As filed with the Securities and Exchange Commission on July 7, 1999
Registration No. 333-69649
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HYBRIDON, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 2836 04-3072298
<S> <C> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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155 Fortune Blvd.
Milford, Massachusetts 01757
(508) 482-7500
(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
(212) 715-9100
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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. |_|
<PAGE>
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CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Proposed Proposed
Maximum Maximum
Title of Each Class Amount to Offering Aggregate Amount of Amount
of Securities to be be Price Per Offering Registration Previously Amount
Registered Registered Share Price Fee Paid Due
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<S> <C> <C> <C> <C> <C> <C>
Series A Convertible
Preferred Stock, 662,099 100 (2) $66,209,900 $20,063.59 $19,430.15 $633.44
$.01 par value
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Common Stock, 10,195,175 1.15625 (3) 11,788,171 $3,571.82 $3,571.82 $0
$.001 par value
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Common Stock, 460,000 0.54687 (4) 251,560 $76.23 $0 $76.23
$.001 par value
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Common Stock,
$.001 par value,
issuable upon 173,333 3.00 (1)(6) 519,999 $157.58 $0 $157.58
exercise of Forum
Warrants
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Common Stock,
$.001 par value,
issuable upon 15,578,800
conversion of Series (1) -- (5) -- -- -- --
A Convertible
Preferred Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock,
$.001 par value,
issuable upon 3,002,958 4.25 (1)(6) 12,762,571 $3,867.05 $3,867.05 $0
exercise of Class A (1)
Warrants
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock,
$.001 par value,
issuable upon 1,752,945 2.40 (1)(6) 4,207,068 $1,274.74 $1,274.74 $0
exercise at Class B (1)
Warrants
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock,
$.001 par value,
issuable upon 904,274 (1) 2.40 (1)(6) 2,170,257 $657.88 $657.88 $0
exercise of Class C
Warrants
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Common Stock,
$.001 par value,
issuable upon 672,267 (1) 2.40 (1)(6) 1,613,441 $488.87 $488.87 $0
exercise of Class D
Warrants
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Common Stock,
$.0001 par
value, issuable upon 609,195 2.40 (1)(6) 1,462,065 $443.01 $443.01 $0
exercise
of Forum Warrants
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Common Stock,
$.0001 par value,
issuable upon 588,235 4.25 (1)(6) 2,499,999 $757.50 $757.50 $0
exercise of Forum
Warrants
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock,
$.0001 par value,
issuable upon 1,111,630 2.40 (1)(6) 2,667,912 $808.38 $808.38 $0
exercise of Pillar
Investment Warrants
===================================================================================================================================
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(1) Pursuant to Rule 416 Hybridon is also registering that number of
additional shares of Common Stock that may become issuable pursuant
to applicable anti-dilution provisions.
(2) 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.
(3) 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).
(4) Estimated solely for purposes of calculating the registration fee
using the average of the bid and ask price for the Common Stock on
June 29, 1999 as required by Rule 457(i).
(5) Pursuant to Rule 457(i) no additional registration fee is 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).
------------------------------
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 JULY [6], 1999
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
662,099 shares of Series A Convertible Preferred Stock
and
35,048,809 shares of Common Stock
This Prospectus offers for resale by the holders (the "Selling
Security Holders") in transactions registered under the Securities Act of 1933
662,099 shares of Series A Convertible Preferred Stock, $.01 par value per
share, of Hybridon (the "Convertible Preferred Stock"), and 35,048,809 shares of
the Common Stock, $.001 par value per share, of Hybridon (the "Common Stock").
These shares were originally issued in transactions intended to qualify for an
exemption from registration under the Securities Act.
In this Prospectus, the Convertible Preferred Stock and the Common
Stock are collectively referred to as the "Securities."
Certain of the shares of Common Stock being registered will be
issued upon the exercise of certain warrants issued by Hybridon. Hybridon will
not receive any of the offering proceeds other than proceeds upon exercise of
these warrants.
The Common Stock is quoted on the NASD Over-the-Counter, or "OTC,"
Bulletin Board under the symbol "HYBN." Prior to this offering there has been no
public market for the Convertible Preferred Stock.
See "Risk Factors" beginning page 5 of this Prospectus for a
discussion of certain factors that you should consider in evaluating an
investment in the Securities.
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 date of this Prospectus is __________, 1999.
<PAGE>
AVAILABLE INFORMATION
Hybridon is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance with the Exchange Act files reports, proxy and information statements
and other information with the Securities and Exchange Commission (the
"Commission"). You may inspect and copy reports, proxy and information
statements and other information at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. You may obtain copies of this material from the Commission by mail at
prescribed rates. Please direct your requests to the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site (http://www.sec.gov)
that contains certain of Hybridon's reports that were filed after Hybridon
became an electronic filer.
Hybridon has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Securities being offered by this Prospectus (including all
exhibits and amendments hereto, the "Registration Statement"). This Prospectus
does not contain all the information set forth in the Registration Statement and
its exhibits and schedules. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to summarize the
material provisions of those documents, but are not necessarily complete; with
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, please refer to the exhibit for a more complete
description of the matter involved. You may inspect copies of the Registration
Statement and its exhibits, without charge, at the offices of the Commission at
the addresses set forth above.
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<PAGE>
PROSPECTUS SUMMARY
This summary highlights information found elsewhere in this
prospectus. It may not contain all of the information that is important to you.
To understand this offering fully, you should read the entire prospectus
carefully, including the "Risk Factors" section and Hybridon's financial
statements.
HYBRIDON
Hybridon, established in 1989, is a leader in the discovery and
development of genetic drugs based on "antisense" technology, in other words
drugs that use synthetic RNA and DNA, also called "oligonucleotides," with the
aim of stopping or reducing the body's production of proteins that directly or
indirectly cause a given disease.
Hybridon believes that drugs based on antisense technology may be
more effective, may cause fewer side effects, and may have a greater range of
applications than conventional drugs.
Hybridon's leadership in this field is based on a number of factors:
its access to proprietary manufacturing technology for the chemical modification
of oligonucleotides; its expertise in the efficient design and development of
antisense drugs; innovations it has devised in the manufacture of
oligonucleotides; its large-scale oligonucleotide manufacturing facility; and
its expertise in the manufacture of oligonucleotides with diverse chemical
modifications.
Hybridon's drug development and discovery programs currently focus
on the treatment of cancer, viral infections (including AIDS and AIDS-related
diseases), and diseases of the eye. Hybridon is currently developing several
drug products, including the cancer drug GEM(R) 231. Hybridon recently completed
a Phase I clinical trial of GEM(R) 231, and the FDA recently granted Hybridon
approval to start a Phase II clinical trial of GEM(R) 231. Other Hybridon drug
products include the AIDS drug GEM(R) 92, for which Hybridon has completed a
Pilot Phase I clinical study in Europe in which the drug was administered
orally.
Hybridon is engaged in corporate collaborations, including with G.D.
Searle & Co., and also has collaborative research relationships with independent
researchers and academic and research institutions, including the National
Institutes of Health.
Through its Hybridon Specialty Products division, Hybridon
manufactures oligonucleotide compounds both for Hybridon's internal use, for use
by collaborators, and for sale to third parties. Hybridon believes that demand
for oligonucleotide compounds will increase, and its strategy is to position
Hybridon Specialty Products to take advantage of this increased demand.
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<PAGE>
SUMMARY FINANCIAL DATA
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Three Months
Years Ended Ended
December 31, March 31,
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1996 1997 1998 1998 1999
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(In thousands, except per share data) (unaudited)
Statement of Operations Data:
Revenues
<S> <C> <C> <C> <C> <C>
Research and development......................... $1,419 $945 $1,100 $150 $150
Product and service revenue...................... 1,080 1,877 3,254 825 1,530
Royalty income................................... 62 48 - - 40
Interest income.................................. 1,447 1,079 148 18 53
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4,008 3,949 4,502 993 1,773
Operating Expenses
Research and development......................... 39,390 46,828 20,977 6,403 3,447
General and administrative....................... 11,347 11,026 6,573 1,665 1,122
Interest......................................... 124 4,536 2,932 1,607 170
Restructuring.................................... -- 11,020 -- -- --
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Total operating expenses...................... 50,861 73,410 30,482 9,675 4,739
-----------------------------------------------------------------------------
Loss from operations................................. (46,853) (69,461) (25,980) (8,682) (2,966)
Extraordinary item:
Gain on conversion of 9% convertible
subordinated notes payable.................... -- -- 8,877 -- --
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Net loss............................................. (46,853) (69,461) (17,103) (8,682) (2,966)
Accretion of preferred stock dividend................ -- -- 2,689 -- 1,042
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Net loss to common stockholders...................... $(46,853) $(69,461) $(19,792) $(8,682) $(4,008)
=============================================================================
Basic and diluted net loss per common share from:
Operations....................................... $(10.24) $(13.76) $(2.19) $(1.72) $(0.19)
Extraordinary gain............................... -- -- 0.75 -- --
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Net loss per share............................ (10.24) (13.76) (1.44) (1.72) (0.19)
Accretion of preferred stock dividends........ -- -- (0.23) -- (0.07)
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Net loss per share applicable to common
stockholders............................... $(10.24) $(13.76) $(1.67) $(1.72) $(0.26)
=============================================================================
Shares used in computing basic and
diluted net loss per Common Share (1)............ 4,576 5,050 11,859 5,060 15,305
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Balance Sheet Data: December 31, March 31,
------------------------------------
1997 1998 1999
------------------------------------ -----------------------
Cash, cash equivalents and short-term
<S> <C> <C> <C> <C>
investments(2)................................... $2,202 $5,607 $2,461
Working capital deficit.............................. (24,100) (5,614) (7,820)
Total assets......................................... 35,072 16,536 12,769
Long-term debt and capital lease
obligations, net of current portion.............. 3,282 473 454
9% convertible subordinated
notes payable.................................... 50,000 1,306 1,306
Accumulated deficit.................................. (218,655) (238,448) (242,456)
Total stockholders' equity (deficit)................. (46,048) 2,249 (656)
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(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) Short-term investments consisted of U.S. government securities with
maturities greater than three months but less than one year from the
purchase date.
4
<PAGE>
RISK FACTORS
Investing in the Securities involves substantial risks. You should
consider carefully the following risk factors, together with all of the other
information included in this Prospectus, in deciding whether to invest in the
Securities.
Hybridon May Never Generate Revenues from Sales of Its Drugs
Hybridon's business is at an early stage of development, and
Hybridon has not yet generated any revenues from the commercial sale of its
drugs. Due to the various risks inherent in Hybridon's business and described in
the following risk factors, Hybridon may never generate revenues from sale of
its drugs, and may never become profitable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" and "-- Liquidity and Capital Resources."
Hybridon Has a History of Operating Losses and Anticipates Future Losses
Hybridon has never earned a profit and has incurred substantial net
operating losses. These losses were caused by lack of revenues from drug sales
to offset research and development and administrative costs. Hybridon expects to
incur operating losses for at least the next several years, as it plans to spend
substantial amounts on research and development, including preclinical studies
and clinical trials, and, if it obtains necessary regulatory approvals, on sales
and marketing efforts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations" and "-- Liquidity
and Capital Resources."
Hybridon May Determine that One or More Drugs in Development Are Commercially
Impractical and Cannot Be Sold Commercially
Before a drug is sold commercially, it must go through an expensive
and time-consuming testing process. Hybridon's drugs are at various stages in
this process, and Hybridon may at any stage determine that one or more of these
drugs cannot be successfully developed. A drug may, for instance, be
ineffective, have undesirable side effects, or demonstrate other therapeutic
characteristics that prevent or limit its commercial use, or may prove too
costly to produce in commercial quantities. If Hybridon determines that a drug
cannot be successfully developed, Hybridon would not be able to generate
revenues from sale of that drug.
Seeking Regulatory Approval of Drugs Is Time-Consuming and Expensive; Failure to
Obtain Approval of a Drug Would Prevent Hybridon from Selling that Drug; Failure
to Comply With Ongoing Regulatory Requirements Could Cause Hybridon to Be
Subject to Penalties
Hybridon is subject to extensive regulation by numerous governmental
authorities in the U.S. and abroad. Obtaining regulatory approval of a drug can
take several years -- exactly how long depends upon the type, complexity, and
novelty of the drug -- and is typically very expensive. The regulations that
Hybridon must comply with may change, and may even become more burdensome to
Hybridon.
Even if Hybridon is satisfied that a drug is safe and effective, the
regulatory authorities may not agree, as data from preclinical studies and
clinical trials can generally be interpreted in different ways. Hybridon will
need the approval of regulatory agencies in order to sell a drug. If they are
unwilling to grant that approval, Hybridon will not be able to generate revenues
from sale of that drug.
Approval of a drug does not end the involvement of regulatory
authorities. Hybridon and its approved drugs will be subject to continued review
and periodic inspection. Approval of a Hybridon drug may be subject to
restrictions that limit how Hybridon may market that drug. Restrictions may be
imposed on the price at which Hybridon may sell its drugs. If Hybridon fails to
comply with any regulations, it may be subject to fines, suspension of
regulatory approvals, drug recalls, and other penalties.
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<PAGE>
Delays in Patient Enrollment Could Increase the Cost or Duration of Hybridon's
Clinical Studies
Clinical trials are very costly and time-consuming. How quickly
Hybridon is able to complete a clinical study depends upon several factors,
including the size of the patient population, how easily patients can get to the
site of the clinical study, and the criteria for determining which patients are
eligible to join the study. Delays in patient enrollment could delay completion
of a clinical study and increase its costs, and could also delay the commercial
sale of the drug that is the subject of the clinical trial.
Hybridon Must Secure Additional Funding to Avoid Terminating Operations or
Filing For Bankruptcy; It May Not Be Able to Secure Sufficient Additional
Financing
Hybridon has very limited cash resources and substantial obligations
to lenders, its real estate landlords, trade creditors and others. Hybridon's
ability to continue operations in 1999 depends on its success in obtaining new
funds. If Hybridon is unable to obtain substantial additional new funding in
July 1999, it will be forced to terminate its operations or seek relief under
applicable bankruptcy laws. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General" and "-- Cash Resources."
In their report on Hybridon's December 31, 1998 financial
statements, Arthur Andersen LLP, Hybridon's independent public accountants,
states that there is substantial doubt about Hybridon's ability to continue as a
going concern.
Hybridon anticipates that, even if it obtains sufficient cash to
fund its operations in 1999, it will be required to raise substantial additional
funds through external sources, including through collaborative relationships
and public or private financings, to support Hybridon's operations beyond 1999.
If adequate funds are not available, Hybridon may be forced to (1) further
curtail significantly one or more of its research, drug recovery or development
programs, (2) obtain funds through arrangements with collaborative partners or
others that may require Hybridon to relinquish rights to certain of its
technologies, drug candidates or drugs, (3) terminate operations, or (4) seek
relief under applicable bankruptcy laws.
Additional Financing May Cause Stockholder Dilution
If Hybridon raises additional funds by issuing equity securities,
the ownership interest of existing stockholders will be diluted. In addition,
Hybridon may grant future investors rights superior to those of existing
stockholders.
If Hybridon Defaults Under its Loan, It Could Be Forced To Terminate Operations
or File for Bankruptcy
Hybridon is a party to a substantial loan. The lenders may
accelerate the repayment date of the loan in the event of default by Hybridon.
If Hybridon does default on the loan, and the lenders accelerate the repayment
date, the lenders could foreclose on Hybridon's assets, and this could force
Hybridon to terminate operations or seek relief under applicable bankruptcy
laws. Hybridon cannot guarantee that it will not default on the loan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--1998 Financing Activities."
The "Penny Stock" Rules Will Likely Have an Adverse Effect on Your Liquidity and
Hybridon's Ability to Raise Additional Capital
Since the Common Stock is not listed on a national securities
exchange or on a qualified automated quotation system, it is subject to the
"penny stock" provisions of Rule 15g-9 under the Securities Exchange Act of
1934, as amended, which impose additional sales practice requirements on
broker-dealers that sell such securities. Prior to any transaction covered by
this rule, the broker-dealer must receive from the purchaser a written consent
to the transaction, and must reasonably determine that transactions in penny
stocks are suitable for the purchaser, and that the purchaser is capable of
evaluating the risks of transactions in penny stocks. These requirements will
likely have an adverse effect on the market liquidity of Hybridon's securities,
and
6
<PAGE>
therefore on Hybridon's ability to raise funds, the ability of broker-dealers to
sell Hybridon's securities, and the ability of purchasers to sell any of their
Hybridon securities in the secondary market.
Hybridon May Be Unable to Obtain or Enforce Patents; Its Patents May Not Provide
Adequate Protection
Hybridon's success will depend to a large extent on its ability to
(1) obtain U.S. and foreign patent protection for drug candidates and processes,
(2) preserve trade secrets and (3) operate without infringing the proprietary
rights of third parties. Legal standards relating to the validity of patents
covering pharmaceutical and biotechnological inventions and the scope of claims
made under such patents are still developing. As a result, Hybridon's ability to
obtain and enforce patents that protect its drugs is uncertain and involves
complex legal and factual questions.
That Hybridon owns or licenses pending or future patent applications
does not mean that patents based on those applications will ultimately be
issued. To obtain a patent on an invention, one must be the first to invent it
or the first to file a patent application for it. Hybridon cannot be completely
sure that the inventors of subject matter covered by patents and patent
applications that it owns or licenses were the first to invent, or the first to
file patent applications for, those inventions. Furthermore existing or future
patents may be challenged, infringed upon, invalidated, found to be
unenforceable, or circumvented by others. Hybridon's rights under any issued
patents may not provide sufficient protection against competing drugs or
otherwise cover commercially valuable drugs or processes. See
"Business--Patents, Trade Secrets, and Licenses."
Hybridon Could Become Involved in Time-Consuming and Expensive Patent
Litigation; Adverse Decisions in Patent Litigation Could Cause Hybridon to Incur
Additional Costs and Experience Delays in Bringing New Drugs to Market
The pharmaceutical and biotechnology industries have been
characterized by time-consuming and extremely expensive litigation regarding
patents and other intellectual property rights. Hybridon may be required to
commence, or may be made a party to, litigation relating to the scope and
validity of its intellectual property rights, or the intellectual property
rights of others. Such litigation could result in adverse decisions regarding
the patentability of Hybridon's inventions and products, or the enforceability,
validity, or scope of protection offered by its patents. Such decisions could
make Hybridon liable for substantial money damages, or could bar Hybridon from
the manufacture, use, or sale of certain products, resulting in additional costs
and delays in bringing drugs to market. Hybridon may not have sufficient
resources to bring any such proceedings to a successful conclusion. It may be
that entry into a licensing arrangement would allow Hybridon to avoid any such
proceedings. There can be no assurance, however, that Hybridon would be able to
enter into any such licensing arrangement on terms acceptable to Hybridon, or at
all.
Hybridon also may be required to participate in interference
proceedings declared by the U.S. Patent and Trademark Office and in
International Trade Commission proceedings aimed at preventing the importing of
drugs that would compete unfairly with Hybridon drugs. Such proceedings could
cause Hybridon to incur considerable costs.
Hybridon's Trade Secrets and Other Unpatented Proprietary Information May Become
Available to Others
Trade secrets and other unpatented proprietary information plays an
important role in Hybridon's business. Hybridon seeks to protect this
information, in part by means of confidentiality agreements with its
collaborators, employees, and consultants. If any of these agreements is
breached, Hybridon may be without adequate remedies. Also, Hybridon's trade
secrets may become known or be independently developed by competitors. This
could have a material adverse effect on Hybridon's business, and Hybridon may
need to engage in costly and time-consuming litigation to protect its
proprietary rights.
The Loss of Key Members of Management Could Be Damaging
Hybridon depends on the principal members of its management and scientific
staff, including E. Andrews Grinstead, III, Hybridon's Chairman of the Board,
President and its Chief Executive Officer, and
7
<PAGE>
Sudhir Agrawal, Hybridon's Senior Vice President of Discovery and its Chief
Scientific Officer. The loss of their services could have a material adverse
effect on Hybridon.
Hybridon May Not Be Able to Meet Its Personnel Needs; This Could Result in
Delays or Additional Costs
From June 30, 1997, to June 15, 1999, the number of employees of
Hybridon decreased from 213 to 50. As a result, Hybridon has lost significant
expertise, and must recruit and retain new scientific personnel to maintain its
current level of operations, while expansion would require a further increase in
scientific personnel. In addition, expansion by Hybridon would likely result in
the need for additional management personnel. Hybridon may not be able to
attract and retain personnel on acceptable terms, given the competition for
experienced scientists and management among numerous pharmaceutical,
biotechnology and health care companies, universities, and non-profit research
institutions. The failure to recruit and retain personnel could result in delays
in commercializing drugs, and could cause Hybridon to incur additional costs.
Hybridon Relies on Relationships With Research Institutions and Corporate
Partners, and Would Be Harmed By a Lack of, or the Failure of, Such
Relationships
Hybridon'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 Hybridon can give no assurances that it will be able to develop and
maintain such relationships on acceptable terms. Hybridon has entered into a
number of collaborative relationships relating to specific disease targets and
other research activities in order to augment its internal research capabilities
and to obtain access to specialized knowledge or expertise. The loss of any of
these collaborative relationships could have a material adverse effect on
Hybridon's research and development program.
Similarly, strategic alliances with corporate partners, primarily
pharmaceutical and biotechnology companies, may help Hybridon develop and
commercialize drugs. Various problems can arise in strategic alliances. A
partner responsible for conducting clinical trials and obtaining regulatory
approval may fail to develop a marketable drug. A partner may decide to pursue
an alternative strategy or alternative partners. A partner that has been granted
marketing rights for a certain drug within a geographic area may fail to market
the drug successfully. Consequently, Hybridon's current strategic alliance or
those it enters into in the future may not be scientifically or commercially
successful. Hybridon may not able to negotiate advantageous strategic alliances
in the future. The absence of, or failure of, strategic alliances could harm
Hybridon's efforts to develop and commercialize its drugs.
HSP's Results May Be Lower than Currently Anticipated
Through HSP, Hybridon manufactures oligonucleotide compounds for
sale to others. The results of HSP will depend on the demand for and margins on
these drugs, which may be lower than Hybridon anticipates. HSP's results will
also be affected by the price and availability of raw materials and HSP's
production costs.
Hybridon Faces Intense Competition, and Hybridon's Products Could Be Rendered
Obsolete; Many of Hybridon's Competitors Have Greater Resources and Experience
than Hybridon
Many companies are attempting to develop drugs similar those
Hybridon proposes to develop. Some of these drugs are in clinical trials, and
one has received FDA approval and is being commercialized. In addition, there
are other drugs available for the treatment of many of the diseases that
Hybridon's proposed drugs would treat. Any of these drugs may prove more
effective than those that Hybridon proposes to develop and may gain greater
market acceptance.
Furthermore, biotechnology and related pharmaceutical technologies
have undergone and continue to be subject to rapid and significant change.
Hybridon expects that the technologies associated with biotechnology research
and development will continue to develop rapidly. Hybridon's future will depend
in large part on its ability to compete with these technologies. Any compounds,
drugs or processes that Hybridon develops may become obsolete before Hybridon
recovers the expenses incurred in developing those drugs.
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Many of Hybridon's competitors have substantially greater financial,
technical, and human resources than Hybridon, and have significantly greater
experience than Hybridon in preclinical studies, clinical trials, seeking
regulatory approval of new drugs, and manufacturing and marketing new drugs.
Hybridon's Manufacturing Capability May Be Adversely Affected by Problems with
Suppliers
Certain of the raw materials that Hybridon requires to manufacture
oligonucleotides are available from only a few suppliers, namely those with
access to the appropriate patented technology. The number of suppliers is
unlikely to increase in the near future. Hybridon may not be able to secure an
adequate supply of these materials at an acceptable price. Also, due to
regulatory restrictions or other problems, Hybridon's suppliers may fail to
provide to Hybridon drugs of acceptable quality. Such supplier problems would
have an adverse effect on Hybridon's ability to manufacture oligonucleotides
cost-effectively.
Hybridon's Lack of Marketing Experience Could Adversely Affect Its Ability to
Commercialize Its Drugs
Direct marketing of any of Hybridon's proposed drugs would require a
substantial marketing staff and sales force supported by a distribution system.
Given that Hybridon currently has little experience in sales, marketing, or
distribution, Hybridon might not be able to undertake direct marketing of its
drugs in a cost-effective manner. The alternative--co-marketing or other
licensing arrangements--would allow Hybridon to avoid the significant cost
involved in direct marketing, but would make Hybridon reliant on the efforts of
others.
Hybridon Could Be Subject to Product Liability Claims for Which It Is Not Fully
Insured
Hybridon risks being the target of product liability claims alleging
that its drugs harm subjects or patients. Such claims could be asserted in
connection with Hybridon drugs used in clinical trials as well as those sold
commercially. Hybridon is covered against such claims by a product liability
insurance policy (subject to various deductibles), but such policies are
becoming increasingly expensive, and Hybridon may not be able to maintain
sufficient coverage to protect it from incurring significant losses due to
product liability claims.
Hybridon Uses Hazardous Materials, and Could Be Held Liable For Damages in the
Event of Accidental Contamination or Injury
Hybridon's activities involve the controlled use of hazardous
chemicals, viruses, and radioactive compounds. Although Hybridon 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 cannot be completely eliminated. In the event
of such an accident, Hybridon could be held liable for any damages that result.
Restrictions on Third-Party Reimbursement Could Adversely Affect Hybridon's
Ability to Commercialize Its Drugs
Hybridon's ability to commercialize drugs successfully will depend
in part on the extent to which various third parties are willing to reimburse
patients for the costs of Hybridon's drugs and related treatments. These third
parties include government authorities, private health insurers, and other
organizations, such as health maintenance organizations. Third-party payors are
increasingly challenging the prices charged for medical products and services.
Accordingly, if less costly drugs are available, third-party payors may not
authorize or may limit reimbursement for Hybridon's drugs, even if they are
safer or more effective than the alternatives. In addition, the trend toward
managed healthcare and government insurance programs could result in lower
prices and reduced demand for Hybridon's drugs. Cost containment measures
instituted by healthcare providers and any general healthcare reform could
affect Hybridon's ability to sell drugs and may have a material adverse effect
on Hybridon. Hybridon may be forced to reduce its prices; this would in turn
adversely affect profitability.
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Hybridon cannot predict what additional legislation or regulation
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
might have on its business. In particular, Hybridon may be forced to reduce its
prices; this would in turn adversely affect profitability.
The Market Price of the Securities Is Likely to Be Volatile
The market price of the securities of biotechnology companies such
as Hybridon are highly volatile. The market price of Hybridon's securities is
likely to be influenced by the results of preclinical studies and clinical
trials by Hybridon or its competitors, fluctuations in Hybridon's operating
results, announcements by Hybridon or its competitors of technological
innovations or new commercial therapeutic products, changes in governmental
regulation, developments in patent or other proprietary rights of Hybridon or
its competitors, public concern as to the safety of drugs developed by Hybridon,
and general market conditions.
Hybridon's Ability to Utilize Its Net Operating Losses and Tax Credits Is Likely
to Be Severely Restricted
Hybridon has substantial net operating loss and tax credit
carryforwards for federal income tax purposes. These carryforwards will expire
beginning on December 31, 2005. The Tax Reform Act of 1986 limits the annual use
of net operating loss and tax credit carryforwards following certain ownership
changes. The securities offerings conducted by Hybridon will severely restrict
Hybridon'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 may be applied against
future taxable income and tax liabilities, respectively, Hybridon may never be
fully able to use its net operating loss and tax credits for federal income tax
purposes.
Hybridon May Be Adversely Affected by Year 2000 Compliance Related Problems
As has been widely publicized, many computer systems and
microprocessors are not programmed to accommodate dates beyond the year 1999.
Hybridon's exposure to this 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. While Hybridon currently believes that all of its internal systems
will be Y2K compliant by the end of the third quarter of 1999, and is taking
appropriate measures to ensure that its suppliers are Y2K compliant, it is
nevertheless possible that Y2K problems will have a material effect on
Hybridon's business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000."
Stock Ownership by Hybridon's Directors and Officers May Delay or Prevent a
Change of Control
Hybridon's directors and executive officers and their affiliates
beneficially own a significant percentage of Hybridon's outstanding Common Stock
and Convertible Preferred Stock. 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 Hybridon.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that do not
reflect historical facts, but instead reflect Hybridon's current expectations,
estimates, and projections regarding its business. Forward-looking statements
can be found in the material set forth under "Risk Factors," "Business," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and are characterized by use of words such as "believes," "plans,"
"expects," and "anticipates." Forward-looking statements are not guarantees of
future performance, and necessarily involve risks and uncertainties, and
Hybridon's results could differ materially from those anticipated in the
forward-looking statements contained in this Prospectus.
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BUSINESS
HYBRIDON
Hybridon, established in 1989, is a leader in the discovery and
development of genetic drugs. These drugs are based on "antisense" technology,
in that they use synthetic RNA and DNA, also called oligonucleotides, with the
aim of stopping or reducing the body's production of proteins that directly or
indirectly cause a given disease. Hybridon's leadership position is based on
following factors:
o its access to proprietary technology for the chemical modification of
oligonucleotides
o its expertise in the efficient design and development of antisense drugs
o innovations it has devised in the manufacture of oligonucleotides
o its large-scale oligonucleotide manufacturing facility
o its expertise in the manufacture of oligonucleotides with diverse chemical
modifications
Hybridon has developed and owns antisense technology that includes
important new medicinal chemistries (relating to the design and manufacture of
new medicinal compounds), analytical chemistry (relating to the detection and
identification of compounds inside and out of the body), and manufacturing
technology.
TECHNOLOGY OVERVIEW
Introduction
The heart, brain, liver, and other organs in the human body function
together to support life. Each microscopic cell within these organs produces
proteins that affect how that cell functions within its organ, and ultimately
how efficiently each organ functions within the body. Almost all human diseases
are caused by abnormal production or performance of proteins within individual
cells. In some instances, cell proteins act directly to cause or support a
disease. In other instances, cell proteins interfere with other proteins that
prevent or combat disease. Traditional drugs are designed to interact with
protein molecules that cause or support diseases. Antisense drugs are designed
to work at an earlier stage in that they are designed to stop the production of
disease-causing or disease-supporting proteins.
The information that controls a cell's production of a specific
protein is contained in the gene relating to that protein. Each gene is made up
of two intertwined strands of DNA that form a structure called a "double helix."
Each strand of DNA consists of a string of individual DNA building blocks,
called nucleotides, arranged in a specific sequence. One of the paired strands
contains the information that directs the composition of a specific protein, and
is called the "coding" strand. The other strand, the "non-coding" strand,
contains a different but complementary sequence of nucleotides. Each strand is
made of linked molecules, known as the "backbone," and attached to the backbone
are molecules known as "bases." It is the sequence of bases, and not the
backbone, that contains genetic information. When Hybridon modifies
oligonucleotides chemically, it modifies the backbone, and not the bases.
The full complement of human genes, known as the human "genome,"
consists of over 100,000 genes and contains the information required to produce
all human proteins. A copy of the complete human genome is present in each cell,
and each cell makes proteins based on its copy of the genome. Cells make
proteins in a two-stage process. First, the cell creates a molecule of messenger
RNA consisting of a string of nucleotides in a sequence complementary to the
sequence of the coding strand of DNA. This is called the "sense" sequence. A
sequence that is complementary to the sense sequence is called the "antisense"
sequence. The cell then produces proteins based on the information contained in
the messenger RNA. The number of copies of messenger RNA the cell produces will
affect how many copies of a given protein it produces.
A normal cell produces a given set of normal proteins in the right
amount for the body to function properly. A diseased cell produces inappropriate
or mutant proteins, or produces the wrong amount of normal proteins. A cell
produces mutant proteins when its DNA changes, either through mutation, as in
many types of cancer cells, or by infection with a virus.
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Conventional Drugs
Most drugs are chemicals that stimulate or suppress the function of
a particular molecule, usually a protein, with tolerable side effects. Most side
effects arise when a drug interacts with proteins in addition to the target
protein. Generally, the fewer other proteins a drug interacts with, the fewer
the side effects.
Conventional drugs generally aim to bind only two or three points of
the target molecule. Frequently, however, sites on other non-target molecules
resemble the target binding site enough to permit the conventional drug to bind
to some degree to those non-target molecules. This lack of selectivity can
result in unwanted side effects, potentially leading to decreased effectiveness.
A further characteristic of conventional drugs is that developing
them is a time-consuming and expensive process, as for every compound that is
found to be effective and have tolerable side effects, thousands may be
investigated and rejected.
Antisense Drugs
An oligonucleotide with a sequence exactly complementary to that of
the messenger RNA of a specific gene can bind to and inactivate the messenger
RNA, thereby decreasing or eliminating the production of disease-causing or
disease-supporting proteins. Antisense technology involves the design and
synthesis of such oligonucleotides. Hybridon believes that drugs based on
antisense technology may be more effective, cause fewer side effects, and have a
greater range of applications than conventional drugs because antisense drugs
are designed to intervene in the production of proteins, rather than after the
proteins are made, and in a highly specific fashion.
Advances in mapping the human genome, including work conducted by
academic institutions, biotechnology companies, and pharmaceutical companies,
have allowed many targets for antisense drugs to be identified. Once a gene
associated with a disease-associated protein is identified, an antisense
oligonucleotide can be designed, and the pharmaceutical effects of that
oligonucleotide can be improved by chemical modification. Chemically-modified
oligonucleotides can be composed of DNA, RNA, or a combination of the two.
Because the nucleotide sequence of a chemically-modified antisense
oligonucleotide is complementary to its target sequence on the messenger RNA of
a given gene, the antisense oligonucleotide forms a large number of bonds at the
target site, typically between 40 and 60. This allows it to form a strong bond
with the messenger RNA. A few identical messenger RNA molecules can cause the
cell to produce many copies of a protein; similarly, a few identical
chemically-modified antisense oligonucleotides can stop this process. This is
due in part to an enzyme called RNase H that can destroy messenger RNA bound to
an oligonucleotide without destroying the oligonucleotide itself, thus freeing
the oligonucleotide to bind with, and cause the destruction of, other messenger
RNA molecules. This process is generally known as catalytic activity. All of
Hybridon's drugs are designed to take advantage of this catalytic activity so
that a relatively small number of antisense molecules can effectively inhibit
production of disease-associated proteins.
HYBRIDON ANTISENSE TECHNOLOGY
Hybridon's antisense chemistry builds on the pioneering work in the
antisense field begun in the 1970s by Dr. Paul C. Zamecnik, a founder,
consultant and director of Hybridon. The development of Hybridon's antisense
chemistry has been directed by Dr. Sudhir Agrawal, Hybridon's Chief Scientific
Officer, and is based on what is referred to in this Prospectus as "advanced
chemistries," namely Hybridon's ability to alter the chemical makeup of the
oligonucleotide backbone in a manner that makes oligonucleotides safer and more
stable without adversely affecting their ability to promote the destruction of
messenger RNA.
Medicinal Chemistries. Hybridon's first antisense drug, GEM(R) 91,
was based on first-generation phosphorothioate chemistry, which altered the
naturally-occurring, or native, form of oligonucleotides by replacing certain
phosphorus atoms in the backbone with sulfur atoms. GEM(R) 91 was more stable
than native
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DNA, but was still able to trigger the action of RNaseH, leading to catalytic
activity. However, there were side effects caused by the administration of this
modified DNA into the body. In particular, in the last clinical trial of GEM(R)
91 three of the nine patients treated experienced unacceptable decreases in
platelet counts, which increased the possibility of uncontrolled bleeding. As a
result, Hybridon discontinued the GEM(R) 91 program. Hybridon has, however, used
the information gained from the human clinical trials of GEM(R) 91 to design its
advanced oligonucleotide chemistries.
Hybridon's scientists have designed and made over twenty families of
advanced oligonucleotide chemistries, including DNA/RNA combinations, also
called hybrid or mixed backbone chemistries. Hybridon believes that antisense
compounds based on these advanced chemistries will show favorable pharmaceutical
characteristics that will significantly increase their potential therapeutic
value. These compounds are likely to have the following desirable
characteristics:
o catalytic activity
o fewer side effects
o greater stability in the body, thereby permitting a patient to take doses
less frequently
o greater potency, thereby permitting a patient to take lower doses
o potential for multiple routes of administration (such as by injection,
orally, or topically)
Manufacturing Technology. Hybridon's expertise in the synthesis of
chemically modified oligonucleotides has served as the foundation of its
manufacturing technology and know-how. Hybridon has developed proprietary
technology, including equipment, to increase the purity of its oligonucleotides,
make the production process more efficient, increase the scale of production,
and significantly reduce the cost of oligonucleotide-based drugs.
Proprietary Analytical Tools. Hybridon has established analytical
tools and processes that enable it to test the purity of oligonucleotides more
quickly and accurately than would be feasible using traditional methods.
Hybridon uses the resulting information to improve quality control, to assist it
in complying with regulatory requirements, and to monitor absorption and
stability of its drugs in preclinical and clinical trials.
Regulatory Know-How. Hybridon drug development and manufacturing
personnel have extensive experience in working with the FDA and other drug
regulatory agencies in an efficient and cost-effective manner. Hybridon often
assists customers of Hybridon Specialty Products, Hybridon's contract
manufacturing division, also called "HSP," by contributing essential components
of their submissions to the FDA.
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS
The Drug Development and Approval Process
The process of taking a compound from the laboratory to human
patients generally takes 10 to 15 years. This process is extremely expensive and
is rigorously regulated by governmental agencies, including, in the United
States, the Food and Drug Administration, or the "FDA." Each drug must undergo a
series of trials (preclinical and clinical) before the FDA will consider
approving it for commercial sale. The FDA or any company conducting drug trials
can discontinue those trials at any time if it feels that patients are being
exposed to an unacceptable health risk or if there is not enough evidence that
the drug is effective. The FDA may also require a company to provide additional
information or conduct additional tests before it will permit a drug to proceed
from one phase of trials to the next.
The phases of preclinical and clinical trials are described below.
o Preclinical Studies. Preclinical trials involve the testing of a given
compound in animals to provide data on the activity and safety of the
compound before the compound is administered to humans.
o Investigational New Drug Application. If the data from research and
preclinical trials are promising, the company will file an Investigational
New Drug Application, or "IND," with the FDA. The IND
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contains the results of the preclinical trials and the protocol for the
first clinical trial. The IND becomes active in 30 days unless the FDA
disapproves it or requires additional information. Once the IND becomes
active, the company can begin clinical trials in humans.
o Phase I Clinical Trials. In Phase I trials, the drug is given to a small
group of healthy individuals or patients with the disease. These trials are
designed to produce data on the drug's safety, the maximum safe dose, and
how the drug is absorbed, distributed, metabolized, and excreted over time.
In some cases, Phase I trials can give an early indication of a drug's
effectiveness. A limited Phase I trial is sometimes called a Pilot Phase I
trial.
o Phase I/II Clinical Trials. In Phase I/II trials, the drug is given to
patients with the diseases to evaluate safety and to get an early
indication of a drug's effectiveness. This type of trial is commonly used
in the evaluation of oncology drugs.
o Phase II Clinical Trials. In Phase II trials, the drug is given to a larger
group of patients with the disease for purposes of evaluating the drug's
effectiveness and side effects at varying doses and schedules of
administration and thereby determining the optimal dose and schedule for
the larger Phase III trials that follow.
o Phase III Clinical Trials. These trials generally have a large number of
patients. The primary purpose of a Phase III trial is to confirm the drug's
effectiveness and produce additional information on side effects.
o New Drug Application. Once Phase III trials are complete, the company will
file a New Drug Application, or "NDA," with the FDA. The NDA contains all
of the information gathered from the Phase I, II and III trials. Based on
the FDA's review of the NDA, the FDA may approve the drug for commercial
sale. The FDA may deny an NDA if the applicable regulatory requirements are
not met. The FDA may also require additional tests before approving an NDA.
Even after approval by the FDA, the company must file additional reports
about the drug with the FDA from time to time. The FDA may withdraw product
approvals if a company fails to comply with ongoing regulatory standards or
if problems occur after a company starts marketing a drug.
o Accelerated Approval. The FDA is authorized to grant accelerated review to
NDAs for drugs that are intended to treat persons with debilitating and
life-threatening illnesses, especially if no satisfactory alternatives are
available. The more severe the disease, the more likely it is that the drug
will qualify for accelerated review. If a new drug is approved after
accelerated review, the FDA may require the company that filed the NDA to
conduct specific post-marketing studies regarding the drug's safety,
benefits and optimal use.
The regulatory process in other countries is generally similar to the U.S.
regulatory process.
Hybridon Drug Development and Discovery Programs
Hybridon is focusing its drug development and discovery efforts on
developing antisense compounds for the treatment of diseases in three major
therapeutic areas: cancer, viral infections, and diseases of the eye.
Hybridon believes there are significant additional opportunities for
the use of antisense, particularly in the treatment of cancer. Compared to
conventional drugs, antisense may provide:
o more specific therapy
o more rapid development of drugs targeting newly-discovered cancer-related
proteins
o fewer toxic side effects, thereby allowing repeat and long-term therapy,
either alone or in combination with other cancer therapies (such as
radiation or chemotherapy)
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o when used in combination therapy, therapeutic effects that complement the
benefits of conventional drugs
For these reasons, Hybridon is exploring new antisense targets relevant to the
treatment of cancer.
CLINICAL PROGRAMS
Hybridon has conducted clinical trials with antisense drugs
targeting the following diseases. Hybridon is seeking partners for each of its
compounds in clinical development.
Cancer
Unlike normal human cells, cancer cells grow in an uncontrolled and
harmful manner. The protein molecule protein kinase A, or "PKA," has been
implicated in the formation and growth of various solid tumors, including colon,
ovarian, breast, and lung tumors. There are two kinds of PKA. It is normal to
find type I in developing fetuses, but abnormal to find it in adults. By
contrast, PKA type II is found in, and is necessary to the health of, normal
adults. Certain cancer cells produce PKA type I in adults. Hybridon has
developed a cancer drug, GEM(R) 231, that is designed to reduce the production
of the harmful PKA type I without interfering with the production of PKA type
II. Current drug candidates based on conventional mechanisms have unacceptable
side effects.
Hybridon has conducted a Phase I clinical trial to evaluate the
safety of GEM(R) 231 at multiple doses, and has found that patients tolerate it
well. This trial explored the maximum tolerated dose of GEM(R) 231 for both
single doses and multiple doses, and even high doses of GEM(R) 231 did not show
the side effects normally seen with current cancer treatments. This trial was
not conducted for the purpose of evaluating the efficiency of GEM(R) 231.
Hybridon is currently conducting additional studies with GEM(R) 231
in patients with solid tumors that had not been cured by prior therapy. These
studies include a pilot Phase II trial and a Phase I/II trial. In addition,
Hybridon has begun the first in a series of Phase I/II trials treating patients
with solid tumors with GEM(R) 231 in combination with other anti-cancer
therapies, such as Taxol(R), Taxotere(R) or radiation therapy.
HIV-1 and AIDS
Acquired Immune Deficiency Syndrome, or "AIDS," is caused by
infection with the Type 1 Human Immunodeficiency Virus, or "HIV-1," and leads to
severe, life-threatening impairment of the immune system. AIDS therapy using a
combination of drugs has resulted in decreased rates of death and improvement in
the quality of life for patients who are HIV-positive or have AIDS. There are
however, increasing reports that this therapy may be failing to give sustained
clinical benefit. Hybridon believes this underscores the need for new AIDS
therapies.
Hybridon has completed a Pilot Phase I clinical study in Europe of
GEM(R) 92, Hybridon's advanced chemistry compound for the treatment of HIV-1
infection and AIDS. This study was designed to explore the safety of GEM(R) 92
and to provide information on its absorption after oral dosing and injection.
The patients tolerated well all doses given in the pilot study. Further, GEM(R)
92 was detected in the blood after both oral dosing and injection, suggesting
that it may be possible to develop GEM(R) 92 as an oral drug. Hybridon believes
this was the first study of the oral administration of an antisense molecule to
humans. In in-vitro studies, beneficial effects were observed when GEM(R) 92 was
used in combination with several marketed AIDS drugs. Importantly, both its
medicinal approach and genetic target are unique, in that no antisense drug has
been approved for the treatment of AIDS, and no other drug has the same target
on the HIV-1 genome.
PRECLINICAL PROGRAMS
Hybridon has also conducted preclinical studies in the following areas.
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<TABLE>
<CAPTION>
Primary Therapeutic
Target Indication(s) Status
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MDM2 (a protein involved in Cancer Ongoing; part of the Searle
programmed cell death) collaboration
Vascular Endothelial Growth Cancer Seeking partner
Factor (a protein that can cause
abnormal formation of new blood Retinopathies (e.g. Seeking partner
vessels) macular degeneration and
diabetic retinopathy)
Psoriasis Seeking partner
Hepatitis C Virus Hepatitis C (which can Seeking partner
lead to liver cancer)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
HYBRIDON SPINOUTS
Hybridon has used multiple strategies to fund applications of its
antisense technology that it cannot develop at present without external funding.
Hybridon has used one such strategy, formation of a spinout company, to form
MethylGene, Inc. and OriGenix Technologies Inc. for the continued development of
certain product candidates.
MethylGene, Inc.
In 1996, Hybridon and three Canadian institutional investors formed
MethylGene. Hybridon owns approximately 30% of MethylGene. Hybridon has granted
exclusive worldwide licenses and sublicenses to MethylGene to develop and market
(1) antisense compounds to inhibit the protein DNA methyltransferase for the
treatment of any disease, (2) other methods of inhibiting DNA methyltransferase
for the treatment of any disease, and (3) antisense compounds to inhibit up to
two additional targets for the treatment of cancers. Research has shown that DNA
methyltransferase, a protein, is overproduced in some tumors, such as
non-small-cell lung cancer, colon cancer, and breast cancer tumors. MethylGene
is obligated to purchase from Hybridon at specified prices all bulk
oligonucleotides that MethylGene requires. Hybridon is also performing drug
development and other services for MethylGene.
The Canadian investors who invested in MethylGene 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 Hybridon Common Stock on the basis of
37.5 MethylGene shares (for which they paid approximately U.S. $56.25) for one
share of Hybridon Common Stock (subject to adjustment for stock splits, stock
dividends and the like). This option expires no later than 2001.
MethylGene submitted INDs in the United States and Canada in
December 1998 and in May 1999 commenced Phase I clinical trials of its first
compound, MG98, for the treatment of cancer.
OriGenix Technologies Inc.
In January 1999, Hybridon and three Canadian institutional investors
formed OriGenix to develop and market drugs for the treatment of infectious
diseases, with an initial focus on viral diseases. Hybridon owns approximately
49% of OriGenix. If OriGenix satisfies certain conditions, the Canadian
investors are required to make an additional investment, which would reduce
Hybridon's ownership interest in OriGenix to 40%.
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Hybridon has granted to OriGenix worldwide exclusive licenses and
sublicenses to antisense technology developed by Hybridon for the treatment of
human papillomavirus, or "HPV," and hepatitis B virus infections. HPV infection
can cause a variety of warts, including benign genital warts. HPV infection can
also lead to cervical cancer. Hepatitis B infections can lead to liver cirrhosis
and cancer of the liver. OriGenix may in the future negotiate with Hybridon for
licenses or sublicenses relating to additional targets. In addition, OriGenix is
obligated to purchase from Hybridon at specified prices all bulk
oligonucleotides it requires. Hybridon anticipates that it will perform drug
development and other services for OriGenix.
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 others, primarily biotechnology and pharmaceutical
corporations, to develop certain products. Hybridon intends to proceed with
Phase II clinical trials of its cancer drug, GEM(R) 231. Otherwise, Hybridon
does not anticipate proceeding with any of its other clinical programs beyond
their current stages of development without a collaborative arrangement with a
corporate partner. Hybridon is currently a party to corporate collaborations
with Searle and Medtronic. Hybridon expects to retain the rights to manufacture
many of the products it may license pursuant to its existing and any future
collaborations.
G.D. Searle & Co.
In January 1996, Hybridon and Searle entered into a collaboration
for research and development of therapeutic antisense compounds in the areas of
inflammation/immunomodulation. The collaboration agreement, as modified in April
1998, provides that Searle may also select specific targets in the fields of
cancer and cardiovascular disease.
Hybridon and Searle are currently conducting research and
development relating to compounds targeting MDM2, a protein that is involved in
programmed cell death and that may play a role in cancer. In this project,
Searle is funding certain research and development efforts at Hybridon, and
Searle and Hybridon have committed personnel to the collaboration. The initial
phase of research and development activities will be conducted through the
earlier of (1) the achievement of certain milestones and (2) January 31, 2000,
subject to early termination by Searle. The parties may agree to extend this
collaboration.
In addition, Searle may designate up to six additional molecular
targets in the specified fields on terms substantially consistent with the terms
applicable to the initial targets. To do so, it must pay specified cash amounts
(in addition to specific research payments relating to each additional target)
and purchase additional Common Stock from Hybridon (at the then fair market
value), with the total payment per additional target equalling $10,000,000. If
Searle designates all of the additional targets, Searle will pay $24,000,000 in
cash and purchase $36,000,000 of equity. If Searle has not designated all of the
additional targets by the time any drug relating to the initial molecular target
reaches a certain stage of preclinical development, Searle must purchase up to
an additional $10,000,000 of Common Stock (at the then fair market value) in
order to keep its right to designate any of the additional targets. This payment
will be credited against the equity investment payments made by Searle for any
additional targets it designates in the future.
Searle has exclusive rights to commercialize any drugs resulting
from the collaboration. If Searle elects to commercialize a drug, Searle will
fund and perform preclinical studies and clinical trials of that drug and will
be responsible for obtaining regulatory approvals for, and marketing of, that
drug. Hybridon has agreed to perform certain research and development work
exclusively with Searle. In addition, for each drug candidate, Searle must make
payments to Hybridon of up to $10,000,000 upon the achievement of development
milestones. Hybridon will also be entitled to royalties from net sales of
products commercialized as a result of the collaboration. As long as Hybridon
satisfies certain requirements relating to its manufacturing capacities and
capabilities, Hybridon will retain manufacturing rights, and Searle will be
required to purchase its requirements of bulk oligonucleotides from Hybridon on
an exclusive basis at specified prices. Upon a change in control of Hybridon,
Searle would have the right to terminate Hybridon's manufacturing rights,
although the royalty payable to Hybridon from net sales would be increased.
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If Searle designates all of the additional targets or if Hybridon
fails to satisfy certain requirements relating to its manufacturing capacities
and capabilities, Searle will have the right to require Hybridon to form a joint
venture with Searle for the development and commercialization of antisense
therapeutic products in the area of inflammation/immunomodulation (other than
products relating to targets that have already been designated by Searle) to
which Searle will contribute $50,000,000 in cash and certain intellectual
property rights. Hybridon will also contribute certain intellectual property and
technology and, if the fair market value of that technology is less than
$50,000,000, Hybridon will, at its discretion, either contribute the difference
in cash or have its share of the first profits of the joint venture reduced by
the amount of that difference. Hybridon and Searle would each own 50% of the
joint venture, although Searle's ownership interest could increase to as much as
75% if the joint venture is established because of Hybridon's failure to satisfy
the requirements relating to its manufacturing capacities and capabilities.
Pursuant to the collaboration, Searle also purchased 200,000 shares
of Common Stock in Hybridon's initial public offering.
Medtronic, Inc.
In May 1994, Hybridon and Medtronic agreed to test a device for
delivering Hybridon's antisense oligonucleotides for the treatment of
Alzheimer's disease. The agreement provides that Hybridon is responsible for the
development of, and will hold all rights to, any drug developed as a result of
this agreement and Medtronic is responsible for the development of, and will
hold all rights to, any delivery system developed as a result of this agreement.
The parties may agree to extend this collaboration to other neurodegenerative
disease targets. Hybridon is not currently conducting any activities under this
agreement.
As part of their collaboration, Medtronic purchased a total of
131,667 shares of Hybridon Common Stock.
HYBRIDON SPECIALTY PRODUCTS
In 1996, Hybridon formed Hybridon Specialty Products, or "HSP," to
manufacture oligonucleotide compounds both for Hybridon's internal use, for use
by its colloborators and for sale to third parties. Hybridon believes that the
current interest in genetic medicine or drugs based on genetic information will
continue, and even increase, as the potential of these technologies for the
development of new classes of drugs becomes more widely understood, and that as
a result demand for oligonucleotide compounds will increase. Hybridon's strategy
is to position HSP to take advantage of this increased demand. There can be no
assurance that this strategy will be successful or that demand will increase as
anticipated. HSP is, however, attempting to minimize this risk by manufacturing
oligonucleotides for many applications, at different stages of development. HSP
is currently manufacturing oligonucleotides for genomic, diagnostic and
therapeutic applications, and Hybridon believes HSP's customers are developing
over 20 oligonucleotide drugs, with at least eight currently in clinical
studies.
HSP manufactures oligonucleotides at its 36,000-square-foot leased
facility, which Hybridon believes is the only facility currently capable of
manufacturing oligonucleotides on a large scale. HSP first began producing
oligonucleotide compounds for sale in June 1996 and had revenues of
approximately $1.1 million in 1996, $1.9 million in 1997 and $2.8 million in
1998. HSP's principal customers in 1998 included Genta Incorporated, LaJolla
Pharmaceuticals, Inc. and MethylGene, Inc.
HSP has developed a manufacturing technology platform that combines
multiple methods to improve the production process and increase the amount of
compounds produced in a single batch, thereby permitting economies of scale. HSP
has developed two separate machines, called synthesizers, for the large-scale
synthesis of oligonucleotides. One of these machines was developed by Hybridon
alone and the other in collaboration with Pharmacia Biotech. Pharmacia has the
right to make and sell synthesizers based on the design developed in the
collaboration but must also pay Hybridon royalties. Hybridon believes that its
synthesizers are the first commercial-scale oligonucleotide synthesizers
designed for advanced oligonucleotide chemistries. In addition, HSP has
developed purification processes that use water in place of chemical solvents,
thereby decreasing the
18
<PAGE>
impact of the process on the environment and permitting HSP to purify large
quantities of oligonucleotides. HSP has also developed processes and unique
chemicals used in the process, which HSP believes may further lower its
production costs.
In 1996, Hybridon entered into a four-year sales and supply
agreement with the Applied Biosystems Division of Perkin-Elmer, pursuant to
which Perkin-Elmer agreed to refer potential customers to HSP, and Hybridon
agreed to purchase certain raw materials from Perkin-Elmer for the manufacture
of oligonucleotides sold to those customers. Hybridon is required to pay
Perkin-Elmer a percentage of the sales price paid by those customers. In
addition, Perkin-Elmer licensed to Hybridon its oligonucleotide synthesis
patents.
HSP is targeting three market areas for oligonucleotides: antisense
therapeutics, non-antisense therapeutics, and diagnostic/genomic DNA probes,
which are oligonucleotides designed to detect the presence of specific genes.
Within each area there is a large number of potential products. HSP is currently
manufacturing oligonucleotides for customers in each of these three market
areas.
The production of oligonucleotides is similar in many respects to
the chemical synthesis used to produce conventional drugs. However, unlike many
conventional drugs, one can with the same chemical building blocks and
essentially the same manufacturing processes and equipment make different
antisense compounds for treating different diseases. As a result, the knowledge
and experience that HSP obtains manufacturing one oligonucleotide compound can
be applied to the manufacture of other oligonucleotide compounds. Furthermore,
since several different oligonucleotide compounds can be manufactured in one
facility, Hybridon anticipates that HSP will have the ability to manufacture
multiple marketed oligonucleotide-based drugs without having to build a separate
plant for each such compound.
In order to meet Hybridon's needs and satisfy outside demand, HSP
may need to increase its manufacturing capacity by adding more oligonucleotide
synthesizers. In addition, in order for Hybridon to successfully commercialize
its drugs or for HSP to achieve a satisfactory profit on sales, HSP may need to
reduce its production costs further.
Hybridon believes that it is currently manufacturing
oligonucleotides according to FDA Good Manufacturing Practices, or "GMP." The
FDA has not formally reviewed HSP's facility and procedures, and Hybridon may
need to revise those procedures in the future as production increases. Since
1996, HSP has undergone multiple significant audits for GMP compliance conducted
by biotechnology and pharmaceutical companies. No significant deficits have been
identified. In addition, in 1997, HSP was one of two biotechnology companies
chosen to participate in the FDA's Biotechnology PAI Pilot Initiative, a pilot
program that allows FDA regulatory officials to provide advice to the selected
companies on compliance with FDA standards before they submit drug approval
filings. The FDA would have informed Hybridon of any substantial issues if any
had arisen.
MARKETING STRATEGY
Hybridon plans to market the drugs it is developing either directly,
using its own sales force, or through co-marketing, licensing, distribution or
similar arrangements with other pharmaceutical and biotechnology companies,
particularly if the products are intended to serve a large,
geographically-diverse patient population.
Direct marketing of any of its proposed drugs would require a
substantial marketing staff and sales force supported by a distribution system.
Co-marketing or other arrangements with other pharmaceutical or biotechnology
companies would allow Hybridon to avoid the significant cost involved in direct
marketing, but would make Hybridon reliant on the efforts of others. While
Hybridon has developed general marketing strategies, it has not begun to
implement any of these strategies.
19
<PAGE>
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon has entered into a number of collaborative research
relationships with independent researchers and leading academic and research
institutions and U.S. government agencies, including the National Institutes of
Health, or "NIH." Such research relationships allow Hybridon to augment its
internal research capabilities and obtain access to specialized knowledge or
expertise.
In general, Hybridon's collaborative research agreements require
Hybridon to pay various amounts to support the research. Hybridon usually
provides the oligonucleotides, which the collaborator then tests. If in the
course of conducting research under its agreement with Hybridon a collaborator
solely or jointly with Hybridon, creates any invention, Hybridon generally has
an option to negotiate an exclusive, worldwide, royalty-bearing license to the
invention. Inventions developed solely by Hybridon's scientists in connection
with a collaborative relationship generally are owned exclusively by Hybridon.
Most of these collaborative agreements are nonexclusive and can be cancelled on
short notice.
Since July 1997, as part of its restructuring, Hybridon has allowed
a number of its collaborative research agreements to expire and has terminated
certain others, but has maintained those that it believes support its current
drug discovery and development programs.
DRUG DEVELOPMENT SERVICES
Hybridon's Drug Development Department has experience in the design
and conduct of preclinical and clinical trials and has prepared and submitted
reports and other regulatory documents in connection with the three Hybridon
advanced chemistry antisense compounds that have entered clinical studies.
Pursuant to a contract with MethylGene, Hybridon's Drug Development Department
has also used its expertise to help design and monitor the preclinical trials of
MethylGene's antisense compound, MG98, that led to MethylGene's submission of
Investigational New Drug, or "IND," applications in Canada and the United
States. MethylGene compensated Hybridon for these services. Hybridon expects to
perform similar services for OriGenix.
PATENTS, TRADE SECRETS, AND LICENSES
Hybridon's success will depend to a large extent on its ability to
(1) obtain U.S. and foreign patent protection for drug candidates and processes,
(2) preserve trade secrets, and (3) operate without infringing the proprietary
rights of third parties.
Hybridon's policy is to file patent applications to protect
technology, inventions and improvements that it considers important to
development of its business, and to obtain licenses to other patents that could
help Hybridon maintain or enhance its competitive position. As of June 15, 1999,
Hybridon owned or exclusively licensed in excess of 90 U.S. and foreign issued
and allowed patents, of which 72 are U.S. patents, and 63 other U.S. and 99
other foreign patent applications. These patents and applications cover various
chemically-advanced oligonucleotides, target sequences, oligonucleotide
products, methods for making and purifying oligonucleotides, analytical methods,
and methods for antisense treatment of various diseases. The patents expire on
dates ranging from 2006 to 2015.
Hybridon is the worldwide exclusive licensee under several U.S.
issued patents or allowed patent applications owned by University of
Massachusetts Medical Center, or "UMMC" (formerly the Worcester Foundation),
relating to oligonucleotides and hybrid or mixed backbone chemistries. Many of
these patents and patent applications have corresponding patents issued by, or
corresponding patent applications on file in, other major industrial countries.
One of the issued U.S. patents and one of the issued European patents cover
antisense oligonucleotides as new compositions of matter for stopping the
replication of HIV. Coverage of the other issued U.S. patents includes
composition and use of oligonucleotides based on advanced chemistries, methods
of oligonucleotide production, composition of certain modified oligonucleotides
that are useful for diagnostic tests or assays, and methods of purifying
oligonucleotides. The UMMC patents licensed to Hybridon expire at various dates
starting in 2006.
20
<PAGE>
Hybridon 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. Hybridon and Massachusetts General Hospital jointly own one
issued U.S. patent applicable to Alzheimer's disease. Hybridon holds an
exclusive license to Massachusetts General Hospital's interests under this
patent.
Hybridon is a nonexclusive licensee of certain patents held by the
NIH relating to oligonucleotide phosphorothioates and is a nonexclusive 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.
The U.S. Patent and Trademark Office, or "PTO," has informed
Hybridon that certain patent applications exclusively licensed by Hybridon from
UMMC have been submitted to the Board of Patent Appeals and Interferences of the
PTO to determine, by means of an interference proceeding, whether an
interference should be declared with issued U.S. patents held by the NIH
relating to oligonucleotide phosphorothioates. An interference proceeding is a
proceeding to determine who was the first to invent, and thus who is entitled to
a patent for, a claimed invention. McDonnell Boehnen Hulbert & Berghoff, a U.S.
patent counsel for Hybridon, is of the opinion that the UMMC patent application
has a prima-facie case for priority against the NIH for an invention that
includes phosphorothioate-modified oligonucleotides. There can, however, be no
assurance that the PTO will declare an interference, or if it does, what the
outcome will be. If Hybridon were to lose the interference, its nonexclusive
license from the NIH of the NIH phosphorothioate patents would not be affected.
If Hybridon were to win the interference, others making, using or selling
certain phosphothioate-modified oligonucleotides would be required to obtain a
license from Hybridon.
The PTO also declared a four-way interference involving two UMMC
U.S. patents, for which Hybridon is the exclusive licensee, relating to a
particular type of modified oligonucleotides. The other parties to this
interference were Integrated DNA Technologies, or "IDT," Isis Pharmaceuticals,
Inc. and Gilead Sciences, Inc. This interference was settled in early 1999. In
connection with the settlement, Hybridon has obtained a nonexclusive license to
certain patents and patent applications owned by IDT that broadly claim chemical
modifications to oligonucleotides. Hybridon has also granted a nonexclusive
license to IDT to make, use, and sell limited quantities of oligonucleotides
incorporating certain of Hybridon's advanced chemistries.
Under its licenses, Hybridon is obligated to pay royalties on its
net sales of products or processes covered by the licensed technology and, in
some cases, to pay a percentage of sublicense income that it receives. These
licenses impose various commercialization, sublicensing, insurance, and other
obligations on Hybridon. If Hybridon fails to comply with these requirements,
the license could be terminated.
Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims made
under such patents are still developing. As a result, Hybridon's ability to
obtain and enforce patents that protect its drugs is uncertain and involves
complex legal and factual questions.
That Hybridon owns or licenses pending or future patent
applications does not mean that patents based on those applications will
ultimately be issued. First, to obtain a patent on an invention, one must be the
first to invent it or the first to file a patent application for it. Patent
applications in the United States are maintained in secrecy until patents issue,
and publication of any given discovery in the scientific or patent literature
tends to lag behind actual date of that discovery by several months.
Consequently, Hybridon cannot be certain that the inventors of subject matter
covered by patents and patent applications that it owns or licenses were the
first to invent, or the first to file patent applications for, those inventions.
Others, including Hybridon's competitors, also hold issued patents
and patent applications relating to antisense technology or particular genetic
targets, including an issued patent in Europe covering the gene MDM2. Holders of
any of these patents or patent applications may be able to require Hybridon to
change or cease making or using certain products or processes, or obtain an
exclusive or nonexclusive license in return for licensing fees, which may be
substantial. In this regard, Hybridon is currently in license negotiations with
the holder of the European MDM2 patent. Hybridon may not be able to obtain any
such licenses at a reasonable cost. Furthermore, such licenses may be made
available to competitors of Hybridon on an exclusive or nonexclusive basis.
Failure to obtain such licenses could have a material adverse effect on
Hybridon.
21
<PAGE>
Previously, a competitor was granted another European patent 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 its entirety in an opposition proceeding before the European Patent Office in
September 1995. The holder of this patent appealed this decision. This appeal
was dismissed on February 18, 1999.
Hybridon requires its employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors to execute
confidentiality agreements. These agreements provide that all confidential
information developed or made known by Hybridon to the individual is to be kept
confidential, subject to specific exceptions. In the case of employees, the
agreements provide that all inventions conceived by the individual are the
exclusive property of Hybridon. These agreements may not, however, provide
meaningful protection for Hybridon's trade secrets or adequate remedies in the
event of breach.
Consistent with pharmaceutical industry and academic standards,
Hybridon's agreements with academic and research institutions and U.S.
government agencies may provide that the results of a given collaboration, or
any developments that derive from the collaboration, will be freely published,
that information or materials supplied by Hybridon will not be treated as
confidential and that Hybridon must negotiate a license to developments and
results in order to commercialize products incorporating them. There can be no
assurance that Hybridon will be able successfully to obtain any such license at
a reasonable cost or that such developments and results will not be made
available to competitors of Hybridon on an exclusive or nonexclusive basis. See
"Business--Academic and Research Collaborations."
GOVERNMENT REGULATION
Hybridon's research, clinical development and production activities
are regulated for safety, effectiveness and quality by numerous governmental
authorities in the United States and other countries. Hybridon believes that it
is in material compliance with all applicable federal, state and foreign legal
and regulatory requirements.
FDA Approvals. In addition to product approvals by the FDA, as
described above, the FDA may require that it inspect Hybridon's manufacturing
facilities for compliance with GMP and other applicable rules and regulations
before it will permit a product manufactured by Hybridon to be marketed in the
United States. Any material change by Hybridon in its manufacturing process or
equipment, including relocation of the manufacturing facility, would necessitate
additional FDA review and approval.
Other Regulation. In addition to regulations enforced by the FDA,
Hybridon 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 Hybridon uses hazardous materials, chemicals, viruses, and
various radioactive compounds, it must comply with U.S. Department of
Transportation and Environmental Protection Agency regulations and other
federal, state, and foreign laws and regulations regarding hazardous waste
disposal, air emissions, and waste-water discharge. Although Hybridon believes
that it complies with these laws and regulations, it cannot completely eliminate
the risk of accidental contamination or injury from these materials.
COMPETITION
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 regulation of gene expression, including antisense
drugs. One competitor of Hybridon has recently received FDA approval to market
an antisense therapeutic product for the treatment of CMV retinitis. Hybridon
believes that the interest in these technologies and products will increase. It
is possible that Hybridon's competitors will succeed in developing products that
are more effective than Hybridon's. Furthermore, Hybridon's proposed drugs will
be competing
22
<PAGE>
with other kinds of drugs. Given the fundamental differences between antisense
technology and other drug technologies, antisense drugs may be less effective at
treating some diseases than other kinds of drugs.
Biotechnology and related pharmaceutical technologies have undergone
and continue to be subject to rapid and significant change. Hybridon expects
that the technologies associated with biotechnology research and development
will continue to develop rapidly. Hybridon's future will depend in large part on
its ability to compete with these technologies
Hybridon has many competitors, including major pharmaceutical and
chemical companies, biotechnology firms, and universities and other research
institutions. Many of these competitors have substantially greater financial,
technical, and human resources than Hybridon, and many have significantly
greater experience than Hybridon in undertaking preclinical studies and clinical
trials of new pharmaceutical products and obtaining FDA and other regulatory
approvals. Accordingly, Hybridon's competitors may succeed in obtaining
regulatory approvals for products more rapidly than Hybridon. Furthermore, if
Hybridon receives approval 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 experience.
HSP also faces competition, as Hybridon's customers may begin to
produce oligonucelotides internally or may find other sources. Hybridon may be
forced to reduce the cost of its products to meet the competition.
EMPLOYEES
As of June 15, 1999, Hybridon employed 50 individuals full-time, of
whom 19 held advanced degrees. Eighteen of these employees are engaged in
research and development activities and eight are employed in finance, corporate
development, and legal and general administrative activities. In addition, 24 of
these employees are employees of HSP, of whom 5 are employed in quality control.
Many of Hybridon's management and professional employees have had prior
experience with pharmaceutical, biotechnology, or medical products companies.
None of Hybridon's employees is covered by a collective bargaining agreement,
and management considers relations with its employees to be good.
PROPERTIES
Hybridon leases its 36,000 square foot facility in Milford,
Massachusetts, under a lease that expires in 2004. Hybridon has an option to
extend this lease for two additional five-year terms.
In addition, Hybridon leases approximately 26,000 square feet of
supplemental laboratory space in Cambridge, Massachusetts under a lease that
expires April 30, 2007. The annual rent for this space is approximately $23 per
square foot. Hybridon is currently subleasing approximately 20,000 square feet
of this to a third party under a sublease that expires September 30, 2000.
LEGAL PROCEEDINGS
Hybridon is not a party to any litigation that it believes could
have a material adverse effect on Hybridon or its business.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From January 24, 1996 until December 2, 1997, Hybridon'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 Hybridon's
Common Stock.
23
<PAGE>
On December 2, 1997, Hybridon'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 Hybridon 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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
1996
<S> <C> <C>
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
Fourth Quarter.................................................. 3.25 1.125
1999
First Quarter................................................... 1.953 1.000
</TABLE>
The reported closing bid price of the Common Stock on the NASD OTC
Bulletin Board on June 21, 1999 was $0.4375 per share.
DIVIDEND POLICY
The Convertible Preferred Stock pays dividends at 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
Hybridon.
Hybridon has never declared or paid cash dividends on its capital
stock, and Hybridon 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 Hybridon issued the 9% Notes on April 2, 1997, limits
Hybridon's ability to pay dividends or make other distributions on its Common
Stock or to pay cash dividends
24
<PAGE>
on the Convertible Preferred Stock. As of March 31, 1999, $1.3 million in
aggregate principal amount of the 9% Notes remained outstanding.
In addition, Hybridon is currently prohibited from paying cash
dividends under the loan held by the Lender. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- 1998 Financing
Activities -- Credit Facility."
USE OF PROCEEDS
Hybridon will not receive any proceeds from the sale of the
Securities by the Selling Security Holders other than proceeds upon exercise of
certain Hybridon warrants. Those proceeds will be added to Hybridon's general
working capital.
CAPITALIZATION
The following table sets forth as of March 31, 1999 the actual
capitalization of Hybridon. See Hybridon's unaudited Consolidated Financial
Statements as of March 31, 1999, included elsewhere in this Registration
Statement (in thousands, except share data.)
<TABLE>
<CAPTION>
<S> <C>
Current portion of long-term debt ........................................................ $6,073
======
Long-term debt, net of current portion ................................................... $ 454
9% Convertible Subordinated Notes due 2004 ............................................... 1,306
Stockholders' Deficit:
Preferred Stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding ......................................... ------
Series A Convertible Preferred Stock, $.01 par value, 1,500,000
shares designated; 641,259 shares issued and outstanding........................... 6
Common Stock, $.001 par value, 100,000,000 shares authorized;
15,304,825 shares issued and outstanding (1)....................................... 15
Additional Paid-In-Capital ........................................................ 242,674
Accumulated deficit ............................................................... (242,456)
Deferred compensation ............................................................ (895)
------
Total stockholders' deficit ....................................... (656)
------
Total Capitalization ...................................... $1,104
======
</TABLE>
- -------------------------
(1) Excludes an aggregate of 14,213,378 shares of Common Stock issuable upon
exercise of options and warrants outstanding as of March 31, 1999, at a
weighted average exercise price of $6.48 per share.
25
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated balance sheet data set forth below, as of
December 31, 1997 and 1998, and the consolidated statements of operations data
for each of the three years in the period December 31, 1998, are derived from
Hybridon'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,
1994, 1995 and 1996 and for the years ended December 31, 1994 and 1995 are
derived from Hybridon'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 March 31, 1999 and for the
three months ended March 31, 1998 and 1999 are derived from Hybridon's unaudited
Consolidated Financial Statements which are included elsewhere in this
Prospectus and which include, in the opinion of Hybridon, 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 three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1999. 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,"
Hybridon's Consolidated Financial Statements and notes thereto and the Report of
Independence Public Accountants included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months
Years Ended December 31, Ended March 31,
----------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(In Thousands, except per share data) (Unaudited)
Statement of Operations Data:
Revenues
<S> <C> <C> <C> <C> <C> <C> <C>
Research and development...................... $ 1,032 $ 1,186 $ 1,419 $945 $1,100 $ 150 $150
Product and service revenue................... -- -- 1,080 1,877 3,254 825 1,530
Royalty income................................ -- -- 62 48 - -- 40
Interest income............................... 135 219 1,447 1,079 148 18 53
-------- ------- -------- -------- ------- ------- -------
1,167 1,405 4,008 3,949 4,502 993 1,773
Operating Expenses
Research and development...................... 20,024 29,685 39,390 46,828 20,977 6,403 3,447
General and administrative.................... 6,678 6,094 11,347 11,026 6,573 1,665 1,122
Interest...................................... 69 173 124 4,536 2,932 1,607 170
Restructuring................................. -- -- -- 11,020 -- -- --
-------- ------- -------- ======== ======= ------- -------
Total operating expenses......... 26,771 35,952 50,861 73,410 30,482 9,675 4,739
------ ------- ------ ======== ======= ------- -------
Loss from operations................................. (25,604) (34,547) (46,853) (69,461) (25,980) (8,682) (2,966)
Extraordinary item:
Gain on conversion of 9% convertible
subordinated notes payable.................... -- -- -- -- 8,877 -- --
-------- -------- -------- ======== ======== ------- -------
Net loss............................................. (25,604) (34,547) (46,853) (69,461) (17,103) (8,682) (2.966)
Accretion of preferred stock dividend................ -- -- -- -- 2,689 -- 1,042
-------- -------- -------- ======== ======== ------- -------
Net loss to common stockholders...................... $(25,604) $(34,547) $(46,853) $(69,461) $(19,792) $(8,682) $(4,008)
======== ======== ======== ========= ========= ======= =======
Basic and diluted net loss per per common share from:
Operations.................................... $ (70.77) $(94.70) $(10.24) $(13.76) $(2.19) $ (1.72) $ (0.19)
Extraordinary gain............................ -- -- -- -- 0.75 -- --
-------- -------- -------- ========= ======== ------- -------
Net loss per share............... (70.77) (94.70) (10.24) (13.76) (1.44) (1.72) (0.19)
Accretion of preferred stock dividends............... -- -- -- -- (0.23) -- (0.07)
-------- -------- ------- ========= ======== ------- -------
Net loss per share applicable to common stockholders. $(70.77) $(94.70) $(10.24) $(13.76) $ (1.67) $ (1.72) $(0.26)
======== ======== ======= ========= ======== ======= =======
Shares Used in Computing Basic and
Diluted Net Loss per Common Share(1)............... 362 365 4,576 5,050 11,859 5,060 15,305
======== ======== ======= ========= ========= ======== =======
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data:
December 31, March 31,
1999
1994 1995 1996 1997 1998 (unaudited)
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments(2)..... $ 3,396 $ 5,284 $ 16,419 $2,202 $ 5,607 $ 2,461
Working capital (deficit) ............................... (1,713) 210 8,888 (24,100) (5,614) (7,820)
Total assets............................................. 11,989 19,618 41,537 35,072 16,536 12,769
Long-term debt and capital lease
obligations, net of current portion............... 1,522 1,145 9,032 3,282 473 454
9% Convertible Subordinated
Notes Payable ........................................... -- -- -- 50,000 1,306 1,306
Accumulated deficit .....................................
(67,794) (102,341) (149,194) (218,655) (238,448) (242,456)
Total stockholders' equity (deficit)..................... 4,774 12,447 22,855 (46,048) 2,249 (656)
-------- -------- ------- -------- -------- --------
</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.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Hybridon is engaged in the discovery and development of genetic
medicines based on antisense technology. Hybridon commenced operations in
February 1990 and since that time has been engaged primarily in research and
development efforts, developing its manufacturing capabilities, and raising
capital. In order to commercialize its therapeutic products, Hybridon will need
to address a number of technological challenges and comply with comprehensive
regulatory requirements. All revenues received by Hybridon 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
Hybridon Specialty Products ("HSP").
Hybridon has incurred cumulative losses from inception through March
31, 1999 of approximately $242.5 million. Hybridon implemented a restructuring
plan in the second half of 1997, which has significantly reduced its operating
expenses. However, Hybridon expects that its research and development expenses
will be significant in 1999 and 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. As of June 15, 1999, the Company had 50 full-time
employees.
RESTRUCTURING PLAN
During the second half of 1997, Hybridon implemented a restructuring
plan to reduce expenditures on a phased basis in an effort to conserve its cash
resources. As part of this plan, in addition to terminating the development of
GEM(R) 91, Hybridon reduced or suspended programs unrelated to its core advanced
chemistry antisense drug development programs. In addition, in 1997, Hybridon
terminated the employment of a substantial number of employees at its Cambridge
and Milford, Massachusetts and Paris, France facilities and substantially
reduced operations at its Paris, France office. In December 1998, Hybridon began
the final process of terminating all operations in Europe.
In 1997 Hybridon subleased a portion of each of its facilities in
Cambridge, Massachusetts (including a substantial portion of its former
headquarters). In June 1998, Hybridon relocated its headquarters from Cambridge,
Massachusetts to its facility in Milford, Massachusetts and subsequently sold
its interest in Charles River Building Limited Partnership, or the "Cambridge
Landlord," which owned the former Cambridge headquarters. In connection with
this transaction and the termination of the Cambridge lease in 1998, Hybridon
received $6,163,000 in cash, which included the return of a portion of its
security deposit for its Cambridge headquarters and the reclassification on
Hybridon's balance sheet of $660,000 from restricted cash to cash and cash
equivalents. The Cambridge facility was re-leased in September 1998 to a third
party, subject to a sublease to a portion of the premises. As a result of these
actions, Hybridon was relieved of its substantial lease obligations for the
Cambridge facility, subject to a continuing liability for any defaults which may
arise under the sublease.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
Hybridon had total revenues of $1.8 million for the three months
ended March 31, 1999, compared with $1.0 million for the same period in 1998.
Product and service revenue increased to $1.5 million for the three months ended
March 31, 1999, compared with $0.8 million for the same period in 1998. The
increase was primarily the result of an expansion of the HSP customer base,
increased sales to certain existing customers, and the receipt of $0.1 million
in service revenue from MethylGene pursuant to an agreement entered into in May
1998.
28
<PAGE>
Revenues from interest income increased to $0.1 million for the
three months ended March 31, 1999, from a nominal amount for the same period in
1998. The change was primarily the result of higher cash balances available for
investment during the quarter.
Hybridon's research and development expenses decreased to $3.4
million for the three months ended March 31, 1999, from $6.4 million for the
same period in 1998. The decrease reflects Hybridon's restructuring that
commenced during the second half of 1997 and continued into 1998. The
restructuring included the discontinuation of operations at Hybridon's
facilities in Europe, termination of the clinical development of GEM(R)91 and
the reduction or suspension of selected programs unrelated to Hybridon's core
advanced chemistry antisense drug development program. The restructuring
resulted in significant reductions in employee-related expenses, clinical and
outside testing, consulting, materials and lab expenses. Accordingly, research
and development salaries and related costs decreased in 1999 due to the
reduction in the number of employees engaged in research and development.
The facilities expense included in research and development expenses
decreased significantly in 1999 as a result of the relocation of the Company's
corporate offices in July 1998 from Cambridge to Milford, Massachusetts.
Hybridon's facility costs in 1999 related to research and development were also
reduced by the income received from subleasing its underutilized Cambridge
facilities before the relocation.
Hybridon's general and administrative expenses decreased to $1.1
million for the three months ended March 31, 1999, from $1.7 million for the
same period in 1998. The decrease reflects Hybridon's restructuring program
initiated during the second half of 1997 and its effect on employee-related and
consulting expenses and net facilities costs and increased legal and accounting
fees resulting from the Hybridon's financing activities in 1998.
The facilities expense included in general and administrative
expenses also decreased significantly in 1999 as a result of the relocation of
the Company's corporate offices to Milford, Massachusetts. Facility costs in
1999 were also reduced by the income received from subleasing underutilized
Cambridge facilities before the relocation. General and administrative expenses
related to business development, public relations and legal expenses all
decreased in 1999.
Hybridon's patent expenses remained at approximately the same level
in 1999, as Hybridon continued to limit the scope of patent protection that it
sought as part of its effort to conserve its cash resources, while prosecuting
and maintaining key patents and patent applications.
Hybridon's interest expense decreased to $0.2 million for the three
months ended March 31, 1999, from $1.6 million for the same period in 1998. The
decrease is attributable to the exchange of approximately $48.7 million of the
9% convertible subordinated notes (the " 9% Notes"), issued in the second
quarter of 1997, for Series A Preferred Stock on May 5, 1998. In addition, the
outstanding balance of borrowings to finance the purchase of property and
equipment was reduced in May 1998, resulting in a reduction in interest expense.
As a result of the above factors, Hybridon incurred a net loss of
$3.0 million for the three months ended March 31, 1999, compared with a net loss
of $8.7 million for the three months ended March 31, 1998. Hybridon had
accretion of preferred stock dividends of $1.0 million at March 31, 1999 to
reflect the 1999 portion of dividends payable to the holders of Series A
Preferred Convertible Stock, resulting in a net loss to common stockholders of
$4.0 million for the three months ended March 31, 1999.
Years Ended December 31, 1996, 1997 and 1998
Hybridon had total revenues of $4.0 million in 1996, $3.9 million in
1997, and $4.5 million in 1998. During 1996, 1997 and 1998, Hybridon received
revenues from research and development collaborations of $1.4 million, $0.9
million and $1.1 million, respectively. Research and development collaboration
revenues decreased in 1997 from 1996 because of the cancellation by Roche of its
collaboration with Hybridon and the resulting elimination of research funding by
Roche. Research and development collaboration revenues increased in 1998 from
1997, primarily due to Hybridon receiving certain payments under its license
agreement with MethylGene, Inc.
29
<PAGE>
Product and service revenues were $1.1 million in 1996, $1.9 million
in 1997 and $3.3 million in 1998. The increase in revenues in 1997 over those in
1996 resulted from a full year of operations for HSP, which commenced operations
in the third quarter of 1996. As of December 31, 1998, HSP had a backlog of $0.9
million. Hybridon anticipates filling this backlog in the first half of 1999.
The increase in revenues in 1998 was primarily the result of an expansion by HSP
in the customer base and increased sales to certain existing customers, and was
also due in part to Hybridon receiving $0.4 million in service revenue from
MethylGene.
Revenues from interest income were $1.4 million in 1996, $1.1
million in 1997 and $0.1 million in 1998. The decrease in interest income in
1997 from 1996, and in 1998 from 1997 was the result of lower cash balances
available for investment each year.
During 1996, 1997 and 1998, Hybridon expended $39.4 million, $46.8
million and $21.0 million, respectively, on research and development activities.
The increases in research and development expenses in 1997 from 1996
reflected increasing expenses related primarily to ongoing clinical trials of
Hybridon's product candidates, including (a) clinical trials of two different
formulations of GEM(R) 132, which were first initiated during the third quarter
of 1996 and the first quarter of 1997, (b) clinical trials of GEM(R) 92, which
were initiated in the third quarter of 1997 and (c) clinical trials of GEM(R)
91, which were initiated in France in October 1993 and in the U.S. in May 1994,
and were terminated in July 1997. Clinical expenses related to GEM(R) 91
decreased significantly during the second half of 1997 after Hybridon terminated
development of this compound. Research and development expenses also increased
in 1997 over 1996 due to significant increases in preclinical expenses incurred
to meet the filing requirements to initiate clinical trials of Hybridon's
product candidates in the United States.
The decrease in research and development expenses in 1998 reflects
Hybridon's restructuring that commenced during the second half of 1997. The
restructuring included the discontinuation of operations at Hybridon's
facilities in Europe, termination of the clinical development of GEM(R) 91 and
the reduction or suspension of selected programs unrelated to Hybridon's core
advanced chemistry antisense drug development program. The restructuring
resulted in significant reductions in employee-related expenses, clinical and
outside testing, consulting, materials and lab expenses.
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 and decreased significantly in 1998 as a
result of the relocation in July 1998 from Cambridge to Milford, Massachusetts.
Hybridon's facility costs in 1998 related to research and development were also
reduced by the income received from subleasing its underutilized Cambridge
facilities.
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 decreased in 1998 from 1997 due to the substantial reduction in the number
of employees engaged in research and development in 1998.
Patent expenses also remained at approximately the same level in
1998 as 1997 and 1996, as Hybridon continued to limit the scope of patent
protection that it sought as part of its effort to conserve its cash resources,
while prosecuting and maintaining key patents and patent applications.
Hybridon incurred general and administrative expenses of $11.3
million in 1996, $11.0 million in 1997 and $6.6 million in 1998.
The decrease in general and administrative expenses in 1998 resulted
primarily from Hybridon's restructuring program initiated during the second half
of 1997 and its effect on employee-related and consulting expenses and net
facilities costs.
The facilities expense related to the general and administrative
area increased significantly in 1997 over 1996 as a result of the relocation of
the corporate offices to Cambridge, Massachusetts. However, as a result of
30
<PAGE>
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, which
carried over into 1998. Hybridon's facilities expense related to the general and
administrative area decreased significantly in 1998 as a result of its
relocation to Milford, Massachusetts. Facility costs in 1998 were also reduced
by the income received from subleasing underutilized Cambridge facilities.
General and administrative expenses related to business development, public
relations and legal expenses decreased in 1998 from 1997, but remained at
approximately the same level in 1997 as 1996.
Interest expense was $0.1 million in 1996, $4.5 million in 1997 and
$2.9 million in 1998. The decrease in interest expense in 1998 is mainly
attributable to the exchange of approximately $48.7 million of the 9% Notes for
Series A Preferred Stock on May 5, 1998. In addition, the outstanding balance of
borrowings to finance the purchase of property and equipment was reduced in May
1998, resulting in a reduction in interest expense.
The increase in interest expense in 1997 from 1996 reflected an
increase in Hybridon's debt outstanding associated with the issuance of the 9%
Notes and interest incurred on borrowings to finance the purchase of property
and equipment.
As a part of its restructuring plan, Hybridon recorded an $11.0
million restructuring charge in 1997 to provide for (i) the termination costs of
certain research programs and other contracts, (ii) the loss of certain leased
facilities (net of sublease income and other contracts), (iii) severance,
benefits and related costs for 95 terminated employees and (iv) the write down
of assets to net realizable value.
As a result of the above factors, Hybridon incurred net losses
before extraordinary items of $46.9 million in 1996, $69.5 million in 1997 and
$26.0 million in 1998. Hybridon had extraordinary income of $8.9 million in 1998
resulting from the exchange of 9% Notes for Series A Preferred Stock in the
second quarter of 1998. In accordance with Statement of Financial Accounting
("SFAS") No.15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, Hybridon recorded an extraordinary gain of approximately $8.9
million related to the exchange. The extraordinary gain represents the
difference between the carrying value of the 9% Notes tendered for exchange and
the fair value of the Series A Preferred Stock issued upon the exchange, as
determined by the per share sales price of such stock sold in May 1998 in the
private offering described below. As a result of this transaction, Hybridon
reduced its net loss before preferred stock dividends to $17.1 million in 1998.
Hybridon had an accretion of preferred stock dividends of $2.7 million at
December 31, 1998 to reflect the 1998 portion of dividends payable to the
holders of Series A Preferred Convertible Stock, resulting in a net loss to
common stockholders of $19.8 million for 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, Hybridon used
approximately $3.1 million to fund operating activities. The primary use of cash
for operating activities was to fund Hybridon's loss before accretion of
preferred stock dividends of $3.0 million. Hybridon did not engage in any
significant investing and financing activities during the three months ended
March 31, 1999.
During the year ended December 31, 1998, Hybridon utilized
approximately $22.7 million to fund operating activities and approximately
$472,000 for capital expenditures. The primary use of cash for operating
activities was to fund Hybridon's loss before extraordinary items of $26.0
million. Capital expenditures during 1998 included amounts expended for the
build-out and equipping of Hybridon's corporate headquarters and primary
research and development laboratories in its leased manufacturing facility in
Milford, Massachusetts.
Hybridon had cash and cash equivalents of $2.5 million at March 31,
1999. However, since that date, Hybridon has expended the majority of such cash
resources and continues to have substantial obligations to lenders, real estate
landlords, trade creditors and others. On May 14, 1999, Hybridon's obligations
included $1.3 million principal amount of 9% Notes, a $6.0 million loan with
Forum Capital Markets, LLC and others, as described below, $0.5 million of notes
payable and approximately $1.8 million of accounts payable.
31
<PAGE>
Because of Hybridon's financial condition, many trade creditors are only willing
to provide Hybridon with products and services on a cash on delivery basis.
1998 FINANCING ACTIVITIES
On February 6, 1998, Hybridon commenced an offer to the holders of
the 9% Notes to exchange the 9% Notes for Series A Preferred Stock and certain
warrants of Hybridon. On May 5, 1998, noteholders holding $48.7 million of
principal and $2.4 million of accrued interest tendered such principal and
accrued interest to Hybridon for 510,505 shares of Series A Preferred Stock and
warrants to purchase 3,002,958 shares of common stock with an exercise price of
$4.25 per share.
On May 5, 1998, Hybridon completed a private offering of equity
securities raising total gross proceeds of approximately $26.7 million from the
issuance of 9,597,476 shares of common stock, 114,285 shares of Series A
Preferred Stock and warrants to purchase 3,329,486 shares of common stock at
$2.40 per share. The gross proceeds include the conversion of approximately $5.9
million of accounts payable, capital lease obligations and other obligations
into common stock. Hybridon incurred approximately $1.6 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. In addition, Hybridon is obligated to issue an additional
300,000 shares in connection with this transaction. For more information about
this transaction, see Note 15(c) of the Notes to Consolidated Statements.
Credit Facility
In December 1996, Hybridon entered into a five-year $7,500,000 note
payable with a bank. The note contained certain financial covenants that
required Hybridon to maintain minimum tangible net worth and minimum liquidity
and prohibited the payment of dividends. The note was payable in 59 equal
installments of $62,500 commencing on February 1, 1997 with a balloon payment of
the then remaining outstanding principal balance due on January 1, 2002. Because
Hybridon was required to make certain prepayments of principal during 1998, the
outstanding principal balance of the loan at November 16, 1998 was approximately
$2.8 million. The lender granted Hybridon a waiver of compliance with the
minimum tangible net worth requirement at December 31, 1998 and March 31, 1999
and the minimum liquidity requirement at April 15, 1999.
Effective November 20, 1998, Forum Capital Markets, LLC ("Forum")
and certain investors associated with Pecks Management Partners Ltd. ("Pecks";
Forum and Pecks collectively, the "Lender") purchased the loan from the bank.
Forum and Pecks are affiliates of two members of Hybridon's Board of Directors.
In connection with this purchase, the Lender lent an additional $3.2 million to
Hybridon so as to increase the outstanding principal amount of the note to
$6,000,000. In addition, the terms of the note payable were amended as follows:
o the maturity was extended to November 30, 2003
o the interest rate was decreased to 8%
o interest is payable monthly in arrears, with the principal due in
full at maturity
o the note payable is convertible, at the Lender's option, in whole or
in part, into shares of common stock of Hybridon at a conversion
price equal to $2.40 a share
o the threshold of the minimum liquidity covenant was reduced from
$4,000,000 to $2,000,000
o the note payable may not be prepaid, in whole or in part, at any
time prior to December 1, 2000
The other terms of the note payable were unchanged.
For further information about this loan, see Note 7 of the Notes to Consolidated
Financial Statements.
Facility Leases
As of December 31, 1998, Hybridon has future operating lease
commitments of approximately $7.7 million through 2007 for its existing leases.
32
<PAGE>
Net Operating Loss Carryforwards
As of December 31, 1998, Hybridon had approximately $220.0 million
and $3.9 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 Hybridon'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. Hybridon has completed several financings since the effective date of
the Tax Act, which, as of December 31, 1998, have resulted in ownership changes
in excess of 50%, as defined under the Tax Act and which will limit Hybridon's
ability to utilize its net operating loss carryforwards.
Since inception, Hybridon has incurred significant losses which it
has funded through the issuance of equity securities, debt issuances, sales by
HSP, and through research and development collaborations and licensing
arrangements.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
Since inception, Hybridon has incurred significant losses, which it
has funded through the issuance of equity securities, debt issuances, sales by
HSP, and through research and development collaborations and licensing
arrangements.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Hybridon's ability to continue operations in 1999 depends on its
success in obtaining new funds in the immediate future. Hybridon is currently
seeking debt or equity financing in an amount sufficient to support its
operations through the end of 1999, and in connection therewith, is in
negotiations with several parties to obtain such financing. However, there can
be no assurance that Hybridon will obtain any funds or as to the timing thereof.
The Company's existing cash resources and proceeds of accounts receivable from
HSP customers are expected to be sufficient to fund the Company's operations
into July 1999. The Company's management expects such receivables to be
collected no later than July 1999, given such customers' payment histories,
although there can be no assurance thereof. If the Company is unable to obtain
substantial additional new funding by the end of July, 1999, Hybridon 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 it to relinquish rights to certain of its
technologies, product candidates or products which it would otherwise pursue on
its own or terminate operations or seek relief under applicable bankruptcy laws.
Even if Hybridon obtains sufficient cash to fund its operations in
1999, it will be required to raise substantial additional funds through external
sources, including through collaborative relationships and public or private
financing, to support its operations beyond 1999. Except for research and
development funding from Searle under its collaborative agreement with Searle
(which is subject to early termination in certain circumstances), Hybridon has
no committed external sources of capital, and, as discussed above, expects no
product revenues for several years from sales of the therapeutic products that
it is developing (as opposed to sales of DNA products and reagents manufactured
and sold by HSP).
No assurance can be given that additional funds will be available to
fund operations for the balance of 1999 or in future years, 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.
Hybridon'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 HSP
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, Hybridon's
ability
33
<PAGE>
to establish and maintain collaborative academic and commercial research,
development and marketing relationships, its ability to obtain third-party
financing for leasehold improvements and other capital expenditures and the
costs of manufacturing scale-up and commercialization activities and
arrangements.
YEAR 2000; CONTINGENCY PLANS
As has been widely publicized, many computer systems and
microprocessors are not programmed to accommodate dates beyond the year 1999.
Hybridon'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.
Hybridon believes that all of its internal systems will be Y2K
compliant by the end of the third quarter of 1999. Hybridon is currently
evaluating all of its internal computer systems and microprocessors in light of
the Y2K problem. As part of this process, Hybridon has conducted an inventory of
its automated instruments and other computerized equipment and is contacting
applicable vendors for information regarding Y2K compliance. Hybridon 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 was completed in the first quarter of 1999. Hybridon does not
expect the cost of bringing all Hybridon's systems and microprocessors into Y2K
compliance will be material. Approximately 50% of Hybridon's systems either have
been found compliant or have already been brought into compliance.
Hybridon'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, Hybridon does not expect that any
of these delays will have a significant effect on Hybridon's business or that
any of Hybridon's other IT projects will be canceled or postponed to pay for the
Y2K upgrades.
With regard to potential supplier Y2K problems, Hybridon has
compiled a list of its critical suppliers, and has sent and received back a Y2K
questionnaire from each of them in order to permit Hybridon to ascertain the Y2K
compliance status of each. Hybridon has not yet uncovered any key supplier Y2K
problems that could have a material effect on its business. If through continued
monitoring of these suppliers Hybridon 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
Hybridon's business even if Hybridon takes all appropriate measures to ensure
that it and its key suppliers are Y2K compliant.
It is possible that the conclusions reached by Hybridon from its
analysis to date will change, which could cause Hybridon's Y2K cost estimates
and target completion dates to change.
DIRECTORS AND EXECUTIVE OFFICERS
OF HYBRIDON
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the
executive officers and directors of Hybridon as of June 1, 1999.
34
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
E. Andrews Grinstead, III................................... 53 Chairman of Board of Directors (Class III), President and
Chief Executive Officer
Sudhir Agrawal, D. Phil..................................... 45 Senior Vice President of Discovery, Chief Scientific
Officer, and Director (Class III)
Nasser Menhall.............................................. 42 Director (Class I)
Arthur W. Berry............................................. 56 Director (Class I)
Harold L. Purkey............................................ 54 Director (Class I)
James B. Wyngaarden, M.D.................................... 73 Director (Class II)
Paul C. Zamecnik, M.D....................................... 85 Director (Class II)
Camille Chebeir............................................. 60 Director (Class II)
Youssef El-Zein............................................. 49 Director (Class III)
H.F. (Jake) Powell.......................................... 66 Director (Class III)
</TABLE>
E. Andrews Grinstead, III joined Hybridon 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 Hybridon, Mr. Grinstead served as Managing Director and
Group Head of the life sciences group at Paine Webber, 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, an
international pharmaceutical company, from 1976 to 1984, most recently as
General Manager of Venezuelan Pharmaceutical, Animal Health and Agricultural
Chemical Operations and at Eli Lilly Corporate Staff as Administrator, Strategic
Planning and Acquisitions. Since 1991, Mr. Grinstead has served 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.
Sudhir Agrawal joined Hybridon 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 Hybridon, 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.
Nasser Menhall was appointed member of the Board of Directors of
Hybridon in 1992. He has been a 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; and President of Biomedical Associates, a private investment
firm, since 1990.
Arthur W. Berry was appointed member of the Board of Directors of
Hybridon in 1998. He has been Chairman and Managing Partner of Pecks Management
Partners, since 1990, and was Vice President and Co-
35
<PAGE>
Manager of the Alliance Convertible Securities Group and President of the
Alliance Convertible Fund from 1985 to 1990. Prior to joining Alliance, he was
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. He is also a member of the Board of
Directors of Intellicorp, Inc.
Harold L. Purkey was appointed member of the Board of Directors of
Hybridon in 1998. He is President of Forum Capital Markets LLC, and was
previously Senior Managing Director of Convertible Securities at Smith Barney
Shearson from 1990 to 1994, and Senior Executive Vice President of Drexel
Burnham Lambert from 1982 to 1989. He is also a member of the Board of Directors
of Richardson Electronics.
James B. Wyngaarden was appointed member of the Board of Directors
of Hybridon in 1990; he has been Vice Chairman of the Board of Directors of
Hybridon since February 1997. He was 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; and Director of the National Institutes of
Health from 1982 to 1989. He is a member of the Board of Directors of Human
Genome Sciences, Inc. and Magainin Pharmaceuticals, Inc.
Paul C. Zamecnik was appointed member of the Board of Directors of
Hybridon in 1990. He was Principal Scientist at the Worcester Foundation for
Biomedical Research, Inc. from 1979 to 1996, and has been Collis P. Huntington
Professor of Oncologic Medicine Emeritus at the Harvard Medical School since
1979. He is also currently Senior Scientist and Honorary Physician at
Massachusetts General Hospital in Boston.
Youssef El-Zein was appointed member of the Board of Directors of
Hybridon in 1992, and has been Vice Chairman of the Board of Directors of
Hybridon since February 1997. He has been Executive Officer of Pillar S.A., a
private investment and management consulting firm, since 1991; Chairman of the
WorldCare Group since 1993; and member of the Board of Directors of Pillar
Investment Limited ("Pillar Investment"), a private investment and management
consulting firm, since 1991.
Camille Chebeir was appointed member of the Board of Directors of
Hybridon in 1999. Since 1995, he has been President of Sedco Services, Inc.,
which manages the worldwide investments of a prominent Saudi Arabian family. In
that capacity, he serves on the boards of various entities in which Sedco
Services, Inc. has invested. Since 1995, he has served as Managing Director of
MetroWest, a Florida real estate development company. Mr. Chebeir was previously
with National Commercial Bank, and served from 1989 to 1992 as Executive Vice
President of its New York branch, and from 1983 to 1989 as Vice
President--Operations. Mr. Chebeir is a former President of the Arab Bankers
Association of North America.
Jake Powell was appointed member of the Board of Directors of
Hybridon in 1999. From 1982 to 1996, he was with Nabisco, Inc., serving from
1994 to 1996 as Executive Vice President and Chief Financial Officer, and from
1989 to 1994 as President of Nabisco International. He served as Senior Vice
President and Chief Financial Officer of Standard Brands, Inc. from 1980 to 1981
and held various executive offices with Standard Brands affiliates from 1974 to
1980.
Hybridon's Restated Certificate of Incorporate provides for a
staggered Board of Directors consisting of three classes, with each class being
as nearly equal in number as possible. At each annual meeting of Hybridon's
stockholders, the term of one class expires and the successors of the directors
in that class are elected for a term of three years. Hybridon has designated
three Class I directors, three Class II directors, and four Class III directors;
they are identified in the above table. They are to serve until the annual
meeting of stockholders to be held in 2000, 2001 and 2002, respectively, and
until their respective successors are duly elected and qualified, or until their
earlier resignation or removal. The Restated Certificate of Incorporate provides
that directors may be removed only for cause by a majority of stockholders.
36
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table sets forth the compensation for the fiscal years
ended December 31, 1998 ("fiscal 1998"), December 31, 1997 and December 31, 1996
for the persons, the Company's Chief Executive Officer and Chief Scientific
Officer, who were serving as Executive Officers at December 31, 1998 and whose
total annual salary and bonus exceeded $100,000 in fiscal 1998 (the Chief
Executive Officer and Chief Scientific Officer are hereinafter referred to as
the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------
OTHER
ANNUAL SECURITIES
COMPEN- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS SATION OPTIONS COMPENSATION
--------------------------- ------ ----- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
E. Andrews Grinstead, III..........................1998 $375,000 0 $ 93,750(1) 500,000 $ 53,861(2)
Chairman of the Board, 1997 $375,000 0 $ 93,750(1) 66,806 $ 53,784(2)
President and Chief Executive 1996 $375,000 $225,000 $ 93,750(1) 50,000 $ 48,163(2)
Officer
Sudhir Agrawal, D. Phil............................1998 $250,000 0 $ 50,000(1) 500,000 $ 22,115(2)
Senior Vice President of 1997 $250,000 0 $ 50,000(1) 32,263 $ 13,462(2)
Discovery, Chief Scientific 1996 $250,000 $100,000 $ 4,277(1) 25,000 $ 24,399(2)
Officer and Director
</TABLE>
- ----------------
(1) Other annual compensation paid, or to be paid, by the Company to, or for
the benefit of, the Named Executive Officer is as follows:
<TABLE>
<CAPTION>
E. Andrews Grinstead, III 1998 1997 1996
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Paid in lieu of employee benefits............................ $79,903 $34,902 $76,017
Purchase of life insurance and other
payments to third parties.................................... 13,487 58,848 17,733
------- ------- -------
Total........................................................ $93,750 $93,750 $93,750
======= ======= =======
Sudhir Agrawal, D. Phil. 1998 1997 1996
- ------------------------ ---- ---- ----
Paid in lieu of employee benefits............................ $39,337 $38,132 $ 0
Purchase of life insurance and other payments to
third parties................................................ 10,663 11,868 4,277
------- ------- ------
Total........................................................ $50,000 $50,000 $4,277
======= ======= ======
</TABLE>
37
<PAGE>
(2) All other compensation paid, or to be paid, by the Company to, or for the
benefit of, the Named Executive Officers is as follows:
<TABLE>
<CAPTION>
E. Andrews Grinstead, III 1998 1997 1996
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Surrender of unused vacation days........................... $37,861 $37,300 $32,163
Additional payments......................................... 16,000 16,484 16,000
------- ------- -------
Total....................................................... $53,861 $53,784 $48,163
======= ======= =======
Sudhir Agrawal, D. Phil. 1998 1997 1996
- ------------------------ ---- ---- ----
Surrender of unused vacation days........................... $22,115 $13,462 $24,399
------ -------- ------
Total....................................................... $ 22,115 $ 13,462 $ 24,399
======== ======== ========
</TABLE>
Option Grants Table
The following table sets forth certain information concerning grants
of stock options made during fiscal 1998 to each of the Named Executive
Officers:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTIONS TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
GRANTED FISCAL YEAR PER SHARE DATE(1) 5% 10%
---------- ------------ --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
E. Andrews Grinstead, III........... 500,000 (3) 21.4% $2.00 7/21/08 $323,407 $1,107,416
Sudhir Agrawal, D.Phil.............. 500,000 (3) 21.4% $2.00 7/21/08 $323,407 $1,107,416
</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 optionholder's continued employment through the option period,
and the date on which the options are exercised. As of April 16, 1999,
the last sale price of Common Stock of the Company was lower than the
exercise price of the options reflected in this table.
(3) These stock options are currently exercisable with respect to 350,000 of
the shares covered thereby and will become exercisable with respect to
the remaining shares covered thereby in equal quarterly installments in
arrears commencing on July 21, 1999.
38
<PAGE>
Aggregated Option Exercises and Year-End Option Table
The following table sets forth certain information concerning the
number and value of unexercised options held by each of the Named Executive
Officers on December 31, 1998:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
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
------------- -------------
<S> <C> <C> <C>
E. Andrews Grinstead, III................................ 461,235 / 302,084 $ -- / --
Sudhir Agrawal........................................... 340,903 / 277,360 $3,750 / --
</TABLE>
- ---------------------
(1) The closing price for the Common Stock as reported by The Nasdaq OTC
Bulletin Board on December 31, 1998 (the last day of trading in 1998) was
$1.625. Value is calculated on the basis of the difference between the
option exercise price and $1.625, multiplied by the number of shares of
Common Stock underlying the option.
DIRECTOR COMPENSATION
Each non-employee director is paid $1,500 for personal or telephonic
attendance at a Board of 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 Director and committee meetings. In addition, Dr. Zamecnik received
compensation in the amount of $83,995 in 1998 in connection with the provision
of certain consulting services to the Company. Of this amount, Dr. Zamecnik
received 25,000 shares of Common Stock and warrants to purchase 6,250 shares of
Common Stock in lieu of $50,000 in cash. The remaining $33,995 was paid in cash.
The Company also is a party to consulting, advisory and other arrangements with
various directors and their affiliates. For a description of the foregoing
arrangements with the Company and certain other transactions between the Company
and affiliates of certain directors, see "Certain 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, (a) as of January 24, 1996 at
an exercise price of $65.625 per share, (b) as of May 1, 1997, at an exercise
price of $27.50 per share, (c) as of May 1, 1998 at an exercise price of $2.375
per share, and (d) as of May 1, 1999 at an exercise price of $1.22 per share.
The Director Plan also provides that options to purchase 5,000 shares of Common
Stock will be granted to each new director upon his or her initial election to
the Board of Directors. However, because of the one-for-five reverse stock split
described below, options to purchase 1,000 shares of Common Stock were granted
to Messrs. Chebeir and Powell upon their appointment to the Board of Directors
in 1999. In addition, on June 8, 1999, the Company's stockholders approved a
one-time grant of options to purchase 8,000 shares of the Company's Common Stock
at an exercise price of $0.47 per share to each director other than Mr.
Grinstead and Dr. Agrawal. Annual options to purchase 5,000 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 options granted automatically each year, on April 30 of the year following
the date of the grant); provided, that the exercisability of these options will
be accelerated upon the occurrence of a change in control
39
<PAGE>
(as defined in the Director Plan). A total of 400,000 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 June 15, 1999,
options to purchase an aggregate of 93,000 shares of Common Stock were
outstanding under the Director Plan. All share information set forth in the
Proxy Statement has been adjusted to take into account the one-for-five reverse
stock split of the Company's Common Stock effected in December 1997.
Non-employee directors also have received options to purchase Common
Stock of the Company under the Company's 1997 Stock Incentive 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 AGREEMENTS, 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 1996, 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 December 31, 1998, at
which date the total unpaid balance of principal and interest was $258,650.
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.
40
<PAGE>
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 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.
Stock options to purchase an aggregate of 207,513 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 156,069 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
On June 16, 1998 the Board of Directors re-established a
Compensation Committee consisting of Messrs. Berry and El-Zein and Dr.
Wyngaarden. 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, 1998.
Since January 1, 1998, the Company has entered into or is engaged in
certain ongoing transactions with (i) Pillar S.A., Pillar Investment, Pillar
Limited and Charles River Building Limited Partnership, entities of which
Messrs. El-Zein and Menhall are affiliates; (ii) entities advised by Pecks, an
entity of which Mr. Berry is a principal; (iii) Forum, an entity of which Mr.
Purkey is an affiliate; and (iv) each of Drs. Wyngaarden and Zamecnik and Mr.
Powell. See "Certain Transactions."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 15,
1999 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, assuming conversion of all convertible debt or preferred
stock and exercise of all warrants and stock options by such person and only by
such person.
41
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership(1)
Name and Address of Number of Percent of
Beneficial Owner Shares Class
- ---------------- --------- ----------
5% STOCKHOLDERS
<S> <C> <C>
Pecks Management Partners Ltd.............................. 8,441,556(2) 34.87%
One Rockefeller Plaza
New York, New York 10022
Forum Capital Markets LLC.................................. 4,923,415(3) 24.75%
53 Forest Ave.
Old Greenwich, CT 06870
General Motors Employees................................... 3,744,926(4) 19.19%
Domestic Group Trust
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
Guardian Life Insurance.................................... 3,171,698(5) 16.75%
Company of America
201 Park Avenue South, 7A
New York, New York 10003
Intercity Holdings Ltd..................................... 2,216,666(6) 13.73%
c/o Cuson Milner House
18 Parliament Street
Hamilton, Bermuda
Abdelah Bin Mahfouz........................................ 2,216,666(7) 13.73%
c/o SEDCO
P.O. Box 4384
Jeddah 21491
Saudi Arabia
Delaware State Employees................................... 2,493,698(8) 13.66%
Retirement Fund
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
42
<PAGE>
Youssef El-Zein............................................ 1,748,722(9) 10.25%
28 Avenue de Messine
75008 Paris, France
Nasser Menhall............................................. 1,726,734(10) 10.14%
28 Avenue de Messine
75008 Paris, France
Pillar Investment Limited.................................. 1,617,373(11) 9.56%
28 Avenue de Messine
75008 Paris, France
Yahia M. A. Bin Laden...................................... 1,373,977(12) 8.59%
2 rue Charles Bonnet
1206 Geneva, Switzerland
Nicris Limited............................................. 1,360,644(13) 8.50%
c/o Magnin Dunand & Associes
2 rue Charles Bonnet
1206 Geneva, Switzerland
Lincoln National Life Insurance Co......................... 1,246,917(14) 7.33%
c/o Lynch & Mayer
520 Madison Avenue
New York, New York 10022
Faisal Finance Switzerland SA.............................. 1,043,112(15) 6.52%
84 Ave Louis Casi
1216 Geneva, Switzerland
Finova Technology Finance Inc. ............................ 896,875 (16) 5.60%
10 Waterside Drive
Farmington, CT 06032
Declaration of Trust for the............................... 870,100(17) 5.23%
Defined Benefit Plan of ICI
American Holdings, Inc.
c/o Pecks Management Partners Ltd.
One Rockfeller Plaza
New York, New York 10022
</TABLE>
- ---------------------
(1) The number of shares beneficially owned is determined under rules
promulgated by the Securities and Exchange Commission (the "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 June 15, 1999 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 255,381 shares of Series A Convertible Preferred Stock owned by
six investment advisory clients of Pecks, which clients would receive
dividends and the proceeds from the sale of such shares. Three of these
clients are Delaware State Employees Retirement Fund, General Motors
Employees Domestic Group Trust and Declaration of Trust for the Defined
Benefit Plan of ICI American Holdings, Inc. These shares of Series A
Convertible Preferred Stock are convertible into 6,008,965 shares of
Common Stock of the Company. This amount also includes 762,419 shares
issuable upon the exercise of Class A warrants and 420,172 shares issuable
upon the exercise of Class D warrants held in the aggregate by the
foregoing entities. This number also includes 1,250,000 shares issuable
upon
43
<PAGE>
conversion of a portion of the $6,000,000 bank loan to the Company owned
by certain of the foregoing entities.
(3) Includes (a) 328,677 shares issuable upon exercise of Class B warrants,
(b) 280,517 shares issuable upon the exercise of Class C warrants, (c)
408,112 shares issuable upon exercise of Class A warrants, (d) 761,568
shares issuable upon exercise of other warrants, (e) 1,250,000 shares
issuable upon conversion of Forum's portion of the $6,000,000 bank loan to
the Company, and (f) 1,098,282 shares issuable upon conversion of 46,677
shares of Series A Convertible Preferred Stock owned by Forum.
(4) Includes 114,177 shares of Series A Convertible Preferred Stock which are
convertible into 2,686,518 shares of Common Stock of the Company. This
amount also includes 492,783 shares issuable upon the exercise of Class A
warrants and 565,625 shares issuable upon conversion of a portion of the
$6,000,000 bank loan to the Company owned by this entity.
(5) Includes 109,067 shares of Series A Convertible Preferred Stock which are
convertible into 2,566,282 shares of Common Stock of the Company. This
amount also includes 353,316 shares issuable upon the exercise of Class A
warrants and 252,100 shares issuable upon the exercise of Class D
warrants.
(6) Includes 375,000 shares issuable upon the exercise of Class B warrants
held by Intercity Holdings Ltd.
(7) 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 Intercity Holdings
Ltd., may be considered a beneficial owner of the shares beneficially
owned by such entity.
(8) Includes 73,536 shares of Series A Convertible Preferred Stock which are
convertible into 1,730,259 shares of Common Stock of the Company. This
amount also includes 137,918 shares issuable upon the exercise of Class A
warrants, 270,271 shares issuable upon the exercise of Class D warrants
and 355,250 shares issuable upon conversion of portion of the $6,000,000
bank loan to the Company owned by this entity.
(9) 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, (i) 462,800 shares held by Pillar Investment Limited, and (j)
9,000 shares issuable upon the exercise of stock options held by Mr.
El-Zein. 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.
(10) 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, (i) 462,800 shares held by Pillar Investment Limited, and (j)
9,000 shares issuable upon the exercise of stock options held by Mr.
Menhall. 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.
(11) 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,
44
<PAGE>
(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.
(12) 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.
(13) Includes 234,764 shares issuable upon the exercise of Class B warrants
held by Nicris Limited.
(14) Includes 42,878 shares of Series A Convertible Preferred Stock which are
convertible into 1,008,894 shares of Common Stock of the Company. This
amount also includes 238,023 shares issuable upon the exercise of Class A
warrants.
(15) Includes 233,026 shares issuable upon the exercise of Class B warrants
held by Faisal Finance Switzerland SA.
(16) Includes 259,375 shares issuable upon the exercise of Class C warrants
held by Finova Technology Finance Inc.
(17) Includes 26,549 shares of Series A Convertible Preferred Stock which are
convertible into 624,682 shares of Common Stock of the Company. This
amount also includes 42,153 shares issuable upon the exercise of Class A
warrants, 74,265 shares issuable upon the exercise of Class D warrants and
129,000 shares issuable upon conversion of a portion of the $6,000,000
bank loan to the Company owned by this entity.
The following table sets forth certain information as of June 15,
1999 with respect to the beneficial ownership of shares of Common Stock and
Series A Convertible 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, assuming
conversion of all convertible debt or preferred stock and exercise of all
warrants and stock options by such person and only by such person.
<TABLE>
<CAPTION>
Series A
Common Stock Convertible Preferred Stock
------------ ---------------------------
Amount and Nature of Percent of Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership Class Beneficial Ownership Class
DIRECTORS
<S> <C> <C> <C> <C>
Arthur W. Berry................................. 8,442,556(2) 34.87% 255,381(3) 38.57%
Harold W. Purkey................................ 4,924,415(4) 24.75% 46,677(5) 7.05%
Youssef El-Zein................................. 1,748,722(6) 10.25% 0 0
Nasser Menhall.................................. 1,726,734(7) 10.14% 0 0
E. Andrews Grinstead, III ...................... 678,176(8) 4.14% 0 0
Sudhir Agrawal.................................. 519,116(9) 3.19% 0 0
Paul Z. Zamecnik................................ 343,180(10) 2.17% 0 0
James B. Wyngaarden............................. 85,850(11) * 0 0
Camille A. Chebeir.............................. 25,000 * 0 0
H.F. Powell..................................... 18,750(12) * 0 0
All directors and executive officers as a group
(10 persons).................................... 16,855,760(13) 54.36% 302,058 45.62%
</TABLE>
- -------------------
* Less than 1%.
(1) The number of shares beneficially owned by each director and executive
officer is determined under rules promulgated by the 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
45
<PAGE>
the individual has the right to acquire within 60 days after June 15, 1999
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 255,381 shares of Series A Convertible Preferred Stock owned by
six investment advisory clients of Pecks, which clients would receive
dividends and the proceeds from the sale of such shares. Three of these
clients are Delaware State Employees Retirement Fund, General Motors
Employees Domestic Group Trust and Declaration of Trust for the Defined
Benefit Plan of ICI American Holdings, Inc. These shares of Series A
Convertible Preferred Stock are convertible into 6,008,965 shares of
Common Stock of the Company. This amount also includes 762,415 shares
issuable upon the exercise of Class A warrants and 420,172 shares issuable
upon the exercise of Class D warrants held in the aggregate by the
foregoing entities. This number also includes 1,250,000 shares issuable
upon conversion of a portion of the $6,000,000 bank loan to the Company
owned by certain of the foregoing entities. Mr. Berry, a principal of
Pecks, may be considered a beneficial owner of the shares owned by such
entities. Mr. Berry disclaims beneficial ownership of these shares.
(3) Includes 255,381 shares of Series A Convertible Preferred Stock owned by
six investment advisory clients of Pecks, which clients would receive
dividends and the proceeds from the sale of such shares. Three of these
clients are Delaware State Employees Retirement Fund, General Motors
Employees Domestic Group Trust and Declaration of Trust for the Defined
Benefit Plan of ICI American Holdings, Inc. These shares of Series A
Convertible Preferred Stock are convertible into 6,008,965 shares of
Common Stock of the Company. This amount also includes 762,419 shares
issuable upon the exercise of Class A warrants and 420,172 shares issuable
upon the exercise of Class D warrants held in the aggregate by the
foregoing entities. This number also includes 1,250,000 shares issuable
upon conversion of a portion of the $6,000,000 bank loan to the Company
owned by certain of the foregoing entities. Mr. Berry, a principal of
Pecks, may be considered a beneficial owner of the shares owned by such
entities. Mr. Berry disclaims beneficial ownership of these shares.
(4) Includes (a) 796,259 shares of Common Stock owned by Forum Capital Markets
LLC, (b) 328,677 shares issuable upon the exercise of Class B warrants
owned by Forum, (c) 280,517 shares issuable upon the exercise of Class C
warrants owned by Forum, (d) 408,112 shares issuable upon the exercise of
Class A warrants owned by Forum, (e) 61,568 shares issuable upon exercise
of othr warrants held by forum, (f) 1,250,000 shares issuable upon
conversion of Forum's portion of the $6,000,000 bank loan to the Company
and (g) 1,098,282 shares issuable upon conversion of 46,677 shares of
Series A Convertible Preferred Stock owned by Forum. Mr. Purkey, an
affiliate of Forum, may be considered a beneficial owner of the shares
beneficially owned by such entity.
(5) Consists of 46,667 shares of Series A Convertible Preferred Stock owned by
Forum. Mr. Purkey, an affiliate of Forum, may be considered a beneficial
owner of the shares beneficially owned by Forum.
(6) 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, (i) 462,800 shares held by Pillar Investment Limited, and (j)
9,000 shares issuable upon the exercise of stock options held by Mr.
El-Zein. 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.
46
<PAGE>
(7) 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, (i) 462,800 shares held by Pillar Investment Limited, and (j)
9,000 shares issuable upon the exercise of stock options held by Mr.
Menhall. 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.
(8) Includes 630,596 shares subject to outstanding stock options which are
exercisable within the 60-day period following June 15, 1999.
(9) Includes 501,356 shares subject to outstanding stock options which are
exercisable within the 60-day period following June 15, 1999.
(10) Includes (a) 50,750 shares subject to outstanding stock options which are
exercisable within the 60-day period following June 15, 1999 and (b)
31,250 shares issuable upon the exercise of Class C warrants.
(11) Includes (a) 62,000 shares subject to outstanding stock options which are
exercisable within the 60-day period following April 16, 1999 and (b) 700
shares held by Mr. Wyngaarden's children.
(12) Includes 18,750 shares subject to outstanding stock options which are
exercisable within 60-day period following June 15, 1999.
(13) Securities owned by Pillar Associated, Pillar S.A., Pillar S.A.R.L. and
Pillar Investment Limited are included only once, although such amounts
were included above for both Messrs. El-Zein and Menhall.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1998, Hybridon has entered into or has been engaged
in the following transactions with the following Hybridon directors and
officers, stockholders who beneficially own more than 5% of the outstanding
Common Stock of Hybridon ("5% Stockholders"), and affiliates or immediate family
members of those directors, officers and 5% Stockholders.
TRANSACTIONS WITH PILLAR S.A. AND CERTAIN OF ITS AFFILIATES
Hybridon has entered into certain transactions with Pillar S.A.,
Pillar Investment, and Charles River Building Limited Partnership, the entity
which owned the Company's former headquarters in Cambridge, Massachusetts (the
"Cambridge Landlord"). Pillar S.A. and Pillar Investment are affiliates of
Messrs. El-Zein and Menhall, two directors of Hybridon. The Cambridge Landlord
is an affiliate of Messrs. El-Zein and Menhall and Mohamed El-Khereiji, a former
director of Hybridon. The following is a summary of those transactions that
relate to Hybridon's 1998 fiscal year.
In 1998, Hybridon was a party to a consulting agreement with Pillar
S.A. dated as of March 1, 1994 (the "1994 Pillar Consulting Agreement"),
pursuant to which Pillar S.A. provided Hybridon with financial advisory and
managerial services in connection with Hybridon's overseas operations, including
support services in connection with contracts and agreements. Under the terms of
the 1994 Pillar Consulting Agreement, Hybridon paid Pillar S.A. consulting fees
of $60,000 per month and $23,000 per month for overhead costs, and reimbursed
certain authorized out-of-pocket expenses. The 1994 Pillar Consulting Agreement
expired on February 28, 1998.
47
<PAGE>
On July 8, 1995, Hybridon entered into an additional agreement with
Pillar S.A. (the "Pillar Europe Agreement") pursuant to which Pillar S.A. agreed
for a period of two years to provide to Hybridon certain consulting, advisory
and related services (in addition to the services to be provided pursuant to the
1994 Pillar Consulting Agreement) and serve as Hybridon's exclusive agent in
connection with potential corporate partnerships in Europe and as a
non-exclusive placement agent of Hybridon in connection with private placements
of securities of Hybridon. On November 1, 1995, the Pillar Europe Agreement was
amended to provide that (1) Pillar S.A. would cease to serve as Hybridon's
executive agent in connection with potential corporate partnerships in Europe,
but would continue to serve as a non-exclusive agent in that connection, (2)
Pillar S.A. would receive a retainer of $26,470 per month for the balance of the
term of the Pillar Europe Agreement, (3) the fees provided for 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
Hybridon engaged in discussions during the 12-month period ended November 1,
1995 as a result of introductions by Pillar S.A., and (4) 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 Hybridon. The Pillar Europe Agreement
expired on April 1, 1997.
In 1998, Hybridon paid Pillar Investment an aggregate of $300,000
under these agreements, in the form 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.
Hybridon has retained Pillar Investment as placement agent in
connection with the private placements of securities of Hybridon in offshore
transactions in reliance upon an exemption from registration under Regulation S
(the "Regulation S Offerings") promulgated under the Securities Act of 1933, as
amended (the "Securities Act"). Pillar Investment received fees consisting of
(1) 9% of the gross proceeds of each Regulation S Offering, (2) a
non-accountable expense allowance equal to 4% of those gross proceeds, (3) 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, subject to
adjustment (the "Pillar Warrants"), (4) the right to purchase, for nominal
consideration, warrants to purchase a number of shares of the Common Stock of
Hybridon equal to 10% of the aggregate number of shares of Common Stock sold by
Hybridon for which Pillar Investment 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 (5) a
consulting/restructuring fee of $960,000 payable in Common Stock of Hybridon
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 Hybridon in 1998 to the extent
contemplated by the Consent and Waiver dated as of January 12, 1998 given by
certain beneficial holders of Hybridon's 9% convertible subordinated notes (the"
9% Notes"), or otherwise to the extent contemplated by the Placement Agency
Agreement between Hybridon and Pillar Investment, subject to Hybridon's receipt
of a fairness opinion with regard thereto. In no event may Pillar Investment
receive compensation in excess of the level that was approved by the holders of
the 9% Notes. Pillar Investment 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, Hybridon
and Pillar Investment have entered into an advisory agreement dated May 5, 1998,
pursuant to which Pillar Investment acts as Hybridon's non-exclusive financial
advisor. This agreement requires that Hybridon pay an affiliate of Pillar
Investment a monthly retainer of $5,000 (with a minimum engagement of 24 months
beginning on May 5, 1998), and further provides that Pillar Investment is
entitled to receive (1) out-of-pocket expenses, (2) subject to Hybridon's
receipt of a fairness opinion with respect thereto, 300,000 shares of Common
Stock in connection with Pillar Investment's efforts in assisting Hybridon in
restructuring its balance sheet, and (3) certain cash and equity success fees in
the event Pillar Investment assists Hybridon in connection with certain
financial and strategic transactions. As of April 16, 1999, Hybridon issued to
Pillar Investment the stipulated 300,000 shares of Common Stock. Hybridon
received a fairness opinion in connection with that issuance.
48
<PAGE>
TRANSACTIONS WITH THE CAMBRIDGE LANDLORD
From February 4, 1997 to September 16, 1998, Hybridon was a party to
a lease with the Cambridge Landlord for its Cambridge facilities (the "Cambridge
Lease") . The Cambridge Lease originally provided for an annual rent equal to
$30 per square foot on a triple-net basis (meaning that the tenant pays taxes,
insurance, and operating costs) 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 Hybridon's election to
acquire an interest in the Cambridge Landlord, as 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, 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, Hybridon 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
Hybridon to an approximately 32% interest in the Cambridge Landlord. Hybridon
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 (1) the aggregate cash contribution made by
Hybridon to the Cambridge Landlord or (2) the fair market value of the
Partnership Interest at the time.
In 1997, Hybridon 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 Hybridon 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 Hybridon or the BVH deposit was released.
In June 1998, Hybridon 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, Hybridon terminated the Cambridge Lease and was
relieved of its substantial lease obligations under the Cambridge Lease, subject
to a contingent continuing liability for any sublessee defaults. Further, in
November 1998 Hybridon completed the sale of its Partnership Interest. As a
result of these transactions, Hybridon 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, Hybridon entered into certain transactions with Forum, an
affiliate of Mr. Purkey, a director of Hybridon, and entities advised by Pecks
Management Partners Ltd., Mr. Berry, a principal of Pecks, is a director of
Hybridon.
Hybridon retained Forum as a placement agent of Hybridon in
connection with Hybridon's 1998 Regulation D offering of Series A Convertible
Preferred Stock and Class D warrants in the U.S. Forum received as compensation
for its services as placement agent with regard to the Regulation D offering and
its assistance with an exchange offer made by the Company to the holders of its
9% Notes, 597,699 shares of Common Stock and warrants (the "1998 Forum
Warrants") to purchase prior to May 4, 2003 an aggregate of 609,194 shares of
Common Stock exercisable at $2.40 per share, in each case subject to adjustment.
In addition, in consideration of the agreements made by Forum consenting to the
Regulation D offering and waiving certain obligations of Hybridon to Forum,
Hybridon agreed to amend Forum's warrant dated as of April 2, 1997, to purchase
up to 71,301 shares of Common Stock of Hybridon (the "1997 Forum Warrant"), to
change the exercise price to $4.25 per share, subject to adjustment, and
increase the number of shares of Common Stock purchasable upon exercise to
588,235, in each case subject to adjustment, and to provide that it may not be
exercised until May 5, 1999 and the transactions contemplated by those private
placements and by
49
<PAGE>
the exchange offer will not trigger any anti-dilution adjustments to its
exercise price or the number of shares of Common Stock purchasable upon
exercise.
In November 1998, Forum and entities advised by Pecks purchased
Hybridon's bank loan. In connection with the purchase of the loan, the
purchasing entities advanced an additional amount to Hybridon 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. This principal amount
of the loan and accrued but unpaid interest thereon is convertible, in whole or
in part, at the lenders' option into Common Stock at a conversion price of $2.40
per share.
In connection with the purchase of the loan, Forum received a fee of
$400,000, which Forum has reinvested by purchasing from Hybridon 160,000 shares
of Common Stock and warrants to purchase an additional 40,000 shares of Common
Stock at $3.00 per share. In addition, Forum received warrants exercisable until
maturity of the Loan to purchase 133,333 shares of Common Stock at $3.00 per
share.
Hybridon maintains an investment account at Forest Investment
Management LLC, an affiliate of Forum and Mr. Purkey.
OTHER TRANSACTIONS
In March 1999, the Company entered into consulting arrangements with
each of Mr. Powell, Dr. Zamecnik and Dr. Wyngaarden pursuant to which each such
person will act as a consultant to the Company for a two-year period and will
receive a consulting fee of $20,000 per year for general consulting services. In
addition, each person will receive a consulting fee of $1,500 per day of on-site
consulting services provided by such person at the Company's corporate offices
(or at an alternative site agreed upon by the parties), and at the Company's
prior request. Additional fees for special projects will be negotiated
separately between the parties. Each of Mr. Powell, Dr. Zamecnik and Dr.
Wyngaarden also received options to purchase 150,000 shares of the Company's
Common Stock at $2.00 per share; such options will vest over a two-year period.
Certain persons and entities (the "Rightsholders"), including Dr.
Zamecnik, Pillar S.A., Pillar Limited, Intercity Holdings, Mr. Bin Laden and
Nicris Limited, are entitled to certain rights with respect to the registration
under the Securities Act of certain shares of Hybridon'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 Hybridon and the Rightsholders (the "Registration Agreements"). The
Registration Agreements generally provide that in the event Hybridon 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 Limited, but excluding, among
others, Dr. Zamecnik, have the additional right under certain Registration
Agreements to require Hybridon to prepare and file registration statements under
the Securities Act, if Rightsholders holding specified percentages of the
Registrable Shares so request, and Hybridon is required to use its best efforts
to effect that registration, subject to certain conditions and limitations.
Hybridon believes that the terms of the transactions described above
were no less favorable than Hybridon could have obtained from unaffiliated third
parties.
50
<PAGE>
SELLING STOCKHOLDERS
The tables below set forth, to the knowledge of Hybridon, certain
information as of June 15, 1999 with respect to the Selling Security Holders.
The table entitled "Stockholders Selling Common Stock" includes information with
respect to Selling Security Holders who are selling Common Stock in this
offering. The table entitled "Stockholders Selling Preferred Stock" includes
information with respect to Selling Security Holders who are selling Preferred
Stock in this offering. Except as noted below, no Selling Security Holder
selling Common or Preferred Stock in this offering will own 1% or more of the
outstanding stock of Hybridon after the offering.
Except as described below, none of the Selling Security Holders
holds any position or office with, or has otherwise had a material relationship
with, Hybridon within the past three years.
<TABLE>
<CAPTION>
Stockholders Selling Common Stock
Number of Shares of Number of Shares of
Common Stock Beneficially Number of Shares of Common Stock Beneficially
Owned Common Owned
Name of Selling Security Holder Prior to Offering Stock Included in Offering After Offering
------------------------------- ------------------- ---------------------------- ---------------
<S> <C> <C> <C>
Fouad M.O. Tawfig and Hanan H. 47,543 6,250 41,293
Zagzoug
Torben Duer 26,750 18,750 8,000
Thomas Fr. Duer 62,500 62,500 0
Darier Hentsch & Cie 651,088 651,088 0
Finn Trunk Black 3,750 3,750 0
MM Pictet & Cie 750,000 750,000 0
Nicris Limited6 1,360,644 1,050,644 310,000
Raji Abou Hadar 62,500 62,500 0
Intercity Ltd.6 2,216,666 1,875,000 341,666
Clapham Investments Ltd. 125,500 125,000 500
LGT Bank in Liechtenstein AG 312,500 312,500 0
Participations Besancon 125,000 125,000 0
Loxhall Limited 62,500 62,500 0
MicroTech Software a/s 33,000 31,250 11,750
JSP Holdings ApS 24,500 12,500 12,000
Jan Poulson 18,750 18,750 0
Mr. Mohamad Hassan Abdul Ghani 67,717 67,717 0
Dr. Khaled M.R. Abdul Ghani 135,435 135,435 0
Mr. Imad Mustapha Mansour 67,717 67,717 0
Mr. Malek Salam 88,033 88,033 0
Faisal Finance (Switzerland) S.A. 1,043,113 1,009,779 33,334
Mr. Guy Semon 22,149 22,149 0
Mrs. Francoise Semon 22,149 22,149 0
Mr. Le Pelley Dumanoir 22,149 22,149 0
Mr. Moh'd Abdo Sweidan 67,119 67,119 0
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Stockholders Selling Common Stock
Number of Shares of Number of Shares of
Common Stock Beneficially Number of Shares of Common Stock Beneficially
Owned Common Owned
Name of Selling Security Holder Prior to Offering Stock Included in Offering After Offering
------------------------------- ------------------- ---------------------------- ---------------
<S> <C> <C> <C>
Mr. Isam Moh'd Khairy Kabbani 67,119 67,119 0
Dr. Essam Ahmad Jawadm Alamdar 201,357 201,357 0
Arab Islamic Bank (E.C.) 503,394 503,394 0
Mr. Sobbi Adra 23,492 23,492 0
Mr. Mansour S.M.A. Al-Sharif 65,972 65,972 0
Mr. Nafez M.M. Al-Jindi 65,972 65,972 0
Solter Corporation 217,345 196,047 21,298
Carset Overseas Corporation 176,375 176,375 0
Mr. Ali A. Bajrai 163,310 163,310 0
Pillar Investment Limited1 1,617,173 1,599,130 18,043
Bioreliance Corporation 16,697 16,697 0
Chestnut Partners 62,500 62,500 0
Datamonitor 62,500 62,500 0
Finova Technology Finance, Inc. 896,875 896,875 0
HPC America, Inc. 218,750 218,750 0
Hyal Pharmaceutical Corporation 17,500 17,500 0
SEIF Foundation2 119,725 119,725 0
Janitronics 45,724 45,724 0
Kinetic Systems, Inc. 163,238 163,238 0
Massachusetts Eye & Ear Infirmary 62,500 62,500 0
Norwegian Radium Hospital Research 37,500 37,500 0
Foundation
Susan and Anthony Russo 62,500 62,500 0
Pharmakinetics Laboratories, Inc. 55,803 55,803 0
The Perkin Elmer Corporation 205,377 205,377 0
Primedica Corporation 364,418 364,418 0
Quintiles Transnational Corp. 379,175 379,175 0
Siena Construction Corporation 31,250 31,250 0
Sierra Biomedical, Inc. 189,203 189,203 0
SP Pharmaceuticals LLC 115,985 115,985 0
Southern Research Institute 68,860 68,860 0
Transamerica Business Credit 468,750 468,750 0
Corporation
Triumvirate Environmental, Inc. 19,138 19,138 0
University of Kansas 29,260 29,260 0
University of Massachusetts 84,450 84,450 0
Paul C. Zamecnik and Mary V. 343,180 156,250 186,930
Zamecnik, JTWROS2,6
Allstate Insurance Company 487,095 487,095 0
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Stockholders Selling Common Stock
Number of Shares of Number of Shares of
Common Stock Beneficially Number of Shares of Common Stock Beneficially
Owned Common Owned
Name of Selling Security Holder Prior to Offering Stock Included in Offering After Offering
------------------------------- ------------------- ---------------------------- ---------------
<S> <C> <C> <C>
Angelo Gordon & Co., L.P. 113,648 113,648 0
Michael Angelo, L.P. 308,510 308,510 0
Ramius Fund Ltd. 227,296 227,296 0
Raphael, L.P. 308,510 308,510 0
Medici Partners, L.P. 97,396 97,396 0
CNA Income Shares, Inc. 487,095 487,095 0
Forest Alternative Strategies Fund II, 25,971 25,971 0
L.P. Series A5I3
Forest Alternative Strategies Fund II, 12,997 12,997 0
L.P. Series A5M3
Forest Alternative Strategies Fund II, 3,897 3,897 0
L.P. Series B-33
Forest Fulcrum Ltd.3 105,533 105,533 0
Forest Global Convertible Fund Series 156,182 156,182 0
A53
Forest Greyhound3 32,481 32,481 0
Forest Performance Fund3 20,470 20,470 0
LLT Ltd.3 25,971 25,971 0
Forum Capital Markets LLC4,6 4,923,415 3,634,855 1,288,560
Providian Life & Health 655,710 655,710 0
Monumental Life Insurance Co. 534,227 534,227 0
The Guardian Pension Trust Fund 97,396 97,396 0
Harris Investment Management 90,147 90,147 0
Offshore Strategies Ltd. 324,765 324,765 0
Libertyview Plus Fund 162,381 162,381 0
Libertyview Fund LLC 81,190 81,190 0
CPR (USA) 405,906 405,906 0
Lincoln National Life Insurance Co. 1,246,917 1,246,917 0
Lincoln National Convertible 483,865 483,865 0
Securities Fund
Weirton Trust 141,271 141,271 0
Walker Art Center 53,595 53,595 0
United National Insurance Co. 22,742 22,742 0
Equi Select Growth & Income Fund 162,383 162,383 0
Zazove Convertible Fund, L.P. 155,436 155,436 0
Lois Wilkens 6,224 6,224 0
Winchester Convertible Plus Ltd. 126,647 126,647 0
Foundation Account No. 1 68,194 68,194 0
LLC Account No. 1 32,481 32,481 0
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Stockholders Selling Common Stock
Number of Shares of Number of Shares of
Common Stock Beneficially Number of Shares of Common Stock Beneficially
Owned Common Owned
Name of Selling Security Holder Prior to Offering Stock Included in Offering After Offering
------------------------------- ------------------- ---------------------------- ---------------
<S> <C> <C> <C>
GPS Fund Limited 97,394 97,394 0
Telefix (First Delta) 16,253 16,253 0
Guardian Life Insurance Co. of 3,171,698 3,171,698 0
America
Declaration of Trust for the Defined 870,100 741,100 129,000
Benefits Plan of ICI America
Holdings, Inc.5
J.W. McConnell Family Foundation5 386,988 329,988 57,000
Delaware State Employees Retirement 2,473,698 2,138,448 355,250
Fund5,6
General Motors Employees Domestic 3,744,926 3,179,301 565,625
Group Trust5,6
Zeneca Holdings5 583,370 496,995 86,375
Thermo Electron Balanced 362,474 305,724 56,750
Investment Fund5
Tucker Anthony & R.L. Day, Inc. 6,199 6,199 0
</TABLE>
NOTES:
1. Mr. Nasser Menhall and Mr. Youssef El-Zein, members of the board of
directors of Hybridon, are principals of Pillar Investment Limited.
2. Dr. Zamecnik is a member of the board of directors of Hybridon and is a
consultant to Hybridon.
3. Harold W. Purkey, a member of the board of directors of Hybridon, is an
affiliate of this Selling Security Holder.
4. Harold W. Purkey, a member of the board of directors of Hybridon, is the
President and a 10% owner of Forum Capital Markets.
5. Arthur W. Berry, a member of the board of directors of Hybridon, serves as
investment advisor to ICI American.
6. These Selling Security Holders will beneficially own greater than 1% of the
Company's Common Stock after the offering, as follows:
<TABLE>
<CAPTION>
Percentage of Outstanding
Selling Security Holder Stock Common Stock Beneficially Owned After the Offering
- ----------------------------- ----------------------------------------------------
<S> <C>
Nicris Limited 1.96%
Intercity Ltd. 2.17%
Paul Zamecnik and Mary V. Zamecnik, JTWROS 1.18%
Forum Capital Markets LLC 7.57%
DelawareState Employees Retirement Fund 2.20%
General Motors Employees Domestic Group Trust 3.46%
</TABLE>
<TABLE>
<CAPTION>
Number of Shares of
Convertible Preferred Number of Shares of Number of Shares of
Stock Beneficially Convertible Preferred Convertible Preferred
Name of Owned Prior to Stock Included in Stock Beneficially
Selling Security Holder Offering Offering Owned After Offering
------------------------------- ------------------- ---------------------------- ---------------
<S> <C> <C> <C>
Allstate Insurance Company 16,750 16,750 0
Angelo Gordon & Co., L.P. 3,908 3,908 0
Michael Angelo, L.P. 10,609 10,609 0
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Stockholders Selling Common Stock
Number of Shares of Number of Shares of
Common Stock Beneficially Number of Shares of Common Stock Beneficially
Owned Common Owned
Name of Selling Security Holder Prior to Offering Stock Included in Offering After Offering
------------------------------- ------------------- ---------------------------- ---------------
<S> <C> <C> <C>
Ramius Fund Ltd. 7,816 7,816 0
Raphael, L.P. 10,609 10,609 0
Medici Partners, L.P. 3,349 3,349 0
CNA Income Shares, Inc. 16,750 16,750 0
Forest Alternative Strategies Fund 893 893 0
II, L.P. Series A5I1
Forest Alternative Strategies Fund 447 447 0
II, L.P. Series A5M1
Forest Alternative Strategies Fund 134 134 0
II, L.P. Series B-31
Forest Fulcrum Ltd.1 3,629 3,629 0
Forest Global Convertible Fund 5,584 5,584 0
Series A51
Forest Greyhound1 1,117 1,117 0
Forest Performance Fund1 704 704 0
LLT Ltd.1 893 893 0
Forum Capital Markets LLC2 46,677 46,677 0
Providian Life & Health 21,563 21,563 0
Monumental Life Insurance Co. 16,400 16,400 0
The Guardian Pension Trust Fund 3,349 3,349 0
Harris Investment Management 3,100 3,100 0
Offshore Strategies Ltd. 11,168 11,168 0
Libertyview Plus Fund 5,584 5,584 0
Libertyview Fund LLC 2,792 2,792 0
CPR (USA) 13,958 13,958 0
Lincoln National Life Insurance Co. 42,878 42,878 0
Lincoln National Convertible 16,639 16,639 0
Securities Fund
Weirton Trust 4,858 4,858 0
Walker Art Center 1,843 1,843 0
United National Insurance Co. 782 782 0
Equi Select Growth & Income Fund 5,584 5,584 0
Zazove Convertible Fund, L.P. 5,345 5,345 0
Lois Wilkens 214 214 0
Winchester Convertible Plus Ltd. 4,355 4,355 0
Foundation Account No. 1 2,345 2,345 0
LLC Account No. 1 1,117 1,117 0
GPS Fund Limited 3,349 3,349 0
Telefix (First Delta) 559 559 0
Guardian Life Insurance Co. of 109,067 109,067 0
America
Declaration of Trust for the Defined 26,549 26,549 0
Benefits Plan of ICI America
Holdings, Inc.3
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Number of Shares of
Common Stock Beneficially Number of Shares of Common Stock Beneficially
Owned Common Owned
Name of Selling Security Holder Prior to Offering Stock Included in Offering After Offering
------------------------------- ------------------- ---------------------------- ---------------
<S> <C> <C> <C>
J.W. McConnell Family Foundation 11,742 11,742 0
Delaware State Employees 73,536 73,536 0
Retirement Fund3
General Motors Employees 114,177 114,177 0
Domestic Group Trust3
Zeneca Holdings3 17,780 17,780 0
Thermo Electron Balanced 11,597 11,597 0
Investment Fund3
</TABLE>
NOTES:
1. Harold W. Purkey, a member of the board of directors of Hybridon, is an
affiliate of this Selling Security Holder.
2. Harold W. Purkey, a member of the board of directors of Hybridon, is the
President and a 10% owner of Forum Capital Markets.
3. Arthur W. Berry, a member of the board of directos of Hybridon, serves as
investment advisor to ICI American.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Hybridon 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
Convertible Preferred Stock. On June 15, 1999, there were issued and outstanding
15,766,825 shares of Common Stock and 662,099 shares of Convertible Preferred
Stock.
There follows a brief summary of the terms of the Common Stock and
the Convertible Preferred Stock. For further information please refer to the
Restated Certificate of Incorporation of Hybridon, 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 any dividends declared by the Board of Directors out of legally available
funds, subject to any preferential dividend rights of the Preferred Stock or
other securities. Upon the liquidation, dissolution or winding up of Hybridon,
the holders of Common Stock are entitled to receive ratably the net assets of
Hybridon 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 that Hybridon may designate and issue in the future, and the
rights of creditors of Hybridon.
Pursuant to the terms of the Unit Purchase Agreement, the initial
purchasers of certain of the shares of Common Stock sold in the Regulation S and
the Regulation D Offerings (those shares, the "Put Shares; those purchasers, the
"Liquidation Put Holders") have the right to put those shares back to Hybridon
upon the liquidation of Hybridon, but only after all other indebtedness and
obligations of Hybridon 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 (that right, the "Liquidation Put"). The Liquidation Put
is not transferrable, and therefore purchasers of Common Stock pursuant to this
Prospectus will 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 Hybridon.
Consequently, in the event of liquidation of Hybridon, holders of shares of
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 June 15, 1999,
there were 9,597,476 Put Shares outstanding.
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 up to 5,000,000 shares of Preferred Stock
in one or more series with such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as the Board of Directors
determines.
57
<PAGE>
SERIES A CONVERTIBLE PREFERRED STOCK
Dividends. Each share of Series A Convertible Preferred Stock
("Convertible Preferred Stock") is entitled to receive cumulative semi-annual
dividends payable, at the option of Hybridon, in cash or additional shares of
Convertible Preferred Stock, at the rate of 6.5% per annum plus accrued but
unpaid dividends. Dividends accrue from the date of issuance and 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 business day. Dividends are paid, at the election of
Hybridon, either in cash or additional 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 is valued at $100.00
per share (subject to appropriate adjustment to reflect any stock split,
combination, reclassification or reorganization of the Convertible Preferred
Stock).
Liquidation Preference. In the event of a (1) liquidation,
dissolution or winding up of Hybridon, whether voluntary or involuntary, (2) a
sale or other disposition of all or substantially all of the assets of Hybridon,
or (3) any consolidation, merger, combination, reorganization or other
transaction in which Hybridon is not the surviving entity or if stock
constituting more than 50% of Hybridon's voting power is exchanged for or
changed into stock or securities of another entity, cash, or any other property
(a "Merger Transaction") (items (1), (2) and (3) of this sentence being
collectively referred to as a "Liquidation Event"), after payment of debts and
other liabilities of Hybridon, the holders of shares of Convertible Preferred
Stock will be entitled to be paid out of Hybridon's available assets, before any
payment to holders of shares ranking junior to the Convertible Preferred Stock,
an amount equal to the Dividend Base Amount. In the case of a Merger
Transaction, however, this payment may be made in cash, property or securities
of the entity surviving the Merger Transaction. If upon any Liquidation Event,
whether voluntary or involuntary, the assets to be distributed to the holders of
the Convertible Preferred Stock are insufficient to permit the payment to such
shareholders of the full amount owed, then all of Hybridon's available assets
will be distributed ratably to the holders of the Convertible Preferred Stock.
All shares of Convertible Preferred Stock rank, as to payment upon the
occurrence of any Liquidation Event, senior to the Common Stock and senior to
all other series of Preferred Stock, unless the terms of any series provides
otherwise.
Right of Conversion. Commencing after May 5, 1999, shares of
Convertible Preferred Stock will be convertible, at the option of the holder,
into shares of Common Stock or other securities and property. The initial
conversion price per share of Common Stock (the "Conversion Price") is $4.25,
and is subject to adjustment as described below. The rate at which each share of
Convertible Preferred Stock is convertible at any time into Common Stock (the
"Conversion Rate") will be determined by dividing the then-existing Conversion
Price into the "Dividend Base Amount" of a share of Convertible Preferred Stock,
which is equal to $100 plus accrued but unpaid dividends (subject to adjustment
to reflect any stock split, combination, reclassification, or reorganization of
the Convertible Preferred Stock).
Adjustment of Conversion Rate and Conversion Price. As of June 15,
1999, each share of Convertible Preferred Stock was convertible into
approximately 23.53 shares of Common Stock. In order to preserve the economic
value of shares of Convertible Preferred Stock, the Conversion Price will be
adjusted if Hybridon does the following;
o pays a dividend or makes a distribution on any class of capital stock
in shares of its Common Stock;
o subdivides its outstanding Common Stock into a greater number of
shares;
o combines its outstanding Common Stock into a smaller number of shares;
o issues shares of Common Stock or Preferred Stock to any holder of
Common Stock or Preferred Stock rights to acquire Shares of Common
Stock or Preferred Stock at a price per share less than the market
price (as defined);
58
<PAGE>
o pays or distributes to the holders of Common Stock or Preferred Stock
assets, properties, or rights to acquire Hybridon Capital Stock at a
price per share less than the market price; or
o makes a distribution consistently solely of cash to the holders of any
class of capital stock where, during a specified 12 month period, the
cash distribution exceeds 10% of the product of the market price of
the Common Stock multiplied by the total outstanding Common Stock.
Exceptions to Adjustments. No adjustment will, however, be made to
either the Conversion Rate or the Conversion Price for issuances of Common Stock
or Preferred Stock or cash paid to holders of shares of Convertible Preferred
Stock (1) as payment for accrued dividends or (2) as a mandatory conversion or
mandatory redemption payment as described below.
Other Changes in Conversion Rate. Hybridon 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, Hybridon will notify registered
holders.
Hybridon may also increase the Conversion Rate 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.
The Conversion Price may not 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.
Mandatory Conversion and Redemption. Upon giving notice to the
holders of the Convertible Preferred Stock, Hybridon may, at its option, cause
the Convertible Preferred Stock to be converted in whole or in part, on a pro
rata basis, into shares of Common Stock using a Conversion Price equal to $4.00
if the closing bid price of the Common Stock equals or exceeds 250% of the
Conversion Price for at least 20 trading days in any period of 30 consecutive
trading days.
At any time after April 1, 2000, Hybridon may, at its option, redeem
the Convertible Preferred Stock for cash equal to the Dividend Base Amount.
Class Voting Rights. Hybridon shall not, without the affirmative
vote or consent of the holders of at least 50% of all outstanding shares of
Convertible Preferred Stock, voting separately as a class, (1) amend, alter or
repeal any provision of the Restated Certificate of Incorporation or Bylaws so
as adversely to affect the rights of the Convertible Preferred Stock (except
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 will not be considered to affect
adversely the relative rights of the Convertible Preferred Stock), or (2)
authorize or issue, or increase the authorized amount of, the Convertible
Preferred Stock, other than the Convertible Preferred Stock issuable as
dividends on the Convertible Preferred Stock.
Preemptive Rights. The Convertible Preferred Stock is not entitled
to any preemptive or subscription rights in respect of any securities of
Hybridon.
Restrictions on Change of Control. So long as any 9% Notes remain
outstanding, no holder of any shares of Convertible Preferred Stock will,
without the prior written consent of Hybridon, be granted voting rights, be
entitled to receive any voting securities of Hybridon, or be entitled to
exercise any conversion rights if that could, in Hybridon's reasonable judgment,
either alone or in conjunction with other issuances or holdings of capital
stock, warrants or convertible securities of Hybridon, result in a Change of
Control (as defined in the Indenture).
59
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
DELAWARE LAW AND CERTAIN PROVISIONS OF HYBRIDON'S RESTATED
CERTIFICATE OF INCORPORATION, BY-LAWS AND INDEBTEDNESS
Hybridon is subject to the provisions of Section 203 of the Delaware
General Corporation Law, which 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 could 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 the classes having 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 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 anyone to
acquire, or of discouraging anyone from acquiring, control of Hybridon.
The Restated Certificate of Incorporation also requires that any
action required or permitted to be taken by the stockholders of Hybridon at an
annual meeting or special meeting of stockholders may be taken only if it is
properly brought before that 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 that 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
Hybridon, or by the Board of Directors. Under Hybridon's 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 Hybridon. The
foregoing provisions could have the effect of delaying until the next
stockholders meeting any given stockholder action, even though it might be
favored by the holders of a majority of the outstanding voting securities of
Hybridon. These provisions may also discourage any person or entity from making
a tender offer for Shares of Common Stock, because such person or entity, even
if it acquired a majority of the outstanding voting securities of Hybridon,
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-law 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 Hybridon 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, any Preferred Stock
other than the Convertible Preferred Stock.
60
<PAGE>
In addition to these provisions of Delaware law, the Restated
Certificate of Incorporation, and the ByLaws, the terms of Hybridon'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 Hybridon, upon a Change of Control of
Hybridon (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 Hybridon, 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.
PLAN OF DISTRIBUTION
The Securities may be sold from time to time by the Selling
Shareholders or their pledgees, donees, transferees or other successors in
interest. Sales of the Securities may be effected on the NASD OTC Bulletin Board
or in negotiated transactions 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 by
means of one or more of the following methods: (i) block trades in which the
broker or dealer attempts 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 that broker or dealer for its
own account pursuant to this Prospectus, including resale to another broker or
dealer; and (iii) ordinary brokerage transactions and transactions in which the
broker solicits purchasers. In effecting sales, brokers and dealers engaged by
Selling Security Holders may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or discounts from
Selling Security Holders (or, if any such broker or dealer acts as agent for the
purchaser of such Securities, from such purchaser) in amounts to be negotiated.
A broker-dealers may agree with the Selling Security Holders to sell a specified
number of Securities at a stipulated price per share, and, to the extent that
broker-dealer is unable to do so acting as agent for the Selling Security
Holders, to purchase as principal any unsold Securities at the price required to
fulfill the broker-dealer commitment to the Selling Security Holders.
Broker-dealers who acquire Securities as principal may thereafter resell those
Securities.
The Selling Security Holders and any broker-dealers participating in
distribution of the Securities may be deemed "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any profit on the sale of Securities
by the Selling Security Holders and any commissions or discounts given to
broker-dealers may be deemed underwriting commissions or discounts under the
Securities Act. In addition, any of the Securities that qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
Prospectus.
Hybridon has agreed to indemnify certain of the Selling Security
Holders, each underwriter of certain of the Securities, and each person
controlling certain of the Selling Security Holders 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 those persons may be required to make in
respect of such liabilities. Certain of the Selling Security Holders have agreed
to indemnify, in certain circumstances, Hybridon against certain liabilities in
connection with the offer and sale of the Securities, including liabilities
under the Securities Act, and to contribute to payments Hybridon may be required
to make in respect thereof.
LEGAL MATTERS
The validity of the Securities offered by this Prospectus will be
passed upon for Hybridon by Kramer Levin Naftalis & Frankel LLP, New York, New
York.
61
<PAGE>
EXPERTS
The consolidated financial statements of Hybridon as of December 31,
1996, 1997, and 1998 and for each of the years in the three-year period ended
December 31, 1998 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 with respect thereto, which report
includes a paragraph stating that there is substantial doubt about Hybridon's
ability to continue as a going concern, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
62
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997,
DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED) F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996,
DECEMBER 31, 1997 AND DECEMBER 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 (UNAUDITED) F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED
DECEMBER 31, 1996, DECEMBER 31, 1997 AND DECEMBER 31, 1998 AND FOR THE THREE
MONTHS
ENDED MARCH 31, 1999 (UNAUDITED) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996,
DECEMBER 31, 1997 AND DECEMBER 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 (UNAUDITED) F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
</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) and subsidiaries as of December 31, 1997 and 1998, 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, 1998. 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, 1997 and 1998 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying consolidated 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 debt
and equity securities and through research and development collaborations and
licensing agreements. The Company expects such resources to fund operations
through May 1999. There is substantial doubt about the Company's ability to
continue as a going concern. See Note 1 for management's plans. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1999 (except with respect to the matter discussed in Note 7(b) as
to which the date is April 15, 1999)
F-2
<PAGE>
<TABLE>
<CAPTION>
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
December 31, 1999
1997 1998 (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,202,202 $ 5,607,882 $ 2,461,184
Accounts receivable 529,702 1,175,441 1,278,492
Prepaid expenses and other current assets 1,005,825 110,827 105,421
--------------- ---------------- --------------
Total current assets 3,737,729 6,894,150 3,845,097
--------------- ---------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 16,027,734 11,127,035 11,127,035
Laboratory and other equipment 14,288,083 11,432,435 11,430,255
--------------- --------------- --------------
30,315,817 22,559,470 22,557,290
Less--Accumulated depreciation and amortization 11,085,013 13,788,979 14,479,810
--------------- --------------- --------------
19,230,804 8,770,491 8,077,480
--------------- --------------- --------------
OTHER ASSETS:
Deferred financing costs and other assets 3,354,767 612,374 585,390
Note receivable from officer 247,250 258,650 261,500
Restricted cash 3,050,982 - -
Investment in real estate partnership 5,450,000 - -
=============== =============== ==============
12,102,999 871,024 846,890
--------------- --------------- --------------
$ 35,071,532 $ 16,535,665 $ 12,769,467
=============== ================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt $ 7,868,474 $ 6,070,951 $ 6,073,283
Accounts payable 8,051,817 2,368,163 1,838,983
Accrued expenses 11,917,298 4,068,679 3,753,129
--------------- ---------------- --------------
Total current liabilities 27,837,589 12,507,793 11,665,395
--------------- ---------------- --------------
LONG-TERM DEBT, NET OF CURRENT PORTION 3,282,123 473,094 453,875
--------------- ---------------- --------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 50,000,000 1,306,000 1,306,000
--------------- ---------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 16)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value-
Authorized--5,000,000 shares
Series A convertible preferred stock-
Designated--1,500,000 shares
Issued and outstanding--641,259 shares - 6,413 6,413
(Liquidation preference of $65,168,048 at
March 31, 1999)
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding--5,059,650 shares at December 31,
1997 and 15,304,825 at December 31, 1998
and March 31, 1999 (unaudited), respectively 5,060 15,305 15,305
Additional paid-in capital 173,695,698 241,632,024 242,674,076
Accumulated deficit (218,655,101) (238,447,837) (242,456,081)
Deferred compensation (1,093,837) (957,127) (895,516)
------------- -------------- --------------
Total stockholders' (deficit) equity (46,048,180) 2,248,778 (655,803)
------------- -------------- --------------
$ 35,071,532 $ 16,535,665 $ 12,769,467
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Product and service $1,080,175 $1,876,862 $3,253,879 $825,069 $1,529,854
Research and development 1,419,389 945,000 1,099,915 150,000 150,000
Royalty and other income 62,321 48,000 - - 40,225
Interest 1,446,762 1,079,122 148,067 17,845 52,801
---------- ------------ ------------ ------------ -------------
4,008,647 3,948,984 4,501,861 992,914 1,772,880
---------- ------------ ------------ -------------- ------------
OPERATING EXPENSES:
Research and development 39,390,525 46,827,915 20,977,370 6,402,537 3,447,278
General and administrative 11,346,670 11,026,748 6,572,502 1,665,112 1,121,468
Interest 124,052 4,535,647 2,932,362 1,607,437 170,326
Restructuring - 11,020,000 - - -
------------ ------------ ------------- -------------- --------------
Total operating expenses 50,861,247 73,410,310 30,482,234 9,675,086 4,739,072
------------- ------------- ------------- -------------- -----------
Loss before extraordinary item (46,852,600) (69,461,326) (25,980,373) (8,682,172) (2,966,192)
EXTRAORDINARY ITEM:
Gain on exchange of 9% convertible
subordinated notes payable - - 8,876,685 - -
---------- ---------------- ------------ -------------- --------------
Net loss (46,852,600) (69,461,326) (17,103,688) (8,682,172) (2,966,192)
ACCRETION OF PREFERRED STOCK DIVIDENDS - - 2,689,048 - 1,042,052
------------ ---------------- ----------- -------------- ------------
Net loss applicable to $(46,852,600) $(69,461,326) $(19,792,736) $(8,682,172) $(4,008,244)
============= ============= ============= ============ ============
common stockholders
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss per share before extraordinary item $ (10.24) $ (13.76) $ (2.19) (1.72) $ (0.19)
Extraordinary item - - 0.75 - -
------------ ---------------- -------------- ------------ -------------
Net loss per share (10.24) (13.76) (1.44) (1.72) (0.19)
Accretion of preferred stock dividends - - (.23) - (0.07)
------------ ---------------- --------------- ------------- -----------
Net loss per share applicable to common
stockholders $ (10.24) $ (13.76) $ (1.67) (1.72) $ (0.26)
============= ============= ============= ============ ============
SHARES USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER COMMON SHARE 4,575,555 5,049,840 11,859,350 5,059,650 15,304,825
============= ============= ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Convertible Series A Convertible
Preferred Stock Preferred Stock Commom Stock
Number of $.01 Par Number of $.01 Par Number of
Shares Value Shares Value Shares
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 3,196,435 $ 31,965 - - $ 368,733
Issuance of common stock related to initial public offering,
net of issuance costs of $5,268,756 - - - - 1,150,000
Conversion of convertible preferred stock to common stock (3,196,435) (31,965) - - 3,371,330
Issuance of common stock related to the exercise of
stock options - - - - 57,740
Issuance of common stock related to the exercise of
warrants - - - - 81,512
Deferred compensation related to grants of stock options to
nonemployees - - - - -
Amortization of deferred compensation - - - - -
Net loss - - - - -
------------- ------------- --- --- -------------
BALANCE, DECEMBER 31, 1996 - - - - 5,029,315
Issuance of common stock related to the exercise of stock - - - - 25,005
Issuance of common stock related to the exercise of
warrants - - - - 330
Issuance of common stock for services rendered - - - - 5,000
Deferred compensation related to grants of stock options to
nonemployees - - - - -
Amortization of deferred compensation - - - - -
Net loss - - - - -
------------- ------------- --- --- -------------
BALANCE, DECEMBER 31, 1997 - - - - 5,059,650
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Additional
$.001 Par Paid-in Accumulated Deferred
Value Capital Deficit Compensation
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 369 $ 114,755,394 $(102,341,175) -
Issuance of common stock related to initial public offering,
net of issuance costs of $5,268,756 1,150 52,230,094 - -
Conversion of convertible preferred stock to common stock 3,371 28,594 - -
Issuance of common stock related to the exercise of
stock options 58 1,089,618 - -
Issuance of common stock related to the exercise of
warrants 81 3,176,660 - -
Deferred compensation related to grants of stock options to
nonemployees - 1,967,116 - (1,967,116)
Amortization of deferred compensation - - - 763,190
Net loss - - (46,852,600) -
------------- ------------- ------------ -----------
BALANCE, DECEMBER 31, 1996 5,029 173,247,476 (149,193,775) (1,203,926)
Issuance of common stock related to the exercise of stock 26 86,300 - -
Issuance of common stock related to the exercise of
warrants - 9,075 - -
Issuance of common stock for services rendered 5 146,869 - -
Deferred compensation related to grants of stock options to
nonemployees - 205,978 - (205,978)
Amortization of deferred compensation - - - 316,067
Net loss - - (69,461,326) -
------------- ------------- ------------- -----------
BALANCE, DECEMBER 31, 1997 5,060 173,695,698 (218,655,101) (1,093,837)
</TABLE>
Total
Stockholders'
Equity (Deficit)
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 stock options to
nonemployees -
Amortization of deferred compensation 763,190
Net loss (46,852,600)
-----------
BALANCE, DECEMBER 31, 1996 22,854,804
Issuance of common stock related to the exercise of stock 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 stock options to
nonemployees -
Amortization of deferred compensation 316,067
Net loss (69,461,326)
-----------
BALANCE, DECEMBER 31, 1997 (46,048,180)
F-5
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
<TABLE>
<CAPTION>
Convertible Series A Convertible
Preferred Stock Preferred Stock
Number of $.01 Par Number of
Shares Value Shares
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 - - -
Issuance of Series A convertible preferred stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable and accrued
interest, net of issuance costs of $1,195,398 - - 510,504
Issuance of common stock and attached warrants in
exchange for conversion of accounts payable and other
obligations - - -
Issuance of Series A convertible preferred stock - - 114,285
Issuance of common stock to Placement Agent - - -
Issuance of common stock and attached warrants in
exchange for conversion of convertible notes payable, net - - -
of issuance costs of $566,167
Issuance of common stock and attached warrants, net of
issuance costs of $1,069,970 - - -
Issuance of common stock for services rendered - - -
Deferred compensation related to grants of
stock options to nonemployees, net of terminations - - -
Issuance of warrants in connection with notes payable - - -
Accretion and issuance of Series A convertible preferred
stock dividends - - 16,470
Amortization of deferred compensation - - -
Net loss - - -
-------------- -------------- -------------- --
BALANCE, DECEMBER 31, 1998 - - 641,259
Accretion of Series A convertible preferred
stock dividends - - -
Amortization of deferred compensation - - -
Net loss - - -
-------------- -------------- -------------- --
BALANCE, MARCH 31, 1999 (UNAUDITED) - $ - 641,259
============== ============== ==========
</TABLE>
<TABLE>
<CAPTION>
Series A Convertible
Preferred Stock Common Stock
$.01 Par Number of $.001 Par
Value Shares Value
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 - 5,059,650 5,060
Issuance of Series A convertible preferred stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable and accrued
interest, net of issuance costs of $1,195,398 5,105 - -
Issuance of common stock and attached warrants in
exchange for conversion of accounts payable and other
obligations - 3,217,154 3,217
Issuance of Series A convertible preferred stock 1,143 - -
Issuance of common stock to Placement Agent - 597,699 598
Issuance of common stock and attached warrants in
exchange for conversion of convertible notes payable, net - 3,157,322 3,157
of issuance costs of $566,167
Issuance of common stock and attached warrants, net of
issuance costs of $1,069,970 - 3,223,000 3,223
Issuance of common stock for services rendered - 50,000 50
Deferred compensation related to grants of
stock options to nonemployees, net of terminations - - -
Issuance of warrants in connection with notes payable - - -
Accretion and issuance of Series A convertible preferred
stock dividends 165 - -
Amortization of deferred compensation - - -
Net loss - - -
-------------- -------------- --------------
BALANCE, DECEMBER 31, 1998 6,413 15,304,825 15,305
Accretion of Series A convertible preferred
stock dividends - - -
Amortization of deferred compensation - - -
Net loss - - -
-------------- -------------- --------------
BALANCE, MARCH 31, 1999 (UNAUDITED) $ 6,413 15,304,825 $ 15,305
=========== ========== ==================
</TABLE>
<TABLE>
<CAPTION>
Additional Accumulated Deferred
Paid-in Capital Deficit Compensation
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 173,695,698 (218,655,101) (1,093,837)
Issuance of Series A convertible preferred stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable and accrued
interest, net of issuance costs of $1,195,398 38,729,489 - -
Issuance of common stock and attached warrants in
exchange for conversion of accounts payable and other
obligations 5,931,341 - -
Issuance of Series A convertible preferred stock 7,998,817 - -
Issuance of common stock to Placement Agent 1,194,800 - -
Issuance of common stock and attached warrants in
exchange for conversion of convertible notes payable, net 4,230,676 - -
of issuance costs of $566,167
Issuance of common stock and attached warrants, net of
issuance costs of $1,069,970 6,873,453 - -
Issuance of common stock for services rendered 93,700 - -
Deferred compensation related to grants of
stock options to nonemployees, net of terminations 109,734 - (109,734)
Issuance of warrants in connection with notes payable 85,433 - -
Accretion and issuance of Series A convertible preferred
stock dividends 2,688,883 (2,689,048) -
Amortization of deferred compensation - - 246,444
Net loss - (17,103,688) -
----------------- --------------- --------------
BALANCE, DECEMBER 31, 1998 241,632,024 (238,447,837) (957,127)
Accretion of Series A convertible preferred
stock dividends 1,042,052 (1,042,052) -
Amortization of deferred compensation - - 61,611
Net loss - (2,966,192) -
-------------------- -------------- ---------------
BALANCE, MARCH 31, 1999 (UNAUDITED) $ (242,674,076) $ (242,456,081) $ (895,516)
================ =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity (Deficit)
<S> <C>
BALANCE, DECEMBER 31, 1997 (46,048,180)
Issuance of Series A convertible preferred stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable and accrued
interest, net of issuance costs of $1,195,398 38,734,594
Issuance of common stock and attached warrants in
exchange for conversion of accounts payable and other
obligations 5,934,558
Issuance of Series A convertible preferred stock 7,999,960
Issuance of common stock to Placement Agent 1,195,398
Issuance of common stock and attached warrants in
exchange for conversion of convertible notes payable, net 4,233,833
of issuance costs of $566,167
Issuance of common stock and attached warrants, net of
issuance costs of $1,069,970 6,876,676
Issuance of common stock for services rendered 93,750
Deferred compensation related to grants of
stock options to nonemployees, net of terminations -
Issuance of warrants in connection with notes payable 85,433
Accretion and issuance of Series A convertible preferred
stock dividends -
Amortization of deferred compensation 246,444
Net loss (17,103,688)
----------------
BALANCE, DECEMBER 31, 1998 2,248,778
Accretion of Series A convertible preferred
stock dividends -
Amortization of deferred compensation 61,611
Net loss (2,966,192)
---------------
BALANCE, MARCH 31, 1999 (UNAUDITED) $ (655,803)
===============
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-6
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(46,852,600) $(69,461,326) $(17,103,688)
Adjustments to reconcile net loss to net cash used in operating activities-
Extraordinary gain on exchange of 9% convertible
subordinated notes payable - - (8,876,685)
Depreciation and amortization 2,393,751 4,488,719 4,057,286
Loss on disposal of fixed assets - - -
Issuance of common stock for services rendered - 146,874 93,750
Amortization of deferred compensation 763,190 316,067 246,444
Amortization of deferred financing costs - 479,737 160,813
Noncash portion of restructuring charge - 1,255,000 -
Changes in assets and liabilities-
Accounts receivable (573,896) 44,194 (645,739)
Prepaid expenses and other current assets (593,797) 539,499 894,998
Note receivable from officer (9,845) 70,728 (11,400)
Accounts payable 2,010,981 3,987,398 (3,059,002)
Accrued expenses 736,141 7,071,532 1,565,806
Deferred revenue - (86,250) -
Amounts payable to related parties (12,500) - -
----------- ------------ -------------
Net cash used in operating activities (42,138,575) (51,147,828) (22,677,417)
----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments (3,785,146) 3,785,146 -
Purchases of property and equipment (8,902,989) (7,509,755) (471,949)
Proceeds from sale of property and equipment - - 714,400
(Investment in) sale of real estate partnership (3,751,552) - 5,450,000
------------ ------------ -------------
Net cash (used in) provided by investing activities (16,439,687) (3,724,609) 5,692,451
----------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A convertible preferred
stock - - 7,999,960
Proceeds from issuance of common stock related to stock options
and restricted stock grants 1,089,676 86,326 -
Net proceeds from issuance of common stock 52,231,244 - 6,876,676
Proceeds from notes payable 7,500,000 - 6,000,000
Proceeds from issuance of convertible promissory notes payable - 50,000,000 4,233,833
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 (446,163) (1,564,268) (7,296,646)
Decrease (increase) in deferred financing costs 251,921 (2,820,790) (400,000)
Decrease (increase) in restricted cash and other assets 401,990 (2,474,948) 2,976,823
----------- ------------ -------------
Net cash provided by (used in) financing activities 65,927,742 44,440,897 20,390,646
----------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,349,480 (10,431,540) 3,405,680
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,284,262 12,633,742 2,202,202
----------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $12,633,742 $ 2,202,202 $ 5,607,882
=========== ============ =============
Three Months Ended March 31,
1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net loss $(8,682,172) $(2,966,192)
Adjustments to reconcile net loss to net cash used in operating activities-
Extraordinary gain on exchange of 9% convertible
subordinated notes payable - -
Depreciation and amortization 1,130,540 690,831
Loss on disposal of fixed assets 359,424 -
Issuance of common stock for services rendered - -
Amortization of deferred compensation 54,348 61,611
Amortization of deferred financing costs 217,021 26,984
Noncash portion of restructuring charge - -
Changes in assets and liabilities-
Accounts receivable 7,815 (103,051)
Prepaid expenses and other current assets 298,956 5,406
Note receivable from officer (2,850) (2,850)
Accounts payable (479,432) (529,180)
Accrued expenses 745,990 (315,550)
Deferred revenue - -
Amounts payable to related parties - -
--------------- ---------------
Net cash used in operating activities (6,350,360) (3,131,991)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments - -
Purchases of property and equipment - -
Proceeds from sale of property and equipment 400,000 2,180
(Investment in) sale of real estate partnership - -
------- -----
400,000 2,180
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A convertible preferred
stock - -
Proceeds from issuance of common stock related to stock options
and restricted stock grants - -
Net proceeds from issuance of common stock - -
Proceeds from notes payable - -
Proceeds from issuance of convertible promissory notes payable 4,233,833 -
Proceeds from issuance of common stock related to stock
warrants - -
Proceeds from sale/leaseback of fixed assets - -
Payments on long-term debt (2,204,315) (16,887)
Decrease (increase) in deferred financing costs - -
Decrease (increase) in restricted cash and other assets 2,157,854 -
---------- ----------
Net cash provided by (used in) financing activities 4,187,372 (16,887)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,762,988) (3,146,698)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,202,202 5,607,882
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 439,214 $2,461,184
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
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.
Since inception, the Company has devoted substantially all of its efforts
toward product research and development, its custom contract manufacturing
business (Hybridon Specialty Products or HSP) 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 HSP), 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 debt and equity securities and research and
development collaborations in order to fund future operations. There is
substantial doubt concerning its ability to continue as a going concern. As
of December 31, 1998, the Company had cash and cash equivalents of
approximately $5.6 million. The Company expects such resources to fund
operations through May 1999. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
The Company is currently seeking debt or equity financing in an amount
sufficient to support its operations through the end of 1999, and in
connection therewith, is in negotiations with several parties to obtain
such financing. If the Company is unable to obtain this sufficient amount
of additional funding in May 1999, it will be forced to terminate its
operations or seek relief under applicable bankruptcy law by the end of May
1999.
See Note 22 for first-quarter 1999 update.
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 NASD OTC as a result of the delisting.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Management Estimates and Uncertainties
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.
F-8
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(Including Data Applicable To Unaudited Periods)
(continued)
The Company is subject to a number of risks and uncertainties similar
to those of other companies of the same size within the biotechnology
industry, such as uncertainty with clinical trials, uncertainty of
additional funding and history of operating losses.
(b) 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 30% interest in MethylGene, Inc. (MethylGene), a Canadian
corporation which is accounted for under the equity method (see Note
14). All material intercompany balances and transactions have been
eliminated in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and
cash equivalents and restricted cash at December 31, 1997 and 1998
consisted of the following (at amortized cost, which approximates fair
market value):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Cash and cash equivalents-
Cash and money market funds $1,702,272 $3,865,365
Corporate bond 499,930 1,742,517
---------- ----------
Total cash and cash equivalents $2,202,202 $5,607,882
========== ==========
Restricted cash-
Note payable to bank (Note 7(a)) $1,758,542 $ -
Foreign bank account (Note 6) 1,034,618 -
Capital lease obligations (Note 7(d)) 257,822 -
---------- ----------
$3,050,982 $ -
========== ==========
</TABLE>
(d) 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 and other 3-5 years
F-9
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(e) Accrued Expenses
At December 31, 1997 and 1998, accrued expenses consist of the
following:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Restructuring (Note 3) $8,316,148 $469,485
Interest 1,125,000 29,385
Payroll and related costs 742,452 1,151,742
Outside research and clinical costs 1,231,818 797,593
Professional fees 150,000 149,957
Contingent stock (Notes 7(b) and 15(c)) - 1,000,000
Other 351,880 470,517
----------- ----------
$11,917,298 $4,068,679
=========== ==========
</TABLE>
(f) Reclassifications
Certain amounts in the prior periods consolidated financial statements
have been reclassified to conform with the current period's
presentation.
(g) Revenue Recognition
The Company has recorded revenue under the consulting and research
agreements discussed in Notes 8, 9 and 14. Revenue is recognized as
earned on a straight-line basis over the term of the agreement, which
approximates when work is performed and costs are incurred. Revenues
from product and service sales are recognized when the products are
shipped or the services are performed. Product revenue during 1997 and
1998 represents revenues from the sale of oligonucleotides
manufactured on a custom contract basis by HSP.
(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-10
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(j) Comprehensive Loss
The Company applies SFAS No. 130, Reporting Comprehensive Income.
Comprehensive loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. The Company's comprehensive loss
is the same as the reported net loss for all periods presented.
(k) Net Loss per Common Share
The Company applies 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. Antidilutive securities which
consist of stock options, warrants and convertible preferred stock (on
an as-converted basis) that are not included in diluted net loss per
common share were 2,595,496, 2,404,561 and 27,774,883 for 1996, 1997,
and 1998, respectively.
(l) Segment Reporting
The Company applies SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards
for reporting information regarding operating segments in annual
financial statements and requires selected information for those
segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. To date,
the Company has viewed its operations and manages its business as
principally one operating segment. As a result, the financial
information disclosed herein, represents all of the material financial
information related to the Company's principal operating segment. All
of the Company's revenues are generated in the United States and
substantially all assets are located in the United States.
(3) RESTRUCTURING
Beginning in July 1997, the Company implemented a restructuring plan to
reduce expenditures on a phased basis 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 programs unrelated to its core advanced chemistry
antisense drug research and development programs. In connection with the
reduction in programs, the Company has accrued termination fees related to
research contracts and has written off assets related to programs that have
been suspended or canceled. 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.
As a result of the implementation of these changes, the Company terminated
the employment of 84 employees at its Cambridge and Milford, Massachusetts,
facilities in 1997 and closed its operations in Paris, France, and
terminated 11 employees at that location.
F-11
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
In connection with the restructuring, the Company entered into different
subleasing arrangements. During 1997, the Company subleased a portion of
each of its facilities in Cambridge, Massachusetts (including a substantial
portion of its former headquarters located at 620 Memorial Drive (the
Cambridge Headquarters)). The Company incurred expenses relating to these
subleases for broker fees and renovation expenses incurred in preparing the
Cambridge Headquarters space for the new tenant. In addition, the Company
accrued the estimated lease loss of subleasing the Cambridge Headquarters
which were vacated during 1998. The Company also subleased its office in
Paris, France, and accrued the estimated lease loss.
The following are the significant components of the $11,020,000 charge for
restructuring (in thousands):
<TABLE>
<CAPTION>
To be Paid
as of
Restructuring Non-Cash Cash December 31,
Charge Portion Disbursed 1998
<S> <C> <C> <C> <C>
Estimated loss on facility leases $ 6,372 $ 5,976 $ 356 $ 40
Employee severance, benefits and
related costs 2,738 - 2,548 190
Write-down of assets to net realizable
value 946 946 - -
Termination costs of certain
research programs 964 672 53 239
---------- -------- ---------- --------
$ 11,020 $ 7,594 $ 2,957 $ 469
========== ======== ========== ========
</TABLE>
The Company disbursed cash totaling approximately $1,453,000 and $1,504,000
in 1997 and 1998, respectively, with respect to the restructuring. The
remaining accrued amount of approximately $469,000 will be paid during
1999.
(4) INVESTMENT IN REAL ESTATE PARTNERSHIP
Under the terms of the lease for the Cambridge Headquarters (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 exercised its right to sell
back the Partnership Interest and received payment of the $5,450,000 in
1998.
(5) NOTE RECEIVABLE FROM OFFICER
At December 31, 1997 and 1998 the Company has a note receivable from
officer, including accrued interest, of $247,250 and $258,650,
respectively. The note has an interest rate of 6.0% per annum and matures
in April 2001.
(6) RESTRICTED CASH - BVH
In November 1997, the Company was notified by Bank Fur Vermogensanlagen Und
Handel AG (BVH) that the Federal Banking Supervisory Office in Germany had
imposed a moratorium on
F-12
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
BVH and had closed BVH for business. Accordingly, the Company classified
its deposit with BVH as restricted cash. The Company sold the deposit to
the Cambridge Landlord, an affiliate of certain directors of the Company,
and recovered the full amount in 1998.
(7) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Future minimum principal payments due under various notes payable,
excluding the 9% convertible subordinated notes (the 9% Notes) due April 1,
2004, are as follows at December 31, 1998:
December 31, Amount
1999 $ 6,070,951
2000 80,746
2001 91,892
2002 104,576
2003 119,010
Thereafter 76,870
-----------
Total long-term debt obligations 6,544,045
Less--Current portion 6,070,951
$ 473,094
===========
(a) Note Payable to a Bank
In December 1996, the Company entered into a five-year $7,500,000 note
payable to a bank. In November 1998, the outstanding balance of
approximately $2,895,000 was purchased from the bank by Forum Capital
Markets, LLC (Forum) and certain investors associated with Pecks
Management Partners Ltd. (Pecks) (collectively, the Lenders), which
are affiliates of two members of the Company's Board of Directors.
(b) Note Payable to Lenders
In connection with the purchase by the Lenders of the note payable to
the bank, the Lenders lent an additional $3,200,000 so as to increase
the outstanding principal amount of the note to $6,000,000. The terms
of the note payable were amended as follows: (i) the maturity was
extended to November 30, 2003; (ii) the interest rate was decreased to
8%; (iii) interest is payable monthly in arrears, with the principal
due in full at maturity of the loan; (iv) the note payable is
convertible, at the Lenders' option, in whole or in part, into shares
of common stock at a conversion price equal to $2.40 per share; (v)
the note includes a minimum liquidity, as defined covenant of
$2,000,000; and (vi) the note payable may not be prepaid, in whole or
in part, at any time prior to December 1, 2000. On March 30, 1999, the
Company received a waiver for noncompliance with the minimum tangible
net worth covenant effective as of December 31, 1998 and March 31,
1999. On April 15, 1999, the Company also received a waiver for
non-compliance with the
F-13
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
minimum liquidity covenant effective as of April 15, 1999. The Company has
classified the outstanding balance of $6,000,000 at December 31, 1998 as a
current liability in the accompanying consolidated balance sheet as it does
not currently have the financing to remain in compliance with the financial
covenants. In connection with the purchase of the note payable, Forum is
entitled to receive $400,000 as a fee, which Forum has agreed to reinvest
by purchasing common stock or preferred stock, both with attached warrants.
The Company has recorded the $400,000 as a deferred financing cost, which
will be amortized to interest expense over the term of the note and an
accrued expense for the issuance of common stock or preferred stock, both
with attached warrants, which will occur in 1999. In addition, Forum is
entitled to 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. The Company
determined the value of the warrants to be $85,433, by using the
Black-Scholes option pricing model. The Company has recorded this $85,433
as a deferred financing cost, which will be amortized to interest expense
over the term of the note.
(c) 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.
(d) Capital Lease Obligations
The Company had entered into various capital leases for equipment.
During 1998, the Company settled its capital lease obligations in full
through the issuance of common stock and warrants (see Note 15 (c)).
(e) 9% Convertible Subordinated Notes Payable
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 convertible at any time prior to the
maturity date at a conversion price equal to $35.0625, 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 are redeemed within 60
days after such trading period. The premium decreases by 1.5% each
year through March 31, 2003. Upon a
F-14
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
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.
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 warrants. On May 5, 1998, noteholders holding $48,694,000 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 $8,876,685 related to the
exchange. The extraordinary gain represents the difference between the
carrying value of the 9% Notes plus accrued interest, less $2,249,173 of
deferred financing costs written off, and the fair value of the Series A
convertible preferred stock, as determined by the per share sales price of
Series A convertible preferred stock sold in the 1998 Unit Financing (see
Note 15(c)), and warrants to purchase common stock issued by the Company.
(8) 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. According to the collaboration
agreement, as modified in April 1998, targets can be selected from
those in the fields of cancer, cardiovascular disease and
inflammation/immunomodulation (the Searle Field).
Pursuant to the collaboration, the parties are conducting research and
development relating to a compound directed at MDM2. In this project,
Searle is funding certain research and development efforts by the
Company, and both Searle and the Company have committed certain of its
own personnel to the collaboration. The initial phase of research and
development activities will be conducted through the earlier of (i)
the achievement of certain 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 to
designate up to six additional molecular targets in the Searle Field
(the Additional Targets) 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 project-specific 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 the initial molecular target reaches a certain
stage of preclinical development, Searle will be required to purchase
an
F-15
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
additional $10,000,000 of common stock (at the then fair market value) in
order to maintain its right to designate any of the Additional Targets. 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 elects 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. The Company has agreed to perform
research and development work exclusively with Searle. In addition, for
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
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 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.
In the event that Searle designates all of the Additional Targets or
if Hybridon fails to satisfy certain requirements relating to its
manufacturing capacities and capabilities, Searle will have the right
to require Hybridon to form a joint venture with Searle, as defined.
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, 1997 and 1998, the Company earned $400,000, $600,000 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 at the offering price of $50.00 per
share.
(9) F. HOFFMANN-LA ROCHE LTD. (ROCHE) COLLABORATION
In December 1992, the Company and Roche entered into a collaboration
involving the application of the Company's antisense oligonucleotide
chemistry to develop compounds for the treatment of hepatitis B,
hepatitis C and human papilloma virus. 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 $1,019,389 and $345,000 of research and
development revenue related to this collaboration in 1996 and 1997,
respectively. Due to the termination of the collaboration, as
discussed above, the Company recognized no revenue with respect to
this collaboration in 1998.
F-16
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(10) 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 agreement provides that
the Company is responsible for the development of, and hold all rights
to, any drug developed pursuant to this collaboration, and Medtronic
is 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 Company is not currently
conducting any activities under this collaboration.
(11) LICENSING AGREEMENT
The Company has entered into a licensing agreement with the Worcester
Foundation for Biomedical Research, Inc., which has merged with the
University of Massachusetts Medical Center, under which the Company
has received exclusive licenses to 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.
(12) PHARMACIA BIOTECH, INC. COLLABORATION
In December 1994, the Company and Pharmacia Biotech, Inc. (Pharmacia)
entered into a collaboration involving the design and development of a
large-scale oligonucleotide synthesis machine. Following completion of
the machine in December 1996, the collaboration expired, 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 received $62,321 and $48,000,
respectively, of royalty income related to such third-party sales. The
Company recognized no royalty income related to this collaboration for
1998.
(13) PERKIN-ELMER CORPORATION SALES AND SUPPLY AGREEMENT
In September 1996, the Company and the Applied Biosystems Division of
Perkin-Elmer Corporation (Perkin-Elmer) signed a four-year sales and
supply agreement under which Perkin-Elmer agreed to refer potential
customers to HSP 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 will be paid to Perkin-Elmer. In
addition, Perkin-Elmer licensed to the Company its oligonucleotide
synthesis patents.
(14) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and three Canadian 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.
F-17
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
The Company has granted to MethylGene exclusive worldwide licenses and
sublicenses in respect of certain technology relating to the
MethylGene fields. These fields, as amended, are defined as (i)
antisense compounds to inhibit DNA methyltransferase for the treatment
of any disease; (ii) other methods of inhibiting DNA methyltransferase
for the treatment of any disease; and (iii) antisense compounds to
inhibit up to two additional molecular targets for the treatment of
cancers, to be agreed upon by the Company and MethylGene. 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 have the right to 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 that meets certain requirements. During 1998, MethylGene
raised additional proceeds from outside investors that decreased the
Company's interest to 30%. 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.
In May 1998, this agreement was amended to grant MethylGene a
non-exclusive right to use any and all 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 provided by the Company; or (iii) May 5, 2000. As
additional consideration for this nonexclusive right, MethylGene is
required to pay the Company certain milestone amounts, as defined, and
transferred 300,000 shares of MethylGene's Class B shares to the
Company. The Company has placed no value on these shares. During 1996,
1997 and 1998, the Company recognized $49,565, $101,894 and
$1,685,932, respectively, of product and service revenue related to
this agreement.
(15) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Common Stock
The Company has 100,000,000 authorized shares of common stock,
$.001 par value, of which 15,304,825 shares were issued and
outstanding at December 31, 1998.
F-18
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(b) Initial Public Offering (IPO)
On February 2, 1996, the Company completed its IPO 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
$52,231,244 after deducting expenses related to the offering.
(c) 1998 Unit Financing
On May 5, 1998, the Company completed a private offering of
equity securities raising total gross proceeds of $26,681,164
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 gross proceeds include the conversion of $5,934,558 of
accounts payable, capital lease obligations and other
obligations into common stock. The Company incurred $1,636,137
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 Offerings and (ii) a nonaccountable expense
allowance equal to 4% of gross proceeds of such Offshore
Offering. Pillar received $1,636,137 and warrants to purchase
1,111,630 shares of common stock at $2.40 per share.
In addition, Pillar is entitled to receive 300,000 shares of
common stock in connection with its efforts in assisting the
Company in restructuring its balance sheet. The Company has
recorded $600,000 of general and administrative expense in the
accompanying consolidated statement of operations during 1998,
which represents the value of this common stock on May 5, 1998
with an offsetting amount to accrued expenses for the shares
to be issued. These shares will be issued in 1999.
(d) Units Issued to Primedica Corporation
In connection with the unit financing (see Note 15(c)) the
Company issued 250,000 shares of common stock and 62,500
warrants to purchase common stock to Primedica Corporation
(Primedica) for future services to be provided. The services
shall commence upon the Company's request after (i) the
Company's 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
common stock and warrants held by Primedica. The Company has
recorded these shares as issued and outstanding at December
31, 1998 at par value. The Company will record the value of
these services as the services are rendered.
F-19
(e) 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 reverse stock split.
(f) Warrants
The Company has the following warrants outstanding and
exercisable for the purchase of common stock at December 31,
1998:
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
<TABLE>
<CAPTION>
Outstanding Exercise Price Exercisable Exercise Price
Expiration Date Warrants per Share Warrants per Share
<S> <C> <C> <C> <C>
February 4, 1999-October 25, 2000 551,201 $ 50.00 551,201 $ 50.00
February 28, 2000 20,000 37.50 20,000 37.50
December 31, 2001 13,000 34.49 13,000 34.49
May 4, 2003 8,641,503 2.40-4.25 4,378,044 2.40
--------- --------- --------- --------
9,225,704 4,962,245
========= =========
Weighted average exercise price per $5.48 $7.91
share ===== =====
</TABLE>
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 16(b)).
The remaining 64,285 warrants were issued to various other
companies that acted as placement agents. See Note 15(c) for
information relating to warrants issued to placement agents in
connection with the 1998 Unit Financing.
As 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 warrant to purchase 71,301 shares of common stock at
an exercise price of $35.06 per share, issued to Forum in
connection with 9% notes 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.
(g) 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
F-20
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
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 December 31, 1998, options to
purchase a total of 525,638 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, 1998, options to purchase a total of
550,534 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, 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) and has reserved and may issue up to
4,500,000 shares for the grant of incentive and nonqualified
stock options. 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,
F-21
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
may not exceed ten years). As of December 31, 1998, options to
purchase a total of 2,363,560 shares of common stock remained
outstanding under the 1997 Option Plan.
Stock option activity for the three years ended December 31,
1998 is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number Exercise Price Average Price
of Shares per Share per Share
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995 738,208 $ .01 - $50.00 $29.15
Granted 476,020 25.00 - 65.60 49.55
Exercised (57,740) .01 - 37.50 18.85
Terminated (20,100) 25.00 - 57.85 40.20
-------
Outstanding, December 31, 1996 1,136,388 1.25 - 65.60 38.05
Granted 315,675 27.50 - 32.50 30.75
Exercised (25,005) 1.25 - 40.00 12.60
Terminated (236,561) 2.50 - 65.60 40.35
--------
Outstanding, December 31, 1997 1,190,497 1.25 - 65.60 36.18
Granted 2,513,000 2.00 - 3.13 2.00
Terminated (242,765) 2.50 - 57.85 37.79
--------
Outstanding, December 31, 1998 3,460,732 $1.25 - $ 65.60 $11.25
========= =================== ======
Exercisable, December 31, 1996 622,930 $1.25 - $ 65.60 $32.55
========= =================== ======
Exercisable, December 31, 1997 740,780 $1.25 - $ 65.50 $34.40
========= =================== ======
Exercisable, December 31, 1998 1,650,021 $1.25 - $ 65.60 $17.13
========= =================== ======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Number Contractual Price per Number Price per
Prices Outstanding Life Share Outstanding Share
<S> <C> <C> <C> <C> <C> <C>
$ 1.25 10,000 3.10 $ 1.25 10,000 $ 1.25
2.00 - 2.37 2,505,000 9.56 2.00 901,562 2.00
2.44 - 3.13 18,800 6.03 2.61 10,800 2.50
4.25 - 5.00 1,200 3.75 5.00 1,200 3.75
17.50 - 25.00 197,330 3.54 23.21 191,331 23.15
27.50 - 31.66 168,974 7.45 30.50 76,017 30.28
35.00 - 36.25 30,000 6.73 35.71 30,000 35.71
37.50 - 37.50 316,048 4.72 37.50 282,583 37.50
38.13 - 43.75 47,900 7.81 40.64 24,648 40.73
50.00 17,700 6.35 50.00 11,700 50.00
57.85 - 65.60 147,780 6.08 58.22 110,180 58.34
--------- --------
3,460,732 $ 11.25 1,650,021 $ 17.13
========= ======== ========= ===========
</TABLE>
F-22
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
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
granted to employees 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. In 1996, 1997 and 1998, the
Company recorded $1,967,116, $205,978 and $109,734,
respectively, of deferred compensation related to grants to
nonemployees, net of terminations. Deferred compensation will
be amortized over the vesting period of the options. The
Company has recorded compensation expense of $763,190,
$316,067 and $246,444 in 1996, 1997 and 1998, respectively,
related to these grants to nonemployees.
The Company has computed the pro forma disclosures require by
SFAS No. 123 for all stock options granted after January 1,
1995 using the Black-Scholes option pricing model. The
assumptions used for the three years ended December 31, 1998
are as follows:
1996 1997 1998
Risk free interest rate 6.14% 6.22% 5.15%
Expected dividend yield - - -
Expected lives 6 years 6 years 6 years
Expected volatility 60% 60% 60%
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 for the three years ended
December 31, 1998 would be as follows:
1996 1997 1998
Net loss applicable to common
stockholders-
As reported $(46,852,600) $(69,461,326) $(19,792,736)
============
Pro forma $(52,890,455) $(73,402,170) $(23,131,304)
============ ============ ============
Basic and Diluted net loss per
common shares-
As reported $(10.24) $(13.76) $(1.67)
======= ======= ======
Pro forma $(11.56) $(14.54) $(1.95)
======= ======= ======
F-23
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(h) 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, as defined, or its subsidiaries.
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.
(i) Preferred Stock
The restated 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. During 1998, the Company designated 1,500,000 shares
as Series A convertible preferred stock.
(j) Series A Convertible Preferred Stock
The rights and preferences of the Series A convertible
preferred stock are as follows:
Dividends
The holders of the Series A convertible preferred stock, as of
March 15 or September 15, are entitled to receive dividends
payable at the rate of 6.5% per annum, payable semi- annually
in arrears. 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. 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 Series A convertible preferred stock. In calculating
the number of shares of Series A convertible preferred stock
to be paid with respect to each dividend, the Series A
convertible preferred stock
F-24
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
shall be valued at $100.00 per share. During 1998, the Company
recorded a total accretion of $2,689,048 for the dividend on
Series A preferred stock and issued 16,470 shares of Series A
convertible preferred stock as a dividend.
Liquidation
In the event of a liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, after payment
or provision for payment of debts and other liabilities of the
Company, the holder of the Series A convertible preferred
stock then outstanding shall be entitled to be paid out of the
assets of the Company available for distribution to its
stockholders, an amount equal to $100.00 per share plus all
accrued but unpaid dividends. If the assets to be distributed
to the holders of the Series A convertible preferred stock
shall be insufficient to permit the payment of the full
preferential amounts, then the assets of the Company shall be
distributed ratably to the holders of the Series A convertible
preferred stock on the basis of the number of shares of Series
A convertible preferred stock held. All shares of Series A
convertible preferred stock shall rank as to payment upon the
occurrence of any liquidation event senior to the common
stock.
Conversion
Commencing after May 6, 1999, but not prior thereto, the
shares of Series A convertible preferred stock shall be
convertible, in whole or in part, at the option of the holder
into fully paid and nonassessable shares of common stock at
$4.25 per share, subject to adjustment as defined.
Mandatory Conversion
At any time after May 6, 1998, the Company at its option, may
cause the Series A 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 if the closing bid price, as defined, of the
common stock shall have equaled or exceeded 250% of the
conversion price, $4.25, subject to adjustment as defined, 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).
At any time after April 1, 2000, the Company, at its option,
may redeem the Series A convertible preferred stock for cash
equal to $100.00 per share plus all accrued and unpaid
dividends at such time, if the Market Trigger has occurred in
the period ending three days prior to the date of notice of
redemption.
(16) COMMITMENTS AND CONTINGENCIES
(a) Facilities
The Company leases its facility in Milford,
Massachusetts, under a lease which has a 10- year term,
which commenced on July 1, 1994, with certain extension
options.
F-25
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
On February 4, 1994, the Company entered into the Cambridge
Lease with a partnership that is affiliated with certain
directors of the Company. As compensation for arranging this
lease, the Company issued Pillar Limited 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
expired subsequent to December 31, 1998. The Company vacated
the Cambridge, Massachusetts, facility in June 1998 and moved
its corporate facilities to Milford, Massachusetts (see Note
3).
Future approximate minimum rent payments as of December 31,
1998, under existing lease agreements through 2007, net of
sublease agreements are as follows:
December 31, Amount
1999 $ 614,000
2000 784,000
2001 1,213,000
2002 1,209,000
2003 1,213,000
Thereafter 2,338,000
-----------
$ 7,371,000
===========
During 1996, 1997 and 1998, facility rent expense net of
sublease revenue was approximately $2,352,000, $4,613,000 and
$3,871,000, respectively.
(b) Related-Party 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 including Forum, 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). During 1996, 1997
and 1998, the Company had expensed $1,106,000, $998,000 and
$1,300,000, respectively, under consulting and advisory
agreements with related parties.
(c) 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 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, 1998 are approximately as
follows:
F-26
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
December 31, Amount
1999 $ 582,000
2000 392,000
2001 279,000
------------
$ 1,253,000
============
Total fees and expenses under these contracts were
approximately $7,171,000, $9,372,000 and $2,011,000 during
1996, 1997 and 1998, respectively.
(d) Employment Agreements
The Company has entered into employment agreements with 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 year's base salary.
(e) Contingencies
From time to time, the Company may be exposed to various types
of litigation. The Company is not engaged in any legal
proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company's
financial condition or results of operations.
(17) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes. At
December 31, 1998, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately
$219,993,000 and $3,936,000, 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, 1998, have resulted in ownership
changes in excess of 50%, as defined under the Act and which will
limit the Company's ability to utilize its net operating loss
carryforwards. Ownership changes in future periods may place
additional limits on 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:
F-27
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
Net
Operating Loss Tax Credit
Expiration Date Carryforwards Carryforwards
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 60,087,000 750,000
2018 23,252,000 500,000
-------------- -----------
$ 219,993,000 $ 3,936,000
============== ===========
At December 31, 1997 and 1998, the components of the deferred tax
assets are approximately as follows:
1997 1998
Operating loss carryforwards $ 78,696,000 $ 87,997,000
Temporary differences 5,137,000 2,677,000
Tax credit carryforwards 3,436,000 3,936,000
------------- -------------
87,269,000 94,610,000
Valuation allowance (87,269,000) (94,610,000)
------------- -------------
$ - $ -
============= =============
A valuation allowance has been provided, as it is more likely than
not the Company will not realize the deferred tax asset. The net
change in the total valuation allowance during 1998 was an increase
of approximately $7,341,000.
(18) 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 $224,000, $253,000
and $253,000 during 1996, 1997 and 1998, respectively.
F-28
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(19) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the three years
in the period ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Cash paid during the period for interest $ 124,052 $ 3,264,596 $ 1,666,127
============ ============ ============
Purchase of property and equipment under capital leases $ 1,722,333 $ 2,374,502 $ -
============ ============ ============
Conversion of preferred stock into common stock $ 159,822 $ - $ -
============ ============ ============
Deferred compensation related to grants of stock options to
nonemployees, net of terminations $ 1,967,116 $ 205,978 $ 109,734
============ ============ ============
Issuance of Series A convertible preferred stock and attached
warrants in exchange for conversion of 9% convertible
subordinated notes payable and accrued interest $ - $ - $ 51,055,850
============ ============ ============
Accretion of Series A convertible preferred stock dividends $ - $ - $ 2,689,048
============ ============ ============
Issuance of common stock and attached warrants in exchange
for conversion of convertible promissory notes payable $ - $ - $ 4,800,000
============ ============ ============
Issuance of common stock and attached warrants in exchange
for conversion of accounts payable and other obligations $ - $ - $ 5,934,558
============ ============ ============
</TABLE>
(20) RESTATEMENT
In March 1999, the Company restated its June 30, 1998 and September
30, 1998 financial statements to reflect the accretion on the Series
A convertible preferred stock, and record $600,000 of general and
administrative expense for the 300,000 shares of common stock that
Pillar is entitled to receive in connection with its efforts in
assisting the Company in restructuring its balance sheet.
(21) ORIGENIX TECHNOLOGIES, INC.
In January 1999, the Company and certain institutional investors
formed a Montreal company, OriGenix Technologies Inc. (OriGenix), to
develop and market drugs for the treatment of infectious diseases.
The Company received a 49% interest in OriGenix in consideration of
certain research and development efforts previously undertaken by
the Company which were made available to OriGenix. The Company has
also licensed certain antisense compounds and other technology to
OriGenix. If certain conditions are satisfied by OriGenix, the
institutional investors are committed to make an additional
investment, at which time the Company's ownership interest in
OriGenix will be reduced 40%. The institutional investors acquired a
51% interest in OriGenix for a total of approximately $4.0 million.
The Company will account for its investment in OriGenix under the
equity method.
F-29
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(22) INTERIM PERIOD AND SUBSEQUENT EVENTS (Unaudited)
(a) Unaudited Interim Financial Statements
The accompanying consolidated balance sheet as of March 31,
1999, and the consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the three
months ended March 31, 1998 and 1999 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
March 31, 1999 presented are not necessarily indicative of
results to be expected for the full fiscal year.
At March 31, 1999, the Company had cash and cash equivalents
of approximately $2.5 million and a working capital deficit of
approximately $7.8 million. The Company is currently seeking
debt or equity financing in an amount sufficient to support
its operations through the end of 1999, and in connection
therewith, is in negotiations with several parties to obtain
such financing. The Company's existing cash resources and
proceeds of accounts receivable from HSP customers are
expected to be sufficient to fund the Company's operations
into July 1999. The Company's management expects such
receivables to be collected no later than July 1999, given
such customers' payment histories, although there can be no
assurance thereof. If the Company is unable to obtain
additional funding by the end of July 1999, it will be forced
to terminate its operations or seek relief under applicable
bankruptcy law.
(b) 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 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, warrants and convertible preferred stock (on
an as-converted basis) that are not included in diluted net
loss per common share were 2,220,880 and 29,301,825 for the
three month periods ended March 31, 1998 and 1999,
respectively.
(c) Comprehensive Loss
The Company follows the provisions of SFAS No. 130, Reporting
Comprehensive Income. Comprehensive loss is defined as the
change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner
sources. The Company's comprehensive loss is the same as the
reported net loss for all periods presented.
F-30
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(d) Cash Equivalents
The Company considers all highly liquid investments with
maturities of three months or less to be cash equivalents.
Cash and cash equivalents at March 31, 1999 consisted of the
following (at amortized cost, which approximates fair market
value):
March 31,
1999
Cash and cash equivalents-
Cash and money market funds $2,267,758
Corporate bond 193,426
----------
$2,461,184
==========
(e) Note Payable to Lenders
In December 1996, the Company entered into a five-year
$7,500,000 note payable to a bank. In November 1998, the
outstanding balance of approximately $2,895,000 was purchased
from the bank by Forum Capital Markets, LLC ("Forum") and
certain investors associated with Pecks Management Partners
Ltd. ("Pecks") (collectively, the "Lenders"), which are
affiliates of two members of the Company's Board of Directors.
In connection with the purchase, the Lenders lent an
additional $3,200,000 so as to increase the outstanding
principal amount of the note to $6,000,000. The terms of the
note payable were amended as follows: (i) the maturity was
extended to November 30, 2003; (ii) the interest rate was
decreased to 8%; (iii) interest is payable monthly in arrears,
with the principal due in full at maturity of the loan; (iv)
the note payable is convertible, at the Lenders' option, in
whole or in part, into shares of common stock at a conversion
price of $2.40 per share; (v) the note includes a minimum
liquidity, as defined, covenant of $2,000,000; and (vi) the
note payable may not be prepaid, in whole or in part, at any
time prior to December 1, 2000. The Company has received
waivers of noncompliance with the minimum tangible net worth
covenant through the quarter ended March 31, 1999 and for the
minimum liquidity covenant for May 30, 1999. The Company has
classified the outstanding balance of $6,000,000 at March 31,
1999 as a current liability in the accompanying consolidated
balance sheet as it does not expect to remain in compliance
with the financial covenants. In connection with the purchase
of the note payable, Forum received $400,000 as a fee, which
Forum has reinvested by purchasing 160,000 shares of common
stock and warrants to purchase 40,000 shares of common stock
at $3.00 per share. The Company has recorded the $400,000 as a
deferred financing cost, which will be amortized to interest
expense over the term of the note and an accrued expense for
the issuance of common stock and warrants. In addition, Forum
received warrants to purchase 133,333 shares of common stock
of the Company at $3.00 per share. The Company recorded the
value of the warrants to be $85,433, by using the
Black-Scholes option pricing model. The Company has recorded
this $85,433 as a deferred financing cost, which will be
amortized to interest expense over the term of the note.
F-31
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable To Unaudited Periods)
(continued)
(h) Accrued Expenses
Accrued expenses as of March 31, 1999 consist of the
following:
March 31, 1999
----------------------------------------------------------
Restructuring $ 486,000
Interest - 58,770
Payroll and related costs 1,147,601
Outside research and clinical costs 460,419
Professional fees 149,957
Contingent stock 1,000,000
Other 450,382
------------
$ 3,753,129
============
(i) Commitments
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.
(j) Supplemental Disclosure of Cash Flow Information
Supplemental disclosure of cash flow information for the three
month periods ended March 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1999
<S> <C> <C>
Cash paid during the period for interest $ 358,680 $ 186,695
========== ===========
Accretion of Series A convertible preferred stock $ - $ 1,042,052
dividends ========== ===========
</TABLE>
F-32
<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 Hybridon since the date hereof or that the information contained
herein is correct as of any time subsequent to its date. ---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary 3
Risk Factors 5
Forward-Looking Statements 10
Business 11
Properties 23
Legal Proceedings 23
Market for Registrant's Common Equity and Related Stockholder Matters 23
Dividend Policy 24
Use of Proceeds 25
Capitalization 25
Selected Financial Data 26
Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Directors and Executive Officers of Hybridon 34
Executive Compensation 37
Security Ownership of Certain Beneficial Owners and Management 41
Certain Relationships and Related Transactions 47
Selling Stockholders 51
Description of Capital Stock 57
Delaware Law and Certain Provisions of Hybridon's Restated Certificate of Incorporation,
By-Laws and Indebtedness 60
Plan of Distribution 61
Legal Matters 61
Experts 62
Index to Consolidated Financial Statements F1
</TABLE>
HYBRIDON, INC.
662,099 SHARES
SERIES A CONVERTIBLE PREFERRED STOCK
($.01 par value per share)
35,048,809 SHARES
COMMON STOCK
($.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 fails to make an indemnification payment
within 60 days after such payment is claimed by such
II-1
<PAGE>
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.
Hybridon 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.
Hybridon 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, Hybridon 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.
(1) On January 20, 1997, Hybridon 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
II-2
<PAGE>
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, Hybridon 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, Hybridon 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, Hybridon 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, Hybridon issued to Dr. Paul Zamecnik, a
Director of Hybridon, 50,000 shares of Common Stock of Hybridon.
(6) On May 5, 1998, Hybridon accepted $48,694,000 principal amount
of its 9% Notes tendered to Hybridon 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 Hybridon (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 Hybridon'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 Hybridon'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 Hybridon under any circumstances.
The Exchange Offer was undertaken by Hybridon as part of Hybridon'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, Hybridon 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 Warrants")
to purchase 672,273 shares of Hybridon'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.
II-3
<PAGE>
The net proceeds to Hybridon 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
Hybridon's debt obligations. The amounts actually expended by Hybridon and the
purposes of such expenditures may vary significantly depending upon numerous
factors, including the progress of Hybridon'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 Hybridon'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, Hybridon may be required to use
net proceeds to repay indebtedness under the Bank Credit Facility.
(8) On May 5, 1998, Hybridon 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 Hybridon 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 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, Hybridon 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, Hybridon 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 Hybridon of a total of $362.50, the par value of all such issued
Common Stock, and (ii) the subsequent furnishing of specified services to
Hybridon by each supplier. The extent to which the suppliers have completed
performing the specified services varies.
(11) On December 12, 1998, Hybridon issued to Dr. Paul Zamecnik
50,000 shares of Common Stock in recognition of Dr. Zamecnik's extraordinary
contribution to Hybridon.
(12) On April 16, 1999, Hybridon issued to Pillar Investments
Limited 300,000 shares of Common Stock in connection with Pillar's efforts in
assisting Hybridon with restructuring its balance sheet.
(13) On May 1, 1999, Hybridon issued to Forum Capital Markey LLC
160,000 shares of Common Stock and warrants to purchase 173,333 shares of Common
Stock, as a reinvestment by Forum of a $400,000 fee paid to Forum in connection
with the purchase of a bank loan to Hybridon.
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
II-4
<PAGE>
Hybridon 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; 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 Hybridon 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.
(14) On January 15, 1998, Hybridon 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 Hybridon'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, Hybridon sold
$2,230,000 in principal amount of 14% Notes and Equity Warrants.
On February 9, 1998, as part of the 14% Note Offering, Hybridon sold
$2,384,000 in principal amount of 14% Notes and Equity Warrants.
On March 27, 1998, as part of the 14% Note Offering, Hybridon sold
$200,000 in principal amount of 14% Notes and Equity Warrants.
On April 21, 1998, as part of the 14% Note Offering, Hybridon sold
$300,000 in principal amount of 14% Notes and Equity Warrants.
On April 24, 1998, as part of the 14% Note Offering, Hybridon 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.
(15) On May 5, 1998, Hybridon 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 Hybridon'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 Hybridon under the Securities Act. After Hybridon 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.
(16) Hybridon 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.
II-5
<PAGE>
The net proceeds to Hybridon 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
Hybridon's debt obligations. The amounts actually expended by Hybridon and the
purposes of such expenditures may vary significantly depending upon numerous
factors, including the progress of Hybridon'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 Hybridon'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, Hybridon 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
Exhibit No. Description
- ----------- -----------
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) Class A Warrant Agreement dated May 5, 1998.
4.5(7) Class B Warrant Agreement dated May 5, 1998.
4.6(7) Class C Warrant Agreement dated May 5, 1998.
4.7(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.
II-6
<PAGE>
+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) Registration Rights Agreement dated as of February 21,
1990 between the Registrant, the Worcester Foundation for
Biomedical Research, Inc. and Paul C. Zamecnik.
10.10(2) Registration Rights Agreement dated as of June 25, 1990
between the Registrant and Nigel L. Webb.
10.11 (2) Registration Rights Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
10.12(2) Registration Rights Agreement dated as of February 6, 1992
between the Registrant and Anthony J. Payne.
++10.13(2) 1990 Stock Option Plan, as amended.
++10.14(2) 1995 Stock Option Plan.
++10.15(2) 1995 Director Stock Plan.
++10.16(2) 1995 Employee Stock Purchase Plan.
10.17(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.
10.18(2) Warrant issued to Pillar S.A. to purchase 100,000 shares
of Common Stock dated as of March 1, 1994, as amended.
10.19(2) Warrant issued to Pillar S.A. to purchase 100,000 shares
of Common Stock dated as of March 1, 1995.
10.20(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.
++10.21(5) Employment Agreement dated as of March 1, 1997 between the
Registrant and E. Andrews Grinstead, III.
10.22(2) Indemnification Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
II-7
<PAGE>
++10.23(6) Employment Agreement dated March 1, 1997 between the
Registrant and Dr. Sudhir Agrawal.
++10.24(2) Consulting Agreement dated as of February 21, 1990 between
the Registrant and Dr. Paul C. Zamecnik.
10.25(2) Master Lease Agreement dated as of March 1, 1994 between
the Registrant and General Electric Capital Corporation.
+10.26(6) Research, Development and License Agreement dated as of
January 24, 1996 between the Registrant and G.D. Searle &
Co.
+10.27(6) Manufacturing and Supply Agreement dated as of January 24,
1996 between the Registrant and G.D. Searle & Co.
10.28(6) Registration Rights Agreement dated as of January 24, 1996
between the Registrant and G.D. Searle & Co.
10.29(5) Loan and Security Agreement dated as of December 31, 1996
between the Registrant and Silicon Valley Bank.
10.30(7) First Amendment to Loan and Security Agreement dated March
30, 1998 between Hybridon, Inc. and Silicon Valley Bank.
10.31(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.
10.32(9) Third Amendment to Loan and Security Agreement dated
September 18, 1998 between Hybridon, Inc. and Silicon
Valley Bank.
10.33(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.
10.34(12) Fifth Amendment to Loan and Security Agreement dated
December 4, 1998 between Hybridon, Inc. and Silicon Valley
Bank.
10.35(5) Warrant issued to Silicon Valley Bank to purchase 65,000
shares of Common Stock dated as of December 31, 1996.
10.36(5) Registration Rights Agreement dated as of December 31,
1996 between the Registrant and Silicon Valley Bank.
+10.37(5) Supply and Sales Agreement dated as of September 1, 1996
between the Registrant and P.E. Applied Biosystems.
10.38(2) Registration Rights Agreement dated as of March 26, 1997
between Forum Capital Markets LLC and the Registrant.
10.39(2) Warrant Agreement dated as of March 26, 1997 between Forum
Capital Markets LLC and the Registrant.
+10.40(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.
II-8
<PAGE>
10.41(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.
10.42(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.
10.43(1) Consent Agreement dated January 15, 1998 between Silicon
Valley Bank and the Registrant relating to the Silicon
Agreement.
10.44(11) 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.
10.45(7) Financial Advisory Agreement between Registrant and Pillar
Investments Ltd. dated May 5, 1998.
10.46(7) Placement Agency Agreement between Registrant and Pillar
Investments Ltd. dated as of January 15, 1998.
+++10.47(12) Licensing Agreement dated March 12, 1999 by and between
Hybridon, Inc. and Integrated DNA Technologies, Inc.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McDonnell Boehnen Hulbert & Berghoff.
27.1 Financial Data Schedule [EDGAR] - Year Ended December 31,
1998
----------------------------------
(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.
II-9
<PAGE>
(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.
(11) Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-69649).
(12) Incorporated by reference to Exhibits to the Registrant's
Annual Report on Form 10- K for the year ended December
31, 1998
+ 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-10
<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:
(2) To include any Prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(3) 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.
(4) 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.
(5) 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.
(6) 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-11
<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 June 28, 1999.
HYBRIDON, INC.
By: /s/ E. ANDREWS GRINSTEAD, III
----------------------------------
E. Andrews Grinstead, III
Chairman, Chief Executive Officer
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.
Signatures Title(s) Date
---------- -------- ----
/s/ E. ANDREWS GRINSTEAD, III Chairman, Chief Executive June 28, 1999
- -------------------------------
E. Andrews Grinstead, III Officer and Director
* Senior Vice President and June 28, 1999
- -------------------------------
Dr. Sudhir Agrawal Director
* Director June 28, 1999
- -------------------------------
Dr. James B. Wyngaarden
* Director June 28, 1999
- -------------------------------
Mr. Nasser Menhall
* Director June 28, 1999
- -------------------------------
Dr. Paul C. Zamecnik
* Director June 28, 1999
- -------------------------------
Mr. Youssef El-Zein
Director June 28, 1999
Mr. Arthur W. Berry
* Director June 28, 1999
- -------------------------------
Mr. Harold L. Purkey
Director June 28, 1999
Mr. Camile Chebeir
Director June 28, 1999
Mr. H.F. Powell
* By: /s/ E. ANDREWS GRINSTEAD, III
------------------------------
E. Andrews Grinstead, III
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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) Class A Warrant Agreement dated May 5, 1998.
4.5(7) Class B Warrant Agreement dated May 5, 1998.
4.6(7) Class C Warrant Agreement dated May 5, 1998.
4.7(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) Registration Rights Agreement dated as of February 21, 1990
between the Registrant, the Worcester Foundation for
Biomedical Research, Inc. and Paul C. Zamecnik.
10.10(2) Registration Rights Agreement dated as of June 25, 1990
between the Registrant and Nigel L. Webb.
10.11(2) Registration Rights Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
<PAGE>
10.12(2) Registration Rights Agreement dated as of February 6, 1992
between the Registrant and Anthony J. Payne.
++10.13(2) 1990 Stock Option Plan, as amended.
++10.14(2) 1995 Stock Option Plan.
++10.15(2) 1995 Director Stock Plan.
++10.16(2) 1995 Employee Stock Purchase Plan.
10.17(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.
10.18(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of
Common Stock dated as of March 1, 1994, as amended.
10.19(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of
Common Stock dated as of March 1, 1995.
10.20(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.
++10.21(5) Employment Agreement dated as of March 1, 1997 between the
Registrant and E. Andrews Grinstead, III.
10.22(2) Indemnification Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
++10.23(6) Employment Agreement dated March 1, 1997 between the
Registrant and Dr. Sudhir Agrawal.
++10.24(2) Consulting Agreement dated as of February 21, 1990 between
the Registrant and Dr. Paul C. Zamecnik.
10.25(2) Master Lease Agreement dated as of March 1, 1994 between the
Registrant and General Electric Capital Corporation.
+10.26(6) Research, Development and License Agreement dated as of
January 24, 1996 between the Registrant and G.D. Searle &
Co.
+10.27(6) Manufacturing and Supply Agreement dated as of January 24,
1996 between the Registrant and G.D. Searle & Co.
10.28(6) Registration Rights Agreement dated as of January 24, 1996
between the Registrant and G.D. Searle & Co.
10.29(5) Loan and Security Agreement dated as of December 31, 1996
between the Registrant and Silicon Valley Bank.
10.30(7) First Amendment to Loan and Security Agreement dated March
30, 1998 between Hybridon, Inc. and Silicon Valley Bank.
10.31(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.
10.32(9) Third Amendment to Loan and Security Agreement dated
September 18, 1998 between Hybridon, Inc. and Silicon Valley
Bank.
10.33(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.
II-14
<PAGE>
10.34(12) Fifth Amendment to Loan and Security Agreement dated
December 4, 1998 between Hybridon, Inc. and Silicon Valley
Bank.
10.35(5) Warrant issued to Silicon Valley Bank to purchase 65,000
shares of Common Stock dated as of December 31, 1996.
10.36(5) Registration Rights Agreement dated as of December 31, 1996
between the Registrant and Silicon Valley Bank.
+10.37(5) Supply and Sales Agreement dated as of September 1, 1996
between the Registrant and P.E. Applied Biosystems.
10.38(2) Registration Rights Agreement dated as of March 26, 1997
between Forum Capital Markets LLC and the Registrant.
10.39(2) Warrant Agreement dated as of March 26, 1997 between Forum
Capital Markets LLC and the Registrant.
+10.40(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.
10.41(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.
10.42(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.
10.43(1) Consent Agreement dated January 15, 1998 between Silicon
Valley Bank and the Registrant relating to the Silicon
Agreement.
10.44(11) 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.
10.45(7) Financial Advisory Agreement between Registrant and Pillar
Investments Ltd. dated May 5, 1998.
10.46(7) Placement Agency Agreement between Registrant and Pillar
Investments Ltd. dated as of January 15, 1998.
+++10.47(12) Licensing Agreement dated March 12, 1999 by and between
Hybridon, Inc. and Integrated DNA Technologies, Inc.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McDonnell Boehnen Hulbert & Berghoff.
27.1 Financial Data Schedule [EDGAR] - Year Ended December 31, 1998
- ------------------------------
(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.
II-15
<PAGE>
(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.
(11) Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-69649).
(12) Incorporated by reference to Exhibits to the Registrant's
Annual Report on Form 10- K for the year ended December 31,
1998
+ 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-16
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, 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
July 2, 1999
II-17
EXHIBIT 23.2
CONSENT OF MCDONNELL BOEHNEN HULBERT & BERGHOFF
[Letterhead of McDonnell Boehnen Hulbert & Berghoff]
July 2, 1999
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., and any pre-effective or post-effective amendments thereto.
Very truly yours,
/s/ John J. McDonnell
---------------------
John J. McDonnell
II-18
