
rights of each such series. No shares of Preferred Stock are currently
outstanding.
(15) COMMITMENTS
The Company has entered into a lease for a production plant in
Milford, Massachusetts. The lease has a 10-year term, which commenced on July 1,
1994, with certain extension options.
On February 4, 1994, the Company entered into a lease for an
approximately 91,500 square foot building in Cambridge, Massachusetts (the
Cambridge Lease). The Cambridge Lease is with a partnership that is affiliated
with three directors of the Company. The Cambridge Lease has a term of 15 years,
commencing February 1, 1997, and may be extended for three additional five-year
terms at the option of the Company. The Cambridge Lease provides for annual rent
of $37.79 per year per square foot for the first five years, $42.73 per year per
square foot for the second five years and $47.00 per year per square foot for
the third five years. As compensation for arranging this lease, the Company
issued Pillar Limited (see Note 15 (a)) five year warrants for the purchase of
100,000 shares of the Company's common stock at an exercise price of $50.00 per
share. These warrants are exercisable through February 4, 1999.
Under the terms of the Cambridge Lease, the Company elected to treat
$5,450,000 of its payments for a portion of the costs of the construction of the
leased premises (primarily relating to tenant improvements) as contributions to
the capital of the Cambridge landlord in exchange for a limited partnership
interest in the Cambridge landlord (the Partnership Interest). The Company's
Partnership Interest represents a 32.15% interest in the Cambridge Landlord. The
Company's right to receive distributions of cash generated from operations or
from any sale or refinancing of the property would be subordinate to the
distribution to certain other limited partners of priority amounts currently
totaling approximately $6,500,000 (approximately $3,500,000 of which is subject
to annual increase at a rate of between 12% and 15% as a result of a cumulative
return to one of the limited partners of the Cambridge Landlord). In the case of
a sale or refinancing of the property, after payment of the priorities described
in the preceding sentence, the Company would be entitled to a return of its
capital contribution and, thereafter, to its pro rata share of the remaining
funds available for distribution. The Company has the right, at any time prior
to February 2000 to sell the Partnership Interest back to certain limited
partners of the Cambridge Landlord for a price equal to the greater of (i) the
total paid for the Partnership Interest ($5,450,000 ) or (ii) the fair market
value of the Partnership Interest at the time. The assets of these limited
partners are limited to their investment in the Cambridge Landlord. See Note
19(e) for subsequent events.
F - 26
<PAGE>
Future approximate minimum rent payments as of December 31, 1997,
under the lease agreements through 2012 discussed above, net of sublease
agreements are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $ 2,275,000
1999 2,831,000
2000 4,248,000
2001 4,677,000
2002 4,991,000
Thereafter 40,586,000
$59,608,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1995, 1996 and 1997, facility rent expense, net of sublease
revenue, was approximately $2,142,000, $2,352,000 and $4,613,000, respectively.
(a) Consulting Agreements with Affiliates of Stockholders and
Directors
The Company has entered into consulting agreements, stock placement
agreements and an advisory agreement with several companies that are controlled
by two shareholders and directors of the Company. The terms of the agreements
with the affiliated companies, S.A. Pillar Investment N.V. (Pillar Investment),
Pillar S.A. (formerly Commerce Consult S.A.) and Pillar Investment Limited
(formerly Ash Properties Limited) (Pillar Limited), are described below.
In March 1994, the Company entered into a consulting agreement with
Pillar S.A., which was amended in March 1995 (the 1994 Pillar Consulting
Agreement). Under the 1994 Pillar Consulting Agreement, the Company agreed to
pay to Pillar S.A. cash compensation for financial advisory and managerial
services in connection with the Company's overseas operations, including support
services in connection with contracts, agreements and arrangements with the
Agence Nationale de Recherches sur le SIDA (ANRS), and for overhead costs and
reimbursement of certain authorized out-of-pocket expenditures. The Company is
committed to pay Pillar S.A. a monthly fee of approximately $96,000 with respect
to this agreement. The agreement expired on February 28, 1998, as amended.
During 1995, 1996 and 1997, the Company had expensed $1,226,000, $1,106,000,
$998,000 under this consulting agreement, respectively.
In connection with the 1994 Pillar Consulting Agreement, the Company
issued to Pillar S.A. two, fiveyear warrants to purchase up to 40,000 shares of
the Company's common stock. The first warrant was issued on March 1, 1994 at an
exercise price of $50.00 per share and will expire on February 28, 1999 and is
fully exercisable as of December 31, 1997. The second warrant was issued on
March 1, 1995 at an exercise price of $37.50 per share and will expire on
February 28, 2000 and is fully exercisable as of December 31, 1997.
All of the warrants issued to Pillar S.A. under the 1994 Pillar
Consulting Agreements and certain other warrants previously issued to Pillar
S.A. provide that within 15 days after the date of any exercise, in full or in
part, Pillar S.A. will pay to the Company an amount in cash equal to the lesser
of (i) 50% of all amounts paid to Pillar S.A. as compensation under the various
Pillar S.A. consulting agreements and (ii) the positive difference, if any,
between the aggregate fair market value of the shares of common stock purchased
upon such exercise and the aggregate exercise price for such shares.
On September 9, 1994, the Company entered into modifications to its
arrangements with Pillar S.A. and its affiliates, including: (i) a reduction in
the exercise price of certain warrants previously issued to $50.00 per share;
(ii) an amendment to the terms of each of the warrants issued to Pillar S.A. and
its affiliates described above to provide for cashless exercise in connection
with a sale or change in control of the Company; (iii) a grant of additional
five-year warrants (the Additional Pillar Warrants) to purchase 22,800 shares of
Common Stock at an exercise price of $50.00 per share; and a right of first
negotiation for Pillar S.A. to provide seed financing for any spin-offs by the
Company which do not involve or relate to antisense therapeutic compounds.
F - 27
<PAGE>
On July 8, 1995, the Company entered into an agreement (the Pillar
Europe Agreement) with Pillar S.A. pursuant to which Pillar S.A. agreed to
provide to the Company certain consulting, advisory and related services and
serve as the Company's exclusive agent in connection with potential corporate
partnerships in Europe and as a nonexclusive placement agent of the Company in
connection with future private placements of securities of the Company for a
period of two years. As discussed below, the Pillar Europe Agreement was
significantly amended on November 1, 1995.
The Company and Pillar S.A. agreed to modify the Pillar Europe
Agreement to provide that (i) Pillar would cease to serve as the Company's
exclusive agent in connection with potential corporate partnerships in Europe
but would continue to serve as a nonexclusive agent in such respect; (ii) Pillar
would receive a retainer of $26,470 per month for the balance of the term of the
Pillar Europe Agreement; (iii) certain fees to be received by Pillar in
connection with European license or collaboration agreements would only be
payable to Pillar in connection with potential collaborations with five
specified French pharmaceutical companies; and (iv) any compensation payable to
Pillar S.A. in connection with its services with respect to other corporate
collaborations or any placements of securities would be negotiated on a
case-by-case basis and would be subject to the approval of the independent
members of the Board of Directors of the Company. In consideration of such
modification, the Company paid Pillar in 1995 a fee totaling $300,000.
Pillar Limited acted as a placement agent for the Company for certain
sales of convertible preferred stock outside the United States and, in addition,
provided the Company with certain financial advisory services with respect to
the sale of such preferred stock outside the United States. In connection with
such services, Pillar earned fees of $492,604 and $2,020,751 during 1994 and
1995, respectively. Pillar received payment for such fees through $2,435,883 of
cash payments and through the issuance of five-year warrants for the purchase of
438,267 shares of common stock at $50.00 per share, expiring on various dates
beginning on July 14, 1998 through October 25, 2000.
Pillar also received compensation for its role as a placement agent
for the Offshore Offering, which is described in Note 1. See Note 19(b) for
terms and subsequent events.
(b) Other Research and Development Agreements
The Company has entered into consulting and research agreements with
the universities, research and testing organizations and individuals, under
which consulting and research support is provided to the Company. These
agreements are for varying terms through and provide for certain minimum annual
or per diem fees plus reimbursable expenses to be paid during the contract
periods. Future minimum fees payable under these contracts as of December 31,
1997 are approximately as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $253,000
1999 129,000
- ------------------------------------------------------------------------------------------------------------------------------------
$382,000
</TABLE>
Total fees and expenses under these contracts were approximately
$5,470,000, $7,171,000 and $9,372,000 during 1995, 1996 and 1997, respectively.
(c) Employment Agreements
The Company has entered into employment agreements with certain of
its executive officers which provide for, among other things, each officer's
annual salary, cash bonus, fringe benefits, and vacation and severance
arrangements. Under the agreements, the officers are generally entitled to
receive severance payments of two to three years' base salary.
F - 28
<PAGE>
(16) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes. At
December 31, 1997, the Company had net operating loss and tax credit
carryforwards for income tax purposes of approximately $205,997,000 and
$3,436,000, respectively, available to reduce federal taxable income and federal
income taxes, respectively. The Tax Reform Act of 1986 (the Act), enacted in
October 1986, limits the amount of net operating loss and credit carryforwards
that companies may utilize in any one year in the event of cumulative changes in
ownership over a three-year period in excess of 50%. The Company has completed
several financings since the effective date of the Act, which, as of December
31, 1997, have resulted in ownership changes in excess of 50%, as defined under
the Act. Ownership changes in future periods may limit the Company's ability to
utilize net operating loss and tax credit carryforwards.
The federal net operating loss carryforwards and tax credit
carryforwards expire approximately as follows:
<TABLE>
<CAPTION>
Net
Operating Loss Tax Credit
Expiration Date Carryforwards Carryforwards
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
December 31,
2005 $ 666,000 $ 15,000
2006 3,040,000 88,000
2007 7,897,000 278,000
2008 18,300,000 627,000
2009 25,670,000 689,000
2010 36,134,000 496,000
2011 44,947,000 493,000
2012 69,343,000 750,000
-------------- ------------
$205,997,000 $3,436,000
- ------------------------------------------------------------------------------------------------------------------------------------
The components of the deferred tax amounts, carryforwards and the
valuation allowance are approximately as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating loss carryforwards $54,661,000 $82,399,000
Temporary differences 1,325,000 5,243,000
Tax credit carryforwards 2,686,000 3,436,000
----------- -----------
58,672,000 91,078,000
Valuation allowance (58,672,000) (91,078,000)
------------ ------------
$ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A valuation allowance has been provided, as it is uncertain if the
Company will realize the deferred tax asset. The net change in the total
valuation allowance during 1997 was an increase of approximately $32,406,000.
(17) EMPLOYEE BENEFIT PLAN
On October 10, 1991, the Company adopted an employee benefit plan
under Section 401(k) of the Internal Revenue Code. The plan allows employees to
make contributions up to a specified percentage of their compensation. Under the
plan, the Company may, but is not obligated to, match a portion of the
employees' contributions up to a defined maximum. The Company is currently
matching 50% of employee contributions to the plan, up to 6% of the employee's
annual base salary, and charged to operations approximately $125,000, $224,000
and $253,000 during 1995, 1996 and 1997, respectively.
F - 29
<PAGE>
(18) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The accompanying consolidated financial statements include
the following cash flow information:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $172,757 $ 124,052 $3,264,596
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing activities:
Purchase of property and equipment under capital leases $ 90,562 $1,722,333 $2,374,502
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash financing activities:
Issuance of Series C convertible preferred stock in
exchange for convertible promissory notes $ - $ - $ -
Issuance of Series D convertible preferred stock in exchange
for convertible promissory notes and accrued interest - - -
Issuance of Series E convertible preferred stock in exchange
for subscriptions receivable - - -
Issuance of Series F convertible preferred stock in exchange
for subscriptions receivable - - -
Issuance of Series G convertible preferred stock in exchange
for subscriptions receivable
Issuance of convertible promissory notes in exchange for
subscriptions receivable - - -
Issuance of stock warrants in exchange for deferred financing costs - -
Cancellation of warrants and reduction of deferred financing costs - -
Conversion of preferred stock into common stock - 159,822 -
Issuance of common stock for services rendered - - 146,874
Deferred compensation related to restricted stock awards and grant of
stock options - 1,967,116 205,978
Issuance of Series A convertible preferred stock in exchange for
conversion of 9% convertible subordinated notes payable and
accrued interest - -
Issuance of common stock in exchange for conversion of
convertible subordinated notes payable - -
Issuance of common stock in exchange for conversion of accounts
payable, capital lease obligations and accrued interest - -
</TABLE>
(19) INTERIM PERIOD AND SUBSEQUENT EVENTS (Unaudited)
(a) Unaudited Interim Financial Statements
The accompanying consolidated balance sheet as of September
30, 1998, and the consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the nine
months ended September 30, 1997 and 1998 and the period
from inception (May 25, 1989) to September 30, 1998 are
unaudited, but, in the opinion of management, have been
prepared on a basis substantially consistent with audited
financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary
for a fair presentation of the results of these interim
periods. The results for the period ended September 30,
1998 presented are not necessarily indicative of results to
be expected for the full fiscal year.
At September 30, 1998, the Company had cash and cash
equivalents of approximately $.8 million and a working
capital deficit of approximately $2.8 million. Subsequent
to September 30, 1998, the Company received (i) $3.2
million of net proceeds from the Forum and Peck loan (see
note 19(k)), (ii) approximately $6.2 million from the sale
of the investment in the real estate limited partnership,
repayment of restricted cash and refund of security
deposit (see note 19e), and (iii) approximately $.3
million from the sale of certain furniture and equipment.
As a result, the Company has cash and cash equivalents of
approximately $6.0 million at December 15, 1998, which the
Company anticipates will last into the first quarter of
1999. The Company continues to seek additional financing
to fund operations. The working capital deficit at
December 15, 1998, was approximately $800,000.
F - 30
<PAGE>
(b) 1998 Unit Financing
On May 5, 1998, the Company completed a private offering of
equity securities raising total gross proceeds of
approximately $27.3 million from the issuance of 9,597,476
shares of common stock, 114,285 shares of Series A
convertible preferred stock and warrants to purchase
3,329,486 shares of common stock at $2.40 per share. The
Company has allocated the proceeds to each security based
on their respective fair market value. The gross proceeds
include the conversion of approximately $6.2 million of
accounts payable, capital lease obligations and other
obligations into common stock. The Company incurred
approximately $2.6 million of cash expenses related to the
private offering and issued 597,699 shares of common stock
and warrants to purchase 1,720,825 shares of common stock
at $2.40 per share to the placement agents. The
compensation received by Pillar, a company affiliated with
certain directors of the Company, with respect to the
offshore component of the private offering (Offshore
Offering) consisted of (i) 9% of gross proceeds of such
Offshore Offering and (ii) a non-accountable expense
allowance equal to 4% of gross proceeds of such Offshore
Offering. Pillar received approximately $1.6 million and
warrants to purchase 1,111,630 shares of common stock at
$2.40 per share.
On February 6, 1998, the Company commenced an exchange
offer to the holders of the 9% Notes (see Notes 6(d) and
19(f)) to exchange the 9% Notes for Series A convertible
preferred stock and certain warrants of the Company. On May
5, 1998, noteholders holding $48.7 million of principal and
$2,361,850 of accrued interest tendered such principal and
accrued interest to the Company for 510,505 shares of
Series A convertible preferred stock and warrants to
purchase 3,002,958 shares of common stock with an exercise
price of $4.25 per share. In accordance with SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt
Restructurings, the Company recorded an extraordinary gain
of approximately $8.9 million related to the conversion.
The extraordinary gain represents the difference between
the carrying value of the 9% Notes and the fair value of
(i) the Series A convertible preferred stock, as determined
by the per share sales price of Series A convertible
preferred stock sold in the private offering described
above, and (ii) warrants to purchase common stock issued by
the Company, which were valued using the Black-Scholes
option pricing model.
(c) Net Loss per Common Share
The Company applies SFAS No. 128, Earnings per Share, in
calculating earnings per share. Basic net loss per share is
computed by dividing net loss applicable to common
stockholders (net loss plus cumulative preferred stock
dividends) by the weighted average number of common shares
outstanding during the period. Diluted net loss per share
for the periods presented is the same as basic net loss per
share as the inclusion of the potential common stock
equivalents would be antidilutive. Antidilutive securities
which consist of stock options and warrants that are not
included in diluted net loss per common share were
2,686,863 and 12,568,143 for the nine month periods ended
September 30, 1997 and 1998, respectively.
(d) Cash Equivalents
The Company applies SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS
No. 115, debt securities that the Company has the
positive intent and ability to hold to maturity are
recorded at amortized cost and are classified as
held-to-maturity securities. These securities include
cash equivalents and restricted cash. Cash equivalents
have original maturities of less than three months. Cash
and cash equivalents at December 31, 1997 and September
30, 1998 consisted of the following:
F - 31
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
<S> <C> <C>
Cash and cash equivalents-
Cash and money market funds $1,702,272 $400,949
Corporate bond 499,930 481,876
---------- --------
$2,202,202 $882,825
========== ========
Restricted cash - long-term
Certificates of deposit $2,016,364 $ -
Savings account 1,034,618 659,618
---------- --------
$3,050,982 $659,618
========== ========
</TABLE>
(e) Accounts Receivable Related to Real Estate Limited
Partnership
Under the terms of the Cambridge Lease, the Company
accounted for $5,450,000 of its payments for a portion of
the costs of construction of the leased premises as
contributions to the capital of the Cambridge landlord in
exchange for a limited partnership interest in the
Cambridge landlord (the Partnership Interest). Under the
terms of the Partnership Interest, the Company has the
right at any time prior to February 2000 to sell the
Partnership Interest back to the other limited partners of
the landlord. In April 1998, the Company exercised its
right to sell back the Partnership Interest and accordingly
the contribution to the real estate partnership has been
classified as a current asset at September 30, 1998.
Subsequent to September 30, 1998, the sale of the building
was finalized and the Company received payment of
approximately $6.2 million, which included the recovery of
a portion of the security deposit on the building and the
repayment of restricted cash.
(f) 9.0% Convertible Subordinated Notes
On April 2, 1997, the Company issued $50,000,000 of the 9%
Notes. As discussed in Note 19(b), on May 5, 1998
noteholders holding $48.7 million of principal value of the
9% Notes tendered such notes in exchange for Series A
convertible preferred stock and warrants to purchase common
stock. In addition, $2,361,850 of accrued interest thereon
was converted into shares of Series A convertible preferred
stock and warrants to purchase common stock. As of
September 30, 1998, there is $1.3 million of 9% Notes
outstanding. Under the terms of the 9% Notes, the Company
must make semi-annual interest payments on the outstanding
principal balance through the maturity date of April 1,
2004. If the 9% Notes are converted prior to April 1, 2000,
the Noteholders are entitled to receive accrued interest
from the date of the most recent interest payment through
the conversion date. The 9% Notes are subordinate to
substantially all of the Company's existing indebtedness.
The 9% Notes are convertible at any time at the option of
the holder prior to the maturity date at a conversion price
equal to $35.0625 per share, subject to adjustment under
certain circumstances, as defined.
Beginning April 1, 2000, the Company may redeem the 9%
Notes at its option for a 4.5% premium over the original
issuance price, provided that from April 1, 2000 to March
31, 2001, the 9% Notes may not be redeemed unless the
closing price of the common stock equals or exceeds 150% of
the conversion price for a period of at least 20 out of 30
consecutive trading days and the 9% Notes redeemed within
60 days after such trading period. The premium decreases by
1.5% each year through March 31, 2003. Upon a change of
control of the Company, as defined, the Company will be
required to offer to repurchase the 9% Notes at 150% of the
original issuance price.
F - 32
<PAGE>
(g) Restructuring
Beginning in July 1997, the Company implemented a
restructuring plan to reduce expenditures on a phased
basis over the balance of 1997 in an effort to conserve
its cash resources. As a part of this restructuring plan,
the Company recorded an $11,020,000 restructuring charge
in 1997 to provide for (i) the termination of certain
research programs, (ii) the abandonment of certain leased
facilities (net of sublease income and related disposal of
fixed assets), (iii) severance obligations to nearly 100
terminated employees and (iv) the cancellation of certain
other contracts. During the third quarter of 1998, the
Company completed its restructuring plan, utilizing the
entire reserve, after moving its corporate headquarters to
Milford, MA. As a result of the Company having vacated the
Cambridge, Massachusetts facility, the Company
significantly reduced its future operating lease
commitments (see Note 15).
(h) Note Payable to a Bank
In December 1996, the Company entered into a five year
$7,500,000 note payable with a bank (see Note 6(a)). The
note contains certain financial covenants that require the
Company to maintain minimum tangible net worth and minimum
liquidity and prohibits the payment of dividends. As of
September 30, 1998, approximately $2,895,000 was
outstanding under the note, which is classified as a
current liability in the accompanying September 30, 1998
consolidated balance sheet. The note, as amended, contains
certain financial covenants that require the Company to
maintain minimum tangible net worth (as defined) and
minimum liquidity (as defined) and prohibits the payment
of dividends. The Company has secured its obligations with
a lien on all of its assets. If, at specified times, the
Company's Minimum Liquidity (as defined) is less than $4.0
million, or its tangible net worth (as defined) is less
than $6 million, the Company is required to prepay the
note in full.
In November 1998, Forum and Pecks, the Lenders, affiliates
of two members of the Company's Board of Directors,
purchased the note payble to the Bank. In connection with
the purchase of the note, the Lenders have advanced an
additional amount to the Company so as to increase the
outstanding principal amount of the Loan to $6,000,000. In
addition, the Lenders have agreed to amend the terms of
the Loan as follows: (i) the maturity will be extended to
November 30, 2003; (ii) the interest rate will be
decreased to 8%; (iii) interest will be payable monthly in
arrears, with the principal due in full at maturity of the
Loan; (iv) the Loan will be convertible, at the Lender's
option, in whole or in part, into shares of common stock,
par value $.001 per share, of the Company ("Common Stock")
at a rate equal to $2.40 per share; (v) the threshold of
the Minimum Liquidity covenant will be reduced from
$4,000,000 to $2,000,000; and (vi) the Loan may not be
prepaid, in whole or in part, at any time prior to
December 1, 2000.
In connection with the purchase of the note, Forum will
receive a fee of $400,000, which will be reinvested by
Forum by purchasing from the Company common or preferred
stock and warrants. Forum will also receive warrants to
purchase $400,000 of shares of common stock of the Company
at the per-share valuation of the next financing, or $3.00
per share if the financing is not completed by May 1,
1999.
(i) Methylgene, Inc. Licensing Agreement
In January 1996, the Company and MethylGene, Inc.
(MethylGene) (a Canadian company which is 30% owned by the
Company) entered into a licensing agreement for the
purpose of researching and developing compounds for the
treatment of cancer and other indications. (See Note 13)
In May 1998, this agreement was amended to grant
MethylGene a non-exclusive right to use all and any
antisense chemistries discovered by the Company or any of
its affiliates for a period commencing on May 5, 1998 and
ending on the earlier of (i) the effective date of
termination by MethylGene of its contract for development
services to be provided by the Company, (ii) May 5, 1999,
unless MethylGene exercises its option to continue
contracting for development services
F - 33
<PAGE>
provided by, or (iii) May 5, 2000. As additional
consideration for this non-exclusive right, MethylGene is
required to pay the Company certain milestone amounts, as
defined, and transfered 300,000 shares of MethylGene's
class B shares to the Company. The Company has placed no
value on these shares. During the nine month period ended
September 30, 1998, the Company recognized $500,000 of
service revenue related to this agreement.
(j) Units Issued to Primedica Corporation (Primedica)
In May 1998, the Company has issued 250,000 shares of
common stock and 62,500 warrants to purchase common stock
to Primedica for future services to be provided. The
services shall commence upon the Company's request after
(i) the Company securities are listed on a nationally
recognized exchange, and (ii) the average closing price of
the Company's common stock is at least $2.00 per share for
the twenty day trading period preceding the contract
commencement date. In the event that the Company does not
use these services as a result of the failure to meet the
contract conditions, Primedica shall forfeit to the
Company all or part of the units held by Primedica. The
Company has recorded these shares as issued and
outstanding at September 30, 1998 at par value. The
Company will record the value of these services as the
services are rendered.
(k) Supplemental Disclosure of Cash Flow Information
The accompanying consolidated financial statements include
the following information:
<TABLE>
<CAPTION>
Cumulative
from May
25, 1989
Nine Months Ended (Inception) to
September 30, September 30,
------------- -------------
<S> <C> <C> <C>
1997 1998 1998
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $786,005 $1,494,323 $5,124,773
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Purchase of property and equipment under capital leases $2,412,276 $ - $5,604,370
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Issuance of Series C convertible preferred stock in exchange
for convertible promissory notes $ - $ - $1,700,000
Issuance of Series D convertible preferred stock in exchange
for convertible promissory notes and accrued interest $ - $ - $9,382,384
Issuance of Series E convertible preferred stock in exchange
for subscriptions receivable $ - $ - $ 555,117
Issuance of Series F convertible preferred stock in exchange
for subscriptions receivable $ - $ - $2,535,000
F - 34
<PAGE>
Issuance of Series G convertible preferred stock in exchange
for subscriptions receivable $ - $ - $ 906,016
Issuance of convertible promissory notes in exchange for
subscriptions receivable $ - $ - $ 937,000
Issuance of stock warrants in exchange for deferred
financing costs $ - $ - $ 238,000
Cancellation of warrants and reduction of deferred
financing costs $ - $ - $ 68,000
Conversion of preferred stock into common stock $ - $ - $ 159,822
Deferred compensation related to restricted stock awards
and grant of stock options $ 205,978 $ 163,044 $ 6,751,286
Issuance of Series A convertible preferred stock in exchange
for conversion of 9% convertible subordinated notes payable
and accrued interest $ - $ 51,061,850 $51,061,850
Accretion of Series A convertible preferred stock dividends $ - $ 1,647,000 $ 1,647,000
Issuance of common stock in exchange for conversion of
convertible subordinated notes payable $ - $ 4,800,000 $ 4,800,000
Issuance of common stock in exchange for conversion of
accounts payable, capital lease obligations and accrued
interest $ - $ 6,434,308 $ 6,434,308
Issuance of common stock for services rendered $ 146,874 $ 1,195,398 $ 1,342,272
</TABLE>
(l) Accrued Expenses
Accrued expenses as of September 30, 1998 consist of the following:
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------------------------------------
<S> <C>
Restructuring $ -
Interest - 52,750
Payroll and related costs 1,142,608
Outside research and clinical costs 978,565
Professional fees 159,691
Other 670,320
-------------
$ 3,003,934
</TABLE>
(m) Commitments
The Company is currently undergoing a sales and use tax audit by the
Massachusetts Department of Revenue. The amount of the final
assesment, while currently unknown, may be material.
F - 35
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
---------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Special Note Regarding Forward-Looking Information...........................................2
Prospectus Summary...........................................................................3
Risk Factors................................................................................10
The Company.................................................................................20
Properties..................................................................................40
Legal Proceedings...........................................................................41
Recent Developments.........................................................................41
Market for Registrant's Common Equity and Related Stockholder Matters...................... 41
Dividend Policy.............................................................................42
Use of Proceeds.............................................................................43
Capitalization..............................................................................43
Selected Financial Data.....................................................................44
Management's Discussion and Analysis of Financial Condition and Results of Operations.......46
Directors, Executive Officers and Certain Significant Employees of the Company..............53
Executive Compensation......................................................................56
Security Ownership and Certain Beneficial Owners and Management ............................61
Certain Relationships and Related Transactions..............................................64
Principal and Selling Stockholders..........................................................68
Description of Capital Stock and Indebtedness...............................................75
Delaware Law and Certain Provisions of the Company's Restated Certificate of Incorporation,
By-Laws and Indebtedness..................................................................92
Certain U.S. Federal Income Tax Considerations..............................................93
Plan of Distribution........................................................................95
Certain Restrictions on Transfer............................................................96
Legal Matters...............................................................................98
Experts.....................................................................................98
Index to Financial Statements...............................................................F-1
</TABLE>
HYBRIDON, INC.
641,259 SHARES
SERIES A CONVERTIBLE PREFERRED STOCK
($.01 par value per share)
33,924,878 SHARES
COMMON STOCK
($.001 par value per share)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the shares of Series A convertible
preferred stock, $.01 par value per share (the "Convertible Preferred Stock")
and shares of common stock, $.001 par value per share (the "Common Stock" and,
together with the Convertible Preferred Stock, the "Securities") offered hereby
are as follows:
SEC Registration fee.........................
Printing and engraving expenses..............
Legal fees and expenses......................
Accounting fees and expenses.................
Blue Sky fees and expenses
(including legal fees).....................
Transfer agent and registrar fees
and expenses...............................
Miscellaneous................................
Total..............................
The Registrant will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
Article EIGHTH of the Registrant's Restated Certificate of Incorporation
provides that no director of the Registrant shall be personally liable for any
monetary damages for any breach of fiduciary duty as a director, except to the
extent that the Delaware General Corporation law prohibits the elimination or
limitation of liability of directors for breach of fiduciary duty.
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant
II-1
<PAGE>
fails to make an indemnification payment within 60 days after such payment is
claimed by such person, such person is permitted to petition the court to make
an independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the full extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
The Company is a party to an indemnification agreement with Mr.
Grinstead. Such agreement provides that Mr. Grinstead shall be indemnified by
the Registrant (a) against all expenses (as defined in the agreement),
judgments, fines, penalties and amounts paid in settlement actually and
reasonably incurred in connection with any legal proceeding (other than one
brought by or on behalf of the Registrant) if Mr. Grinstead acted in good faith
and in a manner which he reasonably believed to be in, or not opposed to, the
best interests of the Registrant, and with respect to any criminal proceeding,
had no reasonable cause to believe that his conduct was unlawful and (b) against
all expenses and amounts paid in settlement actually and reasonably incurred in
connection with a legal proceeding brought by or on behalf of the Registrant if
he acted in good faith and in a manner which he reasonably believed to be in, or
not opposed to, the best interests of the Registrant, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Mr. Grinstead has been adjudged to be liable. If, with respect to such
proceedings, Mr. Grinstead is successful on the merits or otherwise, he shall be
reimbursed for all expenses. Mr. Grinstead is required to provide notice to the
Registrant of any threatened or pending litigation, and the Registrant has the
right to participate in such action or assume the defense thereof.
The Company has obtained directors and officers insurance for the
benefit of its directors and its officers.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement,
the Company has issued and sold its Common Stock, warrants to purchase its
Common Stock, Convertible Subordinated Notes and Series A Convertible Preferred
Stock, to certain investors in transactions that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"):
Unregistered Offerings Pursuant to Section 4(2) Under the 1933 Act
The securities issued in each of the following transactions (items (1)
through (10)) were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act, relating to sales by an
issuer not involving a public offering. The securities issued in each of the
following transactions were offered and sold solely to persons who were
"accredited investors" as that term is defined in Regulation D promulgated under
the Securities Act.
II-2
<PAGE>
(1) On January 20, 1997, the Company issued 25,000 shares of Common
Stock to an investment bank as compensation under a financial advisory services
agreement dated that date. These shares were offered and sold to an "accredited
investor" (as that term is defined in Regulation D promulgated under the
Securities Act) in reliance upon the exemption from registration under Section
4(2) of the Securities Act, relating to sales by an issuer not involving any
public offering.
(2) On January 25, 1997, the Company sold 1,650 shares of Common Stock
to one investor upon exercise by such investor of warrants to purchase Common
Stock for an aggregate purchase price of $9,075 . These shares were offered and
sold to an "accredited investor" (as that term is defined in Regulation D
promulgated under the Securities Act) in reliance upon the exemption from
registration under Section 4(2) of the Securities Act, relating to sales by an
issuer not involving any public offering.
(3) On April 2, 1997, the Company issued to an investment bank
$50,000,000 of its 9% Notes. These 9% Notes were offered and sold to an
"accredited investor" (as that term is defined in Regulation D promulgated under
the Securities Act) in reliance upon the exemption from registration under
Section 4(2) of the Securities Act, relating to sales by an issuer not involving
any public offering.
(4) On April 2, 1997, the Company issued to an investment bank warrants
to purchase 71,301 shares of Common Stock at an exercise price of $35.0625 per
share. These warrants were offered and sold to an "accredited investor" (as that
term is defined in Regulation D promulgated under the Securities Act) in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act, relating to sales by an issuer not involving any public
offering.
(5) On December 10, 1997, the Company issued to Dr. Paul Zamecnik, a
Director of the Company, 50,000 shares of Common Stock of the Company.
(6) On May 5, 1998, the Company accepted $48,694,000 principal amount of
its 9% Notes tendered to the Company in exchange for 510,505 shares of series A
preferred stock (the "Series A Preferred Stock") and warrants (the "Class A
Warrants") to purchase 3,002,958 shares of common stock, par value $.001 per
share (the "Common Stock"), of the Company (the "Exchange Offer"). As a result
of the Exchange Offer, there is approximately $1.3 million principal amount of
the 9% Notes outstanding.
Pursuant to the Exchange Offer, which commenced on February 6,
1998, all tendering Noteholders received per $1,000 principal amount of the 9%
Notes (including accrued but unpaid interest on the 9% Notes) (i) 10 shares of
Series A Preferred Stock and (ii) Class A Warrants to purchase such number of
shares of Common Stock equal to 25% of the number of shares of the Company's
Common Stock into which the Series A Preferred Stock issued to such Noteholder
pursuant to the Exchange Offer would be convertible.
The Convertible Preferred Stock ranks, as to dividends and
liquidation preference, senior to the Company's Common Stock. The Convertible
Preferred Stock issued in the Exchange Offer and in the Regulation D Offering,
as defined below, as well as the Convertible Preferred Stock that was issued as
a dividend on September 30, 1998, will be convertible into an aggregate of
15,088,200 shares of Common Stock, subject to adjustment, beginning May 5, 1999.
The Class A Warrants will be exercisable commencing on May 5,
1999 for a period of four years thereafter at $4.25 per share of Common Stock,
subject to adjustment. The Class A Warrants are not subject to redemption at the
option of the Company under any circumstances.
The Exchange Offer was undertaken by the Company as part of the
Company's new business plan contemplating a restructuring of its capital
structure to reduce debt service obligations, a significant reduction in its
burn rate and an infusion of additional equity capital.
(7) On May 5, 1998, the Company closed a private placement (the
"Regulation D Offering") of (i) 114,285 shares of Series A Preferred Stock,
which sold at $70 per share, and (ii) class D warrants (the "Class D
II-3
<PAGE>
Warrants") to purchase 672,273 shares of the Company's Common Stock, subject to
adjustment, for an aggregate amount of approximately $8 million.
The Class D Warrants will be exercisable commencing on May 5,
1999 until May 4, 2003 at $2.40 per share of Common Stock, subject to
adjustment.
The net proceeds to the Company from the Regulation D Offering
are presently used for general corporate purposes, primarily research and
product development activities, including costs of preparing investigational new
drug applications and conducting preclinical studies and clinical trials, the
payment of payroll and other accounts payable and for debt service required
under the Company's debt obligations. The amounts actually expended by the
Company and the purposes of such expenditures may vary significantly depending
upon numerous factors, including the progress of the Company's research, drug
discovery and development programs, the results of preclinical studies and
clinical trials, the timing of regulatory approvals, sales of DNA products and
reagents to third parties manufactured on a custom contract basis by the HSP
Division and margins on such sales, technological advances, determinations as to
the commercial potential of the Company's compounds and the status of
competitive products. In addition, expenditures will also depend upon the
establishment of collaborative research arrangements with other companies, the
availability of other financing and other factors. Under certain circumstances,
the Company may be required to use net proceeds to repay indebtedness under the
Bank Credit Facility.
(8) On May 5, 1998, the Company closed a private placement of units (the
"Unit Offering") consisting of (i) 2,754,654 shares of Common Stock, and (ii)
class C warrants (the "Class C Warrants") to purchase 788,649 shares of Common
Stock, subject to adjustment, which securities were issued in consideration of
the cancellation (or reduction) of accounts payable, capital lease and other
obligations aggregating $5,509,308.
The Class C Warrants are exercisable at $2.40 per share, subject
to adjustment from time to time, until May 4, 2003.
The Common Stock issued pursuant to the Unit Offering and the
Common Stock underlying the Class C Warrants are subject to a "lock-up" period
ending on May 5, 1999, except to the extent such securities are sold or
transferred pursuant to a Registration Statement. After the Company files a
Registration Statement under the Securities Act, 75% of each holder's Units and
the underlying securities will be subject to an additional "lockup" for the
first three months following the effective date of the Registration Statement
(the "Effective Date"); thereafter, 50% of such securities will be subject to an
additional "lock-up" until six months following the Effective Date; and the
remaining 25% of such securities will be "locked-up" until nine months following
the Effective Date.
(9) On May 5, 1998, the Company sold to Dr. Paul Zamecnik 100,000 shares
of Common Stock and Class C Warrants to purchase 25,000 shares of Common Stock,
subject to adjustment, for a purchase price of $200,000.
The net proceeds of this offering were used to reduce accounts
payable, capital lease and other obligations.
(10) On May 5, 1998, the Company issued to certain suppliers a total of
362,500 shares of Common Stock and Class C Warrants to purchase a total of
90,625 shares of Common Stock. These issuances were in consideration of (i)
payment to the Company of a total of $362.50, the par value of all such issued
Common Stock, and (ii) the subsequent furnishing of specified services to the
Company by each supplier. The extent to which the suppliers have completed
performing the specified services varies.
The Common Stock issued to Dr. Paul Zamecnik and to the certain
suppliers and the Common Stock underlying the Class C Warrants issued to such
persons are subject to a "lock-up" period ending on May 5, 1999, except to the
extent such securities are sold or transferred pursuant to a Registration
Statement. After the Company files a Registration Statement under the Securities
Act, 75% of each holder's Units and the underlying securities will be subject to
an additional "lock-up" for the first three months following the Effective Date;
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<PAGE>
thereafter, 50% of such securities will be subject to an additional "lock-up"
until six months following the Effective Date; and the remaining 25% of such
securities will be "locked-up" until nine months following the Effective Date.
Unregistered Offerings Pursuant to Regulation S Under the Securities Act
The securities issued by the Company in the each of the following
transactions were offered and sold in reliance upon an exemption from
registration under Regulation S promulgated under the Securities Act, relating
to sales by an issuer in offshore transactions (the "Regulation S Offerings").
The securities issued in each of the following Regulation S Offerings were
offered and sold solely to persons who were "accredited investors" as that term
is defined in Regulation D promulgated under the Securities Act.
(11) On January 15, 1998, the Company commenced a private placement of
units (the "Units"), each Unit consisting of 14% Convertible Subordinated Notes
Due 2007 (the "14% Notes") and warrants (the "Equity Warrants") to purchase
shares of the Company's Common Stock (the "14% Note Offering"). The 14% Notes
were subject to both mandatory and optional conversion into shares of series B
preferred stock, under certain circumstances which, in turn, were convertible
into Common Stock (the "Series B Preferred Stock").
On January 23, 1998, as part of the 14% Note Offering, the
Company sold $2,230,000 in principal amount of 14% Notes and Equity Warrants.
On February 9, 1998, as part of the 14% Note Offering, the
Company sold $2,384,000 in principal amount of 14% Notes and Equity Warrants.
On March 27, 1998, as part of the 14% Note Offering, the Company
sold $200,000 in principal amount of 14% Notes and Equity Warrants.
On April 21, 1998, as part of the 14% Note Offering, the Company
sold $300,000 in principal amount of 14% Notes and Equity Warrants.
On April 24, 1998, as part of the 14% Note Offering, the Company
sold $1,020,000 in principal amount of 14% Notes and Equity Warrants.
In each of the above closings, the 14% Notes were issued at face
value.
(12) On May 5, 1998, the Company closed a private placement of 3,223,000
shares of Common Stock and class B warrants (the "Class B Warrants") to purchase
805,750 shares of the Company's Common Stock, subject to adjustment, for
aggregate gross proceeds of $6,446,000.
The Class B Warrants are exercisable for a period of five years
at $2.40 per share of Common Stock, subject to adjustment from time to time.
The Common Stock issued in such private placement and the Common
Stock underlying the Class B Warrants issued in such private placement are
subject to a "lock-up" for a period ending on May 5, 1999, except to the extent
such securities are sold or transferred pursuant to a Registration Statement
filed by the Company under the Securities Act. After the Company files a
Registration Statement under the Securities Act, 75% of each holder's Common
Stock, including the Common Stock underlying the Class B Warrants, will be
subject to an additional "lock-up" for the first three months following the
Effective Date; thereafter, 50% of such securities will be subject to an
additional "lock-up" until six months following the Effective Date; and the
remaining 25% of such securities will be "locked-up" until nine months following
the Effective Date.
(13) The Company has exchanged all of the 14% Notes issued, including
any right to interest thereon, and all Equity Warrants issued together with the
14% Notes, for 3,157,322 shares of Common Stock and Class B Warrants to purchase
947,195 shares of Common Stock.
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<PAGE>
The net proceeds to the Company from the Regulation S Offerings
are presently used for general corporate purposes, primarily research and
product development activities, including costs of preparing investigational new
drug applications and conducting preclinical studies and clinical trials, the
payment of payroll and other accounts payable and for debt service required
under the Company's debt obligations. The amounts actually expended by the
Company and the purposes of such expenditures may vary significantly depending
upon numerous factors, including the progress of the Company's research, drug
discovery and development programs, the results of preclinical studies and
clinical trials, the timing of regulatory approvals, sales of DNA products and
reagents to third parties manufactured on a custom contract basis by the HSP
Division and margins on such sales, technological advances, determinations as to
the commercial potential of the Company's compounds and the status of
competitive products. In addition, expenditures will also depend upon the
establishment of collaborative research arrangements with other companies, the
availability of other financing and other factors. Under certain circumstances,
the Company may be required to use net proceeds to repay indebtedness under the
Bank Credit Facility.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1(1) Restated Certificate of Incorporation of the Registrant, as amended.
3.2(2) Amended and Restated By-Laws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Preferred Stock.
3.4(3) Form of Certificate of Designation of Series B Preferred Stock.
4.1(2) Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant.
4.2(4) Indenture dated as of March 26, 1997 between Forum Capital Markets LLC and the
Registrant.
4.3(7) Certificate of Designation of Series A Preferred Stock, par value $.01 per share,
dated May 5, 1998.
4.4(7) Form of 14% Note Due 2007.
4.5(7) Class A Warrant Agreement dated May 5, 1998.
4.6(7) Class B Warrant Agreement dated May 5, 1998.
4.7(7) Class C Warrant Agreement dated May 5, 1998.
4.8(7) Class D Warrant Agreement dated May 5, 1998.
+10.1(2) License Agreement dated February 21, 1990 and restaged as of September 8, 1993
between the Registrant and the Worcester Foundation for Biomedical Research, Inc.,
as amended.
+10.2(2) Patent License Agreement dated September 21, 1995 between the Registrant and
National Institutes of Health.
+10.3(2) Patent License Agreement effective as of October 13, 1994 between the Registrant
and McGill University.
+10.4(2) License Agreement effective as of October 25, 1995 between the Registrant and the
General Hospital Corporation.
+10.5(2) License Agreement dated as of October 30, 1995 between the Registrant and Yoon
S. Cho-Chung.
+10.6(2) Collaborative Study Agreement effective as of December 30, 1992 between the
Registrant and Medtronic, Inc.
+10.7(2) System Design and Procurement Agreement dated as of December 16, 1994 between
the Registrant and Pharmacia Biotech, Inc.
10.8(2) Lease dated March 10, 1994 between the Registrant and Laborer's Pension/Milford
Investment Corporation for space located at 155. Fortune Boulevard, Milford,
Massachusetts, including Note in the original principal amount of $750,000.
10.9(2) Lease dated February 4, 1994 between the Registrant and Charles River Building
Limited Partnership for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
II-6
<PAGE>
10.10(2) Series G Convertible Preferred Stock and Warrant Purchase Agreement dated as of
September 9, 1994 among the Registrant and certain Purchasers, as amended (the
"Series G Agreement").
10.11(2) Registration Rights Agreement dated as of February 21, 1990 between the Registrant,
the Worcester Foundation for Biomedical Research, Inc. and Paul C. Zamecnik.
10.12(2) Registration Rights Agreement dated as of June 25, 1990 between the Registrant and
Nigel L. Webb.
10.13(2) Registration Rights Agreement dated as of February 6, 1992 between the Registrant
and E. Andrews Grinstead III.
10.14(2) Registration Rights Agreement dated as of February 6, 1992 between the Registrant
and Anthony J. Payne.
++10.15(2) 1990 Stock Option Plan, as amended.
++10.16(2) 1995 Stock Option Plan.
++10.17(2) 1995 Director Stock Plan.
++10.18(2) 1995 Employee Stock Purchase Plan.
10.19(2) Form of Warrant to purchase shares of Series C Convertible Preferred Stock
originally issued to Pillar Investment Limited (formerly known as Ash Properties
Limited), as amended.
10.20(2) Form of Warrant to purchase shares of Common Stock issued in connection with the
issuance of the Registrant's series of notes known as its 10% Convertible
Subordinated Notes due September 16, 1993 and the Registrant's 10% Convertible
Subordinated Note Due March 19, 1993, as amended.
10.21(2) Warrant issued to Pillar S.A. to purchase up to 175,000 shares of Common Stock
dated as of December 1, 1992, as amended.
10.22(2) Form of Warrant originally issued to Pillar Investment Limited to purchase 427,126
shares of Common Stock dated as of February 15, 1993, as amended.
10.23(2) Form of Warrant originally issued to Pillar Investment Limited to purchase 350,000
shares of Common Stock dated as of February 15, 1993, as amended.
10.24(2) Warrant issued to Pillar Investment Limited to purchase 500,000 shares of Common
Stock dated as of February 4, 1994, as amended.
10.25(2) Form of Warrant originally issued to Pillar Investment Limited to purchase shares of
Common Stock issued as placement commissions in connection with the sale of shares
of Series F Convertible Preferred Stock and in consideration of financial advisory
service, as amended.
10.26(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common Stock dated as
of March 1, 1994, as amended.
10.27(2) Form of Warrant to purchase shares of Common Stock issued as part of the Units (as
defined in the Series G Agreement) issued and sold to investors pursuant to the Series
G Agreement on or prior to March 31, 1995, as amended.
10.28(2) Form of Warrant to purchase shares of Common Stock issued and sold to investors
pursuant to the Series G Agreement after March 31, 1995.
10.29(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common Stock dated as
of March 1, 1995.
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<PAGE>
10.30(2) Form of Warrant issued to Pillar Investment Limited to purchase shares of Common
Stock issued as placement commissions in connection with the sale of Units pursuant
to the Series G Agreement.
++10.31(5) Employment Agreement dated as of March 1, 1997 between the Registrant and E.
Andrews Grinstead III.
10.32(2) Indemnification Agreement dated as of February 6, 1992 between the Registrant and
E. Andrews Grinstead III.
++10.33(6) Employment Agreement dated March 1, 1997 between the Registrant and Dr. Sudhir
Agrawal.
++10.34(2) Consulting Agreement dated as of February 21, 1990 between the Registrant and Dr.
Paul C. Zamecnik.
10.35(2) Consulting Agreement dated as of March 1, 1994 between the Registrant and Pillar
S.A.
10.36(2) Consulting Agreement dated as of July 8, 1995 between the Registrant and Pillar
S.A., as amended.
10.37(2) Master Lease Agreement dated as of March 1, 1994 between the Registrant and
General Electric Capital Corporation.
10.38(2) First Amendment to Lease dated as of November 30, 1995 between the Registrant
and Charles River Building Limited Partnership for space located at 620 Memorial
Drive, Cambridge, Massachusetts.
+10.39(6) Research, Development and License Agreement dated as of January 24, 1996 between
the Registrant and G.D. Searle & Co.
+10.40(6) Manufacturing and Supply Agreement dated as of January 24, 1996 between the
Registrant and G.D. Searle & Co.
10.41(6) Registration Rights Agreement dated as of January 24, 1996 between the Registrant
and G.D. Searle & Co.
10.42(6) Second Amendment to Lease dated as of February 23, 1996 between the Registrant
and Charles River Building Limited Partnership for space located at 620 Memorial
Drive, Cambridge, Massachusetts.
10.43(6) Third Amendment to Lease dated as of February 28, 1996 between the Registrant and
Charles River Building Limited Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.44(5) Fourth Amendment to Lease dated as of July 25, 1996 between the Registrant and
Charles River Building Limited Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.45(5) Fifth Amendment to Lease dated as of March 14, 1997 between the Registrant and
Charles River Building Limited Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.46(5) Loan and Security Agreement dated as of December 31, 1996 between the Registrant
and Silicon Valley Bank.
10.47(7) First Amendment to Loan and Security Agreement dated March 30, 1998 between
Hybridon, Inc. and Silicon Valley Bank.
10.48(8) Second Amendment to Loan and Security Agreement dated May 19, 1998, effective
as of April 30, 1998, between Hybridon, Inc. and Silicon Valley Bank.
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<PAGE>
10.49(9) Third Amendment to Loan and Security Agreement dated September 18, 1998
between Hybridon, Inc. and Silicon Valley Bank.
10.50(9) Fourth Amendment to Loan and Security Agreement dated October 30, 1998,
effective as of September 29, 1998 between Hybridon, Inc. and Silicon Valley Bank.
10.51(5) Warrant issued to Silicon Valley Bank to purchase 65,000 shares of Common Stock
dated as of December 31, 1996.
10.52(5) Registration Rights Agreement dated as of December 31, 1996 between the Registrant
and Silicon Valley Bank.
10.53(5) Master Equipment Lease Agreement dated as of October 25, 1996 between the
Registrant and Finova Technology Finance, Inc.
+++10.54(5) Supply and Sales Agreement dated as of September 1, 1996 between the Registrant
and P.E. Applied Biosystems.
10.55(2) Registration Rights Agreement dated as of March 26, 1997 between Forum Capital
Markets LLC and the Registrant.
10.56(2) Warrant Agreement dated as of March 26, 1997 between Forum Capital Markets
LLC and the Registrant.
+++10.57(6) Amendment No. 1 to License Agreement, dated as February 21, 1990 and restated
as of September 8, 1993, by and between the Worcester Foundation for Biomedical
Research, Inc. and the Registrant, dated as of November 26, 1996.
10.58(10) Letter Agreement dated May 12, 1997 between the Registrant and Pillar S.A.
amending the Consulting Agreement dated as of March 1, 1994 between the
Registrant and Pillar S.A.
10.59(10) Amendment dated July 15, 1997 to the Series G Convertible Preferred Stock and
Warrant Purchase Agreement dated as of September 9, 1994 among the Registrant
and certain purchasers, as amended.
10.60(10) Sixth Amendment to Lease dated as April 1997 between the Registrant and Charles
River Building Limited Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.61(1) Consent Agreement dated January 15, 1998 between Silicon Valley Bank and the
Registrant relating to the Silicon Agreement.
10.62(3) Form of Unit Purchase Agreement (the "Unit Purchase
Agreement") in connection with the sale of Notes due
2007 by and among the Registrant and certain
purchasers.
10.63(3) Form of Notes due 2007 of the Registrant issued to or issuable pursuant to the Unit
Purchase Agreement.
10.64(3) Form of Warrants of the Registrant issued or issuable pursuant to the Unit Purchase
Agreement.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McDonnell Boehnen Hulbert & Berghoff.
27.1(1) Financial Data Schedule [EDGAR] - Year Ended December 31, 1997.
27.2(1) Financial Data Schedule [EDGAR] - Year Ended December 31, 1996.
II-9
<PAGE>
27.3(7) Financial Data Schedule [EDGAR] - for period ended March 31, 1998.
27.4(8) Financial Data Schedule [EDGAR] - for period ended June 30, 1998.
27.5(9) Financial Data Schedule [EDGAR] - for period ended September 30, 1998.
99.1 Letter Agreement between the Registrant and Forum Capital Markets LLC and Pecks
Management Partners Ltd. for the purchase of the Loan and Security Agreement with
Silicon Valley Bank.
99.2(7) Financial Advisory Agreement between Registrant and Pillar Investments Ltd. dated
May 5, 1998.
99.3(7) Placement Agency Agreement between Registrant and Pillar Investments Ltd. dated
as of January 15, 1998.
- --------------------------------
* To be filed by Amendment
(1) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1997.
(2) Incorporated by reference to Exhibits to the Registrant's Registration Statement on
Form S-1 (File No. 33-99024).
(3) Incorporated by reference to Exhibit 9(a)(1) to the Registrant's Schedule 13E-4 dated
February 6, 1998.
(4) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K
dated April 2, 1997.
(5) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1996.
(6) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1995.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1998.
(8) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1998.
(9) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1998.
(10) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1997.
</TABLE>
+ Confidential treatment granted as to certain portions, which portions are
omitted and filed separately with the Commission.
++ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997.
+++ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
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<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 14 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of Securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
II-11
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the Securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the termination of
the offering.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 18, 1998
HYBRIDON, INC.
By:/s/ E. ANDREWS GRINSTEAD III
------------------------------
E. Andrews Grinstead III
Chairman, Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Hybridon, Inc., hereby
severally constitute and appoint E. Andrews Grinstead III and Robert G.
Andersen and each of them singly, our true and lawful attorneys, with full power
to them and each of them singly, to sign for us in our names in the capacities
indicated below, all pre-effective and post-effective amendments to
thisRregistration Statement and any related subsequent Registration Statement
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and generally
to do all things in our names and on our behalf in such capacities to enable
Hybridon, Inc. to comply with the provisions of the Securities Act of 1933, as
amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
<S> <C> <C>
/s/ E. ANDREWS GRINSTEAD III Chairman, Chief Executive December 18, 1998
- ----------------------------- Officer and Director
E. Andrews Grinstead III
/s/ SUDHIR AGRAWAL Senior Vice President and
- ----------------------------- Director
Dr. Sudhir Agrawal December 18, 1998
/s/ JAMES B. WYNGAARDEN
- -----------------------------
Dr. James B. Wyngaarden Director December 17, 1998
/s/ NASSER MENHALL
- ----------------------------- Director December 18, 1998
Mr. Nasser Menhall
/s/ PAUL C. ZAMENCNIK Director December 17, 1998
- -----------------------------
Dr. Paul C. Zamecnik
/s/ YOUSSEF EL-ZEIN
- ----------------------------- Director December 18, 1998
Mr. Youssef El-Zein
<PAGE>
- ----------------------------- Director December __, 1998
Mr. Art Berry
- -----------------------------S Director December __, 1998
Sheikh Mohamed El-Khereiji
/s/ HAROLD L. PURKEY Director December 17, 1998
- --------------------
Mr. Harold L. Purkey
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1(1) Restated Certificate of Incorporation of the Registrant, as amended.
3.2(2) Amended and Restated By-Laws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Preferred Stock.
3.4(3) Form of Certificate of Designation of Series B Preferred Stock.
4.1(2) Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant.
4.2(4) Indenture dated as of March 26, 1997 between Forum Capital Markets LLC and the
Registrant.
4.3(7) Certificate of Designation of Series A Preferred Stock, par value $.01 per share,
dated May 5, 1998.
4.4(7) Form of 14% Note Due 2007.
4.5(7) Class A Warrant Agreement, dated May 5, 1998.
4.6(7) Class B Warrant Agreement, dated May 5, 1998.
4.7(7) Class C Warrant Agreement, dated May 5, 1998.
4.8(7) Class D Warrant Agreement, dated May 5, 1998.
+10.1(2) License Agreement dated February 21, 1990 and restaged as of September 8, 1993
between the Registrant and the Worcester Foundation for Biomedical Research, Inc.,
as amended.
+10.2(2) Patent License Agreement dated September 21, 1995 between the Registrant and
National Institutes of Health.
+10.3(2) Patent License Agreement effective as of October 13, 1994 between the Registrant
and McGill University.
+10.4(2) License Agreement effective as of October 25, 1995 between the Registrant and the
General Hospital Corporation.
+10.5(2) License Agreement dated as of October 30, 1995 between the Registrant and Yoon
S. Cho-Chung.
+10.6(2) Collaborative Study Agreement effective as of December 30, 1992 between the
Registrant and Medtronic, Inc.
+10.7(2) System Design and Procurement Agreement dated as of December 16, 1994 between
the Registrant and Pharmacia Biotech, Inc.
10.8(2) Lease dated March 10, 1994 between the Registrant and Laborer's Pension/Milford
Investment Corporation for space located at 155. Fortune Boulevard, Milford,
Massachusetts, including Note in the original principal amount of $750,000.
10.9(2) Lease dated February 4, 1994 between the Registrant and Charles River Building
Limited Partnership for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
II-13
<PAGE>
10.10(2) Series G Convertible Preferred Stock and Warrant Purchase Agreement dated as of
September 9, 1994 among the Registrant and certain Purchasers, as amended (the
"Series G Agreement").
10.11(2) Registration Rights Agreement dated as of February 21, 1990 between the Registrant,
the Worcester Foundation for Biomedical Research, Inc. and Paul C. Zamecnik.
10.12(2) Registration Rights Agreement dated as of June 25, 1990 between the Registrant and
Nigel L. Webb.
10.13(2) Registration Rights Agreement dated as of February 6, 1992 between the Registrant
and E. Andrews Grinstead III.
10.14(2) Registration Rights Agreement dated as of February 6, 1992 between the Registrant
and Anthony J. Payne.
++10.15(2) 1990 Stock Option Plan, as amended.
++10.16(2) 1995 Stock Option Plan.
++10.17(2) 1995 Director Stock Plan.
++10.18(2) 1995 Employee Stock Purchase Plan.
10.19(2) Form of Warrant to purchase shares of Series C Convertible Preferred Stock
originally issued to Pillar Investment Limited (formerly known as Ash Properties
Limited), as amended.
10.20(2) Form of Warrant to purchase shares of Common Stock issued in connection with the
issuance of the Registrant's series of notes known as its 10% Convertible
Subordinated Notes due September 16, 1993 and the Registrant's 10% Convertible
Subordinated Note Due March 19, 1993, as amended.
10.21(2) Warrant issued to Pillar S.A. to purchase up to 175,000 shares of Common Stock
dated as of December 1, 1992, as amended.
10.22(2) Form of Warrant originally issued to Pillar Investment Limited to purchase 427,126
shares of Common Stock dated as of February 15, 1993, as amended.
10.23(2) Form of Warrant originally issued to Pillar Investment Limited to purchase 350,000
shares of Common Stock dated as of February 15, 1993, as amended.
10.24(2) Warrant issued to Pillar Investment Limited to purchase 500,000 shares of Common
Stock dated as of February 4, 1994, as amended.
10.25(2) Form of Warrant originally issued to Pillar Investment Limited to purchase shares of
Common Stock issued as placement commissions in connection with the sale of shares
of Series F Convertible Preferred Stock and in consideration of financial advisory
service, as amended.
10.26(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common Stock dated as
of March 1, 1994, as amended.
10.27(2) Form of Warrant to purchase shares of Common Stock issued as part of the Units (as
defined in the Series G Agreement) issued and sold to investors pursuant to the Series
G Agreement on or prior to March 31, 1995, as amended.
10.28(2) Form of Warrant to purchase shares of Common Stock issued and sold to investors
pursuant to the Series G Agreement after March 31, 1995.
10.29(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common Stock dated as
of March 1, 1995.
II-14
<PAGE>
10.30(2) Form of Warrant issued to Pillar Investment Limited to purchase shares of Common
Stock issued as placement commissions in connection with the sale of Units pursuant
to the Series G Agreement.
++10.31(5) Employment Agreement dated as of March 1, 1997 between the Registrant and E.
Andrews Grinstead III.
10.32(2) Indemnification Agreement dated as of February 6, 1992 between the Registrant and
E. Andrews Grinstead III.
++10.33(6) Employment Agreement dated March 1, 1997 between the Registrant and Dr. Sudhir
Agrawal.
++10.34(2) Consulting Agreement dated as of February 21, 1990 between the Registrant and Dr.
Paul C. Zamecnik.
10.35(2) Consulting Agreement dated as of March 1, 1994 between the Registrant and Pillar
S.A.
10.36(2) Consulting Agreement dated as of July 8, 1995 between the Registrant and Pillar
S.A., as amended.
10.37(2) Master Lease Agreement dated as of March 1, 1994 between the Registrant and
General Electric Capital Corporation.
10.38(2) First Amendment to Lease dated as of November 30, 1995 between the Registrant
and Charles River Building Limited Partnership for space located at 620 Memorial
Drive, Cambridge, Massachusetts.
+10.39(6) Research, Development and License Agreement dated as of January 24, 1996 between
the Registrant and G.D. Searle & Co.
+10.40(6) Manufacturing and Supply Agreement dated as of January 24, 1996 between the
Registrant and G.D. Searle & Co.
10.41(6) Registration Rights Agreement dated as of January 24, 1996 between the Registrant
and G.D. Searle & Co.
10.42(6) Second Amendment to Lease dated as of February 23, 1996 between the Registrant
and Charles River Building Limited Partnership for space located at 620 Memorial
Drive, Cambridge, Massachusetts.
10.43(6) Third Amendment to Lease dated as of February 28, 1996 between the Registrant and
Charles River Building Limited Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.44(5) Fourth Amendment to Lease dated as of July 25, 1996 between the Registrant and
Charles River Building Limited Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.45(5) Fifth Amendment to Lease dated as of March 14, 1997 between the Registrant and
Charles River Building Limited Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.46(5) Loan and Security Agreement dated as of December 31, 1996 between the Registrant
and Silicon Valley Bank.
10.47(7) First Amendment to Loan and Security Agreement dated March 30, 1998 between
Hybridon, Inc. and Silicon Valley Bank.
10.48(8) Second Amendment to Loan and Security Agreement dated May 19, 1998, effective
as of April 30, 1998, between Hybridon, Inc. and Silicon Valley Bank.
II-15
<PAGE>
10.49(9) Third Amendment to Loan and Security Agreement dated September 18, 1998
between Hybridon, Inc. and Silicon Valley Bank.
10.50(9) Fourth Amendment to Loan and Security Agreement dated October 30, 1998,
effective as of September 29, 1998 between Hybridon, Inc. and Silicon Valley Bank.
10.51(5) Warrant issued to Silicon Valley Bank to purchase 65,000 shares of Common Stock
dated as of December 31, 1996.
10.52(5) Registration Rights Agreement dated as of December 31, 1996 between the Registrant
and Silicon Valley Bank.
10.53(5) Master Equipment Lease Agreement dated as of October 25, 1996 between the
Registrant and Finova Technology Finance, Inc.
+++10.54(5) Supply and Sales Agreement dated as of September 1, 1996 between the Registrant
and P.E. Applied Biosystems.
10.55(2) Registration Rights Agreement dated as of March 26, 1997 between Forum Capital
Markets LLC and the Registrant.
10.56(2) Warrant Agreement dated as of March 26, 1997 between Forum Capital Markets
LLC and the Registrant.
+++10.57(6) Amendment No. 1 to License Agreement, dated as February 21, 1990 and restated
as of September 8, 1993, by and between the Worcester Foundation for Biomedical
Research, Inc. and the Registrant, dated as of November 26, 1996.
10.58(10) Letter Agreement dated May 12, 1997 between the Registrant and Pillar S.A.
amending the Consulting Agreement dated as of March 1, 1994 between the
Registrant and Pillar S.A.
10.59(10) Amendment dated July 15, 1997 to the Series G Convertible Preferred Stock and
Warrant Purchase Agreement dated as of September 9, 1994 among the Registrant
and certain purchasers, as amended.
10.60(10) Sixth Amendment to Lease dated as April 1997 between the Registrant and Charles
River Building Limited Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.61(1) Consent Agreement dated January 15, 1998 between Silicon Valley Bank and the
Registrant relating to the Silicon Agreement.
10.62(3) Form of Unit Purchase Agreement (the "Unit Purchase
Agreement") in connection with the sale of Notes due
2007 by and among the Registrant and certain
purchasers.
10.63(3) Form of Notes due 2007 of the Registrant issued to or issuable pursuant to the Unit
Purchase Agreement.
10.64(3) Form of Warrants of the Registrant issued or issuable pursuant to the Unit Purchase
Agreement.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McDonnell Boehnen Hulbert & Berghoff.
27.1(1) Financial Data Schedule [EDGAR] - Year Ended December 31, 1997.
27.2(1) Financial Data Schedule [EDGAR] - Year Ended December 31, 1996.
II-16
<PAGE>
27.3(7) Financial Data Schedule [EDGAR] - for period ended March 31, 1998.
27.4(8) Financial Data Schedule [EDGAR] - for period ended June 30, 1998.
27.5(9) Financial Data Schedule [EDGAR] - for period ended September 30, 1998.
99.1 Letter Agreement between the Registrant and Forum Capital Markets LLC and Pecks
Management Partners Ltd. for the purchase of the Loan and Security Agreement with
Silicon Valley Bank.
99.2(7) Financial Advisory Agreement between Registrant and Pillar Investments Ltd. dated
May 5, 1998.
99.3(7) Placement Agency Agreement between Registrant and Pillar Investments Ltd. dated
as of January 15, 1998.
- --------------------------------
* To be filed by Amendment
(1) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1997.
(2) Incorporated by reference to Exhibits to the Registrant's Registration Statement on
Form S-1 (File No. 33-99024).
(3) Incorporated by reference to Exhibit 9(a)(1) to the Registrant's Schedule 13E-4 dated
February 6, 1998.
(4) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K
dated April 2, 1997.
(5) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1996.
(6) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1995.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1998.
(8) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1998.
(9) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1998.
(10) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1997.
</TABLE>
+ Confidential treatment granted as to certain portions, which portions are
omitted and filed separately with the Commission.
++ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997.
+++ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
II-17
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accounts, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 22, 1998
[LETTERHEAD OF MCDONNELL, BOEHNEN, HULBERT & BERGHOFF]
December 21, 1998
Hybridon, Inc.
155 Fortune Blvd.
Milford, MA 01757
RE: Hybridon, Inc. -- Registration Statement on Form S-1
Dear Sirs:
McDonnell, Boehnen, Hulbert & Berghoff hereby consents to the reference
to our firm under the section "The Company - Patents, Trade Secrets and
Licenses" included in this Registration Statement on Form S-1 of Hybridon, Inc.
Very truly yours,
/s/ John J. McDonnell
---------------------
John J. McDonnell
November 13, 1998
Forum Capital Markets LLC
53 Forest Avenue
Old Greenwich, CT 06870
Attention: Mr. C. Keith Hartley
Pecks Management Partners Ltd.
100 Rockefeller Plaza, Suite 900
New York, NY 10020
Attention: Mr. Arthur Berry
Dear Sirs:
This letter sets forth our agreement in respect of the purchase by Forum
Capital Markets, LLC ("Forum") and Pecks Management Partners Ltd. ("Pecks";
Forum and Pecks collectively, the "Lender") of the loan made by Silicon Valley
Bank to Hybridon, Inc. ("Hybridon") pursuant to the Loan and Security Agreement
dated December 31, 1996, as amended (the "Loan"). The terms of the purchase of
the Loan are as follows:
1. The Lender will purchase the Loan as soon as practicable.
2. The Lender will lend an additional amount to Hybridon as soon as
practicable so that the outstanding principal amount of the Loan is
increased to $6,000,000.
3. The terms of the Loan will be amended as follows:
(a) Maturity: November 30, 2003.
(b) Interest Rate: 8% for the term of the Loan.
(c) Amortization: Interest is payable monthly in arrears; the
principal is due in full at maturity of the Loan.
(d) Conversion: The Loan will be convertible, at the Lender's option,
in whole or in part, into shares of common stock, par value $.001
per share, of Hybridon ("Common Stock") at a rate equal to the
mid-point between the bid and ask price on the date of closing of
the purchase of the Loan.
(e) Covenants: The threshold of the Minimum Liquidity covenant will
be reduced from $4,000,000 to $2,000,000.
<PAGE>
Forum Capital Markets, LLC
Pecks Management Partners, Ltd.
November 13, 1998
Page 2
(f) Prepayment: The Loan may not be prepaid, in whole or in part, at
any time prior to December 1, 2000.
4. The other terms of the Loan will remain unchanged.
5. Forum will receive a fee of $400,000, which will be reinvested by Forum
by purchasing from Hybridon either (a) shares of Hybridon stock (either
Common Stock or Preferred Stock) and accompanying warrants on the same
terms as are sold to investors in Hybridon's next equity offering to
occur after the date of this letter (the "Placement Price") or (b) if no
equity offering is consummated prior to May 1, 1999, 160,000 shares of
Hybridon Common Stock and warrants to purchase an additional 40,000
shares of Hybridon Stock at $3.00 per share. In addition, Forum will
receive warrants exercisable until maturity of the Loan to purchase
$400,000 of shares of Common Stock priced at the Placement Price, or if
no equity offering is consummated prior to May 1, 1999, at $3.00 per
share. These shares and warrants will be issued as soon as practicable
following satisfaction of Section 4.10 of the Indenture dated as of
March 26, 1997, governing Hybridon's 9% Convertible Subordinated Notes
due 2004.
If this letter correctly sets forth our agreement, please so acknowledge
by signing in the space indicated below and returning a copy of this letter to
the undersigned by telecopier. Counterparts are, of course, acceptable.
Very truly yours,
HYBRIDON, INC.
By: /s/ E. A. Grinstead III
-----------------------------------
Name: E. Andrews Grinstead III
Title: President, CEO and Chairman
AGREED AND ACCEPTED AGREED AND ACCEPTED
as of November 16, 1998: as of November 16, 1998:
FORUM CAPITAL MARKETS, LLC PECKS MANAGEMENT PARTNERS
LTD.
By: /s/ C. Keith Hartley By: /s/ Arthur W. Berry
------------------------------ ---------------------------
Name: C. Keith Hartley Name: Arthur W. Berry
Title: Senior Managing Partner Title: Chairman
