As filed with the Securities and Exchange Commission on April 15, 1999
----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
-------
For the Quarter Ended: June 30, 1998 Commission File Number 0-27352
Hybridon, Inc.
--------------
(Exact name of registrant as specified in its charter)
Delaware 04-3072298
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
organization or incorporation)
155 Fortune Blvd.
Milford, MA 01757
-----------------
(Address of principal executive offices, including zip code)
(508) 482-7500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.001 per share 15,306,825
- --------------------------------------- ---------------
Class Outstanding as of April 13, 1999
<PAGE>
HYBRIDON, INC.
Form 10-Q
INDEX
Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 1998 and December
31, 1997. (As Restated)
Consolidated Condensed Statement of Operations for the Three Months
ended and Six Months ended June 30, 1998 and 1997 and Cumulative from
May 25, 1989 (Inception) to June 30, 1998. (As Restated)
Consolidated Condensed Statements of Cash Flows for the Six Months ended
June 30, 1998 and 1997, and Cumulative from May 25, 1989 (Inception)
to June 30, 1998. (As Restated)
Notes to Consolidated Condensed Financial Statements.
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II - Other Information
- ---------------------------
Item 2 - Changes in Securities and Use of Proceeds
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
Signatures
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
(As Restated)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,518,682 $ 2,202,202
Restricted cash (Note 9) 1,592,368 -
Accounts receivable 264,122 529,702
Accounts receivable related to real estate limited partnership 5,450,000 -
Prepaid expenses and other current assets 383,926 1,005,825
--------------- ---------------
Total current assets 13,209,098 3,737,729
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 11,699,244 16,027,734
Laboratory equipment 9,041,452 6,770,402
Equipment under capital leases 1,601,535 4,879,190
Office equipment 1,839,824 1,947,818
Furniture and fixtures 1,474,862 645,264
Construction-in-progress 45,409 45,409
--------------- ---------------
25,702,326 30,315,817
Less -- Accumulated depreciation and amortization 13,199,366 11,085,013
--------------- ---------------
12,502,960 19,230,804
OTHER ASSETS:
Restricted cash 659,618 3,050,982
Note receivable from officer 252,950 247,250
Deferred financing costs and other assets 982,289 3,354,767
Investment in real estate partnership - 5,450,000
--------------- ---------------
1,894,857 12,102,999
$ 27,606,915 $ 35,071,532
=============== ===============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 4,754,478 $ 7,868,474
Accounts payable 4,194,048 8,051,817
Accrued expenses 5,352,350 11,917,298
--------------- ---------------
Total current liabilities 14,300,876 27,837,589
--------------- ---------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 596,431 3,282,123
--------------- ---------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 1,306,000 50,000,000
--------------- ---------------
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 -- 624,789 shares at June 30, 1998 6,248 -
Common stock, $.001 par valueB
Authorized -- 100,000,000 shares
Issued and outstanding -- 15,254,825 and 5,059,650 shares 15,255 5,060
at June 30, 1998, and December 31, 1997,
respectively
Additional paid-in capital 239,274,774 173,695,698
Deficit accumulated during the development stage (226,907,528) (218,655,101)
Deferred compensation (985,141) (1,093,837)
--------------- ---------------
Total stockholders' equity(deficit) 11,403,608 (46,048,180)
--------------- ---------------
$ 27,606,915 $ 35,071,532
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Cumulative from
June 30, June 30, May 25, 1989
(Inception) to
June 30,
1998 1997 1998 1997 1998
(As Restated) (As Restated) (As Restated)
<S> <C> <C> <C> <C> <C>
REVENUES:
Research and development $ 649,915 $ 186,250 $ 799,915 $ 780,150 $ 5,799,263
Product revenue 681,620 727,704 1,506,689 1,075,858 4,963,641
Interest income 44,602 486,502 62,447 603,914 3,283,186
Royalty and other income - 14,971 - 14,971 110,321
-------------- --------------- --------------- --------------- -------------------
1,376,137 1,415,427 2,369,051 2,474,893 14,156,411
-------------- --------------- --------------- --------------- -------------------
OPERATING EXPENSES:
Research and development 5,577,144 14,969,366 11,979,681 26,445,805 177,439,496
General and administrative 2,648,907 2,524,046 4,314,019 5,954,499 52,130,635
Restructuring charge - - - - 11,020,000
Interest 976,526 1,447,348 2,583,963 1,617,555 8,729,993
-------------- --------------- --------------- --------------- -------------------
9,202,577 18,940,760 18,877,663 34,017,859 249,320,124
-------------- --------------- --------------- --------------- -------------------
Loss from operations (7,826,440) (17,525,333) (16,508,612) (31,542,966) (235,163,713)
EXTRAORDINARY ITEM:
Gain on exchange of 9%
convertible subordinated
notes payable 8,876,685 - 8,876,685 - 8,876,685
-------------- --------------- --------------- --------------- -------------------
NET INCOME (LOSS) 1,050,245 (17,525,333) (7,631,927) (31,542,966) (226,287,028)
ACCRETION OF PREFERRED STOCK
DIVIDENDS (620,500) - (620,500) - (620,500)
-------------- ---------------- ---------------- -------------- ------------------
- -
Net income (loss)
applicable to common
stockholders $ 429,745 $ (17,525,333) $ (8,252,427) $ (31,542,966) $ (226,907,528)
============ =============== =============== ============== ===============
BASIC AND DILUTED NET INCOME (LOSS)
PER COMMON SHARE (Note 3):
Loss per share before
extraordinary item $ (0.69) $ (3.47) $ (2.01) $ (6.26)
Extraordinary item .78 - 1.08 -
-------------- --------------- -------------- --------------
Net income (loss) per share .09 (3.47) (0.93) (6.26)
Accretion of preferred stock
dividends (0.05) - (0.08) -
--------------- -------------- -------------- --------------
Net income (loss) per share
applicable to common
stockholder $ .04 $ (3.47) $ (1.01) $ (6.26)
============== =============== ============= ==============
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER COMMON SHARE
(Note 2) 11,333,604 5,048,391 8,196,627 5,042,369
============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Cumulative from
June 30, May 25, 1989
(Inception) to
June 30,
1998 1997 1998
(As Restated) (As Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,631,927) $ (31,542,966) $ (226,287,028)
Adjustments to reconcile net loss to net cash used in
operating activitiesB
Extraordinary gain on exchange of 9% (8,876,685) - (8,876,685)
convertible subordinated notes payable
Depreciation and amortization 1,785,353 2,241,374 12,971,807
Loss on disposal of fixed assets 228,000 - 228,000
Issuance of common stock for services rendered - 146,875 146,875
Compensation on grant of stock options, 108,696 188,412 8,232,494
warrants and restricted stock
Amortization of discount on convertible - - 690,157
promissory notes payable
Amortization of deferred financing costs 225,816 250,395 922,285
Noncash interest on convertible promissory - - 260,799
notes payable
Write-down of assets related to restructuring - - 1,255,000
Changes in operating assets and liabilitiesB
Accounts receivable 265,580 (70,609) (264,122)
Prepaid and other current assets 122,148 (108,610) (883,676)
Note receivable from officer (5,700) (4,663) (252,950)
Amounts payable to related parties - - (200,000)
Accounts payable and accrued expenses (330,465) (572,356) 18,983,650
Deferred revenue - (86,250) -
--------------- --------------- ------------------
Net cash used in operating activities (14,109,184) (29,558,398) (193,073,394)
--------------- --------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments - (16,267,615) -
Purchases of property and equipment, net (285,509) (5,838,183) (29,597,974)
Proceeds from sale of fixed assets 400,000 - 400,000
Investment in real estate partnership - - (5,450,000)
--------------- --------------- ------------------
Net cash provided by (used in)
investing activities 114,491 (22,105,798) (34,647,974)
--------------- --------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock 7,999,960 - 104,584,114
Proceeds from issuance of common stock related to stock - 62,327 1,260,928
options and restricted stock grants
Proceeds from issuance of common stock related to stock - 9,075 3,185,816
warrants
Net proceeds from issuance of common stock 6,876,676 - 59,232,000
Repurchase of common stock - - (263)
Proceeds from notes payable - - 9,450,000
Proceeds from issuance of convertible promissory notes 4,233,833 50,000,000 63,425,577
payable
Proceeds from long-term debt - - 662,107
Payments on long-term debt and capital leases (2,489,782) (895,183) (5,855,662)
Proceeds from sale/leaseback - 1,165,236 4,001,018
Decrease (increase) in restricted cash and other assets 690,486 133,878 (3,448,646)
(Increase) in deferred financing costs - (2,849,958) (3,256,939)
--------------- --------------- ------------------
Net cash provided by financing activities 17,311,173 47,625,375 233,240,050
--------------- --------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,316,480 (4,038,821) 5,518,682
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,202,202 12,633,742 -
--------------- --------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,518,682 $ 8,594,921 $ 5,518,682
=============== =============== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,261,502 $ 492,555 $ 4,891,952
=============== =============== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION
Hybridon, Inc. (the Company) was incorporated in the State of Delaware
on May 25, 1989. The Company is engaged in the discovery and development
of novel genetic medicines based primarily on antisense technology. The
Company is in the development stage. Since inception, the Company has
been engaged primarily in research and development efforts, development
of its manufacturing capabilities and organizational efforts, including
recruiting of scientific and management personnel and raising capital.
To date, the Company has not received revenue from the sale of
biopharmaceutical products developed by it based on antisense
technology. In order to commercialize its own products, the Company will
need to address a number of technological challenges and comply with
comprehensive regulatory requirements. Accordingly, it is not possible
to predict the amount of funds that will be required or the length of
time that will pass before the Company receives revenues from sales of
any of these products. All revenues received by the Company to date have
been derived from collaboration agreements, interest on investment funds
and revenues from the custom contract manufacturing of synthetic DNA and
reagent products by the Company's Hybridon Specialty Products Division.
As a result, although the Company has begun to generate revenues from
its contract manufacturing business, the Company is dependent on the
proceeds from possible future sales of equity securities, debt
financings and research and development collaborations in order to fund
future operations.
On May 5, 1998, the Company 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 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 approximately $5.9 million of accounts payable,
capital lease obligations and other obligations into common stock. The
Company 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. The compensation received by Pillar, a company
affiliated with certain directors of the Company, with respect to the
offshore component of the private offering (Offshore Offering) consisted
of (i) 9% of gross proceeds of such Offshore Offering and (ii) a
non-accountable expense allowance equal to 4% of gross proceeds of such
Offshore Offering. Pillar received approximately $1.6 million and
warrants to purchase 1,111,630 shares of common stock at $2.40 per
share. 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 statements of
operations, which represents the value of this common stock on May 5,
1998.
On February 6, 1998, the Company commenced an exchange offer to the
holders of the 9% Convertible Subordinated Notes (the 9% Notes) (see
Note 6) to exchange the 9% Notes for Series A convertible preferred
stock and certain warrants of the Company. On May 5, 1998,
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Noteholders holding $48.7 million of principal and $2,361,850 of accrued
interest tendered such principal and accrued interest to the Company for
510,505 shares of Series A convertible preferred stock and warrants to
purchase 3,002,958 shares of common stock with an exercise price of
$4.25 per share. In accordance with Statement of Financial Accounting
(SFAS) No.15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, the Company recorded an extraordinary gain of
approximately $8.9 million related to the conversion. The extraordinary
gain represents the difference between the carrying value of the 9%
Notes 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 private offering described
above, and warrants to purchase common stock issued by the Company.
(2) UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited consolidated condensed financial statements included
herein have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission and
include, in the opinion of management, all adjustments, consisting of
normal, recurring adjustments, necessary for a fair presentation of
interim period results. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however,
that its disclosures are adequate to make the information presented not
misleading. The results for the interim periods presented are not
necessarily indicative of results to be expected for the full fiscal
year. It is suggested that these financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, as filed with the Securities and Exchange
Commission.
In April of 1999, the Company restated its June 30, 1998 financial
statements to reflect the accretion on the Series A preferred stock and
$600,000 of general and administrative expense related to common stock
issuable to Pillar (see Note 1). Such restatement resulted in a decrease
in the net loss applicable to common stockholders of $1,220,500 for the
three and six months ended June 30, 1998 (see Note 13).
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Income (Loss) per Common Share
The Company applies SFAS No. 128, Earnings per Share, in calculating
earnings per share. Basic net income (loss) per share is computed by
dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per share for the
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
periods presented is the same as basic net loss per share as the
inclusion of the potential common stock equivalents would be
antidilutive.
(4) 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 June 30, 1998 and December 31,
1997 consisted of the following (at amortized cost, which approximates
fair market value):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Cash and cash equivalents-
Cash and money market funds $ 5,289,964 $ 1,702,272
Corporate bond 228,718 499,930
------------------ ------------------
$ 5,518,682 $ 2,202,202
================== ==================
Restricted cash-current
Certificates of deposit (Note 9) $ 1,592,368 $ -
================== ==================
Restricted cash-long term
Certificates of deposit $ - $ 2,016,364
Savings account 659,618 1,034,618
------------------ ------------------
$ 659,618 $ 3,050,982
================== ==================
</TABLE>
(5) ACCOUNTS RECEIVABLE RELATED TO REAL ESTATE LIMITED PARTNERSHIP
Under the terms of the Cambridge, Massachusetts building lease
(Cambridge Lease), the Company accounted for $5,450,000 of its payments
for a portion of the costs of construction of the leased premises as
contributions to the capital of the Cambridge landlord in exchange for a
limited partnership interest in the Cambridge landlord (the Partnership
Interest). Under the terms of the Partnership Interest, the Company has
the right at any time prior to February 2000 to sell the Partnership
Interest back to the other limited partners of the landlord. In April
1998, the Company exercised its right to sell back the Partnership
Interest. The contribution to the real estate partnership has been
classified as a current asset at June 30, 1998, since the Company
anticipates receiving payment within one year.
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(6) 9.0% CONVERTIBLE SUBORDINATED NOTES
On April 2, 1997, the Company issued $50,000,000 of the 9% Notes. As
discussed in Note 1, on May 5, 1998 Noteholders holding $48.7 million of
principal value of the 9% Notes tendered such notes in exchange for
Series A convertible preferred stock and warrants to purchase common
stock. In addition, $2,361,850 of accrued interest thereon was converted
into shares of Series A convertible preferred stock and warrants to
purchase common stock. As of June 30, 1998, there is $1.3 million of 9%
Notes outstanding. Under the terms of the 9% Notes, the Company must
make semi-annual interest payments on the outstanding principal balance
through the maturity date of April 1, 2004. If the 9% Notes are
converted prior to April 1, 2000, the Noteholders are entitled to
receive accrued interest from the date of the most recent interest
payment through the conversion date. The 9% Notes are convertible at any
time prior to the maturity date at a conversion price equal to $35.0625
per share, subject to adjustment under certain circumstances, as
defined.
Beginning April 1, 2000, the Company may redeem the 9% Notes at its
option for a 4.5% premium over the original issuance price, provided
that from April 1, 2000 to March 31, 2001, the 9% Notes may not be
redeemed unless the closing price of the common stock equals or exceeds
150% of the conversion price for a period of at least 20 out of 30
consecutive trading days and the 9% Notes redeemed within 60 days after
such trading period. The premium decreases by 1.5% each year through
March 31, 2003. Upon a change of control of the Company, as defined, the
Company will be required to offer to repurchase the 9% Notes at 150% of
the original issuance price.
(7) NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires disclosure of all components
of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances
from non-owner sources. The Company's total comprehensive net income
(loss) for the three and six month periods ended June 30, 1998 and 1997
were the same as reported net income (loss) for those periods.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997. Unless
impracticable, companies would be required to restate prior period
information upon adoption. The Company believes that the adoption of
SFAS No. 131 will not have a material impact on its financial results or
financial position.
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(8) RESTRUCTURING
Beginning in July 1997, the Company implemented a restructuring plan to
reduce expenditures on a phased basis over the balance of 1997 in an
effort to conserve its cash resources. As a part of this restructuring
plan, the Company recorded an $11,020,000 restructuring charge in 1997
to provide for (i) the termination of certain research programs, (ii)
the abandonment of certain leased facilities (net of sublease income),
(iii) severance obligations to nearly 100 terminated employees and (iv)
the cancellation of certain other contracts. During June 1998, the
Company vacated the Cambridge, MA facility and moved its corporate
headquarters to Milford, MA.
The total cash impact of the restructuring amounted to approximately
$3,426,000. The total cash paid as of June 30, 1998 was approximately
$2,721,000 and the remaining amount will be paid in 1998.
(9) NOTE PAYABLE TO A BANK
In December 1996, the Company entered into a five year $7,500,000 note
payable with a bank. The note contains certain financial covenants that
require the Company to maintain minimum tangible net worth and minimum
liquidity and prohibits the payment of dividends. The note is payable in
59 equal installments of $62,500 commencing on February 1, 1997 with a
balloon payment of the then remaining outstanding principal balance, due
on January 1, 2002. During 1997, the Company's minimum liquidity had
fallen below the required amount and the Company deposited $1,758,542 as
collateral under the cash pledge agreement. During 1998, the bank
withdrew the full amount of the restricted cash and applied it against
the outstanding balance of the note. The minimum liquidity requirements
were subsequently amended to provide that if as of the fifteenth and
last day of each calendar month the Company does not have minimum
liquidity of at least $8,000,000 or $4,000,000, as defined, the Company
will be required to immediately repay to the bank 35% and 100%,
respectively, of the then outstanding balance. Also, in connection with
the note, the Company issued five year warrants to purchase 13,000
shares of common stock at an exercise price of $34.49 per share. These
warrants were fully exercisable at December 31, 1997. As of June 30,
1998, approximately $4,611,000 was outstanding under the note, which is
classified as a current liability in the accompanying June 30, 1998
balance sheet. Subsequent to June 30, 1998, the Company placed
approximately $1.6 million in escrow at the bank's request. In addition,
in August 1998 the $1.6 million will be applied against the outstanding
amount of the note. Also, upon the closing of the sale of the
Partnership Interests (see Note 5) the Company will be required to pay
down an additional $750,000 on the note.
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(10) METHYLGENE, INC. LICENSING AGREEMENT
In January 1996, the Company and MethylGene, Inc. (MethylGene) (a
Canadian company which is over 30% owned by the Company) entered into a
licensing agreement for the purpose of researching and developing
compounds for the treatment of cancer and other indications. In May
1998, this agreement was amended to grant MethylGene a non-exclusive
right to use all and any antisense chemistries discovered by the Company
or any of its affiliates for a period commencing on May 5, 1998 and
ending on the earlier of (i) the effective date of termination by
MethylGene of its contract for development services to be provided by
the Company, (ii) May 5, 1999, unless MethylGene exercises its option to
continue contracting for development services provided by the Company,
or (iii) May 5, 2000. As additional consideration for this non-exclusive
right, MethylGene is required to pay the Company certain milestone and
royalty amounts, as defined, and transfer 300,000 shares of MethylGene's
class B shares to the Company. The Company has placed no value on these
shares.
(11) UNITS ISSUED TO PRIMEDICA CORPORATION
In connection with the unit financing (see Note 1) 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 June 30, 1998 at par
value. The Company will record the value of these services as the
services are rendered.
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The accompanying consolidated financial statements include the following
information:
<TABLE>
<CAPTION>
Cumulative from
May 25,1989
Six Months Ended (Inception) to
June 30, June 30,
1998 1997 1998
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
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 $ --- $ 51,055,850
Accretion of Series A convertible preferred stock dividends $ 620,500 $ --- $ 620,500
Issuance of common stock and attached warrants in exchange
for conversion of convertible subordinated notes payable $ 4,800,000 $ --- $ 4,800,000
Issuance of common stock in exchange for conversion of
accounts payable and other obligations $ 5,934,558 $ --- $ 5,934,558
</TABLE>
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(13) RESTATEMENT OF JUNE 30, 1998
In April of 1999, the Company restated its 1998 financial statements to
reflect the accretion on the Series A convertible preferred stock and
$600,000 of general and administrative expense related to the common
stock issuable to Pillar (see Note 1). The following table presents the
net income (loss), net income (loss) applicable to common stockholders
and net income (loss) per share as originally reported, and as restated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
<S> <C> <C> <C> <C>
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Net Income (Loss) $ 1,650,245 $ 1,050,245 $ (7,031,927) $ (7,631,927)
Net Income (Loss)
applicable to common
stockholders 1,650,245 429,745 (7,031,927) (8,252,427)
Net Income (Loss) per
share $ 0.15 $ 0.04 $ (0.86) $ (1.01)
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is engaged in the discovery and development of genetic medicines
based on antisense technology. The Company commenced operations in February 1990
and since that time has been engaged primarily in research and development
efforts, development of its manufacturing capabilities and organizational
efforts, including recruitment of scientific and management personnel, and
raising capital. To date, the Company has not received revenue from the sale of
biopharmaceutical products developed by it. In order to commercialize its own
products, the Company will need to address a number of technological challenges
and comply with comprehensive regulatory requirements. Accordingly, it is not
possible to predict the amount of funds that will be required or the length of
time that will pass before the Company receives revenues from sales of any of
these products. All revenues received by the Company to date have been derived
from collaborative agreements, interest on invested funds and revenues from the
custom contract manufacturing of synthetic DNA and reagent products by the
Hybridon Specialty Products ("HSP") Division.
The Company has incurred cumulative losses from inception through June 30, 1998
of approximately $226.3 million. The Company implemented a restructuring plan in
the second half of 1997 which will significantly reduce the Company's operating
expenses and cost requirements in 1998 from 1997 levels. However, the Company
expects that its research and development expenses will continue to be
significant in 1998 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. The Company continues to explore opportunities to reduce
operating expenses in an effort to conserve its cash resources. The number of
employees has continued to decline, through attrition, resulting in a total of
50 full time employees as of August 10, 1998. In connection with the ongoing
restructuring, the Company completed the relocation of its corporate
headquarters to Milford, Massachusetts, the site of the Company's HSP Division.
See "Liquidity and Capital Resources."
This Quarterly Report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects", "intends",
"may", and other similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include the matters set forth under
the heading "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Certain Factors that May Affect Future Results" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
(the "1997 10-K") which information is incorporated herein by reference.
RESTATEMENT OF JUNE 30, 1998 FINANCIAL STATEMENTS
In April of 1999, the Company restated its 1998 financial statements to reflect
the accretion on the Series A convertible preferred stock and the issuance of
300,000 shares of common stock which Pillar is entitled to receive in connection
with its efforts in assisting the Company in restructuring its balance sheet
(see Notes 1, 2 and 13).
<PAGE>
RESULTS OF OPERATIONS
The Company had total revenues of $1,376,000 and $1,415,000 in the three months
ended June 30, 1998 and 1997, respectively, and $2,369,000 and $2,475,000 in the
six months ended June 30, 1998 and 1997, respectively. Revenues from research
and development collaborations were $650,000 and $186,000 for the three months
ended June 30, 1998 and 1997, respectively, and $800,000 and $780,000 for the
six months ended June 30, 1998 and 1997, respectively. Revenues for the three
months ended June 30, 1998 increased primarily due to the Company receiving
certain payments under its License Agreement with MethylGene, Inc., an entity in
which the Company has an over 30% interest. Despite the increase in revenues for
the full six months ended June 30, 1998, primarily as a result of the MethylGene
payments, revenues for the full six months ended June 30, 1998 and 1997 were
approximately the same due to the cancellation of the Roche collaboration in
1997.
Product revenue from HSP was $682,000 and $728,000 for the three months ended
June 30, 1998 and 1997, respectively. The decrease was primarily due to the mix
of products sold during the periods. Product revenue was $1,507,000 and
$1,076,000 for the six months ended June 30, 1998 and 1997, respectively. The
increase was a result of an expansion in the customer base and increasing sales
to existing customers.
Interest income was $45,000 and $487,000 for the three months ended June 30,
1998 and 1997, respectively, and $62,000 and $604,000 for the six months ended
June 30, 1998 and 1997, respectively. The decrease in interest income is
attributable to the decrease in cash and investments held by the Company in 1998
as compared to 1997.
The Company had research and development expenses of $5,577,000 and $14,969,000
for the three months ended June 30, 1998 and 1997, respectively, and $11,980,000
and $26,446,000 for the six months ended June 30, 1998 and 1997, respectively.
The decrease in research and development expenses in 1998 reflects the Company's
restructuring commenced during the second half of 1997. The restructuring
included the discontinuation of operations at the Company's facilities in
Europe, termination of the clinical development of GEM 91 and the reduction or
suspension of selected programs unrelated to the Company's core advanced
chemistry antisense drug development program, including the termination of its
ribozyme program. The restructuring resulted in significant reductions in
employee-related expenses, clinical and outside testing, consulting, materials
and lab expenses. The Company's facility costs in 1998 were also reduced by the
income received from subleasing its unutilized facilities.
The Company had general and administrative expenses of $2,649,000 and $2,524,000
for the three months ended June 30, 1998 and 1997, respectively, and $4,314,000
and $5,954,000 for the six months ended June 30, 1998 and 1997, respectively.
The increase in general and administrative expense for the three months ended
June 30, 1998 includes a $600,000 charge for common stock to be issued to Pillar
as discussed in Note 1. Excluding the $600,000 charge discussed above, the
decrease in general and administrative expenses in 1998 resulted primarily from
the Company's restructuring program initiated during the second half of 1997 and
its effect on employee-related expenses, consulting and net facilities costs.
The Company had interest expense of $977,000 and $1,447,000 for the three months
ended June 30, 1998 and 1997, respectively, and $2,584,000 and $1,618,000 for
the six months ended June 30, 1998 and 1997, respectively. The decrease in
interest expense for the three months ended June 30, 1998 is
<PAGE>
mainly attributable to the conversion of approximately 48.7 million of the 9%
Convertible Subordinated Notes ("the 9% Notes"), issued in the second quarter of
1997, to Series A Convertible Preferred Stock on May 5, 1998. The increase in
interest expense for the six months ended June 30, 1998 is mainly attributable
to the first quarter's interest expense of the 9% Notes which were originally
issued in April 1997.
As a result of the above factors, the Company incurred losses from operations of
$7,826,000 and $17,525,000 for the three months ended June 30, 1998 and 1997,
respectively, and $16,509,000 and $31,543,000 for the six months ended June 30,
1998 and 1997, respectively.
The Company had extraordinary income of $8,877,000 for the three and six months
ended June 30, 1998 resulting from the conversion of the 9% Notes to Series A
Convertible Preferred Stock. See "Item 1 Financial Statements -- Notes to
Consolidated Condensed Financial Statements" for a discussion of the Company's
extraordinary income. As a result of this transaction, the Company recorded a
net income after extraordinary income of $1,050,000 for the three months ended
June 30, 1998 and reduced its net loss to $7,632,000 for the six months ended
June 30, 1998.
RESTATEMENT OF JUNE 30, 1998
In April of 1999, the Company restated its 1998 financial statements to reflect
the accretion on the Series A convertible preferred stock and $600,000 of
general and administrative expense related to common stock issuable to Pillar.
The following table presents the net income (loss), net income (loss) applicable
to common stockholders and net income (loss) per share as originally reported,
and as restated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 1,650,245 $ 1,050,245 $ (7,031,927) $ (7,631,927)
Net Income (Loss)
applicable to common
stockholders 1,650,245 429,745 (7,031,927) (8,252,427)
Net Income (Loss) per
share $ 0.15 $ 0.04 $ (0.86) $ (1.01)
</TABLE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company's net cash used in
operating activities amounted to $12,914,000. The Company's operating cash
requirements were funded primarily through the utilization of existing cash,
proceeds from the Company's private placement described in Item 2 of Part II of
this Quarterly Report on Form 10-Q and in Note 1 to the Consolidated Condensed
Financial Statements in Item 1. hereof and the sale of excess equipment. In
addition, a portion of the Company's restricted cash was utilized to reduce the
related debt and capital lease obligations.
Based on its current operating plan (which includes the sale of its interest in
its former Cambridge headquarters (the "Cambridge Headquarters Facility"), and
certain sales of equipment and furniture (collectively, the "Sales")), the
Company believes that its existing capital resources, together with committed
collaborative research and development payments from G.D. Searle & Co., certain
research and development funding expected to be received from MethylGene, Inc.,
anticipated sales by the Company's HSP Division and anticipated margins on such
sales, and the anticipated net proceeds of the Sales, will be adequate to fund
the Company's capital requirements through 1998. The operating plan is based, in
part, on the assumption that the Company will be relieved of its obligations
under its lease for the Cambridge Headquarters Facility and that the Company
will receive funds from the sale of its limited partnership interest (the
"Limited Partnership Interest") in Charles River Building Limited Partnership,
the entity which owns the Cambridge Headquarters Facility (the "Cambridge
Landlord"), by the end of September 1998. The Cambridge Landlord is in the
process of both re-leasing the Cambridge Headquarters Facility to a third party
and selling the Cambridge Headquarters Facility and has advised the Company that
it expects to complete such transactions by such date.
The Company has the right at any time prior to February 2000 to require the
other limited partners in the Cambridge Landlord to purchase its Limited
Partnership Interest. In April 1998, the Company exercised this right and
anticipates receiving approximately $4,000,000 from such sale, which it expects
will be funded from the Cambridge Landlord's sale of the Cambridge Headquarters
Facility. In addition, the Company expects to receive its security deposit of
approximately $1,700,000 from the Cambridge Landlord. There can be no assurance
as to the timing of such receipt, although the Company has been informed that it
should receive such funds by September 1998.
The Company and Silicon Valley Bank have agreed in principle to amend their
credit agreement as follows: (i) the minimum liquidity and minimum tangible net
worth covenants will not be tested until the earlier of (x) September 30, 1998
and (y) the date of the Company's receipt of the sale proceeds of the Limited
Partnership Interest (the "Proceeds"); (ii) the minimum liquidity covenant will
be revised, including the removal of the $8,000,000 testing threshold, and (iii)
the Company will prepay $1,592,386 of the loan upon execution of the definitive
agreement and will prepay an additional $750,000 upon receipt of the Proceeds.
The Company expects to enter into such definitive agreement in the near future.
The Company will be required to raise substantial additional funds through
external sources, including through collaborative relationships and public or
private financings, to support its operations and, except for research and
development funding from Searle (which is subject to early termination in
certain circumstances), certain research and development funding expected to be
received from MethylGene, Inc. and sale of DNA products and reagents
manufactured on a custom contract basis by the HSP Division, Hybridon has no
current external sources of capital, and, as discussed above, expects no product
revenues for at least several years from sales of products that it is
developing.
<PAGE>
No assurance can be given that such additional funds will be available to fund
the Company's operations or, if available, that such funds will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders will result. Additionally, the
terms of any such additional financing may adversely affect the holdings or
rights of then existing stockholders.
If adequate funds are not available, the Company may be required to further
curtail significantly one or more of its core drug development programs, obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products which the Company would otherwise pursue on its own or
terminate operations.
The Company's future capital requirements will depend on many factors, including
continued scientific progress in its research, drug discovery and development
programs, the magnitude of these programs, progress with preclinical and
clinical trials, sales of DNA products and reagents to third parties by the HSP
Division and the margins on such sales, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, the ability of
the Company to establish and maintain collaborative academic and commercial
research, development and marketing relationships, the ability of the Company to
obtain third-party financing for leasehold improvements and other capital
expenditures and the costs of manufacturing scale-up and commercialization
activities and arrangements.
<PAGE>
HYBRIDON, INC.
PART II
OTHER INFORMATION
-------
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
During the quarter ended June 30, 1998, the Company issued and sold
the following securities that were not registered under the Securities Act of
1933, as amended (the "Securities Act"):
I. Unregistered Offerings Pursuant to Section 4(2) Under the
Securities Act
---------------------------------------------------------
The securities issued in each of the following transactions 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 May 5, 1998, the Company accepted $48,694,000 principal amount of
its 9% Convertible Subordinated Notes Due 2004 (the "9% Notes") tendered to the
Company in exchange for 510,505 shares of series A preferred stock (the "Series
A Preferred Stock") and warrants (the "Class A Warrants") to purchase 3,002,958
shares of common stock, par value $.001 per share (the "Common Stock"), of the
Company (the "Exchange Offer"). As a result of the Exchange Offer, there is
$1,306,000 in principal amount of the 9% Notes outstanding.
Pursuant to the Exchange Offer, which commenced on February 6, 1998,
all tendering Noteholders received per $1,000 principal amount of the 9% Notes
(including accrued but unpaid interest on the 9% Notes) (i) 10 shares of Series
A Preferred Stock and (ii) Class A Warrants to purchase such number of shares of
Common Stock equal to 25% of the number of shares of the Company's Common Stock
into which the Series A Preferred Stock issued to such Noteholder pursuant to
the Exchange Offer would be convertible.
The Series A Preferred Stock ranks, as to dividends and liquidation
preference, senior to the Company's Common Stock. The Series A Preferred Stock
issued in this Exchange Offer and in the Preferred Stock Offering, as defined
below, will be convertible into an aggregate of 14,700,941 shares of Common
Stock, subject to adjustment, beginning May 5, 1999.
The Class A Warrants will be exercisable commencing on May 5, 1999
for a period of four years thereafter at $4.25 per share of Common Stock,
subject to adjustment. The Class A Warrants are not subject to redemption at the
option of the Company under any circumstances.
1
<PAGE>
The Exchange Offer was undertaken by the Company as part of the
Company's new business plan contemplating a restructuring of its capital
structure to reduce debt service obligations, a significant reduction in its
burn rate and an infusion of additional equity capital.
(2) On May 5, 1998, the Company closed a private placement (the
"Preferred Stock 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 the Company's Common Stock, subject to adjustment,
for an aggregate amount of approximately $8 million.
The Class D Warrants will be exercisable commencing on May 5, 1999
until May 4, 2003 at $2.40 per share of Common Stock, subject to adjustment.
The Company retained Forum Capital Markets, LLC ("Forum") as a
placement agent of the Company in connection with the Preferred Stock Offering
in the United States. As of the date hereof, Forum has received as compensation
for its services as placement agent with regard to the Preferred Stock Offering
and its assistance with the Exchange Offer, 597,699 shares of Common Stock and
warrants to purchase 609,195 shares of Common Stock exercisable at $2.40 per
share, in each case subject to adjustment, until May 4, 2003. In addition, in
consideration of the agreements made by Forum consenting to the Company's 1998
private placements described below and waiving certain obligations of the
Company to Forum, the Company agreed to amend Forum's warrant dated as of April
2, 1997, to purchase up to 71,301 shares of Common Stock of the Company so that
the exercise price will be equal to $4.25 per share, 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.
The net proceeds to the Company from the Preferred Stock Offering
are presently intended to be used for general corporate purposes, primarily
research and product development activities, including costs of preparing
investigational new drug applications and conducting preclinical studies and
clinical trials, the payment of payroll and other accounts payable and for debt
service required under the Company's debt obligations. The amounts actually
expended by the Company and the purposes of such expenditures may vary
significantly depending upon numerous factors, including the progress of the
Company's research, drug discovery and development programs, the results of
preclinical studies and clinical trials, the timing of regulatory approvals,
sales of DNA products and reagents to third parties manufactured on a custom
contract basis by the Hybridon Specialty Products Division and margins on such
sales, technological advances, determinations as to the commercial potential of
the Company's compounds and the status of competitive products. In addition,
expenditures will also depend upon the establishment of collaborative research
arrangements with other companies, the availability of other financing and other
factors. Under certain circumstances, the Company may be required to use net
proceeds to repay indebtedness under its credit agreement with Silicon Valley
Bank (the "Silicon Valley Bank Credit Facility").
(3) On May 5, 1998, the Company closed a private placement of units (the
"Unit Offering") consisting of (i) 2,754,654 shares of Common Stock, and (ii)
class C warrants (the "Class C Warrants")
2
<PAGE>
to purchase 788,649 shares of Common Stock, subject to adjustment, which
securities were issued in consideration of the cancellation (or reduction) of
accounts payable, capital lease and other obligations aggregating $5,509,308.
The Class C Warrants are exercisable at $2.40 per share, subject to
adjustment from time to time, until May 4, 2003.
The Common Stock issued pursuant to the Unit Offering and the Common
Stock underlying the Class C Warrants are subject to a "lock-up" period ending
on May 5, 1999, except to the extent such securities are sold or transferred
pursuant to a Registration Statement. After the Company files a Registration
Statement under the Securities Act, 75% of each holder's Units and the
underlying securities will be subject to an additional "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.
(4) On May 5, 1998, the Company sold to Dr. Paul Zamecnik 100,000 shares
of Common Stock and Class C Warrants to purchase 25,000 shares of Common Stock,
subject to adjustment, for a purchase price of $200,000.
The net proceeds of this offering were used to reduce accounts
payable, capital lease and other obligations.
(5) On May 5, 1998, the Company issued to certain suppliers a total of
362,500 shares of Common Stock and Class C Warrants to purchase a total of
90,625 shares of Common Stock. These issuances were in consideration of (i)
payment to the Company of a total of $362.50, the par value of all such issued
Common Stock, and (ii) the subsequent furnishing of specified services to the
Company by each supplier. The extent to which the suppliers have completed
performing the specified services varies.
The Common Stock issued to Dr. Paul Zamecnik and to the certain
suppliers and the Common Stock underlying the Class C Warrants issued to such
persons are subject to a "lock-up" period ending on May 5, 1999, except to the
extent such securities are sold or transferred pursuant to a Registration
Statement. After the Company files a Registration Statement under the Securities
Act, 75% of each holder's Units and the underlying securities will be subject to
an additional "lock-up" for the first three months following the Effective Date;
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.
II. Unregistered Offerings Pursuant to Regulation S Under the
Securities Act
---------------------------------------------------------
The securities issued by the Company in the each of the following
transactions were offered and sold in reliance upon an exemption from
registration under Regulation S promulgated under the Securities Act, relating
to sales by an issuer in offshore transactions (the "Offshore Offerings"). The
securities issued in each of the following Offshore 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.
3
<PAGE>
(1) On January 15, 1998, the Company commenced a private placement of
units (the "Units"), each Unit consisting of 14% Convertible Subordinated Notes
Due 2007 (the "14% Notes") and warrants (the "Equity Warrants") to purchase
shares of the Company's Common Stock (the "14% Note Offering"). The 14% Notes
were subject to both mandatory and optional conversion into shares of series B
preferred stock, under certain circumstances which, in turn, were convertible
into Common Stock (the "Series B Preferred Stock").
On January 23, 1998, as part of the 14% Note Offering, the Company
sold $2,230,000 in principal amount of 14% Notes and Equity Warrants.
On February 9, 1998, as part of the 14% Note Offering, the Company
sold $2,384,000 in principal amount of 14% Notes and Equity Warrants.
On March 27, 1998, as part of the 14% Note Offering, the Company
sold $200,000 in principal amount of 14% Notes and Equity Warrants.
On April 21, 1998, as part of the 14% Note Offering, the Company
sold $300,000 in principal amount of 14% Notes and Equity Warrants.
On April 24, 1998, as part of the 14% Note Offering, the Company
sold $1,020,000 in principal amount of 14% Notes and Equity Warrants.
In each of the above closings, the 14% Notes were issued at face
value.
(2) On May 5, 1998, the Company closed a private placement of 3,223,000
shares of Common Stock and class B warrants (the "Class B Warrants") to purchase
805,750 shares of the Company's Common Stock, subject to adjustment, for
aggregate gross proceeds of $6,446,000.
The Class B Warrants are exercisable for a period of five years at
$2.40 per share of Common Stock, subject to adjustment from time to time.
The Common Stock issued in such private placement and the Common
Stock underlying the Class B Warrants issued in such private placement are
subject to a "lock-up" for a period ending on May 5, 1999, except to the extent
such securities are sold or transferred pursuant to a Registration Statement
filed by the Company under the Securities Act. After the Company files a
Registration Statement under the Securities Act, 75% of each holder's Common
Stock, including the Common Stock underlying the Class B Warrants, will be
subject to an additional "lock-up" for the first three months following the
Effective Date; thereafter, 50% of such securities will be subject to an
additional "lock-up" until six months following the Effective Date; and the
remaining 25% of such securities will be "locked-up" until nine months following
the Effective Date.
(3) The Company has exchanged all of the 14% Notes issued, including any
right to interest thereon, and all Equity Warrants issued together with the 14%
Notes, for 3,157,322 shares of Common Stock and Class B Warrants to purchase
947,195 shares of Common Stock.
4
<PAGE>
The Company has retained Pillar Investments, Ltd. ("Pillar
Investments") as a placement agent of the Company in connection with the private
placements of securities of the Company in the Offshore Offerings. Pillar
Investments is entitled to receive fees consisting of (i) 9% of the gross
proceeds of each Offshore Offering, (ii) a non-accountable expense allowance
equal to 4% of such gross proceeds, (iii) the right to purchase, for nominal
consideration, warrants to purchase 473,598 shares of Common Stock, at an
exercise price of $2.40 per share, (iv) the right to purchase, for nominal
consideration, warrants to purchase such number of shares of the Common Stock of
the Company equal to 10% of the aggregate number of shares of Common Stock sold
by the Company for which Pillar Investments acts as placement agent, exercisable
at 120% of the relevant Common Stock offering price, for a period of five years
(resulting, as of the date hereof, in the right to receive warrants to purchase
638,032 shares at $2.40 per share, subject to adjustment), and (v) a
consulting/restructuring fee of $960,000 payable in Common Stock of the Company
valued at the market price and payable in three equal installments as net
proceeds of $25,000,000, $30,000,000 and $35,000,000 are received in the
aggregate from private placements effected by the Company in 1998 to the extent
contemplated by the Consent dated as of January 12, 1998 given by certain 9%
Noteholders of the Company, or otherwise to the extent contemplated by the
Placement Agency Agreement between the Company and Pillar Investments, subject
to the Company's receipt of a fairness opinion with regard thereto, provided,
however, that in no event shall Pillar Investments be permitted to receive
compensation in excess of the level which was approved by the holders of the 9%
Notes. Through the date hereof, Pillar Investments has received $1,635,400 in
cash pursuant to these arrangements.
The Company and Pillar Investments have entered into an advisory
agreement pursuant to which Pillar Investments acts as the Company's
non-exclusive financial advisor, which agreement provides that an affiliate of
Pillar Investments receive a monthly retainer of $5,000 (with a minimum
engagement of 24 months beginning on May 5, 1998), and further provides that
Pillar Investments is entitled to receive (i) out-of-pocket expenses, (ii)
subject to the Company's receipt of a fairness opinion with respect thereto,
300,000 shares of Common Stock in connection with Pillar Investments' efforts in
assisting the Company in restructuring its balance sheet, and (iii) certain cash
and equity success fees in the event Pillar Investments assists the Company in
connection with certain financial and strategic transactions.
The net proceeds to the Company from the Offshore Offerings are
presently intended to be used for general corporate purposes, primarily research
and product development activities, including costs of preparing investigational
new drug applications and conducting preclinical studies and clinical trials,
the payment of payroll and other accounts payable and for debt service required
under the Company's debt obligations. The amounts actually expended by the
Company and the purposes of such expenditures may vary significantly depending
upon numerous factors, including the progress of the Company's research, drug
discovery and development programs, the results of preclinical studies and
clinical trials, the timing of regulatory approvals, sales of DNA products and
reagents to third parties manufactured on a custom contract basis by the
Hybridon Specialty Products Division and margins on such sales, technological
advances, determinations as to the commercial potential of the Company's
compounds and the status of competitive products. In addition, expenditures will
also depend upon the establishment of collaborative research arrangements with
other companies, the availability of other financing and other factors. Under
certain circumstances, the Company may be required to use net proceeds to repay
indebtedness under the Silicon Valley Bank Credit Facility.
5
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
At the Company's Annual Meeting of Stockholders held on June 15,
1998, the stockholders re-elected the following three individuals as Class III
Directors to hold office until the 2001 Annual Meeting of Stockholders:
For Against Abstain
--- ------- -------
Dr. Sudhir Agrawal 7,944,840 203,844 0
Youssef El-Zein 7,942,216 206,468 0
E. Andrews Grinstead 7,937,748 210,936 0
The term of office as a Director for each of the following
individuals continued after the meeting:
Nasser Menhall
Mohamed A. El-Kheriji
Dr. James B. Wyngaarden
Dr. Paul C. Zamecnik
Pursuant to the Company's offer to exchange its 9% Convertible
Subordinated Notes due 2004 (the "9% Notes") for Series A Preferred Stock and
warrants, exchanging holders of the 9% Notes had the right to designate one
person for nomination to the Company's Board of Directors. The exchanging holder
of the 9% Notes selected Arthur W. Berry as their nominee and Mr. Berry was
appointed as a Class I Director. Harold L. Purkey was also appointed as a Class
I Director.
The stockholders also approved a proposal to amend the Company's
1997 Stock Incentive Plan. The holders of 6,422,087 shares of Common Stock voted
for the proposal, the holders of 239,056 shares of Common Stock voted against
the proposal, the holders of 21,209 shares of Common Stock abstained from voting
and the holders of 1,466,332 shares of Common Stock were broker non-votes.
Finally, the stockholders ratified the selection of Arthur Andersen
LLP as the independent public accountants to audit the Company's consolidated
financial statements. The holders of 8,137,125 shares of Common Stock voted for
the ratification, the holders of 7,379 shares of Common Stock voted against and
the holders of 4,180 abstained from voting.
6
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits.
27.1 Financial Data Schedule (EDGAR)
The following exhibits were previously filed as part of the
Company's Form 10-Q for the quarter ended June 30, 1998.
99.1 Second Amendment to Loan and Security Agreement between
Hybridon, Inc. and Silicon Valley Bank.
99.2 Financial Advisory Agreement between Hybridon, Inc. and
Pillar Investments, Ltd.
99.3 Placement Agency Agreement between Hybridon, Inc. and Pillar
Investments, Ltd.
(b) The following Reports on Form 8-K were filed during the quarter ended
June 30, 1998:
1. On April 9, 1998, the Company filed a Current Report on Form 8-K
dated April 9, 1998 reporting the closing on March 27, 1998 of
$200,000 of Offering Notes and Warrants pursuant to the terms of the
Overseas Offering.
2. On April 27, 1998, the Company filed a Current Report on Form 8-K
dated April 27, 1998, reporting the closing on April 21, 1998 of
$300,000 of Offering Notes and Warrants pursuant to the terms of the
Overseas Offering.
3. On April 28, 1998, the Company filed a Current Report on Form 8-K
dated April 28, 1998, reporting the closing on April 24, 1998 of
$1,020,000 of Offering Notes and Warrants pursuant to the terms of
the Overseas Offering.
4. On May 8, 1998, the Company filed a Current Report on Form 8-K
dated May 8, 1998, reporting, inter alia, the closing on May 5, 1998
of approximately 6.6 million shares of Common Stock and
approximately 114,300 shares of Series A Convertible Preferred Stock
and that approximately $48.6 million principal amount of its 9%
Notes were tendered to the Company to be exchanged for Series A
Preferred Stock.
7
<PAGE>
SIGNATURES
-------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HYBRIDON, INC.
April 13, 1999 /s/ E. Andrews Grinstead, III
- ------------- ---------------------------------------
Date E. Andrews Grinstead, III
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
April 13, 1999 /s/ Robert G. Andersen
- ------------- ---------------------------------------
Date Robert G. Andersen
Treasurer (Principal Accounting and
Financial Officer)
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