UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19635
GENTA INCORPORATED
(Exact name of Registrant as specified in its certificate of incorporation)
Delaware 33-0326866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3550 General Atomics Court
San Diego, California 92121
(Address of principal executive offices) (Zip Code)
(619) 455-2700
(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
Preferred Stock Purchase Rights,
Par Value $.001
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $16.7 million as of March 1, 1997. For
purposes of determining this number, 1.8 million shares of common stock held by
affiliates are excluded.
As of March 1, 1997, the registrant had 39,991,626 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Designated portions of Registrant's Definitive Proxy Statement to be furnished
for the Annual Meeting of the Stockholders to be held on April 4, 1997 are
incorporated by reference in Part III of this Form 10-K.
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Part I
Item 1. Business
Overview
Genta Incorporated ("Genta" or the "Company"), incorporated under the
laws of the State of Delaware on February 4, 1988, is an emerging
biopharmaceutical company engaged in the development of a pipeline of
pharmaceutical products. Genta's multi-faceted approach incorporates a product
development portfolio with balanced technical risk, a novel drug delivery
technology and a United States/European business base. The near to mid-term
segment of the product pipeline consists of oral controlled-release drugs being
developed by the Company's 50%-owned drug delivery joint venture with Jagotec AG
("Jagotec"), Genta Jago Technologies B.V. ("Genta Jago"). Using Jagotec's
patented GEOMATRIX(R) drug delivery technology ("GEOMATRIX"), Genta Jago is
employing a two-pronged commercialization strategy: the development of generic
versions of successful brand-name controlled-release drugs and the development
of controlled-release formulations of drugs currently marketed in only immediate
release form. The Company's longer-term research efforts are focused on the
development of proprietary Anticode(TM) oligonucleotide ("Anticode")
pharmaceuticals intended to block or regulate the production of disease-related
proteins at the genetic level. The Company's Anticode programs are focused
primarily in the area of cancer. In late 1995, a phase I/IIa clinical trial was
initiated in the United Kingdom using Genta's Anticode drug ("G3139") in
non-Hodgkin's lymphoma patients for whom prior therapies have failed. The
clinical trial is being conducted in collaboration with the Royal Marsden NHS
Trust and the Institute for Cancer Research. In late 1996, an Investigational
New Drug application ("IND") for the G3139 clinical program was filed in the
United States and allowed to proceed by the United States Food and Drug
Administration ("FDA"). The Company also manufactures and markets specialty
biochemicals and intermediate products to the in vitro diagnostic and
pharmaceutical industries through its manufacturing subsidiary, JBL Scientific,
Inc. ("JBL"), a California corporation acquired by the Company in February,
1991.
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. The
Company intends that all forward-looking statements be subject to the safeharbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the Company'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 the actual results of the
Company to differ materially from any future results expressed or implied by
such forward-looking statements. Examples of such risks and uncertainties
include, but are not limited to: the obtaining of sufficient financing to
maintain the Company's planned operations; the timely development, receipt of
necessary regulatory approvals and acceptance of new products; the successful
application of the Company's technology to produce new products; the obtaining
of proprietary protection for any such technology and products; the impact of
competitive products and pricing and reimbursement policies; the changing of
market conditions and the other risks detailed in the Risk Factors section of
this Annual Report on Form 10-K and elsewhere herein. The Company does not
undertake to update any forward-looking statements.
See "Risk Factors" for a discussion of certain risks and uncertainties
applicable to the Company and its stockholders, including the Company's need for
additional funds to sustain its operations in 1997 and thereafter, as well as
the threat of a delisting of the Company's common stock from the Nasdaq SmallCap
Market.
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Oral Controlled-Release Drugs
Formulations of drugs using the GEOMATRIX technology are designed to
swell and gel when exposed to gastrointestinal fluids. This swelling and gelling
is designed to allow the active drug component to diffuse from the tablet into
the gastrointestinal fluids, gradually over a period of up to 24 hours. The
Company believes that the GEOMATRIX technology may have other benefits which,
collectively, may distinguish it from competing controlled-release technologies.
The Company believes GEOMATRIX formulations can control drug release and
potentially modulate pharmacokinetic profiles to produce a variety of desired
clinical effects. For example, the GEOMATRIX technology may be used to formulate
tablets with a rapid or a delayed therapeutic effect by varying the release
characteristics of the drug from the tablet. The GEOMATRIX technology may also
be used to formulate tablets that release two drugs at the same or different
rates, or tablets that release a drug in several pulses after administration.
Genta Jago is using the GEOMATRIX drug delivery technology to develop
oral controlled-release formulations for a broad range of presently marketed
drugs which have lost, or will in the near to mid-term lose, patent protection
and/or marketing exclusivity. Certain of these presently marketed drugs are
already available in a controlled-release format, while others are only
available in an immediate release format that requires dosing several times
daily. In the case of drugs already available in a controlled-release format,
Genta Jago is seeking to develop bioequivalent products which would be
therapeutic substitutes for the branded products. In the case of currently
marketed products that are only available in immediate release form requiring
multiple daily dosing, Genta Jago is seeking to develop once or twice-daily
controlled-release formulations. The potential benefits of Genta Jago's oral
controlled-release formulations may include improved compliance, greater
efficacy and reduced side effects as a result of a more constant drug plasma
concentration than that associated with immediate release drugs administered
several times daily.
Genta Jago's strategy is to commercialize its GEOMATRIX
controlled-release products worldwide primarily by forming alliances with major
pharmaceutical companies. Genta Jago has established three such collaborations.
See "Business -- Collaborative and Licensing Agreements" below.
Genta Jago currently has eight products in various stages of
development that are intended to be bioequivalent generic versions of
brand-name, controlled-release drugs currently marketed by others. Four of these
products, nifedipine (Procardia XL(R)), ketoprofen (Oruvail(R)),
carbidopa/levodopa (Sinemet(R)CR), and naproxen (Naprelan(R)) are currently
undergoing manufacturing scale-up after completion of formulations development
and pilot human pharmacokinetic studies. During the manufacturing scale-up phase
of development, Genta Jago and its collaborators are seeking to proceed from the
production of small-scale research quantities to the production of larger-scale
quantities necessary for commercial scale manufacturing. The scale-up has not
yet been successfully completed for these products. Assuming successful
completion of manufacturing scale-up, pivotal bioequivalency studies are
scheduled to begin for these products in 1997. Genta Jago believes that if such
bioequivalency studies are successfully completed, Abbreviated New Drug
Applications (each an "ANDA") may be filed with the FDA for two of its products
in 1997. In addition, potentially bioequivalent versions of two other
products--Voltaren-XR(R) (diclofenac) and Covera-HS(R) (verapamil)--have
completed formulations development and pilot pharmacokinetic studies. Genta Jago
intends to proceed with manufacturing scale-up on these two products during
1997.
Genta Jago has also completed initial formulations development and
pilot human pharmacokinetic studies for GEOMATRIX controlled-release
formulations of cefaclor (Ceclor CD(R)) and metoprolol tartrate and formulations
development is ongoing for additional products including acyclovir (Zovirax(R)).
Genta Jago continues to seek collaborative agreements for these products in
order to finance the manufacturing scale-up and required bioequivalency or
clinical studies. In addition to these products currently in development, Genta
Jago maintains the rights to apply the GEOMATRIX technology to the development
of up to approximately 50 additional drugs. There can be no assurance that any
product will be successfully developed or receive the necessary regulatory
approvals.
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Anticode Programs
Anticode oligonucleotides represent a modern approach to drug
development based upon genetic control of disease. Many human diseases have a
genetic origins that involve either the expression of a harmful foreign gene or
the aberrant expression of a normal or mutated human gene. Anticode
oligonucleotides are short strands of synthetic nucleic acids designed to bind
to ("hybridize" with) specific sequences of disease-related RNA or DNA, thereby
blocking or controlling production of disease-related proteins. The Company
believes that, because of their selective binding properties, Anticode
oligonucleotides will not interfere with the function of normal cells, and
therefore, will elicit significantly fewer side effects than traditional drugs.
Anticode drugs may attack a disease at one of two levels. One approach is to
prevent the synthesis of essential disease-related proteins. In this approach,
certain oligonucleotides are used to interrupt the processing of, or selectively
to destroy, individual messenger RNA (mRNA) sequences, which leads to the
down-regulation (lowering of levels) of specific proteins and thereby
effectively eliminates the disease. This is referred to as the "antisense"
mechanism of action. A second therapeutic opportunity is to prevent
transcription of disease-causing DNA into the mRNA copy of the gene. This is
referred to as the "triple-strand to DNA" mechanism of activity.
Genta has focused its Anticode research on oligonucleotides with
methylphosphonate and phosphorothioate backbones. The Company has exclusively
licensed patents from Dr. Paul O. P. Ts'o, Dr. Paul Miller and Johns Hopkins
University ("Johns Hopkins") covering methylphosphonate technology. Genta also
has obtained certain rights to phosphorothioate oligonucleotide constructions.
Genta's scientists have improved these technologies by introducing
chirally-enriched or chirally-pure oligonucleotides. In preclinical studies,
these improved oligonucleotides effectively turn off the action of targeted mRNA
sequences inside cells. Intravenous administration of these oligonucleotides to
certain animals demonstrates that these compounds remain stable in the
circulatory system and are eventually excreted intact in the urine. New
proprietary delivery systems have also been developed to increase intracellular
concentration of oligonucleotides and to lower the drug dosage for potential
therapeutics. Management believes that the Company has the ability to acquire or
produce quantities of oligonucleotides sufficient to support its present needs
for research and its projected needs for initial clinical development programs.
The Company's Anticode research and development efforts are currently
focused primarily on its cancer, program as described below. Extensive
additional development will be required, and there can be no assurance that any
product will be successfully developed or will receive the necessary regulatory
approvals.
BCL2 Gene Target
The BCL2 gene is a proto-oncogene and a major inhibitor of apoptosis
(programmed cell death) of cancerous cells. The protein produced by this gene
has two known critical functions in the progression of cancer: it makes cancer
cells immortal, creating a survival advantage of malignant over normal cells;
and confers resistance to radiation and chemotherapy, rendering those treatments
ineffective in the late stages of many types of cancer. Genta's lead anti-BCL2
molecule, G3139, is designed to inactivate the RNA that produces the BCL2
protein product, thereby preventing cellular production of the protein. High
levels of BCL2 are associated with a poor clinical prognosis in many solid tumor
and hematological malignancies such as lymphoma, leukemia, melanoma, multiple
myeloma and prostate and breast cancers. The Company believes that its Anticode
strategy against the BCL2 gene has the potential to represent a significant
therapeutic opportunity in many of these cancers.
In preclinical studies conducted by Dr. Finbarr Cotter, at the
Institute for Child Health in London, an anti- BCL2 oligonucleotide was shown to
cure lymphoma-like disease induced by the injection of human B-cell lymphoma
cells in immunodeficient mice. In addition, in a variety of other animal
studies, anti-BCL2 Anticode oligonucleotides were found to inhibit the growth of
human melanoma, colon and human breast cancer tumors in immunodeficient mice.
G3139 has demonstrated efficacy when administered as a single agent.
In July 1996, the National Cancer Institute ("NCI") agreed to fund and
conduct preclinical studies of G3139. Pending the outcome of these ongoing
preclinical studies, NCI intends to sponsor Phase I human trials evaluating
G3139 against a number of solid tumor malignancies. The Company will collaborate
with NCI on the design of such clinical studies and the selection of tumor
targets. The primary goal of the trials will be to determine
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the maximum tolerated dose of G3139, although any preliminary antitumor activity
will also be assessed. Tumors under consideration for clinical study include
malignant melanoma, breast, prostate and colorectal cancers. NCI would cover the
costs of running both preclinical and clinical studies. Genta would be
responsible for supplying NCI with necessary quantities of G3139 to carry out
this work.
In late 1995, a Phase I/IIa clinical trial was initiated in the United
Kingdom using Genta's anti-BCL2 Anticode oligonucleotides, G3139, in
non-Hodgkin's lymphoma patients for whom prior therapies have failed. The
clinical trial is being conducted in collaboration with the Royal Marsden NHS
Trust and the Institute for Cancer Research under the direction of Dr. David
Cunningham. The principal aim of this Phase I/IIa study is to define the maximum
tolerated dose of G3139. Secondary objectives include measurement of clinical
and biochemical disease parameters. To date, G3139 has been administered to 14
patients with relapsed and poor prognosis disease. Other than usually mild
topical skin irritation in most of the patients, no serious, clearly
drug-attributable or dose-limiting adverse effects have been seen, so far. The
doses have been escalated six times, and escalations continue. Some of the
patients have demonstrated encouraging signs of potential drug activity. The
responses included one patient in whom cancer mass was reduced and one who
developed a complete radiological tumor response for over 38 weeks in duration.
These results have been considered very encouraging by several prominent
oncologists and accepted for journal publications and presentation at peer
meetings, including that of the American Society of Clinical Oncologists.
Late in 1996, Genta's IND was filed in the United States and the FDA
has allowed the program to proceed. Genta is working with several prominent
United States and European clinical experts to devise the appropriate clinical
strategy for subsequent trials. Planning includes continuation of Phase I/IIa
clinical trials in non-Hodgkin's lymphoma, initiation of studies in different
BCL2 positive solid tumors, including those in the prostate, reported to express
BCL2 in the vast majority of patients. These studies will also examine both
subcutaneous and intravenous administration. Extensive additional clinical
studies are required, and there can be no assurance that the Company will secure
the funding necessary to conduct this development or that any product will be
successfully developed or receive the necessary regulatory approvals.
In September 1996, the Company received a notice of an allowance from
the United States Patent and Trademark Office for patent claims covering
antisense compounds targeted against BCL2. Those claims covering compositions of
matter give Genta exclusive rights to target sequences of the BCL2 gene. The
patent claims cover the Company's proprietary Anticode molecules which target
BCL2, including its lead clinical candidate, G3139. Other related patents and
claims in the United States and Europe are still pending.
Focal Adhesion Kinase (FAK) Gene Target
FAK protein is involved in the regulation of adhesion-dependent growth
and motility of cells. In a variety of cancers - human epithelial and
mesenchymal tumors, such as those implicated in melanoma, lymphoma and multiple
myeloma - the manufacture of FAK protein ("FAK expression") is highly active.
Moreover, increased FAK expression correlates with increased invasiveness and
increased ability of cancer to metastasize (spread of cancer through body). In
collaborative preclinical experiments with Dr. William G. Cance, at the
University of North Carolina, Genta's Anticode oligonucleotides against FAK were
shown to inhibit the growth of a primary (the site at which the cancer is
believed to have begun) tumor and to virtually eliminate metastases in human
melanoma/immunocompromised mice xenograft models. Combined with the observation
that anti-FAK oligonucleotides appear to show few adverse effects against normal
tissues, such results indicate that the FAK target may represent a promising
therapeutic opportunity for both the treatment of primary disease and the
prevention of metastatic disease.
In an effort to focus its research and development efforts on areas
which provide the most significant commercial opportunities, the Company
continually evaluates its ongoing programs in light of the latest market
information and conditions, availability of third party funding, technological
advances, and other factors. As a result of such evaluation, the Company's
product development plans have changed from time to time, and the Company
anticipates that they will continue to do so in the future. The Company recorded
research and development expenses of $5.8 million, $11.3 million and $13.5
million during 1996, 1995, and 1994, respectively, of which zero,
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approximately $1.1 million and $3.1 million, respectively, were funded pursuant
to collaborative research and development agreements.
In 1996, the Company terminated those employees conducting
pre-clinical research on the Company's antisense projects.
Topical Dermatology Products
During 1996, the Company sold its rights relating to research and
development activities regarding two licensed topical dermatology products for
approximately $373,000. The Company does not presently intend to conduct further
activities in this area.
Manufacturing
In 1996, Genta continued to advance its technology for large-scale
production of its Anticode oligonucleotides and has also developed a high degree
of self-sufficiency for large-scale production of synthon raw materials for its
Anticode oligonucleotides. The Company also filed a series of key patent
applications in 1996 covering the improved synthesis of dimers essential to the
manufacture of its Anticode molecules.
Genta obtained its manufacturing capabilities in early 1991 through the
acquisition of JBL. JBL is a manufacturer of high-quality specialty biochemicals
and intermediate products for the pharmaceutical and in vitro diagnostic
industries. A number of Fortune 500 companies utilize JBL products as raw
material in the production of a final product. The manufacturing facilities at
JBL have not been formally inspected by the FDA for compliance with requirements
for Good Manufacturing Practices ("GMP"). The Company is continuing to develop
procedures, documentation and facilities for the production of Anticode
oligonucleotides which it believes will adequately comply with the necessary GMP
requirements. Failure to establish compliance with GMP to the satisfaction of
the FDA can result in delays in, or prohibition from, initiating clinical trials
or commercial marketing of a product.
The manufacture of all of the Company's and Genta Jago's products will
be subject to GMP requirements prescribed by the FDA or other standards
prescribed by the appropriate regulatory agency in the country of use. There can
be no assurance that the Company or Genta Jago will be able to manufacture
products or have products manufactured for either of them in a timely fashion at
acceptable quality and prices, that they or third party manufacturers can comply
with GMP, or that they or third party manufacturers will be able to manufacture
an adequate supply of product.
Genta Europe
Genta Europe has received $1.1 million of funding from a French
governmental agency, L'Agence National de Valorisation de la Recherche
("ANVAR"), towards research and development activities. Genta Europe is
currently in default under the agreement with ANVAR, and ANVAR has the right to
demand repayment of such funds. However, management believes that this matter
will be resolved in a mutually satisfactory manner.
Sales and Marketing
Genta Jago has secured collaborative agreements with three entities for
the development and commercialization of selected controlled-release
pharmaceuticals. Genta Jago's collaborative agreements generally provide the
collaborative partner exclusive rights to market and distribute the products in
exchange for royalty payments to Genta Jago on product sales. Genta Jago's goal
is to form additional collaborations to develop and market a number of its
GEOMATRIX controlled-release products, while potentially selecting certain
products to develop and commercialize on its own. Genta Jago would consider
several options for commercializing these potential products in the United
States including building a small sales force or contracting for the services of
an existing sales force. To market these potential products outside of the
United States, Genta Jago believes it would best utilize its resources through
licensing arrangements. There can be no assurance that any such potential
product will be successfully developed or that any prospective collaborations or
licensing arrangements will be entered into.
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JBL manufactures and markets specialty biochemicals and intermediate
products to over 100 purchasers in the pharmaceutical and diagnostic industries,
with the top 10 customers representing more than 80% of JBL's total sales.
Collaborative and Licensing Agreements
Genta Jago
In December 1992, the Company and Jagotec formed Genta Jago, a
Netherlands corporation, to develop and commercialize therapeutic products on a
worldwide basis. The Company and Jagotec each own 50% of Genta Jago. Under the
arrangement, Jagotec granted Genta Jago an exclusive license to its GEOMATRIX
oral controlledrelease technology for the development and commercialization of
approximately 25 specified products (the "Initial Products"). In May 1995, the
parties entered into an agreement to expand Genta Jago by adding the rights to
develop and commercialize an additional 35 products (the "Additional Products").
With these Additional Products, Genta Jago now maintains the rights to develop
controlled-release formulations of approximately 60 products using Jagotec's
GEOMATRIX technology. Under the agreement, Genta Jago also acquired certain
manufacturing rights with respect to such products. In connection with the
expansion of Genta Jago, the parties elected to focus Genta Jago's activities
exclusively on GEOMATRIX oral-controlled release products. As a result, Genta
Jago returned to Genta, in May 1995, the right to develop six Anticode products
licensed from Genta in connection with the formation of Genta Jago in 1992.
In connection with the formation of Genta Jago, the Company made an
initial capital contribution of $4 million to Genta Jago and issued an aggregate
of 1.2 million unregistered shares of Genta's common stock to Jagotec and an
affiliate. To obtain the rights to the Additional Products and the manufacturing
rights in May 1995, Genta applied $5 million in option and related fees paid to
Jagotec and its affiliates, of which $3.85 million was paid during 1994
(including $1.85 million of non-refundable fees charged to expense during 1994)
and $1.15 million was paid in the first quarter of 1995. The Company also issued
an additional 1.24 million unregistered shares of Genta's common stock to an
affiliate of Jagotec in May 1995. Genta Jago is required to pay certain
additional fees to Jagotec upon Genta Jago's receipt of revenues from third
parties, and to pay manufacturing royalties to Jagotec.
The Company is also required to provide loans to Genta Jago pursuant to
a working capital agreement which expires in October 1998. The loans are
advanced up to a mutually agreed upon maximum commitment amount which is
established by the parties on a periodic basis. The Company anticipates
contributing working capital loans of up to approximately $300,000 to Genta Jago
during 1997. In connection with Genta Jago's return of the Anticode license
rights to Genta in May 1995, the working capital loan payable by Genta Jago to
Genta was credited with a principal reduction of approximately $4.4 million. As
of December 31, 1996, the Company had advanced working capital loans of
approximately $15.3 million to Genta Jago, net of principal repayments and the
aforementioned credit, which amount fully satisfied the loan commitment
established by the parties through December 31, 1996. Such loans bear interest
and are payable in full in October 1998, or earlier in the event certain
revenues are received by Genta Jago from third parties. There can be no
assurance, however, that Genta Jago will obtain sufficient financial resources
to repay such loans to Genta. Genta Jago repaid Genta $1 million of its working
capital loans, in November 1996, from license fee revenues.
Genta has the option to purchase Jagotec's interest in Genta Jago
during the period beginning in December 1998 through the year 2000. The exercise
price with respect to the Initial Products is the lesser of the fair market
value at the time of exercise of the 50% interest in the Initial Products owned
by Jagotec, or $100 million, in each case reduced by the market value at the
time of exercise of the purchase option of the 1.2 million shares of Genta
common stock issued to Jagotec and an affiliate in 1992. The exercise price with
respect to the Additional Products is the fair market value at the time of
exercise of the 50% interest in the Additional Products owned by Jagotec. The
Company also has an exclusive worldwide license to use Jagotec's GEOMATRIX
technology in Genta's Anticode development programs. Genta Jago has contracted
with Genta and Jagotec to conduct research and development and provide certain
other services.
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Genta Jago/Gensia/Brightstone
In January 1993, Genta Jago entered into a collaboration agreement with
Gensia, Inc. ("Gensia") for the development and commercialization of a
potentially bioequivalent nifedipine product, an oral controlled-release
pharmaceutical product for treatment of cardiovascular disease. Under the
agreement, Gensia was to provide funding for formulation and preclinical
development to be conducted by Genta Jago and to be responsible for clinical
development, regulatory submissions and marketing. Terms of the agreement
provided Gensia exclusive rights to market and distribute the products in North
America, Europe and certain other countries. Genta Jago received $2.2 million,
$1.9 million and $4.9 million of research and development funding in 1996, 1995
and 1994, respectively, pursuant to the agreement. Collaborative revenues of
$2.8 million, $3 million and $4.2 million were recognized under the agreement
during the years ended December 31, 1996, 1995 and 1994, respectively.
Effective October 1996, Gensia and SkyePharma PLC ("SkyePharma")
reached an agreement whereby a SkyePharma subsidiary, Brightstone Pharma, Inc.
("Brightstone"), was assigned Gensia's rights to develop and copromote the
potentially bioequivalent nifedipine product under the collaboration agreement
with Genta Jago. The assignment was accepted by Genta Jago and has no impact on
the terms of the original agreement. Genta Jago is still entitled to receive
additional milestone payments from Brightstone triggered upon regulatory
submissions and approvals, as well as royalties or profit sharing ranging from
10% to 21% of product sales, if any.
Genta's Chairman and Chief Executive Officer is a member of Gensia's
Scientific Advisory Board.
Genta Jago/Apothecon
In March 1996, Genta Jago entered into a collaborative licensing and
development agreement with Apothecon, Inc. ("Apothecon"), the multisource
subsidiary of Bristol-Myers Squibb Co. Under the terms of the agreement,
Apothecon provides funding to Genta Jago up to a specified maximum amount for
the formulation, development and clinical testing of a GEOMATRIX formulation of
OD-CR ketoprofen, subject to certain early termination rights. The agreement
also provides for Genta Jago to receive potential milestone payments and
royalties on product sales, if any. Terms of the agreement provide Apothecon
exclusive rights to market and distribute the products on a worldwide basis.
During 1996, Genta Jago received $1.1 million in funding under the arrangement
and recognized $1.3 million of collaborative revenue from the arrangement.
Genta Jago/Krypton
In October 1996, Genta Jago entered into five collaborative licensing
and development agreements with Krypton, Ltd. ("Krypton"), a subsidiary of
SkyePharma. Under the terms of the agreements, Genta Jago is to sublicense to
Krypton rights to develop and commercialize potentially bioequivalent GEOMATRIX
versions of five currently marketed products. Genta Jago also granted Krypton an
option to sublicense rights to develop and commercialize an improved version of
a sixth product. During 1996, Genta Jago received funding of $1 million under
the collaborative agreements and recognized $1 million of collaborative revenue
from the agreements.
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Chugai/Gen-Probe
In February 1989, the Company entered into a development, license and
supply agreement with Gen-Probe Incorporated ("Gen-Probe"). Gen-Probe was
subsequently acquired by Chugai Pharmaceutical Company, Ltd. ("Chugai"), a
Japanese corporation. Chugai has the option to acquire an exclusive worldwide
license to any product consisting of, including, derived from or based on
oligonucleotides for the treatment or prevention of Epstein-Barr virus,
cytomegalovirus, HIV, human T-cell leukemia virus-1 and all leukemias and
lymphomas. Genta is obligated to pursue the development of a therapeutic
compound for the treatment of one of these indications as its first therapeutic
development program. If Chugai exercises its option to acquire rights to a
product in any such indication, the Company will grant Chugai certain rights to
sell such product and Chugai must fund Genta's development of any such product,
subject to certain limitations and early termination rights. If Chugai fully
funds the development of such product, profits on sales of such product will be
shared between the parties. Through the agreement, the Company also has obtained
certain rights to phosphorothioate oligonucleotide constructions and other
technology. In return, the Company has agreed to pay Chugai a royalty on sales
of products derived from such technology. Gen-Probe is a stockholder in the
Company.
Ts'o/Miller/Hopkins
In February 1989, the Company entered into a license agreement with
Drs. Paul Ts'o and Paul Miller (the "Ts'o/Miller Agreement") pursuant to which
Drs. Ts'o and Miller granted an exclusive license to the Company to certain
issued patents, patent applications and related technology regarding the use of
nucleic acids and oligonucleotides, including methylphosphonates, as
pharmaceutical agents. Dr. Ts'o is a Professor of Biophysics, Department of
Biochemistry, and Dr. Miller a Professor of Biochemistry, both at the School of
Public Health and Hygiene, Johns Hopkins University. In May 1990, the Company
entered into a license agreement with Johns Hopkins (the "Johns Hopkins
Agreement," and collectively with the Ts'o/Miller Agreement, referred to herein
as the "Ts'o/Miller/Hopkins Agreements") pursuant to which Johns Hopkins granted
Genta an exclusive license to its rights in certain issued patents, patent
applications and related technology developed as a result of research conducted
at Johns Hopkins by Drs. Ts'o and Miller and related to the use of nucleic acids
and oligonucleotides as pharmaceutical agents. In addition, Johns Hopkins has
granted Genta certain rights of first negotiation to inventions made by Drs.
Ts'o and Miller in their laboratories in the area of oligonucleotides and to
inventions made by investigators at Johns Hopkins in the course of research
funded by Genta, which inventions are not otherwise included in the
Ts'o/Miller/Hopkins Agreements. Genta has agreed to pay Dr. Ts'o, Dr. Miller and
Johns Hopkins royalties on net sales of products covered by the issued patents
and patent applications, but not the related technology, licensed to the Company
under the Ts'o/Miller/Hopkins Agreements. The Company has also agreed to pay
certain minimum royalties prior to commencement of commercial sales of such
products, which royalties may be credited under certain conditions against
royalties payable on subsequent sales. Subject to certain rights of early
termination, the Ts'o/Miller/Hopkins Agreements remain in effect for the life of
the last-to-expire patent licensed under the respective agreements or until
abandonment of the last-pending patent application licensed under the respective
agreements.
As of December 31, 1996, the Company owed Johns Hopkins $627,271, of
which $200,000 consists of royalty payments for 1995 and 1996 and the balance
consisted of the Company's obligations to provide funds to support a
post-doctoral research program of Johns Hopkins. In February 1997, the Company
paid Johns Hopkins $100,000 toward the post-doctoral support program. The
Company is in negotiations with Johns Hopkins as to payment of the remaining
balance in cash and securities. On February 14, 1997, the Company received
notice from Johns Hopkins that the Company was in material breach of the Johns
Hopkins Agreement. The Johns Hopkins Agreement provides that, if a material
payment default is not cured within 90 days of receipt of notice of such breach,
Johns Hopkins may terminate the Johns Hopkins Agreement. A termination of the
Johns Hopkins agreement could have a material adverse effect on the Company.
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Other Anticode Agreements
The Company entered into agreements with Baxter Healthcare Corporation
and Johnson & Johnson Consumer Products, Inc. in late 1995, which provide
limited funding for preliminary feasibility studies using Genta's Anticode
compounds. Under the terms of these agreements, if the collaborative partner
elects to pursue the commercial development of an Anticode compound upon
completion of the feasibility studies, the parties would enter into mutually
acceptable development, license and supply agreements.
Patents and Proprietary Technology
The Company's policy is to protect its technology by, among other
things, filing patent applications with respect to technology considered
important to the development of its business. The Company also relies upon trade
secrets, unpatented know-how, continuing technological innovation and the
pursuit of licensing opportunities to develop and maintain its competitive
position.
Genta has a portfolio of intellectual property rights to aspects of
Anticode technology which includes rights in novel compositions of matter,
methods of large-scale synthesis and methods of controlling gene expression.
This portfolio includes issued United States and Canadian patents and patent
applications, which were licensed by Genta under the Ts'o/Miller/Hopkins
Agreements as described above, and patent applications filed by the Company. In
addition, foreign counterparts of certain applications have been filed or will
be filed at the appropriate time. These issued patents will expire, absent
regulatory extension, in the years 2001 through 2005. Additional allowed patents
under this agreement generally would not expire until 17 years after the date of
allowance or, in other cases, 20 years from the date of application. Generally,
it is the Company's strategy to apply for patent protection in the United
States, Canada, Western Europe, Israel, Taiwan, Japan, Australia and New
Zealand. The Company seeks to coordinate its patent protection policy with those
of its licensors; however, of the six issued patents licensed by Genta under the
Ts'o/Miller/Hopkins Agreements, five were filed only in the United States and
one was filed in both the United States and Canada. Genta also has rights of
first refusal for future antisense work performed by Drs. Ts'o and Miller. See
"Collaborative and Licensing Agreements -- Ts'o/Miller/Hopkins."
Since its incorporation, Genta has separately filed an aggregate of
over 100 United States and foreign patent applications covering new compositions
and improved methods to use, synthesize and purify Anticode oligonucleotides and
linker-arm technology.
Under the agreement with Gen-Probe, Genta gained non-exclusive access
to all technology developed by Gen-Probe related to the use of DNA probes for
therapeutic applications as of February 1989. This technology is related to
nucleic acid probes for quantitation of organisms and viruses, methods for their
production, including nonnucleotide linking reagents, labeling, and
purification, and methods for their use including hybridization and enhanced
hybridization. This includes rights to 14 issued patents and several pending
United States patent applications and corresponding issued and pending
applications in foreign countries. See "Collaborative and Licensing Agreements
- -- Chugai/Gen-Probe".
Genta also gained access to certain rights from the National Institutes
of Health ("NIH") covering phosphorothioate oligonucleotides. This includes
rights to three United States issued patents, one granted European patent and
other corresponding foreign applications which are still pending. In addition,
under an agreement with the University of Pennsylvania, Genta has acquired
exclusive rights for the use of BCL2 as a target for antisense and gene
therapy-based treatments for cancer.
In September 1996, the Company received a notice of an allowance from
the United States Patent and Trademark Office for patent claims covering
antisense compounds targeted against BCL2 based on the technology acquired from
the University of Pennsylvania. Those claims covering compositions of matter
give Genta exclusive rights to target sequences of the BCL2 gene. The patent
claims cover the Company's proprietary Anticode molecules which target BCL2,
including its lead clinical candidate, G3139. Other related patents and claims
in the United States and Europe are still pending.
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Jagotec's GEOMATRIX technology is the subject of issued patents and
pending applications. Jagotec currently holds four issued United States patents,
five granted foreign patents, and other corresponding foreign patent
applications still pending that cover the GEOMATRIX technology. Certain rights
to GEOMATRIX technology have been licensed to Genta Jago. See "Collaborative and
Licensing Agreements -- Genta Jago".
The patent positions of biopharmaceutical and biotechnology firms,
including Genta, can be uncertain and involve complex legal and factual
questions. Consequently, even though Genta is currently prosecuting its patent
applications with the United States and foreign patent offices, the Company does
not know whether any of its applications will result in the issuance of any
patents or, if any issued patents will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific or patent literature tend to lag
behind actual discoveries by several months, Genta cannot be certain that others
have not filed patent applications directed to inventions covered by its pending
patent applications or that it was the first to file patent applications for
such inventions.
Competitors or potential competitors may have filed applications for,
or have received patents and may obtain additional patents and proprietary
rights relating to, compounds or processes competitive with those of the
Company. See "Competition." Accordingly, there can be no assurance that the
Company's patent applications will result in issued patents or that, if issued,
the patents will afford protection against competitors with similar technology;
nor can there be any assurance that any patents issued to Genta will not be
infringed or circumvented by others; nor can there be any assurance that others
will not obtain patents that the Company would need to license or design around.
There can be no assurance that the Company will be able successfully to obtain a
license to technology that it may require or that, if obtainable, such a license
would be available on reasonable terms.
There can be no assurance that the Company's patents, if issued, would
be held valid by a court of competent jurisdiction. Moreover, the Company may
become involved in interference proceedings declared by the United States Patent
and Trademark Office in connection with one or more of its patents or patent
applications to determine priority of invention, which could result in
substantial cost to the Company, as well as a possible adverse decision as to
priority of invention of the patent or patent application involved.
The Company also relies upon unpatented trade secrets and no assurance
can be given that third parties will not independently develop substantially
equivalent proprietary information and techniques or gain access to the
Company's trade secrets or disclose such technology to the public, or that the
Company can meaningfully maintain and protect unpatented trade secrets.
Genta requires its employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors to execute a
confidentiality agreement upon the commencement of employment or consulting
relationship with the Company. The agreement generally provides that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Genta shall be kept confidential
and shall not be disclosed to third parties except in specific circumstances. In
the case of employees, the agreement generally provides that all inventions
conceived by the individual shall be assigned to, and made the exclusive
property of, the Company. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets or
adequate remedies in the event of unauthorized use or disclosure of such
information, or in the event of an employee's refusal to assign any patents to
the Company in spite of such contractual obligation.
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Government Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of the
Company's proposed products and in its ongoing research and product development
activities. All of the Company's therapeutic products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and premarket approval procedures by the FDA and similar authorities in
foreign countries. Various federal, and in some cases state, statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The lengthy process of
seeking these approvals, and the subsequent compliance with applicable federal
and in some cases state, statutes and regulations, require the expenditure of
substantial resources. Any failure by the Company, its collaborators or its
licensees to obtain, or any delay in obtaining, regulatory approvals could
adversely affect the marketing of any products developed by the Company and its
ability to receive product or royalty revenue.
The activities required before a new pharmaceutical agent may be
marketed in the United States begin with preclinical testing. Preclinical tests
include laboratory evaluation of product chemistry and animal studies to assess
the potential safety and efficacy of the product and its formulations. The
results of these studies must be submitted to the FDA as part of an IND, which
must be reviewed and approved by the FDA before proposed clinical testing can
begin. An IND becomes effective within 30 days of filing with the FDA unless the
FDA imposes a clinical hold on the IND. In addition, the FDA may, at any time,
impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical
hold, clinical trials cannot commence or recommence, as the case may be, without
prior FDA authorization and then only under terms authorized by the FDA.
Typically, clinical testing involves a three-phase process. In Phase I, clinical
trials are conducted with a small number of subjects to determine the early
safety profile and the pattern of drug distribution and metabolism. In Phase II,
clinical trials are conducted with groups of patients afflicted with a specific
disease in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety. In Phase III, large-scale, multi-center, comparative
clinical trials are conducted with patients afflicted with a target disease in
order to provide enough data for the statistical proof of efficacy and safety
required by the FDA and others. In the case of products for life-threatening
diseases, the initial human testing is generally done in patients rather than in
healthy volunteers. Since these patients are already afflicted with the target
disease, it is possible that such studies may provide results traditionally
obtained in Phase II trials. These trials are frequently referred to as "Phase
I/II" trials.
The results of the preclinical and clinical testing, together with
chemistry, manufacturing and control information, are then submitted to the FDA
for a pharmaceutical product in the form of a New Drug Application ("NDA"), for
a biological product in the form of a Product License Application ("PLA") or for
medical devices in the form of a Premarket Approval Application ("PMA") for
approval to commence commercial sales. In responding to an NDA, PLA or PMA, the
FDA may grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. There can be no assurance that approvals will be
granted on a timely basis, if at all, or if granted will cover all the clinical
indications for which the Company is seeking approval or will not contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
In circumstances where a company intends to develop and introduce a
novel formulation of an active drug ingredient already approved by the FDA,
clinical and preclinical testing requirements may not be as extensive. Limited
additional data about the safety and/or effectiveness of the proposed new drug
formulation, along with chemistry and manufacturing information and public
information about the active ingredient, may be satisfactory for product
approval. Consequently, the new product formulation may receive marketing
approval more rapidly than a traditional full NDA, although no assurance can be
given that a product will be granted such treatment by the FDA.
For clinical investigation and marketing outside the United States, the
Company is or may be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. The Company's approach is to design its European
clinical trials studies to meet FDA, European Economic Community ("EEC") and
other European countries' standards. At present, the marketing authorizations
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are applied for at a national level, although certain EEC procedures are
available to companies wishing to market a product in more than one EEC member
state. If the competent authority is satisfied that adequate evidence of safety,
quality and efficacy has been presented, a market authorization will be granted.
The registration system proposed for medicines in the EEC after 1992 is a dual
one in which products, such as biotechnology and high technology products and
those containing new active substances, will have access to a central regulatory
system that provides registration throughout the entire EEC. Other products will
be registered by national authorities under the local laws of each EEC member
state. Provided regulatory harmonization is finalized in the EEC, the Company's
clinical trials will be designed to develop a regulatory package sufficient for
multi-country approval in the Company's European target markets without the need
to duplicate studies for individual country approvals. This approach also takes
advantage of regulatory requirements in some countries, such as in the United
Kingdom, which allow Phase I studies to commence after appropriate toxicology
and preclinical pharmacology studies, prior to formal regulatory approval.
Prior to the enactment of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman/Hatch Act"), the FDA, by regulation,
permitted certain pre-1962 drugs to be approved under an abbreviated procedure
which waived submission of the extensive animal and human studies of safety and
effectiveness normally required to be in a NDA. Instead, the manufacturer only
needed to provide an ANDA containing labeling, information on chemistry and
manufacturing procedures and data establishing that the original "pioneer"
product and the proposed "generic" product are bioequivalent when administered
to humans.
Originally, the FDA's regulations permitted this abbreviated procedure
only for copies of a drug that was approved by the FDA as safe before 1962 and
which was subsequently determined by the FDA to be effective for its intended
use. In 1984, the Waxman/Hatch Act extended permission to use the abbreviated
procedure established by the FDA to copies of post-1962 drugs subject to the
submission of the required data and information, including data establishing
bioequivalence. However, effective approval of such ANDAs were dependent upon
there being no outstanding patent or non-patent exclusivities.
Additionally, the FDA allows, under section 505(b)(2) of the Food Drug
and Cosmetic Act, for the submission and approval of a hybrid application for
certain changes in drugs which, but for the changes, would be eligible for an
effective ANDA approval. Under these procedures the applicant is required to
submit the clinical efficacy and/or safety data necessary to support the changes
from the ANDA eligible drug (without submitting the basic underlying safety and
efficacy data for the chemical entity involved) plus manufacturing and chemistry
data and information. Effective approval of a 505(b)(2) application is dependent
upon the ANDA eligible drug upon which the applicant relies for the basic safety
and efficacy data being subject to no outstanding patent or non-patent
exclusivities. As compared to a NDA, an ANDA or a 505(b)(2) application
typically involves reduced research and development costs. However, there can be
no assurance that any such applications will be approved. Furthermore, the
supply of raw materials must also be approved by the FDA.
The Company is also subject to various foreign, federal, state and
local laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, manufacture, storage, handling and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research and development work and
manufacturing processes. Although the Company believes it is in compliance with
these laws and regulations in all material respects (except as disclosed under
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources"), there can be no assurance that
the Company will not be required to incur significant costs to comply with such
regulations in the future.
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Competition
For many of their applications, the Company's, and Genta Jago's,
products under development will be competing with existing therapies for market
share. In addition, a number of companies are pursuing the development of
antisense and triple-strand technology and controlled-release formulation
technology and the development of pharmaceuticals utilizing antisense and
triple-strand technology and controlled-release formulation technology. The
Company competes with fully integrated pharmaceutical companies, many of which
have more substantial experience, financial and other resources and superior
expertise in research and development, manufacturing, testing, obtaining
regulatory approvals, marketing and distribution. Smaller companies may also
prove to be significant competitors, particularly through their collaborative
arrangements with large pharmaceutical companies or academic institutions.
Furthermore, academic institutions, governmental agencies and other public and
private research organizations have conducted and will continue to conduct
research, seek patent protection and establish arrangements for commercializing
products. Such products may compete directly with any products which may be
offered by the Company.
The Company's products under development are expected to address an
array of markets. The Company's competition will be determined in part by the
potential indications for which the Company's products are developed and
ultimately approved by regulatory authorities. For certain of the Company's
potential products, an important factor in competition may be the timing of
market introduction of the Company's or competitor's products. Accordingly, the
relative speed with which Genta and Genta Jago can develop products, complete
the clinical trials and approval processes and supply commercial quantities of
the products to the market are expected to be important competitive factors. The
Company expects that competition among products approved for sale will be based,
among other things, on product efficacy, safety, reliability, availability,
price, patent position and sales, marketing and distribution capabilities. The
development by others of new treatment methods could render the Company's and
Genta Jago's products under development non-competitive or obsolete. The
Company's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
JBL's products address several markets, including clinical chemistry,
diagnostics, molecular biology and pharmaceutical development. While many
customers have specified JBL products in their manufacturing protocols,
competition from several international competitors could undermine JBL's
competitive position, many of whom have more substantial experience, financial
and other resources and superior expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
distribution. Competition has come primarily on price for some key JBL products
for pharmaceutical development, and from competing technologies in diagnostics
and molecular biology.
Human Resources
As of December 31, 1996, Genta, JBL and Genta Europe had 22, 41 and 2
employees, respectively, 13 of whom held doctoral degrees. Twenty employees were
engaged in research and development activities, 21 were engaged in manufacturing
and 24 were in administration, sales and marketing positions. A significant
number of the Company's management and professional employees have had prior
experience and positions with pharmaceutical and biotechnology companies. Genta
believes it maintains satisfactory relations with its employees.
In October 1996, the Company terminated its nine employees conducting
pre-clinical research on the Company's "antisense" projects and Genta Europe
terminated seven employees. The Company's overall staff was reduced by an
additional net reduction of ten employees in 1996, due to attrition.
Risk Factors
In addition to the other information contained in this Annual Report on
Form 10-K, the following factors should be considered carefully.
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Need for Additional Funds; Risk of Insolvency. Genta's operations to
date have consumed substantial amounts of cash. The Company anticipates that its
existing cash funds, including $3 million in additional financing obtained in
February 1997, will enable the Company to maintain its presently planned
operations until July, 1997. The Company's auditors have included an emphasis
paragraph in their opinion with respect to the Company's ability to continue as
a going concern. Management believes that a minimum of approximately $6.4
million of additional financing will be necessary to sustain operations through
the end of 1997 and to satisfy the Company's obligations under its Senior
Secured Convertible Bridge Notes (the "Convertible Notes") and 4% Convertible
Debentures (the "Convertible Debentures"). Substantial additional sources of
financing will be required in order for the Company to continue its planned
operations thereafter, as well. Furthermore, The Nasdaq Stock Market, Inc.
("Nasdaq") has informed the Company that its common stock will be delisted from
the Nasdaq SmallCap Market unless the Company makes a public filing with the
Securities and Exchange Commission and Nasdaq by April 7, 1997 evidencing
minimum capital and surplus of at least $6 million. See "Risk Factors -- Threat
of Nasdaq Delisting" below. The Company is negotiating with pharmaceutical
companies regarding collaborative agreements and other financing arrangements
and is actively seeking additional equity or debt financing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." However, there can be no assurance that any
such collaborative agreements or other sources of funding will be available on
favorable terms, if at all. If such funding is unavailable, the Company will be
required to license or sell certain of its assets and technology, further scale
back or eliminate some or all of its development programs, further reduce its
work force and spending, and take other measures in order to continue its
operations. If such measures are not successfully completed, the Company may be
required to discontinue its operations. The Company will need to raise
substantial additional funds to conduct the costly and time-consuming research,
pre-clinical development and clinical trials necessary to bring its and Genta
Jago's products to market and to establish production and marketing
capabilities. The Company will also need substantial additional funds to provide
working capital loans to Genta Jago. The Company intends to seek additional
funding through public or private financings, including equity financings, and
through collaborative arrangements. Adequate funds for these purposes, whether
obtained through financial markets or collaborative or other arrangements with
corporate partners or from other sources, may not be available when needed or on
terms acceptable to the Company. Insufficient funds may require the Company to
delay, scale back or eliminate some or all of its research and product
development programs or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop itself. The
Company's future cash requirements will be affected by results of research and
development, results of preclinical studies and bioequivalence and clinical
trials, relationships with corporate collaborators, changes in the focus and
direction of the Company's research and development programs, competitive and
technological advances, resources devoted to Genta Jago, the FDA and foreign
regulatory process, potential litigation by companies seeking to prevent or
delay marketing approval of Genta Jago's products and other factors.
Threat of Nasdaq Delisting. Since October 22, 1996 the Company's common
stock has been trading at less than $1.00 per share. Effective February 7, 1997
the Company's common stock was removed from the Nasdaq National Market and began
trading on the Nasdaq SmallCap Market under a conditional exception from the bid
price and capital surplus requirements of the Nasdaq SmallCap Market. Nasdaq has
indicated that, unless the Company's common stock achieves a minimum bid price
of at least $1.50 per share by April 7, 1997, and maintains a minimum bid price
of at least $1.50 per share for a period of ten consecutive days thereafter, the
Company's common stock will be delisted from the Nasdaq SmallCap Market. The
Board of Directors of the Company has approved an amendment to the Company's
Restated Certificate of Incorporation effecting a one-for-ten reverse stock
split of the Company's common stock (the "Reverse Split Amendment") and has
recommended that stockholders approve the Reverse Split Amendment at the Annual
Meeting of Stockholders to be held on April 4, 1997. The Company believes that,
if the Reverse Split Amendment is approved, it can meet Nasdaq's terms; however,
there can be no assurance that, even with the reverse stock split, the Company
will be able to maintain its listing on the Nasdaq SmallCap Market. To maintain
such listing, the Company will also be required to make a public filing with the
SEC and Nasdaq evidencing minimum capital and surplus of $6 million on or before
April 7, 1997. While the Company believes that it can meet this capital and
surplus level by such date, there can be no assurance that the Company will
succeed in timely achieving this requirement or that, even if successful, the
Company's common stock would not be delisted from the Nasdaq SmallCap Market.
There can be no assurances that approval of the Reverse Split Amendment will
succeed in raising the bid price of the Company's common stock above $1.50 per
share, that such minimum price if achieved would be maintained for the requisite
period, or that even if Nasdaq's minimum bid price requirement were satisfied,
the Company's common stock would not be delisted from the Nasdaq
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SmallCap Market for other reasons. A delisting of the Company's common stock
could adversely affect the ability of the Company to attract new investors.
Subordination of Common Stock to Series A and Series C Preferred Stocks
and Redemption of Series A Preferred Stock; Risk of Dilution. The common stock
is expressly subordinate to the approximately $30 million preference of the
528,100 outstanding shares of Series A Preferred Stock and the approximately
$1.5 million preference of the 1,424 shares of Series C Preferred Stock in the
event of the liquidation, dissolution or winding up of the Company. Further, no
dividends may be paid on the common stock unless full cumulative dividends on
the Series A and Series C Preferred Stocks have been paid or funds set aside for
such preferred dividends by the Company. In addition, the conversion ratio of
the Series A Preferred Stock and the exercise price of warrants issued in
connection with the Series A Preferred Stock (the "Series A Warrants") is
subject to adjustment, among other things, upon certain issuances of common
stock or securities convertible into common stock at $6.75 per share or less.
Each share of Series A preferred stock is presently convertible into 21.31
shares of common stock and the exercise price of the Series A Warrants is $2.60
per share.
The Series A Preferred Stock was subject to a mandatory redemption
(the "Mandatory Redemption") by the Company on September 23, 1996 (the
"Redemption Date"). Under the terms of the Mandatory Redemption, as set forth in
the Company's Restated Certificate of Incorporation, the Redemption Price of $50
per share plus accrued dividends was to be paid, subject to certain conditions,
in common stock valued at an average trading price for ten trading days before
August 20, 1996. The Company elected to effect the Mandatory Redemption through
the use of common stock, and then was required to use its best efforts to
arrange with an investment bank acceptable to the holders of Series A preferred
stock for a firm commitment underwriting relating to such shares. The Company
was unable to arrange for such a firm commitment offering and is now required to
use its reasonable efforts to arrange for a firm commitment underwriting as
promptly as practicable and to redeem any remaining outstanding shares of Series
A preferred stock upon arranging for such firm commitment underwriting. Even if
the Company is successful in satisfying its Mandatory Redemption obligations
with its shares of common stock, holders of common stock will experience
substantial dilution at the time of such redemption. Terms of the Company's
Series A preferred stock provide for the payment of dividends annually in
amounts ranging from $3.00 per share per annum for the first year to $5.00 per
share per annum in the third and fourth years. Dividends may be paid in cash or
common stock or a combination thereof, at the Company's option. Dividends on the
preferred stock accrue on a daily basis (whether or not declared) and shall
accumulate to the extent not paid on the annual dividend payment date following
the dividend period for which they accrue. Each share of Series C Preferred
Stock is convertible, subject to certain conditions, at the option of the
holder, into that number of shares of common stock determined by dividing the
sum of $1,000, plus all accrued dividends on each share of Series C Preferred
Stock (approximately $40 per share), by the conversion price of the Series C
Preferred Stock. The conversion price of the Series C Preferred Stock is equal
to 75% of the average of the closing bid prices of the Company's common stock on
the Nasdaq Stock Market for a specified period. Terms of the Company's Series C
convertible preferred stock also provide for dividends payable in shares of the
Company's common stock. The Company has paid and, to the extent permitted by
law, intends to continue paying the dividends in shares of the Company's common
stock.
Subordination of Common Stock to Senior Secured Convertible Bridge
Notes and 4% Convertible Debentures; Risk of Dilution. In the event of a
liquidation, dissolution or winding up of the Company, the common stock is also
expressly subordinate to $3 million principal amount of Convertible Notes and to
$350,000 principal amount of Convertible Debentures; both issues are payable in
August, 1997. Further, no dividends may be paid on the common stock unless
cumulative dividends on such convertible notes and debentures have been paid or
funds have been set aside for such payment. The Convertible Notes are initially
convertible into 600,000 shares of Series D preferred stock, which are in turn
convertible into 20 million shares of common stock, subject to antidilution
adjustments. The Convertible Debentures are convertible into a maximum of
122,101 shares of common stock.
Early Stage of Development; Technological Uncertainty. Genta is at an
early stage of development. All of the Company's potential therapeutic products
are in research or development, and no revenues have been generated from
therapeutic product sales. The Company is pursuing research and development,
through Genta Jago, of a range of oral controlled-release formulations of
currently available pharmaceuticals. Many of the products to be developed
through Genta Jago have not yet been successfully formulated using GEOMATRIX
technology. In
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addition, none of the products being developed through Genta Jago has had its
manufacturing process successfully scaled-up for commercial production or has
started pivotal bioequivalence trials. To date, a major portion of the Company's
resources have been dedicated to applying molecular biology and medicinal
chemistry to the research and development of potential pharmaceutical products
based upon Anticode technology. While the Company has demonstrated the activity
of Anticode technology in model systems in vitro and the activity of antisense
technology in animals and has identified a number of compounds which the Company
believes are worthy of additional testing, only one of these potential Anticode
products has begun to be tested in humans, with such testing in its early
stages. There can be no assurance that the novel approach of Anticode technology
to develop therapeutic products will result in products which receive necessary
regulatory approvals or that will be successful commercially. Further, results
obtained in preclinical studies or pilot bioequivalence trials are not
necessarily indicative of results that will be obtained in human clinical
testing or pivotal bioequivalence trials, respectively. The Company is also
developing products for certain diseases where no animal models exist. There can
be no assurance that any of the Company's or Genta Jago's potential products can
be successfully developed. Furthermore, the Company's products in research or
development may prove to have undesirable and unintended side effects or other
characteristics that may prevent or limit their commercial use. There can be no
assurance that the Company will be permitted to undertake human clinical testing
of its potential Anticode products or any other of the Company's products
currently in preclinical development, or, if permitted, that such products will
be demonstrated to be safe and efficacious. In addition, there can be no
assurance that any of the Company's or Genta Jago's products will obtain FDA or
foreign regulatory approval for any indication or that an approved compound
would be capable of being produced in commercial quantities at reasonable costs
and successfully marketed. Products, if any, resulting from Genta's or Genta
Jago's research and development programs are not expected to be commercially
available for a number of years.
Loss History; Uncertainty of Future Profitability. Genta has been
unprofitable to date, incurring substantial operating losses associated with
ongoing research and development activities, preclinical testing, clinical
trials, manufacturing activities and development activities undertaken by Genta
Jago. From the period since its inception to December 31, 1996, the Company has
incurred a cumulative net loss of $108.4 million. The Company has experienced
significant quarterly fluctuations in operating results and expects that these
fluctuations in revenues, expenses and losses will continue. The Company has
historically experienced significant quarterly fluctuations in its level of
product sales, generally reflecting the timing and degree of customer demand for
various products.
Dividends. The Company has never paid cash dividends on its common
stock and does not anticipate paying any such dividends in the foreseeable
future. In addition, the Company is restricted from paying cash dividends on its
common stock until such time as all cumulative dividends have been paid on
outstanding shares of its Series A and Series C convertible preferred stock. The
Company currently intends to retain its earnings, if any, after payment of
dividends on outstanding shares of Series A and Series C convertible preferred
stock, for the development of its business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Operations After Restructuring. As a result of the Company's
restructuring to reduce operating expenses, the Company has focused its research
and development programs on its near-term drug delivery (GEOMATRIX) technology
and its Anticode cancer program. The Company's Anticode programs directed at
other areas have largely been curtailed and any future progress with these
programs is dependent upon the Company obtaining a collaborative partner to fund
further research. There can be no assurance that the Company will be successful
in obtaining additional funding for these programs. The Company no longer
anticipates devoting any of its resources to further development of its topical
dermatology product candidates. The Company's agreement with its collaborative
partner, the Procter & Gamble Company ("Procter & Gamble"), for its Anticode
program in infectious diseases, ended in September 1995. The Company will have
to obtain additional corporate partners in order to continue its Anticode
programs. There can be no assurance that the Company will be able to negotiate
such collaborative arrangements on favorable terms, if at all.
Genta Jago's strategy is to form alliances with major pharmaceutical
companies to commercialize its GEOMATRIX oral controlled-release products
worldwide. Genta Jago has established collaborations with Gensia (and, through
Gensia, with Boehringer Mannheim), Apothecon and Krypton. Gensia has since
entered into an Assignment and Release Agreement with SkyePharma for its United
States subsidiary, Brightstone, to assume
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<PAGE>
Gensia's position in the collaboration with Genta Jago with no modification to
the terms of the original agreement between Genta Jago and Gensia. Brightstone
also replaces Gensia in its relationship with Boehringer Mannheim.
No Assurance of Regulatory Approval; Government Regulation. The FDA and
comparable agencies in foreign countries impose substantial premarket approval
requirements upon the introduction of pharmaceutical products through lengthy
and detailed preclinical and clinical testing procedures and other costly and
time-consuming procedures. Satisfaction of these requirements, which includes
demonstrating to the satisfaction of the FDA and foreign regulatory agencies
that the product is both safe and effective, typically takes several years or
more depending upon the type, complexity and novelty of the product. There can
be no assurance that such testing will show any product to be safe or
efficacious or, in the case of certain of Genta Jago's products, to be
bioequivalent to a currently marketed pharmaceutical. Government regulation also
affects the manufacture and marketing of pharmaceutical products. The effect of
government regulation may be to delay marketing of any new products for a
considerable or indefinite period of time, to impose costly procedures upon the
Company's or Genta Jago's activities and to diminish any competitive advantage
that the Company or Genta Jago may attain. It may take years before marketing
approvals are obtained for the Company's or Genta Jago's products, if at all.
There can be no assurance that FDA or other regulatory approval for any products
developed by the Company or Genta Jago will be granted on a timely basis, if at
all, or, if granted, that such approval will cover all the clinical indications
for which the Company or Genta Jago is seeking approval or will not sustain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use. Further, with respect to
the reformulated versions of currently available pharmaceuticals being developed
through Genta Jago, there is a substantial risk that the manufacturers or
marketers of such currently available pharmaceuticals will seek to delay or
block regulatory approval of any reformulated versions of such pharmaceuticals
through litigation or other means. Any significant delay in obtaining, or
failure to obtain, such approvals would materially adversely affect the Company
and Genta Jago's revenue. Moreover, additional government regulation from future
legislation or administrative action may be established which could prevent or
delay regulatory approval of the Company's or Genta Jago's products or further
regulate the prices at which the Company's or Genta Jago's proposed products may
be sold.
The Company is also subject to various foreign, federal, state and
local laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, manufacture, storage, handling and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research and development work and
manufacturing processes. Although the Company believes it is in compliance with
these laws and regulations in all material respects (except as disclosed under
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources"), there can be no assurance that
the Company will not be required to incur significant costs to comply with such
regulations in the future.
Uncertainty Regarding Patents and Proprietary Technology. The Company's
and Genta Jago's success will depend, in part, on their respective abilities to
obtain patents, maintain trade secrets and operate without infringing the
proprietary rights of others. No assurance can be given that patents issued to
or licensed by the Company or Genta Jago will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company or Genta Jago. There can be no assurance that the
Company's or Genta Jago's patent applications will be approved, that the Company
or Genta Jago will develop additional products that are patentable, that any
issued patent will provide the Company or Genta Jago with any competitive
advantage or adequate protection for its inventions or will not be challenged by
others, or that the patents of others will not have an adverse effect on the
ability of the Company or Genta Jago to do business. Competitors may have filed
applications, may have been issued patents or may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company or Genta Jago. Furthermore, there can be no assurance that others
will not independently develop similar products, duplicate any of the Company's
or Genta Jago's products or design around any patented products developed by the
Company or Genta Jago. The Company and Genta Jago rely on secrecy to protect
technology in addition to patent protection, especially where patent protection
is not believed to be appropriate or obtainable. No assurance can be given that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to
18
<PAGE>
the Company's or Genta Jago's trade secrets, or that the Company or Genta Jago
can effectively protect is rights to its unpatented trade secrets.
Genta and Genta Jago have obtained licenses or other rights to patents
and other proprietary rights of third parties, and may be required to obtain
licenses to additional patents or other proprietary rights of third parties. No
assurance can be given that any existing licenses and other rights will remain
in effect or that any licenses required under any such additional patents or
proprietary rights would be made available on terms acceptable to the Company or
Genta Jago, if at all. If Genta's or Genta Jago's licenses and other rights are
terminated or if Genta or Genta Jago cannot obtain such additional licenses,
Genta or Genta Jago could encounter delays in product market introductions while
it attempts to design around such patents or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed. In
addition, the Company or Genta Jago could incur substantial costs, including
costs caused by delays in obtaining regulatory approval and bringing products to
market, in defending itself in any suits brought against the Company or Genta
Jago claiming infringement of the patent rights of third parties or in asserting
the Company's or Genta Jago's patent rights, including those granted by third
parties, in a suit against another party. The Company or Genta Jago may also
become involved in interference proceedings declared by the United States Patent
Office in connection with one or more of its patents or patent applications,
which could result in substantial cost to the Company or Genta Jago, as well as
an adverse decision as to priority of invention of the patent or patent
application involved. There can be no assurance that the Company or Genta Jago
will have sufficient funds to obtain, maintain or enforce patents on their
respective products or technology, to obtain or maintain licenses that may be
required in order to develop and commercialize their respective products, to
contest patents obtained by third parties, or to defend against suits brought by
third parties.
Dependence on Others. The Company's strategy for the research,
development and commercialization of certain of its or Genta Jago's products
requires negotiating, entering into and maintaining various arrangements with
corporate collaborators, licensors, licensees and others, and is dependent upon
the subsequent success of these outside parties in performing their
responsibilities. The Company's agreement with Procter & Gamble represented the
Company's primary source of collaborative revenues during 1995 and such
agreement ended in September 1995. Genta Jago is seeking additional
collaborative arrangements to develop and commercialize certain of their
respective products. However, there can be no assurance that Genta Jago will be
able to negotiate collaborative arrangements on acceptable terms, if at all.
Technology Licensed From Third Parties. The Company has entered into
certain agreements with, and licensed certain technology and compounds from,
third parties. The Company has relied on scientific, technical, clinical,
commercial and other data supplied and disclosed by others in entering into
these agreements, including the Genta Jago agreements, and will rely on such
data in support of development of certain products. Although the Company has no
reason to believe that this information contains errors of omission or fact,
there can be no assurance that there are no errors of omission or fact that
would materially affect the future approvability or commercial viability of
these products.
Competition. The Company and Genta Jago have numerous competitors in
the United States and other countries for their respective technologies and
products under development, including among others, major pharmaceutical and
chemical companies, specialized biotechnology firms, universities and other
research institutions. There can be no assurance that the Company's or Genta
Jago's competitors will not succeed in developing products or other novel
technologies that are more effective than any which have been or are being
developed by the Company or Genta Jago or which would render the Company's or
Genta Jago's technology and products non-competitive. Many of the Company's and
Genta Jago's competitors have substantially greater financial, technical,
marketing and human resources than the Company or Genta Jago. In addition, many
of those competitors have significantly greater experience than the Company or
Genta Jago in undertaking preclinical testing and human clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in healthcare. Accordingly, the Company's or Genta Jago's
competitors may succeed in obtaining regulatory approval for products more
rapidly than the Company or Genta Jago and such competitors may succeed in
delaying or blocking regulatory approvals of the Company's or Genta Jago's
products. Furthermore, if the Company or Genta Jago is permitted to commence
commercial sales of products, it will also be competing with respect to
marketing capabilities, an area in which it has limited or no experience, and
manufacturing efficiency. There are many public and private companies that are
conducting research and development activities based on drug delivery
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<PAGE>
and antisense technologies. The Company believes that the industry-wide interest
in such technologies will accelerate and competition will intensify as the
techniques which permit drug design and development based on such technologies
are more widely understood.
Difficult Manufacturing Requirements. The manufacture of Anticode
oligonucleotides is a time-consuming and complex process. Management believes
that the Company has the ability to acquire or produce quantities of
oligonucleotides sufficient to support its present needs for research and its
projected needs for its initial clinical development programs. However, Genta
believes that improvements in its manufacturing technology will be required to
enable the Company to meet the volume and cost requirements needed for certain
commercial applications of Anticode products. Products based on chemically
modified oligonucleotides have never been manufactured on a commercial scale.
The manufacture of all of the Company's and Genta Jago's products will be
subject to current GMP requirements prescribed by the FDA or other standards
prescribed by the appropriate regulatory agency in the country of use. There can
be no assurance that the Company or Genta Jago will be able to manufacture
products, or have products manufactured for it, in a timely fashion at
acceptable quality and prices, that they or third party manufacturers can comply
with GMP or that they or third party manufacturers will be able to manufacture
an adequate supply of product.
Limited Sales, Marketing and Distribution Experience. The Company and
Genta Jago have very limited experience in pharmaceutical sales, marketing and
distribution. In order to market and sell certain products directly, The Company
or Genta Jago would have to develop or subcontract a sales force and a marketing
group with technical expertise. There can be no assurance that any direct sales
or marketing efforts would be successful.
Uncertainty of Product Pricing, Reimbursement and Related Matters. The
Company's and Genta Jago's business may be materially adversely affected by the
continuing efforts of governmental and third party payers to contain or reduce
the costs of healthcare through various means. For example, in certain foreign
markets the pricing or profitability of healthcare products is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar governmental control. While the Company cannot predict
whether any such legislative or regulatory proposals or reforms will be adopted,
the adoption of any such proposal or reform could adversely affect the
commercial viability of the Company's and Genta Jago's potential products. In
addition, in both the United States and elsewhere, sales of healthcare products
are dependent in part on the availability of reimbursement to the consumer from
third party payers, such as government and private insurance plans. Third party
payers are increasingly challenging the prices charged for medical products and
services and therefore, significant uncertainty exists as to the reimbursement
of existing and newly approved healthcare products. If the Company or Genta Jago
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company or Genta Jago to sell its products on a competitive basis.
Dependence on Qualified Personnel. The Company's success is highly
dependent on the retention of principal members of its management and scientific
staff and the recruitment of additional key personnel. As the Company has
already fallen below critical mass, the loss of additional key personnel or the
failure to recruit necessary additional personnel does and will further impede
the achievement of development objectives. There is intense competition for
qualified personnel in the areas of the Company's activities, and there can be
no assurance that Genta will be able to continue to attract and retain the
qualified personnel necessary for the development of its business.
Product Liability Exposure; Limited Insurance Coverage. The Company's,
JBL's and Genta Jago's businesses expose them to potential product liability
risks which are inherent in the testing, manufacturing, marketing and sale of
human therapeutic products. If available, product liability insurance for the
pharmaceutical industry generally is expensive. The Company has obtained a level
of liability insurance coverage which it deems appropriate for its current stage
of development. However, there can be no assurance that the Company's present
insurance coverage is adequate. Such existing coverage may not be adequate as
the Company further develops products, and no assurance can be given that in the
future adequate insurance coverage will be available in sufficient
20
<PAGE>
amounts or at a reasonable cost, or that a product liability claim would not
have a material adverse effect on the business or financial condition of the
Company.
Hazardous Materials; Environmental Matters. The Company's research and
development and manufacturing processes involve the controlled storage, use and
disposal of hazardous materials, biological hazardous materials and radioactive
compounds. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company may be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
There can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future, nor that the operations, business or assets of the Company will not be
materially adversely affected by current or future environmental laws of
regulations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Liquidity and Capital Resources."
Volatility of Stock Price. The market price of the Company's common
stock, like that of the common stock of many other biopharmaceutical companies,
has been highly volatile. Factors such as the results of preclinical studies and
clinical trials by Genta, Genta Jago or their competitors, other evidence of the
safety or efficacy of products of Genta, Genta Jago or their competitors,
announcements of technological innovations or new therapeutic products by the
Company, Genta Jago or their competitors, governmental regulation, developments
in patent or other proprietary rights of the Company or its competitors,
including litigation, fluctuations in the Company's operating results, and
market conditions for biopharmaceutical stocks in general could have a
significant impact on the future price of the common stock. On March 2, 1997,
the Company had 39,991,626 shares of common stock outstanding. Future sales of
shares of common stock by existing stockholders and option holders also could
adversely affect the market price of the common stock.
Concentration of Ownership. The Company's directors, executive officers
and principal stockholders and certain of their affiliates have the ability to
influence the election of the Company's directors and most other stockholder
actions.
Possible Nonpayment of Dividends on Series A and Series C Preferred
Stock; Deficiency in Fixed Charges and Preferred Stock Dividend Coverage.
Dividends will be payable on the Series A and Series C Preferred Stock only
when, as and if declared by the Company's Board of Directors, out of funds
legally available therefor. The Company has incurred losses and, thus, has had a
deficiency in fixed charges and preferred stock dividend coverage since
inception. For the fiscal years ended December 31, 1991, 1992, 1993, 1994, 1995
and 1996 the coverage deficiency was approximately $9,486,000, $16,703,000,
$16,189,000, $25,998,000, $27,917,000 and $13,950,000 respectively. While the
Company intends to pay dividends on the Series A and Series C Preferred Stock,
it is anticipated that the Company will continue to incur losses and thus will
continue to have a deficiency in fixed charges and preferred stock dividend
coverage. Dividends on the Series A and Series C Preferred Stock may be paid
only out of capital surplus (within the meaning of the Delaware General
Corporation Law) or net profits of the Company for the fiscal year in which the
dividend is declared and the preceding fiscal year.
Effect of Certain Anti-Takeover Provisions. The Company's Restated
Certificate of Incorporation and Bylaws include provisions that could discourage
potential takeover attempts and make attempts by stockholders to change
management more difficult. The approval of 66-2/3% of the Company's voting stock
is required to approve certain transactions and to take certain stockholder
actions, including the calling of a special meeting of stockholders and the
amendment of any of the anti-takeover provisions contained in the Company's
Restated Certificate of Incorporation. Further, pursuant to the terms of its
stockholder rights plan adopted in December 1993, the Company has distributed a
dividend of one right for each outstanding share of common stock. These rights
will cause a substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Board of Directors and may have the
effect of deterring hostile takeover attempts. The stockholder rights plan was
amended to permit the consummation of the transactions with the Aries Funds
described under Item 5(d) of this Annual Report on Form 10-K.
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Item 2. Properties
Genta's principal administrative offices and research laboratories are
located in San Diego, California where the Company occupies approximately 15,000
square feet. The Company's lease for these premises expired in November, 1996,
and the Company is currently renting on a month-to-month basis at the same rate
of $30,076 per month. The Company believes this space will be adequate for its
activities through 1997.
JBL, the Company's manufacturing subsidiary, leases and occupies
approximately 30,000 square feet of office, laboratory and manufacturing space
in San Luis Obispo, California. This lease expires in 2000. The lease calls for
rent of approximately $306,000 in 1997, with amounts generally increasing
annually thereafter to reflect cost of living related increases. The Company
currently uses substantially all of the manufacturing capacity of this facility.
The Company believes that such space will be adequate for its planned operations
through 1997. The Company also has an option to purchase property adjacent to
this facility, for expansion, if necessary. A director and officer and another
officer of the Company, Drs. Klem and Brown, respectively, are affiliated with
the owners of the leased and adjacent properties.
Genta Pharmaceuticals Europe, S.A., the Company's European subsidiary,
leases approximately 10,000 square feet of office, laboratory and manufacturing
space in Marseilles, France. The lease is cancelable in 2003 and expires in
2005. The lease calls for rent of approximately $99,000 in 1997, with amounts
generally increasing annually thereafter to reflect cost of living related
increases.
Item 3. Legal Proceedings
(a) On February 5, 1997, Equity-Linked Investors, L.P. and
Equity-Linked Investors-II (collectively, the "Plaintiffs") who, as a
group, may be deemd to beneficially own more than five percent of the
outstanding shares of the Common Stock of the Company as Series A
preferred stockholders, filed suit (the "Suit") in the Delaware Court
of Chancery (the "Court") against the Company, each of the Company's
directors and the Aries Funds (as hereinafter defined in Item 5).
Through the Suit, the Plaintiffs are seeking to enjoin the transactions
contemplated by The Note and Warrant Purchase Agreement (the
"Transactions"), rescission of the Transactions, damages, attorney
fees, and such other and further relief as the Court may deem just and
proper. The Suit alleges that the Board of Directors of the Company
breached fiduciary duties by failing to consider financing alternatives
to the Transactions and further alleges that the Transactions were not
in the best interests of the stockholders. Additionally, the Suit
alleges that the Aries Funds aided and abetted such breach of fiduciary
duty through their participation in the Transactions. On March 4 and 5,
1997, a trial was held before the Court. The Court has established a
briefing schedule and set a hearing for post-trial arguments on April
1, 1997. The Company believes that the lawsuit is without merit.
(b) No material legal proceedings were terminated in the quarter ending
December 31, 1996.
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, 1996.
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Executive Officers of the Registrant
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas H. Adams, Ph.D........................... 54 Chairman of the Board, Chief Executive Officer
and Director
Lauren R. Brown, Ph.D........................... 54 Vice President, President of JBL
Zofia E. Dziewanowska, Ph.D., M.D............... 57 Senior Vice President, Global Clinical Affairs
Robert E. Klem, Ph.D............................ 52 Vice President, Director, and Chairman of the
Board of JBL
Guy Van de Winckel.............................. 55 Vice President, European Operations
Robert Wang, Ph.D............................... 49 Vice President, Pharmaceutical Operations
</TABLE>
Dr. Adams was the founder of Genta and has been Chairman of the Board
and Chief Executive Officer of Genta since February 1989. He previously served
as Chairman of the Board and Chief Executive Officer of GenProbe, which he
co-founded in 1984. Prior to joining Gen-Probe, he held the positions of Senior
Vice President of Research & Development and Chief Technical Officer at
Hybritech Incorporated ("Hybritech"), a leading monoclonal antibody products
company which was acquired by Eli Lilly and Company in 1986. He had previously
held senior scientific management positions with Technicon Instruments Corp.,
the Hyland Laboratories Division of Baxter Travenol, and DuPont. Dr. Adams is a
director of Life Technologies, Inc., and three private biotechnology firms. He
received his Ph.D. in Biochemistry from the University of California at
Riverside.
Dr. Brown has been Vice President of the Company since October 1991. He
co-founded JBL in 1973 and, since then, has been President of JBL the subsidiary
that Genta acquired in February 1991. He has had significant experience in the
scale-up of a wide variety of processes, including many custom syntheses for
outside companies under GMP standards. In the past, he has also shared
responsibilities for the research program at JBL, and he developed the syntheses
for many of JBL's products. Dr. Brown received his Ph.D. in Organic Chemistry
from the University of California at Riverside.
Dr. Dziewanowska joined the Company as Senior Vice President, Global
Clinical Affairs in May 1994. Prior to joining Genta, Dr. Dziewanowska spent 17
years at Hoffmann-La Roche Inc. in various research and development positions
including, most recently, Vice President and Director of International
Therapeutic Research and Medical Affairs Advisor. Dr. Dziewanowska is currently
holding a faculty appointment at the Cornell University Medical School. She also
has held various positions in the Pharmaceutical Research and Manufacturers
Association of America, the most recent being a Vice-Chairman of the Medical
Section Steering Committee, American Association of Pharmaceutical Physicians
and the International Federation of Pharmaceutical Medicine. Before joining
Hoffmann-La Roche, Dr. Dziewanowska worked four years as associate director of
international clinical pharmacology at Merck, Sharp & Dohme Laboratories and as
a visiting associate physician in the Department of Pharmacology at Rockefeller
University in New York. She received an M.D. degree from the University of
Warsaw Medical School and a Ph.D. in physiology from the Institute of Immunology
and Experimental Therapeutics, Polish Academy of Science. Her medical degree was
recertified in England and the United States She has been invited to speak on a
variety of United States and International Conferences pertaining to clinical
drug research and development, and she is listed in "Who's Who."
Dr. Klem has been a director of the Company since February 1991 and a
Vice President of the Company since October 1991. Dr. Klem co-founded JBL in
1973 and, since then, has been Chairman of the Board and Chief
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Technical Officer of JBL with responsibility for research, development and
marketing activities. Previously, Dr. Klem was the Plant Manager for E.I. DuPont
in Victoria, Texas from 1970 to 1974. Dr. Klem received his Ph.D. in Organic
Chemistry from the University of California at Riverside.
Mr. Van de Winckel has been President of Genta Pharmaceuticals Europe,
S.A. since its incorporation in November 1993 and has been Vice President,
European Operations of the Company since December 1992. From 1987 until December
1992, Mr. Van de Winckel was an independent consultant for healthcare companies
in Europe and the United States, specializing in marketing and financial
strategies. From 1981 until 1986, Mr. Van de Winckel was Vice President
International and Co-President of Hybritech Europe. He previously held various
management positions with Baxter Travenol, including Vice President of Marketing
with the Hyland Laboratories Division and Director of Marketing International.
Mr. Van de Winckel received a degree in international business from the
University of Louvain, Belgium.
Dr. Wang has been Vice President, Pharmaceutical Operations of the
Company since July 1995. From September 1993 through June 1995, Dr. Wang was
Vice President, Corporate Operations of the Company. From the time Dr. Wang
joined Genta in February 1989 to September 1993, Dr. Wang was Vice President,
Process Development of the Company. From 1986 to 1988, Dr. Wang was Vice
President of Development at Gen-Probe where he had technical responsibility for
developing and implementing a novel nonisotopic DNA probe assay system. Prior to
joining Gen-Probe, Dr. Wang was Senior Director of Process Development and
Manufacturing at Hybritech, where he had overall responsibility for
manufacturing, process development and clinical support for all manufacturing.
Dr. Wang also held senior scientific positions at Calbiochem-Behring Diagnostics
and International Diagnostic Technology. He received his Ph.D. in Biochemistry
from the University of California at Riverside and was a post-doctoral fellow at
Scripps Clinic and Research Foundation.
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<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
Throughout 1995 and 1996, the Company's common stock was traded on the
Nasdaq National Market under the symbol "GNTA". However, as of February
7, 1997 the Company's common stock trades in the over-the-counter
market on the Nasdaq SmallCap Market under the symbol "GNTAC" (see
"Risk Factors - Threat of Nasdaq Delisting"). The following table sets
forth, for the periods indicated, the high and low sales prices for the
common stock as reported by Nasdaq.
High Low
1995
First Quarter................................ $ 6 1/2 3 3/4
Second Quarter............................... 3 1/2 1 3/4
Third Quarter................................ 3 1/2 1 3/8
Fourth Quarter............................... 2 7/8 1 1/2
1996
First Quarter................................ 2 15/16 1 7/8
Second Quarter............................... 2 7/8 1 7/16
Third Quarter................................ 2 7/16
Fourth Quarter............................... 1 1/2 9/32
(b) Holders
There were 424 holders of record of the Company's common stock as of
March 1, 1997.
(c) Dividends
The Company has never paid cash dividends on its common stock and does
not anticipate paying any such dividends in the foreseeable future. In
addition, the Company is restricted from paying cash dividends on its
common stock until such time as all cumulative dividends have been paid
on outstanding shares of its Series A and Series C convertible
preferred stocks. The Company currently intends to retain its earnings,
if any, after payment of dividends on outstanding shares of Series A
and Series C convertible preferred stock, for the development of its
business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources".
(d) Recent Sale of Unregistered Securities
In February, 1997, the Company raised gross proceeds of $3 million in a
private placement, to the Aries Fund and the Aries Domestic Fund, L.P.
(collectively the "Aries Funds"), of Convertible Notes and warrants to
purchase 20 million shares of common stock ("Bridge Warrants"). The
Convertible Notes are initially convertible into 600,000 shares of
Series D preferred stock, which in turn are convertible into 20 million
shares of common stock. Bridge Warrants on 7.8 million shares of common
stock have an exercise price of $.001 per share. Bridge Warrants on
12.2 million shares of common stock have an exercise price of $.55 per
share. Further, upon the occurrence of certain events of default, if
elected by the holders, up to $300,000 principal amount of the
Convertible Notes is convertible into common stock at a conversion
price of $.001 per share. Each Bridge Warrant is convertible, at the
option of the holder, into a new
25
<PAGE>
Warrant entitling such holder to purchase one share of common stock at
an exercise price of $0.15 per share or, under certain circumstances,
if lower than $0.15 per share, 50% of the market price of the common
stock. Pursuant to the Note and Warrant Purchase Agreement dated as of
January 28, 1997 between the Company and the Aries Funds (the "Note and
Warrant Purchase Agreement"), the Aries Funds have the right to appoint
a majority of the members of the Board of Directors of the Company;
provided, however, that in the event the Company does not obtain Future
Financings (as defined in the Note and Warrant Purchase Agreement) in
excess of $3.5 million on or before the date which is six months after
the Bridge Closing Date referred to in such agreement, then the Aries
Funds shall have the contractual right to appoint only two directors or
observers and, if at such time, more than two directors have been
appointed by the Aries Funds, the additional directors shall be
required to resign. As of March 14, 1997, the Aries Funds had not
exercised their right to appoint any directors or observers.
26
<PAGE>
Item 6. Selected Consolidated Financial Data
The following table sets forth certain consolidated financial data with
respect to the Company. The selected consolidated financial data should be read
in conjunction with the consolidated financial statements and related
notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (In thousands, except per share amounts)
Revenues:
<S> <C> <C> <C> <C> <C>
Product sales $4,925 $3,782 $3,574 $3,263 $2,272
Gain on sale of technology 373 - - - -
Collaborative research and development - 1,125 3,141 4,733 3,546
------------- ------------- ------------ ------------- -------------
5,298 4,907 6,715 7,996 5,818
------------- ------------- ------------ ------------- -------------
Costs and expenses:
Cost of products sold 2,479 1,899 1,710 1,593 1,502
Research and development 5,834 11,277 13,533 12,117 10,743
Charge for acquired in-process research and
development - 4,762 1,850 - 7,200
Selling, general and administrative 5,639 5,439 6,376 5,140 4,221
------------- ------------- ------------ ------------- -------------
13,952 23,377 23,469 18,850 23,666
------------- ------------- ------------ ------------- -------------
Loss from operations (8,654) (18,470) (16,754) (10,854) (17,848)
Equity in net loss of joint venture (2,712) (6,913) (7,425) (5,310) -
Other income, net (59) 17 731 646 1,145
------------- ------------- ------------ ------------- -------------
Net loss $(11,425) $(25,366) $(23,448) $(15,518) $(16,703)
Dividends on preferred stock (2,525) (2,551) (2,550) (671) -
------------- ------------- ------------ ------------- -------------
Net loss applicable to common shares $(13,950) $(27,917) $(25,998) $(16,189) $(16,703)
============= ============= ============ ============= =============
Net loss per common share(1) $(0.47) $(1.43) $(1.90) $(1.19) $(1.34)
============= ============= ============ ============= =============
Shares used in the calculation of net loss per
common share 29,834 19,519 13,710 13,621 12,450
============= ============= ============ ============= =============
Deficiency of earnings to meet combined fixed
charges and preferred stock dividends(2) $(13,950) $(27,917) $(25,998) $(16,189) $(16,703)
============= ============= ============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEETS DATA: (In thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments $532 $272 $11,103 $34,594 $26,356
Working capital (deficit) (1,954) (1,580) 5,597 30,524 21,530
Total assets 11,169 15,631 23,908 45,486 34,618
Notes payable and capital lease obligations,
less current portion 1,160 2,334 1,871 1,651 1,409
Total stockholders' equity 4,074 6,972 14,076 38,064 26,664
</TABLE>
(1) Computed on the basis of net loss per common share described in Note 1 of
Notes to Consolidated Financial Statements.
(2) The Company has incurred losses and, thus, has had a deficiency in fixed
charges and preferred stock dividend coverage since inception.
27
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since its inception in February 1988, Genta has devoted its principal
efforts toward drug discovery, research and development. Genta has been
unprofitable to date and, even if it obtains financing to continue its
operations, expects to incur substantial operating losses for the next several
years due to continued requirements for ongoing research and development
activities, preclinical testing and clinical trials, manufacturing activities,
regulatory activities, establishment of a sales and marketing organization, and
development activities undertaken by Genta Jago, the Company's joint venture
with Jagotec. From the period since its inception to December 31, 1996, the
Company has incurred a cumulative net loss of $108.4 million. The Company has
experienced significant quarterly fluctuations in operating results and it
expects that these fluctuations in revenues, expenses and losses will continue.
See "Risk Factors."
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. The
Company intends that all forward-looking statements be subject to the safeharbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the Company'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 the actual results of the
Company to differ materially from any future results expressed or implied by
such forward-looking statements. Examples of such risks and uncertainties
include, but are not limited to, obtaining sufficient financing to maintain the
Company's planned operations, the timely development, receipt of necessary
regulatory approvals and acceptance of new products, the successful application
of the Company's technology to produce new products, the obtaining of
proprietary protection for any such technology and products, the impact of
competitive products and pricing and reimbursement policies, changing market
conditions and the other risks detailed in the Risk Factors section of this
Annual Report on Form 10-K and elsewhere herein. The Company does not undertake
to update any forward-looking statements.
Results of Operations
Operating revenues totaled $5.3 million in 1996 compared to $4.9
million in 1995 and $6.7 million in 1994. Sales of specialty chemical and
pharmaceutical intermediate products increased to $4.9 million in 1996 from $3.8
million in 1995 and $3.6 million in 1994. Collaborative research and development
revenues were zero, $1.1 million and $3.1 million in 1996, 1995 and 1994,
respectively. Collaborative research and development revenues recorded in 1995
represented revenues earned pursuant to the Company's collaboration with The
Procter & Gamble Company which ended in late 1995.
Sales of specialty chemical and pharmaceutical intermediate products
increased each year primarily due to increased market penetration of existing
products and, to a lesser degree, the introduction of new products. One
customer, a European distributor, accounted for approximately 27%, 21% and 19%
of product sales during the years ended December 31, 1996, 1995 and 1994,
respectively. One other customer accounted for approximately 16% and 12% of
product sales during the years ended December 31, 1995 and 1994, respectively,
while another customer comprised 18% of 1994 product sales. No other customer
accounted for more than 8% of product sales in 1996. Management does not believe
the loss of any one customer would have a material adverse affect on the
Company's business as a whole. The Company has historically experienced
significant quarterly fluctuations in its level of product sales, generally
reflecting the timing and degree of customer demand for certain products, and
the Company anticipates that these sales fluctuations will continue in future
periods.
Costs and expenses totaled $14 million in 1996 compared to $23.4
million in 1995 and $23.5 million in 1994. Included in costs and expenses during
1995 and 1994 were charges for acquired in-process research and development
totaling $4.8 million and $1.9 million, respectively, associated with the
expansion of Genta Jago to obtain rights to develop additional GEOMATRIX-based
products. Exclusive of these charges, the Company's costs and expenses decreased
by approximately $4.7 million in 1996 relative to 1995 primarily due to lower
research and development expenses largely attributable to the Company's
restructuring and related workforce reductions
28
<PAGE>
implemented in 1995 and 1996. These savings in operating expenses were partially
offset by an aggregate of approximately $850,000 in non-recurring charges
recorded during 1996 primarily related to the Company's restructuring and work
force reductions. As a result of the aforementioned restructuring and other cost
savings measures implemented during 1995 and 1996, the Company anticipates
further reductions in the level of its operating expenses during 1997 relative
to 1996. However, the Company anticipates that, if sufficient collaborative
revenues and other funding is available, research and development expenses may
increase in future years due to requirements for preclinical studies, clinical
trials and increased regulatory costs. The Company also anticipates that costs
associated with Anticode marketing activities, if such products are successfully
developed and approved for marketing, would be the responsibility of corporate
partners.
The Company's equity in net loss of joint venture totaled $2.7 million
in 1996 compared to $6.9 million in 1995 and $7.4 million in 1994. The decrease
in the Company's share of Genta Jago's net loss during 1996 relative to 1995 is
largely attributable to the fact that development efforts are now focused
exclusively on GEOMATRIX-based products and a greater portion of development
activities were funded pursuant to Genta Jago's collaborative agreements with
third parties.
Interest income has fluctuated significantly each year and is
anticipated to continue to fluctuate primarily due to changes in the levels of
cash, investments and interest rates each period.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily from
private and public offerings of its equity securities. Cash provided from these
offerings totaled approximately $95.4 million through December 31, 1996,
including net proceeds of $8.4 million raised during 1996. At December 31, 1996,
the Company had cash, cash equivalents and short-term investments totaling
$532,000 compared to $272,000 at December 31, 1995. The increase in cash and
cash equivalents during 1996 is largely attributable to proceeds from the
Company's private placements, as described in footnote 8 to the Company's
consolidated financial statements.
The Company anticipates that its existing capital resources, including
$3 million in financing obtained from the issuance of the Convertible Notes in
February 1997, will enable the Company to maintain its presently planned
operations until July, 1997. Management believes that a minimum of approximately
$6.4 million of additional financing will be required to sustain the Company's
presently-planned operations through the end of 1997 and to satisfy the
Company's obligations under the Convertible Notes and the Convertible
Debentures. The Company has been informed, however, that its common stock will
be delisted from the Nasdaq SmallCap Market unless the Company makes a public
filing with the Securities and Exchange Commission and Nasdaq by April 7, 1997
evidencing minimum capital and surplus of at least $6 million. While the Company
believes that it can meet this capital and surplus level by such date, there can
be no assurance that the Company will succeed in timely achieving this
requirement. Such delisting may have an adverse effect on the ability of the
Company to attract new investors. The Company is actively seeking additional
sources of financing and is negotiating with pharmaceutical companies regarding
collaborative agreements and other financial arrangements. There can be no
assurance, however, that any such collaborative agreements or other sources of
funding will be available on favorable terms, if at all. The Company has entered
into a letter of intent with an investment banking firm pursuant to which such
firm confirmed its interest in acting as placement agent, on a "best efforts"
basis, of a private placement of preferred stock, convertible notes and warrants
for proceeds of up to $7.5 million (plus an over-allotment option), subject to
certain conditions. In the Letter of Intent, this firm agreed that, to the
extent alternative financings were available at better timing, pricing and
terms, the firm would waive its right to conduct the offering. If the Company is
unsuccessful in raising the required funds, the Company will be required to
license or sell additional assets and technology, further scale back or
eliminate some or all of its development programs, further reduce its work force
and spending, and take other measures in order to continue its operations. If
such measures are not successfully completed, the Company may be required to
discontinue its operations. See "Risk Factors -- Need for Additional Funds; Risk
of Insolvency" and "Risk Factors -- Threat of Nasdaq Delisting."
As described under Item 5(d) of this Annual Report on Form 10-K, the
Aries Funds, who provided $3 million in financing to the Company in February,
1997, have the right to appoint a majority of the members of the
29
<PAGE>
Board of Directors of the Company. As of March 14, 1997, the Aries Funds had not
exercised this right. However, should they determine to do so, their designees
may decide to alter the business strategy, operations and/or management of the
Company in a manner not contemplated in this Annual Report on Form 10-K.
In connection with the Genta Jago joint venture formed in late 1992 and
expanded in May 1995, the Company entered into a working capital agreement with
Genta Jago which expires in October 1998. Pursuant to this agreement, the
Company is required to make loans to Genta Jago up to a mutually agreed upon
maximum commitment amount, which amount is established by the parties on a
periodic basis. The Company anticipates its working capital contribution to
Genta Jago for 1997 will be $300,000, as compared to $846,784 in 1996 and $7.7
million in 1995, as a result of Genta Jago's success in entering into
collaborative agreements with third parties. As of December 31, 1996, the
Company had advanced working capital loans of approximately $15.3 million to
Genta Jago, net of principal repayments. Such loans bear interest and are
payable in full in October 1998, or earlier in the event certain revenues are
received by Genta Jago from third parties. There can be no assurance, however,
that Genta Jago will obtain sufficient financial resources to repay such loans
to Genta. Genta Jago repaid Genta $1 million of its working capital loans in
November 1996 from license fee revenues. The amount of future loans by Genta to
Genta Jago will depend upon several factors including the amount of funding
obtained by Genta Jago through collaborative arrangements, Genta's ability to
provide loans, and the timing and cost of Genta Jago's preclinical studies,
clinical trials and regulatory activities.
Through December 31, 1996, the Company acquired $10.1 million in
property and equipment of which $5.5 million was financed through capital leases
and other equipment financing arrangements, $3.3 million was funded in cash and
the remainder was acquired through the Company's acquisition of JBL. In November
1996, the Company bought out certain of its capital leases for approximately
$1.2 million, primarily covering equipment used in research and development
activities at Genta and JBL, using Company funds which the leasing company had
on deposit. This equipment had an original cost of $4.5 million and a net book
value at buyout of approximately $850,000. The Company capitalized $1.2 million
as fixed assets at the time of the buyout. In 1996, the Company also sold
certain of its fixed assets. This resulted in a decrease of gross fixed assets
from $9.6 million in 1995 to $6 million in 1996. The Company has commitments
associated with its notes payable, capital leases and operating leases as
discussed further in Note 7 of the Notes to Consolidated Financial Statements.
In particular, the Company's equipment financing agreement contains certain
financial covenants, the most significant of which required the Company to
provide certain deposits in the event that the Company's cash and investment
balances fell below specified levels. As of December 31, 1996 the Company had
$251,000 in security deposits with an equipment financing company pursuant to
the terms of the agreement.
In October 1996, JBL retained a chemical consulting firm to advise it
with respect to environmental compliance regarding an incident of soil and
groundwater contamination (the "Spill") by small quantities of certain
chemicals. The Company believes, based upon information known to date, that the
Spill is relatively minor and will not have a material adverse effect on the
business of the Company, although there can be no assurance thereof.
Terms of the Company's Series A Preferred Stock require the payment of
dividends annually in amounts ranging from $3 per share per annum for the first
year to $5 per share per annum in the third and fourth years. Dividends may be
paid in cash or common stock or a combination thereof, at the Company's option.
Dividends on the Series A Preferred Stock accrue on a daily basis (whether or
not declared) and shall accumulate to the extent not paid on the annual dividend
payment date following the dividend period for which they accrue. The Company
may redeem the Series A Preferred Stock under certain circumstances, and was
required to redeem the Series A Preferred Stock, subject to certain conditions,
in September 1996 at a redemption price of $50 per share, plus accrued and
unpaid dividends (the "Redemption Price"). The Company elected to pay the
Redemption Price in common stock. In September 1996, holders of 55,900 shares of
Series A Preferred Stock converted such shares and related accrued dividends
into 2,423,500 shares of the Company's common stock. The Company is obligated to
use its reasonable efforts to arrange for a firm commitment underwriting in
order to redeem the Series A Preferred Stock. The Company is restricted from
paying cash dividends on common stock until such time as all cumulative
dividends on outstanding shares of Series A and Series C Preferred Stock have
been paid. The Company currently intends to retain its earnings, if any, after
payment of dividends on outstanding shares of Series A and Series C Preferred
Stock, for the development of its business. The Company has been unsuccessful to
date in its efforts to renegotiate certain terms of its agreement with the
holders of the Series A Preferred Stock.
30
<PAGE>
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of financing, it expects to incur substantial
additional costs, including costs related to ongoing research and development
activities, preclinical testing and clinical trials, manufacturing activities,
costs associated with the market introduction of potential products, expansion
of its administrative activities, and development activities undertaken by Genta
Jago. The Company will need substantial additional funds before it can expect to
realize significant product revenue. The Company anticipates that significant
additional sources of financing, including equity financings, will be required
in order for the Company to continue its planned principal operations. The
Company's working capital and additional funding requirements will depend upon
numerous factors, including: (i) the availability of funding; (ii) the progress
of the Company's research and development programs; (iii) the timing and results
of preclinical testing and clinical trials; (iv) the timing and costs of
obtaining regulatory approvals; (v) the level of resources devoted to Genta
Jago; (vi) the level of resources that the Company devotes to sales and
marketing capabilities; (vii) technological advances; (viii) the activities of
competitors; and (ix) the ability of the Company to establish and maintain
collaborative arrangements with others to fund certain research and development,
to conduct clinical trials, to obtain regulatory approvals and, if such
approvals are obtained, to manufacture and market products.
In the Company's Quarterly Report on Form 10-Q for the period ending
September 30, 1996, the Company announced that it intended to sell, and was in
negotiations with a potential buyer for, its JBL subsidiary. However, such
negotiations did not produce an agreement, and the Company is no longer pursuing
its discussions with the potential buyer or any other potential purchasers at
this time.
31
<PAGE>
Item 8. Financial Statements and Supplemental Data
INDEX TO FINANCIAL STATEMENTS COVERED
BY REPORTS OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
Page
Genta Incorporated
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................................................33
Consolidated Balance Sheets at December 31, 1996 and 1995....................................................34
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1996.....................................................................35
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1996.........................................................36
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1996...............................................................37
Notes to Consolidated Financial Statements...................................................................38
Genta Jago Technologies B.V. (A Development Stage Company)
Report of Ernst & Young LLP, Independent Auditors............................................................50
Balance Sheets at December 31, 1996 and 1995.................................................................51
Statements of Operations for the years ended December 31, 1996, 1995 and 1994, and
the period from inception (December 15, 1992) through December 31, 1996...................................52
Statement of Stockholders' Equity (Net Capital Deficiency) for the period
from inception (December 15, 1992) through December 31, 1996..............................................53
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994,
and the period from inception (December 15, 1992) through December 31, 1996...............................54
Notes to Financial Statements................................................................................55
</TABLE>
32
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Genta Incorporated
We have audited the accompanying consolidated balance sheets of Genta
Incorporated as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Genta
Incorporated at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company has
incurred substantial and continued operating losses since inception and requires
substantial additional sources of financing to fund its operations through 1997.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans as to this matter are also described in
Note 1. The 1996 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
February 28, 1997
33
<PAGE>
GENTA INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
ASSETS 1996 1995
------------------ -------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $532,013 $271,755
Receivable from sale of preferred stock - 2,785,800
Trade accounts receivable 602,696 471,296
Notes receivable from officers and employees 62,000 362,000
Inventories 992,243 702,644
Other current assets 185,164 151,923
------------------ -------------------
Total current assets 2,374,116 4,745,418
------------------ -------------------
Property and equipment, net 3,634,281 4,656,955
Investment in and advances to joint venture - 258,896
Intangibles, net 4,022,242 3,577,654
Other assets, net 1,138,745 2,392,220
------------------ -------------------
$11,169,384 $15,631,143
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,481,521 $2,260,495
Accrued payroll and related expenses 782,280 628,750
Other accrued expenses 1,229,845 1,407,748
Deferred revenue 193,121 148,532
Short-term notes payable 350,000 760,000
Current portion of notes payable and
capital lease obligations 291,842 1,120,013
------------------ -------------------
Total current liabilities 4,328,609 6,325,538
------------------ -------------------
Capital lease obligations, less current portion 30,652 896,465
Notes payable, less current portion 1,129,388 1,437,481
Deficit in Joint Venture 1,606,503 -
Commitments and contingencies - -
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized, convertible preferred shares
outstanding:
Series A preferred stock, $.001 par value; 528,100 and 600,000 shares
issued and outstanding at December 31, 1996 and 1995,
respectively, liquidation value is $29,786,307 at December 31, 1996 528 600
Series B preferred stock, $.001 par value; no shares and 3,000 shares
issued and outstanding at December 31, 1996 and 1995,
respectively. - 3
Series C convertible preferred stock, $.001 par value; 1,424 and no
shares issued and outstanding at December 31, 1996 and
1995, respectively, liquidation value is $1,468,822 at
December 31, 1996. 1 -
Common stock, $.001 par value; 150,000,000 shares authorized, 39,991,626
shares and 23,963,534 shares issued and
outstanding at December 31, 1996 and 1995, respectively 39,992 23,964
Additional paid-in capital 108,787,562 102,374,105
Accumulated deficit (108,375,407) (96,949,625)
Accrued dividends payable 3,671,532 1,572,588
Notes receivable from stockholders (49,976) (49,976)
------------------ -------------------
Total stockholders' equity 4,074,232 6,971,659
------------------ -------------------
$11,169,384 $15,631,143
================== ===================
</TABLE>
See Acompanying Notes
34
<PAGE>
GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994
----------------- ----------------- ------------------
Revenues:
<S> <C> <C> <C>
Product sales $4,924,694 $3,781,983 $3,573,701
Gain on sale of technology 373,261 - -
Collaborative research
and development - 1,125,000 3,141,688
----------------- ----------------- ------------------
5,297,955 4,906,983 6,715,389
----------------- ----------------- ------------------
Cost and expenses:
Cost of products sold 2,479,337 1,899,216 1,709,762
Research and development 5,833,697 11,277,238 13,533,600
Charge for acquired in-process
research and development - 4,762,000 1,850,000
Selling, general and administrative 5,638,750 5,438,307 6,376,390
----------------- ----------------- ------------------
13,951,784 23,376,761 23,469,752
----------------- ----------------- ------------------
Loss from operations (8,653,829) (18,469,778) (16,754,363)
Equity in net loss of joint venture (2,712,183) (6,913,180) (7,424,828)
Other income (expense):
Interest income 159,165 348,470 1,014,213
Interest expense (218,935) (331,226) (283,530)
----------------- ----------------- ------------------
Net loss $(11,425,782) $(25,365,714) $(23,448,508)
Dividends on preferred stock (2,524,701) (2,551,726) (2,550,000)
----------------- ----------------- ------------------
Net loss applicable to common shares $(13,950,483) $(27,917,440) $(25,998,508)
================= ================= ==================
Net loss per common share $(.47) $(1.43) $(1.90)
================= ================= ==================
Shares used in computing net
loss per common share 29,834,491 19,518,616 13,709,611
================= ================= ==================
</TABLE>
See Acompanying Notes
35
<PAGE>
GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
------------------------ ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ -------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 600,000 600 13,648,972 13,649 86,525,495
Issuance of common stock on exercise
of options - - 3,306 3 9,847
Issuance of common stock as dividend
on preferred stock - - 222,986 223 1,799,274
Dividends accrued on preferred stock - - - - (2,550,000)
Amortization of deferred compensation - - - - -
Net loss - - - - -
------------ -------- -------------- ------------ ---------------
BALANCE AT DECEMBER 31, 1994 600,000 600 13,875,264 13,875 85,784,616
Issuance of common stock - - 5,734,409 5,735 9,159,542
Issuance of common stock upon
conversion of promissory notes - - 1,777,903 1,778 3,020,660
Issuance of common stock for acquired in-process
research and development - - 1,240,000 1,240 1,610,760
Issuance of Series B convertible preferred
stock 3,000 3 - - 2,774,897
Issuance of warrants to purchase common stock - - - - 173,118
Issuance of common stock on exercise
of options - - 7,324 7 3,655
Issuance of common stock as dividend
on preferred stock - - 1,328,634 1,329 2,398,583
Dividends accrued on preferred stock - - - - (2,551,726)
Repayment of notes receivable from
stockholders - - - - -
Amortization of deferred compensation - - - - -
Net loss - - - - -
------------ -------- -------------- ------------ ---------------
BALANCE AT DECEMBER 31, 1995 603,000 603 23,963,534 23,964 102,374,105
Issuance of Series C convertible preferred
stock 6,000 6 - - 5,492,633
Issuance of Series C convertible preferred
stock on conversion of promissory notes 1,044 1 - - 1,044,000
Issuance of common stock upon conversion
of Series A convertible preferred stock (71,900) (72) 2,554,458 2,555 324,538
Issuance of common stock upon conversion
of Series B convertible preferred stock (3,000) (3) 2,269,425 2,269 31,741
Issuance of common stock upon conversion
of Series C convertible preferred stock (5,620) (6) 5,247,489 5,247 59,488
Issuance of common stock upon
conversion of convertible debentures - - 5,877,899 5,878 1,592,721
Issuance of warrants to purchase common stock - - - - 221,543
for patent legal services
Issuance of common stock on exercise
of options - - 78,821 79 171,494
Dividends accrued on preferred stock - - - - (2,524,701)
Net loss - - - - -
============ ======== ============== ============ ===============
BALANCE AT DECEMBER 31, 1996 529,524 $529 39,991,626 $39,992 $108,787,562
============ ======== ============== ============ ===============
<PAGE>
GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
<CAPTION>
ACCRUED NOTES
ACCUMULATED DIVIDENDS ON RECEIVABLE FROM DEFERRED
DEFICIT PREFERRED STOCK STOCKHOLDERS COMPENSATION
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 (48,135,403) 670,862 (74,726) (265,730)
Issuance of common stock on exercise
of options - - - -
Issuance of common stock as dividend - -
on preferred stock - (1,800,000) - -
Dividends accrued on preferred stock - 2,550,000 - -
Amortization of deferred compensation - - - 200,894
Net loss (23,448,508) - - -
--------------- ---------------- --------------- -------------
BALANCE AT DECEMBER 31, 1994 (71,583,911) 1,420,862 (74,726) (64,836)
Issuance of common stock - - - -
Issuance of common stock upon
conversion of promissory notes - - - -
Issuance of common stock for acquired in-process
research and development - - - -
Issuance of Series B convertible preferred
stock - - - -
Issuance of warrants to purchase common stock - - - -
Issuance of common stock on exercise
of options - - - -
Issuance of common stock as dividend
on preferred stock - (2,400,000) - -
Dividends accrued on preferred stock - 2,551,726 - -
Repayment of notes receivable from
stockholders - - 24,750 -
Amortization of deferred compensation - - - 64,836
Net loss (25,365,714) - - -
--------------- ---------------- ---------------- ----------------
BALANCE AT DECEMBER 31, 1995 (96,949,625) 1,572,588 (49,976) -
Issuance of Series C convertible preferred
stock - - - -
Issuance of Series C convertible preferred
stock on conversion of promissory notes - - - -
Issuance of common stock upon conversion
of Series A convertible preferred stock - (327,021) - -
Issuance of common stock upon conversion
of Series B convertible preferred stock - (34,007) - -
Issuance of common stock upon conversion
of Series C convertible preferred stock - (64,729) - -
Issuance of common stock upon
conversion of convertible debentures - - - -
Issuance of warrants to purchase common stock - - - -
for patent legal services
Issuance of common stock on exercise
of options - - - -
Dividends accrued on preferred stock - 2,524,701 - -
Net loss (11,425,782) - - -
=============== ================ ================ ================
BALANCE AT DECEMBER 31, 1996 $(108,375,407) $3,671,532 $(49,976) $ -
=============== ================ ================ ================
<PAGE>
GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
---------------
<S> <C>
BALANCE AT DECEMBER 31, 1993 38,734,747
Issuance of common stock on exercise
of options 9,850
Issuance of common stock as dividend
on preferred stock (503)
Dividends accrued on preferred stock -
Amortization of deferred compensation 200,894
Net loss (23,448,508)
---------------
BALANCE AT DECEMBER 31, 1994 15,496,480
Issuance of common stock 9,165,277
Issuance of common stock upon
conversion of promissory notes 3,022,438
Issuance of common stock for acquired in-process
research and development 1,612,000
Issuance of Series B convertible preferred
stock 2,774,900
Issuance of warrants to purchase common stock 173,118
Issuance of common stock on exercise
of options 3,662
Issuance of common stock as dividend
on preferred stock (88)
Dividends accrued on preferred stock -
Repayment of notes receivable from
stockholders 24,750
Amortization of deferred compensation 64,836
Net loss (25,365,714)
---------------
BALANCE AT DECEMBER 31, 1995 6,971,659
Issuance of Series C convertible preferred
stock 5,492,639
Issuance of Series C convertible preferred
stock on conversion of promissory notes 1,044,001
Issuance of common stock upon conversion
of Series A convertible preferred stock -
Issuance of common stock upon conversion
of Series B convertible preferred stock -
Issuance of common stock upon conversion
of Series C convertible preferred stock -
Issuance of common stock upon
conversion of convertible debentures 1,598,599
Issuance of warrants to purchase common stock 221,543
for patent legal services
Issuance of common stock on exercise
of options 171,573
Dividends accrued on preferred stock -
Net loss (11,425,782)
===============
BALANCE AT DECEMBER 31, 1996 $4,074,232
===============
</TABLE>
See Accompanying Notes
36
<PAGE>
Genta Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994
------------------ ------------------ -----------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(11,425,782) $(25,365,714) $(23,448,508)
Items reflected in net loss not requiring cash:
Depreciation and amortization 1,518,142 1,761,530 1,704,281
Equity in net loss of joint venture 2,712,183 6,913,180 7,424,828
Charge for acquired in-process
research and development and other - 3,807,556 -
Changes in operating assets and liabilities:
Accounts and notes receivable 168,600 294,012 (307,444)
Inventories (289,599) 106,909 36,564
Other current assets (33,241) 366,790 (83,360)
Accounts payable, accrued expenses and other (803,347) 467,738 931,835
Deferred revenue 44,589 (976,468) (141,688)
------------------ ------------------ -----------------
Net cash used in operating activities (8,108,455) (12,624,467) (13,883,492)
INVESTING ACTIVITIES
Purchase of short-term investments (1,497,775) - (10,935,406)
Maturities of short-term investments 1,497,775 3,843,685 24,739,731
Purchase of property and equipment (115,922) (778,964) (1,264,168)
Investment in and advances to joint venture (846,784) (7,722,255) (6,749,298)
Deposits and other 642,654 (2,021,908) (1,291,977)
------------------ ------------------ -----------------
Net cash provided by (used in) investing activities (320,052) (6,679,442) 4,498,882
FINANCING ACTIVITIES
Proceeds from notes payable 2,176,500 4,877,471 757,456
Repayments of notes payable and capital leases (1,948,438) (1,743,728) (1,069,289)
Proceeds from issuance of preferred stock, net 8,267,539 - -
Proceeds from issuance of common stock, net 171,573 9,168,939 9,850
Other 21,591 13,762 (503)
------------------ ------------------ -----------------
Net cash provided by (used in) financing activities 8,688,765 12,316,444 (302,486)
------------------ ------------------ -----------------
Increase (decrease) in cash and cash equivalents 260,258 (6,987,465) (9,687,096)
Cash and cash equivalents at beginning of year 271,755 7,259,220 16,946,316
------------------ ------------------ -----------------
Cash and cash equivalents at end of year $532,013 $271,755 $7,259,220
================== ================== =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $225,186 $298,432 $283,530
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations
entered into for equipment - 622,746 1,182,015
Preferred stock dividends accrued 2,524,701 2,551,726 2,550,000
Common stock issued in payment of dividends
on preferred stock 425,757 2,399,912 1,799,497
Common stock issued upon conversion of notes
payable and accrued interest 1,044,001 3,022,438 -
Preferred stock issued for receivable - 2,774,900 -
Common Stock issued upon conversion of
convertible debentures 1,598,599 - -
Exercise of buyout option for equipment under
capital lease obligation in exchange for deposits 1,200,000 - -
</TABLE>
See Accompanying Notes
37
<PAGE>
Genta Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization and Business
Genta Incorporated ("Genta" or the "Company") is an emerging
biopharmaceutical company engaged in the development of a pipeline of
pharmaceutical products. The near to mid-term segment of this product pipeline
consists of oral controlled-release drugs being developed by the Company's drug
delivery joint venture with Jagotec AG ("Jagotec"), Genta Jago Technologies B.V.
("Genta Jago"). The Company's longer-term research efforts are focused on the
development of proprietary Anticode(TM) oligonucleotide ("Anticode")
pharmaceuticals intended to block or regulate the production of disease-related
proteins by acting at the genetic level. The Company also manufactures and
markets specialty biochemical and pharmaceutical intermediate products through
its manufacturing subsidiary, JBL Scientific, Inc. ("JBL").
Basis of Presentation
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company is actively seeking
collaborative agreements, additional equity financing and other financing
arrangements with potential corporate partners and other sources. However, there
can be no assurance that any such collaborative agreements or other sources of
funding will be available on favorable terms, if at all. The Company is also
considering the licensing or sale of certain of its assets and technology,
delaying or curtailing of certain of its development programs, further
reductions in workforce and spending or other measures in order to continue its
operations. The 1996 financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, JBL and Genta Pharmaceuticals Europe,
S.A., the Company's European subsidiary based in Marseilles, France. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Investment in Joint Venture
The Company has a 50% ownership interest in a joint venture, Genta
Jago, a Netherlands corporation. The investment in joint venture is accounted
for under the equity method (Note 5).
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 amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
Revenue Recognition and Major Customers
Revenue from product sales is recognized upon shipment. One customer, a
European distributor, accounted for approximately 27%, 21% and 19% of product
sales during the years ended December 31, 1996, 1995 and 1994, respectively. One
other customer accounted for approximately 16% and 12% of product sales during
the years ended December 31, 1995 and 1994, respectively, while another customer
comprised 18% of 1994 product sales. No other customer accounted for more than
8% of product sales in 1996. Collaborative research and development revenues are
recorded as earned, generally ratably, as research and development activities
are performed under the terms of
38
<PAGE>
the contracts. Payments received in excess of amounts earned are deferred. See
Note 9 for major collaborative research and development arrangements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and
other highly liquid investments with maturities of three months or less when
purchased. The carrying value of these instruments approximates fair value.
Concentration of Credit Risk
The Company generally invests its excess cash in high credit quality
debt instruments of corporations and financial institutions, and in United
States government securities. Such investments are made in accordance with the
Company's investment policy, which establishes guidelines relative to
diversification and maturities designed to maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The Company has not experienced any losses on its
cash equivalents or short-term investments.
The Company markets its specialty biochemical and intermediate products
to the pharmaceutical and diagnostic industries. Generally, collateral is not
required on the Company's sales. Credit losses have been insignificant and
within management's expectations.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment is stated at cost and depreciated over the
estimated useful lives of the assets using the straight-line method. Leasehold
improvements are stated at cost and amortized over the shorter of the estimated
useful lives of the assets or the lease term. Amortization of equipment under
capital leases is reported with depreciation of property and equipment.
Intangible Assets
Intangible assets, consisting primarily of capitalized patent costs and
purchased proprietary technology, are amortized using the straight line basis
over a term of 5-17 years for issued patents, 14 years for purchased proprietary
technology and 5-7 years for organizational and other amortizable costs.
Asset Impairment
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no affect on the financial
statements from the adoption of Statement No. 121.
Employee Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under SFAS No. 123, deferred compensation is
recorded for
39
<PAGE>
the excess of the fair value of the stock on the date of the option grant, over
the exercise price of the option. The deferred compensation is amortized over
the vesting period of the option.
Net Loss Per Common Share
Net loss per common share is computed using the weighted average number
of common shares outstanding during each period. Shares issuable upon the
exercise of outstanding stock options and warrants and upon the conversion of
convertible preferred stock are not reflected as their effect is anti-dilutive.
2. Inventories
<TABLE>
<CAPTION>
Inventories are comprised of the following:
December 31,
-----------------------
1996 1995
------ ----
<S> <C> <C>
Raw materials and supplies................................. $ 342,875 $ 280,621
Work-in-process............................................ 272,259 162,097
Finished goods............................................. 377,109 259,926
----------- -----------
$ 992,243 $ 702,644
=========== ===========
3. Property and Equipment
Property and equipment is comprised of the following:
December 31,
-----------------------
1996 1995
------ ----
Equipment.................................................. $ 4,093,563 $ 7,719,863
Leasehold improvements..................................... 1,128,520 1,385,041
Furniture and fixtures..................................... 105,318 116,161
Construction in progress................................... 624,167 359,273
------------- ------------
5,951,568 9,580,338
Less accumulated depreciation and amortization............. (2,317,287) (4,923,383)
------------- ------------
$ 3,634,281 $ 4,656,955
============= ============
</TABLE>
Included in property and equipment at December 31, 1996 and 1995, is
equipment under capital leases aggregating $200,000 and $4.7 million,
respectively, all of which is pledged as security pursuant to the Company's
capital lease agreements. Accumulated amortization with respect to the equipment
under capital leases totaled $80,000 and $3 million at December 31, 1996 and
1995, respectively.
4. Notes Receivable from Officers and Employees
Notes receivable consist of loans made to officers and employees to
facilitate their relocation. Such loans are generally secured by each
individual's residence.
5. Genta Jago Joint Venture
In December 1992, the Company and Jagotec, a subsidiary of Jago Holding
AG which was acquired by SkyePharma in May 1996, formed Genta Jago, a 50/50
joint venture to develop and commercialize products in six major therapeutic
areas. Under the arrangement, Jagotec granted Genta Jago an exclusive license to
its GEOMATRIX oral controlled-release technology for the development and
commercialization of approximately 25 specified products. In May 1995, the
parties entered into an agreement to expand Genta Jago by adding the rights to
develop and commercialize an additional 35 products. With these additional
products, Genta Jago now maintains the rights to develop controlled-release
formulations of approximately 60 products using Jagotec's GEOMATRIX technology.
Under the agreement, Genta Jago also acquired certain manufacturing rights with
respect to such products. In connection with the expansion of Genta Jago, the
parties elected to focus Genta Jago's activities
40
<PAGE>
exclusively on GEOMATRIX-based products and, as a result, Genta Jago returned to
Genta in May 1995 the right to develop six Anticode products licensed from Genta
in 1992.
In connection with the formation of Genta Jago, the Company made an
initial capital contribution of $4 million to Genta Jago and issued 1,200,000
unregistered shares of Genta's common stock to Jagotec and an affiliate. To
obtain the additional product and manufacturing rights during 1995, Genta
applied $5 million in option and related fees paid to Jagotec and its
affiliates, of which $3.85 million was paid during 1994 (including $1.85 million
of non-refundable fees charged to expense during 1994) and $1.15 million was
paid during the first quarter of 1995. The Company also issued an additional
1.24 million unregistered shares of Genta's common stock to an affiliate of
Jagotec in May 1995. The Company recorded a charge for acquired in-process
research and development of $4.8 million during 1995 consisting of the fair
value of the 1.24 million shares of common stock issued ($1.6 million), $2
million of refundable option fees paid during 1994, and the $1.15 million in
fees paid during the first quarter of 1995. Genta Jago is required to pay
certain additional fees to Jagotec upon Genta Jago's receipt of revenues from
third parties, and pay manufacturing royalties to Jagotec.
The Company is also required to provide loans to Genta Jago pursuant to
a working capital agreement which expires in October 1998. The loans are
advanced up to a mutually agreed upon maximum commitment amount, which amount is
established by the parties on a periodic basis. In connection with Genta Jago's
return of the Anticode license rights to Genta in May 1995, the working capital
loan payable by Genta Jago to Genta was credited with a principal reduction of
approximately $4.4 million. As of December 31, 1996, the Company had advanced
working capital loans of approximately $15.3 million to Genta Jago, net of
principal repayments and the aforementioned credit, which amount fully satisfied
the loan commitment established by the parties through December 31, 1996. Such
loans bear interest and are payable in full in October 1998, or earlier in the
event certain revenues are received by Genta Jago from third parties. There can
be no assurance, however, that Genta Jago will obtain the necessary financial
resources to repay such loans to Genta. The Company has recorded substantially
all of the net losses incurred by Genta Jago (excluding certain intercompany
transactions) as a reduction of the Company's investment in joint venture.
Under terms of the joint venture, Genta Jago has contracted with the
Company to conduct research and development and provide certain other services.
Revenues associated with providing such services, totaling $1.6 million in 1996,
$2.7 million in 1995, and $2.9 million in 1994, are recorded by the Company as a
reduction of the related research and development and general and administrative
expenses. Terms of the arrangement also grant the Company an option to purchase
Jagotec's interest in Genta Jago exercisable from December 1998 through 2000.
Genta Jago entered into collaborative development agreements with
Gensia, Inc., Apothecon, Inc., a subsidiary of Bristol-Meyers Squibb Co., and
Krypton, Ltd., a subsidiary of SkyePharma, during January 1993, March 1996 and
October 1996, respectively. In October 1996, SkyePharma signed a letter of
intent with Gensia, Inc. and Boehringer Mannheim Corp. whereby Brightstone,
SkyePharma's United States subsidiary, will assume rights to develop Procardia
XL(R) in collaboration with Boehringer Mannheim. Such agreements provide funding
to Genta Jago for the development and clinical testing of selected
controlled-release pharmaceuticals in addition to potential milestone payments
and royalties on future product sales.
41
<PAGE>
Condensed financial information for Genta Jago Technologies B.V. is set forth
below.
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Balance Sheets Data:
Advance contract payments to related parties...................... $ - $ 1,539,000
Receivables under collaboration agreements........................ 904,000 -
Other current assets.............................................. 142,000 245,000
------------- --------------
Total current assets.............................................. 1,046,000 1,784,000
Other assets...................................................... 11,000 12,000
------------- --------------
$ 1,057,000 $ 1,796,000
============= ==============
Current liabilities............................................... $ 3,053,000 $ 1,360,000
Notes payable to Genta Incorporated............................... 15,287,000 13,787,000
Net capital deficiency............................................ (17,283,000) (13,351,000)
------------- --------------
$ 1,057,000 $ 1,796,000
============= ==============
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statements of Operations Data:
Collaborative research and development revenues................... $ 5,477,000 $ 2,968,000 $ 5,285,000
Costs and expenses................................................ 8,453,000 10,336,000 13,338,000
------------ ------------ -------------
Loss from operations.............................................. (2,976,000) (7,368,000) (8,053,000)
Gain on waiver of debt in exchange for return of
license rights to related party................................ - 4,703,000 -
Interest expense.................................................. (956,000) (746,000) (298,000)
-------------- -------------- --------------
Net loss.......................................................... $ (3,932,000) $ (3,411,000) $ (8,351,000)
============== ============== ==============
</TABLE>
6. Intangibles
Intangibles consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
----- ----
<S> <C> <C>
Purchased proprietary technology.................................. $ 1,747,082 $ 1,747,082
Patent and patent applications.................................... 2,964,193 2,356,556
Organizational and other amortizable costs........................ 414,521 428,773
------------- --------------
5,125,796 4,532,411
Less accumulated amortization..................................... (1,103,554) (954,757)
------------- --------------
Net intangible assets............................................. $ 4,022,242 $ 3,577,654
============= ==============
</TABLE>
42
<PAGE>
7. Notes Payable and Leases
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
----- ----
<S> <C> <C>
Note payable with interest at 12.63%, due in monthly installments of
$22,407, secured by equipment with a net book value of approximately
$703,000 and security deposit of $251,000.............................. $ 328,367 $ 540,955
Research financing obligation payable to a French governmental
agency, non-interest bearing, maturing through 2003.................... 1,040,462 1,101,103
Other.................................................................... 7,435 16,584
------------- -------------
1,376,264 1,658,642
Less current portion..................................................... (246,876) (221,161)
------------- -------------
$ 1,129,388 $ 1,437,481
============= =============
</TABLE>
During 1995, the Company obtained $1,100,000 in financing aid from a
French governmental agency to be used to fund certain of its development
programs. The aggregate principal maturities of notes payable for the years 1997
through 2001 are $247,000, $185,000, $154,000, $193,000, and $385,000,
respectively and $212,000 thereafter.
The Company leases its facilities under operating leases that generally
provide for annual cost of living related increases. The JBL facilities are
leased from its prior owners, who include a director, an executive officer and
other stockholders of the Company. Certain equipment is leased under operating
and capital leases. The Company's equipment financing agreements contain certain
financial covenants, the most significant of which required the Company to
provide certain deposits in the event that the Company's cash and investment
balances fell below specified levels. Included in other assets at December 31,
1996 and 1995 was $251,000 and $1.6 million in cash deposits primarily
associated with the Company's equipment financing agreements. Minimum future
obligations under both operating and capital leases at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Operating leases
-------------------------
Related Capital
parties Others leases
---------- -------- ---------
<S> <C> <C> <C>
1997............................................. $ 389,000 $ 447,000 $ 48,000
1998............................................. 408,000 99,000 31,000
1999............................................. 429,000 99,000 1,000
2000............................................. 188,000 99,000 ---
2001............................................. --- 99,000 ---
Thereafter....................................... --- 198,000 ---
------------ ------------- -----------
Total future minimum lease payments.............. $ 1,414,000 $ 1,041,000 80,000
============ =============
Less amount representing interest................ (4,000)
------------
Present value of future minimum lease payments... 76,000
Less current portion............................. (45,000)
------------
Long-term portion................................ $ 31,000
============
</TABLE>
Total rent expense under operating leases for the years ended December
31, 1996, 1995 and 1994 was $1,043,000, $1,117,000, and $1,090,000,
respectively.
43
<PAGE>
8. Stockholders' Equity
Subsequent Event
In February 1997, the company raised gross proceeds of $3 million in a
private placement of Senior Secured Convertible Bridge Notes (the "Convertible
Notes") that bear interest at 12% per annum and mature on the earlier of June
30, 1997 or five business days following the completion of any equity offering
or series of equity offerings with gross proceeds in excess of $2.5 million.
Warrants to purchase 7.8 million and 12.2 million shares of common stock at
exercise prices of $.001 and $.55, respectively, are attached to the Convertible
Notes. The Convertible Notes are convertible, at the option of the holder, into
600,000 shares of Series D Preferred Stock, subject to antidilution adjustments.
In the event of default, the holders of the Convertible Notes have the right to
convert the lesser of (i) the then outstanding principal amount of the
Convertible Notes or (ii) 10% of the original principal amounts of the
Convertible Notes into common shares at a conversion rate of $.001 per share,
subject to antidilution adjustments. The holders of the Convertible Notes also
have the right to appoint a majority of members of the Board of Directors of the
Company; provided however, that in the event the Company does not obtain future
financings in excess of $3.5 million on or before June 30, 1997, the holders
shall have the contractual right to appoint only two directors or observers and,
if additional directors have been appointed, such additional directors shall be
required to resign.
Preferred Stock
In September 1996, the Company raised gross proceeds of $2 million
(approximately $1.9 million net of offering fees and costs) through the sale of
Convertible Debentures to investors in a private placement outside the United
States. The Convertible Debentures bear interest at the rate of 4% per annum
with principal and interest due and payable August 1, 1997. The Convertible
Debentures were convertible, at the option of the holders, beginning in October
1996, into shares of common stock at a conversion price equal to 75 percent of
the average Nasdaq closing bid prices of Genta common stock for a specified
period prior to the date of conversion. Terms of the Convertible Debentures also
provide for interest payable in shares of the Company's common stock. In
November 1996, $1.65 million of the Convertible Debentures and the related
accrued interest was converted into approximately 5.9 million shares of common
stock.
In March 1996, the Company raised gross proceeds of $6 million
(approximately $5.5 million net of offering fees and costs) in a private
placement of Series C Convertible preferred stock (the "Series C Preferred
Stock") sold to institutional investors. In 1996, 5,620 shares of the Series C
Preferred Stock and accrued dividends was converted at the option of the holders
into approximately 5.2 million shares of Genta's common stock. The conversion
price is based upon 75% of the average Nasdaq closing bid prices of Genta's
common stock for a specified period. Terms of the Series C Preferred Stock also
provide for dividends payable in shares of the Company's common stock. The
Company has agreed to file a registration statement with the Securities and
Exchange Commission covering the resale of the common stock issuable upon the
payment of the remaining dividends and the conversion of the Series C Preferred
Stock.
On December 29, 1995, the Company completed the sale of 3,000 shares of
Series B Convertible preferred stock (the "Series B preferred stock") at a price
of $1,000 per share to institutional investors outside of the United States.
Proceeds from the offering totaling approximately $2.8 million were reflected as
a receivable from sale of preferred stock at December 31, 1995 and were received
by the Company on January 2, 1996. The Series B preferred stock was converted
into approximately 2.3 million shares of the Company's common stock in late
February 1996 pursuant to terms of the Series B stock purchase agreements.
In October 1993, the Company completed the sale of 600,000 shares of
Series A convertible preferred stock ("the Series A Preferred Stock") in a
private placement of units consisting of one share of Series A Preferred Stock
and a warrant to acquire one share of common stock, sold at an aggregate price
of $50 per unit. Each share of Series A Preferred Stock is convertible, at any
time prior to redemption, into 21.31 shares of the Company's common stock,
subject to antidilution adjustments. Dividends on the Series A Preferred Stock
are cumulative from the date of issuance, and are payable annually in amounts
ranging from $3 per share per annum for the first year to $5 per share per annum
in the third and fourth years. Dividends may be paid in cash or common stock or
a combination thereof at the Company's option. Dividends are accrued using the
straight-line method over the four year period. The
44
<PAGE>
Company may redeem the Series A Preferred Stock under certain circumstances, and
was required to redeem the Series A Preferred Stock, at the option of the
holder, in September 1996 at a redemption price of $50 per share, plus accrued
and unpaid dividends (the "Redemption Price"). The Company elected to pay the
Redemption Price in common stock. In September 1996, 55,900 shares of Series A
Preferred Stock converted such shares and related accrued dividends into
approximately 2.4 million shares of the Company's common stock. The Company is
obligated to use its reasonable efforts to arrange for a firm commitment
underwriting in order to redeem the Series A Preferred Stock. The company is
restricted from paying cash dividends on common stock until such time as all
cumulative dividends on outstanding shares of Series A and Series C Preferred
Stock have been paid.
In December 1993, the Board of Directors of the Company adopted a
Stockholder Rights Plan which provides for the distribution of a preferred stock
purchase right ("Right") as a dividend for each share of the Company's common
stock held of record at the close of business on January 21, 1994. Under certain
circumstances involving an acquisition of 15% or more of the Company's common
stock or a specified business combination, the Rights would permit the holder
(other than the 15% holder) to purchase shares of the Company's common stock or,
if applicable, common stock of an acquirer at a 50% discount upon payment of an
exercise price of $50 per Right. The Rights expire in December 2003 and may be
redeemed by the Company prior to a 15% acquisition at a price of $.01 per Right.
Warrants
The Company issued five-year warrants to purchase 600,000 shares of
common stock at an exercise price of $2.60 per share, subject to antidilution
adjustments, in connection with the Company's private placement of units in
October 1993. The Company issued a five-year warrant to purchase 235,250 shares
of common stock at an exercise price of $1.70 per share in connection with a
private placement of common stock in May 1995. In addition, five-year warrants
to purchase an aggregate of 247,312 shares of common stock at exercise prices
ranging from $1.94 to $2.13 per share were issued to two equipment financing
companies during 1995. In October 1996, the Company issued a five year warrant
to purchase 375,123 shares of common stock at an exercise price of $1.32 per
share to a patent law firm, in exchange for legal services. In October 1996, the
Company also issued a five year warrant to purchase 100,000 shares of common
stock at an exercise price of $1.50 per share in connection with the Convertible
Debentures issued in September 1996. Warrants to purchase 7.8 million and 12.2
million shares of common stock at exercise prices of $.001 and $.55 per share,
respectively, were also issued in connection with the Convertible Notes.
45
<PAGE>
Stock Benefit Plans
The Company's 1991 Stock Plan (the "Plan") provides for the sale of
stock and the grant of stock options to employees, directors, consultants and
advisors of the Company. Options may be designated as incentive stock options or
non-statutory stock options; however, incentive stock options may be granted
only to employees of the Company. Options under the Plan have a term of up to
ten years and must be granted at not less than the fair market value (85% of
fair market value for non-statutory options) on the date of grant. Common stock
sold and options granted pursuant to the Plan generally vest over a period of
four to five years. Information with respect to the Company's 1991 Stock Plan is
as follows:
<TABLE>
<CAPTION>
Shares under
option Price
------------ -------
<S> <C> <C>
Balance at December 31, 1993............................................... 1,367,116 $ .50-15.75
Granted............................................................... 417,950 4.88-8.75
Exercised............................................................. (3,306) .50-7.25
Cancelled............................................................. (34,537) .50-12.00
------------ -----------
Balance at December 31, 1994............................................... 1,747,223 .50-15.75
Granted............................................................... 1,988,035 1.75-6.25
Exercised............................................................. (7,324) .50
Cancelled............................................................. (1,839,092) .50-9.88
------------ ----------
Balance at December 31, 1995............................................... 1,888,842 .50-15.75
Granted............................................................... 136,773 .41-2.63
Exercised............................................................. (78,821) .50-2.25
Cancelled............................................................. (297,492) .50-15.75
------------ -----------
Balance at December 31, 1996............................................... 1,649,302 $ .41-7.44
============ ===========
</TABLE>
In April 1995, the Stock Plan Committee of the Board of Directors
approved a program whereby employees (including executive officers) of the
Company and certain other option holders could exchange their unexercised
options ("Old Options") on a one-for-one basis for new options ("New Options")
priced at the market value on April 20, 1995. The New Options have the same
vesting schedule and contractual terms as the Old Options. However, the New
Options held by employees (excluding executive officers) and certain other
holders were not exercisable until April 20, 1996 and the New Options held by
executive officers of the Company are not exercisable until April 20, 1997
unless the holder is involuntarily terminated without cause prior to such date.
An aggregate of 1,581,330 options with an average exercise price of
approximately $7.84 per share were exchanged for New Options with an exercise
price of $2.25 per share on April 20, 1995. All of the replacement options are
included in options granted and canceled in the above summary of stock option
activity.
At December 31, 1996, options to purchase approximately 1,248,000
shares of common stock were exercisable at a weighted average price of
approximately $2.81 per share and approximately 669,000 shares of common stock
were available for grant or sale under the Plan. An aggregate of approximately
18,259,930 shares of common stock were reserved for the conversion of preferred
stock and the exercise of outstanding options and warrants at December 31, 1996.
Adjusted pro forma information regarding net loss is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the "Black Scholes"
method for option pricing with the following weighted-average assumptions for
both 1995 and 1996: volatility factors of the expected market value of the
Company's common stock of .7 and .8, respectively; risk-free interest rates of
6%; dividend yields of 0%; and a weighted-average expected life of the option of
five years.
46
<PAGE>
For purposes of adjusted pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
The Company's adjusted pro forma information follows:
Year ended Year ended
December 31, December 31,
1996 1995
------ -----
Adjusted pro forma net loss.................. $ (14,280,253) $ (28,027,475)
Adjusted pro forma loss per share .......... $ (.48) $ (1.44)
The results above are not likely to be representative of the effects of
applying FAS123 on reported net income or loss for future years as these amounts
reflect the expense for only one or two years vesting.
The weighted-average exercise price of options granted, exercised and
cancelled during the year were $1.77, $2.14, and $2.23, respectively. The
weighted-average grant-date fair value of the options granted during the year
was $0.85. Following is a further breakdown of the options outstanding as of
December 31, 1996.
<TABLE>
<CAPTION>
Weighted
Average
Weighted Weighted exercise
Average Average price of
Range Options remaining Exercise Options options
of Prices Outstanding life in years Price exercisable exercisable
--------- ----------- ------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.41 - $1.69 54,878 6.37 $ 0.61 26,978 $ 0.50
$1.75 - $2.63 1,525,674 7.39 2.21 1,158,883 2.22
$3.00 - $7.44 68,750 6.58 7.34 62,472 7.41
---------------------------------------------------------------------------------------------------------------
1,649,302 7.30 $ 2.33 1,248,133 $ 2.45
===============================================================================================================
</TABLE>
9. Research, Development and Licensing Arrangements
The Company entered into collaborative research and development
agreements with The Procter & Gamble Company ("P&G") and the Wyeth-Ayerst
Laboratories Division of American Home Products Corporation ("WyethAyerst")
during 1991 and 1992, respectively. The agreements generally provided for the
Company to receive research funding for the discovery and development of
specified Anticode products. The Wyeth-Ayerst collaboration ended in August 1994
and the P&G collaboration, as extended and modified, ended in September 1995.
The Company received research payments of $3 million during 1994, pursuant to
the P&G and Wyeth-Ayerst agreements. Collaborative revenues of $1.1 million and
$3.1 million were recognized under these contracts during 1995 and 1994,
respectively, which amounts approximate costs incurred on the programs.
In addition to the aforementioned arrangements, the Company has entered
into various license, royalty and sponsored research agreements which provide
the Company with rights to develop and market products covered under the
agreements. In connection with certain license agreements entered into with a
director of the Company and two other stockholders, the Company incurred royalty
expense of $100,000, $100,000, and $75,000 in 1996, 1995, and 1994,
respectively, and is committed to pay minimum royalties of $100,000 annually
until expiration of the related patents.
47
<PAGE>
10. Income Taxes
Significant components of the Company's deferred tax assets as of
December 31, 1996 and 1995 are shown below. A valuation allowance of $32,508,000
has been recognized to offset the net deferred tax assets as realization of such
assets is uncertain.
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
------ ----
<S> <C> <C>
Deferred tax assets:
Capitalized research expenses........................ $ 2,663,000 $ 2,231,000
Net operating loss carryforwards..................... 22,177,000 19,490,000
Research and development credits..................... 3,248,000 2,920,000
Purchased technology and license fees................ 4,523,000 4,519,000
Other, net........................................... 1,108,000 116,000
-------------- -------------
Total deferred tax assets............................ 33,719,000 29,276,000
Valuation allowance for deferred tax assets.......... (32,508,000) (28,305,000)
-------------- -------------
1,211,000 971,000
Deferred tax liabilities:
Patent expenses...................................... (1,211,000) (971,000)
-------------- -------------
Net deferred tax assets.............................. $ --- $ ---
============== =============
</TABLE>
At December 31, 1996, the Company has federal and California net
operating loss carryforwards of approximately $61,731,000 and $9,525,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards. The federal tax loss carryforwards
will begin expiring in 2003, unless previously utilized. The California tax loss
carryforwards began expiring in 1996 and will continue to expire unless
previously utilized. (Approximately $277,000 of the California tax loss expired
in 1996.) The Company also has federal and California research and development
tax credit carryforwards of $2,585,000 and $1,019,000, respectively, which will
begin expiring in 2003 unless previously utilized.
Federal and California tax laws limit the utilization of income tax net
operating loss and credit carryforwards that arise prior to certain cumulative
changes in a corporation's ownership resulting in change of control of the
Company. The future annual use of net operating loss carryforwards and research
and development tax credits will be limited due to the ownership changes that
occurred during 1990, 1991, 1993 and 1996. Because of the decrease in value of
the Company's stock, the ownership change which occurred in 1996 will have a
material impact on the utilization of these carryforwards.
11. Employee Savings Plan
The Company began a 401(k) program in 1994 which allows participating
employees to contribute up to 15% of their salary, subject to annual limits. The
Board of Directors may, at its sole discretion, approve Company contributions.
No such contributions have been approved or made.
12. Gain on Sale of Technology
In December 1996, the Company sold the rights to two development-stage
dermatological products for cash of $373,261.
13. Contingencies
On February 5, 1997, Equity-Linked Investors, L.P. and Equity-Linked
Investors-II (collectively, the "Plaintiffs") who, as a group, beneficially own
more than five percent of the outstanding shares of the Common Stock of the
Company as Series A preferred stockholders, filed Suit (the "Suit") in the
Delaware Court of Chancery (the "Court") against the Company, each of the
Company's directors and the Aries Funds. Through the Suit, the Plaintiffs
48
<PAGE>
are seeking to enjoin the transactions described in footnote 8 under the caption
"Subsequent Event" (the "Transactions"), damages, attorney fees, and such other
and further relief as the Court may deem just and proper. The Suit alleges that
the Board of Directors of the Company breached fiduciary duties by failing to
consider financing alternatives to the Transactions and further alleges that the
Transactions were not in the best interests of the stockholders. Additionally,
the Suit alleges that the Aries Funds aided and abetted such breach of fiduciary
duty through their participation in the Transactions. On March 4 and 5, 1997, a
trial was held before the Court. The Court has established a briefing schedule
and set a hearing for post-trial arguments on April 1, 1997.
In October 1996, JBL retained a chemical consulting firm to advise it
with respect to environmental compliance regarding an incident of soil and
groundwater contamination (the "Spill") by small quantities of certain
chemicals. The Company believes, based upon information known to date, that the
Spill is relatively minor and will not have a material adverse effect on the
business of the Company, although there can be no assurance thereof.
49
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Genta Jago Technologies B.V.
We have audited the accompanying balance sheets of Genta Jago
Technologies B.V. (a development stage company) as of December 31, 1996 and
1995, and the related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996 and for
the period December 15, 1992 (inception) through December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Genta Jago
Technologies B.V. (a development stage company) at December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996 and for the period December 15, 1992
(inception) through December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company has
incurred operating losses since inception and requires substantial sources of
financing to fund its operations through 1997. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan as to this matter are also described in Note 1. The 1996
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
February 28, 1997
50
<PAGE>
GENTA JAGO TECHNOLOGIES B.V.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
ASSETS 1996 1995
------------------- ------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents................................. $36,092 $245,172
Receivables under collaboration agreements................ 903,838 -
Advance contract payments to related parties.............. - 1,538,594
Other current assets...................................... 105,934 -
------------------- ------------------
Total current assets......................................... 1,045,864 1,783,766
Property and equipment, net.................................. 4,900 7,500
Other assets................................................. 6,651 4,492
=================== ==================
$1,057,415 $1,795,758
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses .................... $571,539 $247,354
Payable to related parties................................ 2,481,452 794,838
Deferred contract revenue................................. - 317,555
------------------- ------------------
Total current liabilities.................................... 3,052,991 1,359,747
Notes payable to related party............................... 15,287,099 13,787,099
Stockholders' equity (net capital deficiency):
Common Stock, 14,700 shares authorized, 10,000 shares issued
and outstanding at stated value........................ 512,000 512,000
Additional paid-in capital................................ 3,741,950 3,741,950
Deficit accumulated during the development stage.......... (21,536,625) (17,605,038)
------------------- ------------------
Net capital deficiency....................................... (17,282,675) (13,351,088)
=================== ==================
$1,057,415 $1,795,758
=================== ==================
</TABLE>
See accompanying notes
51
<PAGE>
Genta Jago Technologies B.V.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative from
Years ended December 31. inception
----------------------------------------------- (December 15, 1992)
1996 1995 1994 to December 31, 1996
------------- ---------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Revenues:
Collaborative research
and development............................ $5,477,059 $2,968,463 $5,284,602 $15,406,378
Cost and expenses:
Research and development,
including contractual amounts to
related parties of $7,040,438, $9,318,460,
and $12,456,985, and $35,629,158 in 1996,
1995, 1994 and the period from inception
(December 15, 1992) to December 31, 1996,
respectively............................... 8,091,465 9,866,038 13,046,365 38,263,584
General and and administrative................ 361,920 470,081 291,782 1,385,383
--------------- ---------------- --------------- ---------------
8,453,385 10,336,119 13,338,147 39,648,967
-------------- ---------------- --------------- --------------
Loss from operations............................ (2,976,326) (7,367,656) (8,053,545) (24,242,589)
Other income (expense):
Gain on waiver of debt in exchange for return
of license rights to related party - 4,703,352 - 4,703,352
Interest income................................. 5,814 2,620 8,215 19,546
Interest expense................................ (961,075) (749,808) (306,051) (2,016,934)
---------------- ---------------- --------------- --------------
(955,261) 3,956,164 (297,836) 2,705,964
---------------- ---------------- --------------- --------------
Net loss........................................ $(3,931,587) $(3,411,492) $(8,351,381) $(21,536,625)
================ ================ =============== ==============
</TABLE>
See accompanying notes
52
<PAGE>
GENTA JAGO TECHNOLOGIES B.V.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
PERIOD FROM INCEPTION (DECEMBER 15, 1992) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON DEFICIT STOCKHOLDERS'
STOCK ADDITIONAL ACCUMULATED EQUITY
-------------------- PAID-IN DURING THE (NET CAPITAL
SHARES AMOUNT CAPITAL DEVELOPMENT STAGE DEFICIENCY)
---------- --------- ----------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock at
$51.20 per share for cash .... 2,940 $150,528 $ -- $ -- $150,528
Capital contributions in excess
of stated value .............. -- -- 12,882 -- 12,882
------- -------- ---------- ------------ ------------
Balance at December 31, 1992 .. 2,940 150,528 12,882 -- 163,410
Issuance of common stock at
$51.20 per share for cash ..... 7,060 361,472 -- -- 361,472
Capital contributions in excess
of stated value ............... -- -- 3,729,068 -- 3,729,068
Net loss ...................... -- -- -- (5,842,165) (5,842,165)
------ -------- ---------- ------------ ------------
Balance at December 31, 1993 .. 10,000 512,000 3,741,950 (5,842,165) (1,588,215)
Net loss ...................... -- -- -- (8,351,381) (8,351,381)
------ -------- ---------- ------------ ------------
Balance at December 31, 1994 .. 10,000 512,000 3,741,950 (14,193,546) (9,939,596)
Net loss ...................... -- -- -- (3,411,492) (3,411,492)
------ -------- ---------- ------------ ------------
Balance at December 31, 1995 .. 10,000 512,000 3,741,950 (17,605,038) (13,351,088)
Net loss ...................... -- -- -- (3,931,587) (3,931,587)
------ -------- ---------- ------------ ------------
Balance at December 31, 1996 .. 10,000 $512,000 $3,741,950 $(21,536,625) $(17,282,675)
====== ======== ========== ============ ============
</TABLE>
See accompanying notes.
53
<PAGE>
GENTA JAGO TECHNOLOGIES B.V.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE FROM
INCEPTION
YEARS ENDED DECEMBER 31, (DECEMBER 15, 1992)
------------------------------------- --------------------
1996 1995 1994 TO DECEMBER 31, 1996
--------------- ------------------- ----------------- ----------------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $(3,931,587) $(3,411,492) $(8,351,381) $(21,536,625)
Items reflected in net loss not
requiring cash:
Depreciation and amortization 2,600 2,600 3,451 13,168
Technology license fee 192,580
- - -
Gain on waiver of debt in exchange
for return of license rights to
related party - (4,703,352) - (4,703,352)
Changes in operating assets and liabilities:
Advance contract payments
to related parties 1,538,594 435,276 1,016,053
-
Receivables under collaboration
agreements (903,838) - - (903,838)
Other current assets (105,934) 68,440 (56,770) (105,934)
Accounts payable and accrued expenses 324,185 112,227 20,112 571,539
Payable to related parties 1,686,614 277,479 267,085 2,481,452
Deferred contract revenue (317,555) (1,071,863) 1,065,672
--------------- ------------------- ----------------- ----------------------
Net cash used in operating activities (1,706,921) (8,290,685) (6,035,778) (23,991,010)
INVESTING ACTIVITIES
Purchase of property and equipment and
other (2,159) (4,492) - (24,719)
--------------- ------------------- ----------------- ----------------------
Net cash used in investing activities (2,159) (4,492) - (24,719)
FINANCING ACTIVITIES
Proceeds from issuance of common stock
and capital contributions - - -
Proceeds from notes payable to related 1,500,000 8,415,407 6,688,756 20,590,643
party
Repayment of notes payable to related
party - - (600,192) (600,192)
--------------- ------------------- ----------------- ----------------------
Net cash provided by financing activities 1,500,000 8,415,407 6,088,564 24,051,821
--------------- ------------------- ----------------- ----------------------
Increase (decrease) in cash and
cash equivalents (209,080) 120,230 52,786 36,092
Cash and cash equivalents at
beginning of period 245,172 124,942 72,156 -
--------------- ------------------- ----------------- ----------------------
Cash and cash equivalents at end
of period $36,092 $245,172 $124,942 $36,092
=============== =================== ================= ======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ - $ - $299,808 $299,808
=============== =================== ================= ======================
</TABLE>
See accompanying notes.
54
<PAGE>
Genta Jago Technologies B.V.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization and Business
Genta Jago Technologies B.V. ("Genta Jago") was incorporated in
December 1992 under the laws of the Netherlands. Genta Jago is a joint venture
owned and controlled 50% by Genta Incorporated ("Genta") and 50% by Jagotec AG
("Jagotec"), a subsidiary of Jago Holding AG which was acquired by SkyePharma in
May 1996. Genta Jago was formed to develop and commercialize pharmaceuticals in
six major therapeutic areas, and commenced research and development activities
in January 1993. Genta Jago is managed under the direction of a Board of
Managing Directors consisting of two members appointed from each of Genta and
Jagotec and one outside member.
Pursuant to terms of the joint venture arrangement, Jagotec granted
Genta Jago an exclusive license to its GEOMATRIX oral controlled-release
technology for the development and commercialization of approximately 25
specified products. In May 1995, Genta and Jagotec entered into an agreement to
expand Genta Jago by adding the rights to develop and commercialize an
additional 35 products (see "Expansion of Genta Jago"). With these additional
products, Genta Jago now maintains the rights to develop controlled-release
formulations of approximately 60 products using Jagotec's GEOMATRIX technology.
Genta Jago is dependent on future funding from Genta (see Note 2,
"Capital Contributions and Working Capital Agreement") and corporate partners
and is considered a Development Stage Company. Genta has incurred significant
operating losses since its inception and requires substantial additional sources
of financing to fund its operations through 1997, conditions which raise
substantial doubt about Genta's ability to continue as a going concern. In the
event funding sources prove to be unavailable or inadequate to Genta, Genta's
ability to provide further funding to Genta Jago could be significantly limited.
In this event, Genta Jago would be dependent on collaborative funding and may
have to consider the delay or curtailment of certain of its development
programs.
Revenue Recognition
Collaborative research and development revenues are recorded as earned
as research and development activities are performed under the terms of the
contracts, with such revenues generally approximating costs incurred on the
programs. Payments received in excess of amounts earned are deferred.
Research and Development Expenses
Research and development costs are expensed as incurred.
Depreciation
The costs of furniture and equipment are depreciated over the estimated
useful lives of the assets using the straight-line method.
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 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.
55
<PAGE>
2. Related Party Transactions
License Agreements
Genta Jago entered into license agreements with Jagotec and Genta in
connection with the planned development and commercialization of GEOMATRIX oral
controlled-release products and Anticode products, respectively. The license
with Genta was terminated in 1995 in connection with Genta Jago's return of the
right to develop six Anticode products to Genta. Pursuant to such agreements,
Genta Jago recorded license fee expense of $620,000, $85,000, and $170,000
during the years ended December 31, 1996, 1995 and 1994, respectively, and is
obligated to make future annual license fee payments of $85,000 to Jagotec
through 1997.
Research and Development and Service Agreements
Genta Jago has contracted with Genta and Jagotec to conduct research
and development and provide certain other services. Under terms of such
agreements, Genta Jago generally is required to reimburse the parties for their
respective costs incurred plus a specified mark-up. Payments for research and
development services are generally made in advance and are refundable if the
services are not performed. For the years ended December 31, 1996, 1995 and
1994, Genta Jago incurred expenditures of $7 million, $9.2 million, and $12.3
million, respectively, pursuant to such research and development and service
agreements.
Capital Contributions and Working Capital Agreement
In connection with the formation of the joint venture, Genta was
required to make an initial capital contribution of $4 million to Genta Jago. In
addition, Genta Jago entered into a working capital agreement with Genta which
expires in October 1998. Pursuant to this agreement, Genta is required to make
working capital loans to Genta Jago up to a mutually agreed upon maximum
principal amount, which amount is established by the parties on a periodic
basis. As of December 31, 1996, Genta had advanced working capital loans of
approximately $15.3 million to Genta Jago, net of principal repayments and the
loan credit discussed below. Such loans bear interest at rates per annum ranging
from 5.81% to 7.5%, and are payable in full on October 20, 1998, or earlier in
the event certain revenues are received by Genta Jago and specified cash
balances are maintained by Genta Jago.
Expansion of Genta Jago
In May 1995, Genta and Jagotec entered into an agreement to expand
Genta Jago by adding the rights to develop and commercialize an additional 35
products (the "Additional Products"). With these Additional Products, Genta Jago
now maintains the rights to develop controlled-release formulations of
approximately 60 products using Jagotec's GEOMATRIX technology. Under the
agreement, Genta Jago also acquired certain manufacturing rights with respect to
such products. In connection with the expansion of Genta Jago, the parties
elected to focus Genta Jago's activities exclusively on GEOMATRIX
oral-controlled release products. As a result, Genta Jago returned to Genta the
right to develop six Anticode products licensed from Genta in connection with
the formation of Genta Jago in 1992. In connection with the return of the
Anticode license rights to Genta in May 1995, Genta Jago's note payable to Genta
was credited with a principal reduction of approximately $4.4 million and
accrued interest payable to Genta was reduced by approximately $300,000. Genta
Jago recorded the loan credit and related accrued interest as a gain on waiver
of debt in exchange for return of license rights to related party.
To obtain the rights to the Additional Products and the manufacturing
rights in May 1995, Genta applied $5 million in option and related fees paid to
Jagotec and its affiliates, of which $3.85 million was paid during 1994 and
$1.15 million was paid in the first quarter of 1995. Genta also issued an
additional 1.24 million unregistered shares of Genta's common stock to an
affiliate of Jagotec in May 1995. Genta Jago is required to pay certain
additional fees to Jagotec upon Genta Jago's receipt of revenues from third
parties, and pay manufacturing royalties to Jagotec.
56
<PAGE>
3. Collaborative Research and Development Agreements
In January 1993, Genta Jago entered into a collaboration agreement with
Gensia for the development and commercialization of certain oral
controlled-release pharmaceutical products for treatment of cardiovascular
disease. Under the agreement, Gensia provides funding for formulation and
preclinical development to be conducted by Genta Jago and is responsible for
clinical development, regulatory submissions and marketing. Genta Jago received
$2.2 million, $1.9 million, and $4.9 million of funding in 1996, 1995 and 1994,
respectively, pursuant to the agreement. Collaborative revenues of $2.8 million,
$3 million, and $4.2 million were recognized under the agreement during the
years ended December 31, 1996, 1995 and 1994, respectively. Effective October
1996, Gensia and SkyePharma reached an agreement whereby Brightstone was
assigned Gensia's rights (and those of Gensia's partner, Boehringer Mannheim) to
develop and co-promote the potentially bioequivalent nifedipine product under
the collaboration agreement with Genta Jago. The assignment was accepted by
Genta Jago and has no impact on the terms of the original agreement. Genta Jago
is still entitled to receive additional milestone payments from Brightstone
triggered upon regulatory submissions and approvals, as well as royalties or
profit sharing ranging from 10% to 21% of product sales, if any.
In March 1996, Genta Jago entered into a collaborative licensing and
development agreement with Apothecon. Under the terms of the agreement,
Apothecon will provide funding to Genta Jago up to a specified maximum amount
for the formulation, development and clinical testing of a GEOMATRIX
controlled-release formulation of Q-CR ketoprofen (Oruvail(R)), subject to
certain early termination rights. The agreement also provides for Genta Jago to
receive potential milestone payments and royalties on product sales. Terms of
the agreement provide Apothecon exclusive rights to market and distribute the
products on a worldwide basis. During 1996, Genta Jago recorded revenue and
received $1.1 million in funding under the arrangement and recognized $1.3
million of collaborative revenue.
In October 1996, Genta Jago entered into five collaborative licensing
and development agreements with Krypton, whereby Genta Jago would sublicense to
Krypton, rights to develop and commercialize potentially bioequivalent
GEOMATRIX(R) versions of five currently marketed products, as well as another
agreement granting Krypton an option to sublicense rights to develop and
commercialize an improved version of a sixth product. During 1996, Genta Jago
received funding of $1 million under the collaborative agreements and recognized
$1 million of collaborative revenue.
4. Income Taxes
Significant components of Genta Jago's deferred tax assets as of
December 31, 1996 are shown below. A valuation allowance of $2,154,000 has been
recognized to offset the deferred tax assets as realization of such assets is
uncertain.
<TABLE>
<CAPTION>
December 31,
------------
Deferred tax assets: 1996 1995
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 2,154,000 $1,761,000
Valuation allowance for deferred tax assets (2,154,000) (1,761,000)
------------- ------------
Net deferred tax assets $ --- $ ---
============== ==============
</TABLE>
At December 31, 1996, Genta Jago has foreign net operating loss
carryforwards of approximately $21,537,000. The foreign tax loss carryforwards
will begin expiring in 2000, unless previously utilized.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
57
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
(a) The sections labeled "Proposal Two -- Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the
Company's Proxy Statement are incorporated herein by reference.
(b) Information concerning the Company's Executive Officers is set
forth in Part I of this Form 10-K.
Item 11. Executive Compensation
The section labeled "Compensation of Executive Officers and Directors"
appearing in the Company's Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section labeled "Stock Ownership of Management and Certain
Beneficial Owners" appearing in the Company's Proxy Statement is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The section labeled "Certain Relationships and Related Transactions"
appearing in the Company's Proxy Statement is incorporated herein by reference.
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 Financial Statements under Item 8 of this
report on Form 10-K.
(2) All schedules are omitted because they are not required, are not
applicable, or the required information is included in the
consolidated financial statements or notes thereto.
(3) Reference is made to Paragraph (c) below for Exhibits required by
Item 601 of Regulation S-K, including management contracts and
compensatory plans and arrangements.
(b) Reports on Form 8-K. During the fourth quarter of 1996, the Company
filed the following report on Form 8-K: On October 8, 1996, the Company
filed a report on Form 8-K to disclose the resignation of James C.
Blair, Ph.D. as a Director and as Vice Chairman of the Board of
Directors of the Company.
(c) Exhibits required by Item 601 of Regulation S-K with each management
contract, compensatory plan or arrangement required to be filed
identified.
58
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
3(i).1(1) Restated Certificate of Incorporation as amended by the
Certificate of the Powers, Designations, Preferences and Rights
of the Series B Convertible Preferred Stock as amended by the
Certificate of the Powers, Designations, Preferences and Rights
of the Series C Convertible Preferred Stock.
3(i).2(18) Certificate of Designations of Series D Convertible Preferred
Stock of the Company.
3(ii).1(2) By-laws of the Company.
4.1(5) Specimen Common Stock Certificate.
4.2(4) Specimen Series A Convertible Preferred Stock Certificate.
4.3(4) Specimen Warrant.
4.4(4) Form of Unit Purchase Agreement dated as of September 23, 1993 by
and between the Company and the Purchasers of the Series A
Convertible Preferred Stock and Warrants.
4.5(11) Form of Rights Agreement dated as of December 16, 1993 between
Genta Incorporated and First Interstate Bank of California, which
includes as Exhibit A the form of Certificate of Designations,
Rights and Preferences of Series F Participating Preferred Stock.
4.6(8) Form of Regulation S Subscription Agreement entered into between
the Company and certain purchasers of the Series B Convertible
Preferred Stock.
4.7(1) Form of Securities Subscription Agreement entered into between
the Company and certain purchasers of the Series C Convertible
Preferred Stock.
4.8(1) Common Stock Purchase Warrant dated December 14, 1995 between the
Company and Lease Management Services, Inc.
4.9(17) Warrant for the Purchase of 213,415 Shares of Common Stock issued
to Lyon & Lyon in October 1996.
4.10(17) Warrant for the Purchase of 100,000 Shares of Common Stock issued
to Michael Arnouse in October 1996.
10.1(3)(6)(6) Amended and Restated 1991 Stock Plan of Genta Incorporated.
10.2(5) Master Lease Agreement No. 10300 dated as of May 4, 1989 between
the Company and Lease Management Services, Inc. and Master Lease
Agreement No. 10428 dated as of August 15, 1991 between the
Company and Lease Management Services, Inc.
10.3(5) Standard Industrial Lease dated October 24, 1988, as amended,
between the Company and General Atomics.
10.4(5) Revised and Restated Lease dated as of March 1, 1990 between JBL
Scientific, Inc. and Granada Associates.
59
<PAGE>
10.5(5)(6) Employment Agreement dated February 20, 1991 between the Company
and Dr. Robert E. Klem.
10.6(5)(6) Employment Agreement dated February 20, 1991 between the Company
and Dr. Lauren R. Brown.
10.7(5)(6) Form of Indemnification Agreement entered into between the
Company and its directors and officers.
10.8(5) Preferred Stock Purchase Agreement dated September 30, 1991 and
Amendment Agreement dated October 2, 1991.
10.9(5)(6) Consulting Agreement dated February 2, 1989 between the Company
and Dr. Paul O.P. Ts'o.
10.10(5)(7) Development, License and Supply Agreement dated February 2, 1989
between the Company and Gen-Probe Incorporated.
10.12(5)(7) License Agreement dated February 2, 1989 among the Company, Dr.
Ts'o, Dr. Miller and Mr. Finch.
10.13(5)(7) License Agreement dated May 15, 1990 between the Company and The
Johns Hopkins University.
10.19(6)(1) Promissory Note dated March 7, 1996 between the Company and Dr.
Donald Picker.
10.21(7)(9) Common Stock Transfer Agreement dated as of December 15, 1992,
between the Company and Dr. Jacques Gonella.
10.32(9) Consulting Agreement dated as of December 15, 1992, between the
Company and Dr. Jacques Gonella.
10.36(7)(9) Common Stock Transfer Agreement dated as of December 15, 1992,
between the Company and Jagotec AG.
10.37(7)(9) Collaboration Agreement dated as of January 22, 1993, between
Jobewol Investments B.V. (now known as Genta Jago Technologies
B.V.) and Gensia, Inc.
10.46(10) Form of Purchase Agreement between the Company and certain
purchasers of Common Stock.
10.47(10) Common Stock Purchase Warrant dated May 8, 1995 between the
Company and Index Securities S.A.
10.48(7)(12) Restated Joint Venture and Shareholders Agreement dated as of May
12, 1995 between the Company, Jagotec AG, Jago Holding AG, Jago
Pharma AG and Genta Jago Technologies B.V.
10.50(7)(12) Limited Liability Company Agreement of Genta Jago Delaware LLC
dated as of May 12, 1995 between GPM Generic Pharmaceuticals
Manufacturing Inc. and the Company.
10.51(7)(12) Restated Transfer Restriction Agreement dated as of May 12, 1995
between the Company and Jagotec AG.
10.52(7)(12) Transfer Restriction Agreement dated as of May 12, 1995 between
the Company, GPM Generic Pharmaceuticals Manufacturing Inc. and
Jago Holding AG.
60
<PAGE>
10.53(7)(12) Common Stock Transfer Agreement dated as of May 30, 1995 between
the Company and Jago Finance Limited.
10.54(7)(12) Stockholders' Agreement dated as of May 30, 1995 between the
Company, Jagotec AG, Dr. Jacques Gonella and Jago Finance
Limited.
10.55(7)(12) Restated Geomatrix Research and Development Agreement dated as of
May 12, 1995 between Jago Pharma AG, the Company, Genta Jago
Delaware, L.L.C. and Genta Jago Technologies B.V.
10.56(7)(12) Restated Services Agreement dated as of May 12, 1995 between Jago
Pharma AG, the Company, Genta Jago Delaware, L.L.C. and Genta
Jago Technologies B.V.
10.57(7)(12) Restated Working Capital Agreement dated as of May 12, 1995 and
Amendment No. 1 to Restated Working Capital Agreement dated as of
July 11, 1995 between the Company and Genta Jago Technologies
B.V.
10.58(7)(12) Restated Promissory Note dated as of January 1, 1994 between
Genta Jago Technologies B.V. and the Company.
10.59(7)(12) Restated License Agreement dated as of May 12, 1995 between
Jagotec AG and the Company.
10.61(7)(12) Restated Geomatrix License Agreement dated as of May 12, 1995
between Jagotec AG and Genta Jago Technologies B.V.
10.62(7)(12) Geomatrix Manufacturing License Agreement dated as of May 12,
1995 between Jagotec AG and Genta Jago Technologies B.V.
10.63(7)(12) Restated Geomatrix Supply Agreement dated as of May 12, 1995
between Jago Pharma AG and Genta Jago Technologies B.V.
10.65(13) Form of Regulation S Subscription Agreement entered into between
the Company and certain purchasers of the Series B Convertible
Preferred Stock.
10.66(1) Promissory Note dated November 8, 1995 between the Company and
Domain Partners, L.P.
10.67(1) Promissory Note dated November 8, 1995 between the Company and
Domain Partners II, L.P.
10.68(1) Promissory Note dated November 8, 1995 between the Company and
Institutional Venture Partners, IV.
10.69(14) Amendment to Promissory Note effective March 22, 1996 between the
Company and Institutional Venture Partners, IV.
10.70(14) Amendment to Promissory Note effective March 22, 1996 between the
Company and Domain Partners, L.P.
10.71(14) Amendment to Promissory Note effective March 22, 1996 between the
Company and Domain Partners II, L.P.
10.72(15) Amendments to the Series C Securities Subscription Agreement
dated April 23, 1996.
61
<PAGE>
10.73(16) Form of Regulation S Securities Subscription Agreement entered
into between the Company and certain purchasers of the 4%
Convertible Debentures, Due August 1, 1997.
10.74(16) Form of 4% Convertible Debenture Due August 1, 1997.
10.75(19) Note and Warrant Purchase Agreement dated as of January 28, 1997,
by and among the Company, The Aries Fund, A Cayman Island Trust
(the "Trust") and The Aries Domestic Fund, L.P. (the
"Partnership").
10.76(19) Letter dated January 28, 1997 from Genta Incorporated.
10.77(19) Senior Secured Convertible Bridge Note of the Company dated
January 28, 1997 for $1,050,000.
10.78(19) Senior Secured Convertible Bridge Note of the Company dated
January 28, 1997 for $1,950,000.
10.79(19) Class A Bridge Warrant of the Company for the purchase of
2,730,000 shares of Common Stock.
10.80(19) Class A Bridge Warrant of the Company for the purchase of
5,070,000 shares of Common Stock.
10.81(19) Class B Bridge Warrant of the Company for the purchase of
4,270,000 shares of Common Stock.
10.82(19) Class B Bridge Warrant of the Company for the purchase of
7,930,000 shares of Common Stock.
10.83(19) Security Agreement dated as of January 28, 1997 between the
Company and Paramount Capital, Inc.
10.84(19) Letter Agreement dated January 28, 1997 among the Company,
Paramount Capital, Inc., the Partnership and the Trust.
10.85(19) Amendment No. 1 dated as of January 28, 1997 to Rights Agreement,
dated as of December 16, 1997, between the Company and
ChaseMellon Shareholder Services L.L.C.
10.86(20)(6) Executive Compensation Agreement dated as of January 1, 1996
between the Company and Howard Sampson.
10.87(20) Collaboration Agreement dated December 26, 1995 between the
Company and Johnson & Johnson Consumer Products, Inc.
10.88(20) Assignment Agreement (of Gensia Inc.'s rights in the
Collaboration Agreement between Genta Jago and Gensia, Inc.,
dated January 23, 1993) to Brightstone Pharma, Inc., dated
October 1, 1996 among Gensia, Inc., Genta Jago Technologies B.V.,
Brightstone Pharma, Inc., and SkyePharma PLC.
22.1(20) Subsidiaries of the Registrant.
23.1(20) Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (See page 65)
62
<PAGE>
(1) Incorporated herein by reference to the exhibits of the same number to
the Company's Annual Report on Form 10-K for the year ended December
31, 1995, Commission File No. 0-19635.
(2) Exhibit 3(ii).1 is incorporated herein by reference to the Exhibit of
the same number contained in Post- Effective Amendment No. 1 to the
Company's Registration Statement on Form S-3, Registration No.
33-72130.
(3) Exhibit 10.1 is incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-8, Registration No.
33-85887.
(4) Exhibits 4.2, 4.3, and 4.4 are incorporated by reference to Exhibits of
the same number to the Company's Report on Form 8-K dated as of
September 24, 1993, Commission File No. 0-19635.
(5) Incorporated herein by reference to the exhibit of the same number to
the Company's Registration Statement on Form S-1, Registration No.
33-43642.
(6) Indicates management contract, compensatory plan or arrangement.
(7) The Company has been granted confidential treatment of certain portions
of this exhibit.
(8) Exhibit 4.6 is incorporated by reference to Exhibit 10.65 to the
Company's Report on Form 8-K dated as of December 29, 1995, Commission
File No. 0-19635.
(9) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-3, Registration No.
33-58362.
(10) Incorporated by reference to the exhibits of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995, Commission File No. 0-19635.
(11) Incorporated by reference to Exhibit 5.1 to the Company's Report on
Form 8-K dated as of December 16, 1993, Commission File No. 0-19635.
(12) Incorporated by reference to the exhibits of the same number to the
Company's Quarterly Report on Form 10-Q/A for the quarter ended June
30, 1995, Commission File No. 0-19635.
(13) Incorporated herein by reference to the exhibit of the same number to
the Company's Report on Form 8-K dated as of December 29, 1995.
(14) Incorporated herein by reference to exhibits 10.1, 10.2 and 10.3,
respectively, to the Company's Registration Statement on Form S-3
(Registration No. 333-3846)
(15) Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
Commission File No. 0-19635.
(16) Exhibits 10.73 and 10.74 are incorporated herein by reference to
Exhibits 10.1 and 10.2 to the Company's Report on Form 8-K dated as of
September 17, 1996, Commission File No. 0-19635.
(17) Exhibits 4.9 and 4.10 are incorporated herein by reference to Exhibits
4.1 and 4.2 respectively to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, Commission File No. 0-19635.
(18) Exhibit 3(i).2 is incorporated by reference to Exhibit 3(i) to the
Company's Report on Form 8-K dated as of January 28, 1997, Commission
File No. 0-19635.
63
<PAGE>
(19) Exhibits 10.75, 10.76, 10.77, 10.78, 10.79, 10.80, 10.81, 10.82, 10.83,
10.84 and 10.85 are incorporated herein by reference to Exhibits 10.1,
10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9, 10.10 and 10.11
respectively to the Company's Report on Form 8-K dated as of January
28, 1997, Commission File No.
0-19635.
(20) Filed herewith.
(d) See (a)(2) above.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 13th day of
March, 1997.
Genta Incorporated
By /s/Thomas H. Adams
------------------
Thomas H. Adams, Ph.D.
Chairman and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas H. Adams, his true and lawful
attorney-in-fact and agent, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas H. Adams Chairman and Chief Executive Officer March 13, 1997
- ------------------------------------------ (Principal Executive Officer) and Director
Thomas H. Adams
/s/ Robert E. Klem Director March 11, 1997
- ------------------------------------------
Robert E. Klem
/s/ Paul O.P. Ts'o Director March 11, 1997
- ------------------------------------------
Paul O.P. Ts'o
/s/ Sharon B. Webster Director March 13, 1997
- ------------------------------------------
Sharon B. Webster
</TABLE>
65
EXHIBIT 10.86
EXECUTIVE COMPENSATION AGREEMENT
THIS AGREEMENT is entered into as of January 1, 1996, by and between
Howard Sampson (the "Employee") and Genta Incorporated, a Delaware corporation
(the "Company"). This Agreement supersedes any prior agreements previously
entered into between Employee and Company.
1. Term of Employment.
(a) Basic Rule. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the Company,
from the date hereof until the date when the Employee's employment terminates
pursuant to Subsection (b), (c) or (d) below.
(b) Early Termination. Subject to Sections 6 and 7, the Company may
terminate the Employee's employment by giving the Employee 30 days' advance
notice in writing. The Employee may terminate his employment by giving the
Company 1 day's advance notice in writing. The Employee's employment shall
terminate automatically in the event of his death. Any waiver of notice shall be
valid only if it is made in writing and expressly refers to the applicable
notice requirement of this Section 1.
(c) Cause. The Company may at any time terminate the Employee's
employment for Cause by giving the Employee notice in writing. For all purposes
under this Agreement, "Cause" shall mean:
(i) A willful act by the Employee which constitutes gross
misconduct (as determined by an independent tribunal) or fraud and
which is injurious to the Company; or
(ii) Conviction of, or a plead of "guilty" or no contest" to, a
felony.
No act, or failure to act, by the Employee shall be considered "willful" unless
committed without good faith and without a reasonable belief that the act or
omission was in the Company's best interest.
(d) Disability. The Company may terminate the Employee's active
employment due to Disability by giving the Employee 30 days' advance notice in
writing. For all purposes under this Agreement, "Disability" shall mean that the
Employee, at the time notice is given, has become eligible to receive immediate
long-term disability benefits under the Company's long-term disability insurance
plan or, if there is no such plan, under the federal Social Security program. In
the event that the Employee resumes the performance of substantially all of his
duties hereunder before the termination of his active employment under this
<PAGE>
Subsection (d) becomes effective, the notice of termination shall automatically
be deemed to have been revoked.
(e) Rights Upon Termination. Except as expressly provided in Sections 6
and 7, upon the termination of the Employee's employment pursuant to this
Section 1, the Employee shall only be entitled to the compensation, benefits and
reimbursements described in Sections 3, 4 and 5 for the period preceding the
effective date of the termination. The payments under this Agreement shall fully
discharge all responsibilities of the Company to the Employee upon the
termination of his employment.
(f) Termination of Agreement. This Agreement shall terminate when all
obligations of the parties hereunder have been satisfied.
2. Duties and Scope of Employment.
(a) Position. The Company agrees to employ the Employee as its Chief
Financial Officer for the term of his employment under this Agreement. The
Employee shall report to the Company's President.
(b) Obligations. During the term of his employment under this
Agreement, the Employee shall devote his full business efforts and time to the
Company and its subsidiaries. The Employee shall not render services to any
other for-profit corporation or entity without the prior written consent of the
Company's Board of Directors (the "Board"). This Subsection (b) shall not
preclude the Employee from engaging in appropriate professional, educational,
civic, charitable or religious activities or from devoting a reasonable amount
of time to private investments that do not interfere or conflict with his
responsibilities to the Company.
3. Base Compensation and Incentive Compensation.
(a) Base Compensation. During the term of his employment under this
Agreement, the Company agrees to pay the Employee as compensation for his
services a base salary at the annual rate of $175,000 or at such higher rate as
the Company may determine from time to time. Any difference between the Base
Compensation payable on a bi-monthly basis and that actually paid between
January 1, 1996, and the date this Agreement is executed shall be paid to
Employee in one lump sum upon execution of this Agreement. Such salary shall be
payable in accordance with the Company's standard payroll procedures. (The
annual compensation specified in this Section 3, together with any increases in
such compensation that the Company may grant from time to time, is referred to
in this Agreement as "Base Compensation.")
(b) Incentive Compensation. In addition, Employee shall be eligible for
participation in an annual incentive compensation
2
<PAGE>
program, if any, to be determined in the sole discretion of the Company.
(c) Stock Compensation. In addition to such options and Company stock
compensation available to Employee as of the execution of this Agreement, upon
execution of this Agreement Employee shall receive 75,000 shares of Company
stock at no cost to Participant. Such shares shall be fully vested when granted
and shall not be subject to any right of repurchase by the Company. As a
condition of this grant, Employee agrees to satisfy such requirements as Company
deems necessary to satisfy its federal and state tax withholding requirements.
4. Employee Benefits.
During the term of his employment under this Agreement, the Employee
shall be eligible for the employee benefit plans and executive compensation
programs maintained by the Company for other senior executives, subject in each
case to the generally applicable terms and conditions of the plan or program in
question and to the determinations of any person or committee administering such
plan or program.
5. Business Expenses.
During the term of his employment under this Agreement, the Employee
shall be authorized to incur necessary and reasonable travel, entertainment and
other business expenses in connection with his duties hereunder. The Company
shall reimburse the Employee for such expenses upon presentation of an itemized
account and appropriate supporting documentation, all in accordance with the
Company's generally applicable policies.
6. SkyePharma Transaction.
(a) General. As of September 25, 1996, the Company is contemplating a
transaction with SkyePharma. If the transaction is contemplated by June 30,
1997, Employee shall be paid a lump sum cash bonus of $50,000 upon closing of
the transaction. Closing means execution of a definitive agreement with
shareholder approval, if necessary. Such bonus shall not be paid to Employee if
he is not employed by the Company on the date of closing unless Employee is
either involuntarily terminated without cause or terminates with Good Reason.
(b) Good Reason. For all purposes under this Agreement, "Good Reason"
shall mean that the Employee:
(i) Has incurred a material reduction in his authority or
responsibility except for reason of demonstrated lack of performance;
(ii) Has incurred one or more reductions in his Base
Compensation; or
3
<PAGE>
(iii) Has been notified that the Company's headquarters will be
relocated by a distance of 50 miles or more.
7. Termination for Any Reason Without Cause.
(a) Continuation Period. Except as otherwise specifically provided for
this Agreement, in the event that during the term of this Agreement, the Company
terminates the Employee's employment for any reason other than Cause or Employee
voluntarily terminates under circumstances where an involuntary termination for
Cause is not otherwise warranted, then the Employee shall be entitled to receive
all of the payments and benefit coverage described in this Section 7. Such
payments and benefit coverage shall continue for the period (the "Continuation
Period") commencing on the date when the employment termination is effective and
ending on the date twelve months after such date.
(b) Compensation. During the Continuation Period, the Company shall pay
the Employee compensation at an annual rate equal to his Base Compensation at
the rate in effect on the date of the employment termination. Such amount shall
be paid at periodic intervals in accordance with the Company's standard payroll
procedures.
(c) Insurance Coverage. During the Continuation Period, the Employee
(and, where applicable, his dependents) shall be entitled to continue
participation in the group insurance plans maintained by the Company, including
life, disability and health insurance programs, as if he were still an employee
of the Company. Where applicable, the Employee's salary for purposes of such
plans shall be deemed to be equal to his Base Compensation. To the extent that
the Company finds it impossible to cover the Employee under its group insurance
policies during the Continuation Period, the Company shall provide the Employee
with individual policies which offer at least the same level of coverage and
which impose not more than the same costs on him. The foregoing notwithstanding,
in the event that the Employee becomes eligible for comparable group insurance
coverage in connection with new employment, the coverage provided by the Company
under this Subsection (c) shall terminate immediately. Any group health
continuation coverage that the Company is required to offer under COBRA shall
commence when coverage under this Subsection (c) terminates.
(d) Incentive Programs. The Continuation Period shall be counted as
employment with the Company for purposes of vesting under all stock option,
stock appreciation rights, restricted stock, phantom stock or similar plans
maintained by the Company (any contrary provisions of such plans
notwithstanding). The preceding sentence shall not be construed to require the
Company to grant any new awards to the Employee during the Continuation Period.
The Continuation Period shall also be counted as employment with the Company for
purposes of determining the
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expiration date of any stock option granted by the Company and held by the
Employee when his employment terminates. Any other provision of this Agreement
notwithstanding, the Continuation Period for purposes of this Subsection (d)
shall not exceed three months in the event that the Company terminates the
Employee's employment for performance-related reasons (considering only
performance after the date this Agreement is executed), as determined by the
Board. (There is no Continuation Period for any purpose in the event that the
termination is for Cause.)
(e) No Mitigation. The Employee shall not be required to mitigate the
amount of any payment contemplated by this Section 7 (whether by seeking new
employment or in any other manner). Except as expressly provided in Subsection
(c) above, no such payment shall be reduced by earnings that the Employee may
receive from any other source.
8. Covenant Not to Compete. As a condition to Employee's rights to
receive payments under Section 6 or 7 of this Agreement, the parties agree to
the following:
(a) Competition. Employee hereby agrees, so long as Company is not in
material default (subject to notice and a 30- day cure period) of any of its
material obligations under this Agreement, that Employee will not, except as
specifically provided for in this Covenant, at any time during the Covenant Term
(as defined in Section 8(b) below), directly or indirectly, whether or not for
compensation, engage in any business activity, or have any interest in or
relationship with any person, firm, corporation or business (whether as an
employee, shareholder, proprietor, officer, director, agent, security holder,
trustee, partner, consultant or otherwise), which is competitive with, the
antisense and geomatrix drug delivery business of Company or its subsidiaries
now being conducted in the Covered Area; provided, however, that Employee may
own shares of companies whose securities do not constitute more than five
percent (5%) of the outstanding securities of any such company. Employee further
agrees that as long as the Covenant remains in effect, Employee will not, in any
way which materially adversely affects the Company's business or financial
position divert or attempt to divert, directly or indirectly, any business of
Company or any of its subsidiaries, or any customers of their business, to any
competitor in the Covered Area or induce or attempt to induce, directly or
indirectly, any person to leave his or her employment with Company or any of its
subsidiaries.
(b) Covenant Term. The Term of this Covenant ("Covenant Term") is
defined to be the period commencing on the effective date of this Agreement, and
ending upon the last payment made to Employee pursuant of Section 6 or 7.
(c) Covered Area. The Covered Area shall be the area in which the
Company or any of its wholly-owned subsidiaries is
5
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operating at the time of the alleged violation of the covenants of this
paragraph.
9. Limitation on Payments.
(a) Basic Rule. Any other provision of this Agreement notwithstanding,
the Company shall not be required to make any payment or property transfer to,
or for the benefit of, the Employee (under this Agreement or otherwise) that
would be non-deductible by the Company by reason of section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), or that would subject the
Employee to the excise tax described in section 49999 of the Code. All
calculations required by this Section 9 shall be performed by the independent
auditors retained by the Company most recently prior to the Change in Control
(the "Auditors"), based on information supplied by the Company and the Employee,
and shall be binding on the Company and the Employee. All fees and expenses of
the Auditors shall be paid by the Company.
(b) Reductions. If the amount of the aggregate payments or property
transfers to the Employee must be reduced under this Section 9, then the
Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application of
sections 280G and 4999 of the Code at the time of an initial determination by
the Auditors hereunder, it is possible that a payment will have been made by the
Company that should not have been made (an "Overpayment") or that an additional
payment that will not have been made by the Company could have been made (an
"Underpayment"). In the event that the Auditors, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or the Employee
that the Auditors believe has a high probability of success, determine that an
Overpayment has been made, such Overpayment shall be treated for all purposes as
a loan to the Employee that he shall repay to the Company, together with
interest at the applicable federal rate specified in section 7872(f)(2) of the
Code; provided, however, that no amount shall be payable by the Employee to the
Company if and to the extent that such payment would not reduce the amount that
is nondeductible under section 280G of the Code or is subject to the excise tax
under section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to, or for the benefit of, the Employee, together
with interest at the applicable federal rate specified in section 7872(f)(2) of
the Code.
10. Successors.
(a) Company's Successors. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or
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substantially all of the Company's business and/or assets, by an agreement in
substance and form satisfactory to the Employee, to assume this Agreement and to
agree expressly to perform this Agreement in the same manner and to the same
extent as the Company would be required to perform it in the absence of a
succession. The Company's failure to obtain such agreement prior to the
effectiveness of a succession shall be a breach of this Agreement and shall
entitle the Employee to all of the compensation and benefits to which he would
have been entitled hereunder if the Company had involuntarily terminated his
employment, without Cause immediately after such succession becomes effective.
For all purposes under this Agreement, the term "Company" shall include any
successor to the Company's business and/or assets which executes and delivers
the assumption agreement described in this Subsection (a) or which becomes bound
by this Agreement by operation of law.
(b) Employee's Successors. This Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
11. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and an authorized officer of the Company (other than
the Employee). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) No Setoff; Withholding Taxes. There shall be no right of setoff or
counterclaim, with respect to any claim, debt or obligation, against payments to
the Employee under this
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Agreement. All payments made under this Agreement shall be subject to reduction
to reflect taxes required to be withheld by law.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(g) Arbitration. Except as otherwise provided in Section 9, any
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by arbitration in San Diego in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. Discovery
shall be permitted to the same extent as in a proceeding under the Federal Rules
of Civil Procedure, including (without limitation) such discovery as is
specifically authorized by section 1283.05 of the California Code of Civil
Procedure, without need of prior leave of the arbitrator under section
1283.05(e) of such Code. Judgment on the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. All fees and expenses of the
arbitrator and such Association shall be paid as determined by the arbitrator.
Any attorney fees paid to enforce this Agreement shall be paid by the
non-prevailing party.
(h) No Assignment. The rights of any person to payments or benefits
under this Agreement shall not be made subject to option or assignment, either
by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this Subsection (h) shall be void.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
/s/ Howard Sampson
-------------------------------
Howard Sampson
GENTA INCORPORATED
By /s/ Thomas H. Adams
Title __________________________
8
EXHIBIT 10.87
[Johnson & Johnson Letterhead]
AGREEMENT
This Agreement, made and entered into this 26th day of December, 1995,
by and between
GENTA INCORPORATED, having offices at 3550 General Atomics Court, San
Diego, California 92121 (hereinafter "GENTA"), and
JOHNSON & JOHNSON CONSUMER PRODUCTS, INC., having offices at Grandview
Avenue, Skillman, New Jersey 08550 (hereinafter "CPI").
W I T N E S S E T H
WHEREAS, GENTA is a research-based company which focuses on the
discovery of biopharmaceuticals;
WHEREAS, CPI develops, manufactures and sells skin and hair care
products; and
WHEREAS, GENTA and CPI desire to cooperate in the development of new
skin care agents and active ingredients.
NOW THEREFORE, in consideration of the covenants and conditions set
forth herein, and other good valuable consideration, the sufficiency of which is
hereby acknowledged by each of the parties hereto, it is agreed as follows:
1. General Purpose
It is the general purpose of this Agreement to provide for GENTA and
CPI to cooperate in a feasibility study for the potential joint development of
new and improved skin and hair care products and active ingredients with the
objective of GENTA manufacturing and supplying such ingredients to CPI. In order
to accomplish this purpose, CPI will evaluate the use of one or more of GENTA's
compounds that are selective for the mRNA of the human androgen receptor
(hereinafter, "the Compound") as a prophylactic and/or therapeutic agent for
androgen receptor mediated conditions (such as control of hair growth, sebaceous
gland activity, etc.). These will be evaluated in a study that is designed to
quantify the reduction in sebum production resulting from topical application of
the Compound to the forehead of selected patients (hereinafter, "the Study").
The Compound and the Formulation (as defined below) provided by GENTA
to CPI under this Agreement (a) shall remain the sole property of GENTA, (b)
shall be used by and under the control of CPI solely in order to carry out its
obligations under this Agreement, (c) shall not be used by or delivered to or
for the benefit of any third party without the prior express written consent of
GENTA.
<PAGE>
GENTA and CPI each shall comply in all material respects with all laws
and governmental rules, regulations and guidelines which are applicable to the
Compound, the Formulation or the use thereof, including biosafety procedures,
and with any safety precautions described in a writing which accompanies the
Compound or the Formulation.
CPI shall return to GENTA all unused quantities of the Compound and the
Formulation after the completion, or earlier termination, of the Study.
THE COMPOUND AND THE FORMULATION ARE PROVIDED "AS IS" AND WITHOUT ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR PURPOSE OR
ANY WARRANTY THAT THE USE OF THE COMPOUND OR THE FORMULATION WILL NOT INFRINGE
OR VIOLATE ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY.
It is understood by the parties that "CPI", unless expressly stated
otherwise, shall mean Johnson & Johnson Consumer Products, Inc., the corporation
of New Jersey as above described, together with its Affiliates. "Affiliate" of,
or an entity "Affiliated" with, a specified entity, means an entity that
controls (in other words, owns directly or indirectly or otherwise has the power
to vote more than fifty percent (50%) of the voting stock), is controlled by, or
is under common control with, the entity specified.
2. Responsibility of the Parties
GENTA will provide the Compound and an appropriate delivery vehicle
(hereinafter, "the Formulation"). GENTA will supply the Formulation free of
charge to CPI in quantities sufficient to complete CPI's evaluation. CPI will
(1) provide technical resources to develop an acceptable topical formulation for
use in the Study, (2) conduct appropriate toxicological tests, (3) design,
conduct and evaluate the results of the Study and (4) provide GENTA with a
written summary of all tests conducted in progress reports on the status of the
Study and copies of all results. The Study will take place outside of the United
States. CPI will be responsible for fulfilling regulatory requirements for
shipping the Formulation outside the United States.
The Results shall be jointly owned by GENTA and CPI, and shall
constitute Confidential Information of GENTA and CPI for purposes of Section 4
below.
3. Expenses
Each party will bear its own expenses in the initial preparation and
evaluation of compounds under this Agreement, with the following exception: CPI
shall within fifteen (15) days of signing this Agreement, pay GENTA a
non-refundable commitment fee of Fifty Thousand Dollars ($50,000.00) which will
not be creditable toward any further purchases or license fees.
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4. Confidentiality
In order to accomplish the objectives of this Agreement, it may be
necessary for the parties to exchange materials and information which are
considered to be confidential and proprietary to the disclosing party. Each
party agrees to limit its disclosure of Confidential Information to the other
party to that reasonably necessary to achieve the objectives of this Agreement.
All information disclosed hereunder which is considered by the
disclosing party to be confidential and proprietary shall be in writing and
marked "Confidential", or if initially disclosed orally or visually, designated
as being confidential at the time of disclosure and confirmed in writing within
thirty (30) days (hereinafter "Confidential Information"). All written documents
containing Confidential Information and other confidential material in tangible
form received by either party under this Agreement shall remain the property of
the originating party, and all and any such other materials shall be promptly
returned to the originating party upon request; provided, however, that the
receiving party shall have the right to retain one copy of any and all such
materials solely in its Law Department files.
Each party agrees that all Confidential Information received from the
other party under this Agreement shall be maintained in confidence and not
disclosed to a third party during the term of this Agreement and for a period of
five (5) years thereafter, and the receiving party agrees not to use such
Confidential Information for any purpose other than to further the objectives of
this Agreement without the prior written consent of the other party. Each party
shall use the same standard of care to protect the confidentiality of
information received from the other party as it uses to protect its own
confidential information, and shall limit disclosure of such information to
those of its personnel and consultants who have an actual need to know and have
a written obligation to protect the confidentiality thereof.
Notwithstanding the preceding provisions, obligations regarding
confidentiality and use of Confidential Information disclosed hereunder shall
not include:
a) information which, at the time of disclosure, was published, known
publicly, or otherwise in the public domain;
b) information which, after disclosure, is published, becomes known
publicly, or otherwise becomes part of the public domain through no fault of the
receiving party;
c) information which, prior to the time of disclosure, is known to the
receiving party without any obligation of confidentiality as evidenced by its
written records;
d) information which, after disclosure, is made available to the
receiving party in good faith by a third party who is under no obligation of
confidentiality or secrecy to the disclosing party; and
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e) information which is independently developed by employees or others
on behalf of the receiving party, without access to or use of the Confidential
Information of the disclosing party.
Notwithstanding the preceding provisions, obligations regarding
confidentiality and use of Confidential Information disclosed hereunder shall
not apply to the extent that the receiving party is required to disclose
information by law, order or regulation of a governmental agency or a court of
competent jurisdiction, provided that the receiving party shall provide written
notice thereof to the disclosing party and sufficient opportunity for the
disclosing party to object to any such disclosure or to request confidential
treatment thereof.
The disclosure of Confidential Information hereunder by either party
shall not result in any right or license under any patent or know-how being
granted to the other party, nor shall it be construed to impose on the other
party any restriction, duty or obligation other than that of confidentiality and
non-use as expressly provided herein.
5. Designated Representatives
The following representatives are designated by the parties to disclose
and receive Confidential Information under this Agreement:
For CPI: Stanley Shapiro, Ph.D.
Worldwide Director
Dermatology Research and Drug Discovery
For GENTA: Dr. Donald Picker
Senior Vice President
Research & Development
6. Competitive Activity
GENTA acknowledges that CPI and its affiliates are in the business of
manufacturing and selling cosmetic and pharmaceutical products for the purposes
of caring for the skin and hair and has an ongoing research and development
effort relating to such products. In addition, CPI may consult with, supply, and
jointly develop with third parties skin and hair care compositions and products.
Nothing contained herein shall be construed to prevent CPI from continuing such
activities provided only that CPI does not reveal to such third parties, or use
for any purpose (other than as permitted by this Agreement), the Compound, the
Formulation or any Confidential Information of GENTA covered by this Agreement.
7. Inventions
Any invention, discovery, or improvement made or technology developed,
whether patentable or not (an "Invention") as a result of work performed
pursuant to this Agreement shall be owned by the party making the Invention if
such Invention is made independently of the other party.
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Inventions made jointly by representatives of both GENTA and CPI shall
be jointly owned by CPI and GENTA. GENTA and CPI shall promptly disclose to the
other party all such solely or jointly owned Inventions. Both parties shall
cooperate in the filing and prosecution of patent applications related to joint
inventions and shall share equally the costs associated with such filings and
prosecution. With respect to such joint inventions, the parties will grant each
other a non-assignable, sole license to make, have made, use and sell such
inventions without the right to sublicense without the mutual agreement of the
parties. With respect to joint inventions and inventions made by GENTA pursuant
to this Agreement, CPI shall have the right of first refusal for an exclusive
license to make, have made, use and sell the inventions in the field of skin and
hair care.
Nothing in this Agreement shall be construed to grant to a party a
license or other rights under any intellectual property rights of the other
party, unless expressly provided in this Agreement.
8. Future Rights
Simultaneous with the performance of the Study, CPI and GENTA will
negotiate the terms of a mutually acceptable full development, supply and
product license agreement (hereinafter, "the License Agreement"). Under the
License Agreement, CPI shall have the exclusive worldwide rights to have made,
use and sell GENTA's antisense compounds which are selective to the mRNA of the
human androgen receptor for the field of skin and hair care. The License
Agreement shall be complete prior to the completion of the Study. The
negotiations to develop the License Agreement between CPI and GENTA shall begin
no later than two (2) months after the execution of this Agreement.
At the completion of the Study, CPI shall notify GENTA that the Study
has been completed. Within sixty (60) days after CPI notifies GENTA that the
Study has been completed, CPI shall notify GENTA whether it intends to pursue
the development of the Compound commercially. Upon notification that CPI intends
to pursue the development of the Compound commercially, the parties shall
execute the License Agreement and CPI shall pay GENTA One Hundred and Fifty
Thousand Dollars ($150,000.00). The License Agreement will include at least the
following provisions: (i) GENTA will supply the Compound exclusively to CPI for
use in its skin and hair care products, (ii) CPI will purchase its requirements
of such compounds from GENTA, if GENTA is capable, at a negotiated fair market
price which shall be at least as favorable as GENTA's price to other customers
for similar compounds, and (iii) CPI will pay GENTA mutually acceptable
royalties on Net Sales of products and milestone payments.
9. Exclusivity
During the duration of the Study, GENTA shall not engage any third
party to study the androgen receptor mediated dermatological effects of the
Compound or discuss with or negotiate with any third party regarding the right
to make, have made, use or sell the Compound.
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10. Term and Termination
The term of this Agreement shall be one (1) year from the date written
above. This Agreement may be terminated by CPI upon thirty (30) days prior
written notice to GENTA, provided, however, that the obligations of each party
under Paragraph 4 hereof shall survive such termination of this Agreement.
11. Miscellaneous
This Agreement may not be superseded, amended, or modified except by
written agreement signed on behalf of both parties hereto.
Notices given by either party hereto shall be in writing and shall be
effective upon receipt and shall be sent by registered or certified mail or
overnight courier to the other party at the address set forth above.
Each party's rights and obligations under this Agreement shall enure to
the benefit of, and shall be binding upon, its successors.
This Agreement shall in no way constitute a commitment by CPI to
purchase any goods from GENTA or by GENTA to produce and sell any goods to CPI.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without regard to the conflict of law
principles thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their duly authorized representatives on the day and
year first above written.
GENTA INCORPORATED JOHNSON & JOHNSON
CONSUMER PRODUCTS, INC.
By: /s/Thomas H. Adams By: /s/
------------------ ---------------------
Thomas H. Adams
Title: Vice President,
Title:__________________ Licensing & Acquisition
6
EXHIBIT 10.88
ASSIGNMENT AGREEMENT
(OF COLLABORATION AGREEMENT BETWEEN GENTA JAGO AND GENSIA)
This ASSIGNMENT AGREEMENT effective as of October 1, 1996 (this "AGREEMENT") is
entered into among GENSIA, INC., a Delaware corporation having a place of
business at 9360 Towne Center Drive, San Diego, California 92121, U.S.A.
(hereinafter referred to as "GENSIA"), and GENTA JAGO TECHNOLOGIES B.V., a Dutch
company, having a place of business at Grundstrasse 12, CH-6343 Rotkreuz,
Switzerland (hereinafter referred to as "GENTA JAGO"), and BRIGHTSTONE PHARMA,
INC., a Delaware corporation having a place of business at 109 MacKenan Drive,
Cary, North Carolina 27511, U.S.A. (hereinafter referred to as "BRIGHTSTONE")
and SKYEPHARMA PLC, an English public company, having a place of business at 105
Piccadilly, London (hereinafter referred to as "SKYEPHARMA").
WITNESSTH:
WHEREAS, GENSIA and GENTA JAGO have entered into a certain
Collaboration Agreement dated as of January 22, 1993 (as amended as of October
7, 1994, and thereafter, hereinafter the "GJT Collaboration Agreement")
regarding the development of - inter alia - a GEOMATRIX(R) formulation of
Nifedipine (hereinafter the "Nifedipine Product"); and
WHEREAS, GENSIA and Jagotec AG, a Swiss corporation (hereinafter
"JAGOTEC") have entered into a certain License Agreement dated as of January 22,
1993 (as amended as of October 7, 1994 and thereafter; hereinafter the "License
Agreement") regarding manufacturing rights for - inter alia - the Nifedipine
Product; and
WHEREAS, GENSIA and JAGO Pharma AG, a Swiss corporation (hereinafter
"JAGO PHARMA") have entered into a certain Supply Agreement dated as of January
22, 1993 (as amended as of October 7, 1994 and thereafter; hereinafter the
"Supply Agreement") regarding the manufacturing and supply of - inter alia - the
Nifedipine Product; and
WHEREAS, GENSIA and Boehringer Mannheim Pharmaceuticals Corporation, a
Maryland corporation (hereinafter "BMPC") have entered into a certain License
and Collaboration Agreement dated as of October 10, 1994 (hereinafter the "BMCT
License and Collaboration Agreement") regarding the development and marketing of
the Nifedipine Product; and
WHEREAS, as the result of an internal corporate restructuring,
Boehringer Mannheim Corporation, Therapeutics Division ("BMCT"), succeeded to
the rights and obligations of BMPC under the BMCT License and Collaboration
Agreement;
WHEREAS, BRIGHTSTONE desires to assume, and GENSIA desires to assign to
BRIGHTSTONE, all of GENSIA's rights and obligations under the GJT Collaboration
Agreement as of the Effective Date (as defined below) and under the terms and
subject to the conditions of this Agreement; and
WHEREAS, GENTA JAGO is willing to consent to GENSIA's assignment and
BRIGHTSTONE's assumption of GENSIA's rights and obligations under the GJT
Collaboration Agreement, under the terms and subject to the conditions of this
Agreement; and
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<PAGE>
WHEREAS, the GENTA JAGO and BRIGHTSTONE desire to amend certain
provisions of the GJT Collaboration Agreement as of the Effective Date as set
forth below.
NOW, THEREFORE, for and in consideration of the premises, mutual
covenants and agreements contained herein and intending to be legally bound
hereby, the parties hereby agree as follows:
ARTICLE 1
ASSIGNMENT, SUBSTITUTION AND RELEASE
As of the Effective Date and subject to the terms and conditions of
this Agreement,
1.1 GENSIA does assign and transfer to BRIGHTSTONE all of GENSIA's right,
title and interest in and to, and all of GENSIA's liabilities, duties
and obligations arising or becoming due on or after the Effective Date
under the GJT Collaboration Agreement;
1.2 BRIGHTSTONE does assume such right, title, interest, liabilities,
duties and obligations of GENSIA and does agree that it shall be
substituted for GENSIA under the GJT Collaboration Agreement and that
it will perform the obligations, liabilities and duties of GENSIA
arising or becoming due on or after the Effective Date thereunder in
accordance with the terms hereof and thereof;
1.3 SKYEPHARMA agrees to guarantee the performance of BRIGHTSTONE under the
GJT Collaboration Agreement as it will be amended concurrently
herewith; and
1.4 GENTA JAGO does consent to such assignment and substitution.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 Of Each Party to the Others. Each party hereby represents and warrants
to the other parties as follows:
(a) Corporate Existence. Such party is a corporation duly organized,
validly existing and in good standing under the laws of the state or
other jurisdiction in which it is incorporated.
(b) Authorization and Enforcement of Obligations. Such party has the
corporate power and authority and the legal right to enter into this
Agreement and to perform its obligations hereunder and has taken all
necessary corporate action on its part to authorize the execution and
delivery of this Agreement and the performance of its obligations
hereunder. This Agreement has been duly executed and delivered on
behalf of such party and constitutes a legal, valid and binding
obligation, enforceable against such party in accordance with its
terms.
(c) Consents. All necessary consents, approvals and authorizations of
all governmental authorities and other persons required to be obtained
by such party in connection with this Agreement have been obtained.
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<PAGE>
(d) No Conflict. The execution and delivery of this Agreement and the
performance of such party's obligations hereunder do not conflict with
or violate any requirement of applicable laws or regulations and do not
conflict with, or constitute a default under, any contractual
obligation of such party, except such conflicts that do not,
individually or in the aggregate, have a material adverse effect on
such party or do not materially adversely affect such party's ability
to perform its obligations under this Agreement.
2.2 Of GENSIA and GENTA JAGO to Each Other, SKYEPHARMA and BRIGHTSTONE.
Each of GENSIA and GENTA JAGO hereby represents and warrants to each
other, SKYEPHARMA and BRIGHTSTONE that, immediately prior to the
Effective Date, (a) the GJT Collaboration Agreement is in full force
and effect; (b) the GJT Collaboration Agreement has not been amended,
modified or altered (by amendment, side agreement or otherwise) other
than as described in the recitals to this Agreement, (c) all amounts
owing as of such date by GENSIA to GJT under the GJT Collaboration
Agreement have been paid in full; (d) it has not received any notice of
uncured past default under the GJT Collaboration Agreement, (e) there
exists no uncured default or event which (with only the passage of
time, the giving of notice or both) would constitute an uncured default
of a material obligation under the GJT Collaboration Agreement, other
than any default under the GJT Collaboration Agreement which directly
or indirectly derives from or relates to the same or a related
occurrence (or series of occurrences) which BMCT alleges (or may
allege) constitutes a default under the BMCT License and Collaboration
Agreement or the BMCT Amended License and Collaboration Agreement and
(f) to the best of its knowledge, there exists no pending litigation,
arbitration or similar proceeding to which it is a party, and it has
not received written notice of any threatened litigation, arbitration
or similar proceeding, relating to the GJT Collaboration Agreement or
the activities contemplated by the GJT Collaboration Agreement.
ARTICLE 3
RELEASES
3.1 Release of GENSIA. GENTA JAGO, BRIGHTSTONE and SKYEPHARMA do hereby
release, remise and forever discharge GENSIA and its officers,
directors, shareholders, employees and agents from (i) liabilities of
GENSIA resulting from acts of GENTA JAGO on or after the Effective Date
arising from the GJT Collaboration Agreement; and (ii) those
liabilities of GENSIA to GENTA JAGO, BRIGHTSTONE or SKYEPHARMA arising
from the GJT Collaboration Agreement which have accrued prior to the
Effective Date and are actually known by GENTA JAGO, BRIGHTSTONE or
SKYEPHARMA. In no event shall the foregoing release apply to
obligations and liabilities of GENSIA owing to third parties.
3.2 Release of GENTA JAGO, BRIGHTSTONE and SKYEPHARMA. GENSIA does hereby
release, remise and forever discharge each of GENTA JAGO, BRIGHTSTONE
and SKYEPHARMA and its officers, directors, shareholders, employees and
agents from any and all liabilities and obligations arising out of or
related to the GJT Collaboration Agreement which have accrued prior to
the Effective Date and are actually known by GENSIA. In no event shall
the foregoing release apply to obligations and liabilities of GENTA
JAGO, BRIGHTSTONE or SKYEPHARMA owing to third parties.
- 3 -
<PAGE>
ARTICLE 4
INDEMNIFICATION
4.1 Indemnification Provision. Each of SKYEPHARMA, BRIGHTSTONE AND GENTA
JAGO severally agree to indemnify GENSIA and hold GENSIA harmless from
and against all losses, liabilities, damages and expenses, including
reasonable attorneys' fees and costs, incurred as a result of any
claim, demand, action or other proceeding arising from the acts or
omissions of SKYEPHARMA, BRIGHTSTONE AND GENTA JAGO, respectively,
under the GJT Collaboration Agreement accruing on and after the
Effective Date. GENTA JAGO further agrees to indemnify GENSIA and hold
GENSIA harmless from and against all losses, liabilities, damages and
expenses, including reasonable attorneys' fees and costs, arising from
liabilities and obligations of GENSIA to GENTA JAGO arising out of or
related to the GJT Collaboration Agreement which liabilities and
obligations have accrued prior to the Effective Date and are actually
known by GENTA JAGO; provided, however, that in no event shall
SKYEPHARMA, BRIGHTSTONE OR GENTA JAGO indemnify GENSIA in respect of
obligations and liabilities of GENSIA owing to third parties. GENSIA
agrees to indemnify GENTA JAGO and hold GENTA JAGO harmless from and
against all losses, liabilities, damages and expenses, including
reasonable attorneys' fees and costs, arising from liabilities and
obligations of GENTA JAGO to GENSIA arising out of or related to the
GJT Collaboration Agreement which liabilities and obligations have
accrued prior to the Effective Date and are actually known by GENSIA;
provided, however, that in no event shall GENSIA indemnify GENTA JAGO
in respect of obligations and liabilities of GENTA JAGO owing to third
parties. GENSIA agrees to indemnify SKYEPHARMA, BRIGHTSTONE or GENTA
JAGO and hold each of them harmless from and against all losses,
liabilities, damages and expenses, including reasonable attorneys' fees
and costs, arising from liabilities and obligations of GENSIA owing to
third parties related to the GJT Collaboration Agreement, provided,
however, that the foregoing indemnification shall not apply to losses,
liabilities, damages and expenses of the indemnified parties incurred
as a result of the operation of the first sentence of this Section 4.1.
The foregoing notwithstanding, in no event will any party hereto be
required to indemnify another party hereunder for any loss, liability,
damage or expense to the extent it is caused by acts of such
indemnified party constituting gross negligence or willful misconduct
or constituting a breach of this Agreement.
4.2 Procedure. A party (the "Indemnitee") that intends to claim
indemnification under this Section 4 shall promptly notify the
indemnifying party (the "Indemnitor") of any claim, demand, action or
other proceeding in respect of which the Indemnitee intends to claim
such indemnification, and the Indemnitor shall have the right to
participate in, and, to the extent the Indemnitor so desires, jointly
with any other Indemnitor similarly noticed, to assume the defense
thereof with counsel selected by the Indemnitor, provided, however,
that an Indemnitee shall have the right to retain its own counsel, with
the fees and expenses to be paid by the Indemnitee. The indemnity
obligations under this Section 4 shall not apply to amounts paid in
settlement of any claim, demand, action or other proceeding if such
settlement is effected without the consent of the Indemnitor, which
consent shall not be unreasonably withheld. The failure to deliver
notice to the Indemnitor within a reasonable time after the
commencement of any such action, if prejudicial to its ability to
defend such action, shall relieve such Indemnitor of any liability to
the Indemnitee under this Section 4, but the omission so to deliver
notice to the Indemnitor will not relieve it of any liability that it
may have to any Indemnitee otherwise than under this Section 4. The
Indemnitor may not settle the action or otherwise consent to an adverse
judgment in such action that diminishes the rights or interests of the
Indemnitee without the express written consent of the Indemnitee, which
consent shall not be unreasonably withheld. The Indemnitee, its
employees
- 4 -
<PAGE>
and agents shall cooperate fully with the Indemnitor and its legal
representatives in the investigation of any action, claim or liability
covered by this indemnification.
ARTICLE 5
AMENDMENTS TO THE GJT COLLABORATION AGREEMENT
The GJT Collaboration Agreement is hereby amended as follows:
5.1 The reference to GENTA JAGO in the ingress of the GJT Collaboration
Agreement:
JOBEWOL INVESTMENTS BV (proposed to be renamed GENTA JAGO
TECHNOLOGIES BV), a Dutch corporation ("Technologies"), having
a place of business located at Vijzelstraat 32, NL-1017
Amsterdam, Netherlands,
shall be deleted and replaced by the following:
GENTA JAGO TECHNOLOGIES BV, A DUTCH COMPANY ("TECHNOLOGIES"),
HAVING A PLACE OF BUSINESS AT GRUNDSTRASSE 12, CH-6343
ROTKREUZ, SWITZERLAND,
5.2 In Section 1.2, the qualifying threshold of voting stock or other
ownership interest shall be increased from at least forty percent (40%)
to MORE THAN FIFTY PERCENT (50%).
5.3 Section 1.11 shall be deleted in its entirety and replaced by the
following new Section:
1.11 "GEOMATRIX(R) TECHNOLOGY" SHALL MEAN THE ORAL CONTROLLED-RELEASE
DRUG DELIVERY AND RELATED TECHNOLOGY LICENSED TO TECHNOLOGIES BY
JAGOTEC AG WHICH UTILIZES A HYDROPHILIC DRUG-CONTAINING MATRIX TABLET
WHICH CONTROLS THE RELEASE OF THE DRUG THROUGH THE USE OF ONE OR MORE
BARRIER LAYERS, TOGETHER WITH ALL IMPROVEMENTS THEREON AND THERETO.
5.4 Section 2.5 shall be deleted in its entirety and replaced by the
following new Section:
2.5 RIGHTS TO GEOMATRIX(R) TECHNOLOGY. TECHNOLOGIES REPRESENTS AND
WARRANTS THAT IT HAS THE EXCLUSIVE RIGHT AND LICENSE FOR SALE AND USE
IN THE FIELD UNDER THE PATENT RIGHTS, THE GEOMATRIX(R) TECHNOLOGY AND
THE KNOW-HOW NECESSARY AND REQUIRED TO GRANT THE LICENSES UNDER ARTICLE
6.1 BELOW, AND THAT IT HAS THE RIGHT TO GRANT THE LICENSES HEREUNDER.
5.5 Section 14.4 shall be amended by the following new sub-section
14.4 TERMINATION OF THE LICENSE AGREEMENTS.
14.4.1 IN THE EVENT THAT THE LICENSE AGREEMENT IS TERMINATED PRIOR TO
THE EXPIRATION OF THE LAST TO EXPIRE OF THE PATENTS LICENSED TO
TECHNOLOGIES IN THE TERRITORY, THEN JAGOTEC SHALL GRANT A DIRECT
LICENSE TO BRIGHTSTONE WHEREUNDER THE SAME LICENSE RIGHTS AS ARE
GRANTED UNDER THE LICENSE AGREEMENT TO TECHNOLOGIES ARE DIRECTLY
GRANTED TO BRIGHTSTONE. IN THIS EVENT JAGOTEC SHALL ASSUME ALL RIGHTS
AND OBLIGATIONS OF TECHNOLOGIES UNDER THIS AGREEMENT AND SHALL PROMPTLY
CURE ALL DEFAULTS OF TECHNOLOGIES UNDER THIS AGREEMENT, IF ANY.
- 5 -
<PAGE>
14.4.2 NOTWITHSTANDING ANYTHING CONTAINED IN THIS SECTION 14.4, NO
ACTION TAKEN BY JAGOTEC AND/OR BRIGHTSTONE TO CONTINUE OR NOT TO
CONTINUE THE LICENSE SHALL RELIEVE TECHNOLOGIES FROM ANY LIABILITY FOR
ANY UNCURED DEFAULTS UNDER THIS AGREEMENT OR THE LICENSE AGREEMENTS,
AND SUCH ACTION BY JAGOTEC AND/OR BRIGHTSTONE SHALL BE WITHOUT
PREJUDICE TO ANY OTHER RIGHTS OR REMEDIES JAGOTEC AND/OR BRIGHTSTONE
MAY HAVE IN LAW OR EQUITY.
5.6 In Section 20.1, the notice addresses to BRIGHTSTONE and Technologies
are amended as follows:
If to BRIGHTSTONE: BRIGHTSTONE PHARMA INC.
109 MacKenan Drive
Cary, NC 27511, U.S.A.
att: Joseph F. Bozman, Jr.
- 6 -
<PAGE>
with copies to: SKYEPHARMA PLC
105 Piccadilly
London W1V 9FN, England
att: Company Secretary
and: RINDERKNECHT GLAUS & STADELHOFER
Beethovenstrasse 7
P.O. Box 4451
CH-8022 Zurich, Switzerland
att: Dr. Thomas M. Rinderknecht
If to TECHNOLOGIES: GENTA JAGO TECHNOLOGIES BV
Swiss Branch
Grundstrasse 12
CH-6343 Rotkreuz
att: Management Committee
with copies to: remains unchanged
5.7 Section 20.6 (Non-Competition) shall be deleted in its entirety.
ARTICLE 6
CONFIDENTIALITY
6.1 For a period of ten years from the Effective Date, GENSIA shall
maintain in confidence and shall not use in any way information and
data resulting from or related to the development of the Products under
the GJT Collaboration Agreement and, to the extent not included in the
foregoing, information supplied by GENTA JAGO and marked "Confidential"
(collectively the "Information").
6.2 The obligation not to disclose or use Information shall not apply to
any part of such Information that (a) is or becomes patented, published
or otherwise part of the public domain other than by acts of GENSIA or
its Affiliates or sublicensees in contravention of this Agreement, (b)
is disclosed to GENSIA or its Affiliates or sublicensees by a Third
Party, provided that such Information was not obtained by such Third
Party directly or indirectly on a confidential basis, (c) prior to
disclosure to GENSIA was already in possession of GENSIA or its
Affiliates or sublicensees, provided such Information was not obtained
directly or indirectly from GENTA JAGO under the GJT Collaboration
Agreement, or (d) is disclosed in a press release agreed to by all
parties hereto. GENSIA agrees that it shall not, directly or
indirectly, perform research and development on, promote, sell or
distribute another sustained release formulation of Nifedipine in the
Territory, provided, however, that the foregoing non-competition
obligation shall not apply to GENSIA in the event of a change of
control (as defined in Section 13.2.4 of the License and Collaboration
Agreement between GENSIA and BMCT).
6.3 Furthermore, GENSIA shall not disclose to any third party any of the
terms or conditions of the GJT Collaboration Agreement or this
Agreement without the prior written consent of the other parties
hereto, except where and to the extent required by applicable law.
Notwithstanding the foregoing, prior to the Effective Date, the parties
hereto shall agree on the substance of
- 7 -
<PAGE>
information to describe the terms of this transaction, which
information may be disclosed by GENSIA without the consent of the other
parties hereto.
ARTICLE 7
CLOSING, CONDITION PRECEDENT AND EFFECTIVE DATE
7.1 The closing of the transaction contemplated hereby ("Closing") shall
take place at the offices of Bryan Cave LLP, counsel for BMCT, 700
Thirteenth Street, N.W., Washington, D.C., or at such other place as
the parties may agree at 1:00 p.m. EST on February 24, 1997, provided
that the following conditions precedent have been fulfilled:
(a) GENSIA, JAGOTEC, BRIGHTSTONE and SKYE PHARMA shall have agreed
upon and duly executed an assignment agreement (hereinafter
the "JAGOTEC Assignment") providing for the assignment of all
of GENSIA's rights and obligations under the License Agreement
to, and the assumption thereof by, BRIGHTSTONE under terms and
conditions reasonably acceptable to all parties thereto; and
(b) GENSIA, JAGO PHARMA, BRIGHTSTONE and SKYE PHARMA shall have
agreed upon and duly executed an assignment agreement
(hereinafter the "JAGO PHARMA Assignment") providing for the
assignment of all of GENSIA's rights and obligations under the
Supply Agreement to, and the assumption thereof by,
BRIGHTSTONE under terms and conditions reasonably acceptable
to all parties thereto; and
(c) GENSIA, BMCT, BRIGHTSTONE and SKYE PHARMA shall have agreed
upon and duly executed an assignment agreement (hereinafter
the "BMPC Assignment") providing for the assignment of all of
GENSIA's rights and obligations under the BMPC Agreement to,
and the assumption thereof by, BRIGHTSTONE under terms and
conditions reasonably acceptable to all parties thereto.
7.2 Provided that the Closing shall take place as provided hereinbefore,
the "Effective Date" of this transaction shall be October 1, 1996.
ARTICLE 8
MISCELLANEOUS
8.1 This Agreement embodies the entire understanding among the parties
hereto and supersedes any prior representations, agreements,
arrangements or understandings among them regarding the subject matter
hereof, including but not limited to the letter of intent dated October
17, 1996. There are no representations, agreements, arrangements or
understandings, oral or written, among the parties hereto regarding the
subject matter hereof which are not fully expressed herein.
8.2 No change, modification, extension, termination or waiver of this
Agreement, or any provision herein contained, shall be valid unless
made in writing and duly signed by authorized representatives of the
parties hereto.
8.3 This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first written above.
GENSIA, INC.
/s/David F. Hale
- ---------------------------------
By: David F. Hale
Its: Chairman, President and CEO
GENTA JAGO Technologies B.V.
/s/ /s/Thomas H. Adams
- --------------------------------- ---------------------------------
By: By: Thomas H. Adams, Ph.D.
Its: Managing Director Its: Managing Director
BRIGHTSTONE PHARMA INC.
/s/
- ---------------------------------
By:
Its: President
SKYE PHARMA PLC
/s/
- ---------------------------------
By:
Its: Chairman
EXHIBIT 22.1
GENTA INCORPORATED
SUBSIDIARIES OF THE REGISTRANT
JBL Scientific, Inc., a California corporation, is a wholly owned subsidiary of
Genta Incorporated.
Genta Pharmaceuticals Europe S.A., a French corporation, is a wholly owned
subsidiary of Genta Incorporated.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Forms S-3 and S-8 of our reports dated February 28, 1997, with
respect to the consolidated financial statements of Genta Incorporated and the
financial statements of Genta Jago Technologies B.V., included in the Genta
Incorporated Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
March 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS
OF OPERATIONS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1996
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