UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For annual and transitional reports pursuant to sections
13 or 15(d) of the Securities Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27352
HYBRIDON, INC.
(Exact name of Registrant as specified
in its certificate of incorporation)
Delaware 04-3072298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
155 Fortune Blvd.
Milford, Massachusetts 01757
(Address of principal executive offices) (Zip Code)
(508) 482-7500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $27,593,715 million as of March 28, 2000.
For purposes of determining this number, 6,056,444 shares of common stock held
by affiliates are excluded.
As of March 28, 2000, the registrant had 16,323,873 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Items 10, 11, 12 and 13
Statement with respect to the Annual of Part III.
Meeting of Stockholders to be held on
June 12, 2000.
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HYBRIDON, INC.
FORM 10-K
INDEX
PART I 6
ITEM 1. BUSINESS...........................................................6
HYBRIDON...........................................................6
TECHNOLOGY OVERVIEW................................................6
Conventional Drugs............................................7
Antisense Drugs...............................................7
HYBRIDON TECHNOLOGY................................................8
Medicinal Chemistries.........................................8
Manufacturing Technology......................................8
Proprietary Analytical Tools..................................9
Regulatory Know-How...........................................9
DRUG DEVELOPMENT AND DISCOVERY.....................................9
The Drug Development and Approval Process.....................9
Hybridon Drug Development and Discovery Programs.............10
CLINICAL PROGRAMS.................................................10
Cancer.......................................................10
HIV-1 and AIDS...............................................11
PRECLINICAL PROGRAMS..............................................11
HYBRIDON SPINOUTS.................................................12
MethylGene, Inc..............................................12
OriGenix Technologies Inc....................................12
CORPORATE COLLABORATIONS..........................................12
G.D. Searle & Co.............................................13
Medtronic, Inc...............................................13
HYBRIDON SPECIALTY PRODUCTS.......................................13
MARKETING STRATEGY................................................14
ACADEMIC AND RESEARCH COLLABORATIONS..............................15
DRUG DEVELOPMENT SERVICES.........................................15
PATENTS, TRADE SECRETS, AND LICENSES..............................15
GOVERNMENT REGULATION.............................................17
FDA Approvals................................................17
Other Regulation.............................................17
COMPETITION.......................................................18
EMPLOYEES.........................................................18
ITEM 2. PROPERTIES........................................................19
ITEM 3. LEGAL PROCEEDINGS.................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............19
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF HYBRIDON..........19
Executive Officers................................................19
Significant Employees.............................................19
PART II 21
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................21
ITEM 6. SELECTED FINANCIAL DATA...........................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................25
GENERAL...........................................................25
RESULTS OF OPERATIONS.............................................25
Revenues.....................................................25
Research and Development Expenses............................25
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General and Administrative Expenses..........................26
Interest Expense.............................................26
Restructuring Charge.........................................26
Net Loss.....................................................26
LIQUIDITY AND CAPITAL RESOURCES...................................27
General......................................................27
Cash Resources...............................................27
1998 FINANCING ACTIVITIES.........................................28
Credit Facility..............................................28
Facility Leases..............................................29
Net Operating Loss Carryforwards.............................29
RISK FACTORS.................................................................29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................31
PART III 32
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT
EMPLOYEES OF HYBRIDON.............................................32
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................32
PART IV 32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...32
SIGNATURES 38
POWER OF ATTORNEY AND SIGNATURES.............................................38
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FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. Hybridon
intends that all forward-looking statements be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect Hybridon's views as of the date they are made
with respect to future events and financial performance, but are subject to many
risks and uncertainties, which could cause actual results to differ materially
from any future results expressed or implied by such forward-looking statements.
Examples of such risks and uncertainties include the risks detailed in the Risk
Factors section of this Annual Report on Form 10-K. Hybridon does not undertake
to update any forward-looking statements.
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PART I
ITEM 1. BUSINESS
HYBRIDON
Hybridon, Inc., established in 1989, is involved in the discovery and
development of genetic drugs, which are drugs that treat diseases by acting on a
particular gene or protein. The genetic drugs being developed by Hybridon are
based on "antisense" technology, in that they use synthetic genetic material,
also called oligonucleotides, with the aim of inhibiting or reducing the body's
production of proteins that directly or indirectly cause a given disease.
Hybridon has developed and owns antisense technology that includes
important new medicinal chemistries (relating to the design and manufacture of
new antisense compounds), analytical chemistry (relating to the detection and
identification of compounds inside and out of the body), and manufacturing
technology.
Hybridon also has rights to technology allowing the chemical
modification of oligonucleotides, has particular expertise in the efficient
design and development of antisense drugs, and has devised innovations in the
manufacture of oligonucleotides. In addition, it has one of the few large-scale
oligonucleotide manufacturing facilities.
These aspects of Hybridon's business are discussed below.
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 that contains genetic
information.
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
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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.
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 other 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. 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 inhibit the expression of
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.
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HYBRIDON 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. Development of Hybridon's antisense
chemistry has been directed by Dr. Sudhir Agrawal, Hybridon's Chief Scientific
Officer, and now also President and Acting Chief Executive Officer. It has been
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,
targets the messenger RNA that codes for an essential protein in Type 1 Human
Immunodeficiency Virus, or "HIV-1." GEM(R) 91 is based on first-generation
phosphorothioate chemistry, which altered the naturally-occurring, or native,
form of oligonucleotides by replacing certain oxygen atoms in the backbone with
sulfur atoms. GEM(R) 91 was more stable than native 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 treatment of three of the
nine patients with advanced HIV disease was interrupted due to unacceptable
decreases in platelet counts. 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 and significantly improve therapeutic value compared to earlier
antisense drug candidates. These compounds are likely to have the following
desirable characteristics:
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)
Immunostimulatory Technology. It is well-known that the first
generation phosphorothioate oligonucleotides containing the dinucleotide
sequence CpG mobilize the body's immune defense system. This is called
immunostimulation. Hybridon has found that selectively changing the backbone
chemistry at specific points relative to the CpG in the molecule will cause
significant decreases or increases in the immunostimulatory activities. These
discoveries are being used to both enhance and suppress this activity depending
on the therapeutic use. For example, an oligonucleotide causing enhanced
immunostimulation could be used as an anti-cancer therapy, or used together with
other components of a vaccine. Modifications that decrease immunostimulation are
used to reduce the side-effects of some antisense oligonucleotide compounds.
Drug Potentiation Technology. Hybridon has discovered that certain
oligonucleotides are able to enhance the activity of irinotecan, a marketed
anti-cancer drug, when the two are used together in animal models of cancer. The
observed increase in activity is not solely due to an antisense mechanism. This
discovery is being further studied to determine the mechanism of the effect and
to possibly prepare for human clinical trials.
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,
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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 has
assisted customers of Hybridon Specialty Products ("HSP"), Hybridon's contract
manufacturing division, in preparing essential components of their submissions
to the FDA.
DRUG DEVELOPMENT AND DISCOVERY
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 U.S., 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, Hybridon may file an Investigational
New Drug Application, or "IND," with the FDA. The IND 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, Hybridon can begin clinical trials in the U.S.
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.
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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, Hybridon will
file a New Drug Application, or "NDA," with the FDA. The NDA contains
all of the information gathered from the Phase I, I/II, 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, Hybridon 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
Hybridon 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 anti-cancer 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)
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
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necessary to the health of, normal adults. Certain cancer cells produce PKA type
I in adults. Hybridon is developing 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 the anti-cancer therapies
Taxol(R) and Taxotere(R).
HIV-1 and AIDS
Acquired Immune Deficiency Syndrome, "AIDS," is caused by infection
with 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 that they were 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
<TABLE>
<CAPTION>
Hybridon has also conducted preclinical studies in the following areas:
- ----------------------------------------------------------------------------------------------
Primary
Target Therapeutic Indication(s) Status
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
MDM2 (a protein involved in programmed Cancer Seeking partner
cell death)
- ----------------------------------------------------------------------------------------------
Vascular Endothelial Growth Factor (a Cancer Seeking partner
protein that can cause abnormal
formation of new blood vessels) Retinopathies (e.g. macular Seeking partner
degeneration and diabetic
retinopathy)
- ----------------------------------------------------------------------------------------------
Hepatitis C Virus Hepatitis C (which can lead Seeking partner
to liver cancer)
- ----------------------------------------------------------------------------------------------
</TABLE>
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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 spinout companies, 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 commenced Phase I clinical trials of its first compound,
MG98, for the treatment of cancer in May 1999.
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
40% of OriGenix.
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 may also 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. Subject to sufficient funds being
available, 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 expects
to retain the rights to manufacture many of the products it may license pursuant
to its existing and any future collaborations.
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G.D. Searle & Co.
In January 1996, Hybridon and Searle entered into a research and
development collaboration for the development of antisense compounds. Hybridon
and Searle were investigating antisense inhibitors of MDM2, a protein involved
in programmed cell death, or apoptosis. In March 2000, Searle elected not to
extend this research and development collaboration. Hybridon will seek a new
development partner for this program.
It is believed that MDM2 may play an important role in many types of
cancer. As part of the agreement, Searle will return to Hybridon all licenses
granted to Searle, including the recently issued U.S. patent 6,013,786, which
covers specific antisense inhibitors of human MDM2. Searle also grants to
Hybridon use of Searle's agreement-related patent rights, including all
antisense rights relating to MDM2.
Through January 2000, Searle was making annual research payments to
Hybridon of $600,000. A royalty will be paid to Searle if antisense compounds
discovered under the collaboration are commercialized successfully.
Pursuant to their 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 HSP to manufacture oligonucleotide compounds
both for Hybridon's internal use, for use by its collaborators 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 is 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, $2.8
million in 1998 and $5.8 in 1999. HSP's principal customers in 1999 included
Genta Incorporated, MethylGene, Inc. and Ribozyme Pharmaceuticals, Inc. Each of
those customers accounted for more than 10% of HSP's 1999 revenues.
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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 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
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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.
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
IND applications in Canada and the U.S. MethylGene compensated Hybridon for
these services. Hybridon may perform similar services for OriGenix.
PATENTS, TRADE SECRETS, AND LICENSES
Hybridon's success will largely depend on its ability to:
o obtain U.S. and foreign patent protection for drug candidates and
processes
o preserve trade secrets
o 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 March 28, 2000, Hybridon
owned or exclusively licensed in excess of 98 U.S. and foreign issued and
allowed patents, of which 81 are U.S. patents. Hybridon also has 56 other U.S.
and 120 other foreign patent applications. The foreign patent counts include
Japan, Canada and Europe as a whole, as well as other non-European individual
countries. 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.
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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.
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
National Institutes of Health, or "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. Hybridon is also a nonexclusive
licensee of certain patents exclusively licensed to Genzyme covering certain
technology relating to MDM2.
The U.S. Patent and Trademark Office, or "PTO," has informed Hybridon
that certain patent applications exclusively licensed by Hybridon from UMMC will
be submitted to the Board of Patent Appeals and Interferences of the PTO to
determine 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 be
no assurance, however, 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.
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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 U.S. are maintained in secrecy until patents are issued, and publication
of any given discovery in the scientific or patent literature tends to lag
behind the 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. 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. 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. 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 U.S. 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
U.S. 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
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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 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 March 29, 2000, Hybridon employed 46 individuals full-time, of
whom 16 held advanced degrees. Eight of these employees are engaged in research
and development activities and eleven are employed in finance, corporate
development, and general administrative activities. In addition, 27 of these
employees are employees of HSP, of whom five 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.
On February 15, 2000, Hybridon announced that E. Andrews Grinstead,
III, currently Hybridon's Chief Executive Officer, had taken an unexpected
medical leave of absence of indefinite duration due to a serious illness and
that Mr. Grinstead had been replaced as President.
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ITEM 2. 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. The option to renew this
lease must be exercised during the six-month period commencing March 1, 2002.
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.
ITEM 3. LEGAL PROCEEDINGS
Hybridon is not a party to any litigation that it believes could damage
Hybridon or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 1999.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF HYBRIDON
The executive officers and significant employees of Hybridon as of
March 29, 2000 are as follows:
Executive Officers
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
E. Andrews Grinstead, III.................... 54 Director and Chief Executive Officer
Sudhir Agrawal, D. Phil...................... 46 President and Acting Chief Executive
Officer, Senior Vice President of
Discovery, Chief Scientific Officer, and
Director
Robert G. Andersen........................... 49 Vice President of Operations and Planning
and Chief Financial Officer
Significant Employees
NAME AGE POSITION
- ---- --- --------
R. Russell Martin, M.D. 64 Senior Vice President of Drug Development
Frederick M. Miesowicz, Ph.D. 49 Senior Vice President and General
Manager, Hybridon Specialty Products
Jin-Yan Tang, Ph.D. 56 Vice President of Production
</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. Mr. Grinstead resigned as Chairman in December 1999. On February 15, 2000,
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Hybridon announced that Mr. Grinstead had taken an unexpected medical leave of
absence of indefinite duration due to a serious illness and that Mr. Grinstead
had been replaced as President. 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, Senior Vice President of Discovery in March
1994, and President and Acting Chief Executive Officer in February 2000. 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.
Robert G. Andersen joined Hybridon in November 1996 and served as Vice
President of Systems Engineering and Management Information Systems prior to
being appointed Vice President of Operations and Planning in 1997, Treasurer in
January 1998, and Chief Financial Officer of Hybridon in February 2000. Prior to
joining Hybridon, Mr. Andersen served in a variety of positions at Digital
Equipment Corporation, a computer company, from 1986 to 1996, most recently as
Group Manager of the Applied Objects Business Unit. From 1978 to 1986, Mr.
Andersen served in a variety of positions at United Technologies Corporation, an
aviation technology company, most recently as Director of Quality for Otis
Elevator Company's European Operations. Mr. Andersen received his B.E.E. in
Electrical Engineering from The City College of New York in 1972 and an M.S. in
Management from Northeastern University in 1978. He is also a graduate of the
United Technologies Advanced Studies Program.
R. Russell Martin joined Hybridon in April, 1994 as Vice President of
Clinical Research and is presently the Senior Vice President of Drug Development
for Hybridon, Inc. in Milford, MA. He was Vice President of Clinical Research
(Infectious Diseases) for Bristol-Myers Squibb from 1989-1993, and from 1983
until 1993, he was responsible for worldwide registrational trials (phase I
through III) for new infectious diseases therapies for that company. During that
period, he held appointments in medicine and infectious diseases at Baylor
College of Medicine, University of Connecticut School of Medicine, and Yale
University School of Medicine. Prior to joining the pharmaceutical industry, he
was an Associate Professor and then Professor of Medicine, Microbiology and
Immunology at Baylor College of Medicine from 1971-1983. He received an A.B.
from Yale University in 1956 and M.D. degree from the Medical College of Georgia
in 1960. He is a Fellow of the American College of Physicians and of the
Infectious Diseases Society of America.
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Frederick M. Miesowicz joined Hybridon in July 1999 as Senior Vice
President and General Manager of Hybridon Specialty Products. Prior to joining
Hybridon, Dr. Miesowicz served as Senior Vice President of Scientific Affairs at
Cellcor from 1992 to 1995 and as Vice President and General Manager of Cellcor,
a subsidiary of Cytogen Inc., from 1995 to 1998, where he directed all
operations related to Cellcor's cellular immunotherapy programs. Dr. Miesowicz
has an extensive background in cellular therapies and medical devices. Prior to
joining Cellcor, he managed the U.S. and European SteriCell Division of Terumo
Medical Corporation after it was acquired from DuPont and was with E.I. DuPont
de Nemours & Company for over 14 years managing both immunotherapy and
immunodiagnostic R&D groups. In 1986, he assumed development responsibility for
DuPont's cellular therapy business, working with the National Cancer Institute
and others on ex vivo immunotherapies and medical devices to process lymphocytes
for therapeutic use. He holds a BS degree in Chemistry from Siena College and
received a Ph.D. in Chemistry in 1977 from Harvard University.
Jin-YanTang joined Hybridon in 1991 and served as Senior Research
Scientist from 1991 to 1993, Director of Oligonucleotide Chemistry from 1993 to
1994 and Executive Director of Process Chemistry from 1994 to April 1995 prior
to being appointed Vice President of Process Development in April 1995. In
November of 1997, Dr. Tang was appointed Vice President of Production. Prior to
joining Hybridon, Dr. Tang served as a Visiting Fellow at the Worcester
Foundation from 1988 to 1991. He also served as a Visiting Professor at the
University of Colorado in 1988. Dr. Tang received a B.S. in biochemistry from
Shanghai University of Sciences and Technology in 1965 and a Ph.D. from the
Shanghai Institute of Biochemistry in 1978.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
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.
On December 2, 1997, Hybridon's common stock was removed from the
Nasdaq National Market and began being quoted on the NASD OTC Bulletin Board.
Quotes on the NASD OTC Bulletin Board may reflect inter-dealer prices, without
retail markups, markdowns or commissions and do 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 payments for 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 1, 1998:
HIGH LOW
---- ---
1998
First Quarter................................... $3.359 $1.000
Second Quarter................................... 2.750 1.609
Third Quarter.................................... 2.516 1.125
Fourth Quarter................................... 3.250 1.125
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1999
First Quarter.................................... $1.875 1.000
Second Quarter................................... 1.500 0.250
Third Quarter.................................... 1.500 0.350
Fourth Quarter................................... 1.750 0.406
The reported closing bid price of the Common Stock on the NASD OTC
Bulletin Board on March 28, 2000 was $2.6875 per share.
(b) Holders
The number of common stockholders of record on March 28, 2000 was 365.
(c) Dividends
The convertible preferred stock pays dividends at 6.5% per year,
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 9% convertible subordinated 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 on the convertible
preferred stock. As of March 29, 2000, $1.3 million in total 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."
(d) Recent Sales of Unregistered Securities
Sales by Hybridon during the quarterly period ended December 31, 2000,
of securities that were not registered under the Securities Act of 1933, as
amended were as follows:
(1) In October 1999, Hybridon sold approximately $455,000 principal
amount of promissory notes at face value to certain "accredited investors," 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) In September and November 1999, Hybridon sold an aggregate of $1.5
million principal amount of promissory notes at face value to E. Andrews
Grinstead, III, Hybridon's Chief Executive Officer, 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 December 13, 1999, Hybridon sold an aggregate of $5.1 million
principal amount of 8% Notes to purchasers in a private placement transaction.
These 8% Notes were offered and sold to "accredited investors" 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) As of December 31, 1999, the $455,000 indebtedness under the
October 1999 loan agreement were converted into 8% Notes, 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.
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(5) As of December 31, 1999, the $1.5 million principal amount of
promissory notes held by Mr. Grinstead, automatically converted into 8% Notes,
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.
(6) As of December 7, 1999, in connection with the Subordination and
Intercreditor Agreement by and among Hybridon, the representative of the
purchasers of the 8% Notes, Forum and the entities advised by Pecks, whereby,
among other things, the $6,000,000 Forum loan was subordinated to the 8% Notes,
Hybridon issued warrants to purchase an aggregate of 2.75 million shares of
Hybridon common stock to designees of Pecks and Forum. These warrants were
offered and sold to "accredited investors" 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.
(7) In connection with the December 13, 1999 private placement of 8%
Notes, Hybridon agreed, subject to certain conditions, to issue to Pillar
Investment Limited or its designees, 8% Notes in an aggregate principal amount
equal to 9% of the aggregate principal amount of 8% Notes sold to investors
introduced to Hybridon by Pillar and warrants to purchase an aggregate principal
amount of 8% Notes equal to 10% of the 8% Notes sold to investors introduced to
Hybridon by Pillar. These notes and warrants were offered and sold to
"accredited investors" 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from
Hybridon's consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants. The financial data should be read
along 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
Independent Public Accountants included elsewhere in this Annual Report on Form
10-K.
23
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(In Thousands, except per share data)
Statement of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Product and service revenue................... $ - $ - $1,080 $1,877 $3,254 $6,186
Research and development...................... 1,032 1,186 1,419 945 1,100 600
Royalty income................................ - - 62 48 - -
Interest income............................... 135 219 1,447 1,079 148 215
----- ----- ------- ------- ------- -------
Total revenues........................ 1,167 1,405 4,008 3,949 4,502 7,001
----- ----- ------- ------- ------- -------
Operating Expenses:
Research and development...................... 20,024 29,685 39,390 46,828 20,977 13,090
General and administrative.................... 6,678 6,094 11,347 11,026 6,573 3,664
Interest...................................... 69 173 124 4,536 2,932 750
Restructuring................................. - - - 11,020 - -
-------- ------- ------- -------- -------- -------
Total operating expenses...................... 26,771 35,952 50,861 73,410 30,482 17,504
-------- -------- -------- -------- -------- -------
Loss from operations............................... (25,604) (34,547) (46,853) (69,461) (25,980) (10,503)
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) (10,503)
Accretion of preferred stock dividend.............. - - - - (2,689) (4,232)
-------- --------- -------- --------- -------- --------
Net loss to common stockholders.................... $(25,604) $(34,547) $(46,853) $(69,461) $(19,792) $(14,735)
======== ======== ======== ========= ========= =========
Basic and diluted net loss per common share from:
Operations.................................... $(70.77) $(94.70) $(10.24) $(13.76) $ (2.19) $ (0.66)
Extraordinary gain............................ - - - - 0.75 -
--------- ------ -------- -------- ------- -------
Net loss per share............................ (70.77) (94.70) (10.24) (13.76) (1.44) (0.66)
Accretion of preferred stock dividends - - - - (0.23) (0.27)
-------- -------- --------- -------- -------- --------
Net loss per share applicable to common $(70.77) $(94.70) $ (10.24) $(13.76) $(1.67) $ (0.93)
======= ======= ======== ======== ======= ========
Stockholders..................................
Shares Used in Computing Basic and
Diluted Net Loss per Common Share(1) 362 365 4,576 5,050 11,859 15,811
======== ======= ======== ======= ======= =======
Balance Sheet Data:
December 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Cash, cash equivalents and short-term
investments(2).................................. $3,396 $5,284 $ 16,419 $2,202 $5,607 $2,552
Working capital (deficit) ......................... (1,713) 210 8,888 (24,100) (5,614) (6,338)
Total assets....................................... 11,989 19,618 41,537 35,072 16,536 11,935
Long-term debt and capital lease
obligations, net of current portion........... 1,522 1,145 9,032 3,282 473 392
8% convertible notes payable - - - - - 6,100
9% convertible subordinated
notes payable ..................................... - - - 50,000 1,306 1,306
Accumulated deficit ............................... (67,794) (102,341) (149,194) (218,655) (238,448) (253,183)
Total stockholders' equity (deficit)............... 4,774 12,447 22,855 (46,048) 2,249 (6,072)
---------- --------- -------- -------- --------- ---------
</TABLE>
(1) Computed on the basis described in Notes 2(k) 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 ninety days but less than one year from the
purchase date.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Hybridon is involved in the discovery and development of genetic
medicines based on antisense technology. Hybridon began operations in February
1990 and since that time has been involved 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 from
collaborative agreements, interest on invested funds and revenues from the
custom contract manufacturing of synthetic DNA and reagent products by Hybridon
Specialty Products.
Hybridon has incurred total losses of approximately $253.2 million
through December 31, 1999. Hybridon adopted a restructuring plan in the second
half of 1997 that has significantly reduced its operating expenses. However,
Hybridon expects that its research and development and general and
administrative expenses will be significant in 2000 and future years as it
pursues its core drug development programs and expects to continue to incur
operating losses and significant capital needs beyond its internally generated
funds.
Hybridon's existing cash resources are expected to be sufficient to
fund operations only until June 2000. However, if the noteholders force default
proceedings due to events of non-compliance, Hybridon's existing cash resources
may not be sufficient to fund operations into June 2000. Hybridon's ability to
continue operations beyond that time will depend on its success in obtaining new
funding, either through additional financing or new partnerships or
collaborations with third parties, that may require it to relinquish rights to
certain of its technologies, product candidates or products which it would
otherwise pursue on its own. If Hybridon is unable to obtain substantial
additional new funding by June 2000, Hybridon will have to terminate operations
or seek relief under applicable bankruptcy laws.
RESULTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1999
Revenues
Hybridon had total revenues of $3.9 million in 1997, $4.5 million in
1998, and $7.0 million in 1999. During 1997, 1998 and 1999, Hybridon received
revenues from research and development collaborations of $0.9 million, $1.1
million and $0.6 million, respectively. Research and development collaboration
revenues increased in 1998 from 1997, primarily due to Hybridon receiving
certain payments under its license agreement with MethylGene, Inc. Research and
development collaboration revenues decreased in 1999 from 1998, primarily due to
a reduction in revenues recorded under this license agreement. Also, in March
2000, Hybridon announced that Searle, a collaborative partner of Hybridon, was
terminating its collaboration agreement with Hybridon.
Product and service revenues were $1.9 million in 1997, $3.3 million in
1998 and $6.2 million in 1999. Substantially all of Hybridon's product and
service revenue is generated by its wholly owned subsidiary, Hybridon Specialty
Products (HSP). The increase in revenues in 1998 over those in 1997 was
primarily the result of (1) an expansion of customer base, (2) increased sales
to certain existing customers, and (3) $0.4 million of service revenue from
MethylGene, an entity in which Hybridon has an approximately 30% equity
interest. The increase in revenues in 1999 were primarily the result of
increased sales to HSP customers and receipt of service revenues from
MethylGene, Inc, and OriGenix Technologies, Inc., entities in which Hybridon has
an equity interest. The service revenues received from MethylGene decreased from
$0.4 million to $0.3 million and increased for OriGenix from zero to $0.1
million for 1998 and 1999, respectively.
Revenues from interest income were $1.1 million in 1997, $0.1 million
in 1998 and $0.2 million in 1999. The decrease in interest income in 1998 from
1997 was the result of lower cash balances available for investment. The
increase in interest income in 1999 from 1998, was the result of higher cash
balances available for investment.
Research and Development Expenses
During 1997, 1998 and 1999, Hybridon expended $46.8 million, $21.0
million and $13.1 million, respectively, on research and development activities.
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<PAGE>
The decreases in research and development expenses each year reflect
Hybridon's reduction of its operating expenses in 1997 and 1998 pursuant to the
restructuring that began in 1997 and was completed in 1998 and the lower levels
of cash available for expenditures in 1999. The restructuring included the
termination of operations at Hybridon's facilities in Europe, and also resulted
in significant reductions in employees and employee-related expenses, clinical
and outside testing, consulting, materials and lab expenses.
In addition, the facilities expense included in research and
development expenses decreased significantly in 1998 and 1999 as a result of
moving Hybridon's corporate offices and lab space in July 1998 from Cambridge to
Milford, Massachusetts and the sublease of its remaining unused Cambridge
facilities.
Research and development salaries and related costs decreased in 1998
from 1997 due to the substantial reduction in the number of employees involved
in research and development in 1998. Research and development salaries and
related costs remained at approximately the same level in 1999 as 1998.
Hybridon's patent expenses remained at approximately the same level in
1997 as 1998 and 1999.
General and Administrative Expenses
Hybridon incurred general and administrative expenses of $11.0 million
in 1997, $6.6 million in 1998 and $3.7 million in 1999. The decreases reflect
Hybridon's reduction of its operating expenses in 1997 and 1998 pursuant to the
restructuring which began in 1997 and completed in 1998 and which resulted in
significant reduction in employees and employee-related expenses and consulting
expenses. General and administrative expenses related to business development,
public relations and legal and accounting expenses also decreased in 1999.
In addition, the facilities expense included in general and
administrative expenses also decreased significantly in 1999 as a result of
moving Hybridon's corporate offices to Milford, Massachusetts in 1998.
Interest Expense
Interest expense was $4.5 million in 1997, $2.9 million in 1998 and
$0.7 million in 1999. The decreases are attributable to the exchange of
approximately $48.7 million of the 9% convertible subordinated notes issued in
the second quarter of 1997 for Series A preferred stock on May 5, 1998. In
addition, the outstanding balance of loans needed to finance the purchase of
property and equipment was reduced in May 1998, resulting in a subsequent
reduction in interest expense. Due to the issuance of the 8% convertible
subordinated notes in December 1999, Hybridon's interest expense will increase
beginning in 2000.
Restructuring Charge
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 terminated employees and (iv) the write down of
assets to net realizable value.
Net Loss
As a result of the above factors, Hybridon incurred net losses from
operations before extraordinary items of $69.5 million in 1997, $26.0 million in
1998 and $10.5 million in 1999. Hybridon had extraordinary income of $8.9
million in 1998 resulting from the conversion of $48.7 million principal amount
of its 9% notes to Series A preferred stock in the second quarter of 1998. In
accordance with Statement of Financial Accounting Standards 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 offered 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 extraordinary gain, Hybridon's net loss was reduced to $17.1 million for
1998.
Hybridon had recorded preferred stock dividends on the Series A
convertible preferred stock of $2.7 million and $4.2 million in 1998 and 1999,
respectively, resulting in a net loss applicable to common stockholders of $19.8
million and $14.7 million for 1998 and 1999, respectively. The net loss
applicable to common stockholders for 1997 was $69.5 million.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
General
Since inception, Hybridon has incurred significant losses, which it has
funded through the issuance of equity securities, debt issuances, sales by
Hybridon Specialty Products, and through research and development collaborations
and licensing arrangements.
During the year ended December 31, 1999, Hybridon utilized
approximately $8.6 million to fund operating activities and approximately $9,000
for capital expenditures. The primary use of cash for operating activities was
to fund Hybridon's loss of $10.5 million. Hybridon expects to purchase a minimal
amount of capital equipment in 2000 as part of its effort to conserve cash
resources.
Cash Resources
Hybridon had cash and cash equivalents of $2.6 million at December 31,
1999. However, since that date, Hybridon has spent a portion of such cash
resources and continues to have substantial obligations to lenders, real estate
landlords, trade creditors and others. On March 27, 2000, Hybridon's obligations
included $1.3 million principal amount of 9% notes, a $6.0 million loan with
Forum Capital Markets, LLC and others (collectively, the "Lenders"),
approximately $7.7 million in 8% convertible notes and accrued interest as
described below, and approximately $1.3 million of accounts payable. 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. The note to the
Lenders contains certain financial covenants that require Hybridon to maintain
minimum tangible net worth and minimum liquidity requirements. Hybridon
currently meets the minimum liquidity requirements, but is not in compliance
with the minimum tangible net worth requirement. However, the Lenders have
granted Hybridon a waiver of compliance with the minimum tangible net worth and
the minimum liquidity requirements at December 31, 1999 and have agreed not to
require that Hybridon comply with those requirements for any periods commencing
January 1, 2000 through March 31, 2000.
Hybridon sold an aggregate of $1,500,000 principal amount of promissory
notes to E. Andrews Grinstead, III, Hybridon's Chief Executive Officer, at face
value during September and November of 1999. These notes accrued interest at 12%
per annum and in December 1999 were converted into 8% notes due 2002. Hybridon
also sold an aggregate of approximately $525,000 of debt to purchasers in a
private placement transaction in October and November 1999; as of December 13,
1999, this debt automatically converted into 8% notes.
On December 13, 1999, Hybridon sold an aggregate of an additional $4.1
million principal amount of 8% notes to purchasers in a private placement
transaction. At December 31, 1999, including the 8% notes issued upon conversion
of the debt issued to Mr. Grinstead and other purchasers, the principal amount
of 8% notes outstanding was $6.1 million. After the financing was completed in
the first quarter of 2000, the principal amount of 8% notes outstanding,
including financing costs and accrued interest, was approximately $7.7 million.
The terms of the offering were as follows: (a) three-year term; (b) interest
rate of 8%, payable semi-annually in arrears; (c) interest payable in cash or in
additional notes, at Hybridon's option; (d) convertible into common stock at
$0.60 per share; (e) prepayable by Hybridon, in whole or in part, at any time in
cash; (f) if prepaid at Hybridon's election, Hybridon will issue a number of
warrants to purchase common stock equal to the number of shares into which the
amount prepaid was convertible, with a $0.60 strike price; and (g) secured by
substantially all assets. The securities offered have not been registered under
the Securities Act and may not be offered or sold in the U.S. absent
registration or an applicable exemption from registration requirements.
In connection with the offering of these notes, the Lenders entered
into a Subordination and Intercreditor Agreement with Hybridon and the
representative of the purchasers of these notes whereby, among other things,
they agreed to subordinate their loan to the notes, subject to certain
conditions. Also in connection with this offering, Hybridon agreed to issue
warrants to purchase an aggregate of 2.75 million shares of Hybridon's common
stock to designees of Pecks and Forum. These warrants are exercisable from
December 31, 2000 until December 31, 2002 at $.60 per share.
The 8% notes permit the noteholders' representative to declare an event
of default, among other things, if Hybridon fails to maintain, as of the last
day of any calendar month, consolidated cash on hand (and cash equivalents and
marketable securities) of at least $1.5 million. As of February 29, 2000,
Hybridon met this requirement, and expects that it will meet this requirement as
of March 31, 2000. However, if Hybridon is unable to raise additional funding
during 2000, Hybridon will be unable to maintain compliance with the minimum
cash requirement. If an event of default under the notes were declared and not
cured in the requisite time period, then the respective representatives of the
8%
27
<PAGE>
noteholders and the creditor's committee, made up of representatives of Pecks,
Forum and Pillar, to represent the creditor's committee, could declare their
debt securities immediately due and payable, in which case Hybridon may be
required to sell substantial assets to raise funds for this repayment and, if
the proceeds of those sales together with any other funds available are
insufficient, Hybridon could be forced to declare bankruptcy.
Hybridon's existing cash resources are expected to be sufficient to
fund operations only until June 2000. However, if the noteholders force default
proceedings due to events of non-compliance, Hybridon's existing cash resources
may not be sufficient to fund operations into June 2000. Hybridon's ability to
continue operations beyond that time will depend on its success in obtaining new
funding, either through additional financing or new partnerships or
collaborations with third parties, that may require it to relinquish rights to
certain of its technologies, product candidates or products which it would
otherwise pursue on its own. If Hybridon is unable to obtain substantial
additional new funding by June 2000, Hybridon will have to terminate operations
or seek relief under applicable bankruptcy laws.
Even though Hybridon has obtained sufficient cash to fund its
operations until June 2000, 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 throughout 2000 and
beyond. 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 guarantee can be given that
additional funds will be available to fund operations for the balance of 2000 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 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.
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 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 was obligated to issue an additional
300,000 shares in connection with this transaction. For more information about
this transaction, see note 10(b) 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 obligations that
required Hybridon to maintain a minimum worth and a minimum liquidity and
prohibited the payment of dividends. The note was payable in 59 equal
installments of $62,500 beginning 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. Effective November 20, 1998, the Lenders purchased the loan from
the bank. Forum and Pecks are affiliates of two members of Hybridon's board of
directors. In connection with
28
<PAGE>
this purchase, Forum and Pecks 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 option of Forum and Pecks, 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 obligation 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.
Facility Leases
As of December 31, 1999, Hybridon had future operating lease
commitments of approximately $6.9 million through 2007 for its existing leases.
Net Operating Loss Carryforwards
As of December 31, 1999, Hybridon had approximately $228.7 million and
$4.2 million of net operating loss and tax credit carryforwards, respectively.
The Tax Reform Act of 1986 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, 1999, 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.
RISK FACTORS
The following important factors, among others, could cause actual
results to differ materially from those contained in forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.
Hybridon's Financial Condition and Need for Substantial Additional Funding
If Hybridon does not secure additional funding by June, 2000, Hybridon will be
forced to cease doing business or file for bankruptcy.
If by June 2000 Hybridon does not secure additional funding, whether
through debt or equity financing, the sale of assets, establishment of a
suitable partnership or collaboration with a third party, or a combination
thereof, Hybridon could be forced to cease doing business or file for
bankruptcy, and shareholders may lose their entire investment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Shareholders could be substantially diluted if Hybridon issues shares to obtain
financing Hybridon needs.
In order to obtain the funds Hybridon currently needs to continue
Hybridon's operations, and the additional funds Hybridon will need in the
future, Hybridon may need to issue shares of common stock or debt or equity
securities convertible into shares of common stock. Hybridon will probably need
to issue a significant number of shares in order to raise sufficient funds to
pay Hybridon's creditors, meet covenants of Hybridon's credit facility and
continue Hybridon's operations. This will result in substantial dilution to
shareholders investment.
29
<PAGE>
Hybridon is not in compliance with some of the covenants in Hybridon's loan
agreement and note offering. If our lenders and noteholders foreclose, Hybridon
will have few, or no, assets to distribute to Hybridon shareholders.
Hybridon has taken out a $6 million loan and has completed a $7.7
million 8% note offering, both of which are secured by substantially all of
Hybridon's assets. The loan and the 8% notes are owned in part by Hybridon
affiliates. The loan agreement for the $6 million loan requires us to maintain
liquidity of $2,000,000 and a net worth of $6,000,000. The 8% notes require
Hybridon to maintain liquidity of $1,500,000. Hybridon believes that it
currently meets the liquidity requirements, but Hybridon does not meet the net
worth requirement. Hybridon does not expect to be able to comply with these
requirements in the future unless it is able to obtain significant additional
financing. Hybridon's lenders have in the past waived Hybridon's compliance with
these requirements, but they may not be willing to do so in the future. If
Hybridon's lenders and noteholders decline to give Hybridon waivers, Hybridon
will be in default and they will have the right to accelerate the repayment date
on the loan and the 8% notes and foreclose on Hybridon's assets. Foreclosure
will likely force Hybridon to cease doing business or file for bankruptcy. If
this happens, and Hybridon is liquidated, there will be few or no assets
available for distribution to Hybridon's shareholders. Since the debt is owned
in part by Hybridon's affiliates, the court may treat the loan as a capital
contribution or as a junior debt, in which case there may be assets available
for distribution to Hybridon's shareholders, along with the lenders.
Hybridon expects operating losses to continue into the future.
As of December 31, 1999, Hybridon has incurred an accumulated deficit
of approximately $253 million. Hybridon expects to continue incurring operating
losses until revenues from the sale of any drugs that Hybridon succeeds in
developing exceed Hybridon's research and development and administrative costs.
Assuming Hybridon is able to obtain adequate funding to continue operations,
Hybridon will need to spend substantial additional amounts on research and
development, including preclinical studies and clinical trials, in order to
obtain the necessary regulatory approvals. If Hybridon obtains regulatory
approval, Hybridon will also need to spend substantial amounts on sales and
marketing efforts. See "Business--Anticipated and Potential Costs."
Hybridon's Operations
Hybridon may not succeed in developing a commercially viable drug.
Hybridon does not currently have any drugs on the market and the drug
candidates Hybridon is working on are still in development. These drugs have not
yet been proven to be effective in humans. For example, Hybridon's drug closest
to commercialization, GEM(R) 231, is still in Phase II clinical trials. All of
Hybridon's other drug candidates have not yet begun human testing. Historically,
drug candidates have a low overall probability of being commercialized, but that
probability increases as the drug progresses through the various development
stages. 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 its drug candidates cannot be successfully developed,
or if Hybridon is unable to obtain the necessary regulatory approval, it will
not be able to generate the revenues from the sale of drugs that it would need
in order to be profitable.
Hybridon has many competitors, and may not be able to compete successfully
against them.
Several companies, in particular Isis Pharmaceuticals, Inc. and Genta
Incorporated, are also in the business of developing antisense drugs. Isis has
received the approval of the U.S. Food and Drug Administration, or "FDA," for
Vitravene. ISIS is currently marketing this drug for the treatment of CMV
retinitis, and has several other drugs in clinical testing for the possible
treatment of cancer, including ISIS 3521 and 2503. Genta is testing G3139 in
humans, also for the treatment of cancer. These drugs candidates are further
along in clinical testing than Hybridon's cancer drug GEM(R) 231. Other
companies have antisense drugs in preclinical and clinical development,
including Inex and AVI Biopharma.
In general, the human health care products industry is extremely
competitive. Many drugs are currently marketed for the treatment of cancer, such
as Taxol, Carboplatin, Taxotere and Camptosar. While it is unlikely that GEM(R)
231 will compete against these drugs, it may be used in combination with them.
GEM(R) 231 and other Hybridon antisense drugs may not, however, be able to
capture sufficient market share to be profitable.
Furthermore, biotechnology and related pharmaceutical technologies have
undergone rapid and significant change and Hybridon expects that the
technologies associated with biotechnology research and development will
continue to develop rapidly. Hybridon's prospects depend in large part on
Hybridon's ability to compete with these
30
<PAGE>
technologies. Any compounds, drugs or processes that Hybridon develops may
become obsolete before it recovers the expenses incurred in developing them.
Hybridon's ability to compete will suffer if it is unable to protect its patent
rights and trade secrets or if Hybridon infringes the proprietary rights of
third parties.
Hybridon's success will depend to a large extent on its ability to
obtain U.S. and foreign patent protection for drug candidates and processes,
preserve trade secrets and operate without infringing the proprietary rights of
third parties.
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 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, patents Hybridon owns or
licenses may be challenged, infringed upon, invalidated, found to be
unenforceable, or circumvented by others, and its 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 seeks to protect trade secrets and other unpatented
proprietary information, in part by means of confidentiality agreements with its
collaborators, employees, and consultants. If any of these agreements are
breached, Hybridon may be without adequate remedies. Also, Hybridon's trade
secrets may become known or be independently developed by competitors.
Hybridon's Securities
Because "penny stock" rules apply to trading in Hybridon's common stock,
shareholders may find it difficult to sell their shares of Hybridon stock.
Hybridon's common stock is a "penny stock," as it is not listed on an
exchange and trades at less than $5.00 a share. Broker-dealers who sell penny
stocks must provide purchasers of these stocks with a standardized
risk-disclosure document prepared by the SEC. It provides information about
penny stocks and the nature and level of risks involved in investing in the
penny-stock market. A broker must also give a purchaser, orally or in writing,
bid and offer quotations and information regarding broker and salesperson
compensation, make a written determination that the penny stock is a suitable
investment for the purchaser, and obtain the purchaser's written agreement to
the purchase. The penny stock rules may make it difficult for shareholders to
sell their shares of Hybridon stock. Because of the rules, there is less trading
in penny stocks. Also, many brokers choose not to participate in penny stock
transactions.
Certain existing stockholders hold a substantial portion of our stock, and
consequently could control most matters requiring approval by stockholders.
Hybridon's officers, directors and principal stockholders own or
control more than 60% of Hybridon's common stock on a fully-diluted basis. As a
result, these stockholders, acting together, have the ability to control most
matters requiring approval by the stockholders. This concentration of ownership
may have the effect of delaying or preventing a change in control of Hybridon.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Historically, Hybridon's primary exposures have been related to
nondollar-denominated operating expenses in Europe. As of December 31, 1999,
Hybridon's assets and liabilities related to nondollar-denominated currencies
were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required to be filed hereunder are filed as
APPENDIX A hereto, are listed under Item 14(a), and are incorporated herein by
this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF
HYBRIDON
The response to this item is contained in part under the caption
"Executive Officers and Significant Employees of Hybridon" in Part I of this
Annual Report on Form 10-K and in part in Hybridon's Proxy Statement for the
Annual Meeting of Stockholders to be held on June 12, 2000 (the "2000 Proxy
Statement"), under the caption "Election of Directors," which section is
incorporated herein by this reference. The 2000 Proxy Statement will be filed
with the Securities and Exchange Commission (the "Commission") not later than
120 days after the fiscal year covered by this Annual Report on Form 10-K.
Officers are elected on an annual basis and serve at the discretion of
the Board of Directors.
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
The response to this item is contained in the 2000 Proxy Statement
under the caption "Election of Directors," which section is incorporated herein
by this reference. The 2000 Proxy Statement will be filed with the Commission
not later than 120 days after the fiscal year covered by this Annual Report on
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the 2000 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management,"
which section is incorporated herein by this reference. The 2000 Proxy Statement
will be filed with the Commission not later than 120 days after the fiscal year
covered by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the 2000 Proxy Statement
under the caption "Certain Relationships and Related Transactions," which
section is incorporated herein by this reference. The 2000 Proxy Statement will
be filed with the Commission not later than 120 days after the fiscal year
covered by this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. Reference is made to the Index to Consolidated
Financial Statements under Item 8 of this Annual Report on Form 10-K.
(2) Hybridon is not filing any financial statement schedules as part of
this Annual Report on Form 10-K because they are not applicable or
the required information is included in the financial statements or
notes thereto.
(3) The list of Exhibits filed as a part of this Annual Report on Form
10-K are set forth on the Exhibit Index immediately preceding such
Exhibits, and is incorporated herein by this reference.
(b) Reports on Form 8-K. During the fourth quarter of 1999, Hybridon did not
file any reports on Forms 8-K.
(c) Exhibits required by Item 601 of Regulation S-K with each management
contract, compensatory plan or arrangement required to be filed
identified.
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Certificate of Incorporation of the Registrant, as
amended.
3.2(2) Amended and Restated Bylaws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Preferred
Stock.
32
<PAGE>
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.
4.8 Form of Notes due 2002 of Hybridon.
+10.1(2) License Agreement dated February 21, 1990 and restated 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.
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.
33
<PAGE>
++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.
10.34 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.
34
<PAGE>
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 of 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 Licensing Agreement dated March 12, 1999 by and between
Hybridon, Inc. and Integrated DNA Technologies, Inc.
+++10.48(13) Licensing Agreement dated September 7, 1999 by and between
Hybridon, Inc. and Genzyme Corporation.
10.49(13) Form of loan agreement relating to a loan in the amount of
$454,901 made to Hybridon, Inc. in October 1999 by various
parties.
10.50(13) Form of promissory note relating to a loan in the amount of
$454,901 made to Hybridon, Inc. in October 1999 by various
parties.
10.51(13) Loan Agreement dated as of September 1, 1999, between
Hybridon, Inc. and E. Andrews Grinstead, III.
10.52(13) Term promissory note in the amount of $500,000 dated September
1, 1999, by Hybridon, Inc. in favor of E. Andrews Grinstead,
III.
10.53(13) Term promissory note in the amount of $500,000 dated September
27, 1999, by Hybridon, Inc. in favor of E. Andrews Grinstead,
III.
10.54(14) Subordination and Intercreditor Agreement by and among
Hybridon, the holders of Notes due 2002, Forum and entities
advised by Pecks, dated as of December 7, 1999.
10.55(14) Letter Agreement between Hybridon and Pillar Investments dated
December 10, 1999.
35
<PAGE>
10.56(14) Form of Subscription Agreements dated as of December 13, 1999,
by and among Hybridon and the purchasers of Notes due 2002.
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, 1999
- ------------------------
(1) Incorporated by reference to Exhibits to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997.
(2) Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 33-99024).
(3) Incorporated by reference to Exhibit 9(a)(1) to the
Registrant's Schedule 13E-4 dated February 6, 1998.
(4) Incorporated by reference to Exhibits to the Registrant's
Current Report on Form 8-K dated April 2, 1997.
(5) Incorporated by reference to Exhibits to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996.
(6) Incorporated by reference to Exhibits to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995.
(7) Incorporated by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31,
1998.
(8) Incorporated by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30,
1998.
(9) Incorporated by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended September
30, 1998.
(10) Incorporated by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30,
1997.
(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.
(13) Incorporated by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended September
30, 1999.
(14) Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 33-99024).
+ Confidential treatment granted as to certain portions, which
portions are omitted and filed separately with the Commission.
36
<PAGE>
++ 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.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this
30th day of March 2000.
Hybridon, Inc.
/s/ Sudhir Agrawal
--------------------------
Sudhir Agrawal, D. Phil.
President and Acting Chief
Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Hybridon, Inc., hereby
severally constitute and appoint Sudhir Agrawal and Robert G. Andersen, and each
of them singly, our true and lawful attorneys, with full power to them and each
of them singly, to sign for us in our names in the capacities indicated below,
all amendments to this Annual Report on Form 10-K, and generally to do all
things in our names and on our behalf in such capacities to enable Hybridon,
Inc. to comply with the provisions of the Securities Exchange Act of 1934, as
amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signatures Titles Date
- ---------- ------ ----
/s/ Sudhir Agrawal President, Acting March 30, 2000
- ----------------------- Chief Executive
Sudhir Agrawal, D. Phil. Officer (Principal
Executive Officer)
and Director
/s/ James B. Wyngaarden Chairman of the March 30, 2000
- ----------------------- Board of Directors
James B. Wyngaarden, M.D.
/s/ Robert G. Andersen Chief Financial March 30, 2000
- ---------------------- Officer and Vice
Robert G. Andersen President of Operations
and Planning
/s/ Nasser Menhall Director March 30, 2000
- ------------------
Nasser Menhall
/s/ Paul C. Zamecnik Director March 30, 2000
- --------------------
Paul C. Zamencnik, M.D.
/s/ Youssef El-Zein Director March 30, 2000
- -------------------
Youssef El-Zein
/s/ Arthur W. Berry Director March 30, 2000
- -------------------
Arthur W. Berry
/s/ Harold L. Purkey Director March 30, 2000
- --------------------
Harold L. Purkey
/s/ Camille Chebeir Director March 30, 2000
- -------------------
Camille Chebeir
38
<PAGE>
INDEX
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
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, 1998 and 1999 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, 1999. These consolidated 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 auditing standards generally accepted
in the United States. 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, 1998 and 1999 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred significant losses which it has funded through the issuance of debt and
equity securities and through research and development collaborations and
licensing agreements. The Company expects that its existing financial resources
will fund operations only until June 2000. As a result, 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 25, 2000
F-2
<PAGE>
Hybridon, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
1998 1999
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 5,607,882 $ 2,551,671
Accounts receivable 1,175,441 1,218,142
Prepaid expenses and other current assets 110,827 101,914
--------------- ---------------
Total current assets 6,894,150 3,871,727
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 11,127,035 11,127,035
Laboratory equipment and other 11,432,435 9,943,170
--------------- ---------------
22,559,470 21,070,205
Less--Accumulated depreciation and amortization 13,788,979 14,691,883
-------------- ---------------
8,770,491 6,378,322
OTHER ASSETS:
Deferred financing costs and other assets 612,374 1,415,149
Note receivable from officer 258,650 270,050
--------------- ---------------
871,024 1,685,199
$ 16,535,665 $ 11,935,248
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,070,951 $ 6,080,746
Accounts payable 2,368,163 1,622,694
Accrued expenses 4,068,679 2,505,988
--------------- ---------------
Total current liabilities 12,507,793 10,209,428
--------------- ---------------
LONG-TERM DEBT, NET OF CURRENT PORTION 473,094 392,348
--------------- ---------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 1,306,000 1,306,000
--------------- ---------------
8% CONVERTIBLE NOTES PAYABLE - 6,099,775
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 11)
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 and 661,856 shares at December 31, 1998
and 1999, respectively
(Liquidation preference of $67,224,000 at December 31, 1999) 6,413 6,618
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding--15,304,825 and 16,260,722 shares at December 31, 1998
and 1999, respectively 15,305 16,261
Additional paid-in capital 241,632,024 247,813,331
Accumulated deficit (238,447,837) (253,183,130)
Deferred compensation (957,127) (725,383)
--------------- ---------------
Total stockholders' equity (deficit) 2,248,778 (6,072,303)
--------------- ---------------
$ 16,535,665 $ 11,935,248
=============== ===============
</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 December 31,
1997 1998 1999
REVENUES:
<S> <C> <C> <C>
Product and service $ 1,876,862 $ 3,253,879 $ 6,186,136
Research and development 945,000 1,099,915 600,000
Royalty and other income 48,000 - -
Interest 1,079,122 148,067 214,745
--------------- --------------- ---------------
3,948,984 4,501,861 7,000,881
--------------- --------------- ---------------
OPERATING EXPENSES:
Research and development 46,827,915 20,977,370 13,090,381
General and administrative 11,026,748 6,572,502 3,663,811
Interest 4,535,647 2,932,362 749,731
Restructuring 11,020,000 - -
--------------- --------------- ---------------
Total operating expenses 73,410,310 30,482,234 17,503,923
--------------- --------------- ---------------
Loss before extraordinary item (69,461,326) (25,980,373) (10,503,042)
EXTRAORDINARY ITEM:
Gain on exchange of 9% convertible subordinated notes payable - 8,876,685 -
--------------- --------------- ---------------
Net loss (69,461,326) (17,103,688) (10,503,042)
ACCRETION OF PREFERRED STOCK DIVIDENDS - 2,689,048 4,232,251
--------------- --------------- ---------------
Net loss applicable to common stockholders $ (69,461,326) $ (19,792,736) $ (14,735,293)
=============== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss before extraordinary item $ (13.76) $ (2.19) $ (0.66)
Extraordinary item - 0.75 -
--------------- --------------- ---------------
Net loss (13.76) (1.44) (0.66)
Accretion of preferred stock dividends - (0.23) (0.27)
--------------- -------------- --------------
Net loss per share applicable to common stockholders $ (13.76) $ (1.67) $ (0.93)
============== ============== ==============
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON
SHARE 5,049,840 11,859,350 15,810,664
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Hybridon, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible Series A Convertible
Preferred Stock Preferred Stock Common Stock
Number of $.01 Par Number of $.01 Par Number of $.001 Par
Shares Value Shares Value Shares Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 - $ - - $ - 5,029,315 $ 5,029
Issuance of common stock related to the
exercise of stock options - - - - 25,005 26
Issuance of common stock related to the
exercise of warrants - - - - 330 -
Issuance of common stock for services rendered - - - - 5,000 5
Deferred compensation related to grants of
stock options to nonemployees - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
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 - - 510,504 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 - - 114,285 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 of issuance cost of
$566,167 - - - - 3,157,322 3,157
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 - - 16,470 165 - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 - - 641,259 6,413 15,304,825 15,305
Issuance of common stock to placement agents - - - - 460,000 460
Conversion of Series A convertible preferred
stock into common stock - - (21,076) (211) 495,897 496
Issuance of warrants in connection with notes
payable - - - - - -
Accretion and issuance of Series A convertible
preferred stock dividends - - 41,673 416 - -
Fair value of stock options to nonemployees - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 - $ - 661,856 $ 6,618 16,260,722 $ 16,261
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Paid-in Accumulated Deferred Equity
Capital Deficit Compensation (Deficit)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $173,247,476 $(149,193,775 $(1,203,926) $22,854,804
Issuance of common stock related to the
exercise of stock options 86,300 - - 86,326
Issuance of common stock related to the
exercise of warrants 9,075 - - 9,075
Issuance of common stock for services rendered 146,869 - - 146,874
Deferred compensation related to grants of
stock options to nonemployees 205,978 - (205,978) -
Amortization of deferred compensation - - 316,067 316,067
Net loss - (69,461,326) - (69,461,326)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 173,695,698 (218,655,101) (1,093,837) (46,048,180)
Issuance of Series A convertible preferred
stock and attached warrants in exchange for
conversion of 9% convertible subordinated
notes payable and accrued interest, net of
issuance costs of $1,195,398 38,729,489 - - 38,734,594
Issuance of common stock and attached warrants
in exchange for conversion of accounts
payable and other obligations 5,931,341 - - 5,934,558
Issuance of Series A convertible preferred
stock 7,998,817 - - 7,999,960
Issuance of common stock to placement agent 1,194,800 - 1,195,398
Issuance of common stock and attached warrants
in exchange for conversion of convertible
notes payable, net of issuance cost of
$566,167 4,230,676 - - 4,233,833
Issuance of common stock and attached
warrants, net of issuance costs of $1,069,970 6,873,453 - - 6,876,676
Issuance of common stock for services rendered 93,700 - - 93,750
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 - - 85,433
Accretion and issuance of Series A convertible
preferred stock dividends 2,688,883 (2,689,048) - -
Amortization of deferred compensation - - 246,444 246,444
Net loss - (17,103,688) - (17,103,688)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 241,632,024 (238,447,837) (957,127) 2,248,778
Issuance of common stock to placement agents 999,540 - - 1,000,000
Conversion of Series A convertible preferred
stock into common stock (285) - - -
Issuance of warrants in connection with notes
payable 547,328 - - 547,328
Accretion and issuance of Series A convertible
preferred stock dividends 4,231,835 (4,232,251) - -
Fair value of stock options to nonemployees 402,889 - - 402,889
Amortization of deferred compensation - - 231,744 231,744
Net loss - (10,503,042) - (10,503,042)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $247,813,331 $(253,183,130 $ (725,383) $(6,072,303)
============ ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Hybridon, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (69,461,326) $ (17,103,688) $ (10,503,042)
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) -
Loss on disposal of property and equipment - - 46,500
Depreciation and amortization 4,488,719 4,057,286 2,355,062
Noncash interest expense - - 65,485
Issuance of common stock for services rendered 146,874 93,750 -
Compensation from grant of stock options 316,067 246,444 634,633
Amortization of deferred financing costs 479,737 160,813 123,140
Noncash portion of restructuring charge 1,255,000 - -
Changes in assets and liabilities-
Accounts receivable 44,194 (645,739) (42,701)
Prepaid expenses and other current assets 539,499 894,998 8,913
Note receivable from officer 70,728 (11,400) (11,400)
Accounts payable 3,987,398 (3,059,002) (745,469)
Accrued expenses 7,071,532 1,565,806 (562,691)
Deferred revenue (86,250) - -
-------------- -------------- --------------
Net cash used in operating activities (51,147,828) (22,677,417) (8,631,570)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments 3,785,146 - -
Purchases of property and equipment (7,509,755) (471,949) (9,395)
Proceeds from sale of property and equipment - 714,400 -
Proceeds from sale of real estate partnership - 5,450,000 -
-------------- -------------- --------------
Net cash (used in) provided by investing activities (3,724,609) 5,692,451 (9,395)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net 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 86,326 - -
Net proceeds from issuance of common stock - 6,876,676 -
Proceeds from notes payable - 6,000,000 -
Proceeds from issuance of convertible notes payable and
warrants 50,000,000 4,233,833 4,534,290
Proceeds from related party notes payable - - 1,500,000
Proceeds from issuance of common stock related to stock
warrants 9,075 - -
Proceeds from sale/leaseback of fixed assets 1,205,502 - -
Payments on long-term debt (1,564,268) (7,296,646) (70,951)
Increase in deferred financing costs (2,820,790) (400,000) (378,585)
(Increase) decrease in restricted cash and other assets (2,474,948) 2,976,823 -
-------------- -------------- --------------
Net cash provided by financing activities 44,440,897 20,390,646 5,584,754
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,431,540) 3,405,680 (3,056,211)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,633,742 2,202,202 5,607,882
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,202,202 $ 5,607,882 $ 2,551,671
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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. 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. As of December 31,
1999, the Company had cash and cash equivalents of approximately $2.6
million. The Company expects that such resources will fund operations
only until June 2000. As a result, there is substantial doubt concerning
its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company is currently seeking debt or equity financing in an amount
sufficient to support its operations through the end of 2000. If the
Company is unable to obtain this sufficient amount of additional funding
by June 2000, it will be forced to terminate its operations or seek
relief under applicable bankruptcy law by the end of June 2000.
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.
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
F-7
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
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 approximately 30% interest
in MethylGene, Inc. (MethylGene), and the Company's approximately
40% interest in OriGenix Technologies Inc. (OriGenix) both
Canadian corporations which are accounted for under the equity
method (see Notes 8 and 9, respectively). All material
intercompany balances and transactions have been eliminated in
consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with
maturities of 90 days or less when purchased to be cash
equivalents. Cash and cash equivalents at December 31, 1998 and
1999 consist of the following (at amortized cost, which
approximates fair market value):
1998 1999
Cash and cash equivalents-
Cash and money market funds $ 3,865,365 $ 505,794
Corporate bond 1,742,517 2,045,877
----------- -----------
Total cash and cash
equivalents $ 5,607,882 $ 2,551,671
=========== ===========
(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:
Estimated Useful
Asset Classification Life
Leasehold improvements Life of lease
Laboratory equipment and other 3-5 years
F-8
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
(e) Accrued Expenses
At December 31, 1998 and 1999, accrued expenses consist of the
following:
1998 1999
Restructuring (Note 3) $ 469,485 $ -
Interest 29,385 25,496
Payroll and related costs 1,151,742 753,834
Outside research and clinical costs 797,593 452,633
Professional fees 149,957 165,000
Contingent stock (Notes 5(a) and 10(b)) 1,000,000 -
Other 470,517 1,109,025
----------- -----------
$ 4,068,679 $ 2,505,988
=========== ===========
(f) Reclassifications
Certain amounts in the prior periods consolidated financial
statements have been reclassified to conform with the current
periods presentation.
(g) Revenue Recognition
The Company has recorded revenue under the consulting and research
agreements discussed in Notes 6 and 8. Revenue is recognized as
earned on the 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 1998 and 1999 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-9
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
(j) Comprehensive Loss
The Company applies Statement of Financial Accounting Standards
(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 2,404,561,
27,774,883 and 32,854,153 for 1997, 1998 and 1999, 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.
(m) New Accounting Pronouncement
In March 1999, the Financial Accounting Standards Board (FASB)
issued a proposed interpretation, Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of
APB Opinion No. 25 (the Proposed Interpretation). The Proposed
Interpretation would clarify the application of APB 25 in certain
situations, as defined. The Proposed Interpretation would be
effective upon issuance (expected to be in early 2000) but would
cover certain events that occur after December 15, 1998. To the
extent that events covered by this Proposed Interpretation occur
during the period after December 15, 1998, but before issuance of
the final interpretation, the effects of applying this Proposed
Interpretation would be recognized on a prospective basis from the
effective date. Accordingly, upon initial application of the final
interpretation, (a) no adjustments would be made to
F-10
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
financial statements for periods before the effective date and (b)
no expense would be recognized for any additional compensation
cost measured that is attributable to periods before the effective
date. The Company expects that the adoption of the Proposed
Interpretation will affect the accounting for stock options
repriced during fiscal year 1999 (see Note 10(f)).
The Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition, in December 1999. The
Company is required to adopt this new accounting guidance through
a cumulative charge to operations, in accordance with Accounting
Principles Board Opinion (APB) No. 20, Accounting Changes, no
later than the second quarter of fiscal 2000. The Company believes
that the adoption of the guidance provided in SAB No. 101 will not
have a material impact on future operating results.
(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 selected programs unrelated to its four core
advanced chemistry antisense drug research development programs. In
connection with the reduction in programs, the Company accrued
termination fees related to research contracts and wrote off assets
related to programs that were 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 since July 1997 and
closed its operations in Paris, France, and terminated 11 employees at
that location.
In connection with the restructuring, the Company entered into different
subleasing arrangements. During 1997, the Company subleased substantial
portions of each of its facilities in Cambridge, Massachusetts,
(including a portion of its former headquarters located at 620 Memorial
Drive, the Cambridge Lease). The Company incurred expenses relating to
these subleases for broker fees and renovation expenses incurred in
preparing the Cambridge Lease space for the new tenant. In addition, the
Company accrued the estimated lease loss of subleasing the Cambridge
Lease which were vacated during 1998. The Company also subleased its
office in Paris, France, and accrued the estimated lease loss.
F-11
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
The following are the significant components of the $11,020,000 charge
for restructuring (in thousands):
Restructuring
Charge
Estimated loss on facility leases $ 6,372
Employee severance, benefits and related costs 2,738
Write-down of assets to net realizable value 946
Termination costs of certain development programs 964
------------
$ 11,020
The total cash impact of the restructuring was approximately $5,165,000,
and was paid as of December 31, 1999.
(4) NOTE RECEIVABLE FROM OFFICER
At December 31, 1998 and 1999 the Company has a note receivable and
accrued interest from an officer, of $258,650 and $270,050, respectively.
The note has an interest rate of 6.0% per annum and matures in April
2001.
(5) LONG-TERM DEBT
Future minimum principal payments due under various notes payable,
excluding the 9% convertible subordinated notes (the 9% Notes) due April
1, 2004 and the 8% convertible subordinated notes (the 8% Notes) due
November 30, 2002, are as follows at December 31, 1999:
December 31, Amount
2000 $ 6,080,746
2001 91,892
2002 104,576
2003 119,010
2004 76,870
--------------
Total long-term debt obligations 6,473,094
Less--Current portion 6,080,746
--------------
$ 392,348
F-12
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
(a) Note Payable
During November 1998, the Company entered into a $6,000,000 note
payable with Forum Capital Markets, LLC (Forum) and certain
investors associated with Pecks Management Partners Ltd.
(collectively, the Lenders). The terms of the note payable are as
follows: (i) the maturity is November 30, 2003; (ii) the interest
rate is 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 Lender's 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 December 1, 1999, the Company received a waiver for
noncompliance with the minimum tangible net worth covenant
effective December 31, 1999. In addition, the Lenders also agreed
to waive compliance with all covenants for the period January 1,
2000 through March 31, 2000. The Company has classified the
outstanding balance of $6,000,000 at December 31, 1999, 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
issuance of the note payable, Forum received $400,000, which was
reinvested by Forum to purchase 160,000 shares of common stock
with 40,000 attached warrants at an exercise price of $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. In addition, Forum received warrants to
purchase 133,333 shares of common stock of the Company at $3.00
per share. The Company computed 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.
(b) Note Payable to Landlord
In December 1994, the Company issued a $750,000 promissory note to
its landlord to fund specific construction costs associated with
the development of its manufacturing plant in Milford,
Massachusetts. The promissory note bears interest at 13% per annum
and is to be paid in equal monthly installments of principal and
interest over the remainder of the 10-year lease term.
(c) Capital Lease Obligations
The Company 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
10 (b)).
F-13
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
(d) 9% Convertible Subordinated Notes Payable
On April 2, 1997, the Company issued $50,000,000 of 9% Convertible
Subordinated Notes Payable (9% Notes). Under the terms of the 9%
Notes, the Company must make semiannual interest payments on the
outstanding principal balance through the maturity date of April
1, 2004. If the 9% Notes are converted prior to April 1, 2000, the
noteholders are entitled to receive accrued interest from the date
of the most recent interest payment through the conversion date.
The 9% Notes are subordinate to substantially all of the Company's
existing indebtedness. The 9% Notes are 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 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 May 5, 1998, holders of $48,694,000 of principal and $2,361,850
of accrued interest tendered such principal and accrued interest
on the 9% Notes 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 10(b)), and warrants to purchase
common stock issued by the Company.
(e) 8% Convertible Notes Payable
In December 1999, the Company completed an offering of the 8%
Convertible Notes Payable (8% Notes). As of December 31, 1999, the
Company had received approximately $5.7 million in principal with
respect to the 8% Notes. Subsequent to December 31, 1999, the
Company received approximately an additional $1.2 million in
principal of 8% Notes. In connection with the closing of the 8%
Notes in December, the Company converted the outstanding balance
of the promissory notes payable to the Company's Chief Executive
Officer into 8% Notes (see Note 5(f)). Under the terms of the 8%
Notes, the Company must make semiannual interest payments on the
outstanding principal balance through the maturity date of
November 30, 2002. The 8% Notes are convertible at any time prior
to the maturity date at a conversion price equal to $0.60
F-14
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
per share of common stock (the Conversion Ratio), subject to
adjustment under certain circumstances, as defined. If the 8%
Notes are prepaid before the maturity date, all noteholders are
entitled to receive a warrant to purchase the number of shares of
common stock equal to the number of shares of common stock that
would be issued using the Conversion Ratio.
In connection with the 8% Notes, the Company must comply with
certain covenants, including making all payments of interest when
due and maintaining consolidated cash balances of at least $1.5
million as of the last day of any calendar month. If an event of
default occurs, as defined, the noteholders may declare the unpaid
principal and interest due and payable immediately. If the Company
defaults with respect to payment of interest, the Company will be
required to pay interest at a default rate equal to 12%.
In addition, in connection with the issuance of the 8% Notes, the
holders of the note payable to Lenders (see Note 5(a)) received a
warrant to purchase 2,750,000 shares of the Company's common stock
at $.60 per share. The warrant was granted as consideration to the
Lenders for relinquishing their seniority upon liquidation of the
Company to the holders of the 8% Notes. The Company computed the
value of the warrants to be $547,328, by using the Black-Scholes
option pricing model. The Company has recorded the $547,328 as a
deferred financing cost, which will be amortized to interest
expense over the term of the 8% Notes.
(f) Related Party Notes Payable
During September 1999, the Company entered into two $500,000
promissory notes payable to the Company's Chief Executive Officer
(the Officer). During November 1999, the Company entered into an
additional $500,000 promissory note payable to the Officer. In
connection with the issuance of the 8% Notes (see Note 5(e)), the
Company converted the principal balance, $1,500,000, and accrued
but unpaid interest of $46,502 into 8% Notes.
(6) 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. The Company and Searle were investigating antisense
inhibitors of MDM2, a protein involved in programmed cell death, or
apoptosis. In March 2000, the Company announced that Searle had elected
not to extend its collaboration agreement with the Company.
During 1997, 1998 and 1999, the Company earned $600,000 each year, 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.
(7) LICENSING AGREEMENT
F-15
<PAGE>
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 technology in certain patents and patent
applications. The Company is required to make royalty payments based on
future sales of products employing the technology or falling under claims
of a patent, as well as a specified percentage of sublicense income
received related to the licensed technology. Additionally, the Company is
required to pay an annual maintenance fee through the life of the
patents.
(8) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and certain institutional investors formed a
Quebec company, MethylGene, Inc. (MethylGene) to develop and market
certain compounds and procedures to be agreed upon by the Company and
MethylGene.
The Company has granted to MethylGene exclusive worldwide licenses and
sublicenses in respect of certain technology relating to the methylgene
fields. These fields are defined as (i) antisense compounds to inhibit
DNA methyltransferase for the treatment of cancers; (ii) other methods of
inhibiting DNA methyltransferase for the treatment of any indications;
and (iii) antisense compounds to inhibit a second molecular target other
than DNA methyltransferase for the treatment of cancers, to be agreed
upon by the Company and MethylGene. In 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. During 1998, MethylGene raised
additional proceeds from outside investors that decreased the Company's
interest to 30%.
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 transfer 300,000 shares of MethylGene's Class B
shares to the Company. The Company has placed no value on these shares.
During 1997, 1998 and 1999, the Company recognized $101,894, $1,685,932
and $1,926,888, respectively, of product and service revenue related to
this agreement.
F-16
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
(9) ORIGENIX TECHNOLOGIES, INC.
In January 1999, the Company and certain institutional investors formed a
Montreal company, OriGenix to develop and market drugs for the treatment
of infectious diseases.
The Company received a 49% interest in OriGenix in exchange for certain
research and development efforts previously undertaken by the Company
which were made available to OriGenix. The Company also licensed certain
antisense compounds and other technology to OriGenix. During 1999,
OriGenix raised additional proceeds from institutional investors that
reduced the Company's ownership interest to 40%. The institutional
investors acquired a 51% interest in OriGenix for a total of
approximately $4.0 million. The Company accounted for their investment in
OriGenix under the equity method. During 1999, the Company recognized
$101,290 of product and service revenue from sales to OriGenix.
(10) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Common Stock
The Company has 100,000,000 authorized shares of common stock,
$.001 par value, of which 16,260,722 shares were issued and
outstanding at December 31, 1999.
(b) 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 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 the
F-17
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
common stock on May 5, 1998 with an offsetting amount to accrued
expenses for the shares to be issued. These shares were issued in
1999.
(c) Units Issued to Primedica Corporation
In connection with the unit financing (see Note 10(b)) 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 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
recorded these shares as issued and outstanding during 1998 at par
value. The Company will record the value of these services as the
services are rendered.
(d) Warrants
The Company has the following warrants outstanding and exercisable
for the purchase of common stock at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercise Price Exercisable Exercisable
Expiration Date Shares per Share Shares Price per Share
<S> <C> <C> <C> <C> <C>
January 23, 2000-October 25, 2000 293,679 $ 50.00 293,679 $ 50.00
February 28, 2000 20,000 37.50 20,000 37.50
December 31, 2001 13,000 34.49 13,000 34.49
April 2, 2002-May 4, 2003 8,641,510 2.40-4.25 8,641,510 2.53
December 31, 2002 2,750,000 0.60 - -
November 30, 2003 173,333 3.00 173,333 3.00
------------- -------------
11,891,522 9,141,522
============= =============
Weighted average exercise price per
share $ 3.35 $ 4.19
========== ==========
</TABLE>
(e) Stock Options
In 1990 and 1995, the Company established the 1990 Stock Option
Plan (the 1990 Option Plan) and the 1995 Stock Option Plan (the
1995 Option Plan), respectively, which provide for the grant of
incentive stock options and nonqualified stock options. Options
granted under these plans vest over various periods and expire no
later than 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
F-18
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
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, 1999, options to purchase a total
of 365,379 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, 1999,
options to purchase a total of 497,704 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 400,000 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, 1999, options to
purchase a total of 89,000 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 6,500,000
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
F-19
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
duration of the option (which, in the case of incentive stock
options, may not exceed ten years). As of December 31, 1999,
options to purchase a total of 4,437,466 shares of common stock
remained outstanding under the 1997 Option Plan.
As of December 31, 1999, 2,575,830 options remain available for
grant under the 1995 Option Plan, the Director Plan and the 1997
Option Plan.
Stock option activity for the three years ended December 31, 1999
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, 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
Granted 7,640,650 0.44 - 2.00 0.85
Terminated (5,711,832) 0.44 - 65.60 7.53
------------ ----------------- ------------
Outstanding, December 31, 1999 5,389,550 $0.50 - $ 2.00 $ 0.50
============= ================ ========
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
============= ================ ========
Exercisable, December 31, 1999 2,772,099 $0.50 - $ 2.00 $ 0.50
============= ================ ========
</TABLE>
F-20
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
<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>
$ 0.50 5,385,550 8.39 $ 0.50 2,771,974 $ 0.50
2.00 4,000 9.81 2.00 125 2.00
------------ ---------- ------------ ----------
5,389,550 $ 0.50 2,772,099 $ 0.50
============ ========== ============ ==========
</TABLE>
In 1997 and 1998, the Company recorded $205,978 and $109,734,
respectively, of deferred compensation related to grants to
nonemployees, net of terminations. In accordance with Emerging
Issues Task Force (EITF) No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling Goods or Services, the Company will
measure the value of options as they vest using the Black-Scholes
option pricing model. The Company has recorded compensation
expense of $316,067, $246,444 and $634,633 in 1997, 1998 and 1999,
respectively, related to these grants to nonemployees.
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 APB Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123.
The Company has computed the pro forma disclosures require by SFAS
No. 123 for all stock options and warrants granted to employees
after January 1, 1995 using the Black-Scholes option pricing
model. The assumptions used for the three years ended December 31,
1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Risk free interest rate 6.22% 5.15% 6.12%
Expected dividend yield - -
Expected lives 6 years 6 years 6 years
Expected volatility 60% 60% 60%
</TABLE>
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective assumptions
including expected stock price volatility. Because the Company's
employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
F-21
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
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, 1999 would be as follows:
<TABLE>
<CAPTION>
1997 1998 1999
Net loss to applicable common
<S> <C> <C> <C>
stockholders, as reported $ (69,461,326) $ (19,792,736) $ (14,735,293)
=============== =============== ===============
Pro forma net loss applicable to common
stockholders $ (73,402,170) $ (23,131,304) $ (18,647,864)
=============== =============== ===============
Basic and Diluted net loss per common
shares-
As reported $ (13.76) $ (1.67) $ (0.93)
========= ========= =========
Pro forma $ (14.54) $ (1.95) $ (1.18)
========= ========= =========
</TABLE>
(f) Repricing
In September 1999, the Company's Board of Directors authorized the
repricing of options to purchase 5,251,827 shares of common stock
to $.50 per share, which represented the market value on the date
of the repricing. As discussed in Note 2(m), these options will be
subject to variable plan accounting, as defined in the Proposed
Interpretation, if the Proposed Interpretation is adopted in its
current form. The repriced options have been reflected as grants
and cancellations in the stock option activity for the year ended
December 31, 1999. Because the amount of compensation expense to
be recorded is a function of both the Company's stock price and
employee turnover after the effective date of the Proposed
Interpretation, the Company cannot estimate the ultimate expense
to be recognized.
(g) 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
F-22
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
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.
(h) 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.
(i) 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 shall be valued at $100.00 per
share. During 1999, the Company recorded a total accretion of
$4,232,251 for the dividend on Series A preferred stock and
issued 41,673 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
F-23
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
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
Shares of Series A convertible preferred stock are
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.
During 1999, holders of 21,076 shares of Series A convertible
preferred stock elected to convert their shares into 495,897
shares of the Company's common stock.
Mandatory Conversion
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.
(11) 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.
On February 4, 1994, the Company entered into the Cambridge Lease
which is with a partnership that is affiliated with certain
directors of the Company. The Company vacated the Cambridge,
Massachusetts, facility in June 1998 and moved its corporate
facilities to Milford, Massachusetts (see Note 3).
F-24
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
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
2000 $ 811,000
2001 1,240,000
2002 1,235,000
2003 1,240,000
2004 933,000
Thereafter 1,460,000
--------------
$ 6,919,000
During 1997, 1998 and 1999, facility rent expense net of sublease
revenue was approximately $4,613,000, $3,871,000 and $1,123,000,
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 1997, 1998 and 1999, the Company had
expensed $998,000, $1,300,000 and $336,000, respectively, under
these agreements with related parties.
(c) Other Research and Development Agreements
The Company has entered into consulting and research agreements
with 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, 1999 are approximately as follows:
December 31, Amount
2000 $ 218,000
2001 78,000
----------
$ 296,000
Total fees and expenses under these contracts were approximately
$9,372,000, $2,011,000 and $477,000 during 1997, 1998 and 1999,
respectively.
F-25
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
(d) Employment Agreements
The Company has entered into employment agreements with certain of
its executive officers which provide for, among other things, each
officer's annual salary, cash bonus, fringe benefits, and vacation
and severance arrangements. Under the agreements, the officers are
generally entitled to receive severance payments of two to three
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.
(12) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes. At
December 31, 1999, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately
$228,744,000 and $4,186,000, 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,
1999, 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.
F-26
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
The federal net operating loss carryforwards and tax credit carryforwards
expire approximately as follows:
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 21,366,000 500,000
2019 10,637,000 250,000
---------------- ---------------
$ 228,744,000 $ 4,186,000
================ ===============
As of December 31, 1998 and 1999, the components of the deferred tax
assets are approximately as follows:
1998 1999
Operating loss carryforwards $ 87,243,000 $ 91,498,000
Temporary differences 3,461,000 3,378,000
Tax credit carryforwards 3,936,000 4,186,000
------------ ------------
94,640,000 99,062,000
Valuation allowance (94,640,000) (99,062,000)
------------ ------------
$ - $ -
============ ============
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 1999 was an increase of
approximately $4,422,000.
(13) 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
F-27
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
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 $253,000, $253,000 and $96,000
during 1997, 1998 and 1999, respectively.
(14) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the three years in
the period ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Cash paid during the period for interest $ 3,264,596 $ 1,666,127 $ 753,620
=============== =============== ===============
Purchase of property and equipment under capital leases $ 2,374,502 $ - $ -
=============== =============== ===============
Conversion of preferred stock into common stock $ - $ - $ 496
=============== =============== ===============
Deferred compensation related to grants of stock options
to nonemployees, net of terminations $ 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 $ 4,232,251
=============== =============== ===============
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 $ -
=============== =============== ===============
Issuance of common stock in lieu of services $ - $ - $ 1,000,000
=============== =============== ===============
</TABLE>
F-28
<PAGE>
THE TERMS OF THIS NOTE ARE SUBJECT TO THE TERMS OF A SUBSCRIPTION AGREEMENT AND
AN INTERCREDITOR AGREEMENT, COPIES OF WHICH ARE AVAILABLE FROM HYBRIDON, INC.
(THE "COMPANY"). THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE SECURITIES ACT. ANY SUCH
TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS
AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS.
THE SECURED PARTY (AS DEFINED IN THE SUBSCRIPTION AGREEMENT) IS THE EXCLUSIVE
AGENT OF THE HOLDER OF THIS NOTE WITH RESPECT TO CERTAIN ACTIONS HEREUNDER AND
UNDER THE SUBSCRIPTION AGREEMENT; THE SECURED PARTY, IN ITS SOLE DISCRETION, MAY
TAKE OR FOREBEAR FROM TAKING CERTAIN ACTIONS HEREUNDER AND UNDER THE
SUBSCRIPTION AGREEMENT ON BEHALF OF THE HOLDERS OF NOTES.
HYBRIDON, INC.
No.___
Note due 2002
$---------
[DATE OF ISSUANCE]
Hybridon, Inc., a Delaware corporation, (the "Company"), for
value received, hereby promises to pay to ___________________________ (the
"Holder"), or registered assigns, the principal sum set forth above, with
accrued but unpaid interest thereon at a rate equal to eight percent (8%) per
annum, on November 30, 2002 (the "Maturity Date"). Payment shall be made at such
place as designated by the Company upon surrender of this Note (as defined
below), and shall be in such coin or currency of the United States of America as
at the time of payment shall be legal tender for the payment of public and
private debts. This Note is one of a duly authorized issue of Hybridon, Inc.
Notes due 2002 (individually a "Note" and collectively the "Notes") issued
pursuant to a Subscription Agreement which is available from the Company (the
"Subscription Agreement") and similar agreements. Capitalized terms used herein
without definition have the respective meanings specified therefor in the
Subscription Agreement. The Notes shall be subordinated in right of payment to
all existing and future Operating Indebtedness
<PAGE>
of the Company. The Notes are secured by the Collateral pursuant to the
Subscription Agreement, and the security interests granted therein are subject
to any prior security interest in the Collateral granted by the Company except
as modified by the Intercreditor Agreement.
SECTION 1. Interest.
The Company will pay interest semi-annually in arrears on
April 1 and October 1 of each year (each an "Interest Payment Date"), or if any
such day is not a Business Day, on the next succeeding Business Day to the
registered Holder hereof as of the preceding March 15 or September 15 (each, a
"Record Date"). Interest on this Note will accrue from the most recent Interest
Payment Date to which interest has been paid or, if no interest has been paid,
from the date of its issuance set forth above; provided that if there is no
existing Default in the payment of interest, and if this Note is authenticated
between a Record Date, and the next succeeding Interest Payment Date, interest
shall accrue from such next succeeding Interest Payment Date. The Company may,
with respect to each Interest Payment Date, at its option and in its sole
discretion, in lieu of payment of interest on the Notes in cash, issue
additional Notes ("Interest Notes") in an aggregate principal amount equal to
the amount of interest not paid in cash on such Interest Payment Date. Each
issuance of Interest Notes in lieu of the payment of cash interest on the Notes
shall be made pro rata with respect to the outstanding Notes; provided, however,
that the Company may at its option pay cash in lieu of issuing Interest Notes in
any denomination of less than $1,000. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
SECTION 2. Prepayment.
(a) This Note (including interest accrued on the principal
hereof) may be prepaid by the Company, at any time, in whole or in part, without
penalty or premium except as provided in Subsection 2(b).
(b) If this Note (or any portion hereof) is prepaid by the
Company, then the Company shall simultaneously issue to the Holder hereof Class
E Warrants ("Warrants") to purchase a number of shares of Common Stock equal to
the number of shares of Common Stock then issuable upon conversion of this Note
(or the prepaid portion hereof, if prepaid in part). Such Warrants shall
initially be exercisable at $.60 per share of Common Stock and shall be governed
by a Warrant Agreement by and among the Company, ChaseMellon Shareholder
Services, L.L.C. and the Secured Party in substantially the form attached to the
Subscription Agreement as Exhibit B (the "Warrant Agreement").
SECTION 3. Conversion.
(a) Conversion. The Holder may elect, at any time prior to the
Maturity Date, to convert this Note and all accrued interest hereon into a
number of shares of Common Stock equal to Liquidation Amount (as defined below)
divided by the then current Conversion Price (as defined below). The
"Liquidation Amount" shall be the aggregate principal amount of, plus any
accrued but unpaid interest on, this Note. The "Conversion Price" shall
initially be $0.60, subject to adjustment as provided below, representing an
initial conversion rate (subject to
<PAGE>
adjustment) of 1,666-2/3 shares of Common Stock per $1,000 of Liquidation
Amount (the "Conversion Rate").
(b) Conversion Procedures. (i) Any Holder of a Note desiring
to convert such Note into Common Stock shall surrender such Note at the
Company's principal executive office, accompanied by proper instruments of
transfer to the Company or in blank, accompanied by irrevocable written notice
to the Company that the Holder elects so to convert such Note (the "Notice of
Conversion") and specifying the name or names (with address) in which a
certificate or certificates evidencing shares of Common Stock are to be issued.
(ii) The Company need not deem a Notice of Conversion to be
received unless the Holder complies with all the provisions hereof. The Company
will make a notation of the date that a Notice of Conversion is received, which
date of receipt shall be deemed to be the date of receipt for purposes hereof.
(iii) The Company shall, as soon as practicable after such
deposit of any Note accompanied by a Notice of Conversion and compliance with
any other conditions herein contained, deliver to the person for whose account
such Note was so surrendered, or to the nominee or nominees of such person,
certificates evidencing the number of full shares of Common Stock to which such
person shall be entitled as aforesaid, subject to Section 4.
(iv) Subject to the following provisions of this Paragraph
3(b)(iv), such conversion shall be deemed to have been made as of the date of
such surrender of the Note to be converted, and the person or persons entitled
to receive the Common Stock deliverable upon conversion of such Note shall be
treated for all purposes as the record holder or holders of such Common Stock on
such date and the Note shall no longer be deemed outstanding and all rights
whatsoever in respect thereof (including the right to receive interest thereon)
shall terminate except the right to receive the number of full shares of Common
Stock to which such person shall be entitled hereunder; provided, however, that
the Company shall not be required to convert any Note while the stock transfer
books of the Company are closed for any purpose, but the surrender of a Note for
conversion during any period while such books are so closed shall become
effective for conversion immediately upon the reopening of such books as if the
surrender had been made on the date of such reopening, and the conversion shall
be at the Conversion Rate in effect on such date applied to the Liquidation
Amount calculated through such date of reopening.
(c) Adjustments to Conversion Price. (i) In case the Company
shall hereafter (A) pay a dividend or make a distribution on its Common Stock in
shares of Common Stock, (B) subdivide its outstanding shares of Common Stock
into a greater number of shares or (C) combine its outstanding shares of Common
Stock into a smaller number of shares (each of (A) through (C) an "Action"), the
Conversion Price shall be adjusted to equal the product of the Conversion Price
in effect immediately prior to such Action multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such Action and the denominator of which shall be the
number of shares of Common Stock outstanding immediately following such Action.
An adjustment made pursuant to this Subsection 3(b) shall become effective
immediately after the record date in the case of a
<PAGE>
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(ii) In case the Company shall hereafter issue by
reclassification of its Common Stock any shares of capital stock of the Company
(a "Reclassification"), provision shall be made so that, immediately following
such Reclassification, the Notes shall be convertible into the kind and quantity
of securities to which the Holders of such Notes would have been entitled
pursuant to such Reclassification, had such Holders converted such Notes
immediately prior to such Reclassification.
(d) Reservation of Shares; Transfer Taxes; Etc. The Company
shall at all times reserve and keep available, out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Notes, such number of shares of its Common Stock free of
preemptive rights as shall be sufficient to effect the conversion of all Notes
from time to time outstanding. The Company shall use its best efforts from time
to time, in accordance with the laws of the State of Delaware, to increase the
authorized number of shares of Common Stock if at any time the number of shares
of Common Stock not outstanding shall not be sufficient to permit the conversion
of all the then-outstanding Notes.
The Company shall pay any and all issue or other taxes (other
than income taxes) that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of the Notes. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of Common Stock (or other securities
or assets) in a name other than that in which the Notes so converted were
registered, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Company the amount of such tax or
has established, to the satisfaction of the Company, that such tax has been
paid.
(e) Other Changes in Conversion Rate. The Company from time to
time may increase the Conversion Rate by any amount for any period of time if
the period is at least 20 days and if the increase is irrevocable during the
period. Whenever the Conversion Rate is so increased, the Company shall mail to
the Holder of record of this Note a notice of the increase at least 15 days
before the date the increased Conversion Rate takes effect, and such notice
shall state the increased Conversion Rate and the period it will be in effect.
The Company may make such increases in the Conversion Rate, in
addition to those required or allowed by this paragraph (e), as shall be
determined by it, as evidenced by a resolution of the Board of Directors of the
Company, to be advisable in order to avoid or diminish any income tax to holders
of Common Stock resulting from any dividend or distribution of stock or issuance
of rights or warrants to purchase or subscribe for stock or from any event
treated as such for income tax purposes.
SECTION 4. Fractional Shares.
No fractional shares or scrip representing fractional shares
of Common Stock shall be issued upon conversion of this Note. If more than one
certificate evidencing Notes shall be surrendered for conversion at one time by
the same Holder, the number of full shares issuable
<PAGE>
upon conversion thereof shall be computed on the basis of the aggregate
Liquidation Amount of the Notes so surrendered. Instead of any fractional share
of Common Stock which would otherwise be issuable upon conversion of this Note
(or of such aggregate number of Notes), the Company may elect, in its sole
discretion, independently for each Holder, whether such number of shares of
Common Stock will be rounded to the nearest whole share (with a .5 of a share
rounded upward) or whether such Holder will be given cash, in lieu of any
fractional share, in an amount equal to the same fraction of the Conversion
Price as of the close of business on the day of conversion.
SECTION 5. Events of Default Defined.
The following shall each constitute an "Event of Default"
hereunder:
(a) the failure of the Company to make any payment of (i)
principal of this Note when due and payable and such failure shall continue for
five (5) or more days; and (ii) interest on this Note when due and payable and
such failure shall continue for thirty (30) or more days;
(b) the failure of the Company to observe or perform any
covenant in this Note or in the Subscription Agreement, and such failure shall
have continued unremedied for a period of sixty (60) days after written notice
as provided in the last paragraph of this Section 5;
(c) a default occurs (after giving effect to any applicable
grace periods or any extension of any maturity date) in the payment when due of
principal of, or an acceleration of, any indebtedness for money borrowed by the
Company or any of its Subsidiaries (other than an Unrestricted Subsidiary (as
defined below) which is not a Significant Subsidiary (as defined below) and
provided there is no recourse against the Company or any other Subsidiary with
respect to the obligations of such Unrestricted Subsidiary arising as a result
of such default) in excess of $2 million, individually or in the aggregate, if
such indebtedness is not discharged, or such acceleration is not annulled,
within 30 days after written notice as provided in the last paragraph of this
Section 5;
(d) the Company or any of its Significant Subsidiaries,
pursuant to or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief
against it in an involuntary case,
(iii) consents to the appointment of a Custodian of it
or for all or substantially all of its property, and such Custodian is
not discharged within 30 days,
(iv) makes a general assignment for the benefit of
its creditors, or
(v) admits in writing that it is generally unable to
pay its debts as the same become due;
<PAGE>
(e) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief in any involuntary case against
the Company or any Significant Subsidiary,
(ii) appoints a Custodian of the Company or any
Significant Subsidiary or for all or substantially all of the property
of the Company or any Significant Subsidiary, or
(iii) orders the liquidation of the Company or any
Significant Subsidiary, and, in each case, the order or decree remains
unstayed and in effect for 60 consecutive days.
The term "Bankruptcy Law" means Title 11 of the U.S. Code or
any similar federal, foreign or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, examiner or
similar official under any Bankruptcy Law. The term "Significant Subsidiary" has
the same meaning as significant subsidiary has under Regulation S-X under the
Securities Act as in effect on the date hereof. "Unrestricted Subsidiary" means
any Subsidiary of the Company which (i) is not wholly-owned by the Company, (ii)
is designated as an Unrestricted Subsidiary by the Board of Directors of the
Company and (iii) at the time of any investment by the Company in such
Subsidiary, in the aggregate holds or comprises less than 20% of the Company's
assets as shown on the Company's consolidated balance sheet prepared in
accordance with generally accepted accounting principles consistently applied as
at the time of such investment.
(f) the failure of the Company to maintain, as of the last day
of any calendar month, consolidated cash on hand (and cash equivalents and
marketable securties) of at least $1.5 million.
A Default under Subsection (b), (c) or (f) of this Section 5 shall not be an
Event of Default until (i) the Secured Party shall have notified the Company of
the Default and (ii) the Company shall have failed to cure the Default under
such Subsection (b) within 60 days after receipt of the notice, under such
Subsection (c) within 10 days after receipt of the notice or under Subsection
(f) within 30 days after receipt of the notice. Any such notice must (x) specify
the Default, (y) demand that it be remedied and (z) state that the notice is a
"Notice of Default."
SECTION 6. Remedies upon Event of Default.
Except as limited by the Intercreditor Agreement:
(a) If an Event of Default occurs and is continuing, the
Secured Party (by notice to the Company) may declare the unpaid principal of and
accrued interest on all the Notes then outstanding to be due and payable (an
"Acceleration"). Upon any such declaration, such principal and accrued interest
shall be due and payable immediately. The Secured Party may rescind an
acceleration and its consequences if (a) the Company has paid a sum sufficient
to pay (i) all overdue interest on all Notes then outstanding and (ii) the
principal of the Notes then outstanding which have become due otherwise than by
such declaration of acceleration and accrued interest thereon at a rate borne by
the Notes and (b) the rescission would not conflict with any judgment or decree
and if all existing Events of Default have been cured or waived
<PAGE>
except nonpayment of principal or interest that has become due solely because of
acceleration. No such rescission shall effect any subsequent Default or impair
any right consequent thereto.
(b) The Secured Party may waive an existing Default or Event
of Default and its consequences. Upon any such waiver, such Default shall cease
to exist and any Event of Default arising therefrom shall be deemed to have been
cured for every purpose of this Note and the Subscription Agreement; but no such
waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
(c) If the Company defaults in a payment of interest on the
Notes, then, in lieu of this Note's ordinary 8% interest, the Company shall pay
defaulted interest at a rate of 12% (or, during the first six months immediately
following any Acceleration, 16%, and thereafter 24%) per annum. The Company
shall pay the defaulted interest to the Holders of the Notes on a special record
date. The Company shall fix or cause to be fixed any such special record date
and payment date, which specified record date shall not be fewer than 10 days
prior to the payment date for such defaulted interest, and shall promptly mail
or cause to be mailed to each Holder a notice that states the special record
date, the payment date and the amount of defaulted interest to be paid.
(d) Upon the occurrence and during the continuance of an Event
of Default, the Secured Party may, at its election, without notice of its
election and without demand, take any action permitted by law, including the
exercise of any rights accorded a secured creditor under the Uniform Commercial
Code as in effect in the Commonwealth of Massachusetts at such time.
(e) To the extent permitted by law, the remedies provided
herein shall be exclusive of any other remedies now or hereafter existing at law
or in equity or by statute or otherwise.
(f) In any suit for the enforcement of any right or remedy
under this Note or the Subscription Agreement, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant.
SECTION 7. Note Register.
(a) The Company shall keep at its principal executive office a
register (herein sometimes referred to as the "Note Register"), in which,
subject to such reasonable regulations as it may prescribe, but at its expense
(other than transfer taxes, if any), the Company shall provide for the
registration and transfer of this Note.
(b) Whenever this Note shall be surrendered at the principal
executive office of the Company for transfer or exchange, accompanied by a
written instrument of transfer in form reasonably satisfactory to the Company
duly executed by the Holder hereof or his attorney duly authorized in writing,
and, subject to compliance with applicable securities laws, the Company shall
execute and deliver in exchange therefor a new Note or Notes, as may be
<PAGE>
requested by such Holder, in the same aggregate unpaid principal amount and
payable on the same date as the principal amount of the Note or Notes so
surrendered; each such new Note shall be dated as of the date to which interest
has been paid on the unpaid principal amount of the Note or Notes so surrendered
and shall be in such principal amount and registered in such name or names as
such Holder may designate in writing.
(c) Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Note
and of indemnity or bond reasonably satisfactory to it, and upon reimbursement
to the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of this Note (in case of mutilation) the Company will make and
deliver in lieu of this Note a new Note of like tenor and unpaid principal
amount and dated as of the date to which interest has been paid on the unpaid
principal amount of this Note in lieu of which such new Note is made and
delivered.
SECTION 8. Miscellaneous.
(a) Amendments and Waivers. The Secured Party on behalf of the
Holders of the Notes may waive or otherwise consent to the amendment of any of
the provisions hereof, provided that no such waiver or amendment may reduce the
principal amount of or interest on any of the Notes or change the stated
maturity of the principal of this Note, without the consent of each holder of
any Note affected thereby.
(b) Restrictions on Transferability. In addition to the
restrictions set forth in the Subscription Agreement, the securities represented
by this Note have been acquired for investment and have not been registered
under the Securities Act of 1933, as amended, or the securities laws of any
state or other jurisdiction. Without such registration, such securities may not
be sold, pledged, hypothecated or otherwise transferred, except pursuant to
exemptions from the Securities Act of 1933, as amended, and the securities laws
of any state or other jurisdiction.
(c) Forbearance from Suit. No holder of Notes shall institute
any suit or proceeding for the enforcement of the payment of principal or
interest unless the Secured Party joins in such suit or proceeding.
(d) No Recourse Against Others. No directors, officer,
employee, incorporator or stockholder of the Company, as such, shall have any
liability for any obligations of the Company under this Note, the Subscription
Agreement or for any claim based on, in respect of, or by reason of, such
obligations or their creation. The Holder of this Note by accepting this Note
waives and releases all such liability. The waiver and release are part of the
consideration for the issuance of this Note.
(e) Subordination. The Holder by accepting this Note agrees
that the payment (by set-off or otherwise) of principal of and interest on the
Notes is subordinated in right of payment, to the extent and in the manner
provided in Section 9 of the Subscription Agreement, to the prior payment in
full of all obligations in respect of Operating Indebtedness of the Company,
whether outstanding on the date of the Subscription Agreement or thereafter
incurred.
<PAGE>
(f) Denominations. This Note is issuable in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof,
except as otherwise provided in Section 1 hereof.
(g) Governing Law. This Note shall be governed by, and
construed in accordance with, the laws of the State of Massachusetts, excluding
the body of law relating to conflict of laws. Notwithstanding anything to the
contrary contained herein, in no event may the effective rate of interest
collected or received by the Holder exceed that which may be charged, collected
or received by the Holder under applicable law.
(h) Interpretation. If any term or provision of this Note
shall be held invalid, illegal or unenforceable, the validity of all other terms
and provisions hereof shall in no way be affected thereby.
(i) Successors and Assigns. This Note shall be binding upon
the Company and its successors and assigns and shall inure to the benefit of the
Holder and its successors and registered assigns.
(j) Notices. All notices, requests, consents and demands shall
be made in writing and shall be mailed postage prepaid, or delivered by hand, to
the Company or to the Holder thereof at their respective addresses set forth
below or to such other address as may be furnished in writing to the other party
hereto:
If to the Holder: At the address shown on Schedule A
attached hereto
If to the Company: Hybridon, Inc.
155 Fortune Boulevard
Milford, Massachusetts 01757
Attention: Robert Andersen
(k) Saturdays, Sundays, Holidays. If any date that may at any
time be specified in this Note as a date for the making of any payment of
principal or interest under this Note shall fall on Saturday, Sunday or on a day
which in New York or Massachusetts or California shall be a legal holiday, then
the date for the making of that payment shall be the next subsequent day which
is not a Saturday, Sunday or legal holiday.
(l) Subscription Agreement. This Note is subject to the terms
contained in the Subscription Agreement and the registered Holder of this Note
is entitled to the benefits of such Subscription Agreement to the extent
provided therein.
(m) No Adverse Interpretation of Other Agreements. This Note
and the Subscription Agreement may not be used to interpret another note,
indenture, loan or debt agreement of the Company or a Subsidiary. Any such note,
indenture, loan or debt agreement may not be used to interpret this Note or the
Subscription Agreement.
<PAGE>
IN WITNESS WHEREOF, this Note due 2002 No. __ has been executed and
delivered on the date first above written by the duly authorized representative
of the Company.
HYBRIDON, INC.
By:
------------------------------
Name:
Title:
<PAGE>
SCHEDULE A
Name of Holder Address of Holder
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 25, 2000 included in this Form 10-K into the Hybridon, Inc.'s
previously filed Registration Statement File No.'s 33-3896, 33-3898, 33-3900 and
33-3902.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 30, 2000
Exhibit 23.2
[Letterhead of MCDONNELL BOEHNEN HULBERT & BERGHOFF]
March 28, 2000
Hybridon, Inc.
155 Fortune Blvd.
Milford, MA 01757
RE: Hybridon, Inc. -- Form 10-K Consent
Dear Sirs:
McDonnell, Boehnen, Hulbert & Berghoff hereby consents to the reference to
our firm under the section "Patents, Trade Secrets and Licenses" included in the
Hybridon, Inc., Annual Report on Form 10-K for the year ended December 31, 1999.
Very truly yours,
/s/ Michael S. Greenfield
Michael S. Greenfield
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000861838
<NAME> HYBRIDON INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,551,671
<SECURITIES> 0
<RECEIVABLES> 1,218,142
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,871,727
<PP&E> 21,070,205
<DEPRECIATION> 14,691,883
<TOTAL-ASSETS> 11,935,248
<CURRENT-LIABILITIES> 10,209,428
<BONDS> 7,798,123
0
6,618
<COMMON> 0
<OTHER-SE> (6,095,182)
<TOTAL-LIABILITY-AND-EQUITY> 11,935,248
<SALES> 6,186,136
<TOTAL-REVENUES> 7,000,881
<CGS> 0
<TOTAL-COSTS> 16,754,192
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 749,731
<INCOME-PRETAX> (10,503,042)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,503,042)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (10,503,042)
<EPS-BASIC> (0.93)
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