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, 19981999
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. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $12,146,631$27,593,715 million as of April 13, 1999.March 28, 2000.
For purposes of determining this number, 5,078,0836,056,444 shares of common stock held
by affiliates are excluded.
As of April 13, 1999,March 28, 2000, the registrant had 15,306,82516,323,873 shares of Common Stock
outstanding.
Documents Incorporated by Reference
-----------------------------------
Portions of the Registrant's Proxy Statement Items 10, 11, 12 and 13
ofStatement with respect to the Annual Meeting of Part III.
Meeting of Stockholders to be held on
June 8, 1999.12, 2000.
2
HYBRIDON, INC.
FORM 10-K
INDEX
PART I Item6
ITEM 1. BUSINESS...........................................................2
HYBRIDON..................................................................2BUSINESS...........................................................6
HYBRIDON...........................................................6
TECHNOLOGY OVERVIEW.......................................................2
Introduction.......................................................2OVERVIEW................................................6
Conventional Drugs.................................................3Drugs............................................7
Antisense Drugs....................................................4Drugs...............................................7
HYBRIDON ANTISENSE TECHNOLOGY.............................................4TECHNOLOGY................................................8
Medicinal Chemistries..............................................4Chemistries.........................................8
Manufacturing Technology...........................................5Technology......................................8
Proprietary Analytical Tools.......................................5Tools..................................9
Regulatory Know-How................................................5
HYBRIDONKnow-How...........................................9
DRUG DEVELOPMENT AND DISCOVERY PROGRAMS..........................6DISCOVERY.....................................9
The Drug Development and Approval Process..........................6Process.....................9
Hybridon Drug Development and Discovery Programs...................7Programs.............10
CLINICAL PROGRAMS.........................................................8
Protein Kinase A...................................................8PROGRAMS.................................................10
Cancer.......................................................10
HIV-1 and AIDS.....................................................8
Cytomegalovirus....................................................9AIDS...............................................11
PRECLINICAL PROGRAMS......................................................10PROGRAMS..............................................11
HYBRIDON SPINOUTS.........................................................10SPINOUTS.................................................12
MethylGene, Inc....................................................10Inc..............................................12
OriGenix Technologies Inc.........................................11Inc....................................12
CORPORATE COLLABORATIONS..................................................11COLLABORATIONS..........................................12
G.D. Searle & Co...................................................11Co.............................................13
Medtronic, Inc.....................................................13
THEInc...............................................13
HYBRIDON SPECIALTY PRODUCTS (HSP) DIVISION............................13PRODUCTS.......................................13
MARKETING STRATEGY........................................................15STRATEGY................................................14
ACADEMIC AND RESEARCH COLLABORATIONS......................................15COLLABORATIONS..............................15
DRUG DEVELOPMENT SERVICES.................................................16SERVICES.........................................15
PATENTS, TRADE SECRETS, AND LICENSES.......................................16LICENSES..............................15
GOVERNMENT REGULATION.....................................................19REGULATION.............................................17
FDA Approvals......................................................19Approvals................................................17
Other Regulation...................................................20
COMPETITION...............................................................20
EMPLOYEES.................................................................21
ItemRegulation.............................................17
COMPETITION.......................................................18
EMPLOYEES.........................................................18
ITEM 2. PROPERTIES.........................................................21
ItemPROPERTIES........................................................19
ITEM 3. LEGAL PROCEEDINGS..................................................22
ItemPROCEEDINGS.................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE....................................22VOTE OF SECURITY HOLDERS...............19
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY...............22
i
HYBRIDON..........19
Executive Officers................................................19
Significant Employees.............................................19
PART II.......................................................................26
ItemII 21
ITEM 5. MARKET FOR THE COMPANY'SREGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................26
ItemMATTERS...............................................21
ITEM 6. SELECTED FINANCIAL DATA............................................28
ItemDATA...........................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................29
ItemOPERATIONS.........................................25
GENERAL...........................................................25
RESULTS OF OPERATIONS.............................................25
Revenues.....................................................25
Research and Development Expenses............................25
3
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.........45
ItemRISK........31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................45
ItemDATA.......................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................................45DISCLOSURE...............................31
PART III......................................................................46
ItemIII 32
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT
EMPLOYEES OF THE COMPANY....................46
ItemHYBRIDON.............................................32
ITEM 11. COMPENSATION OF EXECUTIVE COMPENSATION.............................................46
ItemOFFICERS................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....46
ItemMANAGEMENT........................................................32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................46TRANSACTIONS....................32
PART IV.......................................................................47
ItemIV 32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMS 8-K.......................................................47
iiFORM 8-K...32
SIGNATURES 38
POWER OF ATTORNEY AND SIGNATURES.............................................38
4
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 but are not limited to: the
obtaining of sufficient financing to maintain Hybridon's planned operations; the
timely development, receipt of necessary regulatory approvals and acceptance of
new products; the successful application of Hybridon's technology to produce new
products; the obtaining of proprietary protection for any such technology and
products; the impact of competitive products and pricing and reimbursement
policies; the changing of market conditions and the other risks detailed in the Risk
Factors section of this Annual Report on Form 10-K and elsewhere herein.
The Company10-K. Hybridon does not undertake
to update any forward-looking statements.
See "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations -- Risk Factors" for a discussion of certain risks and
uncertainties applicable to the Hybridon and its stockholders, including
Hybridon's need for additional funds to sustain its operations in 1999 and
thereafter.
15
PART I
ITEM 1. BUSINESS
HYBRIDON
Hybridon, Inc., established in 1989, is a leaderinvolved in the discovery and
development of genetic drugs. These 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, which usesin that they use synthetic RNA and DNA that are designed to treatgenetic material,
also called oligonucleotides, with the underlying causeaim of disease
by stoppinginhibiting 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 manufactures and sells synthetic RNA and
DNA, also calledhas rights to technology allowing the chemical
modification of oligonucleotides, to third parties on a contract basis.
Hybridon's leadershiphas particular expertise in the efficient
design and development of antisense field is based on oligonucleotide
technology it owns or exclusively licenses, including (a) new advanced
chemistries, (b) sequence selection know-how, (c) drug development know-how, (d)drugs, and has devised innovations in the
manufacture of oligonucleotides. In addition, it has one of the few large-scale
oligonucleotide manufacturing process, (e) its fully integrated, large scale
manufacturing facility and (f) its experience in manufacturing over 300
different compounds with various chemical modifications.facilities.
These aspects of Hybridon's business are discussed below.
TECHNOLOGY OVERVIEW
Introduction
The heart, brain, liver and other organs in the human body contains many organs, such as the heart, liver, brain,
etc., that function
together to support life. Each organ in turn is made up of
many microscopic units called cells. Each cell within these organs produces
proteins which determinethat affect how that cell functions within its organ, and ultimately
how wellefficiently each organ functions within the body. Almost all human diseases
result fromare caused by abnormal
protein production or altered performance of proteins within individual
cells. In some instances, thecell proteins act directly to cause or support a
disease. In other instances, thecell proteins interfere with other proteins that
prevent or combat disease. Traditional drugs are designed to interact with
protein molecules that supportcause or causesupport diseases. Antisense drugs are designed
to work at an earlier statestage, 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 its gene.the gene relating to that protein. Each gene is made up of two
intertwined strands of DNA that pair
together to form a structure called a "double helix." Each
strand of DNA isconsists of a string of individual DNA building blocks, called
nucleotides, that are arranged in a specific sequence. One of the paired strands contains
the information that directs the composition of thea specific protein, and is
called the "coding" strand. The other strand, the "non-coding" strand, contains
a different but complementary sequence of nucleotidesnucleotides. 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 are complementary with nucleotides oncontains genetic
information.
The full complement of human genes, known as the coding strand.
The complete human genome"genome,"
consists of over 100,000 genes and contains the information required to produce
all human proteins. A copy of the complete human genome 2
is present in each cell,
and the proteins made by each cell are read frommakes proteins based on its copy of the genome. Proteins are made from genesCells make
proteins in two steps.a two-stage process. First, the information contained in the gene is read from the coding strand of DNA intocell creates a molecule of messenger
RNA. The messenger RNA also consistsconsisting of a string of nucleotides in a specific sequence.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. Second, theThe cell then produces proteins based on the information that
is now recordedcontained in
the messenger RNA. The
information contained in a single gene
is often read into multiple6
number of copies of messenger RNA which in turn causes the cells to produce morecell produces will affect how many copies
of the protein.a given protein it produces.
A normal cell produces a particulargiven set of normal proteins in the right
amount for the body to function properly. In aA diseased cell the wrongproduces inappropriate
or mutant proteins, are made, or normal proteins are made inproduces the wrong amount.
Mutantamount of normal proteins. A cell
produces mutant proteins occur because thewhen its DNA has changed,changes, either through mutation, as in
many types of cancer cells, or by infection with a virus. Infection with a virus can also cause the cell to
make proteins that are not coded by the human genome. This misinformation causes
the cell to produce proteins that are harmful to the body.
Antisense technology involves the use of a strand of nucleotides, called
an oligonucleotide, which has a specific sequence exactly complementary to that
of the messenger RNA read from a specific gene. Because of the complementary
nature of its sequence, it binds to and inactivates the messenger RNA, thereby
decreasing or eliminating the production of disease associated proteins.
Hybridon believes that drugs based on antisense technology may have broader
applicability, greater efficacy and fewer side effects than conventional drugs
because antisense drugs are designed to intervene in the production of proteins,
rather than intervening after the proteins are made, and in a highly specific
and more selective fashion.
Conventional Drugs
Most drugs are chemicals that stimulate or stopsuppress the function of a
particular molecule, usually a protein, with tolerable side effects. A drug will
causeMost side
effects arise when ita drug interacts with other proteins in addition to the
target protein. Therefore,Generally, the fewer other proteins a drug that interacts with, as few other proteins as
possible causesthe
fewer the side effects.
Conventional drugs are not well tolerated for the treatment of many
diseases because of their relatively low level of selectivity, thus producing
more side effects. Conventional drugsgenerally aim to bind only a few, generally 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 thethose non-target molecules. This lack of selectivity maycan
result in decreased effectiveness of the drug because of unwanted side effects.
In addition, the developmenteffects, potentially leading to decreased effectiveness.
A further characteristic of conventional drugs is generally time
consumingthat developing them
is a time-consuming and expensive asprocess. For every compound that is found to
be effective and have tolerable side effects, thousands of compounds mustmay be made to find the most
effective drug with the fewest side effects.
3
investigated and
rejected.
Antisense Drugs
In contrastAn 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 regulateare designed to intervene in the actual production of proteins.proteins, rather
than after the proteins are made, and in a highly specific fashion.
Advances in mapping the human genome, project, including work conducted by
academic institutions, biotechnology companies and pharmaceutical companies,
have identifiedallowed many targets for antisense drugs.drugs to be identified. Once a gene
associated with a disease-associated protein is identified, an antisense
oligonucleotide can be designed, and itsthe pharmaceutical effects of that
oligonucleotide can be improved by chemical modification. Chemically-modified
oligonucleotides maycan be composed of DNA, RNA, or a combination of the two.
Because the nucleotide sequence of nucleic acid bases of a chemically-modified antisense
oligonucleotide is complementary to its target sequence on athe messenger RNA of
a given gene, the antisense oligonucleotide forms a large number of bonds at the
target site, typically between 40 and 60. Thus, the oligonucleotide willThis allows it to form a strong bond
with the messenger RNA read from the selected gene.RNA. A few identical messenger RNA molecules maycan cause the
cell to produce many copies of a protein; nonetheless,similarly, a few identical
chemically-modified antisense oligonucleotides maycan stop this process. Moreover,This is
due in part to an enzyme called RNaseH has been foundRNase H that can destroy the messenger RNA that binds the oligonucleotide. This occursbound to
an oligonucleotide without destroying the oligonucleotide itself, thus freeing
the oligonucleotide to bind with, and cause the destruction of, other identical messenger
RNA molecules and cause destruction of these
moleculesmolecules. This process is generally known as well. This is called 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.
7
HYBRIDON ANTISENSE TECHNOLOGY
Hybridon has developed and owns antisense technology that includes
important new medicinal chemistries, analytical chemistry and manufacturing
technology. The development of Hybridon's antisense chemistry has been directed
by Dr. Sudhir Agrawal, Hybridon's Chief Scientific Officer.
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. Currently,Development of Hybridon's antisense
chemistry has been directed by Dr. ZamecnikSudhir 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 Professor Emeritus at Harvard Medical Schoolmanner that makes oligonucleotides safer and has a research affiliation withmore stable without
adversely affecting their ability to promote the Massachusetts General Hospital in Boston.destruction of messenger RNA.
Medicinal Chemistries. Hybridon's first antisense drug, GEMGEM(R) 91,
which
wastargets the messenger RNA that codes for an essential protein in Type 1 Human
Immunodeficiency Virus, or "HIV-1." GEM(R) 91 is based on its first-generation
phosporothioatephosphorothioate chemistry, and differed only
slightly fromwhich altered the naturally-occurring, or native,
DNA,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, forleading 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 GEMGEM(R) 91 treatment of three of the
nine patients treated experiencedwith advanced HIV disease was interrupted due to unacceptable
decreases in platelet counts thus increasing
the possibility of uncontrolled bleeding.counts. As a result, Hybridon discontinued the GEMGEM(R) 91
4
program. Hybridon has, however, used the information gained from the human
clinical trials of GEMGEM(R) 91 to design its more 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; thuscharacteristics and significantly increasing their potentialimprove therapeutic value.value compared to earlier
antisense drug candidates. These compounds are likely to have the following
properties:
o catalytic activity;desirable characteristics:
o fewer side effects;effects
o more stablegreater stability in the body, enablingthereby permitting a patient to take
doses less frequently;frequently
o more potent, enablinggreater potency, thereby permitting a patient to be giventake lower doses
and therefore be less expensive than
first-generation drug candidates; and
o ability to be given to patients different wayspotential 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,
improve the efficiency of8
make the production process more efficient, increase the scale of production,
and significantly reduce the cost of drug compounds significantly.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 that it
obtains with its tools and processes to improve quality control, to complyassist it in complying
with regulatory requirements, and to monitor absorption and stability of its
drugs in preclinical and clinical trials.
Hybridon has the capability to provide or
support all required quality control functions.
Regulatory Know-How. Hybridon drug development and manufacturing
personnel also have extensive experience in navigatingworking with the FDA and other drug
regulatory processagencies in aan efficient and cost-effective manner. Hybridon often
assists HSPhas
assisted customers of Hybridon Specialty Products ("HSP"), Hybridon's contract
manufacturing division, in creating drug/devise master files and writing chemistry
and manufacturing control sections forpreparing essential components of their submissions
to the FDA.
5
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS
The Drug Development and Approval Process
The process of taking a compound from the laboratory to human patients
is likelygenerally takes 10 to take a number of15 years. This process is extremely expensive and is
rigorously regulated by governmental agencies. Inagencies, including, in the United States, this
process is regulated byU.S., the Food
and Drug Administration, (theor the "FDA"). The FDA
requires that eachEach drug must undergo a series of trials
and studies (preclinical and clinical) prior to considering its approvalbefore the FDA will consider approving it for
commercial sale. The FDA or theany company conducting thedrug trials can discontinue
clinicalthose trials at any time if it is feltfeels that the 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 proceedsto proceed from one
phase of trials to the next.
If the FDA's concerns are not
addressed by additional information or tests, the drug will not be allowed to
proceed to the next phase. The regulatory process in other countries is
generally similar to the process required by the FDA. The sequential phases of
the preclinical and clinical trials and studies are described below.below:
o Preclinical Studies. Preclinical studies are designedtrials involve the testing of a given
compound in animals to provide data on the effectivenessactivity and safety of the
compound before the compound is administered to humans.
o Investigational New Drug Application ("IND").Application. If the data from the
research and
preclinical studiestrials are promising, the company willHybridon may file an INDInvestigational
New Drug Application, or "IND," with the FDA. The IND contains the
results of the preclinical studiestrials and the protocol for the first
clinical trial. The IND becomes active in 30 days unless the FDA
disapproves it or requires additional information. Once the IND becomes
active, the companyHybridon can begin clinical trials in humans.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 as a function ofover time. In some cases, early indications suggesting
effectiveness can be found. A very small Phase I studytrials can give an early
indication of a drug's effectiveness. A limited Phase I trial is
sometimes called a Pilot Phase I study.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 studies,trials, the drug is given to a
larger group of patients with the disease to evaluatefor purposes of evaluating
the drug's effectiveness and side effects at varying doses that are considered to be
appropriateand
schedules of administration and thereby determining the optimal dose
and schedule for the larger Phase III trials that follow.
9
o Phase III Clinical Trials. These studiestrials generally have a large number
of patients. The primary purpose of a Phase III studytrial is to confirm the
drug's effectiveness and produce additional information on side
effects.
A Phase III study that provides data
6
critical to support the registration of the drug with the FDA is often
called a Pivotal Trial.
o New Drug Application ("NDA").Application. Once Phase III studiestrials are complete, a
companyHybridon will
file a New Drug Application, (NDA)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. Before approving an NDA, theThe FDA may require additional tests and,
in any event, may deny an NDA if the applicable
regulatory requirements are not met. The FDA may also require
additional tests before approving an NDA. Even after approval by the
FDA, the companyHybridon must file additional reports about the drug with the FDA
from time to time. ProductThe FDA may withdraw product approvals may be withdrawn by the FDA if compliancea company
fails to comply with ongoing regulatory standards is not maintained or if problems occur
following
initial marketing.after a company starts marketing a drug.
o Accelerated Approval. Drugs meeting certain criteria are candidates for
special consideration during theThe FDA is authorized to grant accelerated review
and approval process after
submission of an NDA. Accelerated review and marketing approval of an
NDA is possibleto NDAs for drugs that are intended to treat persons with debilitating
and life-threatenedlife-threatening illnesses, especially whereif no satisfactory
alternatives are available. The more severe the disease, the more
likely it is that the drug will qualify for accelerated approval.review. If thea
new drug receivesis approved after accelerated approval,review, the companyFDA may be requiredrequire
Hybridon to conduct specific post-marketing studies to obtain additional information
about itsregarding 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 which incorporate its advanced chemistries for the treatment of diseases in three major
therapeutic areas: cancer, disease caused by virusesviral infections and diseases of the eye.
Hybridon believes there are significant additional opportunities for
the use of antisense, particularly forin the treatment of cancer. Compared to
conventional anti-cancer drugs, antisense may provide:
o more specific therapy for cancer;
o more rapid development of drugs targeting newly-discovered
cancer-related proteins;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); and
o when used in the case of combination therapy, additive or synergistic
therapeutic effects.effects that complement
the benefits of conventional drugs
For these reasons, Hybridon is exploring new antisense targets relevant
to the treatment of cancer.
7
CLINICAL PROGRAMS
Hybridon plans to seek corporate collaborationshas conducted clinical trials with antisense drugs targeting
the following diseases. Hybridon is seeking partners for each of its compounds
in clinical development.
Hybridon intends to proceed with its GEM 231 clinical
program for the treatment of cancer through Phase II clinical trials, at which
time it may seek a corporate collaborator. Hybridon generally does not
anticipate proceeding with any of its other programs described below beyond
their current stages of development without a collaborative arrangement with a
corporate partner.
CLINICAL PROGRAMS
Hybridon has conducted clinical studies in the following areas, with
those in more advanced stages of development described first.
Protein Kinase ACancer
Unlike the growth of normal human cells, cancer cells grow in an uncontrolled and
harmful manner. The protein molecule protein kinase A, (PKA)or "PKA," has been
implicated in the formation and growth of various solid tumors, including colon,
ovarian, breast, and lung.lung tumors. There are two kinds of PKA. Type IIt is normal to
find type I in developing fetuses, but its production is abnormal to find it in adults. By
contrast, PKA type II is found in, and is
10
necessary to the health of, normal adults. Certain cancer cells however, produce PKA type
I in adults. Hybridon'sHybridon is developing a cancer drug, GEM(R) 231, that
targets PKA, GEM 231, is designed
to stopreduce the production of the harmful PKA type I without interfering with the
production of PKA type II. Current cancer drugsdrug candidates based on conventional
mechanisms can only stop production of both types, leading
tohave unacceptable side effects.
Hybridon has conducted a Phase I clinical study that has evaluatedtrial to evaluate the safety
of GEMGEM(R) 231 at multiple doses, and has found that patients tolerate it to be well tolerated. Thewell.
This trial explored the maximum tolerated dose of GEMGEM(R) 231 was established for both single
doses and multiple doses. Evendoses, and even high doses of GEMGEM(R) 231 did not show the
side effects normally seen with current cancer treatments. Evaluation of efficacyThis trial was not
an
objectiveconducted for the purpose of this trial. In December 1998,evaluating the efficiency of GEM(R) 231.
Hybridon received approval to start a
Phase II Clinical trial of GEMis currently conducting additional studies with GEM(R) 231 in
patients with solid tumors whichthat had not responded tobeen cured by prior therapy. These
studies include a pilot Phase II trial and a Phase I/II trial. In addition,
to continuing to evaluate GEM 231 asHybridon has begun the first in a single-agent therapy, Hybridon plans to conduct smallseries of Phase I/II studies in at
least two types oftrials treating patients
with solid tumors using GEMwith GEM(R) 231 in combination with radiation or
other anti-tumor agents, such as Taxol.the anti-cancer therapies
Taxol(R) and Taxotere(R).
HIV-1 and AIDS
AIDSAcquired Immune Deficiency Syndrome, "AIDS," is caused by infection
with the HIV-1 virus 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 improvementsimprovement in the quality of life for patients withwho are
HIV-positive or have AIDS. 8
However, thereThere 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 pilotPilot Phase I clinical study in Europe of
GEMGEM(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 theits absorption of GEM 92 after oral dosing and injection.
AllThe patients tolerated well all doses that they were given in the pilot study were well tolerated.study.
Further, GEM92GEM(R) 92 was detected in the blood after both oral dosing and
injection, suggesting that it may be possible to develop GEMGEM(R) 92 as an oral
drug. Hybridon believes this was the first study of the oral administration of
an antisense molecule to humans. In vitroin-vitro studies, have
indicated that GEMbeneficial effects were
observed when GEM(R) 92 is additivewas used in combination with a number ofseveral marketed compounds.AIDS
drugs. Importantly, both its medicinal approach and genetic target are unique.
Cytomegalovirus
Cytomegalovirus ("CMV") is present, although inactive,unique,
in approximately
60% of the general population in the United States and in up to 90% of the
HIV/AIDS population. Because AIDS patients have such severely damaged immune
systems, advanced AIDS patients often suffer from active CMV infection. The most
frequent active form of CMV infection in AIDS patients is CMV retinitis, which
can result in blindness if left untreated. Active CMV infection in AIDS patientsthat no antisense drug has declined in recent years because of the success of the current combination
AIDS therapy. CMV infection is also a medical problem in other patients with
weak immune systems, such as those who have undergone organ transplants and
those undergoing chemotherapy.
Hybridon has conducted Phase I and early Phase II clinical trials of GEM
132, Hybridon's advanced chemistry antisense oligonucleotidebeen approved for the treatment of CMV infection. No clinical studies with GEM 132 are currently ongoingAIDS, and none are currently planned. Hybridon will reevaluateno
other drug has the status of GEM 132
development shouldsame target on the current poor market conditions improve. A competitor of
Hybridon has recently received FDA approval to market an antisense therapeutic
for the treatment of CMV retinitis. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations -- Risk Factors --Hybridon Faces
Intense Competition, And Hybridon's Products Could Be Rendered Obsolete; Many Of
Hybridon's Competitor's Have Greater Resources And Experience Than Hybridon."
9
HIV-1 genome.
PRECLINICAL PROGRAMS
Hybridon has also conducted preclinical studies in the following areas.
Hybridon has also conducted preclinical studies in the following areas:
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Primary
Target Primary Therapeutic Indication(s) Status
Indication(s)
-------------
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
MDM2 (a protein involved in programmed Cancer Research
Compounds/Searle
CollaborationSeeking partner
cell death)
- ----------------------------------------------------------------------------------------------
Vascular Endothelial Growth Factor (a Cancer Angiogenesis Preclinical/Seeking Partnerpartner
protein that can cause abnormal
formation of new blood vessels) Retinopathies (e.g. Preclinical/macular Seeking Partner
macularpartner
degeneration and diabetic
retinopathy)
Psoriasis Preclinical/Seeking Partner- ----------------------------------------------------------------------------------------------
Hepatitis C Virus Hepatitis; Liver Lead Compounds/Hepatitis C (which can lead Seeking Cancer Partnerpartner
to liver cancer)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
11
HYBRIDON SPINOUTS
Hybridon has used multiple strategies to fund usesapplications of its
antisense technology that it cannot develop at present without external funding.
Hybridon has used one such strategy, withformation of spinout companies, to form
MethylGene, Inc. and OrigenixOriGenix Technologies Inc. for the continued development of
certain product candidates.
MethylGene, Inc.
In 1996, Hybridon and three Canadian institutional investors formed
MethylGene, Inc.MethylGene. Hybridon currently owns approximately 30% of MethylGene. Hybridon has granted
exclusive worldwide licenses and sublicenses to MethylGene to develop and market
(i)(1) antisense compounds to inhibit the protein DNA methyltransferase for the
treatment of any disease, (ii)(2) other methods of inhibiting DNA methyltransferase
for the treatment of any disease, and (iii)(3) antisense compounds to inhibit up to
two additional targets for the treatment of cancers. Research has shown that DNA
methyltransferase, is a protein, that has been shown to beis overproduced in some tumors, such as
small cellnon-small-cell lung cancer, colon cancer, and breast cancer.cancer tumors. MethylGene
is obligated to purchase from Hybridon at specified prices all formulatedbulk
oligonucleotides that MethylGene requires at specified prices.requires. Hybridon is also performing drug
development and other services for MethylGene.
10
The Canadian investors who initially 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 Common Stock 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 Stockcommon stock (subject to adjustment for stock splits, stock
dividends and the like). This option expires no later than 2001.
MethylGene submitted an IND in the United States and Canada in December
1998 and commenced Phase I clinical trials of its first compound,
MG98, for the treatment of cancer in MarchMay 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
49%40% of OriGenix. If certain conditions are satisfied by OriGenix, the Canadian
investors are committed to make an additional investment, at which time
Hybridon's ownership interest in OriGenix will be reduced to 40%.
Hybridon has granted to OriGenix worldwide exclusive licenses and
sublicenses to antisense technology developed by Hybridon for the treatment of
human papilloma viruspapillomavirus, or "HPV," and hepatitis B virus infections. Human papilloma viruses
("HPV")HPV infection
can cause a variety of warts, including benign genital warts which, if
untreated,warts. HPV infection can
also lead to cervical cancer. Hepatitis B infections can lead to liver cirrhosis
and cancer of the liver. InOriGenix may in the future OriGenix may 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 at specified prices.requires. Hybridon anticipates that it willmay 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 third parties,others, primarily biotechnology and pharmaceutical
corporations, to develop certain products. Subject to sufficient funds being
available, Hybridon isintends 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 party tocollaborative arrangement with a corporate collaborations with Searle and Medtronic.partner. Hybridon expects
to retain the rights to manufacture many of the products it may license pursuant
to theseits existing and any future collaborations.
12
G.D. Searle & Co.
In January 1996, Hybridon and Searle entered into a collaboration for
research and
development collaboration for the development of therapeutic antisense compounds. According to the
collaboration agreement
11
as modified in April 1998, targets can be selected from those in the fields of
cancer, cardiovascular disease and inflammation/immunomodulation (the "Searle
Field"). Hybridon
and Searle are currently conductingwere 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 compounds targeting MDM2.
In this project,Through January 2000, Searle is funding certainwas making annual research and development efforts at Hybridon, and Searle and Hybridon have
committed personnel to the collaboration. The initial phase of research and
development activities will be conducted through the earlier of (i) the
achievement of certain milestones and (ii) January 31, 2000, subject to early
termination by Searle. The parties may extend the collaboration by mutual
agreement, including agreement on additional research funding to be made by
Searle.
In addition, Searle has the right to designate up to six additional
molecular targets in the Searle Field (the "Additional Targets") on terms
substantially consistent with the terms applicable to the initial molecular
target. Searle may exercise this right for each of the Additional Targets by
paying specified cash amounts (beyond specific research payments relating to the
particular Additional Target) and purchasing additional Common Stock from
Hybridon (at the then fair market value), totaling $10,000,000 per Additional
Target. If Searle designates all of the Additional Targets, Searle will pay
$24,000,000 in cash and purchase $36,000,000 of equity. If Searle has not
designated all of the Additional Targets by the time the initial molecular
target reaches a certain stage of preclinical development, Searle will be
required to purchase up to an additional $10,000,000 of Common Stock (at the
then fair market value) in order to keep its right to designate any of the
Additional Targets. This payment will be credited against the equity investment
payments made by Searle for any of the Additional Targets designated in the
future.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle elects to commercialize a product, Searle will fund
and perform preclinical tests and clinical trials of the product candidate and
will be responsible for regulatory approvals for, and marketing of, the product.
Hybridon has agreed to perform certain research and development work exclusively
with Searle. In addition, for each product candidate, Searle is required to make
milestone payments to
Hybridon of up to $10,000,000 upon the achievement of
development milestones. Hybridon also$600,000. A royalty will be entitledpaid to royalties from net
sales of products resulting fromSearle if antisense compounds
discovered under the collaboration. As long as Hybridon
satisfies stated manufacturing capacities and capabilities, Hybridon will retain
manufacturing rights, and Searle will be requiredcollaboration are commercialized successfully.
Pursuant to purchase its requirements
of products from Hybridon on an exclusive basis at specified prices. Upon a
change in control of Hybridon, Searle would have the right to terminate
Hybridon's manufacturing rights, although the royalty payable to Hybridon from
net sales would be increased in such event.
If Searle designates all of the Additional Targets or if Hybridon fails
to satisfy certain requirements relating to its manufacturing capacities and
capabilities, Searle will have the right to require Hybridon to form a joint
venture with Searle for the development of products in the Searle Field (other
than products relating to molecular targets that have already been
12
designated by Searle) to which Searle will contribute $50,000,000 in cash and
certain intellectual property rights. Hybridon will also contribute certain
intellectual property and technology and, if the fair market value of such
technology is less that $50,000,000, Hybridon will, at its discretion, either
contribute the difference in cash or have its share of the first profits of the
joint venture reduced by the amount of such difference. Hybridon and Searle
would each own 50% of the joint venture, although Searle's ownership interest
could increase to 75% if the joint venture is established because of Hybridon's
failure to satisfy the requirements relating to its manufacturing capacities and
capabilities.
Under thetheir collaboration, Searle also purchased 200,000 shares
of Common
Stockcommon stock in Hybridon's initial public offering.
Medtronic, Inc.
In May 1994, Hybridon and Medtronic entered into a collaborationagreed to test a drug delivery device for the potential use of
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 inas a result of
this collaboration,agreement and Medtronic is responsible for the development of, and will
hold all rights to, any delivery system developed inas a result of this collaboration. By mutual agreement, theagreement.
The parties may agree to extend this collaboration to other neurodegenerative
disease targets. Hybridon is not currently conducting any activities under this
collaboration.agreement.
As part of thetheir collaboration, Medtronic purchased a total of 131,667
shares of Hybridon's Common Stock.Hybridon common stock.
HYBRIDON SPECIALTY PRODUCTS (HSP)
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 investigating the potential of gene expression
modulation technologiesgenetic medicine
or drugs based on genetic information will continue, and even increase, as the
usepotential of these technologies for the development of new classes of drugs
becomes more widely understood. The Company'sunderstood, and that as a result demand for oligonucleotide
compounds will increase. Hybridon's strategy is to position HSP to take
advantage of this potential growth.increased demand. There can be no assurance that suchthis strategy
will be successful or that industry growthdemand will beincrease as anticipated. See "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -- Risk
Factors -- HSP's Results May Be Lower Than Currently Anticipated" and
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations -- Risk Factors -- Hybridon Faces Intense Competition, And Hybridon's
Products Could Be Rendered Obsolete; Many Of Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon." However, HSP is, however,
attempting to minimize this risk by manufacturing oligonucleotides for many
applications, at different stages of development. HSP is currently is manufacturing
oligonucleotides for both
13
genomic, diagnostic and therapeutic applications.applications, and
Hybridon believes HSP's customers are developing over 20 oligonucleotide drugs.drugs,
with at least eight currently in clinical studies.
HSP manufactures oligonucleotides at its 36,000 square foot36,000-square-foot leased
facility, which Hybridon believes is the only facility capable of manufacturing oligonucleotides on a large commercial-scale oligonucleotides.scale.
HSP first began production ofproducing oligonucleotide compounds for sale in June 1996 and
had revenues of approximately $1.1 million in 1996, $1.9 million in 1997, and $2.8
million in 1998.1998 and $5.8 in 1999. HSP's principal customers include Genta/JBL Scientific, LaJollain 1999 included
Genta Incorporated, MethylGene, Inc. and Ribozyme Pharmaceuticals, Inc. and MethylGene, Inc.Each of
those customers accounted for more than 10% of HSP's 1999 revenues.
13
HSP has developed a manufacturing technology platform whichthat combines
multiple methods to improve the production process and increase the amount of
compounds produced in a single batch.batch, thereby permitting economies of scale. HSP
has developed two separate commercial
scale synthesizers.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 on sales.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 whichthat use water in place of chemical solvents,
thereby decreasing environmentalthe impact of the process on the environment and permitting
purification ofHSP to purify large amounts
(kilograms)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. Under the agreement,Perkin-Elmer, pursuant to which
Perkin-Elmer agreed to refer potential customers to HSP, and Hybridon agreed to
purchase amiditescertain raw materials from Perkin-Elmer for the manufacture of
oligonucleotides sold to suchthose customers. Hybridon is also required to pay
Perkin-Elmer a percentage of the sales price paid by suchthose customers. In
addition, Perkin-Elmer licensed to Hybridon its oligonucleotide synthesis
patents.
HSP is targeting three market areas for oligonucleotides: antisense
andtherapeutics, non-antisense therapeutics, diagnostics and genetic research.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 diagnostics, therapeutics and genetic research.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, antisense compounds used for different diseasesone can be made with the same chemical building blocks usingand
essentially the same manufacturing processes and equipment with minimal changes.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 for the treatment of other
diseases. This also allowscompounds. Furthermore,
since several different oligonucleotide compounds tocan be manufactured
14
in one
facility, potentially reducing capital expenditures required inHybridon anticipates that HSP will have the future and reducing the risks associated with buildingability to manufacture
multiple marketed oligonucleotide-based drugs without having to build a separate
plant for a single
designated drugeach 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 order to satisfy future internal and third-party
requirements.synthesizers. In addition, in order for Hybridon to successfully commercialize
its drugs or for HSP to achieve a satisfactory profit on sales, HSP may be requiredneed to
reduce its production costs. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations -- Risk Factors -- HSP's Results May Be
Lower Than Currently Anticipated."costs further.
Hybridon believes that it is currently manufacturing oligonucleotides
according to FDA-requiredFDA Good Manufacturing Practices, (GMP)or "GMP". The FDA has not
formally inspected Hybridon'sreviewed HSP's facility and procedures, and Hybridon may need to improve itsrevise
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. This isInitiative, a pilot
program that allows FDA regulatory officials to provide advice to the selected
companies on compliance with FDA standards before companiesthey 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,
withusing its own sales groupforce, or through co-marketing, licensing, distribution or
othersimilar arrangements with pharmaceutical and biotechnology companies. To market products
that will serve a large, geographically diverse patient population, Hybridon
expects to enter into licensing, distribution or partnering agreements withother pharmaceutical and biotechnology companies,
that haveparticularly if the products are intended to serve a large,
establishedgeographically-diverse patient population. Direct marketing of any of its
proposed drugs would require a substantial marketing
14
staff and sales organizations.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.
See "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Risk Factors
- --Hybridon's Lack Of Marketing Experience Could Adversely Affect Its Ability To
Commercialize Its Drugs."
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon entershas entered into a number of collaborative research
agreements for specific
disease targetsrelationships with independent researchers and otherleading academic and research
activities in orderinstitutions and U.S. government agencies, including the National Institutes of
Health, or "NIH". Such research relationships allow Hybridon to supplementaugment its
internal research capabilities and to obtain access to the specialized knowledge or
expertise. In some cases Hybridon relies primarily upon outside
collaborators. Accordingly, termination of a collaborative research agreement
could result in the termination of the related research program.
In general, Hybridon's collaborative research agreements require
Hybridon to pay various amounts to support the research. Hybridon usually
provides the oligonucleotides, 15
which the collaborator then tests. If the collaborator creates any invention
duringin the
course of his or her efforts,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 as part of the collaborationin 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 whichthat it believes are appropriate to 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 studiesand clinical trials and has prepared and submitted
the reports and other regulatory documents for Hybridon'sin connection with the three Hybridon
advanced chemistry antisense compounds whichthat have entered Phase Iclinical studies.
This development expertise is also
being used throughPursuant to a contract with MethylGene, under which Hybridon's Drug Development Department
has helpedalso used its expertise to help design and monitor the preclinical studies fortrials of
MethylGene's antisense compound, MG98, leadingthat led to MethylGene's submission of
an
Investigational New Drug ("IND") applicationIND applications in Canada and the United States.U.S. MethylGene compensated Hybridon for
these services. Hybridon expects tomay perform similar services for OriGenix.
PATENTS, TRADE SECRETS, AND LICENSES
ProprietaryHybridon's success will largely depend on its ability to:
o obtain U.S. and foreign patent protection for Hybridon's products,drug candidates and
processes
and know-how
is important to Hybridon's business. For that reason, Hybridon prosecutes and
aggressively enforces its patents ando preserve trade secrets
o operate without infringing the proprietary technology.rights of third parties
Hybridon's policy is to file patent applications to protect technology,
inventions and improvements that are consideredit considers important to the development of its
business.business, and to obtain licenses to other patents that could help Hybridon
also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain or enhance its competitive position. As of March 1, 1998,28, 2000, Hybridon
owned or exclusively licensed 62in excess of 98 U.S. and foreign issued and
allowed patents, of which 81 are U.S. patents, 9 issued foreign patents, 7 allowed U.S. patent applications, 2
allowed foreign applications and 63patents. Hybridon also has 56 other U.S.
and 99120 other non-U.S.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, specific oligonucleotide products, methods for making
and purifying oligonucleotides, analytical methods, and methods for antisense
treatment of various diseases. The patents expire at variouson dates ranging from 2006 to
2015.
1615
Hybridon is the worldwide exclusive licensee under several U.S. issued
patents or allowed patents and various patent applications owned by University of Massachusetts
Medical Center, or "UMMC" (formerly the Worcester Foundation) ("U. Mass"), 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 or
corresponding patents in, other major industrial countries. One of the
issued U.S. patents (the "HIV Patent") and one of the issued European patents licensed from the U. Mass cover antisense
oligonucleotides as new compositions of matter for stopping the replication of
HIV. TheCoverage of the other issued U.S. patents include claims coveringincludes composition and usesuse of
oligonucleotides based on advanced chemistries, methods of oligonucleotide
production, compositionscomposition of certain modified oligonucleotides that are useful for
diagnostic tests or assays, and methods of purifying oligonucleotides. The earliest
expiration of theUMMC
patents licensed to Hybridon by U. Mass is 2006, when the HIV
Patent expires.expire at various dates starting in 2006.
Hybridon also is the exclusive licensee under various other U.S. and foreign
patents and patent applications, including two U.S. patent applications owned by
McGill University relating to oligonucleotides and DNA methyltransferase.
Hybridon and Massachusetts General Hospital ("MGH") jointly own one issued U.S. patent
applicable to Alzheimer's disease. Hybridon holds an exclusive license to
MGH'sMassachusetts General Hospital's interests under suchthis patent.
Hybridon is a nonexclusive licensee of certain patents held by the
National Institutes of Health, ("NIH")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, (the "PTO")or "PTO," has informed Hybridon
that certain patent applications exclusively licensed by Hybridon from U. Mass
have beenUMMC 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 phosphoro-thioates.phosphorothioates. An interference
proceeding is a proceeding in the PTO to determine who iswas the first to invent, a
claimed invention, and thus
who is entitled to a patent for, thea claimed invention. McDonnell Boehnen Hulbert
& Berghoff, Hybridon'sa U.S. patent counsel for Hybridon, is of the opinion that the U. MassUMMC
patent application has a prima-facie case for priority against the NIH for an
invention that includes phosphorothioate-modified oligonucleotides. However, thereThere can be
no assurance, however, that the PTO will declare an interference, will be
declared, or if declared, as toit does,
what the outcome thereof.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 has also declared a four-way interference involving two additionalUMMC U.S.
patents, for which Hybridon is the exclusive licensee, relating to Hybridon's chimeric oligonucleotides which
Hybridon exclusively licenses from U. Mass. Thisa particular
type of modified oligonucleotides. The other parties to this interference also involves
patents owned by or exclusively licensed towere
Integrated DNA Technologies, ("IDT"),or "IDT," Isis Pharmaceuticals, Inc. and Gilead
Sciences, Inc. 17
All parties have agreed to settle theThis interference and the settlement agreement
has been filed with the PTO for approval.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 whichthat broadly claim chemical modifications
to oligonucleotides. Hybridon has also granted a nonexclusive license to IDT to
make, use, and sell limited quantities of oligonucleotides which incorporateincorporating 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 any sublicense income that Hybridon may receive.it receives. These licenses
impose various commercialization, sublicensing, insurance and other obligations
on Hybridon. Failure ofIf Hybridon fails to comply with these requirements, the license
could result in terminationbe terminated.
Legal standards relating to the validity of the license.
The patent positions ofpatents covering
pharmaceutical and biotechnology firms,
including Hybridon,biotechnological inventions and the scope of claims made
under such patents are generallystill developing. As a result, Hybridon's ability to
obtain and enforce patents that protect its drugs is uncertain and involveinvolves
complex legal and factual questions.
Consequently, even though16
That Hybridon and its licensors
prosecute theirowns or licenses pending or future patent applications
Hybridon does not know whether any of themean that patents based on those applications will issue as patentsultimately be
issued. First, to obtain a patent on an invention, one must be the first to
invent it or if any patents are issued, whether they
will provide adequate proprietary protection. Sincethe first to file a patent application for it. Patent applications
in the United StatesU.S. are maintained in secrecy until patents issue,are issued, and since publication
of discoveriesany given discovery in the scientific or patent literature tendtends to lag
behind the actual discoveriesdate of that discovery by several months,months. Consequently,
Hybridon cannot be certain that the inventors of subject matter covered by
patents and patent applications that it owns or any licensor of patents to it, waslicenses were the first creator of inventions claimed by
pending patent applicationsto
invent, or that Hybridon or any licensor, was the first to file patent applications for, suchthose inventions.
See "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations -- Risk Factors --
Hybridon May Be Unable To Obtain Or Enforce Patents; Its Patents May Not Provide
Adequate Protection."Others, including Hybridon's competitors, and other third partiesalso hold issued patents and
pending
patent applications relating to antisense and/technology or particular genetic
targets which couldtargets. Holders of any of these patents or patent applications may be able to
require Hybridon to change itsor cease making or using certain products or
processes, pay
substantialor obtain an exclusive or nonexclusive license in return for
licensing fees, or cease certain activities, including an issued
patent in Europe covering MDM2 (the "MDM2 Patent").which may be substantial. Hybridon is currently in
license negotiations with the holder of the MDM2 Patent. There canmay not be no
assurance that Hybridon will be able successfully to obtain any
such licenses at a reasonable cost or thatcost. Furthermore, such licenses to such intellectual property will notmay 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. See "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations -- Risk Factors -- Hybridon May Be Unable To Obtain Or
Enforce Patents; Its Patents May Not Provide Adequate Protection." Previously, a competitor was granted another European patent had been granted to a third party relating
to certain types of stabilized synthetic oligonucleotides for use as therapeutic
agents for selectively blocking the translation of a messenger RNA into a
targeted protein by binding with a portion of the messenger RNA to which the
stabilized synthetic oligonucleotide is substantially complementary. This
European patent was revoked in its entirety in an opposition
18
proceeding before
the European Patent Office in September 1995. The holder of this patent appealed
suchthis decision. This appeal was dismissed on February 18, 1999.
Hybridon requires its employees, consultants, outside scientific
collaborators, and 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. There is no assurance,These agreements may not, however, that these
agreements will provide
meaningful protection for Hybridon's trade secrets or adequate remedies in the
event of breach of agreement.
Hybridon engages in collaborationsbreach.
Consistent with pharmaceutical industry and sponsored research agreements and
enters into preclinical and clinical testingacademic standards,
Hybridon's agreements with academic and research institutions and U.S.
government agencies such as the NIH, to take
advantage of their technical expertise and to gain access to certain technology.
Consistent with pharmaceutical industry and academic standards, these agreements
may provide that the results of a given collaboration, or
any developments and resultsthat derive from the collaboration, will be freely published,
that information or materials supplied by Hybridon will not be treated as
confidential, and that Hybridon may be required tomust 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"Business--Academic and Research Collaborations."
GOVERNMENT REGULATION
Hybridon's research, clinical development and production activities are
regulated for safety, effectiveness and quality by numerous governmental
authorities in the United StatesU.S. and other countries. Hybridon believes that it is in
material compliance with all applicable federal, state and foreign legal and
regulatory requirements.
However, it is possible that legal or regulatory requirements may
change, which could have a material adverse effect on Hybridon's business or
results of operations.
FDA ApprovalsApprovals. In addition to product approvals by the FDA, as
described above, Hybridon
may be required to obtain a satisfactory inspection by the FDA coveringmay require that it inspect Hybridon's manufacturing
facilities before a product manufactured by Hybridon
can be marketed in the United States. The FDA will review Hybridon's
manufacturing procedures and inspect its facilities and equipment for compliance with GMP and other applicable rules and regulations.regulations
before it will permit a product manufactured by Hybridon to be marketed in the
U.S. Any material
19
change by Hybridon in its manufacturing process or equipment,
or locationincluding relocation of the manufacturing facility, would necessitate additional
FDA review and approval.
Other RegulationRegulation. 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.
In addition,Furthermore, because Hybridon uses hazardous materials, chemicals, viruses, and
17
various radioactive compounds, Hybridon'sit must comply with U.S. Department of
Transportation and Environmental Protection Agency requirementsregulations 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 the
standards prescribed by applicablethese laws and regulations, it cannot completely eliminate
the risk of accidental contamination or injury from these materials.
In the
event of such an accident, Hybridon could be held liable for any damages that
result. Any such liability could have a material adverse effect on Hybridon.
COMPETITION
Hybridon's proposed products will be competing with products developed
by third parties for the same diseases. Competition among these products will be
affected by, among other things, product efficacy, safety, reliability,
availability, price and patent protection. In addition, the speed at which
Hybridon can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market will be
an important competitive factor. Hybridon's competitive position will also
depend upon its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise develop proprietary products or processes, and to
secure sufficient funds to sustain it until commercial sales of its drugs occur.
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.
Hybridon believes that the industry-wide interest in these technologies and
products will continue and will accelerate. It is possible that Hybridon's
competitors will succeed in developing products that are more effective than
Hybridon's or which would render Hybridon's technology and products obsolete or
noncompetitive. One competitor of Hybridon has recently received FDA approval to market an
antisense therapeutic product for the treatment of CMV retinitis. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations -- Risk Factors -- Hybridon
Faces Intense Competition, Andbelieves that the interest in these technologies and products will increase. It
is possible that Hybridon's Products Could Be Rendered Obsolete; Many Ofcompetitors will succeed in developing products that
are more effective than Hybridon's. Furthermore, Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon." Furthermore, becauseproposed drugs will
be competing with other kinds of drugs. Given the fundamental differences
between 20
antisense technology and other drug technologies, thereantisense drugs may be
less effective at treating some diseases for which suchthan other kinds of drugs.
Biotechnology and related pharmaceutical technologies are superiorhave undergone
and continue to antisense.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 among others, 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. In addition,Hybridon, and many of these competitors have significantly
greater experience than Hybridon in undertaking preclinical studies and human clinical
trials of new pharmaceutical products and obtaining FDA and other regulatory
approvals of products for use in
health care.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 competes against a number of third parties. There is the
possibility thatfaces competition, as Hybridon's customers couldmay begin to
produce their drugsoligonucelotides internally or couldmay find other sources for their manufacturing needs. Many of
these third parties and customers have greater financial, technical and human
resources than Hybridon. Key competitive factors will include the price and
quality of the products as well as manufacturing capacity and ability to comply
with specifications and to fulfill orders on a timely basis.sources. Hybridon may be
requiredforced to reduce the cost of its product offeringsproducts to meet the competition. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations -- Risk Factors -- Hybridon Faces Intense Competition, And Hybridon's
Products Could Be Rendered Obsolete; Many Of Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon."
EMPLOYEES
As of March 31, 1999,29, 2000, Hybridon employed 5146 individuals full-time, of
whom 2016 held advanced degrees. NineteenEight of these employees are engaged in research
and development activities and eighteleven are employed in finance, corporate
development, and legal and general administrative activities. In addition, twenty-four27 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.
18
ITEM 2. PROPERTIES
Hybridon leases its 36,000 square foot facility in Milford,
Massachusetts under a lease whichthat expires in 2004. The term of theHybridon has an option to
extend this lease may be
extended at Hybridon's option for two additional five-year terms. 21
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 comprising approximately 26,000 square feet forunder a term expiringlease that
expires April 30, 2007 at an2007. The annual rent offor this space is approximately $23 per
square foot. Hybridon is currently subleasing approximately 20,000 square feet
of this facility to a third party under a sublease expiringthat expires September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
Hybridon is not a party to any litigation that it believes could have a material adverse effect ondamage
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, 1998.1999.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANYHYBRIDON
The executive officers and significant employees of the CompanyHybridon as of
March 31, 199929, 2000 are as follows:
EXECUTIVE OFFICERSExecutive Officers
NAME AGE POSITION
- ---- --- --------
E. Andrews Grinstead, III............. 53 Chairman of Board of Directors, PresidentIII.................... 54 Director and Chief Executive Officer
Sudhir Agrawal, D. Phil............... 45Phil...................... 46 President and Acting Chief Executive
Officer, Senior Vice President of
Discovery, Chief Scientific Officer, and
Director
22
SIGNIFICANT EMPLOYEESRobert G. Andersen........................... 49 Vice President of Operations and Planning
and Chief Financial Officer
Significant Employees
NAME AGE POSITION
- ---- --- --------
Robert G. Andersen.................... 48 Vice President of Operations and Planning and
Treasurer
Judith Marquis, Ph.D, D.A, B.T........ 52 Vice President of Pre-Clinical Development
R. Russell Martin, M.D. .............. 6364 Senior Vice President of Drug Development
Jin-Yan Tang,Frederick M. Miesowicz, Ph.D. .................. 55 Vice President of Production
Cheryl M. Northrup.................... 4249 Senior Vice President and General
CounselManager, Hybridon Specialty Products
Jin-Yan Tang, Ph.D. 56 Vice President of Production
Mr.E. Andrews Grinstead, III joined the CompanyHybridon in June 1991 and was
appointed Chairman of the Boardboard and Chief Executive Officer in August 1991 and
President in January 1993. He has served on the Boardboard of Directorsdirectors since June
1991. Mr. Grinstead resigned as Chairman in December 1999. On February 15, 2000,
19
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 the Company,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, ("Eli Lilly"), an international pharmaceutical company, from 1976 to
1984, most recently as General Manager of Venezuelan Pharmaceutical, Animal
Health and Agricultural Chemical Operations and at Eli Lilly Corporate Staff as
Administrator, Strategic Planning and Acquisitions. FromSince 1991, until its merger with another company in 1998, Mr. Grinstead
served as a director of EcoScience Corporation, a development stage
company engaged in the development of biopesticides, and has served since 1991 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 Boardboard of the Massachusetts
Biotech Council in 1997. Since 1994, Mr. Grinstead has served as a member of the
Boardboard of Trusteestrustees of the Albert B. Sabin Vaccine Foundation, a charitable
foundation dedicated to disease prevention. Mr. Grinstead received an A.B. from
Harvard College in 1967, a J.D. from the University of Virginia School of Law in
1974 and an M.B.A. from the Harvard Graduate School of Business Administration
in 1976.
Dr.Sudhir Agrawal joined the CompanyHybridon in February 1990 and served as Principal
Research Scientist from February 1990 to January 1993 and as Vice President of
Discovery from December 1991 to January 1993 prior to being appointed Chief
Scientific Officer in January 1993, and Senior Vice President of Discovery in March
1994.1994, and President and Acting Chief Executive Officer in February 2000. He has
served on the Boardboard of 23
Directorsdirectors since March 1993. Prior to joining the Company,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.
Mr.Robert G. Andersen joined the CompanyHybridon in November 1996 and was appointedserved as Vice
President of Systems Engineering and Management Information Systems in November 1996 prior to
being appointed Vice President of Operations and Planning in 1997, and Treasurer
of the Company in
January 1998.1998, and Chief Financial Officer of Hybridon in February 2000. Prior to
joining the Company,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 Group.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.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 aan M.S. in
Management from Northeastern University in 1978. Dr.He is also a graduate of the
United Technologies Advanced Studies Program.
R. Russell Martin joined the Company and servedHybridon in April, 1994 as Vice President of
Clinical Research from April 1994 to February 1997 prior to being appointedand is presently the Senior Vice President of Drug Development
for Hybridon, Inc. in February 1997. Prior to joining the Company,
Dr. Martin served in a variety of positions at Bristol Myers Squibb from 1983 to
1994, most recently asMilford, 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 suchthat
period, he served as an Adjunct Associate Professorheld appointments in medicine and infectious diseases at Baylor
College of Medicine, and Associate Clinical Professor at Yale University School of medicine
from 1987 to 1994, Clinical Professor at University of Connecticut School of Medicine, from 1986 to 1993 and Adjunct ProfessorYale
University School of Medicine at Baylor College
of Medicine from 1993 to 1994.Medicine. Prior to joining Bristol Myers Squibb, Dr. Martin
served asthe pharmaceutical industry, he
was an Associate Professor and then Professor of Medicine, Microbiology and
Immunology at Baylor College of Medicine from 1975 to 1983. Dr. Martin1971-1983. He received an A.B. in American studies
from Yale University in 1956 and an M.D. degree from the Medical College of Georgia
in 1960. Dr. Marquis joined the Company in April, 1995, and served as Director of
Drug Safety Evaluation until January, 1998 when she was appointed Vice President
of Preclinical Development. Prior to joining the Company, Dr. Marquis served as
Director of Preclinical Development at Procept, Inc., from 1993 to 1995, and
Director of Life Sciences Research at Arthur D. Little, Inc., from 1989 to 1993.
Prior to joining the pharmaceutical industry, Dr. Marquis spent 16 years in
medical research and education at Tufts University School of Medicine. Dr.
Marquis receivedHe is a B.S. in Biology from Trinity College of Vermont in 1973 and a
Ph.D. in physiology and biophysics from the University of Vermont School of
Medicine. She is board certified in toxicology and a former presidentFellow of the American BoardCollege of Toxicology.
24Physicians and of the
Infectious Diseases Society of America.
20
Ms. NorthrupFrederick M. Miesowicz joined the CompanyHybridon in 1997 and was appointedJuly 1999 as Senior Vice
President and General Counsel in June 1998. Ms. Northrup served as Corporate
Counsel to ImmuLogic Pharmaceutical Corporation from 1996 to 1997 and as a
DirectorManager of the Wallace Law Registry from 1994 to 1996. Ms. Northrup also served
as Director of Legal Services of the Boston Five Cents Savings Bank from 1992
until 1994 and as Associate General Counsel to American Finance Group in 1990.Hybridon Specialty Products. Prior to joining
American Finance Group, Ms. NorthrupHybridon, 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 an Associateacquired from 1981DuPont 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 1990process lymphocytes
for therapeutic use. He holds a BS degree in Chemistry from Siena College and
received a PartnerPh.D. in Chemistry in 1977 from 1990 to 1991 of Peabody & Brown, a law firm in
Boston, Massachusetts. Ms. Northrup received her A.B. degree from Smith College
in 1978 and a J.D. degree from Boston College Law School in 1981.
Dr. TangHarvard University.
Jin-YanTang joined the CompanyHybridon 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 the Company,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.
25
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 Stockcommon 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.common stock.
On December 2, 1997, Hybridon's Common Stockcommon stock was delistedremoved from the
Nasdaq National Market and began being quoted on the NASD OTC Bulletin Board.
Prices reflectedQuotes on the NASD OTC Bulletin Board may reflect inter-dealer prices, without
retail mark-up, mark-downsmarkups, markdowns or commissions and maydo not necessarily represent actual
transactions.
On December 10, 1997 Hybridon effected a one-for-five reverse stock
split of its Common Stock.common stock. As a result of the reverse stock split, each five
shares of Common Stockcommon stock was automatically converted into one share of Common
Stock,common
stock, with cash paid in lieu ofpayments for any fractional shares.
The following table sets forth for the periods indicated the high and
low sales prices per share of the Common Stockcommon stock during each of the quarters set
forth below as reported on the Nasdaq National Market and the NASD OTC Bulletin
Board since January 24, 1996 and as adjusted to reflect the December 1997
reverse stock split.
HIGH LOW
---- ---
1996
- ----
First Quarter (from January 24, 1996)........ $71.250 $43.750
Second Quarter............................... 59.375 25.625
Third Quarter................................ 59.375 33.125
Fourth Quarter............................... 43.125 26.250
1997
- ----
First Quarter................................ $43.125 $28.125
Second Quarter............................... 35.625 25.000
Third Quarter................................ 28.125 7.500
Fourth Quarter............................... 4.859 2.609
26
1998
- ----
First Quarter................................ 3.359 1.000
Second Quarter............................... 2.75 1.609
Third Quarter................................ 2.516 1.125
Fourth Quarter............................... 3.25 1.125
1999
- ----
First Quarter................................ 1.9531, 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
21
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 April 13, 1999March 28, 2000 was $1.1875$2.6875 per share.
(b) Holders
-------
The number of Common Stockholderscommon stockholders of record on April 13, 1999March 28, 2000 was 351.365.
(c) Dividends
---------
The dividend rate of Hybridon's Series A convertible preferred stock (the "Series A Preferred Stock") ispays dividends at 6.5% per annum,year,
payable semi-annually in arrears. These dividends may be paid either in cash or
in additional shares of Series A Preferred Stock,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 Stockcommon stock or
any cash dividends on the Series A Preferred Stockconvertible preferred stock in the foreseeable future.
The Indentureindenture under which Hybridon issued its 9% Convertible Subordinated Notes (the
"9% Notes")convertible subordinated notes on
April 2, 1997, limits Hybridon's ability to pay dividends or make other
distributions on its Common Stockcommon stock or to pay cash dividends on the Series A
Preferred Stock.convertible
preferred stock. As of December 31,1998,March 29, 2000, $1.3 million in aggregatetotal principal amount of
the 9% Notesnotes remained outstanding.
In addition, Hybridon is currently prohibited from paying cash dividends under
a $6,000,000 securedthe loan which is ownedheld by affiliatesthe Lender. See "Management's Discussion and Analysis of
two membersFinancial Condition and Results of Hybridon's Board of Directors. See Note 7(b) to the Consolidated Financial
Statements.Operation--1998 Financing Activities--Credit
Facility."
(d) Recent Sales of Unregistered Securities
---------------------------------------
DuringSales by Hybridon during the quarterly period ended December 31, 1998, the Company did not
sell any2000,
of securities that were not registered under the Securities Act of 1933, as
amended.
27amended 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.
22
(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
the Company's
Consolidated Financial Statements thatHybridon's consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants. ThisThe financial data should be read
in
conjunctionalong with, the Management'sand are qualified by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements" Hybridon's
consolidated financial statements and the Notesnotes thereto and the other financial information appearingReport of
Independent Public Accountants included elsewhere in this Annual Report on Form
10-K.
23
Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(In thousands,Thousands, except per share data)
Statement of Operations Data:
Revenues:
Statement of Operations Data:
Revenues
Research and development................... $ 1,032 $ 1,186 $ 1,419 $ 945 $ 1,100
Product and service revenue................ -- -- 1,080 1,877 3,254revenue................... $ - $ - $1,080 $1,877 $3,254 $6,186
Research and development...................... 1,032 1,186 1,419 945 1,100 600
Royalty income............................. -- --income................................ - - 62 48 --- -
Interest income............................income............................... 135 219 1,447 1,079 148 215
----- ----- ------- ------- ------- -------
-------Total revenues........................ 1,167 1,405 4,008 3,949 4,502 7,001
----- ----- ------- ------- ------- -------
Operating ExpensesExpenses:
Research and development...................development...................... 20,024 29,685 39,390 46,828 20,977 13,090
General and administrative.................administrative.................... 6,678 6,094 11,347 11,02711,026 6,573 Interest...................................3,664
Interest...................................... 69 173 124 4,536 2,932 Restructuring.............................. -- -- --750
Restructuring................................. - - - 11,020 --- -
-------- ------- ------- ------- --------------- -------- -------
Total operating expenses..............expenses...................... 26,771 35,952 50,861 73,410 30,482 ------- ------- ------- -------17,504
-------- -------- -------- -------- -------- -------
Loss from operations............................operations............................... (25,604) (34,547) (46,853) (69,461) (25,980) (10,503)
Extraordinary item:
Gain on exchangeconversion of 9% convertible
-- -- -- --Subordinated notes payable.................... - - - - 8,877 subordinated notes payable................. ------- ------- ------- ------- --------
-------- --------- -------- --------- -------- --------
Net Loss........................................loss........................................... (25,604) (34,547) (46,853) (69,461) (17,104)(17,103) (10,503)
Accretion of preferred stock dividends.......... -- -- -- -- 2,689
------- ------- ------- ------- -------dividend.............. - - - - (2,689) (4,232)
-------- --------- -------- --------- -------- --------
Net loss to common stockholders.................stockholders.................... $(25,604) $(34,547) $(46,853) $(69,461) $(19,793)$(19,792) $(14,735)
======== ======== ======== ======== ================= ========= =========
Basic and Diluteddiluted net loss per common share:
Loss per share before extraordinary item...from:
Operations.................................... $(70.77) $(94.70) $ (10.24) $ (13.76)$(10.24) $(13.76) $ (2.19) $ (0.66)
Extraordinary Item.........................gain............................ - - - - 0.75 ------- ------- --------
--------- ------ -------- -------- ------- -------
Net loss per share.........................share............................ (70.77) (94.70) (10.24) (13.76) (1.44) (0.66)
Accretion of preferred stock dividends.....dividends - - - - (.23)
------- ------- ------- ------- -------(0.23) (0.27)
-------- -------- --------- -------- -------- --------
Net loss per share applicable to common shareholders............................... $ (70.77) $ (94.70)$(70.77) $(94.70) $ (10.24) $(13.76) $(1.67) $ (13.76) $ (1.67)(0.93)
======= ======= ======== ======== ========== ========= ================ ========
Stockholders..................................
Shares Used in Computing Basic and
Diluted Net Loss per Common Share...........................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.....................................investments(2).................................. $3,396 $5,284 $ 16,419 2,202 5,608$2,202 $5,607 $2,552
Working capital (deficit)....................... ......................... (1,713) 210 8,8918,888 (24,100) (5,614) (6,338)
Total assets....................................assets....................................... 11,989 19,618 41,537 35,072 16,536 11,935
Long-term debt and capital lease
obligations, net of current portion..........portion........... 1,522 1,145 9,032 3,282 6,473473 392
8% convertible notes payable - - - - - 6,100
9% Convertible Subordinated
Notes Payable................................... -- -- --convertible subordinated
notes payable ..................................... - - - 50,000 1,306 1,306
Accumulated Deficitdeficit ............................... (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)
---------- --------- -------- -------- --------- ---------
28(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
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Hybridon is engagedinvolved in the discovery and development of genetic
medicines based on antisense technology. Hybridon commencedbegan operations in February
1990 and since that time has been engagedinvolved primarily in research and development
efforts, developing its manufacturing capabilities, and raising capital. In
order to commercialize its therapeutic products, Hybridon will need to address a
number of technological challenges and comply with comprehensive regulatory
requirements. All revenues received by Hybridon to date have been derived from
collaborative agreements, interest on invested funds and revenues from the
custom contract manufacturing of synthetic DNA and reagent products by HSP.
Hybridon
has very limited cash resources and substantial obligations to
lenders, its real estate landlords, trade creditors, and others. Hybridon's
ability to continue operations in 1999 depends on its success in obtaining new
funds. If Hybridon is unable to obtain substantial additional new funding by the
end of May 1999, it will be required to terminate its operations or seek relief
under applicable bankruptcy laws. Hybridon is currently seeking debt or equity
financing in an amount sufficient to support its operations through the end of
1999, and in connection therewith, is in negotiations with several parties to
obtain such financing.
In the Report of Independent Public Accountants set forth in Appendix A
attached to this Annual Report on Form 10-K, Arthur Andersen LLP, Hybridon's
independent public accountants, states that there is substantial doubt about
Hybridon's ability to continue as a going concern.Specialty Products.
Hybridon has incurred cumulativetotal losses from inceptionof approximately $253.2 million
through December 31, 1998 of approximately $238.4 million.1999. Hybridon implementedadopted a restructuring plan in the second
half of 1997 whichthat has significantly reduced Hybridon'sits operating expenses in 1998 from 1997 levels.expenses. However,
Hybridon expects that its research and development and general and
administrative expenses will be significant in 19992000 and future years as it
pursues its core drug development programs and expects to continue to incur
operating losses and have significant capital requirements that it will
not be able to satisfy withneeds beyond its internally generated
funds.
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements herein thatHybridon's existing cash resources are not statements of historical fact
may be deemedexpected to be forward-looking statements. For example,sufficient to
fund operations only until June 2000. However, if the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intendednoteholders force default
proceedings due to identify forward-looking statements. Such forward-looking statements
are basedevents 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 management's current expectations and involve known and unknown
risks, uncertainties, and other factors whichits success in obtaining new
funding, either through additional financing or new partnerships or
collaborations with third parties, that may cause the actual results,
performance or achievements of Hybridonrequire it to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. There are a number of important factors that could
cause Hybridon's actual resultsrelinquish rights to
differ materially from those indicated by
such forward-looking statements. These factors include, without limitation,
those set forth below under the caption "Risk Factors."
29
RESTRUCTURING PLAN
During the second half of 1997, Hybridon implemented a restructuring
plan to reduce expenditures on a phased basis in an effort to conserve its cash
resources. As part of this plan, in addition to terminating the development of
GEM 91, Hybridon reduced or suspended programs unrelated to its core advanced
chemistry antisense drug development programs. In addition, in 1997, Hybridon
terminated the employment of a substantial number of employees at its Cambridge
and Milford, Massachusetts and Paris, France facilities and substantially
reduced operations at its Paris, France office. In December 1999, Hybridon began
the final process of terminating all operations in Europe.
In 1997 Hybridon subleased a portion of eachcertain of its facilities in
Cambridge, Massachusetts (including atechnologies, product candidates or products which it would
otherwise pursue on its own. If Hybridon is unable to obtain substantial
portion of its former
headquarters). Inadditional new funding by June 1998,2000, Hybridon relocated its headquarters from Cambridge,
Massachusettswill have to its facility in Milford, Massachusetts and subsequently sold
its interest in Charles River Building Limited Partnership, which owned the
former Cambridge headquarters. In connection with this transaction and the
termination of the Cambridge lease in 1998, the Company received $6,163,000 in
cash, which included the return of a portion of its security deposit for its
Cambridge headquarters and the reclassification on the Company's balance sheet
of $660,000 from restricted cash to cash and cash equivalents. The Cambridge
facility was re-leased in September 1998 to a third party, subject to a sublease
to a portion of the premises. As a result of these actions, Hybridon was
relieved of its substantial lease obligations for the Cambridge facility,
subject to a continuing liability for any defaults which may ariseterminate operations
or seek relief under the
sublease.applicable bankruptcy laws.
RESULTS OF OPERATIONS
Years ended December 31, 1996, 1997, 1998 and 19981999
Revenues
Hybridon had total revenues of $4.0 million in 1996, $3.9 million in 1997, and $4.5 million in
1998.1998, and $7.0 million in 1999. During 1996, 1997, 1998 and 1998,1999, Hybridon received
revenues from research and development collaborations of $1.4 million, $0.9 million, and $1.1
million respectively. Research and development collaboration
revenues decreased in 1997 from 1996 because of the cancellation by Roche of its
collaboration with Hybridon and the resulting elimination of research funding by
Roche.$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 $1.1 million in 1996, $1.9 million in 1997, and $3.3 million in
1998. The increase1998 and $6.2 million in revenues in 1997 over those in
1996 resulted from a full year1999. Substantially all of operations for HSP, which commenced operations
in the third quarter of 1996. As of December 31, 1998, HSP had a backlog of $0.9
million.Hybridon's product and
service revenue is generated by its wholly owned subsidiary, Hybridon anticipates filling this backlog in the first half of 1999.Specialty
Products (HSP). The increase in revenues in 1998 over those in 1997 was
primarily the result of (1) an expansion by HSP
in theof customer base, and(2) increased sales
to certain existing customers, and was
also due in part to Hybridon receiving(3) $0.4 million inof service revenue from
MethylGene.
30
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 $1.4 million in 1996, $1.1 million in 1997, and $0.1 million
in 1998.1998 and $0.2 million in 1999. The decrease in interest income in 1997 from
1996, and in 1998 from
1997 was the result of lower cash balances available for investment each year.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 1996, 1997, 1998 and 1998,1999, Hybridon expended $39.4 million, $46.8 million, $21.0
million and $21.0$13.1 million, respectively, on research and development activities.
25
The increasesdecreases in research and development expenses each year reflect
Hybridon's reduction of its operating expenses in 1997 from 1996
reflected increasing expenses related primarilyand 1998 pursuant to ongoing clinical trials of
Hybridon's product candidates, including (a) clinical trials of two different
formulations of GEM 132, which were first initiated during the
third quarter of
1996restructuring that began in 1997 and was completed in 1998 and the first quarterlower levels
of 1997, (b) clinical trials of GEM 92, which were
initiatedcash available for expenditures in the third quarter of 1997 and (c) clinical trials of GEM 91, which
were initiated in France in October 1993 and in the U.S. in May 1994, and were
terminated in July 1997. Clinical expenses related to GEM 91 decreased
significantly during the second half of 1997 after Hybridon terminated
development of this compound. Research and development expenses also increased
in 1997 over 1996 due to significant increases in preclinical expenses incurred
to meet the filing requirements to initiate clinical trials of Hybridon's
product candidates in the United States.
The decrease in research and development expenses in 1998 reflects
Hybridon's restructuring that commenced during the second half of 1997.1999. The restructuring included the
discontinuationtermination of operations at Hybridon's facilities in Europe, termination of the clinical development of GEM 91 and the
reduction or suspension of selected programs unrelated to Hybridon's core
advanced chemistry antisense drug development program. The restructuringalso resulted
in significant reductions in employees and employee-related expenses, clinical
and outside testing, consulting, materials and lab expenses.
TheIn addition, the facilities expense related to theincluded in research and
development area
increasedexpenses decreased significantly in 19971998 and 1999 as a result of
the relocation of themoving Hybridon's corporate offices to Cambridge, Massachusetts and decreased significantly in 1998 as a
result of the relocationlab space in July 1998 from Cambridge to
Milford, Massachusetts.
Hybridon's facility costs in 1998 related to researchMassachusetts and development were also
reduced by the income received from subleasingsublease of its underutilizedremaining unused Cambridge
facilities.
Research and development salaries and related costs remained at
approximately the same level in 1997 as 1996 because of the costs involved in
terminating employees in 1997.
Research and development salaries and related costs decreased in 1998
from 1997 due to the substantial reduction in the number of employees engagedinvolved
in research and development in 1998. Patent expenses alsoResearch 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 as
1997 and 1996, as Hybridon continued to limit the scope of patent protection
that it sought as part of its effort to conserve its cash resources, while
prosecuting and maintaining key patents and patent applications.
31
1999.
General and Administrative Expenses
Hybridon incurred general and administrative expenses of $11.3 million
in 1996, $11.0 million
in 1997, and $6.6 million in 1998.1998 and $3.7 million in 1999. The decrease in general and administrativedecreases reflect
Hybridon's reduction of its operating expenses in 1998 resulted
primarily from Hybridon's restructuring program initiated during the second half
of 1997 and its effect on1998 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 and net
facilities costs.
The facilities expense related to the general and administrative area
increased significantly in 1997 over 1996 as a result of the relocation of the
corporate offices to Cambridge, Massachusetts. However, as a result of the
implementation of the restructuring plan in the second half of 1997, such
increase was offset by decreases in general and administrative salaries and
related costs and in consulting expenses in the second half of 1997, which
carried over into 1998. Hybridon's facilities expense related to the general and
administrative area decreased significantly in 1998 as a result of its
relocation to Milford, Massachusetts. Facility costs in 1998 were also reduced
by the income received from subleasing underutilized Cambridge facilities.expenses. General and administrative expenses related to business development,
public relations and legal and accounting expenses also decreased in 1998 from 1997, but remained at
approximately1999.
In addition, the same levelfacilities expense included in 1997general and
administrative expenses also decreased significantly in 1999 as 1996.a result of
moving Hybridon's corporate offices to Milford, Massachusetts in 1998.
Interest Expense
Interest expense was $0.1 million in 1996, $4.5 million in 1997, and $2.9 million in 1998.1998 and
$0.7 million in 1999. The decrease in interest expense in 1998 is mainlydecreases are attributable to the exchange of
approximately $48.7 million of the 9% Convertible
Subordinated Notes ("the 9% Notes"),convertible subordinated notes issued in
the second quarter of 1997 for Series A Preferred Stockpreferred stock on May 5, 1998. In
addition, the outstanding balance of borrowingsloans needed to finance the purchase of
property and equipment was reduced in May 1998, resulting in a subsequent
reduction in interest expense. The increase in interest expense in 1997 from 1996 reflected an increase
in Hybridon's debt outstanding associated withDue to the issuance of the 9% Notes and8% convertible
subordinated notes in December 1999, Hybridon's interest incurred on borrowings to finance the purchase of property and
equipment.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, (netnet of sublease income and other contracts),contracts, (iii) severance,
benefits and related costs for 95 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 $46.9 million in 1996, $69.5 million in 1997, and $26.0 million in
1998.1998 and $10.5 million in 1999. Hybridon had extraordinary income of $8.9
million in 1998 resulting from the exchangeconversion of $48.7 million principal amount
of its 9% Notes fornotes to Series A Preferred Stockpreferred stock in the second quarter of 1998. In
accordance with Statement of Financial Accounting ("SFAS") No.15,Standards No. 15, Accounting
by Debtors and Creditors for Troubled Debt Restructurings, the CompanyHybridon recorded an
extraordinary gain of approximately $8.9
32
million related to the exchange. The
extraordinary gain represents the difference between the carrying value of the
9% Notes tenderednotes offered for exchange and the fair value of the Series A Preferred Stockpreferred stock
issued upon the exchange, as determined by the per share sales price of such
stock sold in May 1998 in the private offering described below. As a result of
this transaction, Hybridon
reduced itsextraordinary gain, Hybridon's net loss beforewas reduced to $17.1 million for
1998.
Hybridon had recorded preferred stock dividends to $17.1 million in 1998.
Hybridon had an accretion ofon the Series A
convertible preferred stock dividends of $2.7 million at
December 31,and $4.2 million in 1998 to reflect the 1998 portion of dividends payable to the
holders of Series A Preferred Convertible Stock,and 1999,
respectively, resulting in a net loss applicable to common stockholders of $19.8
million and $14.7 million for 1998.1998 and 1999, respectively. The net loss
applicable to common stockholders for 1997 was $69.5 million.
26
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
HSP,Hybridon Specialty Products, and through research and development collaborations
and licensing arrangements.
During the year ended December 31, 1998,1999, Hybridon utilized
approximately $21.5$8.6 million to fund operating activities and approximately $472,000$9,000
for capital expenditures. The primary use of cash for operating activities was
to fund Hybridon's loss before extraordinary items of $26.0$10.5 million. Capital
expenditures during 1998 included amounts expended for the build-out and
equipping of Hybridon's corporate headquarters and primary research and
development laboratories in its leased manufacturing facility in Milford,
Massachusetts. Hybridon expects to purchase a minimal
amount of capital equipment in 19992000 as part of its effort to conserve cash
resources.
Cash Resources
Hybridon had cash and cash equivalents of $5.6$2.6 million at December 31,
1998.1999. However, since that date, Hybridon has expended the majorityspent a portion of such cash
resources and continues to have substantial obligations to lenders, real estate
landlords, trade creditors and others. On March 30, 1999,27, 2000, Hybridon's obligations
included $1.3 million principal amount of 9% Notes,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, $0.5 million of notes
payable and approximately $2.4$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
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 in 1999 dependsbeyond that time will depend on its success in obtaining new
funds in the immediate future. Hybridon is currently seeking
debtfunding, either through additional financing or equity financing in an amount sufficient to support its operations
through the end of 1999, and in connection therewith, is in negotiationsnew partnerships or
collaborations with severalthird parties, to obtain such financing. However, there can be no assurance
that Hybridon will obtain any funds or as to the timing thereof. If the Company
is unable to obtain substantial additional new funding by the end of May 1999,
Hybridon may be required to further curtail significantly one or more of its
core drug development programs, obtain funds through arrangements with
collaborative partners or others that may require it to relinquish rights to
certain of its technologies, product candidates or products which it would
otherwise pursue on its own orown. 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.
It is also possible that Hybridon's creditors may
seek to commence involuntary bankruptcy proceedings against the Company.
33
Even ifthough Hybridon obtainshas obtained sufficient cash to fund its
operations in 1999,until June 2000, it will be required to raise substantial additional
funds through external sources, including through collaborative relationships
and public or private financings,financing, to support its operations beyond 1999. Except for researchthroughout 2000 and
development funding from Searle under its collaborative agreement with Searle
(which is subject to early termination in certain circumstances),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 assuranceguarantee can be given that
additional funds will be available to fund operations for the balance of 19992000 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% Notesnotes to exchange the 9% Notesnotes for Series A Preferred Stockpreferred stock and certain
warrants of Hybridon. On May 5, 1998, noteholders holding $48.7 million of
principal and $2.4 million of accrued interest tendered such principal and accrued
interest to Hybridon for 510,505 shares of Series A Preferred Stockpreferred 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 Stockpreferred 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 iswas obligated to issue an additional
300,000 shares in connection with this transaction. For more information about
this transaction, see Note 15(c)note 10(b) of the Notesnotes to Consolidated Statements.
34
consolidated statements.
Credit Facility
In December 1996, Hybridon entered into a five yearfive-year $7,500,000 note
payable with a bank. The note contained certain financial covenantsobligations that
required Hybridon to maintain a minimum tangible net worth and a minimum liquidity and
prohibited the payment of dividends. The note was payable in 59 equal
installments of $62,500 commencingbeginning on February 1, 1997, with a balloon payment of
the then remaining outstanding principal balance due on January 1, 2002. Because
Hybridon was required to make certain prepayments of principal during 1998, the
outstanding principal balance of the loan at November 16, 1998 was approximately
$2.8 million. The lender has granted Hybridon a waiver of compliance with the
minimum tangible net worth requirement at December 31, 1998 and March 31, 1999
and the minimum liquidity requirement at April 15, 1999.
Effective November 20, 1998, Forum Capital Markets, LLC ("Forum") and
certain investors associated with Pecks Management Partners Ltd. ("Pecks"; Forum
and Pecks collectively, the "Lender")Lenders purchased the loan from
the bank. Forum and Pecks are affiliates of two members of Hybridon's Boardboard of
Directors.directors. In connection with
28
this purchase, the LenderForum 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:
(i)o the maturity was extended to November 30, 2003;
(ii)2003
o the interest rate was decreased to 8%;
(iii)
o interest is payable monthly in arrears, with the principal due in full
at maturity;
(iv)maturity
o the note payable is convertible, at the Lender's 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;
(v)share
o the threshold of the minimum liquidity covenantobligation was reduced from
$4,000,000 to $2,000,000; and
(vi)$2,000,000
o the note payable may not be prepaid, in whole or in part, at any time
prior to December 1, 2000.2000
The other terms of the note payable were unchanged.
For further information about this loan, see Note 7 of the Notes to Consolidated
Financial Statements.
Facility Leases
As of December 31, 1998,1999, Hybridon hashad future operating lease
commitments of approximately $7.7$6.9 million through 2007 for its existing leases.
Net Operating Loss Carryforwards
As of December 31, 1998,1999, Hybridon had approximately $220.0$228.7 million and
$3.9$4.2 million of net operating loss and tax credit carryforwards, respectively.
The Tax Reform Act of 1986 (the "Tax Act") contains certain provisions that may limit Hybridon's
ability to utilize net operating loss and tax credit carryforwards in any given
year if certain events occur, including cumulative changes in ownership
interests in excess of 50% over a three-year period. Hybridon has completed
several financings since the effective date of the Tax Act, 35
which, as of
December 31, 1998,1999, 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.
YEAR 2000
As has been widely publicized, many computer systems and microprocessors
are not programmed to accommodate dates beyond the year 1999. Hybridon's
exposure to this year 2000 ("Y2K") problem comes not only from its own internal
computer systems and microprocessors, but also from the systems and
microprocessors of its key suppliers, including utility companies and payroll
services.
Hybridon believes that all of its internal systems will be Y2K compliant
by the end of the third quarter of 1999. Hybridon is currently evaluating all of
its internal computer systems and microprocessors in light of the Y2K problem.
As part of this process, Hybridon has conducted an inventory of its automated
instruments and other computerized equipment and is contacting applicable
vendors for information regarding Y2K compliance. Hybridon will then upgrade or
otherwise modify its internal computer systems and microprocessors, to the
extent necessary. Testing of all its internal computer systems and
microprocessors was completed in the first quarter of 1999. Hybridon does not
expect the cost of bringing all Hybridon's systems and microprocessors into Y2K
compliance will be material. Approximately 50% of Hybridon's systems either have
been found compliant or have already been brought into compliance.
Hybridon's Y2K compliance efforts are in addition to other planned
information technology ("IT") projects. While these efforts have caused and may
continue to cause delays in other IT projects, Hybridon does not expect that any
of these delays will have a significant effect on Hybridon's business or that
any of Hybridon's other IT projects will be canceled or postponed to pay for the
Y2K upgrades.
With regard to potential supplier Y2K problems, Hybridon has compiled a
list of its critical suppliers, and has sent and received back a Y2K
questionnaire from each of them in order to permit Hybridon to ascertain the Y2K
compliance status of each. Hybridon has not yet uncovered any key supplier Y2K
problems that could have a material effect on its business. If through continued
monitoring of these suppliers Hybridon becomes aware of any such problems and is
not satisfied that those problems are being adequately addressed, it will take
appropriate steps to find alternative suppliers.
It has been acknowledged by governmental authorities that Y2K problems
have the potential to disrupt global economies, that no business is immune from
the potentially far-reaching effects of Y2K problems, and that it is difficult
to predict with certainty what will happen after December 31, 1999.
Consequently, it is possible that Y2K problems will have a material effect on
Hybridon's business even if Hybridon takes all appropriate measures to ensure
that it and its key suppliers are Y2K compliant.
It is possible that the conclusions reached by Hybridon from its
analysis to date will change, which could cause Hybridon's Y2K cost estimates
and target completion dates to change.
36
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 May Never Generate Revenues From Sales Of Its Drugsdoes 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 businessoperations, 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
Hybridon is at an early stagenot in compliance with some of development,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 yet
generated anymeet 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 commercial sale of its drugs. Due to the various
risks inherentany drugs that Hybridon succeeds in
its business and described in the following risk factors,
Hybridon may never generate revenues from sale of its drugs, and may never
become profitable. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations -- Results Of Operations" and " -- Liquidity
And Capital Resources."
Hybridon Has A History Of Operating Losses, And Anticipates Future Losses
Hybridon has never earned a profit and has incurred substantial net
operating losses. These losses were caused by lack of revenues from drug sales
to offsetdeveloping exceed Hybridon's research and development and administrative costs.
Assuming Hybridon expectsis able to incur operating losses for at least the next several years, as it plansobtain adequate funding to continue operations,
Hybridon will need to spend substantial additional amounts on research and
development, including preclinical studies and clinical trials, and, if it obtainsin order to
obtain the necessary regulatory approvals,approvals. If Hybridon obtains regulatory
approval, Hybridon will also need to spend substantial amounts on sales and
marketing efforts. See "Management's Discussion And Analysis Of Financial
Condition And Results Of"Business--Anticipated and Potential Costs."
Hybridon's Operations -- Results Of Operations" and " -- Liquidity
And Capital Resources."
Hybridon May Determine That One Or More Drugs In Development Are Commercially
Impractical And Cannot Be Sold Commercially
Before a drug is sold commercially, it must go through an expensive and
time-consuming testing process. Hybridon's drugs are at various stages in this
process, and
Hybridon may atnot succeed in developing a commercially viable drug.
Hybridon does not currently have any stage determinedrugs 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
one or more of these drugs
cannot be successfully developed.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 aits drug candidates cannot be successfully developed,
Hybridon would not be able to generate revenues from sale of that
drug.
Seeking Regulatory Approval Of Drugs Is Time-Consuming And Expensive; Failure To
Obtain Approval Of A Drug Would Prevent Hybridon From Selling That Drug; Failure
To Comply With Ongoing Regulatory Requirements Could Cause Hybridon To Be
Subject To Penalties
Hybridon is subject to extensive regulation by numerous governmental
authorities in the U.S. and abroad. Obtaining regulatory approval of a drug can
take several years --exactly how long depends upon the type, complexity, and
novelty of the drug -- and is
37
typically very expensive. The regulations that Hybridon must comply with may
change, and may even become more burdensome to Hybridon.
Evenor if Hybridon is satisfied that a drug is safe and effective,unable to obtain the necessary regulatory authorities may not agree, as data from preclinical studies and
clinical trials can generally be interpreted in different ways. Hybridon will
need the approval, of regulatory agencies in order to sell a drug. If they are
unwilling to grant that approval, Hybridonit will
not be able to generate the revenues from the sale of drugs that drug.
Approvalit 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 adeveloping 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 does not endfor the involvementtreatment of regulatory
authorities. HybridonCMV
retinitis, and its approvedhas 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 be subject to continued review
and periodic inspection. Approval of a Hybridon drug may be subject to
restrictions that limit how Hybridon may market that drug. Restrictions may be
imposed on the price at which Hybridon may sell its drugs. If Hybridon fails to
comply with any regulations,compete against these drugs, it may be subject to fines, suspension of
regulatory approvals, drug recalls,used in combination with them.
GEM(R) 231 and other penalties.
Delays In Patient Enrollment Could Increase The Cost Or Duration Of Hybridon's
Clinical Studies
Clinical trials are very costly and time-consuming. How quickly Hybridon isantisense drugs may not, however, be able to
complete a clinical study depends upon several factors, including the
size of the patient population, how easily patients can getcapture sufficient market share to the site of the
clinical study,be profitable.
Furthermore, biotechnology and the criteria for determining which patients are eligible to
join the study. Delays in patient enrollment could delay completion of a
clinical studyrelated pharmaceutical technologies have
undergone rapid and increase its costs,significant change and could also delay the commercial sale
of the drug that is the subject of the clinical trial.
Hybridon Must Secure Additional Funding To Avoid Terminating Operations Or
Filing For Bankruptcy; It May Not Be Able To Secure Sufficient Additional
Financing
Hybridon has very limited cash resources and substantial obligations to
lenders, its real estate landlords, trade creditors and others. Hybridon's
ability to continue operations in 1999 depends on its success in obtaining new
funds. If Hybridon is unable to obtain substantial additional new funding by the
end of May 1999, it will be forced to terminate its operations or seek relief
under applicable bankruptcy laws. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations -- General" and "-- Cash
Resources."
In their report on Hybridon's December 31, 1998 financial statements,
Arthur Andersen LLP, Hybridon's independent public accountants, states that
there is substantial doubt about Hybridon's ability to continue as a going
concern.
Hybridon anticipates that, even if it obtains sufficient cash to fund
its operations in 1999, it will be required to raise substantial additional
funds through external sources, including through collaborative relationships
and public or private financings, to support Hybridon's operations beyond 1999.
If adequate funds are not available, Hybridon may be forced to (1) further
curtail significantly one or more of its research, drug recovery or development
programs, (2) obtain funds through arrangements with collaborative partners or
others that may require Hybridon to relinquish rights to certain of its
technologies, drug
38
candidates or drugs, (3) terminate operations, or (4) seek relief under
applicable bankruptcy laws.
Additional Financing May Cause Stockholder Dilution
If Hybridon raises additional funds by issuing equity securities, the
ownership interest of existing stockholders will be diluted. In addition,
Hybridon may grant future investors rights superior to those of existing
stockholders.
If Hybridon Defaults Under Its Loan, It Could Be Forced To Terminate Operations
Or File For Bankruptcy
Hybridon is a party to a substantial loan. The lenders may accelerate
the repayment date of the loan in the event of default by Hybridon. If Hybridon
does default on the loan, and the lenders accelerate the repayment date, the
lenders could foreclose on Hybridon's assets, and this could force Hybridon to
terminate operations or seek relief under applicable bankruptcy laws. Hybridon
cannot guarantee that it will not default on the loan. See "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -- 1998
Financing Activities."
The "Penny Stock" Rules Will Likely Have An Adverse Effect On Your Liquidity And
Hybridon's Ability To Raise Additional Capital
Since the Common Stock is not listed on a national securities exchange
or on a qualified automated quotation system, it is subject to the "penny stock"
provisions of Rule 15g-9 under the Securities Exchange Act of 1934, as amended,
which impose additional sales practice requirements on broker-dealers that sell
such securities. Prior to any transaction covered by this rule, the
broker-dealer must receive from the purchaser a written consent to the
transaction, and must reasonably determine that transactions in penny stocks are
suitable for the purchaser, andexpects that the
purchaser is capable of evaluating the
risks of transactionstechnologies associated with biotechnology research and development will
continue to develop rapidly. Hybridon's prospects depend in penny stocks. These requirements will likely have an
adverse effect on the market liquidity of Hybridon's securities, and thereforelarge part on
Hybridon's ability to raise funds,compete with these
30
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
broker-dealers to sell
Hybridon's securities, and the ability of purchasers to sell any of their
Hybridon securities in the secondary market.
Hybridon May Be Unable To Obtain Or Enforce Patents; Its Patents May Not Provide
Adequate Protectionthird parties.
Hybridon's success will depend to a large extent on its ability to
(1)
obtain U.S. and foreign patent protection for drug candidates and processes,
(2)
preserve trade secrets and (3) operate without infringing the proprietary rights of
third parties. Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims made
under such patents are still developing. As a result, Hybridon's ability to
obtain and enforce patents that protect its drugs is uncertain and involves
complex legal and factual questions.
39
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 also cannot be
completely sure that
the inventors of subject matter covered by its 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, thatpatents Hybridon owns or
licenses pending or future patent applications does not mean that patents based on those
applications will ultimately be issued. Existing or future patents may be challenged, infringed upon, invalidated, found to be
unenforceable, or circumvented by others. Hybridon'sothers, 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,"Business--Patents, Trade Secrets, and Licenses."
Hybridon Could Become Involved In Time-Consuming And Expensive Patent
Litigation; Adverse Decisions In Patent Litigation Could Cause Hybridon To Incur
Additional Costs And Experience Delays In Bringing New Drugs To Market
The pharmaceutical and biotechnology industries have been characterized
by time-consuming and extremely expensive litigation regarding patents and other
intellectual property rights. Hybridon may be requiredseeks to commence, or may be
made a party to, litigation relating to the scope and validity of its
intellectual property rights, or the intellectual property rights of others.
Such litigation could result in adverse decisions regarding the patentability of
Hybridon's inventions and products, or the enforceability, validity, or scope of
protection offered by its patents. Such decisions could make Hybridon liable for
substantial money damages or could bar Hybridon from the manufacture, use, or
sale of certain products, resulting in additional costs and delays in bringing
drugs to market. Hybridon may not have sufficient resources to bring any such
proceedings to a successful conclusion.
Hybridon also may be required to participate in interference proceedings
declared by the U.S. Patent and Trademark Office (or similar proceedings in
foreign countries) and in International Trade Commission proceedings aimed at
preventing the importing of drugs that would compete unfairly with Hybridon
drugs. Such proceedings could cause Hybridon to incur considerable costs.
Hybridon's Trade Secrets And Other Unpatented Proprietary Information May Become
Available To Others
Tradeprotect trade secrets and other unpatented
proprietary information plays an
important role in Hybridon's business. Hybridon seeks to protect this information, in part by means of confidentiality agreements with its
collaborators, employees, and consultants. If any of these agreements isare
breached, Hybridon may be without adequate remedies. Also, Hybridon's trade
secrets may become known or be independently developed by competitors.
This
could haveHybridon'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 material adverse effect"penny stock," as it is not listed on Hybridon's business,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 may
need to engage in costly and time-consuming litigation to protect its
proprietary rights.
The Loss Of Key Members Of Management Could Be Damaging
Hybridon depends on the principal members of its management and
scientific staff, including E. Andrews Grinstead III, Hybridon's Chairmanstock. Because of the Board, Presidentrules, 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
its Chief Executive Officer,consequently could control most matters requiring approval by stockholders.
Hybridon's officers, directors and Sudhir Agrawal, Hybridon's
Senior Vice President of Discovery
40
and its Chief Scientific Officer. The loss of their services could have a
material adverse effect on Hybridon.
Hybridon May Not Be Able To Meet Its Personnel Needs; This Could Result In
Delays Or Additional Costs
From June 30, 1997, to March 31, 1999, the number of employees of
Hybridon decreased from 213 to 51. As a result, Hybridon has lost significant
expertise, and must recruit and retain new scientific personnel to maintain its
current level of operations, while expansion would require a further increase in
scientific personnel. In addition, expansion by Hybridon would likely result in
the need for additional management personnel. Hybridon may not be able to
attract and retain personnel on acceptable terms, given the competition for
experienced scientists and management among numerous pharmaceutical,
biotechnology and health care companies, universities, and non-profit research
institutions. The failure to recruit and retain personnel could result in delays
in commercializing drugs, and could cause Hybridon to incur additional costs.
Hybridon Relies On Relationships With Research Institutions And Corporate
Partners, And Would Be Harmed By A Lack Of, Or The Termination Of, Such
Relationships
Hybridon's success will depend in part on its continued ability to
develop and maintain relationships with independent researchers and leading
academic and research institutions. The competition for such relationships is
intense, and Hybridon can give no assurances that it will be able to develop and
maintain such relationships on acceptable terms. Hybridon has entered into a
number of such collaborative relationships relating to specific disease targets
and other research activities in order to augment its internal research
capabilities and to obtain access to specialized knowledgeprincipal stockholders own or
expertise. The
loss of any of these collaborative relationships could have a material adverse
effect on Hybridon's research and development program.
Similarly, strategic alliances with corporate partners, primarily
pharmaceutical and biotechnology companies, may help Hybridon develop and
commercialize drugs. Various problems can arise in strategic alliances. A
partner responsible for conducting clinical trials and obtaining regulatory
approval may fail to develop a marketable drug. A partner may decide to pursue
an alternative strategy or alternative partners. A partner that has been granted
marketing rights for a certain drug within a geographic area may fail to market
the drug successfully. Consequently, Hybridon's current strategic alliance or
those it enters into in the future may not be scientifically or commercially
successful. Hybridon may not able to negotiate advantageous strategic alliances
in the future. The absence of, or failure of, strategic alliances could harm
Hybridon's efforts to develop and commercialize its drugs.
HSP's Results May Be Lower Than Currently Anticipated
Through HSP, Hybridon manufactures oligonucleotide compounds for sale to
others. The results of HSP will depend on the demand for and margins on these
drugs, which may be lowercontrol more than Hybridon anticipates. HSP's results will also be
affected by the price and availability of raw materials.
41
Hybridon Faces Intense Competition, And Hybridon's Products Could Be Rendered
Obsolete; Many Of Hybridon's Competitors Have Greater Resources And Experience
Than Hybridon
Many companies are attempting to develop drugs similar to those Hybridon
proposes to develop. Some of these drugs are in clinical trials, and one has
received FDA approval and is being commercialized. In addition, there are other
drugs already available for the treatment of many of the diseases that
Hybridon's proposed drugs would treat. Any of these drugs may prove more
effective than those that Hybridon proposes to develop, and may gain or maintain
greater market acceptance.
Furthermore, biotechnology and related pharmaceutical technologies have
undergone and continue to be subject to rapid and significant change. Hybridon
expects that the technologies associated with biotechnology research and
development will continue to develop rapidly. Hybridon's future will depend in
large part on its ability to compete with these technologies. Any compounds,
drugs or processes that Hybridon develops may become obsolete before it recovers
expenses incurred in developing those drugs.
Many60% of Hybridon's competitors have substantially greater financial,
technical, and human resources than Hybridon, and have significantly greater
experience than Hybridon in preclinical studies, clinical trials, seeking
regulatory approval of new drugs, and manufacturing and marketing new drugs.
Hybridon's Manufacturing Capability May Be Adversely Affected By Problems With
Suppliers
Certain of the raw materials that Hybridon requires to manufacture
oligonucleotides are available from onlycommon stock on a few suppliers, namely those with
access to the appropriate patented technology. The number of suppliers is
unlikely to increase in the near future. Hybridon may not be able to secure an
adequate supply of these materials at an acceptable price. Also, due to
regulatory restrictions or other problems, Hybridon's suppliers may fail to
provide materials of acceptable quality.
Hybridon's Lack Of Marketing Experience Could Adversely Affect Its Ability To
Commercialize Its Drugs
Direct marketing of any of its proposed drugs would require a
substantial marketing staff and sales force supported by a distribution system.
Given that Hybridon currently has little experience in sales, marketing, or
distribution, Hybridon might not be able to undertake direct marketing of its
drugs in a cost-effective manner. The alternative -- co-marketing or other
licensing arrangements -- would allow Hybridon to avoid the significant cost
involved in direct marketing, but would require Hybridon to rely on the efforts
of others.
42
Hybridon Could Be Subject To Product Liability Claims For Which It Is Not Fully
Insured
Hybridon risks being the target of product liability claims alleging
that its drugs harm subjects or patients. Such claims could be asserted in
connection with Hybridon drugs used in clinical trials as well as those sold
commercially. Hybridon is covered against such claims by a product liability
insurance policy (subject to various deductibles), but such policies are
becoming increasingly expensive. Hybridon may not be able to maintain sufficient
coverage to protect it from incurring significant losses due to product
liability claims.
Hybridon Uses Hazardous Materials, And Could Be Held Liable For Damages In The
Event Of Accidental Contamination Or Injury
Hybridon's activities involve the controlled use of hazardous chemicals,
viruses, and radioactive compounds. Although Hybridon believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state, and local regulations, the risk of
accidental contamination or injury cannot be completely eliminated. In the event
of such an accident, Hybridon could be held liable for any damages that result.
Restrictions On Third-Party Reimbursement Could Adversely Affect Hybridon's
Ability To Commercialize Its Drugs
Hybridon's ability to commercialize drugs successfully will depend in
part on the extent to which various third parties are willing to reimburse
patients for the costs of Hybridon's drugs and related treatments. These third
parties include government authorities, private health insurers, and other
organizations, such as health maintenance organizations. Third-party payors are
increasingly challenging the prices charged for medical products and services.
Accordingly, if less costly drugs are available, third-party payors may not
authorize or may limit reimbursement for Hybridon's drugs, even if they are
safer or more effective than the alternatives. In addition, the trend toward
managed healthcare and government insurance programs could result in lower
reimbursement and reduced demand for Hybridon's drugs. Cost containment measures
instituted by healthcare providers and any general healthcare reform could
affect Hybridon's ability to sell drugs and may have a material adverse effect
on Hybridon. Hybridon may be forced to reduce its prices; this would in turn
adversely affect profitability.
Hybridon cannot predict what additional legislation or regulation
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
might have on its business. In particular, Hybridon may be forced to reduce its
prices; this would in turn adversely affect profitability.
The Market Price Of Hybridon's Securities Is Likely To Be Volatile
The market price of the securities of biotechnology companies such as
Hybridon is highly volatile. The market price of Hybridon's securities could be
influenced by the results of preclinical studies and clinical trials by Hybridon
or its competitors, fluctuations in
43
Hybridon's operating results, announcements by Hybridon or its competitors of
technological innovations or new commercial therapeutic products, changes in
governmental regulation, developments in patent or other proprietary rights of
Hybridon or its competitors, public concern as to the safety of drugs developed
by Hybridon, and general market conditions.
Hybridon Does Not Anticipate Paying Dividends On Common Stock In The Foreseeable
Future
Hybridon has never paid any cash dividends on the Common Stock and does
not anticipate paying any in the foreseeable future. Furthermore, the Indenture
pursuant to which the 9% Notes were issued limits Hybridon's ability to pay
dividends or make other distributions on the Common Stock, and Hybridon is
currently prohibited under the terms of its $6,000,000 secured loan from paying
cash dividends. Whether Hybridon is ultimately able to pay cash dividends on the
Common Stock depends on Hybridon's future earnings, operating and financial
condition, and capital requirements, and on general business conditions.
Hybridon's Ability To Utilize Its Net Operating Losses And Tax Credits Is Likely
To Be Severely Restricted
Hybridon has substantial net operating loss and tax credit carryforwards
for federal income tax purposes. These carryforwards will expire beginning on
December 31, 2005. The Tax Reform Act of 1986 limits the annual use of net
operating loss and tax credit carryforwards following certain ownership changes.
The securities offerings conducted by Hybridon will severely restrict Hybridon's
ability to utilize its net operating losses and tax credits in any particular
year. Additionally, because the U.S. tax laws limit the time during which net
operating loss and tax credit carryforwards may be applied against future
taxable income and tax liabilities, respectively, Hybridon may never be fully
able to use its net operating loss and tax credits for federal income tax
purposes.
Hybridon May Be Adversely Affected By Year 2000 Compliance Related Problems
As has been widely publicized, many computer systems and microprocessors
are not programmed to accommodate dates beyond the year 1999. Hybridon's
exposure to this Y2K problem comes not only from its own internal computer
systems and microprocessors, but also from the systems and microprocessors of
its key suppliers, including utility companies and payroll services. While
Hybridon believes that all of its internal systems will be Y2K compliant by the
end of the third quarter of 1999, and is taking appropriate measures to ensure
that its suppliers are Y2K compliant, it is nevertheless possible that Y2K
problems will have a material effect on Hybridon's business. See "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -- Year
2000."
44
Stock Ownership By Hybridon's Directors And Officers May Delay Or Prevent A
Change Of Control
Hybridon's directors and executive officers and their affiliates
beneficially own a significant percentage of Hybridon's outstanding Common Stock
and Convertible Preferred Stock.fully-diluted basis. As a
result, these stockholders, if acting together, may have the ability to influencecontrol most
matters requiring approval by the outcome of corporate actions
requiring stockholder approval.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, 1998,1999,
Hybridon's assets and liabilities related to nondollar-denominated currencies
were not material.
ITEM.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.
4531
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF
THE COMPANYHYBRIDON
The response to this item is contained in part under the caption
"Executive Officers and Significant Employees of the Company"Hybridon" in Part I of this
Annual Report on Form 10-K and in part in the Company'sHybridon's Proxy Statement for the
Annual Meeting of Stockholders to be held on June 8, 199912, 2000 (the "1999"2000 Proxy
Statement"), under the caption "Election of Directors," which section is
incorporated herein by this reference. The 19992000 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 19992000 Proxy Statement
under the caption "Election of Directors," which section is incorporated herein
by this reference. The 19992000 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 19992000 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management,"
which section is incorporated herein by this reference. The 19992000 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 19992000 Proxy Statement
under the caption "Certain Relationships and Related Transactions," which
section is incorporated herein by this reference. The 19992000 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.
46
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) The CompanyHybridon 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 1998, the Company1999, 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 By-LawsBylaws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Preferred
Stock.
32
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.
47
4.8 Form of Notes due 2002 of Hybridon.
+10.1(2) License Agreement dated February 21, 1990 and restagedrestated 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 155.155 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
++10.16(2) 1995 Employee Stock Purchase Plan.
48
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.
49
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
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.
50
+++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
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, 19981999
- ------------------------------------------------------------------------
(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.
5136
++ 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.
5237
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
15th30th day of April 1999.March 2000.
Hybridon, Inc.
/s/ E. Andrews Grinstead, III
-----------------------------
E. Andrews Grinstead, III
Chairman of the Board,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 E. Andrews Grinstead, IIISudhir 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/ E. Andrews Grinstead, III Chairman,Sudhir Agrawal President, Acting March 30, 2000
- ----------------------- Chief Executive
April 15, 1999
- -----------------------------Sudhir Agrawal, D. Phil. Officer (Principal
Executive Officer)
and Director
E. Andrews Grinstead, III/s/ James B. Wyngaarden Chairman of the March 30, 2000
- ----------------------- Board of Directors
James B. Wyngaarden, M.D.
/s/ Robert G. Andersen Treasurer (Principal April 15, 1999Chief Financial March 30, 2000
- ----------------------------- Financial---------------------- Officer and AccountingVice
Robert G. Andersen Officer)
Senior Vice President of Operations
and Planning
/s/ Nasser Menhall Director March 30, 2000
- ----------------------------- Director
Sudhir Agrawal, D. Phil.
/s/ James B. Wyngaarden
- ----------------------------- Director April 14, 1999
James B. Wyngaarden, Ph.D.
- ----------------------------- Director------------------
Nasser Menhall
/s/ Paul C. Zamecnik Director April 15, 1999March 30, 2000
- -------------------------------------------------
Paul C. Zamecnik, Ph.D.Zamencnik, M.D.
/s/ Youssef El-Zein Director April 15, 1999March 30, 2000
- ------------------------------------------------
Youssef El-Zein
/s/ Arthur W. Berry Director April 15, 1999March 30, 2000
- ------------------------------------------------
Arthur W. Berry
/s/ Harold L. Purkey Director April 15, 1999March 30, 2000
- -------------------------------------------------
Harold L. Purkey
/s/ Camille Chebeir Director April 15, 1999March 30, 2000
- ------------------------------------------------
Camille Chebeir
/s/ H.F. Powell Director April 15, 1999
- -----------------------------
H.F. Powell
/s/ Mohamed El-Khereij Director April 15, 1999
- -----------------------------
Mohamed El-Khereij
5438
APPENDIX A
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-7F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8F-7
F-1
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, 19971998 and 1998,1999 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, 1998.1999. 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
auditing
standards.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, 1997 and 1998 and 1999 and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998,1999 in
conformity with accounting principles generally accepted accounting principles.in the United States.
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred significant losses which it has funded through the issuance of debt and
equity securities and through research and development collaborations and
licensing agreements. The Company expects suchthat its existing financial resources
towill fund operations through May 1999. Thereonly until June 2000. As a result, there is substantial
doubt about the Company's ability to continue as a going concern. Seeconcern (see Note 1 for
management's plans.plans). The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1999 (except with
respect to the matter disclosed
in Note 7(b) as to which the date
is April 15, 1999)25, 2000
F-2
HYBRIDON, INC. AND SUBSIDIARIESHybridon, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1997 1998 1999
CURRENT ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 2,202,2025,607,882 $ 5,607,8822,551,671
Accounts receivable 529,702 1,175,441 1,218,142
Prepaid expenses and other current assets 1,005,825 110,827 101,914
--------------- ---------------
Total current assets 3,737,729 6,894,150 3,871,727
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 16,027,73411,127,035 11,127,035
Laboratory equipment and other equipment 14,288,083 11,432,435 9,943,170
--------------- ---------------
30,315,817 22,559,470 Less-Accumulated21,070,205
Less--Accumulated depreciation and amortization 11,085,013 13,788,979 14,691,883
-------------- ---------------
---------------
19,230,804 8,770,491 --------------- ---------------6,378,322
OTHER ASSETS:
Deferred financing costs and other assets 3,354,767 612,374 1,415,149
Note receivable from officer 247,250 258,650 Restricted cash 3,050,982 -
Investment in real estate partnership 5,450,000 -270,050
--------------- ---------------
12,102,999 871,024 --------------- ---------------
$ 35,071,5321,685,199
$ 16,535,665 $ 11,935,248
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,868,4746,070,951 $ 6,070,9516,080,746
Accounts payable 8,051,817 2,368,163 1,622,694
Accrued expenses 11,917,298 4,068,679 2,505,988
--------------- ---------------
Total current liabilities 27,837,589 12,507,793 10,209,428
--------------- ---------------
LONG-TERM DEBT, NET OF CURRENT PORTION 3,282,123 473,094 392,348
--------------- ---------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 50,000,000 1,306,000 1,306,000
--------------- ---------------
8% CONVERTIBLE NOTES PAYABLE - 6,099,775
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 117 and 16)11)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value-
Authorized-5,000,000Authorized--5,000,000 shares
Series A convertible preferred stock-
Designated-1,500,000Designated--1,500,000 shares
Issued and outstanding-641,259outstanding--641,259 and 661,856 shares at December 31, 1998
- 6,413and 1999, respectively
(Liquidation preference of $65,168,048$67,224,000 at December 31, 1998)1999) 6,413 6,618
Common stock, $.001 par value-
Authorized-100,000,000Authorized--100,000,000 shares
Issued and outstandingC5,059,650outstanding--15,304,825 and 15,304,82516,260,722 shares at December 31, 19971998
and 1998,1999, respectively 5,060 15,305 16,261
Additional paid-in capital 173,695,698 241,632,024 247,813,331
Accumulated deficit (218,655,101) (238,447,837) (253,183,130)
Deferred compensation (1,093,837) (957,127) (725,383)
--------------- ---------------
Total stockholders' equity (deficit) equity (46,048,180) 2,248,778 (6,072,303)
--------------- ---------------
$ 35,071,53216,535,665 $ 16,535,66511,935,248
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HYBRIDON, INC. AND SUBSIDIARIESHybridon, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1997 1998 1999
REVENUES:
REVENUES:
Product and service $ 1,080,175 $ 1,876,862 $ 3,253,879 $ 6,186,136
Research and development 1,419,389 945,000 1,099,915 600,000
Royalty and other income 62,321 48,000 - -
Interest 1,446,762 1,079,122 148,067 ------------- ------------- -------------
4,008,647214,745
--------------- --------------- ---------------
3,948,984 4,501,861 ------------- ------------- -------------7,000,881
--------------- --------------- ---------------
OPERATING EXPENSES:
Research and development 39,390,525 46,827,915 20,977,370 13,090,381
General and administrative 11,346,670 11,026,748 6,572,502 3,663,811
Interest 124,052 4,535,647 2,932,362 749,731
Restructuring - 11,020,000 - ------------- ------------- --------------
--------------- --------------- ---------------
Total operating expenses 50,861,247 73,410,310 30,482,234 ------------- ------------- -------------17,503,923
--------------- --------------- ---------------
Loss before extraordinary item (46,852,600) (69,461,326) (25,980,373) (10,503,042)
EXTRAORDINARY ITEM:
Gain on exchange of 9% convertible subordinated -notes payable - 8,876,685 notes payable ------------- ------------- --------------
--------------- --------------- ---------------
Net Loss (46,852,600)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 $ (46,852,600) $ (69,461,326) $ (19,792,736) ============= ============= =============$ (14,735,293)
=============== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss per share before extraordinary item $ (10.24) $ (13.76) $ (2.19) $ (0.66)
Extraordinary item - 0.75 -
-
------------- ------------- ---------------------------- --------------- ---------------
Net loss per share (10.24) (13.76) (1.44) (0.66)
Accretion of preferred stock dividends - - (.23)
------------- ------------- -------------(0.23) (0.27)
--------------- -------------- --------------
Net loss per share applicable to common stockholders $ (10.24) $ (13.76) $ (1.67) ============= ============= =============$ (0.93)
============== ============== ==============
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON
SHARE 4,575,555 5,049,840 11,859,350 ============= ============= =============15,810,664
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HYBRIDON, INC. AND SUBSIDIARIES
Hybridon, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible Series A Convertible
CommonPreferred Stock Preferred Stock PreferredCommon Stock
Number of $.01 Par Number of $.01 Par Number of $.001 Par
Shares Value Shares Value Shares Value
BALANCE, DECEMBER 31, 1995 3,196,435 $ 31,9651996 - $ - 368,733- $ 369
Issuance of common stock related to initial
public offering, net of issuance costs of
$5,268,756 - - - - 1,150,000 1,150
Conversion of convertible preferred stock
to common stock (3,196,435) (31,965) - - 3,371,330 3,3715,029,315 $ 5,029
Issuance of common stock related to the
exercise of stock options - - - - 57,740 58
Issuance of common stock related to the
exercise of warrants - - - - 81,512 81
Deferred compensation related to grants
of stock options to nonemployees - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
----------- ---------- ----------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1996 - - - - 5,029,315 5,029
Issuance of common stock related to the
exercise of stock - - - - 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
Additional Accumulated Deferred Total
Paid-in Deficit Compensation Stockholders'
Capital Equity (Deficit)
BALANCE, DECEMBER 31, 1995 $114,755,394 $(102,341,175) $ - $ 12,446,553
Issuance of commonSeries A convertible preferred
stock related to initial
public offering,and attached warrants in exchange for
conversion of 9% convertible subordinated
notes payable and accrued interest, net of
issuance costs of $5,268,756 52,230,094$1,195,398 - - 52,231,244
Conversion510,504 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 to- - 114,285 1,143 - -
Issuance of common stock 28,594to 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
=========== =========== =========== =========== =========== ===========
Total
Additional Stockholders'
Paid-in Accumulated Deferred Equity
Capital Deficit Compensation (Deficit)
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 1,089,618 - - 1,089,676
Issuance of common stock related to the
exercise of warrants 3,176,660 - - 3,176,741
Deferred compensation related to grants
of stock options to nonemployees 1,967,116 - (1,967,116) -
Amortization of deferred compensation - - 763,190 763,190
Net loss - (46,852,600) - (46,852,600)
------------ ------------- ----------- ------------
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 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)
F-5
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
Convertible Series A Convertible Common Stock
Preferred Stock Preferred Stock
Number of $.01 Par Number of $.01 Par Number of $.001 Par
Shares Value Shares Value Shares Value
Issuance of Series A convertible preferred
stock and attached warrants in exchange for
conversion of 9% convertible -- -- 510,504 5,105 -- --
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 -- -- -- -- 3,217,154 3,217
accounts
payable and other obligations 5,931,341 - - 5,934,558
Issuance of Series A convertible preferred
stock -- -- 114,285 1,143 -- --7,998,817 - - 7,999,960
Issuance of Common Stockcommon stock to Placement Agent -- -- -- -- 597,699 598placement agent 1,194,800 - 1,195,398
Issuance of common stock and attached warrants
in exchange for conversion -- -- -- -- 3,157,322 3,157
of convertible
notes payable, net of issuance costscost of
$566,167 4,230,676 - - 4,233,833
Issuance of common stock and attached
warrants, net of issuance costs of -- -- -- -- 3,223,000 3,223
$1,069,970 6,873,453 - - 6,876,676
Issuance of common stock for services -- -- -- -- 50,000 50
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 -- -- 16,470 165 -- --
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 -- $ -- 641,259 $ 6,413 15,304,825 $ 15,305
======= ======== ========== ========== ========== ==========
Additional Accumulated Deferred Total
Paid-in Capital Deficit Compensation Stockholders'
Equity
(Deficit)
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 and attached warrants in exchange for
conversion of 9% convertible 39,924,887 -- -- 39,929,992
subordinated notes payable and accrued interest
Issuance ofinto common stock and attached
warrants in exchange for conversion of 5,931,341 -- -- 5,934,558
accounts payable and other obligations
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 4,230,676 -- -- 4,233,833
of convertible notes payable, net of
issuance costs of $566,167
Issuance of common stock and attached
warrants, net of issuance costs of 6,873,453 -- -- 6,876,676
$1,069,970
Issuance of common stock for services 93,700 -- -- 93,750
rendered
Deferred compensation related to grants
of stock options to nonemployees, 109,734 -- (109,734) --
net of terminations(285) - - -
Issuance of warrants in connection with 85,433 -- -- 85,433
notes
payable 547,328 - - 547,328
Accretion and issuance of Series A convertible
preferred 2,688,883 (2,689,048) -- --
stock dividends 4,231,835 (4,232,251) - -
Fair value of stock options to nonemployees 402,889 - - 402,889
Amortization of deferred compensation -- -- 246,444 246,444- - 231,744 231,744
Net loss -- (17,103,688) -- (17,103,688)
------------- ------------- ------------- -------------- (10,503,042) - (10,503,042)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $247,813,331 $(253,183,130 $ (725,383) $(6,072,303)
============ ============= =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
Hybridon, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ 241,632,024 $(238,447,837)(69,461,326) $ (957,127)(17,103,688) $ 2,248,778
============= ============= ============= =============(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
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(46,852,600) $(69,461,326) $(17,103,688)
Adjustments to reconcile net loss to net cash used in
operating activitiesB
Extraordinary gain on exchange of 9% convertible -- -- (8,876,685)
subordinated notes payable
Depreciation and amortization 2,393,751 4,488,719 4,057,286
Issuance of common stock for services rendered -- 146,874 93,750
Amortization of deferred compensation 763,190 316,067 246,444
Amortization of deferred financing costs -- 479,737 160,813
Noncash portion of restructuring charge -- 1,255,000 --
Changes in assets and liabilitiesB
Accounts receivable (573,896) 44,194 (645,739)
Prepaid expenses and other current assets (593,797) 539,499 894,998
Note receivable from officer (9,845) 70,728 (11,400)
Accounts payable 2,010,981 3,987,398 (3,059,002)
Accrued expenses 736,141 7,071,532 1,565,806
Deferred revenue -- (86,250) --
Amounts payable to related parties (12,500) --
------------ ------------ ------------
Net cash used in operating activities (42,138,575) (51,147,828) (22,677,417)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments (3,785,146) 3,785,146 --
Purchases of property and equipment (8,902,989) (7,509,755) (471,949)
Proceeds from sale of property and equipment -- -- 714,400
(Investment in) sale of real estate partnership (3,751,552) 5,450,000
------------ ------------ ------------
Net cash (used in) provided by investing activities (16,439,687) (3,724,609) 5,692,451
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A convertible preferred stock -- -- 7,999,960
Proceeds from issuance of common stock related to stock 1,089,676 86,326 --
options and restricted stock grants
Net proceeds from issuance of common stock 52,231,244 -- 6,876,676
Proceeds from notes payable 7,500,000 -- 6,000,000
Proceeds from issuance of convertible promissory notes payable -- 50,000,000 4,233,833
Proceeds from issuance of common stock related to stock 3,176,741 9,075 --
warrants
Proceeds from sale/leaseback of fixed assets 1,722,333 1,205,502 --
Payments on long-term debt (446,163) (1,564,268) (7,296,646)
Decrease (increase) in deferred financing costs 251,921 (2,820,790) (400,000)
Decrease (increase) in restricted cash and other assets 401,990 (2,474,948) 2,976,823
------------ ------------ ------------
Net cash provided by financing activities 65,927,742 44,440,897 20,390,646
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,349,480 (10,431,540) 3,405,680
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,284,262 12,633,742 2,202,202
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,633,742 $ 2,202,202 $ 5,607,882
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 19981999
(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),by HSP, as
well as from research and development revenues and fees and royalties
derived from licensing of the Company's technology. Accordingly, althoughAlthough 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. ThereAs 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.
As of December 31, 1998, the Company had cash and cash equivalents of
approximately $5.6 million. The Company expects such resources to fund
operations through May 1999. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
The ComapnyCompany is curentlycurrently seeking debt or equity financing in an amount
sufficient to support its operations through the end of 1999, and in
connection therewith, is in negotiations with several parties to obtain
such financing.2000. If the
Company is unable to obtain this sufficient amount of additional funding
in May 1999,by June 2000, it will be forced to terminate its operations or seek
relief under applicable bankruptcy law by the end of May 1999.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
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.
F-8
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(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), aand the Company's approximately
40% interest in OriGenix Technologies Inc. (OriGenix) both
Canadian corporationcorporations which isare accounted for under the equity
method (see Note 14)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 three months90 days or less when purchased to be cash
equivalents. Cash and cash equivalents and restricted cash at December 31, 19971998 and
1998 consisted1999 consist of the following (at amortized cost, which
approximates fair market value):
1997 1998
Cash and cash equivalents-
Cash and money market funds $1,702,272 $3,865,365
Corporate bond 499,930 1,742,517
---------- ----------
Total cash and cash equivalents $2,202,202 $5,607,882
========== ==========
Restricted cash-
Note payable to bank (Note 7(a)) $1,758,542 $ -
Foreign bank account (Note 6) 1,034,618 -
Capital lease obligations (Note 7(d)) 257,822 -
---------- ----------
$3,050,982 $ -
========== ==========
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 Estimated
Useful Life
Leasehold improvements Life of lease
Laboratory equipment and other 3-5 years
F-9F-8
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)1999
(CONTINUED)
(e) Accrued Expenses
At December 31, 19971998 and 1998,1999, accrued expenses consist of the
following:
1997 1998
Restructuring (Note 3) $8,316,148 $469,485
Interest 1,125,000 29,385
Payroll and related costs 742,452 1,151,742
Outside research and clinical costs 1,231,818 797,593
Professional fees 150,000 149,957
Contingent stock (Notes 7(b) and 15(c)) - 1,000,000
Other 351,880 470,517
----------- ----------
$11,917,298 $4,068,6791998 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
period'speriods presentation.
(g) Revenue Recognition
The Company has recorded revenue under the consulting and research
agreements discussed in Notes 8, 96 and 14.8. Revenue is recognized as
earned on athe 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 19971998 and 19981999 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-10F-9
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)1999
(CONTINUED)
(j) Comprehensive Loss
The Company applies SFASStatement 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 2,595,496, 2,404,561,
27,774,883 and 27,774,88332,854,153 for 1996, 1997, 1998 and 1998,1999, 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
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 and development programs. In
connection with the reduction in programs, the Company has accrued
termination fees related to research contracts and has writtenwrote off assets
related to programs that have beenwere 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
F-11
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Cambridge and Milford, Massachusetts, facilities insince 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 a portionsubstantial
portions of each of its facilities in Cambridge, Massachusetts,
(including a substantial portion of its former headquarters located at 620 Memorial
Drive, (thethe Cambridge Headquarters)Lease). The Company incurred expenses relating to
these subleases for broker fees and renovation expenses incurred in
preparing the Cambridge HeadquartersLease space for the new tenant. In addition, the
Company accrued the estimated lease loss of subleasing the Cambridge
HeadquartersLease which were vacated during 1998. The Company also subleased its
office in Paris, France, and accrued the estimated lease loss.
F-11
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):
To be Paid
as of
Restructuring Non-Cash Cash December 31,
Charge Portion Disbursed 1998
------ ------- --------- ----
Estimated loss on facility leases $ 6,372 $ 5,976 $ 356 $ 40
Employee severance, benefits and 2,738 -- 2,548 190
related costs
Write-down of assets to net realizable 946 946 -- --
value
Termination costs of certain 964 672 53 239
research programs ------- ------- ------- -------
$11,020 $ 7,594 $ 2,957 $ 469
======= ======= ======= =======
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 Company disbursedtotal cash totaling approximately $1,453,000 and
$1,504,000 in 1997 and 1998, respectively, with respect to the
restructuring. The remaining accrued amount of approximately $469,000 will
be paid during 1999.
(4) INVESTMENT IN REAL ESTATE PARTNERSHIP
Under the termsimpact of the lease for the Cambridge Headquarters (the Cambridge
Lease), the Company accounted for $5,450,000restructuring was approximately $5,165,000,
and was paid as of its payments for a portion
of the costs of construction of the leased premises as contributions to
the capital of the Cambridge landlord in exchange for a limited
partnership interest in the Cambridge landlord (the Partnership Interest).
Under the terms of the Partnership Interest, the Company exercised its
right to sell back the Partnership Interest and received payment of the
$5,450,000 in 1998.
F-12
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBERDecember 31, 1998
(Continued)
(5)1999.
(4) NOTE RECEIVABLE FROM OFFICER
At December 31, 19971998 and 19981999 the Company has a note receivable from
officer, includingand
accrued interest from an officer, of $247,250$258,650 and $258,650,$270,050, respectively.
The note has an interest rate of 6.0% per annum and matures in April
2001.
(6) RESTRICTED CASH - BVH
In November 1997, the Company was notified by Bank Fur Vermogensanlagen
Und Handel AG (BVH) that the Federal Banking Supervisory Office in Germany
had imposed a moratorium on BVH and had closed BVH for business.
Accordingly, the Company classified its deposit with BVH as restricted
cash. The Company sold the deposit to the Cambridge Landlord, an affiliate
of certain directors of the Company, and recovered the full amount in
1998.
(7)(5) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Future minimum principal payments due under various notes payable,
excluding the 9% convertible subordinated notes (the 9% Notes) due April
1, 2004 and the 8% convertible subordinated notes (the 8% Notes) due
November 30, 2002, are as follows at December 31, 1998:1999:
December 31, Amount
------------ ------
19992000 $ 6,070,951
2000 80,7466,080,746
2001 91,892
2002 104,576
2003 119,010
Thereafter2004 76,870
-----------------------------
Total long-term debt obligations 6,544,0456,473,094
Less--Current portion 6,070,951
---------------6,080,746
--------------
$ 473,094
===============392,348
F-12
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(CONTINUED)
(a) Note Payable
to a Bank
In December 1996,During November 1998, the Company entered into a five-year $7,500,000$6,000,000 note
payable to a bank. In November 1998, the outstanding balance of
approximately $2,895,000 was purchased from the bank bywith Forum Capital Markets, LLC (Forum) and certain
investors associated with Pecks Management Partners Ltd.
(Pecks) (collectively, the Lenders), which are
affiliates of two members of the Company's Board of Directors.
F-13
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(b) Note Payable to Lenders
In connection with the purchase by the Lenders of the note payable to the
bank, the Lenders lent an additional $3,200,000 so as to increase the
outstanding principal amount of the note to $6,000,000.. The terms of the note payable were amendedare as
follows: (i) the maturity was extended tois November 30, 2003; (ii) the interest
rate was decreased tois 8%; (iii) interest is payable monthly in arrears, with the
principal due in full at maturity of the loan; (iv) the note
payable is convertible, at the Lenders'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 March 30,December 1, 1999, the Company received a waiver for
noncompliance with the minimum tangible net worth covenant
effective as of December 31, 1998 and1999. In addition, the Lenders also agreed
to waive compliance with all covenants for the period January 1,
2000 through March 31, 1999. On April 15, 1999, the Company also received a
waiver for noncompliance with the minimun liquidity covenant effective as
of April 15, 1999.2000. The Company has classified the
outstanding balance of $6,000,000 at December 31, 19981999, 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
purchaseissuance of the note payable, Forum is entitledreceived $400,000, which was
reinvested by Forum to receive $400,000 as a
fee, which Forum has agreed to reinvest by purchasingpurchase 160,000 shares of common stock
or
preferred stock, both with 40,000 attached warrants.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 and an accrued expense for the issuance
of common stock or preferred stock, both with attached warrants, which
will occur in 1999.note. In addition, Forum is entitled to receivereceived warrants to
purchase $400,000 of133,333 shares of common stock of the Company at the per
share valuation of the next financing, or $3.00
per share if the financing
is not completed by May 1, 1999.share. The Company determinedcomputed the value of the warrants to be
$85,433, by using the Black-Scholes option pricing model. The
Company has recorded this $85,433 as a deferred financing cost,
which will be amortized to interest expense over the term of the
note.
(c)(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.
(d)(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
15 (c)10 (b)).
(e)F-13
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 the 9% Notes.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, F-14
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 February 6, 1998, the Company commenced an exchange offer to the
holders of the 9% Notes to exchange the 9% Notes for Series A convertible
preferred stock and warrants. On May 5, 1998, noteholders holdingholders 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 15(c)10(b)), and warrants to purchase
common stock issued by the Company.
(8)(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
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. According to the collaboration agreement, as modified
in April 1998, targets can be selected from those in the fields of cancer,
cardiovascular disease and inflammation/immunomodulation (the Searle
Field).
Pursuant to the collaboration, the parties are conducting research and
development relating to a compound directed at MDM2. In this project,
Searle is funding certain research and development efforts by the Company,
and both Searle and the Company have committed certain of its own
personnel to the collaboration. The initial phase of research and
development activities will be conducted through the earlier of (i) the
achievement of certain milestones, and (ii) January 31, 2000, subject to
early termination by Searle. The parties may extend the initial
collaboration by mutual agreement, including agreement as to additional
research funding by Searle.
In addition, under the collaboration, Searle has the right to designate up
to six additional molecular targets in the Searle Field (the Additional
Targets) on terms substantially consistent with the terms
F-15
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
of the collaboration applicable to the initial molecular target. This
right is exercisable by Searle with respect to each of the Additional
Targets upon the payment by Searle of certain research payments (beyond
the project-specific payments relating to the particular Additional
Target) and the purchase of additional common stock from the Company by
Searle (at the then fair market value). The aggregate amount to be paid by
Searle for such research payments and equity investment in order to
designate each of the Additional Targets is $10,000,000 per Additional
Target. In the event that Searle designates all of the Additional Targets,
the aggregate amount to be paid by Searle for research payments will be
$24,000,000, and the aggregate amount to be paid by Searle in equity
investment will be $36,000,000. If Searle has not designated all of the
Additional Targets by the time the initial molecular target reaches a
certain stage of preclinical development, Searle will be required to
purchase an additional $10,000,000 of common stock (at the then fair
market value) in order to maintain its right to designate any of the
Additional Targets. The payment for any such common stock will be
creditable against the equity investment portion of the payments to be
made by Searle with respect to the designation of any of the Additional
Targets that Searle has not yet designated.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle elects to commercialize a product, Searle
will fund and perform preclinical tests and clinical trials of the product
candidate and will be responsible for regulatory approvals for and
marketing of the product. The Company has agreed to perform research and
development work exclusively with Searle. In addition, for each product
candidate, the Company will be entitled to milestone payments from Searle
totaling up to an aggregate of $10,000,000 upon the achievement of certain
development benchmarks. The Company also will be entitled to royalties
from net sales of products resulting from the collaboration. Subject to
satisfying certain conditions relating to its manufacturing capacities and
capabilities, the Company will retain manufacturing rights, and Searle
will be required to purchase its requirements of products from the Company
on an exclusive basis at specified prices. Upon a change in control of the
Company, Searle would have the right to terminate the Company's
manufacturing rights, although the royalty payable would be increased in
such event.
In the event that Searle designates all of the Additional Targets or if
Hybridon fails to satisfy certain requirements relating to its
manufacturing capacities and capabilities, Searle will have the right to
require Hybridon to form a joint venture with Searle, as defined. The Company and Searle would each own 50%were investigating antisense
inhibitors of MDM2, a protein involved in programmed cell death, or
apoptosis. In March 2000, the joint venture, although
Searle's ownership interest inCompany announced that Searle had elected
not to extend its collaboration agreement with the joint venture would increase based upon
a formula to up to a maximum of 75% if the joint venture is established in
certain instances relating to the Company's failure to satisfy certain
requirements relating to its manufacturing capacitiesCompany.
During 1997, 1998 and capabilities.
During 1996, 1997 and 1998,1999, the Company earned $400,000, $600,000 and
$600,000, respectively,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.
F-16
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(9) F. HOFFMANN-LA ROCHE LTD. (ROCHE) COLLABORATION
In December 1992, the Company and Roche entered into a collaboration
involving the application of the Company's antisense oligonucleotide
chemistry to develop compounds for the treatment of hepatitis B, hepatitis
C and human papilloma virus. On September 3, 1997, Roche notified the
Company that it had decided not to pursue further collaboration with the
Company and was terminating the collaboration effective February 28, 1998.
The Company has recorded $1,019,389 and $345,000 of research and
development revenue related to this collaboration in 1996 and 1997,
respectively. Due to the termination of the collaboration, as discussed
above, the Company recognized no revenue with respect to this
collaboration in 1998.
(10) MEDTRONIC, INC. COLLABORATIVE STUDY AGREEMENT
In May 1994, the Company and Medtronic, Inc. (Medtronic) entered into a
collaborative study agreement (the Medtronic Agreement) involving the
development of antisense compounds for the treatment of Alzheimer's
disease and a drug delivery system to deliver such compounds into the
central nervous system. The agreement provides that the Company is
responsible for the development of, and hold all rights to, any drug
developed pursuant to this collaboration, and Medtronic is responsible for
the development of, and hold all rights to, any delivery system developed
pursuant to this collaboration. The parties may extend this collaboration
by mutual agreement to other neurodegenerative disease targets. The
Company is not currently conducting any activities under this
collaboration.
(11)(7) LICENSING AGREEMENT
F-15
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.
(12) PHARMACIA BIOTECH, INC. COLLABORATION
In December 1994, the Company and Pharmacia Biotech, Inc. (Pharmacia)
entered into a collaboration involving the design and development of a
large-scale oligonucleotide synthesis machine. Following completion of the
machine in December 1996, the collaboration expired, and Pharmacia
retained the right to sell the machine to third parties, subject to an
obligation to pay the Company royalties on such third-party sales. During
1996 and 1997, the Company received $62,321 and $48,000, respectively, of
royalty income related to such third-party sales. The Company recognized
no royalty income related to this collaboration for 1998.
F-17
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(13) PERKIN-ELMER CORPORATION SALES AND SUPPLY AGREEMENT
In September 1996, the Company and the Applied Biosystems Division of
Perkin-Elmer Corporation (Perkin-Elmer) signed a four-year sales and
supply agreement under which Perkin-Elmer agreed to refer potential
customers to HSP for the manufacture of custom oligonucleotides and the
Company agreed that amidites for the manufacture of these oligonucleotides
would be purchased from Perkin-Elmer and a percentage of the sales price
will be paid to Perkin-Elmer. In addition, Perkin-Elmer licensed to the
Company its oligonucleotide synthesis patents.
(14)(8) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and three Canadiancertain 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 MethylGenemethylgene
fields. These fields as amended, are defined as (i) antisense compounds to inhibit
DNA methyltransferase for the treatment of any disease;cancers; (ii) other methods of
inhibiting DNA methyltransferase for the treatment of any disease;indications;
and (iii) antisense compounds to inhibit up to two additionala second molecular targetstarget 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. This option terminates sooner if MethylGene raises certain
additional amounts of equity or debt financing or if MethylGene enters
into a corporate collaboration that meets certain requirements. During 1998, MethylGene raised
additional proceeds from outside investors that decreased the Company's
interest to 30%. The Company is accounting for its
investment in MethylGene under the equity method and, due to the existence
of the investors exchange rights, the Company has recorded, up to its
original investment, 100% of MethylGene's losses in the accompanying
consolidated statement of operations.
In May 1998, this agreement was amended to grant MethylGene a
non-exclusive right to use any and all antisense chemistries discovered
by the Company or any of its affiliates for a period commencing on May 5,
1998 and ending on the earlier of (i) the effective date of termination
by MethylGene of its contract for development services to be provided by
the Company; (ii) May 5, F-18
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 transferredtransfer 300,000 shares of MethylGene's Class B
shares to the Company. The Company has placed no value on these shares.
During 1996, 1997, 1998 and 1998,1999, the Company recognized $49,565, $101,894, $1,685,932
and $1,685,932,$1,926,888, respectively, of product and service revenue related to
this agreement.
(15)F-16
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 15,304,82516,260,722 shares were issued and
outstanding at December 31, 1998.1999.
(b) Initial Public Offering (IPO)
On February 2, 1996, the Company completed its IPO of 1,150,000 shares of
common stock at $50.00 per share. The sale of common stock resulted in net
proceeds to the Company of $52,231,244 after deducting expenses related to
the offering.
(c) 1998 Unit Financing
On May 5, 1998, the Company completed a private offering of equity
securities raising total gross proceeds of $26,681,164 from the
issuance of 9,597,476 shares of common stock, 114,285 shares of
Series A convertible preferred stock and warrants to purchase
3,329,486 shares of common stock at $2.40 per share. The gross
proceeds include the conversion of $5,934,558 of accounts payable,
capital lease obligations and other obligations into common stock.
The Company incurred $1,636,137 of cash expenses related to the
private offering and issued 597,699 shares of common stock and
warrants to purchase 1,720,825 shares of common stock at $2.40 per
share to the placement agents. The compensation received by
Pillar, a company affiliated with certain directors of the
Company, with respect to the offshore component of the private
offering (Offshore Offering) consisted of (i) 9% of gross proceeds
of such Offshore Offerings and (ii) a nonaccountable expense
allowance equal to 4% of gross proceeds of such Offshore Offering.
Pillar received $1,636,137 and warrants to purchase 1,111,630
shares of common stock at $2.40 per share.
In addition, Pillar is entitled to receive 300,000 shares of common stock,
in connection with its efforts in assisting the Company in
restructuring its balance sheet. The Company has recorded $600,000
of general and administrative expense in the accompanying
consolidated statement of operations during 1998, which represents
the value of thisthe
F-17
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 will bewere issued in
1999.
F-19
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(d)(c) Units Issued to Primedica Corporation
In connection with the unit financing (see Note 15(c)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'sCompany securities are listed
on a nationally recognized exchange, and (ii) the average closing
price of the Company's common stock is at least $2.00 per share
for the twenty-day trading period preceding the contract
commencement date. In the event that the Company does not use
these services as a result of the failure to meet the contract
conditions, Primedica shall forfeit to the Company all or part of
the common stock and warrants held by Primedica. The Company
has recorded these shares as issued and outstanding at December 31,during 1998 at par
value. The Company will record the value of these services as the
services are rendered.
(e) Stock Split
On December 10, 1997, the Board of Directors declared a one-for-five
reverse split of its common stock. Share quantities and related per share
amounts have been retroactively restated to reflect the reverse stock
split.
(f)(d) Warrants
The Company has the following warrants outstanding and exercisable
for the purchase of common stock at December 31, 1998:1999:
Outstanding Exercise Price Exercisable Exercise PriceExercisable
Expiration Date WarrantsShares per Share WarrantsShares Price per Share
--------------- -------- --------- -------- ---------
February 4, 1999-October
January 23, 2000-October 25, 2000 551,201 $50.00 551,201 $50.00293,679 $ 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
MayApril 2, 2002-May 4, 2003 8,641,5038,641,510 2.40-4.25 4,378,044 2.40
--------------- ---------------
9,225,704 4,962,245
=============== ===============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 $5.48 $7.91
per
share ===== =====$ 3.35 $ 4.19
========== ==========
Five-year warrants to purchase 368,620 shares of common stock at $50.00
per share were issued in 1994 and 1995 as a component of the compensation
for services of several placement agents of the Company's convertible
preferred stock. Of these warrants, 304,335 were issued to a company that
is controlled by two directors of the Company (see Note 16(b)). The
remaining 64,285 warrants were issued to various other companies that
acted as placement agents. See Note 15(c) for information relating to
warrants issued to placement agents in connection with the 1998 Unit
Financing.
F-20
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
As consideration of the agreements made by Forum consenting to the
Company's 1998 private placements and waiving certain obligations of the
Company to Forum, the Company agreed to amend the warrant to purchase
71,301 shares of common stock at an exercise price of $35.06 per share,
issued to Forum in connection with 9% notes so that the exercise price
will be equal to $4.25 per share, and the number of shares of common stock
purchasable upon exercise thereof will be increased to 588,235, in each
case subject to adjustment; provided, however, that such warrant will also
be amended to provide that such warrant may not be exercised until May 5,
1999 and the transactions contemplated by such private placements and by
the exchange offer will not trigger any anti-dilution adjustments to the
exercise price thereof or the number of shares of common stock subject
thereto.
(g)(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
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, 1998,1999, options to purchase a total
of 525,638365,379 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, 1998,1999,
options to purchase a total of 550,534497,704 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 50,000400,000 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 F-21
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
May 1 of each year commencing in 1997. All options will vest on
the first anniversary of the date of grant or, in the case of
annual options, on April 30 of each year with respect to options
granted in the previous year. As of December 31, 1998,1999, options to
purchase a total of 21,00089,000 shares of common stock remained
outstanding under the Director Plan.
In May 1997, the Company adopted the 1997 Stock Option Plan (the
1997 Option Plan) and has reserved and may issue up to 4,500,0006,500,000
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
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, 1998,1999,
options to purchase a total of 2,363,5604,437,466 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, 19981999
is summarized as follows:
Weighted
Number Exercise Price Average Price
of Shares per Share per Share
Outstanding, December 31, 1995 738,208 $ .01 - $ 50.00 $29.15
Granted 476,020 25.00 - 65.60 49.55
Exercised (57,740) .01 - 37.50 18.85
Terminated (20,100) 25.00 - 57.85 40.20
-------
Outstanding, December 31, 1996 1,136,388 1.25$1.25 - 65.60$65.60 $ 38.05
Granted 315,675 27.50 - 32.50 30.75
ExerciseExercised (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 $1.251.25 - $65.60 $11.25
========= ================ ======
Exercisable,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, 1996 622,930 $1.251999 5,389,550 $0.50 - $65.60 $32.55
=========$ 2.00 $ 0.50
============= ================ ==============
Exercisable, December 31, 1997 740,780 $1.25 - $65.60 $34.40
=========$ 65.50 $ 34.40
============= ================ ==============
Exercisable, December 31, 1998 1,650,021 $1.25 $65.60 $17.13
=========- $ 65.60 $ 17.13
============= ================ ==============
Exercisable, December 31, 1999 2,772,099 $0.50 - $ 2.00 $ 0.50
============= ================ ========
F-22F-20
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)1999
(CONTINUED)
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
$ 1.25 10,000 3.100.50 5,385,550 8.39 $ 1.25 10,0000.50 2,771,974 $ 1.250.50
2.00 - 2.37 2,505,000 9.564,000 9.81 2.00 901,562125 2.00
2.44 - 3.13 18,800 6.03 2.61 10,800 2.50
4.25 - 5.00 1,200 3.75 5.00 1,200 3.75
17.50 - 25.00 197,330 3.54 23.21 191,331 23.15
27.50 - 31.66 168,974 7.45 30.50 76,017 30.28
35.00 - 36.25 30,000 6.73 35.71 30,000 35.71
37.50 - 37.50 316,048 4.72 37.50 282,583 37.50
38.13 - 43.75 47,900 7.81 40.64 24,648 40.73
50.00 17,700 6.35 50.00 11,700 50.00
57.85 - 65.60 147,780 6.08 58.22 110,180 58.34
------------- -------------
3,460,732------------ ---------- ------------ ----------
5,389,550 $ 11.25 1,650,021 $17.13
============= ======== ============= ======0.50 2,772,099 $ 0.50
============ ========== ============ ==========
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 Accounting
Principles BoardAPB Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. In 1996, 1997 and 1998, the Company
recorded $1,967,116, $205,978 and $109,734, respectively, of deferred
compensation related to grants to nonemployees, net of terminations.
Deferred compensation will be amortized over the vesting period of the
options. The Company has recorded compensation expense of $763,190,
$316,067 and $246,444 in 1996, 1997 and 1998, respectively, related to
these grants to nonemployees.
The Company has computed the pro forma disclosures require by SFAS
No. 123 for all stock options 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,
19981999 are as follows:
1996 1997 1998 1999
Risk free interest rate 6.14% 6.22% 5.15% 6.12%
Expected dividend yield - - -
Expected lives 6 years 6 years 6 years
Expected volatility 60% 60% 60%
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective assumptions
including expected stock price F-23
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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
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, 19981999 would be as follows:
1996 1997 1998 1999
Net loss to applicable common
Netstockholders, as reported $ (69,461,326) $ (19,792,736) $ (14,735,293)
=============== =============== ===============
Pro forma net loss applicable to common
stockholders-
As reported $ (46,852,600) $ (69,461,326) $ (19,792,736)
================= ================= =================
Pro forma $ (52,890,455)stockholders $ (73,402,170) $ (23,131,304) ================= ================= =================$ (18,647,864)
=============== =============== ===============
Basic and Diluted net loss per common
shares-
As reported $(10.24) $(13.76) $(1.67)
======= ======== =======$ (13.76) $ (1.67) $ (0.93)
========= ========= =========
Pro forma $(11.56) $(14.54) $(1.95)
======= ======== =======$ (14.54) $ (1.95) $ (1.18)
========= ========= =========
(h)(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
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.
(i)(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, F-24
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
the powers,
privileges, preferences and relative, optional or special rights
thereof, including liquidation preferences and dividends, and
conversion and redemption rights of each such series. During 1998,
the Company designated 1,500,000 shares as Series A convertible
preferred stock.
(j)(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 1998,1999, the Company recorded a total accretion of
$2,689,048$4,232,251 for the dividend on Series A preferred stock and
issued 16,47041,673 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
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
Commencing after May 6, 1999, but not prior thereto, the sharesShares of Series A convertible preferred stock shall beare
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.
F-25
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)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
At any time after May 6, 1998, theThe Company at its option, may cause the Series A convertible
preferred stock to be converted in whole or in part, on a pro
rata basis, into fully paid and nonassessable shares of common
stock using a conversion price equal to $4.00 if the closing
bid price, as defined, of the common stock shall have equaled
or exceeded 250% of the conversion price, $4.25, subject to
adjustment as defined, for at least 20 trading days in any 30
consecutive trading day period ending three days prior to the
date of notice of conversion (such event, the Market Trigger).
At any time after April 1, 2000, the Company, at its option,
may redeem the Series A convertible preferred stock for cash
equal to $100.00 per share plus all accrued and unpaid
dividends at such time, if the Market Trigger has occurred in
the period ending three days prior to the date of notice of
redemption.
(16)(11) COMMITMENTS AND CONTINGENCIES
(a) Facilities
The Company leases its facility in Milford, Massachusetts, under a
lease which has a 10- year10-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. As compensation for arranging this lease, the
Company issued Pillar Limited five-year warrants for the purchase
of 100,000 shares of the Company's common stock at an exercise
price of $50.00 per share. These warrants expired subsequent to
December 31, 1998. The Company vacated the Cambridge,
Massachusetts, facility in June 1998 and moved its corporate
facilities to Milford, Massachusetts (see Note 3).
F-24
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, $ 614,000
2000 784,000
2001 1,213,000
2002 1,209,000
2003 1,213,000
Thereafter 2,338,000
---------------
$ 7,371,000
===============
F-26
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
During 1996, 1997 and 1998, facility rent expense net of sublease
revenue was approximately $2,352,000, $4,613,000, $3,871,000 and $3,871,000,$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 1996, 1997, 1998 and 1998,1999, the Company had
expensed $1,106,000, $998,000, $1,300,000 and $1,300,000,$336,000, respectively, under
consulting and advisorythese agreements with related parties.
(c) Other Research and Development Agreements
The Company has entered into consulting and research agreements
with the universities, research and testing organizations and
individuals, under which consulting and research support is
provided to the Company. These agreements are for varying terms
and provide for certain minimum annual or per diem fees plus
reimbursable expenses to be paid during the contract periods.
Future minimum fees payable under these contracts as of December
31, 19981999 are approximately as follows:
December 31, Amount
------------ ------
19992000 $ 582,000
2000 392,000218,000
2001 279,000
---------------78,000
----------
$ 1,253,000
===============296,000
Total fees and expenses under these contracts were approximately
$7,171,000, $9,372,000, $2,011,000 and $2,011,000$477,000 during 1996, 1997, 1998 and 1998,1999,
respectively.
F-25
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.
F-27
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(e) Contingencies
From time to time, the Company may be exposed to various types of
litigation. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a
material adverse effect on the Company's financial condition or
results of operations.
(17)(12) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes. At
December 31, 1998,1999, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately
$219,993,000$228,744,000 and $3,936,000,$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,
1998,1999, 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
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 23,252,00021,366,000 500,000
------------ ------------
$219,993,0002019 10,637,000 250,000
---------------- ---------------
$ 3,936,000
============ ============
F-28
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER228,744,000 $ 4,186,000
================ ===============
As of December 31, 1998 (Continued)
At December 31, 1997 and 1998,1999, the components of the deferred tax
assets are approximately as follows:
1997 1998 ---- ----1999
Operating loss carryforwards $ 78,696,00087,243,000 $ 87,997,00091,498,000
Temporary differences 5,137,000 2,677,0003,461,000 3,378,000
Tax credit carryforwards 3,436,000 3,936,000 4,186,000
------------ ------------
87,269,000 94,610,00094,640,000 99,062,000
Valuation allowance (87,269,000) (94,610,000)(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 19981999 was an increase of
approximately $7,341,000.
(18)$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
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 $224,000,$253,000, $253,000 and $253,000$96,000
during 1996,
1997, 1998 and 1998,1999, respectively.
(19)(14) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the three years in
the period ended December 31, 19981999 are as follows:
1996 1997 1998 1999
Cash paid during the period for interest $ 124,052 $ 3,264,596 $ 1,666,127 ============== ============== ===========$ 753,620
=============== =============== ===============
Purchase of property and equipment under capital leases $ 1,722,333 $ 2,374,502 $ - ============== ============== ===========$ -
=============== =============== ===============
Conversion of preferred stock into common stock $ 159,822- $ - $ -
============== ============== ===========496
=============== =============== ===============
Deferred compensation related to grants of stock options
to $ 1,967,116nonemployees, net of terminations $ 205,978 $ 109,734 nonemployees, net of terminations ============== ============== ===========
F-29
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)$ -
=============== =============== ===============
Issuance of Series A convertible preferred stock and
attached $ - $ - $51,055,850
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 $ 2,689,048
============== ============== ===========4,232,251
=============== =============== ===============
Issuance of common stock and attached warrants in exchange
$ - $ - $ 4,800,000
for conversion of convertible promissory notes payable ============== ============== ===========$ - $ 4,800,000 $ -
=============== =============== ===============
Issuance of common stock and attached warrants in exchange
$ - $ - $ 5,934,558
for conversion of accounts payable and other obligations ============== ============== ===========$ - $ 5,934,558 $ -
=============== =============== ===============
Issuance of common stock in lieu of services $ - $ - $ 1,000,000
=============== =============== ===============
(20) RESTATEMENT
In March 1999, the Company restated its June 30, 1998 and September 30,
1998 financial statements to reflect the accretion on the Series A
convertible preferred stock, and record $600,000 of general and
administrative expense for the 300,000 shares of common stock that
Pillar is entitled to receive in connection with its efforts in
assisting the Company in restructuring its balance sheet.
(21) ORIGENIX TECHNOLOGIES, INC.
In January 1999, the Company and certain institutional investors formed
a Montreal company, OriGenix Technologies Inc. (OriGenix), to develop
and market drugs for the treatment of infectious diseases.
The Company received a 49% interest in OriGenix in consideration of
certain research and development efforts previously undertaken by the
Company which were made available to OriGenix. The Company has also
licensed certain antisense compounds and other technology to OriGenix.
If certain conditions are satisfied by OriGenix, the institutional
investors are committed to make an additional investment, at which time
the Company's ownership interest in OriGenix will be reduced 40%. The
institutional investors acquired a 51% interest in OriGenix for a total
of approximately $4.0 million. The Company will account for its
investment in OriGenix under the equity method.
F-30F-28
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Certificate of Incorporation of the Registrant, as amended.
3.2(2) Amended and Restated By-Laws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Preferred Stock.
3.4(3) Form of Certificate of Designation of Series B Preferred Stock.
4.1(2) Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant.
4.2(4) Indenture dated as of March 26, 1997 between Forum Capital Markets
LLC and the Registrant.
4.3(7) Certificate of Designation of Series A Preferred Stock, par value
$.01 per share, dated May 5, 1998.
4.4(7) Class A Warrant Agreement dated May 5, 1998.
4.5(7) Class B Warrant Agreement dated May 5, 1998.
4.6(7) Class C Warrant Agreement dated May 5, 1998.
4.7(7) Class D Warrant Agreement dated May 5, 1998.
+10.1(2) License Agreement dated February 21, 1990 and restaged as of
September 8, 1993 between the Registrant and the Worcester
Foundation for Biomedical Research, Inc., as amended.
+10.2(2) Patent License Agreement dated September 21, 1995 between the
Registrant and National Institutes of Health.
+10.3(2) Patent License Agreement effective as of October 13, 1994 between
the Registrant and McGill University.
+10.4(2) License Agreement effective as of October 25, 1995 between the
Registrant and the General Hospital Corporation.
+10.5(2) License Agreement dated as of October 30, 1995 between the
Registrant and Yoon S. Cho-Chung.
+10.6(2) Collaborative Study Agreement effective as of December 30, 1992
between the Registrant and Medtronic, Inc.
+10.7(2) System Design and Procurement Agreement dated as of December 16,
1994 between the Registrant and Pharmacia Biotech, Inc.
10.8(2) Lease dated March 10, 1994 between the Registrant and Laborer's
Pension/Milford Investment Corporation for space located at 155.
Fortune Boulevard, Milford, Massachusetts, including Note in the
original principal amount of $750,000.
10.9(2) Registration Rights Agreement dated as of February 21, 1990 between
the Registrant, the Worcester Foundation for Biomedical Research,
Inc. and Paul C. Zamecnik.
10.10(2) Registration Rights Agreement dated as of June 25, 1990 between the
Registrant and Nigel L. Webb.
10.11(2) Registration Rights Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
10.12(2) Registration Rights Agreement dated as of February 6, 1992 between
the Registrant and Anthony J. Payne.
++10.13(2) 1990 Stock Option Plan, as amended.
++10.14(2) 1995 Stock Option Plan.
++10.15(2) 1995 Director Stock Plan.
++10.16(2) 1995 Employee Stock Purchase Plan.
10.17(2) Form of Warrant originally issued to Pillar Investment Limited to
purchase shares of Common Stock issued as placement commissions in
connection with the sale of shares of Series F Convertible Preferred
Stock and in consideration of financial advisory service, as
amended.
10.18(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common
Stock dated as of March 1, 1994, as amended.
10.19(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common
Stock dated as of March 1, 1995.
10.20(2) Form of Warrant issued to Pillar Investment Limited to purchase
shares of Common Stock issued as placement commissions in connection
with the sale of Units pursuant to the Series G Agreement.
++10.21(5) Employment Agreement dated as of March 1, 1997 between the
Registrant and E. Andrews Grinstead, III.
10.22(2) Indemnification Agreement dated as of February 6, 1992 between the
Registrant and E. Andrews Grinstead, III.
++10.23(6) Employment Agreement dated March 1, 1997 between the Registrant and
Dr. Sudhir Agrawal.
++10.24(2) Consulting Agreement dated as of February 21, 1990 between the
Registrant and Dr. Paul C. Zamecnik.
10.25(2) Master Lease Agreement dated as of March 1, 1994 between the
Registrant and General Electric Capital Corporation.
+10.26(6) Research, Development and License Agreement dated as of January 24,
1996 between the Registrant and G.D. Searle & Co.
+10.27(6) Manufacturing and Supply Agreement dated as of January 24, 1996
between the Registrant and G.D. Searle & Co.
10.28(6) Registration Rights Agreement dated as of January 24, 1996 between
the Registrant and G.D. Searle & Co.
10.29(5) Loan and Security Agreement dated as of December 31, 1996 between
the Registrant and Silicon Valley Bank.
10.30(7) First Amendment to Loan and Security Agreement dated March 30, 1998
between Hybridon, Inc. and Silicon Valley Bank.
10.31(8) Second Amendment to Loan and Security Agreement dated May 19, 1998,
effective as of April 30, 1998, between Hybridon, Inc. and Silicon
Valley Bank.
10.32(9) Third Amendment to Loan and Security Agreement dated September 18,
1998 between Hybridon, Inc. and Silicon Valley Bank.
10.33(9) Fourth Amendment to Loan and Security Agreement dated October 30,
1998, effective as of September 29, 1998 between Hybridon, Inc. and
Silicon Valley Bank.
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.
10.36(5) Registration Rights Agreement dated as of December 31, 1996 between
the Registrant and Silicon Valley Bank.
+10.37(5) Supply and Sales Agreement dated as of September 1, 1996 between the
Registrant and P.E. Applied Biosystems.
10.38(2) Registration Rights Agreement dated as of March 26, 1997 between
Forum Capital Markets LLC and the Registrant.
10.39(2) Warrant Agreement dated as of March 26, 1997 between Forum Capital
Markets LLC and the Registrant.
+10.40(6) Amendment No. 1 to License Agreement, dated as February 21, 1990 and
restated as of September 8, 1993, by and between the Worcester
Foundation for Biomedical Research, Inc. and the Registrant, dated
as of November 26, 1996.
10.41(10) Letter Agreement dated May 12, 1997 between the Registrant and
Pillar S.A. amending the Consulting Agreement dated as of March 1,
1994 between the Registrant and Pillar S.A.
10.42(10) Amendment dated July 15, 1997 to the Series G Convertible Preferred
Stock and Warrant Purchase Agreement dated as of September 9, 1994
among the Registrant and certain purchasers, as amended.
10.43(1) Consent Agreement dated January 15, 1998 between Silicon Valley Bank
and the Registrant relating to the Silicon Agreement.
10.44(11) Letter Agreement between the Registrant and Forum Capital Markets
LLC and Pecks Management Partners Ltd. for the purchase of the Loan
and Security Agreement with Silicon Valley Bank.
10.45(7) Financial Advisory Agreement between Registrant and Pillar
Investments Ltd. dated May 5, 1998.
10.46(7) Placement Agency Agreement between Registrant and Pillar Investments
Ltd. dated as of January 15, 1998.
+++10.47 Licensing Agreement dated March 12, 1999 by and between Hybridon,
Inc. and Integrated DNA Technologies, Inc.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McDonnell Boehnen Hulbert & Berghoff.
27.1 Financial Data Schedule [EDGAR] - Year Ended December 31, 1998
- ------------------------------------------------
(1) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(2) Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 33-99024).
(3) Incorporated by reference to Exhibit 9(a)(1) to the Registrant's
Schedule 13E-4 dated February 6, 1998.
(4) Incorporated by reference to Exhibits to the Registrant's Current
Report on Form 8-K dated April 2, 1997.
(5) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1998.
(8) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1998.
(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).
+ Confidential treatment granted as to certain portions, which
portions are omitted and filed separately with the Commission.
++ Management contract or compensatory plan or arrangement required to
be filed as an Exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1997.
+++ Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Commission.