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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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, 2000
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 NO.)
345 VASSAR STREET 02139
CAMBRIDGE, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(617) 679-5500
(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 the
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 the 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 $8.8 million as of March 26, 2001.
For purposes of determining this number, 2,546,663 shares of common stock
held by affiliates are excluded.
As of March 26, 2001, the registrant had 18,693,259 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement
with respect to the Annual Meeting of Stockholders
to be held on June 28, 2001................................. Items 10, 11, 12 and 13 of Part III.
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HYBRIDON, INC.
FORM 10-K
INDEX
PAGE
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PART I.
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 27
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 27
PART III.
Item 10. Directors and Executive Officers of Hybridon................ 28
Item 11. Compensation of Executive Officers.......................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 28
Item 13. Certain Relationships and Related Transactions.............. 28
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 28
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FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. Hybridon
intends that all forward-looking statements be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect Hybridon's views as of the date they are made
with respect to future events and financial performance, but are subject to many
risks and uncertainties, which could cause actual results to differ materially
from any future results expressed or implied by such forward-looking statements.
Examples of such risks and uncertainties include the risks detailed in the Risk
Factors section of this Annual Report on Form 10-K. Hybridon does not undertake
to update any forward-looking statements.
PART I.
ITEM 1. BUSINESS
HYBRIDON
Hybridon, established in 1989, utilizes chemically-modified synthetic DNA
for medical applications, including the discovery and development of genetically
based drugs, which treat diseases by acting on a particular gene. The genetic
drugs being developed by Hybridon are based on "antisense" technology, in that
they use synthetic DNA material, also called oligonucleotides, with the aim of
inhibiting or reducing the body's production of proteins that directly or
indirectly cause or support a given disease. Hybridon has also developed a
portfolio of chemically modified DNA compounds designed to stimulate responses
of the immune system. Chemically-modified DNA is also being developed for use in
the laboratory to determine the function of proteins produced by genes whose
function has not yet been established.
Hybridon has developed and owns certain medicinal chemistry innovations
useful in the design of new synthetic DNA compounds. Hybridon also has rights to
technology allowing the chemical modification of synthetic DNA.
Hybridon manufactured and sold synthetic DNA compounds on a large scale
until September 21, 2000 when it sold its Hybridon Specialty Products or "HSP"
business and assets in order to focus on its drug research and development
activities and to provide working capital to fund these activities. For
additional information about the HSP transaction, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- General."
RECENT DEVELOPMENTS
On March 30, 2001, Hybridon signed a binding agreement with unrelated
institutional investors providing for the sale of 60% of Hybridon's holdings of
shares of Class A and Class B stock of MethylGene, Inc. The agreement covers a
total of 2,350,000 such shares and provides a purchase price of Canadian $2.85
(approximately $1.81 US Dollars as of March 30, 2001) per share or approximately
US $4.3 million in the aggregate. Closing of the transaction is subject to the
satisfaction of various conditions, including waivers by MethylGene's
shareholders of rights of first refusal which have now been executed by
MethylGene's shareholders and received by the Company. Hybridon has given an
option, exercisable at any time prior to April 30, 2001, to MethylGene and its
shareholders to purchase the balance of Hybridon's holdings of MethylGene stock
at Canadian $2.85 per share. If all of these shares were purchased, Hybridon
would receive an additional sum of US $2.9 million.
Hybridon's holdings of MethylGene shares were subject to the security
interest of the holders of its 8% Convertible notes due 2002 and its $6.0
million notes due 2003. The following is a discussion of arrangements which
Hybridon made with these noteholders to procure a release of their security
interest.
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On March 5, 2001, Hybridon made an offer to the holders of its 8%
Convertible notes due 2002 to exchange their notes for one share of a
newly-designated class of Series B Convertible Preferred Stock (par value $.01
per share) for each $100 in principal amount of notes tendered. At the offer's
expiration date of March 30, 2001, holders of $6.9 million out of a total of
$7.5 million in principal amount of notes outstanding accepted the exchange
offer which was then concluded. Shares of the Series B Convertible Preferred
Stock have a face value of $100 per share and are senior in right of payment
with respect to liquidation, distributions and dividends to Hybridon's Series A
Convertible Preferred Stock and common stock. Such shares will accrue dividends
at the rate of 8% per annum which are payable in kind or in cash at Hybridon's
option. Shares of Series B Convertible Preferred Stock are convertible into
shares of common stock at an initial rate of one share of Series B Convertible
Preferred Stock for 200 shares of common stock. If all shares of Series B
Convertible Preferred Stock issued to the holders of 8% notes were converted to
common stock at this time, Hybridon would be required to issue 15,209,200 shares
of its common stock.
For interest calculation purposes, 8% notes submitted for exchange were
deemed exchanged as of March 5, 2001. Under the offer, all accrued but unpaid
interest on the exchanged notes will be paid through March 5, 2001 by issuing
additional notes in an aggregate principal amount equal to the amount of accrued
but unpaid interest. These additional notes were tendered for exchange by the
noteholders participating in the offer. Any tender of notes involving
denominations of less than $100 in principal amount were exchanged for cash
equal to such principal amount. Dividends on shares of Series B Convertible
Preferred Stock will begin accruing on March 6, 2001.
As a result of the exchange offer, Hybridon has become entitled to the
unrestricted use of $5.0 million, which were proceeds from the sale of its HSP
business. These proceeds had been pledged to secure Hybridon's obligations under
the 8% notes and the $6.0 million notes.
On March 28, 2001, Hybridon entered into an agreement with the holders of
its $6.0 million notes whereby it would pay, out of the proceeds of the sale of
its MethylGene shares, $1.8 million to the holders in partial satisfaction of
the notes. In addition, it agreed that it would deposit up to another $1.2
million in a money market account for the purpose of securing payment of the
balance of the outstanding notes and the sum of $811,000 to secure the payment
of the balance remaining on notes held by a particular lender group. This
arrangement was made to encourage the holders of these notes to release their
security interest in the MethylGene shares. If more than 60% of its holdings of
MethylGene shares are sold, Hybridon will pay off additional notes up to a total
of $3,000,000 and the $1,200,000 of money market funds securing the notes would
decrease proportionately.
TECHNOLOGY OVERVIEW
Introduction
The heart, brain, liver and other organs in the human body function
together to support life. Each microscopic cell within these organs produces
proteins that affect how that cell functions within its organ, and ultimately
how efficiently each organ functions within the body. Most human diseases are
caused by abnormal production or performance of proteins within individual
cells. In some instances, cell proteins act directly to cause or support a
disease. In other instances, cell proteins interfere with other proteins that
prevent or combat disease. Traditional drugs are designed to interact with
protein molecules that cause or support diseases. Antisense drugs are designed
to work at an earlier stage to stop the production of disease-causing or
disease-supporting proteins.
The information that controls a cell's production of a specific protein is
contained in the gene relating to that protein. Each gene is made up of two
intertwined strands of DNA that form a structure called a "double helix." Each
strand of DNA consists of a string of individual DNA building blocks, called
nucleotides, arranged in a specific sequence. Each strand is made of linked
molecules, known as the "backbone," and attached to the backbone are molecules
known as "bases." It is the sequence of bases that contains genetic information.
One of the paired strands contains the information that directs the composition
of a specific protein, and is called the "coding" strand. The other strand, the
"non-coding" strand, contains a different but complementary sequence of
nucleotides.
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The full complement of human genes, known as the human "genome," contains
the information required to produce all human proteins. A copy of the complete
human genome is present in each cell, and each cell makes proteins based on its
copy of the genome. Cells make proteins in a two-stage process. First, the cell
creates a molecule of messenger RNA consisting of a string of nucleotides in a
sequence that is the exact mirror image or 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. Then,
the cell then produces proteins based on the information contained in the
messenger RNA. The number of copies of messenger RNA the cell produces will
affect how many copies of a given protein it produces.
A normal cell produces a given set of normal proteins in the right amount
for the body to function properly. A diseased cell produces inappropriate or
mutant proteins, or produces the wrong amount of normal proteins. A cell
produces mutant proteins when its DNA changes, either through mutation, as in
many types of cancer cells, or by infection with a virus.
Conventional Drugs
Most drugs are chemicals that stimulate or suppress the function of a
particular molecule, usually a protein, with tolerable side effects. Most drug
side effects arise when a drug interacts with proteins in addition to the target
protein. Generally, the fewer other proteins a drug interacts with, the fewer
the side effects.
Conventional drugs generally aim to bind only two or three points of the
target molecule. Frequently, however, sites on other non-target molecules
resemble the target-binding site enough to permit the conventional drug to bind
to some degree to those non-target molecules. This lack of selectivity can
result in unwanted side effects, potentially leading to decreased effectiveness.
Another characteristic of conventional drugs is that developing them is a
time-consuming and expensive process. For every compound that is found to be
effective and have tolerable side effects, thousands may be investigated and
rejected.
Antisense Drugs
A synthetic DNA with a sequence exactly complementary to that of the
messenger RNA of a specific gene can bind to and inhibit the expression of the
messenger RNA, thereby decreasing or eliminating the production of
disease-causing or disease-supporting proteins. Antisense technology involves
the design and synthesis of such synthetic DNA. Hybridon believes that drugs
based on antisense technology may be more effective, cause fewer side effects,
and have a greater range of applications than conventional drugs because
antisense drugs are designed to intervene in a highly specific fashion in the
production of proteins, rather than after the proteins are made.
Advances in mapping the human genome, including work conducted by academic
institutions, biotechnology companies and pharmaceutical companies, have allowed
many targets for antisense drugs to be identified. Once a gene associated with a
disease-associated protein is identified, a synthetic DNA with an antisense
mechanism can be designed, and the pharmaceutical effects of that synthetic DNA
can be improved by chemical modification. Chemically-modified synthetic DNA can
be composed of DNA, RNA, or a combination of the two.
Because the nucleotide sequence of a chemically-modified antisense
synthetic DNA is complementary to its target sequence on the messenger RNA of a
given gene, the antisense synthetic DNA forms a large number of bonds at the
target site, typically between 40 and 60. This allows it to form a strong bond
with the messenger RNA. A few identical messenger RNA molecules can cause the
cell to produce many copies of a protein; similarly, a few identical molecules
of chemically-modified antisense synthetic DNA can inhibit this process. This is
due in part to an enzyme called RNase H that can destroy messenger RNA bound to
synthetic DNA without destroying the synthetic DNA itself, thus freeing the
synthetic DNA to bind with, and cause the destruction of, other messenger RNA
molecules. This process is generally known as catalytic activity. All of
Hybridon's drugs are designed to take advantage of this catalytic activity so
that a relatively small number of antisense molecules can effectively inhibit
production of disease-associated proteins.
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HYBRIDON ANTISENSE TECHNOLOGY
Hybridon's antisense chemistry builds on the pioneering work in the
antisense field begun in the 1970s by Dr. Paul C. Zamecnik, a founder,
consultant, director and shareholder of Hybridon. Development of Hybridon's
antisense chemistry has been directed by Dr. Sudhir Agrawal, Hybridon's Chief
Scientific Officer, director, shareholder and now also President and Acting
Chief Executive Officer. It has been based on Hybridon's "advanced chemistries,"
namely, its ability to alter the chemical makeup of the synthetic DNA backbone
in a manner that makes synthetic DNA safer and more stable without adversely
affecting its ability to promote the destruction of messenger RNA.
Medicinal Chemistries. Hybridon's first antisense drug, GEM(R)91, targeted
the messenger RNA that codes for an essential protein in Type 1 Human
Immunodeficiency Virus, or "HIV-1." GEM(R)91 was based on first-generation
chemistry, which altered the naturally-occurring, or native, form of DNA 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 Rnase
H, leading to catalytic activity. However, there were side effects caused by the
administration of this modified DNA into the body. In particular, in the last
clinical trial of GEM(R)91 treatment of three of the nine patients with advanced
HIV disease was interrupted due to unacceptable decreases in platelet counts. As
a result, Hybridon discontinued the GEM(R)91 program. Hybridon has, however,
used the information gained from the human clinical trials of GEM(R)91 to design
its second generation chemically-modified synthetic DNA chemistries.
On November 9, 2000, Hybridon announced the issuance of a U.S. patent that
broadly claims second generation antisense compounds.
Hybridon has designed and made families of advanced synthetic DNA
chemistries, including DNA/ RNA combinations, also called hybrid or mixed
backbone chemistries. Hybridon believes that antisense compounds based on these
advanced chemistries will show favorable pharmaceutical characteristics and
significantly improve therapeutic value compared to earlier antisense drug
candidates. These compounds are likely to have the following desirable
characteristics:
- fewer side effects
- greater stability in the body, thereby permitting a patient to take doses
less frequently
- greater potency, thereby permitting a patient to take lower doses
- potential for multiple routes of administration, including by injection,
orally, or topically.
Hybridon is actively exploring opportunities for licensing portions of its
antisense technology platform towards the goal of generating substantial revenue
from its antisense patent estate.
Drug Potentiation Technology. Hybridon has discovered that at times
synthetic DNA is 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.
Functional Genomic Technology. With the advent of the human genome project,
researchers have identified thousands of genes whose functions have not yet been
established. A reliable, fast and economic way to study the function of any gene
is through the use of synthetic DNA designed to target a specific messenger RNA.
In order to reduce the possibility that a drug will be responsible for
undesirable side effects, it is important to understand the role of each gene in
normal and disease conditions before designing drugs for that specific target.
Hybridon has an established program in functional genomics in which
synthetic DNA can be used for the study of the function of any newly discovered
gene. Hybridon's synthetic DNA, designed as antisense molecules, are especially
useful in these studies because of their enhanced ability to interact with very
specific targets. In the design of synthetic DNA for functional genomics
studies, Hybridon draws on its extensive experience in the antisense field to
increase specific targeting and reduce non- antisense effects of the synthetic
DNA employed in the functional genomics program. Hybridon's synthetic DNA
chemistry program has also
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identified a novel antisense structure identified as a "cyclicon" that will
further simplify the application of antisense to identify gene function. These
modified DNA-like compounds present certain advantages over other available
compounds for DNA chip or PCR-based gene expression techniques. Hybridon is
actively seeking opportunities to license this technology to companies, which
have identified specific genes and which are employing these genomics techniques
for drug discovery and development.
Regulatory Know-How. Hybridon drug development personnel have extensive
experience in working with the Food and Drug Administration and other drug
regulatory agencies in an efficient and cost-effective manner. Hybridon has
assisted its spin-off companies in preparing essential components of their
submissions to the FDA.
SYNTHETIC DNA TECHNOLOGY FOR STIMULATING THE IMMUNE SYSTEM
Naturally occurring and synthetic DNA compounds containing certain
sequences and arrangements of the building blocks that make up the DNA have been
found to mobilize the body's immune response system. The most widely studied of
these sequences involve the presence in the DNA of the base cytosine followed by
the base guanosine, a sequence also known as a CpG-motif. The stimulation of the
immune system by synthetic DNA can potentially be used in a beneficial manner to
stimulate the immune defenses where they are deficient or as a cofactor to boost
the responses to other agents. The latter use is illustrated by independently
published reports which have shown that DNA compounds have therapeutic potential
to enhance immunity following vaccines and as treatments for cancer, infectious
and allergic diseases.
Hybridon has engaged in a systematic effort to make chemical modifications
to synthetic DNA that contains CpG and related sequences. This has resulted in
the creation of a portfolio of synthetic DNA and similar compounds that have
immune stimulatory properties. Introducing modifications at specific locations
in the DNA building blocks and their linkages causes substantial stimulation to
the body's immune system. These discoveries have been used to synthesize
proprietary chemically modified synthetic DNA that can be used alone or in
association with other agents, including vaccines, to enhance the responsiveness
of the immune system.
Hybridon has entered into materials transfer agreements with several
companies whereby Hybridon supplies modified synthetic DNA to these companies
which will evaluate their potential for stimulating the immune system.
DRUG DEVELOPMENT AND DISCOVERY
Drug Development and Approval Process
The process of taking a compound from the laboratory to human patients
generally takes 10 to 15 years. This process is extremely expensive and is
rigorously regulated by governmental agencies, including, in the U.S., the Food
and Drug Administration, or the "FDA." Each drug must undergo a series of
trials, both preclinical and clinical, before the FDA will consider approving it
for commercial sale. The FDA or any company conducting drug trials can
discontinue those trials at any time if it feels that patients are being exposed
to an unacceptable health risk or if there is not enough evidence that the drug
is effective. The FDA may also require a company to provide additional
information or conduct additional tests before it will permit a drug to proceed
from one phase of trials to the next.
The phases of preclinical and clinical trials are described below:
- Preclinical Studies. Preclinical trials involve the testing of a given
compound in animals to provide data on the activity and safety of the
compound before the compound is administered to humans.
- Investigational New Drug Application. If the data from research and
preclinical trials are promising, Hybridon may file an Investigational
New Drug Application, or "IND," with the FDA. The IND contains the
results of the preclinical trials and the protocol for the first clinical
trial. The IND becomes active in 30 days unless the FDA disapproves it or
requires additional information. Once the IND becomes active, Hybridon
can begin clinical trials in the U.S.
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- Phase I Clinical Trials. In Phase I trials, the drug is given to a small
group of healthy individuals or patients with the disease. These trials
are designed to produce data on the drug's safety, the maximum safe dose,
and how the drug is absorbed, distributed, metabolized and excreted over
time. In some cases, Phase I trials can give an early indication of a
drug's effectiveness. A limited Phase I trial is sometimes called a Pilot
Phase I trial.
- 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.
- Phase II Clinical Trials. In Phase II trials, the drug is given to a
larger group of patients with the disease for purposes of evaluating the
drug's effectiveness and side effects at varying doses and schedules of
administration and thereby determining the optimal dose and schedule for
the larger Phase III trials that follow.
- Phase III Clinical Trials. These trials generally have a large number of
patients. The primary purpose of a Phase III trial is to confirm the
drug's effectiveness and produce additional information on side effects.
- New Drug Application. Once Phase III trials are complete, Hybridon will
file a New Drug Application, or "NDA," with the FDA. The NDA contains all
of the information gathered from the Phase I, I/II, II and III trials.
Based on the FDA's review of the NDA, the FDA may approve the drug for
commercial sale. The FDA may deny an NDA if the applicable regulatory
requirements are not met. The FDA may also require additional tests
before approving an NDA. Even after approval by the FDA, Hybridon must
file additional reports about the drug with the FDA from time to time.
The FDA may withdraw product approvals if a company fails to comply with
ongoing regulatory standards or if problems occur after a company starts
marketing a drug.
- Accelerated Approval. The FDA is authorized to grant accelerated review
to NDAs for drugs that are intended to treat persons with debilitating
and life-threatening illnesses, especially if no satisfactory
alternatives are available. The more severe the disease, the more likely
it is that the drug will qualify for accelerated review. If a new drug is
approved after accelerated review, the FDA may require Hybridon to
conduct specific post-marketing studies regarding the drug's safety,
benefits and optimal use.
The regulatory process in other countries is generally similar to the U.S.
regulatory process.
Drug Development and Discovery Programs
Hybridon is focusing its drug development and discovery efforts on
developing synthetic DNA compounds with the potential to enhance immune
responses, as well as antisense compounds for the treatment of diseases in three
major therapeutic areas: cancer, viral infections and diseases of the eye. For
example, in the treatment of cancer, compared to conventional anti-cancer drugs,
antisense may provide more specific therapy and more rapid development of drugs
targeting newly-discovered cancer-related proteins. It may also provide 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. When used in combination therapy, it may provide therapeutic
effects that complement the benefits of conventional drugs. Synthetic DNA-based
compounds have been identified and studied in humans for their potential to
treat viral infections (e.g., Human Immunodeficiency Virus, human
cytomegalovirus). Other compounds, still in preclinical development, have been
identified for hepatitis C. Diseases of the eye for which DNA-based therapies
are in the research stage include conditions where new blood vessel formation is
involved (e.g., macular degeneration, diabetic retinopathy).
CLINICAL PROGRAMS
Hybridon has conducted clinical trials with antisense drugs targeting
cancer and HIV-1 AIDS. Hybridon is seeking partners for each of its compounds in
clinical development.
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Cancer
Unlike normal human cells, cancer cells grow in an uncontrolled and harmful
manner. The protein molecule protein kinase A, or "PKA," has been implicated in
the formation and growth of various solid tumors, including colon, ovarian,
breast, and lung tumors. There are two kinds of PKA. It is normal to find type I
in developing fetuses, but abnormal to find it in adults. By contrast, PKA type
II is found in, and is necessary to the health of, normal adults. Certain cancer
cells produce PKA type I in adults. Hybridon is developing a cancer drug,
GEM(R)231, that is designed to reduce the production of the harmful PKA type I
without interfering with the production of the beneficial PKA type II. Most
current drug candidates based on conventional mechanisms have unacceptable side
effects.
Hybridon has conducted a Phase I clinical trial to evaluate the safety of
GEM(R)231 at multiple doses, and has found that patients tolerate it well. This
trial explored the maximum tolerated dose of GEM(R)231 for both single doses and
multiple doses, and even high doses of GEM(R)231 did not show the side effects
normally seen with current cancer treatments.
Hybridon is currently conducting additional Phase I/II studies with
GEM(R)231 in patients with solid tumors that had not been cured by prior
therapy. Hybridon has also begun Phase I/II trials treating patients with solid
tumors with GEM(R)231 in combination with the anti-cancer therapies Taxol(R) and
Taxotere(R).
HIV-1 and AIDS
Acquired Immune Deficiency Syndrome, "AIDS," is caused by infection with
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 improvement in the quality of life for patients who are
HIV-positive or have AIDS. There are, however, reports that this therapy may be
failing to give sustained clinical benefit. Hybridon believes this underscores
the need for new AIDS therapies.
Hybridon has completed a Pilot Phase I clinical study in Europe of
GEM(R)92, Hybridon's advanced chemistry compound for the treatment of HIV-1
infection and AIDS. This study was designed to explore the safety of GEM(R)92 by
injection and to provide information on its absorption after oral dosing and
injection. The patients tolerated well all doses that they were given in the
pilot study. Further, GEM(R)92 was detected in the blood after both oral dosing
and injection, suggesting that it may be possible to develop GEM(R)92 as an oral
drug. Hybridon believes this was the first study of the oral administration of
an antisense molecule to humans. In laboratory studies, beneficial effects were
observed when GEM(R)92 was used in combination with several marketed AIDS drugs.
Importantly, both its medicinal approach and genetic target are unique, in that
no antisense drug has been approved for the treatment of AIDS, and no other drug
has the same target on the HIV-1 genome.
PRECLINICAL PROGRAMS
Hybridon has conducted preclinical studies and is seeking partners in the
following areas:
TARGET PRIMARY THERAPEUTIC(S)
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MDM2 -- a protein involved in
programmed cell death.............. Cancer
VEGF (Vascular Endothelial Growth
Factor) -- a protein that can cause
abnormal formation of new blood
vessels............................ Cancer
Diseases of the eyes -- e.g.
macular degeneration and diabetic
retinopathy
Hepatitis C Virus.................... Hepatitis C -- can lead to liver
cancer
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HYBRIDON SPINOUTS
Hybridon has used multiple strategies to fund applications of its antisense
technology that it cannot develop without external funding. Hybridon has used
one such strategy: the establishment of spinout companies, to form MethylGene
and OriGenix Technologies Inc. for the continued development of certain product
candidates.
MethylGene, Inc.
In 1996, Hybridon and three Canadian institutional investors formed
MethylGene. Hybridon owns 3,902,941 shares or approximately 22% of MethylGene.
Hybridon has granted exclusive worldwide licenses and sublicenses to MethylGene
to develop and market the following:
- antisense compounds for the treatment of any disease which act by
inhibiting the production of DNA methyltransferase
- other methods of inhibiting DNA methyltransferase
- antisense compounds to inhibit up to two additional molecular targets
Current research by MethylGene has shown that DNA methyltransferase, a
protein, is overproduced in some tumors, such as non-small-cell lung cancer,
colon cancer, and breast cancer tumors. Research on MethylGene's first target,
the DNA Methyltransferase enzyme, has yielded a unique anti-cancer drug
presently in Phase I trials. MethylGene is researching several other targets for
cancer as well as for infectious diseases.
See Item 1. Business -- Recent Developments for a description of an
agreement whereby Hybridon has agreed to sell 60% of its holdings of MethylGene
and offered an option to purchase the balance.
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 28% of
OriGenix.
Hybridon has granted to OriGenix exclusive worldwide licenses and
sublicenses to antisense technology developed by Hybridon for the treatment of
human papillomavirus, or "HPV," and hepatitis B virus infections. HPV infection
can cause a variety of warts, including benign genital warts. HPV infection can
also lead to cervical cancer. Hepatitis B infections can lead to liver cirrhosis
and cancer of the liver. OriGenix may in the future negotiate with Hybridon for
licenses or sublicenses relating to additional targets.
OriGenix's first family of compounds targets HPV. The most advanced
compound under development, ORI-1001, is a potent antiviral agent against HPV
types 6 and 11 that are associated with genital warts. ORI-1001 recently has
been formulated for topical delivery. An Investigational New Drug (IND)
application is expected to be filed for this compound in 2001.
On September 21, 2000, Hybridon sold its HSP business. Prior to such sale,
Hybridon had the exclusive right to manufacture and supply OriGenix and
MethylGene with its synthetic DNA supply needs. In connection with the HSP sale,
Avecia Biotechnology now supplies OriGenix and MethylGene with synthetic DNA. In
addition, Hybridon permitted OriGenix and MethylGene through a worldwide,
royalty free, paid-up license to manufacture its own compounds and amended the
current license agreement between the parties accordingly. Hybridon receives a
credit for orders placed by OriGenix and MethylGene with Avecia Biotechnology
for its supply needs that count against Hybridon's minimum purchase requirement
with Avecia Biotechnology. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
CORPORATE COLLABORATION
An important part of Hybridon's business strategy is to enter into research
and development collaborations, licensing agreements, or other strategic
alliances, primarily with biotechnology and pharmaceutical corporations, to
develop drug products. Subject to sufficient funds being available, Hybridon
intends to
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proceed with Phase II clinical trials of its cancer drug GEM(R)231. For drugs
other than GEM(R)231, Hybridon does not anticipate proceeding with any of its
other clinical programs beyond their current stages of development without
having a collaborative arrangement with a corporate partner.
G.D. Searle & Co.
From January 1996 to March 2000 Hybridon and Searle engaged in a research
and development collaboration for the development of synthetic DNA antisense
compounds. Most recently, Searle and Hybridon were investigating antisense
inhibitors of MDM2, a protein involved in programmed cell death, or apoptosis.
It is believed that MDM2 may play an important role in many types of cancer.
Through January 2000, Searle made annual research payments to Hybridon of
$600,000. In March 2000, however, Searle elected not to extend this research and
development collaboration. Hybridon is seeking a new development partner for
this program.
Consistent with its January 1996 agreement with Hybridon, Searle was
required to return to Hybridon all licenses granted to Searle, including the
recently issued U.S. patent 6,013,786, which covers specific synthetic DNA
antisense inhibitors of human MDM2. Hybridon has the right to use any of
Searle's patent rights relating to the work performed under the collaboration,
including all synthetic DNA antisense rights relating to MDM2.
Hybridon will pay Searle a royalty if it successfully commercializes any
antisense compounds discovered as a result of their collaboration.
Pursuant to their collaboration, Searle also purchased 200,000 shares of
common stock in Hybridon's 1996 initial public offering.
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon has entered into a number of collaborative research relationships
with independent researchers and leading academic and research institutions and
U.S. government agencies, including the National Institutes of Health, or "NIH."
Such research relationships allow Hybridon to augment its internal research
capabilities and obtain access to specialized knowledge or expertise.
In general, Hybridon's collaborative research agreements require Hybridon
to pay various amounts to support the research. Hybridon usually procures the
synthetic DNA, which the collaborator then tests. If in the course of conducting
research under its agreement with Hybridon a collaborator, solely or jointly
with Hybridon, creates any invention, Hybridon generally has an option to
negotiate an exclusive, worldwide, royalty-bearing license to the invention.
Inventions developed solely by Hybridon's scientists in connection with a
collaborative relationship generally are owned exclusively by Hybridon. Most of
these collaborative agreements are nonexclusive and can be cancelled on short
notice.
Since July 1997, as part of its restructuring, Hybridon has allowed a
number of its collaborative research agreements to expire and has terminated
others, but has maintained those that it believes support its current drug
discovery and development programs.
DRUG DEVELOPMENT SERVICES
Hybridon has experience in the design and conduct of preclinical and
clinical trials and has prepared and submitted reports and other regulatory
documents in connection with the three Hybridon advanced chemistry antisense
compounds that have entered clinical studies. Pursuant to a contract with
MethylGene that has now expired, Hybridon also used its expertise to help design
and monitor the preclinical trials of MethylGene's antisense compound, MG98,
that led to MethylGene's submission of IND applications in Canada and the U.S.
MethylGene compensated Hybridon for these services.
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PATENTS, TRADE SECRETS, AND LICENSES
Hybridon's success will largely depend on its ability to:
- obtain U.S. and foreign patent protection for drug candidates and
processes
- preserve trade secrets
- operate without infringing the proprietary rights of third parties.
Hybridon's policy is to file patent applications to protect technology,
inventions and improvements that it considers important to the development of
its business, and to obtain licenses to other patents that could help Hybridon
maintain or enhance its competitive position. On November 9, 2000, Hybridon
announced the issuance of a U.S. patent that broadly claims second generation
antisense compounds. As of March 15, 2001, Hybridon owned or exclusively
licensed 72 U.S. issued patents and allowed patent applications with
corresponding foreign patents in the fields of antisense medicinal chemistries,
antisense drug candidates for gene targets. Hybridon also has 52 pending U.S.
patent applications with corresponding foreign applications in the areas of
antisense medicinal chemistries, antisense drug candidates for gene targets,
synthetic DNA technology for stimulating the immune system and drug potentiation
technology. The foreign patent and patent application counts include Japan,
Canada and Europe as a whole, as well as other non-European individual
countries. These patents and applications cover various chemically modified
synthetic DNA compounds, target sequences, synthetic DNA products, analytical
methods, and methods for synthetic DNA antisense treatment of various diseases.
The patents expire on dates ranging from 2006 to 2015.
Hybridon is the worldwide exclusive licensee under several U.S. issued
patents or allowed patent applications owned by University of Massachusetts
Medical Center, or "UMMC," relating to synthetic DNA and hybrid or mixed
backbone chemical modifications. Many of these patents and patent applications
have corresponding patents issued by, or corresponding patent applications on
file in other major industrial countries. One of the issued U.S. patents and one
of the issued European patents cover antisense synthetic DNA as new compositions
of matter for stopping the replication of HIV. Coverage of the other issued U.S.
patents includes composition and use of synthetic DNA based on chemical
modifications, composition of certain synthetic DNA molecules that are useful
for diagnostic tests or assays, and methods of purifying synthetic DNA. The UMMC
patents licensed to Hybridon expire at various dates starting in 2006.
Hybridon is the exclusive licensee under various other U.S. and foreign
patents and patent applications, including two U.S. patent applications owned by
McGill University relating to synthetic DNA and the protein DNA
methyltransferase. Hybridon and Massachusetts General Hospital jointly own one
issued U.S. patent applicable to Alzheimer's disease. Hybridon holds an
exclusive license to Massachusetts General Hospital's interests under this
patent.
The field of each of these licenses extends to a wide variety of genetic
targets. Hybridon is also a nonexclusive licensee, along with other companies,
of certain patents for which Genzyme has exclusively licensed, covering certain
technology relating to MDM2.
The U.S. Patent and Trademark Office, or "PTO," has informed Hybridon that
patent applications exclusively licensed by Hybridon from UMMC are allowable
except that they may have interfering subject matter with several patents owned
by the National Institutes of Health (NIH). A showing by Hybridon 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 specific chemical modifications of the DNA backbone.
An interference proceeding is a proceeding to determine who was the first to
invent, and thus who is entitled to a patent for, a claimed invention. While
Hybridon is of the opinion that the UMMC patent application has a prima-facie
case for priority against the NIH for an invention that includes a specific
modification of the synthetic DNA backbone, there can be no assurance that the
PTO will declare an interference, or if it does, what the outcome will be. If
Hybridon were to win the interference, others making, using or selling the
specific chemical modifications of the synthetic DNA backbone claimed in the NIH
interference would be required to obtain a license from Hybridon. As part of the
HSP sale, the
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Company granted Avecia Biotechnology an option to a license to use the patent
applications that are the subject of the potential interference.
The PTO declared a four-way interference involving two other unrelated UMMC
U.S. patents, for which Hybridon is the exclusive licensee, relating to a
particular type of modified synthetic DNA. The other parties to this
interference were Integrated DNA Technologies, Isis Pharmaceuticals, Inc. and
Gilead Sciences, Inc. This interference was settled in early 1999. In connection
with the settlement, Hybridon has obtained a nonexclusive license to certain
patents and patent applications owned by IDT that broadly claim chemical
modifications to synthetic DNA. Hybridon has also granted a nonexclusive license
to IDT to make, use, and sell limited quantities of synthetic DNA incorporating
certain of Hybridon's advanced chemistries.
Under its licenses, Hybridon is obligated to pay royalties on its net sales
of products or processes covered by the licensed technology and, in some cases,
to pay a percentage of sublicense income that it receives. These licenses impose
various commercialization, sublicensing, insurance and other obligations on
Hybridon. If Hybridon fails to comply with these requirements, the license could
be terminated.
Legal standards relating to the validity of patents covering pharmaceutical
and biotechnological inventions and the scope of claims made under such patents
are still developing. As a result, Hybridon's ability to obtain and enforce
patents that protect its drugs is uncertain and involves complex legal and
factual questions.
The fact that Hybridon owns or licenses pending or future patent
applications does not mean that patents based on those applications will
ultimately be issued. First, to obtain a patent on an invention, one must be the
first to invent it in the U.S. or the first to file a patent application for it
in the rest of the world. Patent applications in the U.S. are maintained in
secrecy until patents are issued, and publication of any given discovery in the
scientific or patent literature tends to lag behind the actual date of that
discovery by several months. Consequently, Hybridon cannot be certain that the
inventors of subject matter covered by patents and patent applications that it
owns or licenses were the first to invent, or the first to file patent
applications for, those inventions.
Others, including Hybridon's competitors, also hold issued patents and
patent applications relating to antisense technology or particular genetic
targets. Holders of any of these patents or patent applications may be able to
require Hybridon to change or cease making or using some products or processes,
or obtain an exclusive or nonexclusive license in return for licensing fees,
which may be substantial. Hybridon may not be able to obtain any such licenses
at a reasonable cost. Furthermore, such licenses may be made available to
competitors of Hybridon on an exclusive or nonexclusive basis. Failure to obtain
such licenses could have a material adverse effect on Hybridon.
Hybridon requires its employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors to execute
confidentiality agreements. These agreements provide that all confidential
information developed or made known by Hybridon to the individual is to be kept
confidential, subject to specific exceptions. In the case of employees, the
agreements provide that all inventions conceived by the individual are the
exclusive property of Hybridon. These agreements may not, however, provide
meaningful protection for Hybridon's trade secrets or adequate remedies in the
event of breach.
Consistent with pharmaceutical industry and academic standards, Hybridon's
agreements with academic and research institutions and U.S. government agencies
may provide that the results of a given collaboration, or any developments that
derive from the collaboration, will be freely published, that information or
materials supplied by Hybridon will not be treated as confidential, and that
Hybridon must negotiate a license to developments and results in order to
commercialize products incorporating them. There can be no assurance that
Hybridon will be able to obtain successfully any such license at a reasonable
cost or that such developments and results will not be made available to
competitors of Hybridon on an exclusive or nonexclusive basis. See
"Business -- Academic and Research Collaborations."
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GOVERNMENT REGULATION
Hybridon's research and clinical development activities are regulated for
safety, effectiveness and quality by numerous governmental authorities in the
U.S. and other countries. Hybridon believes that it is in material compliance
with all applicable federal, state and foreign legal and regulatory
requirements.
In addition to regulations enforced by the FDA in connection with product
approvals, Hybridon also is subject to regulation under the Occupational Safety
and Health Act and other present and potential future federal, state or local
regulations. Furthermore, because Hybridon uses hazardous materials, chemicals,
viruses, and various radioactive compounds, it must comply with U.S. Department
of Transportation and Environmental Protection Agency regulations and other
federal, state, and foreign laws and regulations regarding hazardous waste
disposal, air emissions, and waste-water discharge. Although Hybridon believes
that it complies with these laws and regulations, it cannot completely eliminate
the risk of accidental contamination or injury from these materials.
COMPETITION
There are a number of companies, both privately and publicly held, that are
conducting research and development activities on technologies and products
aimed at therapeutic regulation of gene expression, including antisense drugs.
One competitor of Hybridon received FDA approval to market an antisense
therapeutic product for the treatment of CMV retinitis that was launched in
November 1998.
Two privately held companies are developing synthetic DNA drugs designed to
stimulate the responses of the immune system. These drug candidates are in
clinical trials, either alone or in combination with vaccines to prevent or to
treat various diseases. Hybridon believes that the interest in these
technologies and products will increase. It is possible that Hybridon's
competitors will succeed in developing products that are more effective than
Hybridon's. Furthermore, Hybridon's proposed drugs will be competing with other
kinds of drugs. Given the fundamental differences between antisense technology
and other drug technologies, antisense drugs may be less effective at treating
some diseases than other kinds of drugs.
Biotechnology and related pharmaceutical research programs have undergone
and continue to be subject to rapid and significant change. Hybridon expects
that the technologies associated with biotechnology research and development
will continue to develop rapidly. Hybridon's future will depend in large part on
its ability to compete with these technologies.
Hybridon has many competitors, including major pharmaceutical and chemical
companies, biotechnology firms, and universities and other research
institutions. Many of these competitors have substantially greater financial,
technical, and human resources than Hybridon, and many have significantly
greater experience than Hybridon in undertaking preclinical studies and clinical
trials of new pharmaceutical products and obtaining FDA and other regulatory
approvals. Accordingly, Hybridon's competitors may succeed in obtaining
regulatory approvals for products more rapidly than Hybridon. Furthermore, if
Hybridon receives approval to commence commercial sales of products, it will
also be competing with respect to marketing capabilities, an area in which it
has limited experience.
EMPLOYEES
As of March 27, 2001, Hybridon employed 14 individuals full-time, of whom
10 held advanced degrees. Eleven of these employees are engaged in research and
development activities and three are employed in finance, corporate development,
and legal and general administrative activities. 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, Dr. Sudhir Agrawal, formerly Senior Vice President of
Discovery, was elected President and Acting Chief Executive Officer. Also, James
B. Wyngaarden was elected Chairman of the Board of Directors and Robert G.
Andersen was elected Chief Financial Officer.
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ITEM 2. PROPERTIES
Hybridon leases approximately 26,000 square feet of laboratory and office
space, including 6,000 square feet of specialized pre-clinical lab space, in
Cambridge, Massachusetts under a lease that expires April 30, 2007. The annual
rent for this space is approximately $650,000.
ITEM 3. LEGAL PROCEEDINGS
Hybridon is not a party to any litigation that it believes could damage
Hybridon or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 2000.
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EXECUTIVE OFFICERS OF HYBRIDON
The executive officers and significant employees of Hybridon as of March
29, 2001 are as follows:
NAME AGE POSITION
- ---- --- --------
Sudhir Agrawal, D.Phil. ............. 47 President and Acting Chief Executive Officer, Chief
Scientific Officer, and Director
Robert G. Andersen................... 50 Vice President of Operations and Planning, Chief
Financial Officer, Treasurer and Assistant Secretary
R. Russell Martin, M.D. ............. 65 Senior Vice President of Drug Development
Jinyan Tang, Ph.D. .................. 57 Vice President of Chemistry
Dr. Sudhir Agrawal joined Hybridon in February 1990 and served as Principal
Research Scientist from February 1990 to January 1993 and as Vice President of
Discovery from December 1991 to January 1993 prior to being appointed Chief
Scientific Officer in January 1993, Senior Vice President of Discovery in March
1994, and President and Acting Chief Executive Officer in February 2000. He has
served on the board of directors since March 1993. Prior to joining Hybridon,
Dr. Agrawal served as a Foundation Scholar at the Worcester Foundation from 1987
through 1991. Dr. Agrawal served as a Research Associate at Research Council
Laboratory of Molecular Biology in Cambridge, England from 1985 to 1986,
studying synthetic oligonucleotides. Dr. Agrawal received a B.Sc. in chemistry,
botany and zoology in 1973, an M.Sc. in organic chemistry in 1975 and a D.Phil.
in chemistry in 1980 from Allahabad University in India.
Robert G. Andersen joined Hybridon in November 1996 and served as Vice
President of Systems Engineering and Management Information Systems prior to
being appointed Vice President of Operations and Planning in 1997, Treasurer in
March 1998, and Chief Financial Officer of Hybridon in February 2000. Mr.
Andersen also serves as a director of OriGenix, Inc., a Hybridon spin-off
company based in Montreal, Canada. Prior to joining Hybridon, Mr. Andersen
served in a variety of positions at Digital Equipment Corporation, a computer
company, from 1986 to 1996, most recently as Group Manager of the Applied
Objects Business Unit. From 1978 to 1986, Mr. Andersen served in a variety of
positions at United Technologies Corporation, an aviation technology company,
most recently as Director of Quality for Otis Elevator Company's European
Operations. Mr. Andersen received his B.E.E. in Electrical Engineering from The
City College of New York in 1972 and an M.S. in Management from Northeastern
University in 1978. He is also a graduate of the United Technologies Advanced
Studies Program.
Dr. R. Russell Martin joined Hybridon and was appointed Vice President of
Clinical Research in 1994. He became Vice President of Drug Development during
1996 and Senior Vice President of Drug Development in 1998. Dr. Martin is also a
member of the Board of Directors of MethylGene, Inc., one of Hybridon's
spin-offs. Prior to joining Hybridon, Dr. Martin served in a variety of
positions at Bristol-Myers Squibb, most recently as Vice President of Infectious
Diseases Clinical Research. Dr. Martin received an A.B. degree from Yale
University in 1956 and a M.D. degree from the Medical College of Georgia in
1960. From 1971 to 1983, he was on the faculty of Baylor College of Medicine,
most recently as Professor of Medicine, Microbiology and Immunology.
Dr. Jinyan Tang has worked at Hybridon since 1991. Dr. Tang was Vice
President of Process Research and Development from 1995 to 1997, followed by
Vice President of Production from 1997 to 2000 and Vice President of Chemistry
starting in 2000. Prior to joining Hybridon, Dr. Tang served as Visiting Fellow
at the Worcester Foundation from 1988 to 1991. Dr. Tang served as Visiting
Research Professor at the University of Colorado in 1988 and Associate Professor
at the Shanghai Institute of Biochemistry, Chinese Academy of Sciences from 1985
to 1988 studying oligonucleotide chemistry. Dr. Tang received a B.Sc. in
Biochemistry in 1965 and a Ph.D. of Biochemistry in 1978 from the Shanghai
Institute of Biochemistry, Chinese Academy of Sciences.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
From January 24, 1996 until December 2, 1997, Hybridon's common stock was
traded on the Nasdaq National Market under the symbol "HYBN." Prior to January
24, 1996, there was no established public trading market for Hybridon's common
stock.
On December 2, 1997, Hybridon's common stock was removed from the Nasdaq
National Market and began being quoted on the NASD OTC Bulletin Board. Quotes on
the NASD OTC Bulletin Board may reflect inter-dealer prices, without retail
markups, markdowns or commissions and do not necessarily represent actual
transactions.
On December 10, 1997 Hybridon effected a one-for-five reverse stock split
of its common stock. As a result of the reverse stock split, each five shares of
common stock was automatically converted into one share of common stock, with
cash payments for any fractional shares.
The following table sets forth for the periods indicate the high and low
sales prices per share of the common stock during each of the quarters set forth
below as reported on the NASD OTC Bulletin Board since January 1, 1999:
HIGH LOW
------ ------
1999
First Quarter.............................................. $1.969 $1.000
Second Quarter............................................. 1.500 0.250
Third Quarter.............................................. 1.500 0.344
Fourth Quarter............................................. 2.000 0.375
2000
First Quarter.............................................. $6.875 $0.844
Second Quarter............................................. 3.438 0.750
Third Quarter.............................................. 1.313 0.500
Fourth Quarter............................................. 1.016 0.281
The reported closing sales price of the common stock on the NASD OTC
Bulletin Board on March 30, 2001 was $0.55 per share.
(b) HOLDERS
The number of common stockholders of record on March 30, 2001 was 303.
(c) DIVIDENDS
Hybridon's Series A convertible preferred stock pays dividends at 6.5% per
year, payable semi-annually in arrears. These dividends may be paid either in
cash or in additional shares of convertible preferred stock, at the discretion
of Hybridon.
On March 6, 2001, Hybridon's board authorized the creation of a Series B
preferred stock which, when issued, will pay dividends at 8% per year, payable
semi-annually in arrears. These dividends will be payable either in cash or in
additional shares of convertible preferred stock, at the discretion of Hybridon.
Hybridon has never declared or paid cash dividends on its capital stock,
and Hybridon does not expect to pay any dividends on its common stock or any
cash dividends on the convertible preferred stock in the foreseeable future. The
indenture under which Hybridon issued 9% convertible subordinated notes on April
2, 1997, limits Hybridon's ability to pay dividends or make other distributions
on its common stock or to pay cash dividends on the convertible preferred stock.
As of March 30, 2001, $1,306,000 in total principal amount of the 9% notes
remained outstanding.
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In addition, Hybridon is currently prohibited from paying cash dividends
under the loan held by the Lender. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- 1998 Financing
Activities -- $6.0 Million Loan."
(d) RECENT SALES OF UNREGISTERED SECURITIES
Sales by Hybridon during the quarterly period ended December 31, 2000, of
securities that were not registered under the Securities Act of 1933, as amended
were as follows:
On May 30, 2000, the Board of Directors of Hybridon approved a Line of
Credit Agreement with certain lenders who provided Hybridon with a $2,000,000
credit facility in a private placement transaction. This 8% convertible loan was
used to provide working capital pending the closing of the sale of Hybridon's
Hybridon Specialty Products (HSP) manufacturing operation. On September 30,
2000, two of the lenders, Dr. Paul Zamecnik and Dr. James Wyngaarden, elected to
convert their portion of the loan, including accrued interest, into shares of
Common Stock. Dr. Zamecnik converted $202,956 into 187,922 shares of Common
Stock. Dr. Wyngaarden converted $28,211 into 26,121 shares of Common Stock. The
portion of the loan owned by other lenders was repaid with interest.
Hybridon agreed to issue to the $2,000,000 credit facility lenders warrants
to purchase 1,000,000 shares of Common Stock at a price of $1.08 per share.
Hybridon also agreed to issue warrants to purchase up to 500,000 shares of
Common Stock at a price of $1.08 per share to the representatives of the
lenders. The convertible loans made under the $2,000,000 credit facility and the
related 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.
On March 30, 2001, Hybridon completed an exchange offer to the holders of
its 8% Convertible Notes due 2001 whereby it will issue a total of 76,046 shares
of a newly designated class of Series B Convertible Preferred Stock in exchange
for the cancellation of $7.6 million of principal amount of 8% Notes and accrued
interest.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from
Hybridon's consolidated financial statements, as adjusted to reflect the
disposition of Hybridon's HSP business as discontinued operations, which have
been audited by Arthur Andersen LLP, independent public accountants. The
financial data should be read along with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Hybridon's consolidated financial statements and notes thereto and
the Report of Independent Public Accountants included elsewhere in this Annual
Report on Form 10-K.
HYBRIDON, INC.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Service revenue................................... $ -- $ -- $ 375 $ 365 $ 82
Research and development.......................... 1,419 945 1,100 600 179
Royalty and other income.......................... 62 -- -- 123 229
Interest income................................... 1,447 1,079 148 92 83
--------- --------- --------- --------- ---------
Total revenues............................. 2,928 2,024 1,623 1,180 573
--------- --------- --------- --------- ---------
Operating Expenses:
Research and development.......................... 33,150 35,326 14,183 5,783 3,620
General and administrative........................ 11,347 11,027 6,573 3,664 3,184
Interest.......................................... 34 4,278 2,820 683 2,154
Restructuring..................................... -- 10,345 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses.......................... 44,531 60,976 23,576 10,130 8,958
--------- --------- --------- --------- ---------
Loss from continuing operations................... (41,603) (58,952) (21,953) (8,950) (8,385)
Income (loss) from discontinued operations........ (5,250) (10,509) (4,028) (1,553) 5,462
--------- --------- --------- --------- ---------
Loss before extraordinary gain...................... (46,853) (69,461) (25,981) (10,503) (2,923)
Extraordinary item:
Gain on conversion of 9% convertible Subordinated
notes payable................................... -- -- 8,877 -- --
--------- --------- --------- --------- ---------
Net loss............................................ (46,853) (69,461) (17,104) (10,503) (2,923)
Accretion of preferred stock dividend............... -- -- (2,689) (4,232) (4,087)
--------- --------- --------- --------- ---------
Net loss applicable to common stockholders.......... $ (46,853) $ (69,461) $ (19,793) $ (14,735) $ (7,010)
========= ========= ========= ========= =========
Basic and diluted net loss per common share from:
Continuing operations............................. $ (9.09) $ (11.67) $ (1.85) $ (0.57) $ (0.48)
Discontinued operations........................... (1.15) (2.08) (0.34) (0.10) 0.31
Extraordinary gain................................ -- -- 0.75 -- --
--------- --------- --------- --------- ---------
Net loss per share................................ (10.24) (13.76) (1.44) (0.66) (0.17)
Accretion of preferred stock dividends............ -- -- (0.23) (0.27) (0.23)
--------- --------- --------- --------- ---------
Net loss per share applicable to common
stockholders.................................... $ (10.24) $ (13.76) $ (1.67) $ (0.93) $ (0.40)
========= ========= ========= ========= =========
Shares Used in Computing Basic and diluted Net
Loss per common share(1)........................ 4,576 5,050 11,859 15,811 17,418
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments(2).................................... $ 16,419 $ 2,202 $ 5,608 $ 2,552 $ 3,532
Working capital (deficit)........................... 9,483 (21,992) (5,306) (6,534) (4,238)
Total assets........................................ 38,295 30,480 15,092 10,717 10,001
Restricted cash..................................... 438 3,051 -- -- 5,000
Long-term debt and capital lease obligations, net of
current portion................................... 6,959 1,328 -- -- --
9% convertible subordinated notes payable........... -- 50,000 1,306 1,306 1,306
8% convertible subordinated notes payable........... -- -- -- 6,100 8,046
Accumulated deficit................................. (149,194) (218,655) (238,448) (253,183) (260,193)
Total stockholders' equity (deficit)................ 22,855 (46,048) 2,249 (6,072) (7,530)
- ---------------
(1) Computed on the basis described in Note 2(k) of Notes to consolidated
financial statements appearing elsewhere in this document.
(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.
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QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table presents our unaudited statement of operations data for
each of the eight quarters in the period ended December 31, 2000. The
information for each of these quarters is unaudited, but has been prepared on
the same basis as the audited financial statements appearing elsewhere in this
document. In our opinion, all necessary adjustments, consisting only of normal
recurring adjustments, have been made to present fairly the unaudited quarterly
results when read in conjunction with our audited financial statements and the
notes thereto appearing elsewhere in this document. These operating results are
not necessarily indicative of the results of operations that may be expected for
any future period.
THREE MONTHS ENDED
------------------------------------------------------------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31
1999 1999 1999 1999 2000 2000 2000 2000
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Service revenue.............. $ 110 $ 73 $ 113 $ 70 $ 45 $ -- $ 25 $ 13
Research and development..... 150 150 150 150 -- -- -- 179
Royalty and other income..... 40 15 52 16 32 25 19 6
Interest income.............. 53 16 13 10 35 16 16 163
------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 353 254 327 246 112 41 60 361
------- ------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Research and development..... 1,398 1,019 2,108 1,258 1,173 860 761 826
General and administrative... 1,121 941 884 717 903 875 562 844
Interest..................... 153 150 208 172 346 559 952 297
Restructuring................ -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 2,672 2,110 3,200 2,147 2,422 2,294 2,275 1,968
------- ------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations................. (2,319) (1,856) (2,873) (1,901) (2,310) (2,253) (2,215) (1,607)
Income (loss) from
discontinued operations.... (647) (778) 141 (269) (394) (182) 5,868 170
------- ------- ------- ------- ------- ------- ------- -------
Loss before extraordinary
gain......................... (2,966) (2,634) (2,732) (2,171) (2,704) (2,435) 3,653 (1,437)
Extraordinary item:
Gain on conversion of 9%
convertible Subordinated
notes payable.............. -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income.............. (2,966) (2,634) (2,732) (2,171) (2,704) (2,435) 3,653 (1,437)
Accretion of preferred stock
dividend..................... (1,042) (1,076) (1,076) (1,038) (1,071) (1,021) (1,021) (975)
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income applicable to
common stockholders.......... $(4,008) $(3,710) $(3,808) $(3,209) $(3,775) $(3,455) $ 2,632 $(2,412)
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted net (loss)
income per common share from:
Continuing operations........ $ (0.15) $ (0.12) $ (0.18) $ (0.12) $ (0.14) $ (0.13) $ (0.12) $ (0.09)
Discontinued operations...... (0.04) (0.05) 0.01 (0.02) (0.02) (0.01) 0.33 0.01
Extraordinary gain........... -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income per
share...................... (0.19) (0.17) (0.17) (0.13) (0.17) (0.14) 0.20 (0.08)
Accretion of preferred stock
dividends.................. 0.07 0.07 0.07 0.06 0.07 0.06 0.06 0.05
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income per share
applicable to common
stockholders............... $ (0.26) $ (0.24) $ (0.24) $ (0.20) $ (0.23) $ (0.20) $ 0.15 $ (0.13)
======= ======= ======= ======= ======= ======= ======= =======
Shares Used in Computing
Basic and diluted Net
(Loss) per common
share(1)................... 15,305 15,661 15,984 16,261 16,261 17,243 17,923 18,380
======= ======= ======= ======= ======= ======= ======= =======
- ---------------
(1) Computed on the basis described in Note 2(k) of Notes to consolidated
financial statements appearing elsewhere in this document.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Hybridon, established in 1989, utilizes chemically-modified synthetic DNA
for medical applications, including the discovery and development of genetically
based drugs, which treat diseases by acting on a particular gene. The genetic
drugs being developed by Hybridon are based on "antisense" technology, in that
they use synthetic DNA material, also called oligonucleotides, with the aim of
inhibiting or reducing the body's production of proteins that directly or
indirectly cause or support a given disease. Chemically-modified DNA is also
being developed for use in the laboratory to determine the function of proteins
produced by genes whose function has not yet been established. Hybridon has also
developed a portfolio of chemically-modified DNA compounds designed to stimulate
responses of the immune system.
Hybridon has developed and owns certain innovations in areas of medicinal
chemistry, which concern the design of new synthetic DNA compounds. Hybridon
also has rights to technology allowing the chemical modifications of synthetic
DNA.
Hybridon began operations in February 1990 and since that time has been
involved primarily in research and development efforts, developing its
manufacturing capabilities, and raising capital. In order to commercialize its
therapeutic products, Hybridon will need to address a number of technological
challenges and comply with comprehensive regulatory requirements. Revenues
received by Hybridon to date have been from collaborative agreements, interest
on invested funds and revenues from the custom contract manufacturing of
synthetic DNA and reagent products by its manufacturing business, Hybridon
Specialty Products or "HSP" prior to the disposal thereof in September 2000.
Hybridon has incurred total losses of approximately $260.0 million through
December 31, 2000. Hybridon expects that its research and development and
general and administrative expenses will be significant in 2001 and future years
as it pursues its core drug development programs and expects to continue to
incur operating losses and significant capital needs.
On September 21, 2000, Hybridon completed the sale of its HSP business to
Avecia Biotechnology, a subsidiary of one of Europe's leading specialty
chemicals companies. Avecia Biotechnology acquired the HSP business and
intellectual property useful in DNA manufacturing for US$15.0 million, of which
approximately $12.0 million was paid at closing, and the remaining $3.0 million
is payable on September 21, 2001, subject to certain offset rights. As part of
this transaction, Hybridon entered into an agreement whereby it may have an
obligation to purchase synthetic DNA products from Avecia Biotechnology. To the
extent that Avecia Biotechnology's third party sales of HSP product exceed
certain goals, Hybridon does not have any such purchase commitment. If Avecia
Biotechnology's third party sales do not meet such goals, Hybridon must make
purchases sufficient to cover the shortfall, subject to an agreed upon formula.
Hybridon's commitment is on a "take-or-pay" basis for the fourth quarter of 2000
and each quarter of 2001. Purchases by OriGenix and MethylGene are applied
against Hybridon's commitment. Any unpaid amounts under this agreement will
reduce the $3.0 million contingent payment to be received in September 2001. The
balance of the term of this agreement (through March 31, 2003) does not require
minimum purchases. In December 2000, Hybridon accrued approximately $337,000 for
its purchasing shortfall.
In connection with the sale of the HSP business, Avecia Biotechnology
agreed to take over Hybridon's obligations to supply MethylGene, Inc. and
OriGenix with quantities of synthetic DNA. Avecia gives Hybridon credit under
its minimum purchase requirements for any orders for synthetic DNA, which Avecia
receives, from MethylGene or OriGenix.
On May 30, 2000, Hybridon entered into a Line of Credit Agreement pursuant
to which the lenders agreed to provide Hybridon with an 8%, $2.0 million credit
facility. The $2.0 million credit facility was intended to provide Hybridon with
working capital any time prior to the earlier of September 30, 2000, and the
date the HSP sale was consummated. On July 10, 2000 and August 10, 2000,
Hybridon drew down approximately $0.5 million on each of these dates under the
$2.0 million credit facility, representing a total draw down of $1.0 million. On
September 28, 2000 Hybridon paid back approximately $0.8 million and
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converted the remaining $0.2 million to common stock in October 2000. Hybridon
has no additional borrowing capacity under this credit facility.
As of March 27, 2001, Hybridon had 14 full-time employees.
The financial statements of Hybridon have been restated to reflect the
financial results of the HSP business as a discontinued operation for the years
ended December 31, 2000, 1999, and 1998.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
Revenues
Hybridon had total revenues from continuing operations of $1.6 million in
1998, $1.2 million in 1999, and $0.6 million in 2000. During 1998, 1999 and
2000, Hybridon received revenues from research and development collaborations of
$1.1 million, $0.6 million and $0.2 million, respectively. Research and
development collaboration revenues decreased during this period, primarily due
to a reduction in revenues recorded under its license agreement with MethylGene
and the termination of the Searle collaboration agreement in early 2000.
Service revenues were $0.4 million in 1998, $0.4 million in 1999 and $0.1
million in 2000. The decrease in revenues in 2000 from those in 1999 was
primarily due to a decrease in support services provided to MethylGene, and
OriGenix Technologies, Inc., entities in which Hybridon has a minority interest.
Service revenues include drug development, clinical research, bio-analytical
work and information services, which include access to research, pre-clinical
and clinical information and data from Hybridon. As of December 31, 2000,
Hybridon had no collaborations under which it will be receiving research
funding.
Revenues from royalty and other income were zero in 1998, $0.1 million in
1999 and $0.1 million in 2000. The 1999 and 2000 revenue consisted primarily of
a NIH grant and an equipment lease between Hybridon and OriGenix.
Revenues from interest income were $0.1 million in 1998, $0.1 million in
1999 and $0.2 million in 2000. The increase in interest income in 2000 over 1999
was the result of higher cash balances available for investment, resulting from
the HSP sale in 2000.
Research and Development Expenses
During 1998, 1999 and 2000, Hybridon expended $14.2 million, $5.8 million
and $3.6 million, respectively, on research and development activities.
The decreases in research and development expenses reflect more focused R&D
activities in order to conserve cash by minimizing operating expenses such as
salaries and related costs, clinical and outside testing, consulting, materials
and lab expenses.
In addition, research and development facilities expenses decreased
significantly during this period due to the consolidation of corporate offices
and laboratory space and the disposition of one of Hybridon's Cambridge,
Massachusetts facilities in July, 1998 and the disposition of the Milford,
Massachusetts facility in September, 2000.
Hybridon's patent expenses remained at approximately the same level in 1999
as 1998 and decreased slightly in 2000 with the sale of its HSP business.
General and Administrative Expenses
Hybridon incurred general and administrative expenses of $6.6 million in
1998, $3.7 million in 1999 and $3.2 million in 2000. The decreases reflect the
facilities consolidation mentioned above, as well as reductions in business
development, public relations, legal fees and accounting expenses during 1999.
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Interest Expense
Interest expense was $2.8 million in 1998, $0.7 million in 1999 and $2.2
million in 2000. The decrease in 1999 from 1998 is attributable to the exchange
of approximately $48.7 million of the 9% convertible subordinated notes issued
in the second quarter of 1997 for Series A preferred stock on May 5, 1998. In
addition, the outstanding balance of loans needed to finance the purchase of
property and equipment was reduced in May 1998, resulting in a subsequent
reduction in interest expense. Due to the issuance of the 8% convertible
subordinated notes in December 1999 and the draw down on the $2.0 million credit
facility in 2000, Hybridon's interest expense increased in 2000 over that of
1999.
Loss from Continuing Operations
As a result of the above factors, Hybridon incurred losses from continuing
operations of $22.0 million in 1998, $9.0 million in 1999 and $8.4 million in
2000.
Loss from Discontinued Operations
Hybridon incurred losses from discontinued operations of $4.0 million in
1998, $1.6 million in 1999 and realized a gain of $5.5 million in 2000. The
income from discontinued operations, as presented on the consolidated statement
of operations for 2000, includes the gain on sale of HSP of $6.3 million net of
the operating loss from the discontinued HSP operations, totaling $0.8 million.
For all other years presented, the net loss relates solely to the operating
results of HSP. Hybridon has not allocated interest expense to discontinued
operations.
Net Loss
Hybridon incurred losses from operations before extraordinary items of
$26.0 million in 1998, $10.5 million in 1999 and $2.9 million in 2000. Hybridon
had extraordinary income of $8.9 million in 1998 resulting from the conversion
of $48.7 million principal amount of its 9% notes to Series A preferred stock in
the second quarter of 1998. In accordance with Statement of Financial Accounting
Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, Hybridon recorded an extraordinary gain of approximately $8.9
million related to the exchange. The extraordinary gain represents the
difference between the carrying value of the 9% notes offered for exchange and
the fair value of the Series A preferred stock issued upon the exchange, as
determined by the per share sales price of such stock sold in May 1998 in the
private offering described below. As a result of this extraordinary gain,
Hybridon's net loss was reduced to $17.1 million for 1998.
Preferred stock dividends on the Series A convertible preferred stock
amounted to $2.7 million, $4.2 million and $4.1 million in 1998, 1999 and 2000,
respectively, resulting in a net loss applicable to common stockholders of $19.8
million, $14.7 million and $7.0 million for 1998, 1999 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
General
Since inception, Hybridon has incurred significant losses, which it has
funded through the issuance of equity securities, debt issuances, product sales
by HSP, the sale of HSP during 2000 and through research and development
collaborations and licensing arrangements.
During the year ended December 31, 2000, Hybridon utilized approximately
$7.6 million to fund continuing operating activities and approximately $36,000
for capital expenditures. The primary use of cash for operating activities was
to fund Hybridon's $8.4 million loss from continuing operations.
Cash Resources
Hybridon had cash and cash equivalents of $8.5 million at December 31,
2000, of which $5.0 million is classified as restricted cash. This restricted
cash had been pledged as collateral, to secure Hybridon's
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obligation to, among others, the holders of the 8% Convertible Notes. The pledge
provided for a release of the restricted cash upon payment of the 8% Convertible
Notes. The exchange of such notes effective March 5, 2001 has resulted in a
release of those funds to Hybridon for discretionary purposes.
On March 30, 2001, Hybridon's obligations included $1.3 million principal
amount of 9% notes, a $6.0 million loan from Founders Financial Group LP,
formerly Forum Capital Markets, LLC and other lenders, approximately $0.6
million in 8% Convertible Notes and accrued interest as described below, and
approximately $0.8 million of accounts payable. The loan agreement covering the
$6.0 million loan from the lenders, contains financial covenants that require
Hybridon to maintain minimum tangible net worth and minimum liquidity
requirements. Compliance with these covenants has been waived through September
30, 2001 by the noteholders.
Hybridon received approximately $12.0 million of the $15.0 million from the
sale of HSP to Avecia. The remaining $3.0 million is payable on September 21,
2001, subject to offset rights under the agreement to purchase HSP. As part of
this transaction, Hybridon entered into a supply agreement whereby it may have
an obligation to purchase products from Avecia Biotechnology. To the extent that
Avecia Biotechnology's third-party sales of HSP product exceed certain goals,
Hybridon does not have any such purchase commitment. If Avecia Biotechnology's
third party sales do not meet such goals, Hybridon must make purchases
sufficient to cover the shortfall, subject to an agreed upon formula. Hybridon's
commitment is on a "take-or-pay" basis for the fourth quarter of 2000 and each
quarter of 2001. Purchases by OriGenix and MethylGene are applied against
Hybridon's commitment. Any unpaid amounts under this agreement will reduce the
$3.0 million contingent payment to be received in September 2001. The balance of
the term of this agreement (through March 31, 2003) does not require minimum
purchases. In December 2000, Hybridon accrued approximately $337,000 for its
purchasing shortfall. See Note 14 of the footnotes to the financial statements.
To facilitate the sale of the HSP's business and assets, the holders of the
8% Convertible Notes due 2002 and the $6.0 million notes due 2003 amended the
terms of a Subordination and Intercreditor Agreement, to release their lien on
that portion of Hybridon's assets being conveyed to Avecia. In return for this
partial release, Hybridon set aside, from the proceeds of the HSP sale, the sum
of $5.0 million, which it classifies as restricted cash on its balance sheet and
pledged the same as collateral to secure its obligation to the 8% Convertible
Noteholders and the lenders of the $6.0 million loan. The amendment provided
that the restrictions on the $5.0 million would be released upon substantial
payment of the 8% notes. The exchange of the Notes into Series B shares, being a
discharge of Hybridon's obligation under the notes, has resulted in a release of
the $5.0 million to Hybridon's use.
On May 30, 2000, Hybridon entered into a Line of Credit Agreement pursuant
to which the lenders under this agreement agreed to provide Hybridon with an 8%,
$2.0 million credit facility. The $2.0 million credit facility was intended to
provide Hybridon with working capital until the HSP sale was consummated.
Hybridon drew down approximately $0.5 million on July 10, 2000 and approximately
$0.5 million on August 10, 2000, representing a total draw down of approximately
$1.0 million under the $2.0 million credit facility. On September 28, 2000,
following the close of the HSP sale, Hybridon repaid approximately $0.8 million
of principal and interest in cash. In October 2000, Hybridon converted the
remaining $0.2 million of principal and interest into equivalent shares of
common stock at $1.08 per share, 214,043 shares, pursuant to the terms of the
agreement. Hybridon has no additional borrowing capacity under this $2.0 million
credit facility.
In connection with the $2.0 million credit facility, Hybridon has (a)
issued to the representatives of the lenders of the $2.0 million credit facility
warrants to purchase up to 500,000 shares of Hybridon's common stock at an
exercise price of $1.08 per share and (b) issued to the lenders of the $2.0
million credit facility, proportionate to their respective interests in the $2.0
million credit facility, warrants to purchase 1,000,000 shares of Hybridon's
common stock at an exercise price of $1.08 per share.
Hybridon believes that its existing cash resources and the additional funds
to be received upon consummation of the transactions discussed below will be
sufficient to fund operations through December 31, 2001. Hybridon will be
required to raise substantial additional funds from external sources to support
its operations in 2002 and beyond.
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On March 30, 2001 Hybridon signed a binding agreement with unrelated
institutional investors, providing for the sale of 60% of Hybridon's holdings of
shares of Class A and Class B stock of MethylGene. The agreement covers a total
of 2,350,000 such shares and provides for a purchase price of Canadian $2.85 per
share or a total of approximately Canadian $6.7 million or US $1.81 per share
(as of March 30, 2001) or approximately US $4.3 million in the aggregate. For
additional information about this transaction, see "Business -- Hybridon."
Effective March 5, 2001, Hybridon completed an exchange whereby $6.9
million of its $7.5 million in principal, of 8% Notes due 2002 have been
exchanged for shares of a newly-designated Series B Convertible Preferred Stock.
The exchange ratio was one such share for each $100 in principal amount of notes
exchanged. For additional information about this exchange, see
"Business -- Recent Developments."
Additionally, Hybridon has reached agreements with the holders of its $6.0
million notes due 2003 providing for a partial payment on the outstanding
balance of such notes from the proceeds of the sale of the MethylGene shares and
the deposit of additional sums to secure the payment of a portion of the balance
of such notes, which remain outstanding. For additional information about this
transaction, see "Business -- Recent Developments."
During the second quarter of 2001, Hybridon expects to emerge from a period
of restructuring with its core scientific and management team intact, with very
little debt outstanding and with a substantial portfolio of patents and patent
applications in place. Hybridon has established a strong proprietary position in
the immune stimulation and antisense fields and expects to be able to continue
its research and development efforts in immune stimulation and antisense. As our
compounds are developed in the clinic and in the research pipeline, Hybridon
will seek opportunities to license the antisense technology base in chemistry
and delivery for use with other company's proprietary genes.
1999 Financing Activities -- 8% Convertible Notes Due 2002
The following is a description of Hybridon's 8% Convertible Notes due 2002.
At March 30, 2001, $7.5 million of principal amount was outstanding. All but
$0.6 million of this amount was exchanged on that day for shares of newly
designated Series B Preferred Stock.
Hybridon sold an aggregate of $1.5 million principal amount of promissory
notes to E. Andrews Grinstead, III, Hybridon's then 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% Convertible Notes
due 2002. Hybridon also sold an aggregate of approximately $0.5 million of debt
to purchasers in a private placement transaction in October and November 1999;
as of December 13, 1999, this debt automatically converted into Hybridon's 8%
Convertible Notes due 2002.
On December 13, 1999, Hybridon sold an aggregate of an additional $4.1
million principal amount of 8% Convertible Notes due 2002 to purchasers in a
private placement transaction. At December 31, 1999, including the 8%
Convertible 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% Convertible Notes outstanding, including financing costs and
accrued interest, was approximately $7.7 million.
Under the terms of the 8% Convertible Notes, Hybridon must make semiannual
interest payments on the outstanding principal balance through the maturity date
of November 30, 2002. Hybridon has been electing to make these interest payments
by issuing additional 8% Convertible Notes in lieu of cash payments. The 8%
Convertible Notes are convertible at any time prior to the maturity date at a
conversion price equal to $0.60 per share of common stock, the "Conversion
Ratio", subject to adjustment under certain circumstances, as defined. If the 8%
Convertible Notes are prepaid before the maturity date, all noteholders are
entitled to receive warrants 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, with an exercise price of $0.60 per share of common stock.
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In connection with the 8% Convertible Notes, Hybridon must comply with
certain covenants. These covenants include, without limitation, the requirement
that Hybridon make all payments of interest when due and maintain consolidated
cash balances of at least $1.5 million as of the last day of any calendar month.
At September 30, 2000, Hybridon is in compliance with the covenant regarding
consolidated cash balances. If an event of default occurs, the noteholders may
declare the unpaid principal and interest due and payable immediately. If
Hybridon defaults with respect to payment of interest, Hybridon will be required
to pay interest at a default rate equal to 12%.
In connection with the issuance of the 8% Convertible Notes, the lenders of
the $6.0 million loan received a warrant to purchase 2,750,000 shares of common
stock at $.60 per share. The warrant was granted as consideration to the lenders
of the $6.0 million loan for subordinating to holders of the 8% Convertible
Notes their security interest in Hybridon's assets. Hybridon computed the value
of the warrant to be $547,328, using the Black-Scholes option-pricing model.
Hybridon has recorded this amount as a deferred financing cost, which will be
amortized to interest expense over the term of the 8% Convertible Notes.
1998 Financing Activities -- 9% Notes and Stock Issuances
On February 6, 1998, Hybridon commenced an offer to the holders of 9% notes
issued in 1997 to exchange the 9% notes for Series A preferred stock and certain
warrants of Hybridon. On May 5, 1998, noteholders holding $48.7 million of
principal and $2.4 million of interest tendered such principal and accrued
interest to Hybridon for 510,505 shares of Series A preferred stock and warrants
to purchase 3,002,958 shares of common stock with an exercise price of $4.25 per
share.
On May 5, 1998, Hybridon completed a private offering of equity securities
raising total gross proceeds of approximately $26.7 million from the issuance of
9,597,476 shares of common stock, 114,285 shares of Series A preferred stock and
warrants to purchase 3,329,486 shares of common stock at $2.40 per share. The
gross proceeds include the conversion of approximately $5.9 million of accounts
payable, capital lease obligations and other obligations into common stock.
Hybridon issued 597,699 shares of common stock and warrants to purchase
1,720,825 shares of common stock at $2.40 per share to the placement agents. In
addition, Hybridon was obligated to issue an additional 300,000 shares in
connection with this transaction. For more information about this transaction,
see note 9(b) of the notes to consolidated statements.
Hybridon may redeem the 9% notes, of which $1.3 million was outstanding at
March 30, 2001, 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 Hybridon, as defined, Hybridon will be required to offer to
repurchase the 9% notes at 150% of the original issuance price.
Facility Leases
As of December 31, 2000, Hybridon had future operating lease commitments of
approximately $3.9 million through 2007 for its existing leases.
Net Operating Loss Carryforwards
As of December 31, 2000, Hybridon had approximately $235.6 million and $4.2
million of net operating loss and tax credit carryforwards, respectively. The
Tax Reform Act of 1986 contains certain provisions that may limit Hybridon's
ability to utilize net operating loss and tax credit carryforwards in any given
year if certain events occur, including cumulative changes in ownership
interests in excess of 50% over a three-year period. Hybridon has completed
several financings since the effective date of the Tax Act, which, as of
December 31, 1999, have resulted in ownership changes in excess of 50%, as
defined under the Tax Act and which will limit Hybridon's ability to utilize its
net operating loss carryforwards.
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RISK FACTORS
OUR FINANCIAL CONDITION AND NEED FOR SUBSTANTIAL ADDITIONAL FUNDING
Your Investment Could Be Substantially Diluted if We Issue Shares to Obtain
Financing We Need.
Our business is the discovery and development of genetic drugs, which act
on genes either to increase the production of proteins that combat disease or
suppress the production of proteins which cause or support diseases. Since our
founding in 1989, we have not produced any commercially viable drugs and we have
operated at a loss. In the past, we have financed our operations largely from
the sale of shares of common or preferred stock and the sale of debt or other
securities convertible into common stock.
In order to obtain the funds to continue our operations, we will need to
issue shares of common stock or debt or securities convertible into shares of
common stock. We will probably need to issue a significant number of shares in
order to raise sufficient funds to pay our creditors, meet covenants of our
credit facility and continue our operations. This could result in substantial
dilution to the book value of our shares.
We Are Not in Compliance With One of the Covenants in Our Loan Agreement. If Our
Lenders Foreclose, We Will Have Few, or No, Assets to Distribute to Our
Shareholders.
We owe $6.0 million under a 1996 loan and we owe $0.6 million under our 8%
notes, both of which are secured by substantially all of our assets. The loan
and the 8% notes are owned in part by our affiliates. The loan agreement for the
$6.0 million loan requires us to maintain liquidity of $2.0 million and a net
worth of $6.0 million. The 8% notes require us to maintain liquidity of $1.5
million. See Note 15(c) of the footnotes to the financial statements. On
numerous occasions in the past, our lenders have waived our compliance with
these requirements and have done so through September 30, 2001, although they
may not be willing to do so in the future. If our lenders and noteholders ever
decline to give us waivers, we 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
our assets. Foreclosure will likely force us to cease doing business or file for
bankruptcy. If this should happen, and we are liquidated, there will be few or
no tangible assets available for distribution to our shareholders. Since the
debt is owned in part by our affiliates, the court may treat the loan as a
capital contribution in which case there may be assets available for
distribution to our shareholders, along with the lenders.
We Expect Our Operating Losses to Continue into the Future.
As of December 31, 2000, we have incurred operating losses of approximately
$260 million. We expect to continue incurring operating losses until revenues
from the sale of any drugs that we succeed in developing exceed our research and
development and administrative costs. We will need to spend substantial
additional amounts on research and development, including preclinical studies
and clinical trials, in order to obtain the necessary regulatory approvals. If
we obtain regulatory approval, we will then need to spend substantial amounts on
sales and marketing efforts.
OUR OPERATIONS
We May Not Succeed in Developing a Commercially Viable Drug.
We do not currently have any drugs on the market and the drug candidates we
are working on are still in development. Before a drug is approved for sale by
the regulatory authorities, the drug, which has undergone pre-clinical trials
with animals to test activity and safety, must then pass several clinical trials
with humans. The development of a new drug generally requires three phases of
clinical trials. Phase I testing is conducted on a small group of healthy
individuals for safety and dosage. Phase I/II testing is on patients with
targeted diseases to test safety and, to a degree, effectiveness. Phase III is
on a large patient group to confirm effectiveness. Our drug closest to
commercialization, GEM(R)231, is still in Phase II clinical trials. Another
drug, GEM(R)92, has been administered to the volunteers in a pilot Phase I
study. All of our other drugs that are under consideration for development are
in pre-clinical trials and have not been tested on humans.
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Drug candidates, in general, have a low overall probability of being
commercialized, but that probability increases as the drug advances 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 our drug candidates cannot be successfully developed,
or if we are unable to obtain the necessary regulatory approval, we will not be
able to generate the revenues from the sale of drugs that we would need in order
to be profitable.
We Sold Substantially All of Our Revenue-Generating Operations.
Throughout our history we have engaged primarily in the research and
development of genetic drugs. However, in 1996 we formed Hybridon Specialty
Products to manufacture synthetic DNA compounds for Hybridon's internal use, for
use by our collaborators and for sale to third parties. We sold the business and
assets of Hybridon Specialty Products on September 21, 2000, for approximately
$15,000,000. We are now dependent for revenue solely upon the ultimate success
of our drug research and development activities for our long-term viability.
We Have Many Competitors, and May Not Be Able to Compete Successfully Against
Them.
Several companies, in particular Isis Pharmaceuticals, Inc. and Genta
Incorporated, are also in the business of developing synthetic DNA drugs. Isis,
which has received the approval of the U.S. Food and Drug Administration, or
"FDA," for Vitravene(R), and is currently marketing this drug for the treatment
of CMV retinitis. Isis has several other drugs in clinical testing for the
possible treatment of cancer, including ISIS 3521 and 2503. Genta is testing
Genasense (G3139) in humans, also for the treatment of cancer. These potential
new drugs are further along in clinical testing than Hybridon's cancer drug
GEM(R)231. Other companies also have synthetic DNA drugs in preclinical and
clinical development.
In general, the human health care products industry is extremely
competitive. Many drugs are currently marketed for the treatment of cancer, such
as Taxol(R), Carboplatin, Taxotere(R) and Camptosar(R). While it is unlikely
that GEM(R)231 will compete against these drugs, it may be used in combination
with them. GEM(R)231 and other Hybridon synthetic DNA drugs may not, however, be
able to capture sufficient market share to be profitable.
To our knowledge two privately held companies are developing synthetic DNA
drugs specially designed to stimulate the responses of the immune system. These
potential new drugs are in clinical trials, either alone or in combination with
vaccines to prevent or to treat various diseases.
Furthermore, biotechnology and related pharmaceutical technologies have
undergone rapid and significant change and we expect that the technologies
associated with biotechnology research and development will continue to develop
rapidly. Our prospects depend in large part on our ability to compete with these
technologies. Any compounds, drugs or processes that we develop may become
obsolete before we recover the expenses incurred in developing them.
Our Ability to Compete Will Suffer if We Are Unable to Protect Our Patent Rights
and Trade Secrets or if We Infringe the Proprietary Rights of Third Parties.
Our success will depend to a large extent on our ability to obtain U.S. and
foreign patent protection for drug candidates and processes, preserve trade
secrets and operate without infringing the proprietary rights of third parties.
To obtain a patent on an invention, the inventor must be the first to
invent it or the first to file a patent application for it. We cannot be sure
that the inventors of subject matter covered by patents and patent applications
that we own or license were the first to invent, or the first to file patent
applications for, those inventions. Furthermore, patents we own or license may
be challenged, infringed upon, invalidated, found to be unenforceable, or
circumvented by others, and our rights under any issued patents may not provide
sufficient protection against competing drugs or otherwise cover commercially
valuable drugs or processes. See "Business -- Patents, Trade Secrets, and
Licenses."
26
29
We seek to protect trade secrets and other unpatented proprietary
information, in part by means of confidentiality agreements with our
collaborators, employees, and consultants. If any of these agreements is
breached, we may be without adequate remedies. Also, our trade secrets may
become known or be independently developed by competitors.
OUR SECURITIES
Because "Penny Stock" Rules Apply to Trading in Our Common Stock, You May Find
It Difficult to Sell these Shares.
Our common stock is a "penny stock," as it is not listed on a national
securities 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. 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 you to sell your shares of our
stock. Because of the rules, there is less trading in penny stocks. Also, many
brokers choose not to participate in penny stock transactions.
Certain Existing Stockholders Hold a Substantial Portion of Our Stock, and
Consequently Could Control Most Matters Requiring Approval by Stockholders.
Our officers, directors and principal stockholders own or control more than
55% of our common stock on a fully-diluted basis. As a result, these
stockholders, acting together, have the ability to control most matters
requiring approval by the stockholders. This concentration of ownership may have
the effect of delaying or preventing a change in control of Hybridon.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that do
not reflect historical facts, but instead reflect Hybridon's current
expectations, estimates and projections regarding its business. Forward-looking
statements can be found in the material set forth under "Risk Factors,"
"Business," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and are characterized by use of words such as
"believes," "plans," "expects," and "anticipates." Forward-looking statements
are not guarantees of future performance, and necessarily involve risks and
uncertainties, and Hybridon's results could differ materially from those
anticipated in the forward-looking statements contained in this prospectus.
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, 2000,
Hybridon's assets and liabilities related to nondollar-denominated currencies
were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required to be filed hereunder are filed as
APPENDIX A hereto, are listed under Item 14(a), and are incorporated herein by
this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
30
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF HYBRIDON
The response to this item is contained in part under the caption "Executive
Officers of Hybridon" in Hybridon's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 14, 2001 (the "2001 Proxy Statement"), under the
caption "Election of Directors," which section is incorporated herein by this
reference. The 2001 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 2001 Proxy Statement under
the caption "Election of Directors," which section is incorporated herein by
this reference. The 2001 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 2001 Proxy Statement under
the caption "Stock Ownership of Certain Beneficial Owners and Management," which
section is incorporated herein by this reference. The 2001 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 2001 Proxy Statement under
the caption "Certain Relationships and Related Transactions," which section is
incorporated herein by this reference. The 2001 Proxy Statement will be filed
with the Commission not later than 120 days after the fiscal year covered by
this Annual Report on Form 10-K.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Reference is made to the Index to Consolidated
Financial Statements under Item 8 of this Annual Report on Form
10-K.
(2) Hybridon is not filing any financial statement schedules as part of
this Annual Report on Form 10-K because they are not applicable or
the required information is included in the financial statements or
notes thereto.
(3) The list of Exhibits filed as a part of this Annual Report on Form
10-K are set forth on the Exhibit Index immediately preceding such
Exhibits, and is incorporated herein by this reference.
(b)Reports on Form 8-K. During the fourth quarter of 2000, Hybridon did not
file any reports on Forms 8-K.
28
31
(c) Exhibits required by Item 601 of Regulation S-K with each management
contract, compensatory plan or arrangement required to be filed
identified.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1(1) Restated Certificate of Incorporation of the Registrant, as
amended.
3.2(2) Amended and Restated Bylaws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Preferred
Stock.
3.4 Form of Certificate of Designation of Series B Preferred
Stock.
4.1(2) Specimen Certificate for shares of Common Stock, $.001 par
value, of the Registrant.
4.2(4) Indenture dated as of March 26, 1997 between Forum Capital
Markets LLC and the Registrant.
4.3(7) Certificate of Designation of Series A Preferred Stock, par
value $.01 per share, dated May 5, 1998.
4.4(7) Class A Warrant Agreement dated May 5, 1998.
4.5(7) Class B Warrant Agreement dated May 5, 1998.
4.6(7) Class C Warrant Agreement dated May 5, 1998.
4.7(7) Class D Warrant Agreement dated May 5, 1998.
4.8 Specimen Certificate for shares of Series B Preferred Stock,
$.01 par value, of the Registrant.
+10.1(2) License Agreement dated February 21, 1990 and restated as of
September 8, 1993 between the Registrant and the Worcester
Foundation for Biomedical Research, Inc., as amended.
+10.2(2) Patent License Agreement dated September 21, 1995 between
the Registrant and National Institutes of Health.
+10.3(2) Patent License Agreement effective as of October 13, 1994
between the Registrant and McGill University.
+10.4(2) License Agreement effective as of October 25, 1995 between
the Registrant and the General Hospital Corporation.
+10.5(2) License Agreement dated as of October 30, 1995 between the
Registrant and Yoon S. Cho-Chung.
+10.6(2) Collaborative Study Agreement effective as of December 30,
1992 between the Registrant and Medtronic, Inc.
+10.7(2) System Design and Procurement Agreement dated as of December
16, 1994 between the Registrant and Pharmacia Biotech, Inc.
10.8(2) Lease dated March 10, 1994 between the Registrant and
Laborer's Pension/Milford Investment Corporation for space
located at 155 Fortune Boulevard, Milford, Massachusetts,
including Note in the original principal amount of $750,000.
10.9(2) Registration Rights Agreement dated as of February 21, 1990
between the Registrant, the Worcester Foundation for
Biomedical Research, Inc. and Paul C. Zamecnik.
10.10(2) Registration Rights Agreement dated as of June 25, 1990
between the Registrant and Nigel L. Webb.
10.11(2) Registration Rights Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
10.12(2) Registration Rights Agreement dated as of February 6, 1992
between the Registrant and Anthony J. Payne.
++10.13(2) 1990 Stock Option Plan, as amended.
++10.14(2) 1995 Stock Option Plan.
29
32
EXHIBIT NO. DESCRIPTION
- ----------- -----------
++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(12) Fifth Amendment to Loan and Security Agreement dated
December 4, 1998 between Hybridon, Inc. and Silicon Valley
Bank.
10.35(5) Warrant issued to Silicon Valley Bank to purchase 65,000
shares of Common Stock dated as of December 31, 1996.
10.36(5) Registration Rights Agreement dated as of December 31, 1996
between the Registrant and Silicon Valley Bank.
30
33
EXHIBIT NO. DESCRIPTION
- ----------- -----------
+10.37(5) Supply and Sales Agreement dated as of September 1, 1996
between the Registrant and P.E. Applied Biosystems.
10.38(2) Registration Rights Agreement dated as of March 26, 1997
between Forum Capital Markets LLC and the Registrant.
10.39(2) Warrant Agreement dated as of March 26, 1997 between Forum
Capital Markets LLC and the Registrant.
+10.40(6) Amendment No. 1 to License Agreement, dated as of February
21, 1990 and restated as of September 8, 1993, by and
between the Worcester Foundation for Biomedical Research,
Inc. and the Registrant, dated as of November 26, 1996.
10.41(10) Letter Agreement dated May 12, 1997 between the Registrant
and Pillar S.A. amending the Consulting Agreement dated as
of March 1, 1994 between the Registrant and Pillar S.A.
10.42(10) Amendment dated July 15, 1997 to the Series G Convertible
Preferred Stock and Warrant Purchase Agreement dated as of
September 9, 1994 among the Registrant and certain
purchasers, as amended.
10.43(1) Consent Agreement dated January 15, 1998 between Silicon
Valley Bank and the Registrant relating to the Silicon
Agreement.
10.44(11) Letter Agreement between the Registrant and Forum Capital
Markets LLC and Pecks Management Partners Ltd. for the
purchase of the Loan and Security Agreement with Silicon
Valley Bank.
10.45(7) Financial Advisory Agreement between Registrant and Pillar
Investments Ltd. dated May 5, 1998.
10.46(7) Placement Agency Agreement between Registrant and Pillar
Investments Ltd. dated as of January 15, 1998.
+++10.47(12) 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(11) 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(11) Letter Agreement between Hybridon and Pillar Investments
dated December 10, 1999.
10.56(11) Form of Subscription Agreements dated as of December 13,
1999, by and among Hybridon and the purchasers of Notes due
2002.
10.57(11) First Amended and Restated Subordination and Intercreditor
Agreement by and among Hybridon, the holders of Notes due
2002, Forum and entities advised by Pecks.
10.58(11) License Agreement dated September 20, 2000 by and between
Hybridon and Boston Biosystems, Inc.
31
34
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.59(11) Assignment of Coexclusive License dated September 20, 2000
by and between Hybridon and the Public Health Service.
10.60(11) Oligonucleotide Purification Patent License Agreement dated
September 20, 2000 by and between Hybridon and Boston
Biosystems, Inc.
10.61(14) Asset Purchase Agreement dated June 29, 2000 by and between
Hybridon and Boston Biosystems, Inc.
+++10.62(11) Assignment of Patent Rights dated September 20, 2000 by and
between Hybridon and Boston Biosystems, Inc.
+++10.63(11) PNT Monomer Patent License and Option Agreement dated
September 20, 2000 by and between Hybridon and Boston
Biosystems, Inc.
+++10.64(11) Agreement Relating to Patents Forming Part of Acquired
Assets but to be Licensed Back to Hybridon for the Purposes
of OriGenix Agreements dated September 20, 2000 by and
between Hybridon and Boston Biosystems, Inc.
++10.65 E. Andrews Grinstead Settlement Letter.
10.66 Agreement dated March 28, 2001 by and between Hybridon,
Founders Financial Group, Pecks Management Partners L.T.D.
and General Motors Investment Management Corporation, in its
capacity as Trustee for the General Motors Employees Global
Trust Group.
10.67 Stock Purchase Agreement by and between Paul Capital
Partners L.P. and PCP Associates and Hybridon dated March
30, 2001.
10.68 Agreement and Mutual Release between Hybridon and
MethylGene, Inc. dated March 21, 2001.
10.69 Offer to Exchange Series B Preferred Stock of Hybridon dated
March 5, 2001.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2(11) Consent of McDonnell Boehnen Hulbert & Berghoff.
- ---------------
(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.
32
35
(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 the Registrant's Proxy Statement dated August
8, 2000.
+ 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.
+++ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
33
36
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
12th day of April 2001.
Hybridon, Inc.
By: /s/ SUDHIR AGRAWAL
------------------------------------
Sudhir Agrawal, D. Phil.
President and Acting
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Hybridon, Inc., hereby
severally constitute and appoint Sudhir Agrawal and Robert G. Andersen, and each
of them singly, our true and lawful attorneys, with full power to them and each
of them singly, to sign for us in our names in the capacities indicated below,
all amendments to this Annual Report on Form 10-K, and generally to do all
things in our names and on our behalf in such capacities to enable Hybridon,
Inc. to comply with the provisions of the Securities Exchange Act of 1934, as
amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SUDHIR AGRAWAL President, Acting Chief April 12, 2001
- ----------------------------------------------------- Executive Officer
Sudhir Agrawal, D. Phil. (Principal Executive
Officer) and Director
/s/ JAMES B. WYNGAARDEN Chairman of the Board of April 12, 2001
- ----------------------------------------------------- Directors
James B. Wyngaarden, M.D.
/s/ ROBERT G. ANDERSEN Chief Financial Officer and April 12, 2001
- ----------------------------------------------------- Vice President of Operations
Robert G. Andersen and Planning
/s/ NASSER MENHALL Director April 12, 2001
- -----------------------------------------------------
Nasser Menhall
/s/ PAUL C. ZAMECNIK Director April 12, 2001
- -----------------------------------------------------
Paul C. Zamecnik, M.D.
/s/ YOUSSEF EL-ZEIN Director April 12, 2001
- -----------------------------------------------------
Youssef El-Zein
/s/ ARTHUR W. BERRY Director April 12, 2001
- -----------------------------------------------------
Arthur W. Berry
34
37
SIGNATURE TITLE DATE
--------- ----- ----
/s/ C. KEITH HARTLEY Director April 12, 2001
- -----------------------------------------------------
C. Keith Hartley
/s/ CAMILLE CHEBEIR Director April 12, 2001
- -----------------------------------------------------
Camille Chebeir
35
38
HYBRIDON, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
39
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, 1999 and 2000,
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, 2000. These financial statements are the responsibility of
Hybridon, Inc. and subsidiaries' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hybridon, Inc. and
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 12, 2001
F-2
40
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-----------------------------
1999 2000
------------- -------------
Current Assets:
Cash and cash equivalents................................. $ 2,551,671 $ 1,532,155
Short-term investments.................................... -- 2,000,000
Receivables............................................... 196,528 337,403
Prepaid expenses and other current assets................. 101,914 71,616
------------- -------------
Total current assets............................... 2,850,113 3,941,174
------------- -------------
Property and equipment, at cost:
Leasehold improvements.................................... 150,342 150,342
Laboratory equipment and other............................ 5,249,621 5,236,299
------------- -------------
5,399,963 5,386,641
Less -- Accumulated depreciation and amortization......... 5,229,514 5,295,963
------------- -------------
170,449 90,678
------------- -------------
Other assets:
Deferred financing costs and other assets................. 1,325,149 969,631
Restricted cash........................................... -- 5,000,000
Note receivable from officer.............................. 270,050 --
------------- -------------
1,595,199 5,969,631
------------- -------------
Net assets from discontinued operations..................... 6,101,518 --
------------- -------------
$ 10,717,279 $ 10,001,483
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt......................... $ 6,000,000 $ 6,000,000
Accounts payable.......................................... 1,263,943 1,084,330
Accrued expenses.......................................... 2,119,864 1,094,735
------------- -------------
Total current liabilities.......................... 9,383,807 8,179,065
------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE................... 1,306,000 1,306,000
------------- -------------
8% CONVERTIBLE NOTES PAYABLE................................ 6,099,775 8,046,420
------------- -------------
Commitments and Contingencies (Notes 7, 10 and 14)
Stockholders' equity (deficit):
Preferred stock, $0.01 par value --
Authorized -- 5,000,000 shares
Series A convertible preferred stock --
Designated -- 1,500,000 shares
Issued and outstanding -- 661,856 and 626,170 shares
at December 31, 1999 and 2000, respectively
(liquidation preference of $63,592,143 at December 31,
2000).................................................. 6,618 6,262
Common stock, $0.001 par value --
Authorized -- 100,000,000 shares
Issued and outstanding -- 16,260,722 and 18,382,237
shares at December 31, 1999 and 2000, respectively...... 16,261 18,382
Additional paid-in capital.................................. 247,813,331 252,645,636
Accumulated deficit......................................... (253,183,130) (260,193,046)
Deferred compensation....................................... (725,383) (7,236)
------------- -------------
Total stockholders' deficit........................ (6,072,303) (7,530,002)
------------- -------------
$ 10,717,279 $ 10,001,483
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
41
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1999 2000
------------ ------------ -----------
Revenues:
Service revenue................................. $ 375,000 $ 365,000 $ 82,500
Research and development........................ 1,099,915 600,000 179,277
Royalty and other income........................ -- 122,544 82,826
Interest income................................. 148,067 92,202 228,695
------------ ------------ -----------
Total revenues.......................... 1,622,982 1,179,746 573,298
------------ ------------ -----------
Operating expenses:
Research and development........................ 14,182,952 5,783,092 3,620,203
General and administrative...................... 6,572,502 3,663,811 3,184,017
Interest........................................ 2,819,659 683,134 2,153,831
------------ ------------ -----------
Total operating expenses................ 23,575,113 10,130,037 8,958,051
------------ ------------ -----------
Loss from continuing operations.............. (21,952,131) (8,950,291) (8,384,753)
Income (loss) from discontinued operations... (4,028,242) (1,552,751) 5,462,154
------------ ------------ -----------
Loss before extraordinary gain.................... (25,980,373) (10,503,042) (2,922,599)
Extraordinary item:
Gain on conversion of 9% convertible
Subordinated notes payable................... 8,876,685 -- --
------------ ------------ -----------
Net loss.......................................... (17,103,688) (10,503,042) (2,922,599)
Accretion of preferred stock dividend............. (2,689,048) (4,232,251) (4,087,317)
------------ ------------ -----------
Net loss applicable to common stockholders........ $(19,792,736) $(14,735,293) $(7,009,916)
============ ============ ===========
Basic and diluted net loss per common share from:
Continuing operations........................... $ (1.85) $ (0.57) $ (0.48)
Discontinued operations......................... (0.34) (0.10) 0.31
Extraordinary gain.............................. 0.75 -- --
------------ ------------ -----------
Net loss per share.............................. (1.44) (0.66) (0.17)
Accretion of preferred stock dividends.......... (0.23) (0.27) (0.23)
------------ ------------ -----------
Net loss per share applicable to common
stockholders................................. $ (1.67) $ (0.93) $ (0.40)
============ ============ ===========
Shares used in computing basic and diluted net
loss per common share........................... 11,859,350 15,810,664 17,418,233
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
42
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------- -----------------------
NUMBER NUMBER ADDITIONAL
OF $0.01 PAR OF $0.001 PAR PAID-IN ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL DEFICIT
------- --------- ---------- ---------- ------------ -------------
BALANCE, DECEMBER 31, 1997.................. 5,059,650 $ 5,060 $173,695,698 $(218,655,101)
Issuance of Series A convertible preferred
stock and attached warrants in exchange for
conversion of 9% convertible subordinated
notes payable and accrued interest, net of
issuance costs of $1,195,398............... 510,504 $5,105 -- -- 38,729,489 --
Issuance of common stock and attached
warrants in exchange for conversion of
accounts payable and other obligations..... -- -- 3,217,154 3,217 5,931,341 --
Issuance of Series A convertible preferred
stock...................................... 114,285 1,143 -- -- 7,998,817 --
Issuance of common stock to placement
agent...................................... -- -- 597,699 598 1,194,800 --
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 4,230,676 --
Issuance of common stock and attached
warrants, net of issuance costs of
$1,069,970................................. -- -- 3,223,000 3,223 6,873,453 --
Issuance of common stock for services
rendered................................... -- -- 50,000 50 93,700 --
Deferred compensation related to grants of
stock options to nonemployees, net of
terminations............................... -- -- -- -- 109,734 --
Issuance of warrants in connection with
notes payable.............................. -- -- -- -- 85,433 --
Accretion and issuance of Series A
convertible preferred stock dividends...... 16,470 165 -- -- 2,688,883 (2,689,048)
Amortization of deferred compensation....... -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- (17,103,688)
------- ------ ---------- ------- ------------ -------------
BALANCE, DECEMBER 31, 1998.................. 641,259 6,413 15,304,825 15,305 241,632,024 (238,447,837)
Issuance of common stock to placement
agents..................................... -- -- 460,000 460 999,540 --
Conversion of Series A convertible preferred
stock into common stock.................... (21,076) (211) 495,897 496 (285) --
Issuance of warrants in connection with
notes payable.............................. -- -- -- -- 547,328 --
Accretion and issuance of Series A
convertible preferred stock dividends...... 41,673 416 -- -- 4,231,835 (4,232,251)
Fair value of stock options to
nonemployees............................... -- -- -- -- 402,889 --
Amortization of deferred compensation....... -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- (10,503,042)
------- ------ ---------- ------- ------------ -------------
BALANCE, DECEMBER 31, 1999.................. 661,856 6,618 16,260,722 16,261 247,813,331 (253,183,130)
Exercise of common stock options............ -- -- 335,240 336 167,287 --
Retirement of common stock.................. -- -- (250,000) (250) -- --
Cancellation of stock options............... -- -- -- -- (50,781) --
Revaluation of stock options issued to non-
employees.................................. -- -- -- -- (449,665) --
Accretion and issuance of Series A
convertible preferred stock dividends...... 41,363 414 -- -- 4,086,903 (4,087,317)
Issuance of stock options to
non-employees.............................. -- -- -- -- 117,523 --
Issuance of warrants in connection with line
of credit.................................. -- -- -- -- 731,136 --
Conversion of line of credit into common
stock...................................... -- -- 214,043 214 230,953 --
Conversion of Series A convertible preferred
stock into common stock.................... (77,049) (770) 1,822,232 1,821 (1,051) --
Amortization of deferred compensation....... -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- (2,922,599)
------- ------ ---------- ------- ------------ -------------
BALANCE, DECEMBER 31, 2000.................. 626,170 $6,262 18,382,237 $18,382 $252,645,636 $(260,193,046)
======= ====== ========== ======= ============ =============
TOTAL
STOCKHOLDERS
DEFERRED EQUITY
COMPENSATION (DEFICIT)
------------ ------------
BALANCE, DECEMBER 31, 1997.................. $(1,093,837) $(46,048,180)
Issuance of Series A convertible preferred
stock and attached warrants in exchange for
conversion of 9% convertible subordinated
notes payable and accrued interest, net of
issuance costs of $1,195,398............... -- 38,734,594
Issuance of common stock and attached
warrants in exchange for conversion of
accounts payable and other obligations..... -- 5,934,558
Issuance of Series A convertible preferred
stock...................................... -- 7,999,960
Issuance of common stock to placement
agent...................................... -- 1,195,398
Issuance of common stock and attached
warrants in exchange for conversion of
convertible notes payable, net of issuance
cost of $566,167........................... -- 4,233,833
Issuance of common stock and attached
warrants, net of issuance costs of
$1,069,970................................. -- 6,876,676
Issuance of common stock for services
rendered................................... -- 93,750
Deferred compensation related to grants of
stock options to nonemployees, net of
terminations............................... (109,734) --
Issuance of warrants in connection with
notes payable.............................. -- 85,433
Accretion and issuance of Series A
convertible preferred stock dividends...... -- --
Amortization of deferred compensation....... 246,444 246,444
Net loss.................................... -- (17,103,688)
----------- ------------
BALANCE, DECEMBER 31, 1998.................. (957,127) 2,248,778
Issuance of common stock to placement
agents..................................... -- 1,000,000
Conversion of Series A convertible preferred
stock into common stock.................... -- --
Issuance of warrants in connection with
notes payable.............................. -- 547,328
Accretion and issuance of Series A
convertible preferred stock dividends...... -- --
Fair value of stock options to
nonemployees............................... -- 402,889
Amortization of deferred compensation....... 231,744 231,744
Net loss.................................... -- (10,503,042)
----------- ------------
BALANCE, DECEMBER 31, 1999.................. (725,383) (6,072,303)
Exercise of common stock options............ -- 167,623
Retirement of common stock.................. -- (250)
Cancellation of stock options............... 50,781 --
Revaluation of stock options issued to non-
employees.................................. 449,665 --
Accretion and issuance of Series A
convertible preferred stock dividends...... -- --
Issuance of stock options to
non-employees.............................. -- 117,523
Issuance of warrants in connection with line
of credit.................................. -- 731,136
Conversion of line of credit into common
stock...................................... -- 231,167
Conversion of Series A convertible preferred
stock into common stock.................... -- --
Amortization of deferred compensation....... 217,701 217,701
Net loss.................................... -- (2,922,599)
----------- ------------
BALANCE, DECEMBER 31, 2000.................. $ (7,236) $ (7,530,002)
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
43
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1999 2000
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(17,103,688) $(10,503,042) $(2,922,599)
Income (loss) from discontinued operations................ (4,028,242) (1,552,751) 5,462,154
------------ ------------ -----------
Loss from continuing operations........................... (13,075,446) (8,950,291) (8,384,753)
Adjustments to reconcile net loss to net cash used in
operating activities --
Extraordinary gain on exchange of 9% convertible
subordinated notes payable............................ (8,876,685) -- --
Depreciation and amortization........................... 2,120,212 394,381 115,403
Compensation expense related to the issuance of stock
options............................................... -- -- 117,523
Amortization of deferred compensation................... 246,444 634,633 217,701
Amortization of deferred financing costs................ 160,813 123,140 456,919
Interest expense related to the issuance of common stock
warrants.............................................. -- -- 731,136
Non cash interest expense............................... -- 65,485 151,077
Issuance of common stock for services rendered.......... 93,750 -- --
Changes in operating assets and liabilities --
Receivables........................................... (511,652) 114,694 (140,875)
Prepaid expenses and other current assets............. 894,998 209,341 30,298
Note receivable from officer.......................... (11,400) (11,400) --
Accounts payable and accrued expenses................. (276,463) (1,153,013) (935,000)
------------ ------------ -----------
Net cash used in continuing operating activities.... (19,235,429) (8,573,030) (7,640,571)
------------ ------------ -----------
Net cash provided by (used in) discontinued
operations........................................ (4,090,858) (130,581) (162,472)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets.................................. -- -- (101,401)
Purchases of short-term investments....................... -- -- (2,000,000)
Proceeds from sale of discontinued operations............. -- -- 11,726,144
Purchases of property and equipment....................... 114,576 (8,303) (35,572)
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........................................ 6,278,976 (8,303) 9,589,171
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series A convertible
preferred stock......................................... 7,999,960 -- --
Net proceeds from issuance of common stock................ 6,876,676 -- 167,623
Net borrowings under line of credit....................... -- -- 231,167
Proceeds from notes payable............................... 6,000,000 -- --
Proceeds from issuance of convertible notes payable and
warrants................................................ 4,233,833 4,534,290 1,795,566
Proceeds from related party notes payable................. -- 1,500,000 --
Payments on long-term debt................................ (7,234,300) -- --
Increase in deferred financing costs...................... (400,000) (378,587) --
(Increase) decrease in restricted cash and other assets... 2,976,822 -- (5,000,000)
------------ ------------ -----------
Net cash provided by (used in) financing
activities........................................ 20,452,991 5,655,703 (2,805,644)
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents........ 3,405,680 (3,056,211) (1,019,516)
Cash and cash equivalents, beginning of period.............. 2,202,202 5,607,882 2,551,671
------------ ------------ -----------
Cash and cash equivalents, end of period.................... $ 5,607,882 $ 2,551,671 $ 1,532,155
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
44
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(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 been primarily engaged in research and
development efforts, development of its manufacturing capabilities and
organizational efforts, including recruiting of scientific and management
personnel and raising capital. To date, the Company has not received revenue
from the sale of biopharmaceutical products developed by it based on the
antisense mechanism. In order to commercialize its own products, the Company
will need to address a number of technological challenges and comply with
comprehensive regulatory requirements. Accordingly, it is not possible to
predict the amount of funds that will be required or the length of time that
will pass before the Company receives revenues from sales of any of these
products. All revenues received by the Company to date have been derived from
collaboration and licensing agreements, interest on investment funds and
revenues from the custom contract manufacturing of synthetic DNA and reagent
products by the Company's Hybridon Specialty Products business prior to the
disposal thereof.
On September 21, 2000, the Company completed the sale (see Note 14) of its
Hybridon Specialty Products business to a subsidiary of Avecia, Inc. (Avecia) of
Manchester, United Kingdom, for up to $15.0 million, referred to as the HSP
sale.
The Company believes that its existing cash resources and the additional
funds to be received upon consummation of the transactions discussed in Note 15
will be sufficient to fund operations through December 31, 2001. The Company
will be required to raise substantial additional funds from external sources to
support its operations in 2002 and beyond.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
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 uncertainty with clinical trials, uncertainty of additional funding and
history of operating losses.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the results of
the Company and its subsidiary Hybridon S.A., an inactive French corporation.
The consolidated financial statements also reflect the Company's approximately
22% interest in MethylGene, Inc., and the Company's approximately 28% interest
in OriGenix Technologies Inc., both Canadian corporations that are accounted for
under the equity method (see Notes 7 and 8, respectively). All material
intercompany balances and transactions have been eliminated in consolidation.
F-7
45
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(c) Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with maturities of 90
days or less when purchased to be cash equivalents. Cash and cash equivalents at
December 31, 1999 and 2000 consist of the following (at amortized cost, which
approximates fair market value):
DECEMBER 31
------------------------
1999 2000
---------- ----------
Cash and cash equivalents* --
Cash and money market funds....................... $ 505,794 $ 238,327
Corporate bond.................................... 2,045,877 1,293,828
---------- ----------
Total cash and cash equivalents........... $2,551,671 $1,532,155
========== ==========
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company's short-term investments are classified as
held-to-maturity and are recorded at amortized cost. At December 31, 2000 the
Company's short-term investments consisted of corporate bonds, which mature in
January 2001.
- ---------------
* Does not include restricted cash of $5,000,000 at December 31, 2000 (see Note
4(f)).
(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
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
Leasehold improvements...................................... Life of lease
Laboratory equipment and other.............................. 3 - 5 years
(e) Accrued Expenses
At December 31, 1999 and 2000, accrued expenses consist of the following:
DECEMBER 31
------------------------
1999 2000
---------- ----------
Payroll and related costs........................... $ 552,710 $ 127,856
Other............................................... 1,567,154 966,879
---------- ----------
$2,119,864 $1,094,735
========== ==========
(f) Reclassifications
Certain amounts in the prior-period consolidated financial statements have
been reclassified to conform to the current period's presentation.
(g) Revenue Recognition
The Company has recorded revenue under the consulting and research
agreements discussed in Notes 7 and 8. Revenue is recognized as earned on the
straight-line basis over the term of the agreement, which approximates when work
is performed and costs are incurred. Revenues from service sales are recognized
when the services are performed. Service revenues include drug development,
clinical research, bio-analytical
F-8
46
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
work and information services, which include access to research, pre-clinical
and clinical information and data from the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition. This bulletin summarizes
certain views of the Staff on applying accounting principles generally accepted
in the United States to revenue recognition in financial statements. The Company
believes that its current revenue recognition policy complies with SAB No. 101.
(h) Financial Instruments
Statement of Financial Accounting Standards SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of an estimate of the
fair value of certain financial instruments. The Company's financial instruments
consist of cash and cash equivalents, accounts receivable and debt obligations.
The estimated fair value of these financial instruments approximates their
carrying value at December 31, 2000 and 1999, respectively. The estimated fair
values have been determined through information obtained from market sources and
management estimates, The Company does not have any material derivative or any
other financial instruments as defined by SFAS No. 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments.
(i) Concentration of Credit Risk and Significant Customers
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to the potential
for credit risk consist primarily of accounts receivable. As of December 31,
2000, accounts receivable consists of approximately $337,000 relating to
Avecia's minimum purchase requirement (see Note 14).
(j) Comprehensive Loss
The Company applies SFAS No. 130, Reporting Comprehensive Income.
Comprehensive loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. The Company's comprehensive loss is the same as the reported
net loss for all periods presented.
(k) Net Loss per Common Share
The Company applies SFAS No 128, Earnings per Share. Under SFAS No. 128,
basic net loss per common share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per
common share is the same as basic net loss per common share as the effects of
the Company's potential common stock equivalents are antidilutive. Antidilutive
securities, which consist of stock options, warrants and convertible preferred
stock and convertible debt instruments (on an as-converted basis) that are not
included in diluted net loss per common share were 30,312,133, 45,557,695 and
49,098,529 for 1998, 1999 and 2000, 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
F-9
47
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
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 June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts and
for hedging activities. SFAS No. 133, as amended by SFAS Nos. 137 and 138, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
In addition, the Emerging Issues Task Force (EITF) has issued a number of
derivative-related tentative and final consensuses. The Company does not expect
the adoption of any of these new standards to have a material impact on its
consolidated financial statements or results of operation.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB Opinion No. 25. This interpretation clarifies the application of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees
in certain situations, as defined. The interpretation was effective July 1,
2000, but covers certain events occurring during the period after December 15,
1998 but before the effective date. To the extent that events covered by this
interpretation occur during the period after December 31, 1998 but before the
effective date, the effects of applying this interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final interpretation, (i) no adjustments would be made to the
consolidated financial statements before the effective date and (ii) no expense
would be recognized for any additional compensation cost measured that is
attributable to periods before the effective date. The adoption of this
interpretation did not have any effect on the Company's consolidated financial
statements or results of operations. The adoption of FIN 44 will affect the
accounting for stock options repriced during fiscal year 1999 (see Note 9(f)).
(3) NOTE RECEIVABLE FROM OFFICER
At December 31, 1999, the Company had a note receivable and accrued
interest from an officer of $270,050, with an interest rate of 6.0% per annum.
The Company forgave the note in 2000 and charged this amount to general and
administrative expense.
(4) LONG-TERM DEBT
(a) Note Payable
During November 1998, the Company entered into a $6,000,000 note payable
with Forum Capital Markets, LLC, which is now Founders Financial Group, L.P.
(Founders), and certain investors associated with Pecks Management Partners Ltd.
(Pecks). The terms of the note payable are as follows: (i) the maturity is
November 30, 2003; (ii) the interest rate is 8%; (iii) interest is payable
monthly in arrears, with the principal due in full at maturity of the loan; (iv)
the note payable is convertible, at Pecks' and Founders' option, in whole or in
part, into shares of common stock at a conversion price equal to $2.40 per
share, a premium to fair value at date of issuance, and (v) the note requires
minimum liquidity, as defined, of $2,000,000. The Company has classified the
outstanding balance of $6,000,000 at December 31, 1999 and 2000 as a current
liability in the accompanying consolidated balance sheets as it does not
currently have the financing to remain in compliance with the financial
covenants. In connection with the issuance of the note payable, Forum received a
fee of $400,000, which was reinvested by Founders to purchase 160,000 shares of
F-10
48
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
common stock with 40,000 attached warrants at an exercise price of $3.00 per
share. The Company has recorded the $400,000 as a deferred financing cost, which
will be amortized to interest expense over the term of the note. As an
additional fee, Forum received warrants to purchase 133,333 shares of common
stock of the Company at $3.00 per share. The Company computed the value of the
warrants to be $85,433, by using the Black-Scholes option pricing model. The
Company has recorded this $85,433 as a deferred financing cost, which will be
amortized to interest expense over the term of the note. See Note 15 for
subsequent events.
(b) 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 9(b)).
(c) 9% Convertible Subordinated Notes Payable
On April 2, 1997, the Company issued $50,000,000 of 9% convertible
subordinated notes Payable (9% Notes). Under the terms of the 9% Notes, the
Company must make semiannual interest payments on the outstanding principal
balance through the maturity date of April 1, 2004. If the 9% Notes are
converted prior to April 1, 2000, the noteholders are entitled to receive
accrued interest from the date of the most recent interest payment through the
conversion date. The 9% Notes are subordinate to substantially all of the
Company's existing indebtedness. The 9% Notes are convertible at any time prior
to the maturity date at a conversion price equal to $35.0625 per share, a
premium to fair value at the date of issuance, subject to adjustment under
certain circumstances, as defined.
Beginning April 1, 2000, the Company may redeem the 9% Notes at its option
for a 4.5% premium over the original issuance price provided that from April 1,
2000 to March 31, 2001, the 9% Notes may not be redeemed unless the closing
price of the common stock equals or exceeds 150% of the conversion price for a
period of at least 20 out of 30 consecutive trading days and the 9% Notes are
redeemed within 60 days after such trading period. The premium decreases by 1.5%
each year through March 31, 2003. Upon a change of control of the Company, as
defined, the Company will be required to offer to repurchase the 9% Notes at
150% of the original issuance price.
On May 5, 1998, holders of $48,694,000 of principal and $2,361,850 of
accrued interest tendered such principal and accrued interest on the 9% Notes to
the Company for 510,505 shares of Series A convertible preferred stock and
warrants to purchase 3,002,958 shares of common stock with an exercise price of
$4.25 per share. In accordance with SFAS No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings, the Company recorded an
extraordinary gain of $8,876,685 related to the exchange. The extraordinary gain
represents the difference between the carrying value of the 9% Notes plus
accrued interest, less $2,249,173 of deferred financing costs written off, and
the fair value of the Series A convertible preferred stock, as determined by the
per share sales price of Series A convertible preferred stock sold in the 1998
Unit Financing (see Note 9(b)), and warrants to purchase common stock issued by
the Company. As of December 31, 2000, $1,306,000 of 9% Notes are outstanding.
(d) 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
4(e)). 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,
F-11
49
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2002. The 8% Notes are convertible at any time prior to the maturity date at a
conversion price equal to $0.60 per share of common stock, fair value at the
commitment date, 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. As of December 31, 2000, $8,046,420 of 8%
Notes are outstanding.
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. At December 31, 2000 the Company is in compliance with the
covenant regarding consolidated cash balances. 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%. On July 10, 2000, the holders of the 8% notes entered into an amendment
(See Note 4(f)) to the Subordination and Intercreditor Agreement.
In addition, in connection with the issuance of the 8% Notes, the holders
of the note payable to Pecks and Founders (see Note 4(a)) received a warrant to
purchase 2,750,000 shares of the Company's common stock at $0.60 per share. The
warrant was granted as consideration to Pecks and Founders 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.
See Note 15 for subsequent events.
(e) Related Party Notes Payable
During September 1999, the Company entered into two $500,000 promissory
notes payable to the Company's chief executive officer. During November 1999,
the Company entered into an additional $500,000 promissory note payable to its
chief executive officer. In connection with the issuance of the 8% Notes (see
Note 4(d)), the Company converted the principal balance of $1,500,000, and the
accrued but unpaid interest of $46,502 into 8% Notes.
(f) $2.0 Million Line of Credit
On May 30, 2000, the Company entered into a line of credit agreement
pursuant to which the $2.0 million line of credit lenders agreed to provide the
Company with a line of credit (see Note 1). The $2.0 million line of credit was
intended to provide the Company with working capital pending the closing of the
HSP sale. On July 10, 2000 and August 10, 2000, the Company drew down
approximately $0.5 million each of these dates under the $2.0 million line of
credit, representing a total draw down of $1.0 million.
On September 28, 2000, following the close of the sale of HSP, the Company
received a Notice of Repayment from the $2.0 million line of credit lenders and
repaid approximately $0.8 million of principal and interest in cash and $0.2
million of principal and interest in equivalent shares of common stock (214,043
shares) at $1.08 per share, a premium to fair value at the date of the line of
credit agreement, in October 2000, pursuant to the terms of the original
agreement. The Company has no additional borrowing capacity under this $2.0
million line of credit.
The $2.0 million line of credit lenders, the holders of the 8% Convertible
Notes (Note 4(d)), and the Lender (Note 4(a)) on July 10, 2000 entered into an
amendment to the Subordination and Intercreditor Agreement. In the Subordination
and Intercreditor Agreement, as amended all parties agreed to release their
F-12
50
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
lien on the portion of the collateral that includes assets to be conveyed in the
HSP sale (Note 14). In return for this partial release, the Company undertook in
the Subordination and Intercreditor Agreement, as amended, that upon
consummation of the HSP sale it would set aside from the proceeds thereof the
sum of $5.0 million with which it will purchase a money market instrument and
pledge the same as collateral to secure its obligation to the holders of the 8%
Convertible Notes and the $2.0 million line of credit lenders. The amount of the
pledge will be reduced as the Company's obligations are converted to equity or
repaid. The Company is entitled to collect and keep interest income generated by
the money market account. The lenders that are party to the Subordination and
Intercreditor Agreement, as amended, will continue to have a lien on
substantially all of the Company's assets remaining after the HSP sale.
In connection with the $2.0 million line of credit, the Company has agreed
(i) to issue to the representatives of the $2.0 million line of credit lenders
warrants to purchase up to 500,000 shares of common stock at an exercise price
of $1.08 per share and (ii) to issue to the $2.0 million line of credit lenders,
proportionate to their respective interests in the $2.0 million line of credit,
warrants to purchase 1,000,000 shares of common stock at an exercise price of
$1.08 per share. The Company computed the value of the warrants to be $731,136,
using the Black-Scholes option pricing model. The Company has amortized this
amount to interest expense over the term of the $2.0 million line of credit.
(5) G.D. SEARLE & CO. AGREEMENT
In January 1996, the Company and G.D. Searle & Co. entered into a
collaboration relating to research and development of therapeutic antisense
compounds. The Company and Searle were investigating antisense inhibitors of
MDM2, a protein involved in programmed cell death, or apoptosis. In March 2000,
the Company announced that Searle had elected not to extend its collaboration
agreement with the Company.
During 1998 and 1999, the Company earned $600,000 each year, in research
and development revenues from Searle. Under the collaboration, Searle also
purchased 200,000 shares of common stock in the Company at the offering price of
$50.00 per share.
(6) LICENSING AGREEMENT
The Company has entered into a licensing agreement with the Worcester
Foundation for Biomedical Research, Inc., which has merged with the University
of Massachusetts Medical Center, under which the Company has received exclusive
licenses to 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.
(7) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and institutional investors formed a Quebec
company, MethylGene, Inc. 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 technology relating to the MethylGene fields. These
fields are defined as (i) antisense compounds for the treatment of any disease
which act by inhibiting the production of DNA methyltransferase; (ii) other
methods of inhibiting DNA methyltransferase and (iii) antisense compounds to
inhibit up to two additional molecular targets, to be agreed upon by the Company
and MethylGene.
F-13
51
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
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. Subsequently, MethylGene has raised
additional proceeds from outside investors that reduced the Company's ownership
interest to 22%.
In May 1998, this agreement was amended to grant MethylGene a nonexclusive
right to use any and all antisense chemistries discovered by the Company or any
of its affiliates for a period commencing on May 5, 1998 and ending on the
earlier of (i) the effective date of termination by MethylGene of its contract
for development services to be provided by the Company; (ii) May 5, 1999, unless
MethylGene exercises its option to continue contracting for development services
provided by the Company or (iii) May 5, 2000. As additional consideration for
this nonexclusive right, MethylGene is required to pay the Company milestone
amounts, as defined, and transfer 300,000 shares of MethylGene's Class B shares
to the Company. The Company has placed no value on these shares. During 1998,
1999 and 2000, the Company recognized $875,000, $285,000 and $72,500,
respectively, of revenue related to this agreement.
On September 21, 2000, the Company sold its HSP business (Note 14). Prior
to such sale, the Company supplied MethylGene with its synthetic DNA supply
needs. During 1998, 1999 and 2000, the Company recognized $810,932, $1,641,889
and $25,695, respectively, of product revenue from sales to MethylGene in
discontinued operations. In connection with the HSP sale, the purchaser now
supplies MethylGene with synthetic DNA. Also, the Company sold MethylGene a
worldwide, royalty free, paid-up license to manufacture their compounds. The
Company recognized approximately $179,000 of revenue in 2000, related to this
license sale. The Company's supply agreement to MethylGene was directly part of
in its original license agreement to MethylGene. MethylGene has created a
separate license agreement, whereby the Company receives a credit for orders
placed by MethylGene with Avecia Biotechnology for its supply needs, as
discussed in Note 14.
See Note 15 for subsequent events.
(8) 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 that were
made available to OriGenix. The Company also licensed certain antisense
compounds and other technology to OriGenix. Subsequently, OriGenix has raised
additional proceeds from institutional investors that reduced the Company's
ownership interest to 28%. 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 and 2000, the
Company recognized $80,000 and $10,000, respectively, of service revenue from
sales of DNA products to OriGenix.
On September 21, 2000, the Company sold its HSP business (Note 14). Prior
to such sale, the Company supplied OriGenix with its synthetic DNA supply needs.
During 1999 and 2000, the Company recognized $16,290 and $89,869, respectively,
of product revenue from sales to OriGenix in discontinued operations. In
connection with the sale of its synthetic DNA manufacturing assets, or HSP sale,
the purchaser now supplies OriGenix with synthetic DNA. Also, the Company sold
OriGenix a worldwide, royalty free, paid-up license to manufacture their
compounds and amended its license agreement. The Company receives a credit for
orders placed by OriGenix with Avecia, Inc. for its supply needs as discussed in
Note 14.
F-14
52
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(9) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Common Stock
The Company has 100,000,000 authorized shares of common stock, $.001 par
value, of which 18,382,237 shares were issued and outstanding at December 31,
2000.
(b) 1998 Unit Financing
On May 5, 1998, the Company completed a private offering of equity
securities raising total gross proceeds of $26,681,164 from the issuance of
9,597,476 shares of common stock, 114,285 shares of Series A convertible
preferred stock and warrants to purchase 3,329,486 shares of common stock at
$2.40 per share. The gross proceeds include the conversion of $5,934,558 of
accounts payable, capital lease obligations and other obligations into common
stock. The Company incurred $1,636,137 of cash expenses related to the private
offering and issued 597,699 shares of common stock and warrants to purchase
1,720,825 shares of common stock at $2.40 per share to the placement agents. The
compensation received by Pillar Investment Limited (Pillar), a company
affiliated with certain directors of the Company, with respect to the offshore
component of the private 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 was entitled to 300,000 shares of common stock, in
connection with its efforts in assisting the Company in restructuring its
balance sheet. The Company has recorded $600,000 of general and administrative
expense in the accompanying consolidated statement of operations during 1998,
which represents the value of the common stock on May 5, 1998, with an
offsetting amount to accrued expenses for the shares to be issued. These shares
were issued in 1999.
(c) Units Issued to Primedica Corporation
In connection with the unit financing (see Note 9(b)), the Company issued
250,000 shares of common stock and 62,500 warrants to purchase common stock to
Primedica Corporation for future services to be provided. The services shall
commence upon the Company's request after (i) the Company securities are listed
on a nationally recognized exchange and (ii) the average closing price of the
Company's common stock is at least $2.00 per share for the 20 day trading period
preceding the contract commencement date. In the event that the Company does not
use these services as a result of the failure to meet the contract conditions,
Primedica shall forfeit to the Company all or part of the common stock and
warrants held by Primedica. The Company recorded these shares as issued and
outstanding during 1998 at par value. The Company reacquired and retired these
shares and cancelled the associated warrants during 2000, since the Company did
not use Primedica's services.
F-15
53
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(d) Warrants
The Company has the following warrants outstanding and exercisable for the
purchase of common stock at December 31, 2000:
OUTSTANDING
AND EXERCISE PRICE
EXPIRATION DATE EXERCISABLE PER SHARE
--------------- ----------- --------------
December 31, 2001.................................. 13,000 $34.49
April 2, 2002...................................... 588,235 4.25
December 31, 2002.................................. 2,750,000 0.60
May 4, 2003........................................ 7,990,766 3.10
September 20, 2003................................. 1,500,000 1.08
November 30, 2003.................................. 173,333 3.00
----------
13,015,334
==========
Weighted average exercise price per share........ $ 2.42
======
Substantially all of such warrants were issued in connection with various
equity and debt financings described herein. Pursuant to EITF Issue 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock, the Company believes that equity
classification is appropriate for all outstanding warrants.
(e) Stock Options
In 1990 and 1995, the Company established the 1990 Stock Option Plan and
the 1995 Stock Option Plan, respectively, which provide for the grant of
incentive stock options and nonqualified stock options. Options granted under
these plans vest over various periods and expire no later than 10 years from the
date of grant. However, under the 1990 Option Plan, in the event of a change in
control, as defined in the 1990 Plan, the exercise dates of all options then
outstanding shall be accelerated in full and any restrictions on exercising
outstanding options issued pursuant to the 1990 Option Plan shall terminate. In
October 1995, the Company terminated the issuance of additional options under
the 1990 Option Plan. As of December 31, 2000, options to purchase a total of
344,880 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% and
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 options which
in the case of incentive stock options may not exceed 10 years. As of December
31, 2000, options to purchase a total of 608,515 shares of common stock remained
outstanding under the 1995 Option Plan.
In October 1995, the Company adopted the 1995 Director Stock Option Plan. A
total of 400,000 shares of common stock may be issued upon the exercise of
options granted under the Director Plan. Under the terms of the Director Plan,
as amended by shareholders at the 1999 Annual Meeting, options to purchase 5,000
shares of common stock are granted to each eligible director on May 1 of each
year and upon appointment to the Board. All options will vest on the first
anniversary of the date of grant or, in the case of annual options, on
F-16
54
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
April 30 of each year with respect to options granted in the previous year. As
of December 31, 2000, options to purchase a total of 120,000 shares of common
stock remained outstanding under the Director Plan.
In May 1997, the Company adopted the 1997 Stock Option Plan and has
reserved and may issue up to 8,500,000 shares for the grant of incentive and
nonqualified stock options. The maximum number of shares with respect to which
options may be granted to any employee under the 1997 Option Plan shall not
exceed 500,000 shares of common stock during any calendar year. The Compensation
Committee of the Board of Directors has the authority to select the employees to
whom options are granted and determine the terms of each option, including (i)
the number of shares of common stock subject to the option; (ii) when the option
becomes exercisable; (iii) the option exercise price, which in the case of
incentive stock options must be at least 100% (110% in the case of incentive
stock) of the fair market value of the common stock as of the date of grant and
(iv) the duration of the option, which in the case of incentive stock options
may not exceed 10 years. As of December 31, 2000, options to purchase a total of
4,328,438 shares of common stock remained outstanding under the 1997 Option
Plan.
As of December 31, 2000, 4,223,807 options remain available for grant under
the 1995 Option Plan, the Director Plan and the 1997 Option Plan.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options or warrants granted to employees to be included in the statement of
operations or disclosed in the notes to financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees under APB Opinion No. 25 and elect the disclosure-only alternative
under SFAS No. 123.
Stock option activity for the three years ended December 31, 2000, is
summarized as follows:
WEIGHTED
NUMBER EXERCISE PRICE AVERAGE PRICE
OF SHARES PER SHARE PER SHARE
---------- -------------- -------------
Outstanding, December 31, 1997............. 1,190,497 $1.25 - $65.60 $36.18
Granted.................................. 2,513,000 2.00 - 3.13 2.00
Terminated............................... (242,765) 2.50 - 57.85 37.79
---------- -------------- ------
Outstanding, December 31, 1998............. 3,460,732 1.25 - 65.60 11.25
Granted.................................. 7,640,650 0.44 - 2.00 0.85
Terminated............................... (5,711,832) 0.44 - 65.60 7.53
---------- -------------- ------
Outstanding, December 31, 1999............. 5,389,550 0.50 - $ 2.00 0.50
Granted.................................. 1,351,026 0.50 - 3.75 1.18
Exercised................................ (335,240) 0.50 0.50
Terminated............................... (1,003,503) 0.50 - 57.85 0.82
---------- -------------- ------
Outstanding, December 31, 2000............. 5,401,833 $0.50 - $ 2.00 $ 0.67
========== ============== ======
Exercisable, December 31, 1998............. 1,650,021 $1.25 - $65.60 $17.13
========== ============== ======
Exercisable, December 31, 1999............. 2,772,099 $0.50 - $ 2.00 $ 0.50
========== ============== ======
Exercisable, December 31, 2000............. 3,980,476 $0.50 - $ 1.25 $ 0.60
========== ============== ======
F-17
55
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE CONTRACTUAL LIFE PRICE PRICE
PRICES NUMBER (YEARS) PER SHARE NUMBER PER SHARE
- -------- --------- ---------------- --------- --------- ---------
0$.50.. 4,111,833 7.25 $0.50 3,340,080 $0.50
1.06.. 500,000 9.00 1.06 434,715 1.06
1.25.. 750,000 9.45 1.25 205,681 1.25
1.75.. 5,000 9.36 1.75 -- --
2.00.. 35,000 9.33 2.00 -- --
--------- ---- ----- --------- -----
5,401,833 7.74 $0.67 3,980,476 $0.60
========= ==== ===== ========= =====
In accordance with 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 fair value of nonemployee
options as they vest using the Black-Scholes option pricing model. The Company
has recorded compensation expense of $246,444, $231,744 and $217,701 in 1998,
1999 and 2000, respectively, related to 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, 2000 are as follows:
1998 1999 2000
-------- -------- --------
Average risk free interest rate...................... 5.15% 6.12% 6.39%
Expected dividend yield.............................. -- -- --
Expected lives....................................... 6 years 6 years 6 years
Expected volatility.................................. 60% 60% 90%
Weighted Average Grant Date fair value of options
granted during the period (per share).............. $ 0.93 $ 0.37 $ 0.98
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The pro forma effect of applying SFAS No. 123 for the three years ended
December 31, 2000 would be as follows:
1998 1999 2000
------------ ------------ -----------
Net loss applicable to common stockholders, as
reported........................................ $(19,792,736) $(14,735,293) $(7,009,916)
============ ============ ===========
Pro forma net loss applicable to common
stockholders, as adjusted for the effect of
applying SFAS No. 123........................... $(23,131,304) $(18,647,864) $(8,389,005)
============ ============ ===========
Basic and Diluted net loss per common shares --
As reported..................................... $ (1.67) $ (0.93) $ (0.40)
============ ============ ===========
Pro forma....................................... $ (1.95) $ (1.18) $ (0.48)
============ ============ ===========
F-18
56
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(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 $0.50 per
share, which represented the market value on the date of the repricing. These
options will be subject to variable plan accounting (see Note 2(m)), as defined
in FIN 44. The repriced options have been reflected as grants and cancellations
in the stock option activity for the year ended December 31, 1999. FIN 44 became
effective on July 1, 2000. The Company is following the provisions of FIN 44 and
will remeasure the intrinsic value of the repriced options, through the earlier
of the date of exercise, cancellation or expiration, at each reporting date. As
of December 31, 2000, the Company has not recognized any compensation expense to
date related to the repriced options, as the fair market value of the Company's
common stock at December 31, 2000, was below the exercise price of the repriced
option.
(g) Employee Stock Purchase Plan
In October 1995, the Company adopted the 1995 Employee Stock 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 Stock 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 Stock
Purchase Plan, the option price is an amount equal to 85% of the fair market
value per share of the common stock on either the first day or the last day of
the Offering Period, whichever is lower. In no event may an employee purchase in
any one Offering Period a number of shares that is more than 15% of the
employee's annualized base pay divided by 85% of the market value of a share of
common stock on the commencement date of the Offering Period. The Compensation
Committee may, in its discretion, choose an Offering Period of 12 months or less
for each of the Offerings and choose a different Offering Period for each
Offering. No shares have been issued under the Plan.
(h) Preferred Stock
The restated Certificate of Incorporation of the Company permits its Board
of Directors to issue up to 5,000,000 shares of preferred stock, par value $0.01
per share, in one or more series, to designate the number of shares constituting
such series, and fix by resolution, the powers, privileges, preferences and
relative, optional or special rights thereof, including liquidation preferences
and dividends, and conversion and redemption rights of each such series. During
1998, the Company designated 1,500,000 shares as Series A convertible preferred
stock.
(i) Series A Convertible Preferred Stock
The rights and preferences of the Series A convertible preferred stock are
as follows:
Dividends
The holders of the Series A convertible preferred stock, as of March 15 or
September 15, are entitled to receive dividends payable at the rate of 6.5% per
annum, payable semi-annually in arrears. Such dividends shall accrue from the
date of issuance of such share and shall be paid semi-annually on April 1 and
October 1 of each year. Such dividends shall be paid, at the election of the
Company, either in cash or additional duly
F-19
57
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
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 2000,
the Company recorded a total accretion of $4,087,317 for the dividend on Series
A preferred stock and issued 41,363 shares of Series A convertible preferred
stock as a dividend.
Liquidation
In the event of a liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after payment or provision for payment of
debts and other liabilities of the Company, the holder of the Series A
convertible preferred stock then outstanding shall be entitled to be paid out of
the assets of the Company available for distribution to its stockholders, an
amount equal to $100.00 per share plus all accrued but unpaid dividends. If the
assets to be distributed to the holders of the Series A convertible preferred
stock shall be insufficient to permit the payment of the full preferential
amounts, then the assets of the Company shall be distributed ratably to the
holders of the Series A convertible preferred stock on the basis of the number
of shares of Series A convertible preferred stock held. All shares of Series A
convertible preferred stock shall rank as to payment upon the occurrence of any
liquidation event senior to the common stock.
Conversion
Shares of Series A convertible preferred stock are convertible, in whole or
in part, at the option of the holder into fully paid and nonassessable shares of
common stock at $4.25 per share, subject to adjustment as defined.
During 2000, holders of 77,049 shares of Series A convertible preferred
stock elected to convert their shares into 1,822,232 shares of the Company's
common stock.
During 1999, holders of 21,076 shares of Series A convertible preferred
stock elected to convert their shares into 495,897 shares of the Company's
common stock.
Mandatory Conversion
The Company at its option, may cause the Series A convertible preferred
stock to be converted in whole or in part, on a pro rata basis, into fully paid
and nonassessable shares of common stock using a conversion price equal to $4.00
if the closing bid price, as defined, of the common stock shall have equaled or
exceeded 250% of the conversion price, $4.25, subject to adjustment as defined,
for at least 20 trading days in any 30 consecutive trading day period ending
three days prior to the date of notice of conversion, such event, the "Market
Trigger".
At any time after April 1, 2000, the Company, at its option, may redeem the
Series A convertible preferred stock for cash equal to $100.00 per share plus
all accrued and unpaid dividends at such time, if the Market Trigger has
occurred in the period ending three days prior to the date of notice of
redemption.
(10) COMMITMENTS AND CONTINGENCIES
(a) Facilities
The Company leases its facility on Vassar Street in Cambridge,
Massachusetts, under a lease that has a 10-year term, which commenced on May 1,
1997.
The Company vacated its Milford, Massachusetts's facility in September
2000, following the HSP Sale (see Note 14) and moved its corporate facilities to
the Vassar Street facility.
F-20
58
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Future approximate minimum rent payments as of December 31, 2000, under
existing lease agreements through 2007, are as follows:
DECEMBER 31, AMOUNT
------------ ----------
2001..................................................... $ 637,000
2002..................................................... 620,000
2003..................................................... 611,000
2004..................................................... 611,000
2005..................................................... 611,000
Thereafter............................................... 815,000
----------
$3,905,000
==========
During 1998, 1999 and 2000, facility rent expense for continuing operations
net of sublease revenue was approximately $1,363,000, $67,000 and $246,000,
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 S.A., formerly Commerce Consult S.A., and Pillar
Investment Limited, formerly Ash Properties Limited. During 1998, 1999 and 2000,
the Company recorded expenses of $1,300,000, $336,000 and $74,000, respectively,
under these agreements with related parties.
(c) Employment Agreements
The Company has entered into employment agreements with certain of its
executive officers that 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.
(d) 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.
(11) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes. Accordingly,
a deferred tax asset or liability is determined based on the difference between
the financial statement and tax basis of assets and liabilities, as measured by
the enacted tax rates expected to be in effect when these differences reverse.
At December 31, 2000, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $235,569,000 and
$4,236,000, respectively, available to reduce federal taxable income and federal
income taxes, respectively. The Tax Reform Act of 1986, 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 Tax Reform Act of 1986, which as of
December 31, 2000, 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
F-21
59
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
periods may place additional limits on the Company's ability to utilize net
operating loss and tax credit carry forwards.
The federal net operating loss carryforwards and tax credit carryforwards
expire approximately as follows:
NET
OPERATING
LOSS TAX CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS
--------------- ------------- -------------
December 31,
2005........................................... $ 666,000 $ 15,000
2006........................................... 3,040,000 88,000
2007........................................... 7,897,000 278,000
2008........................................... 18,300,000 627,000
2009........................................... 25,670,000 689,000
2010........................................... 36,134,000 496,000
2011........................................... 44,947,000 493,000
2012........................................... 60,087,000 750,000
2018........................................... 21,366,000 500,000
2019........................................... 10,637,000 250,000
2020........................................... 6,825,000 50,000
------------ ----------
$235,569,000 $4,236,000
============ ==========
As of December 31, 1999 and 2000, the components of the deferred tax assets
are approximately as follows:
1999 2000
------------ ------------
Operating loss carryforwards.................... $ 91,498,000 $ 94,177,000
Temporary differences........................... 3,378,000 1,085,000
Tax credit carryforwards........................ 4,186,000 4,186,000
------------ ------------
99,062,000 99,448,000
Valuation allowance............................. (99,062,000) (99,448,000)
------------ ------------
$ -- $ --
============ ============
(12) EMPLOYEE BENEFIT PLAN
On October 10, 1991, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The plan allows employees to make
contributions up to a specified percentage of their compensation. Under the
plan, the Company may, but is not obligated to, match a portion of the
employees' contributions up to a defined maximum. The Company is currently
matching 50% of employee contributions to the plan, up to 6% of the employee's
annual base salary and charged to continuing operations approximately $166,000,
$54,000 and $47,000 during 1998, 1999 and 2000, respectively.
F-22
60
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(13) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the following periods
presented are as follows:
DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ---------- ----------
Cash paid during the period for interest.............. $ 1,666,127 $ 753,620 $ 641,132
=========== ========== ==========
Conversion of preferred stock into common stock....... $ -- $ 496 $ 1,821
=========== ========== ==========
Conversion of line of credit into common stock........ $ -- $ -- $ 231,167
=========== ========== ==========
Deferred compensation related to grants of stock
options to nonemployees, net of terminations........ $ 109,734 $ -- $ (50,781)
=========== ========== ==========
Forgiveness of note receivable........................ $ -- $ -- $ 270,050
=========== ========== ==========
Issuance of Series A convertible preferred stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable and accrued
interest............................................ $51,055,850 $ -- $ --
=========== ========== ==========
Accretion of Series A convertible preferred stock
dividends........................................... $ 2,689,048 $4,232,251 $4,087,317
=========== ========== ==========
Issuance of common stock and attached warrants in
exchange for conversion of convertible promissory
notes payable....................................... $ 4,800,000 $ -- $ --
=========== ========== ==========
Issuance of common stock and attached warrants in
exchange for conversion of accounts payable and
other obligations................................... $ 5,934,558 $ -- $ --
=========== ========== ==========
Issuance of common stock in lieu of services.......... $ -- $1,000,000 $ --
=========== ========== ==========
(14) HSP SALE
On September 21, 2000, the Company completed the sale of its Hybridon
Specialty Products business, which manufactures, markets and sells
oligonucleotides, to a subsidiary of Avecia, Inc. of Manchester, United Kingdom,
Avecia Biotechnology, for up to $15.0 million. The Company recorded a gain of
approximately $6.3 million on the HSP sale, comprised of net proceeds of
approximately $12.0 million less transaction and other costs of approximately
$1.2 million and the book value of the net assets sold. The remaining $3.0
million is subject to performance under the supply agreement described below and
will be recorded as a gain, net of payments for minimum purchases of product,
when earned and received. The transaction costs consist principally of legal and
accounting fees, severance arrangements with certain employees, and other
estimated costs associated with consummating the sale. As a condition of the HSP
sale requested by Avecia, the Company held a special meeting of shareholders on
September 12, 2000, and obtained the approval of the HSP sale by the common and
preferred stock and the debt holders.
The gain on the Asset Sale is computed as follows:
Proceeds........................................... $12,000,000
Property and equipment sold, net................... $4,894,887
Security deposit................................... 90,000
----------
Net book value of assets sold...................... 4,984,887
Current liabilities assumed by the buyer........... (88,969)
Long term liabilities assumed by the buyer......... (324,555)
----------
Net assets sold.................................... (4,571,363)
Transaction and other costs........................ (1,157,578)
-----------
Gain on sale.................................. $ 6,271,059
===========
F-23
61
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
The consolidated financial statements of the Company have been restated to
reflect the financial results of the Hybridon Specialty Products business as a
discontinued operation for the years ended December 31, 1998, 1999, and 2000.
Reported revenues, expenses and cash flows exclude the operating results of the
discontinued operations. Revenues from discontinued operations for the years
ended December 31, 1998, 1999 and 2000 are approximately $1,623,000, $5,821,000
and $2,950,000, respectively. The net income from discontinued operations, as
presented on the consolidated statement of operations for the year ended
December 31, 2000, includes the gain on sale as calculated above of $6.3 million
as well as the operating loss from discontinued operations for the year ended
December 31, 2000, totaling $0.8 million. For all other years presented, the net
loss relates solely to the operating results of the Hybridon Specialty Products
business.
As part of this transaction, the Company entered into a supply agreement
whereby it may have an obligation to purchase products from Avecia
Biotechnology. To the extent that Avecia Biotechnology's third-party sales of
HSP product exceed certain goals, the Company does not have any such purchase
commitment. If Avecia Biotechnology's third party sales do not meet such goals,
the Company must make purchases sufficient to cover the shortfall, subject to an
agreed upon formula. The Company's commitment is on a "take-or-pay" basis for
the fourth quarter of 2000 and each quarter of 2001. Purchases by OriGenix and
MethylGene are applied against the Company's commitment. Any unpaid amounts
under this agreement will reduce the $3.0 million contingent payment to be
received in September 2001. The balance of the term of this agreement (through
March 31, 2003) does not require minimum purchases.
To the extent that the Company purchases products under this agreement for
use in the normal course of business, the Company will record in a manner
consistent with its accounting treatment for research materials (expense as
incurred). To the extent that the Company makes payments for a purchasing
shortfall where it has no use for the related products, the Company will record
such amount as an offset against the gain to be recorded in September 2001 upon
receipt of the additional $3.0 million payment. In December 2000, the Company
accrued approximately $337,000 for its purchasing shortfall. This amount is
included in receivables and accounts payable on the accompanying balance sheet.
(15) SUBSEQUENT EVENTS
(a) Investment in MethylGene, Inc.
On March 30, 2001, the Company signed a binding agreement with unrelated
institutional investors, providing for the sale of 60% of the Company's holdings
of shares of Class A and Class B stock of MethylGene. The agreement covers a
total of 2,350,000 such shares and provides a purchase price of Canadian $2.85
(approximately $1.81 US Dollars as of March 30, 2001) per share or approximately
US $4.3 million in the aggregate. Closing of the transaction is subject to the
satisfaction of various conditions, including waivers by MethylGene's
shareholders of rights of first refusal which have now been executed by
MethyGene's shareholders and received by the Company. The Company has given an
option, exercisable at any time prior to April 30, 2001, to MethylGene and its
shareholders to purchase the balance of its holdings of MethylGene stock at
Canadian $2.85 per share. If all of these shares were purchased, the Company
would receive an additional sum of approximately US $2.9 million.
The Company's holdings of MethylGene shares were subject to the security
interest of its 8% Convertible Notes due 2002 and its $6.0 million Notes due
2003. (See Note 15(b) and (c))
(b) 8% Convertible Notes Payable
On March 5, 2001, the Company made an offer to the holders of its 8%
Convertible Notes due 2002 to exchange their notes for one share of a
newly-designated class of Series B Convertible Preferred Stock (par value $.01
per share) for each $100 in principal amount of notes tendered. At the offer's
expiration date of
F-24
62
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
March 30, 2001, holders of $6.9 million out of a total of $7.5 million in
principal amount of notes outstanding accepted the exchange offer which has been
declared effective. Shares of the Series B Convertible Preferred Stock have a
face value of $100 per share and are senior in right of payment in regards to
liquidation distributions and dividends to the Company's Series A Convertible
Preferred Stock and common stock. Such shares will accrue dividends at the rate
of 8% per annum which are payable in kind or in cash at the Company's option.
Shares of Series B Convertible Preferred Stock are convertible into shares of
common stock at an initial rate of one share of Series B Convertible Preferred
Stock for 200 shares of common stock.
For interest calculation purposes, 8% notes submitted for exchange were
deemed exchanged as of March 5, 2001. Under the offer, all accrued but unpaid
interest on the exchanged notes will be paid through March 5, 2001 by issuing
additional notes in an aggregate principal amount equal to the amount of accrued
but unpaid interest. These additional notes were tendered for exchange by the
noteholders participating in the offer. Dividends on shares of Series B
Convertible Preferred Stock will begin to accrue on March 6, 2001.
As a result of the exchange offer, the Company has become entitled to the
unrestricted use of $5.0 million, which were proceeds from the sale of its HSP
business. These proceeds had been pledged to secure the Company's obligations
under the 8% notes and the $6.0 million notes.
(c) Note Payable
On March 28, 2001, the Company entered into an agreement with the holders
of its $6.0 million of notes due 2003 whereby it would pay, out of the proceeds
of the sale of its MethylGene shares, (Note 15(a)) $1.8 million to the holders
in partial satisfaction of the notes. In addition, the Company agreed that it
would deposit up to another $1.2 million in a money market account for the
purpose of securing payment of the balance of the outstanding notes and the sum
of $811,000 to secure the payment of the balance remaining on notes held by a
particular lender group. This arrangement was made to encourage the holders of
these notes to release their security interest in the MethylGene shares. If more
than 60% of its holdings of MethylGene shares are sold, Hybridon will pay off
additional notes up to a total of $3,000,000 and the $1,200,000 of money market
funds securing the notes would decrease proportionately.
F-25