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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998
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)
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 ___
As of May 15, 1998, the registrant had 5,752,266 shares of common stock
outstanding.
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<PAGE>
Genta Incorporated
INDEX TO FORM 10
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
Quarters Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
Genta Incorporated
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------------------------------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 453,420 $ 1,202,668
Short term investments .................................... 6,380,717 7,253,756
Trade accounts receivable ................................. 938,348 431,046
Inventories ............................................... 696,020 826,008
Other current assets ...................................... 278,215 218,513
------------------------------
Total current assets ......................................... 8,746,720 9,931,991
Property and equipment, net .................................. 1,578,400 1,718,150
Intangibles, net ............................................. 3,240,000 3,390,032
Deposits and other assets .................................... 708,550 713,730
------------------------------
Total assets.................................................. $ 14,273,670 $ 15,753,903
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 938,455 $ 882,111
Payable to Research Institution............................ 602,658 602,658
Accrued payroll payable ................................... 426,307 548,295
Other accrued expenses .................................... 1,175,017 992,660
Deferred revenue .......................................... 212,382 198,570
Current portion of notes payable........................... 906,064 900,558
------------------------------
Total current liabilities .................................... 4,260,883 4,124,852
------------------------------
Deficit in joint venture ..................................... 2,481,178 2,204,053
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized:
Series A convertible preferred stock, $.001 par value;
453,100 and 456,600 shares issued and outstanding
at March 31, 1998 and December 31, 1997,
respectively, liquidation value is $27,186,000 at
March 31, 1998 ..................................... 453 457
Series D convertible preferred stock, $.001 par
value; 226,995 shares issued and outstanding at
March 31, 1998 and December 31, 1997, liquidation
value is $31,779,300 at March 31, 1998 ............. 227 227
Common stock, $.001 par value; 70,000,000 shares
authorized; 5,737,756 and 5,712,364 shares issued and
outstanding at March 31, 1998 and December 31, 1997,
respectively .......................................... 5,738 5,712
Additional paid-in-capital ................................ 129,330,493 129,320,493
Accumulated deficit ....................................... (126,361,302) (124,467,891)
Accrued dividends payable ................................. 4,556,000 4,566,000
------------------------------
Total stockholders' equity ................................... 7,531,609 9,424,998
------------------------------
Total liabilities and stockholders' equity ................... $ 14,273,670 $ 15,753,903
==============================
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
<PAGE>
Genta Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarters Ended March 31,
1998 1997
----------- -----------
(Unaudited)
Revenues:
Product sales ................................. $ 1,602,179 $ 1,158,839
Contract revenue for Genta Jago................ 17,396 87,524
Collaborative research and development ........ -- 50,000
----------- -----------
1,602,179 1,208,839
----------- -----------
Cost and expenses:
Cost of products sold ......................... 870,881 712,226
Research and development ...................... 932,187 1,194,563
Selling, general and administrative ........... 1,506,215 1,459,458
----------- -----------
3,291,887 3,278,723
----------- -----------
Loss from operations ............................. (1,689,708) (2,069,884)
Equity in net loss of joint venture ............... (286,790) (303,129)
Other income (expense):
Interest income ............................... 86,517 118,104
Interest expense .............................. (3,430) (610,950)
----------- -----------
Net loss ......................................... (1,893,411) (2,865,859)
Dividends on preferred stock ..................... 0 (575,155)
----------- -----------
Net loss applicable to common shares.............. $(1,893,411) $(3,441,014)
=========== ===========
Net loss per common share (basic and diluted)..... $ (.33) $ (.86)
=========== ===========
Shares used in computing net
loss per common share (basic and diluted)......... 5,737,756 3,999,163
=========== ===========
See accompanying notes.
* Per share data has been adjusted to reflect the one for ten reverse stock
split of the Company's outstanding common stock which was effected April 4,
1997.
<PAGE>
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarters ended March 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net Loss ........................................................... $(1,893,411) $(2,865,859)
Items reflected in net loss not requiring cash:
Depreciation and amortization ................................... 289,782 250,666
Equity in net loss of joint venture ............................. 286,790 303,129
Interest imputed on convertible debentures....................... -- 545,000
Changes in operating assets and liabilities ..................... (295,783) (238,092)
----------- -----------
Net cash used in operating activities .............................. (1,612,622) (2,005,156)
Investing activities:
Maturities of short-term investments................................ 873,039 --
Purchase of property and equipment ................................. -- (4,449)
Sale of property and equipment...................................... -- 253,337
Loans receivable from joint venture ................................ (9,665) (169,090)
Deposits and other ................................................. -- (108,020)
----------- -----------
Net cash provided by (used in) investing activities ................ (863,374) (28,222)
Financing activities:
Proceeds from notes payable ........................................ -- 3,000,000
Repayments of notes payable and capital lease ...................... -- (209,947)
----------- -----------
Net cash provided by financing activities .......................... -- 2,790,053
----------- -----------
Increase (decrease) in cash and cash equivalents ................... (749,248) 756,675
Cash and cash equivalents at beginning of period ................... 1,202,668 532,013
----------- -----------
Cash and cash equivalents at end of period ......................... $ 453,420 $ 1,288,688
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ...................................................... $ 3,430 $ 14,670
Supplemental schedule of noncash investing and financing activities:
Preferred stock dividends accrued .................................. -- 575,155
</TABLE>
See accompanying notes.
<PAGE>
Genta Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
(1) Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required to be presented for
complete financial statements. The accompanying financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented. Certain balances in 1997 have been reclassified to
conform with the presentation in 1998.
The condensed consolidated financial statements and related disclosures
have been prepared with the presumption that users of the interim financial
information have read or have access to the audited financial statements for the
preceding fiscal year. Accordingly, these financial statements should be read in
conjunction with the audited consolidated financial statements and the related
notes thereto included in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997, as amended.
The Company has experienced significant quarterly fluctuations in operating
results and it expects that these fluctuations in revenues, expenses and losses
will continue.
(2) Inventories
Inventories are comprised of the following:
March 31, December 31,
1998 1997
------------ -----------
Raw materials and supplies $ 306,148 $ 329,691
Work-in-process 149,064 141,120
Finished goods 240,808 355,197
------------ -----------
$ 696,020 $ 826,008
============ ===========
(3) Net Loss Per Common Share
As required, the Company adopted SFAS No. 128, "Earnings Per Share," for
the year ended December 31, 1997. SFAS No. 128 changes the method used to
calculate earnings per share and requires the restatement of all prior periods.
Under SFAS No. 128, the Company is required to present basic and diluted
earnings per share if applicable. Basic earnings per share is based on the
weighted average number of shares outstanding during the period. Diluted
earnings per share includes the weighted average number of shares outstanding
and gives effect to potentially dilutive common shares such as options, warrants
and convertible debt and preferred stock outstanding.
Net loss per common share for the three months ended March 31, 1998 and
1997 is based on the weighted average number of shares of common stock
outstanding during the periods. Potentially dilutive securities include options,
warrants and convertible preferred stock; however, such securities have not been
included in the calculation of the net loss per common share as their effect is
antidilutive where, as here, there is loss rather than earnings. Therefore,
there is no difference between the basic and diluted net loss per common share
for any of the periods presented.
6
<PAGE>
(4) Stockholders' Equity
During January and February 1998, an aggregate of 3,500 shares of Series A
Preferred Stock and accrued dividends were converted at the option of the
respective holders thereof into an aggregate of 25,392 shares of Genta's common
stock at a conversion price of $8.27 per share.
(5) Legal Proceedings
LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based broker/dealer,
has asserted claims against the Company and others, including Paramount Capital
Inc., of which Dr. Rosenwald is the sole stockholder and Mr. Weiss is a Senior
Managing Director, and various related entities and persons. LBC's claims relate
to the alleged breach by the Company of certain letter agreements, allegedly
entered into by LBC and the Company in 1995 and 1996 with respect to brokerage
and/or investment banking services, particularly in connection with a $3 million
investment, for which LBC is seeking a fee. On March 30, 1998, the Company
received a Statement of Claim under NASD arbitration rules, and a request that
the Company voluntarily submit to NASD arbitration. LBC's Statement of Claim
sought damages in the form of cash (in excess of $4 million), stock, warrants
and other securities. Subsequently, LBC abandoned the arbitration, and on April
9, 1998, the Company's counsel learned that a Complaint had been filed in the
United States District Court for the Southern District of New York (98 Civ.
2491) by LBC against the Company and the same other parties. The Company
believes it has valid legal and equitable defenses to LBC's lawsuit. The Company
intends to defend vigorously and possibly to assert counterclaims against LBC.
Item 2. 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 and clinical testing, 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 March 31, 1998, the Company
has incurred a cumulative net loss of $126.4 million. The Company has
experienced significant quarterly fluctuations in operating results and it
expects that these fluctuations in revenues, expenses and losses will continue.
The Company's independent auditors have included an explanatory statement
in their report to the Company's financial statements at December 31, 1997, that
expresses substantial doubt as to the Company's ability to continue as a going
concern. There are several factors that must be considered risks in that regard
and those that are known to management are discussed under the caption "Certain
Trends and Uncertainties, in this Management's discussion and Analysis of
Financial Condition and Results of Operations ("MD&A")."
The statements contained in this Quarterly Report on Form 10-Q 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
safe-harbor 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 Certain Trends and Uncertainties
section of this Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Quarterly Report on Form 10-Q. The
Company does not undertake to update any forward-looking statements.
Results of Operations
Operating revenues totaled $1.62 million in the first quarter of 1998
compared to $1.30 million in the first quarter of 1997. This revenue is the
result of increased sales by the Company's subsidiary, JBL Scientific, Inc. All
of the Company's product sales are attributable to JBL. Sales of specialty
chemical and pharmaceutical intermediate products used in the clinical
diagnostics, pharmaceutical research and development and pharmaceutical
manufacturing increased to $1.60 million in the first quarter of 1998 compared
to $1.16 million in the same period in 1997. While the annual demand for many of
JBL's products is relatively stable, there are significant quarter to quarter
variations in sales due to the timing of customers' production schedules and
demands. The increases in the current quarter were primarily a result of sales
in pharmaceutical and custom syntheses. Overall, demand for the Company's
products has been increasing, while competition has caused prices to decrease.
Sales of products used
7
<PAGE>
in pharmaceutical manufacturing and pharmaceutical research and development
increased due to increased market penetration while sales of products used in
clinical diagnostics trended slightly downward.
Europa Bioproducts ("Europa"), JBL's European distributor, accounted for
approximately 10% of product sales in the first quarter of 1998, compared to 23%
in the comparable period in 1997. Two other customers each accounted for more
than 10% of product sales in the first quarter of 1998, representing 15.7% and
14.4%, respectively. Individual customers' demands for JBL products generally
fluctuate with the outcomes of clinical trials or the availability of funding.
The Company believes that the loss of any material customer, if not replaced,
could have an adverse effect on the Company.
Costs and expenses were $3.3 million in the first quarter of 1998, which
was unchanged from the same quarter in 1997. The costs of products sold by JBL
increased from $0.71 million in the first quarter of 1997 to $0.87 million in
the first quarter of 1998 as volumes increased. Gross margins for JBL in the
quarter were $0.73 million compared to $0.45 million in the first quarter of
1997. The improvement in gross margins largely reflects the increase in sales
combined with relatively stable fixed overhead costs.
Research and Development expenses decreased in the first quarter from $1.1
million in 1997 to $0.93 million in 1998. Included in these expenses in the
first quarter of 1998 is $0.45 million for the purchase of bulk G3139 to support
the Company's expanded clinical research program. Not included is $0.26 million
for additional G3139 supplies that were still undergoing release testing at the
end of the first quarter. The remaining decrease in research and development
expenses is primarily attributable to the Company's research and development
workforce reductions implemented in 1997 together with the discontinuation of
several programs.
Selling, General and Administrative Expenses were $1.5 million in the first
quarter of 1998, which did not differ from the corresponding period in 1997.
The Company's equity in net loss of joint venture (Genta Jago) decreased to
$0.29 million in the first quarter of 1998 from $0.30 million in the comparable
period of 1997. The decrease in the Company's equity in net loss of joint
venture is largely attributable to the fact that a greater portion of
development activities were funded pursuant to Genta Jago's collaborative
agreements with third parties. The equity in net loss of joint venture is
determined by reducing the loss per Genta Jago financials by Genta's 20% markup
on internal costs for which the joint venture is billed plus the interest
accrued on the working capital loans.
Since the formation of Genta Jago, no products have been successfully
developed and marketed. Since the initial plans called for earlier introductions
and since there have been significant changes in the market environment since
the Company entered into the joint venture, there is reason to believe that any
products that may be marketed in the future could represent significantly poorer
financial opportunities than those that were anticipated in the earlier plans.
This reduction in opportunity derives from factors such as the presence of
direct competitors to Genta Jago's products being in the marketplace before
Genta Jago, and increasing pricing pressures on pharmaceuticals, particularly
multisource or generic products from payers such as reimbursers and government
buyers. See "MD&A--Certain Trends and Uncertainties--Uncertainty of
Technological Change and Competition" and "MD&A--Certain Trends and
Uncertainties--Uncertainty of Product Pricing, Reimbursement and Related
Matters." Both of these factors may adversely affect Genta Jago even if it is
successful in developing products to obtain regulatory approval. As a result and
in consideration of the Company's need to reduce expenses and focus its efforts,
the Company is seeking to direct its resources from the joint venture to its
Anticode(TM) drug development, specifically G3139, for the immediate future.
Interest income has fluctuated significantly each year and is anticipated
to continue to fluctuate primarily due to changes in the levels of cash,
short-term investments and interest rates each period.
In consideration of EITF D-60, which was issued by the SEC in March 1997,
the Company recorded debt issuance costs totaling $3.0 million related to value
associated with 6.4 million Bridge Warrants issued in connection with a $3.0
million debt issue in February 1997 that matured in December 1997. The Company
has amortized such costs to interest expense over the life of the debt. In the
three months ended March 31, 1997, the Company recorded a charge to interest
expense totaling $545,000 ($.14 per share) related to amortization of such debt
issuance costs.
8
<PAGE>
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 $112.4 million through March 31, 1998. At March
31, 1998, the Company had cash, cash equivalents and short-term investments
totaling $6.8 million compared to $8.5 million at December 31, 1997.
The Company will need substantial additional funds before it can expect to
realize significant product revenue. The Company projects that, at its current
rate of spending and for its current activities, its existing cash funds will
enable the Company to maintain its present operations into the first quarter of
1999. To the extent that the Company is successful in accelerating its
development of G3139 or in expanding its development portfolio or acquiring or
adding new development candidates, the current cash resources would be consumed
at a greater rate. Similarly, the Company has been seeking to identify and hire
additional senior managers to direct the business of the Company. To the extent
it is successful in these endeavors, the rate of cash utilization would also
increase. Certain parties with whom the Company has agreements have claimed
default and, should the Company be obligated to pay these claims or should the
Company engage legal services to defend or negotiate its positions or both, its
ability to continue operations could be significantly reduced or shortened. See
"MD&A--Certain Trends and Uncertainties--Claims of Genta's Default Under Various
Agreements." 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 also
anticipates seeking additional product development opportunities from external
sources. Such acquisitions may consume cash reserves or require additional cash
or equity. The Company's working capital and additional funding requirements
will depend upon numerous factors, including: (i) the progress of the Company's
research and development programs; (ii) the timing and results of preclinical
testing and clinical trials; (iii) the level of resources devoted to Genta Jago;
(iv) the level of resources that the Company devotes to sales and marketing
capabilities; (v) technological advances; (vi) the activities of competitors;
and (vii) the ability of the Company to establish and maintain collaborative
arrangements with others to fund certain research and development efforts, to
conduct clinical trials, to obtain regulatory approvals and, if such approvals
are obtained, to manufacture and market products. See "MD&A--Certain Trends and
Uncertainties--Need for Additional Funds; Risk of Insolvency."
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of financing, it expects to use such financing to
continue and expand its 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.
In the first quarter of 1998, the holders of an aggregate of 3,500 shares
of Series A Preferred Stock converted those shares into 25,392 shares of Common
Stock. See Note 4 to the financial statements.
Certain Trends and Uncertainties
In addition to the other information contained in this Quarterly Report on
Form 10-Q, the following factors should be considered carefully.
9
<PAGE>
Need for Additional Funds; Risk of Insolvency.
Genta's operations to date have consumed substantial amounts of cash. The
Company's auditors have included an explanatory paragraph in their opinion with
respect to the Company's ability to continue as a going concern. See "Report of
Ernst & Young, LLP, Independent Auditors" in the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1997 (the "1997 Annual
Report") and "MD&A -- Liquidity and Capital Resources." 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
products to market and to establish production and marketing capabilities. 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; to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself; to sell itself to a third party; to cease
operations; or to declare bankruptcy. The Company's future cash requirements
will be affected by results of research and development, results of pre-clinical
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 processes, potential litigation by
companies seeking to prevent or delay marketing approval of Genta Jago's
products and other factors.
Loss History; Uncertainty of Future Profitability.
Genta has been unprofitable to date, incurring substantial operating losses
associated with ongoing research and development activities, pre-clinical
testing, clinical trials, manufacturing activities and development activities
undertaken by Genta Jago. From the period since its inception to March 31, 1998,
the Company has incurred a cumulative net loss of $126.4 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's independent auditors have included an explanatory paragraph in
their report to the Company's financial statements at December 31, 1997, which
paragraph expresses substantial doubt as to the Company's ability to continue as
a going concern. See "Report of Ernst & Young LLP, Independent Auditors" in the
1997 Annual Report and "MD&A -- Certain Trends and Uncertainties -- Need for
Additional Funds; Risk of Insolvency."
Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of
Dilution; Anti-Dilution Adjustments.
In the event of the liquidation, dissolution or winding up of the Company,
the Common Stock is expressly subordinate to the approximately $27.2 million
preference of the 453,100 outstanding shares of Series A Preferred Stock and the
approximately $37.4 million preference of the 267,390 shares of Series D
Preferred Stock (including 40,395 shares of Series D Preferred Stock issuable
upon exercise of certain warrants). Dividends may not be paid on the Common
Stock unless full cumulative dividends on the Series A and Series D Preferred
Stock have been paid or funds have been set aside for such preferred dividends
by the Company.
The conversion rate 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") are subject to adjustment, among other things, upon certain
issuances of Common Stock or securities convertible into Common Stock at $67.50
per share or less. As of March 31, 1998, each share of Series A Preferred Stock
is convertible into approximately 7.25 shares of Common Stock at a conversion
price of $8.27 per share and the exercise price of the Series A Warrants is
presently $9.32 per share. There are outstanding Series A Warrants to purchase
an aggregate of 675,966 shares of Common Stock, which expire on September 24,
1998. The conversion rate of the Series D Preferred Stock and the exercise
prices of the Class D Warrants are subject to adjustment, among other things,
upon certain issuances of Common
10
<PAGE>
Stock or securities convertible into Common Stock at prices per share below
certain levels. In addition, the Conversion Price of the Series D Preferred
Stock in effect on June 29, 1998 (the "Reset Date") will be adjusted and reset
effective as of the Reset Date if the average closing bid price of the Common
Stock for the 20 consecutive trading days immediately preceding the Reset Date
(the "12 Month Trading Price") is less than 140% of the then applicable
Conversion Price (a "Reset Event"). Upon the occurrence of a Reset Event, the
then applicable Conversion Price will be reduced to be equal to the greater of
(i) the 12 Month Trading Price divided by 1.40 and (ii) 25% of the then
applicable Conversion Price. Each share of Series D Preferred Stock is presently
convertible into approximately 106 shares of Common Stock, at a conversion price
of $0.94375 per share of Common Stock, and the exercise price of the Class D
Warrants is presently $0.94375 per share. There are 807,900 Class D Warrants
outstanding and another 201,975 Class D Warrants issuable upon the exercise of
certain warrants. Finally, the Company has outstanding Bridge Warrants to
purchase an aggregate of 6,357,616 shares of Common Stock at an exercise price
of $0.471875 per share, Line of Credit Warrants to purchase an aggregate of
50,000 shares of Common Stock at an exercise price of $2.50 per share, warrants
to purchase an aggregate of 95,768 shares of Common Stock at various exercise
prices between approximately $13 and $21 per share and outstanding employee
stock options. The Note and Warrant Purchase Agreement provides that a number of
additional Bridge Warrants ("Penalty Warrants") equal to 1.5% of the number of
Bridge Warrants then held by the Aries Funds shall be issued to the Aries Funds
for each day beyond 30 days after the final closing of the Private Placement
that a shelf registration statement covering the Common Stock underlying the
securities purchased pursuant to the Note and Warrant Purchase Agreement is not
filed with the SEC and for each day beyond 210 days after the closing date of
the investment contemplated by the Note and Warrant Purchase Agreement that such
shelf registration statement is not declared effective by the SEC. The Company
filed such shelf registration statement with the SEC on September 9, 1997,
however, the Company has to date been unable to have such shelf registration
statement declared effective by the SEC. As a result, the Company could be
obligated to issue Penalty Warrants to the Aries Funds. The Aries Funds have
not, to date, requested that the Company issue such Penalty Warrants. The
Company and the Aries Funds are currently conducting negotiations to determine
whether, and to what extent, Penalty Warrants will be issued. See "Market for
Registrant's Common Equity and Related Stockholder Matters -- Recent Sales of
Unregistered Securities" in the 1997 Annual Report.
Claims of Genta's Default Under Various Agreements.
On May 7, 1997 Jago and Jagotec gave Genta Jago formal notices of its
assertion that Genta Jago is in breach of the Restated GEOMATRIX(R) Services
Agreement, the Restated GEOMATRIX(R) Research and Development Agreement and the
Restated GEOMATRIX(R) License Agreement, stating that should the breach not be
cured within the applicable cure period, Genta Jago would reserve the right to
terminate the agreements in accordance with their terms. Each of these
Agreements provides for a cure period of 30 days, except that if the default is
not capable of being cured within this period and the defaulting party is
diligently undertaking to cure such default as soon as commercially feasible
thereafter under the circumstances, then the non-breaching party shall have no
right to terminate the agreement. In addition each of these agreements contains
a provision providing for the final resolution of any disputes, claims or
controversies, whether before or after termination of the agreement, by
arbitration in Paris, France. After the 30-day cure period expired, Jago did not
take action purporting to terminate these agreements but did not rescind the
notices of default. Jago, Jagotec and Jago Holding AG also gave formal notice of
default under the Restated Joint Venture and Shareholders Agreement, contending
that due to Genta's failure to meet its funding obligations to Genta Jago, Genta
Jago was unable to fulfill its obligations to Jago. The amount claimed by Jago
to be in default is approximately $1.2 million, of which $200,000 relates to
1997 and $1.0 million relates to development costs and license fees for 1996.
There is no specific cure period contained in the Restated Joint Venture and
Shareholders Agreement but rather a provision providing for resolution of
disputes, claims or controversies by arbitration in Paris, France. The Company
met with Jago and is attempting to resolve the situation without resort to
arbitration. While a termination of these agreements may have a material adverse
effect on the Company, the Company intends to oppose vigorously Jago's position.
Stating that it was without prejudice to Genta's position, Genta provided
approximately $129,000 to Genta Jago for the payment by Genta Jago of all
amounts claimed by Jago under the Restated GEOMATRIX(R) License Agreement and
certain other amounts
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owed by Genta Jago to third parties (both included in Jago's notice of default).
On May 15, 1997, Johns Hopkins University ("Johns Hopkins") sent Genta a letter
stating that the license agreement entered into between the Company and Johns
Hopkins in May 1990 (the "Johns Hopkins Agreement") was terminated. On November
26, 1997 the Ts'o/Miller Partnership sent Genta a letter claiming that Genta was
in material breach of the February 1989 license agreement between the Company
and the Ts'o/Miller Partnership (the "Ts'o/Miller Agreement") for failing to pay
royalties from 1995 through 1997. This notice further advised that if the
alleged breach were not cured within 90 days of the notice the license would be
terminated. The Company has received a further notice stating that the license
is terminated and that $287,671 is due and payable. See "Business --
Anticode(TM) Brand of Antisense Oligonucleotide Programs -- Oligonucleotide
Collaborative and Licensing Agreements --Ts'o/Miller/Hopkins" in the 1997 Annual
Report. The Company is currently engaged in settlement discussions with Johns
Hopkins and the Ts'o/Miller Partnership. The French government agency L'Agence
Nationale de Valorisation de la Recherche ("ANVAR") asserted, in a letter dated
February 13, 1998, that Genta Europe was not in compliance with the ANVAR
Agreement, and that ANVAR might request the immediate repayment of such loan.
The Company does not believe that under the terms of the ANVAR Agreement, ANVAR
is entitled to request early repayment and is working with ANVAR to achieve a
mutually satisfactory resolution. See "Business -- Genta Europe" in the 1997
Annual Report. LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based
broker/dealer, has asserted claims against the Company and others. See "Legal
Proceedings." There can be no assurance that the Company will not incur material
costs in relation to these terminations and/or assertions of default or
liability. See "MD&A -- Liquidity and Capital Resources."
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. To date, most of the Company's
resources have been dedicated to applying molecular biology and medicinal
chemistry to the research and development of potential Anticode(TM)
pharmaceutical products based upon oligonucleotide technology. While the Company
has demonstrated the activity of Anticode(TM) oligonucleotide technology in
model systems in vitro and the activity of antisense technology in animals and
has identified compounds that the Company believes are worthy of additional
testing, only one of these potential Anticode(TM) oligonucleotide 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 oligonucleotide technology will
result in products that will receive necessary regulatory approvals or that will
be successful commercially. Further, results obtained in pre-clinical studies or
early clinical investigations or pilot bioequivalence trials are not necessarily
indicative of results that will be obtained in pivotal human clinical or
bioequivalence trials. 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 the Company's products currently in
pre-clinical development, or, if permitted, that such products will be
demonstrated to be safe and efficacious. 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 formulated using GEOMATRIX
technology. In 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. 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. Certain competitive products have
already been filed with and/or approved by the FDA. See "MD&A -- Certain Trends
and Uncertainties -- Potential Adverse Effect of Technological Change and
Competition."
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Limited Availability of Net Operating Loss Carry Forwards.
At December 31, 1997, the Company has federal and California net operating
loss carryforwards of approximately $71,697,000 and $15,236,000, 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 prior to 1997. The federal tax loss carryforwards
will begin expiring in 2003, unless previously utilized. Approximately
$2,767,000 of the California tax loss carryforward expired during 1997 and the
related deferred tax asset and tax loss carryforward amounts have been reduced
accordingly. The remaining California tax loss will continue to expire in 1998,
unless utilized. The Company also has federal and California research and
development tax credit carryforwards of $2,921,000 and $1,203,000, 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, 1996 and 1997. Because of the decrease in
value of the Company's stock, the ownership changes which occurred in 1996 and
1997 will cause a material limitation on the Company's ability to utilize these
carryforwards, and therefore much of the carryforwards will not be utilized.
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 D Preferred Stocks. The Company currently intends to retain
its earnings, if any, after payment of dividends on outstanding shares of Series
A and Series D Preferred Stocks, for the development of its business.
No Assurance of Regulatory Approval; Government Regulation.
The FDA and comparable agencies in foreign countries impose substantial
premarket approval requirements on the introduction of pharmaceutical products
through lengthy and detailed pre-clinical 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 have attained. 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 could materially adversely affect the
Company's or Genta Jago's revenue. Moreover, additional government regulation
from future legislation or administrative action may be established which could
prevent or
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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 (collectively "Governmental Regulations")
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. In October 1996, JBL
retained an engineering consulting firm to advise it with respect to an incident
of soil and groundwater contamination (the "Spill"). Sampling conducted at the
JBL facility revealed the presence of chloroform and perchloroethylenes ("PCEs")
in the soil and groundwater at this site. Six soil borings were drilled and
groundwater monitoring wells were installed at several locations around the
site. Chloroform was detected in on-site monitoring wells at levels of up to 190
ug/liter, exceeding the California Drinking Water Maximum Contamination Level
for trihalomethanes of 100 ug/liter. PCEs were also detected in on-site
monitoring wells at levels of up to 22 ug/liter, exceeding the California
Drinking Water Maximum Contamination Level of 5 ug/liter. In addition, Toluene
was detected at levels of up to 2 ug/liter at several monitoring points on-site,
which is significantly below the California Toxicity Action Level of 100
ug/liter. These toxicity levels are not binding, as the final regulatory maximum
levels may be higher or lower. JBL has notified the appropriate regulatory
agency, the California Regional Water Quality Control Board, of conditions at
the site, and with the agency's approval, JBL is monitoring groundwater
conditions at the site on a quarterly basis. JBL is currently in the
pre-regulatory action stage with ongoing site monitoring and site assessment. In
addition, current sampling results indicate that contaminants may be migrating
off-site. An off-site well, used as a domestic and irrigation water source, has
shown evidence of being impacted by chloroform at 0.9 ug/liter, significantly
below (less than one percent of) the California Drinking Water Maximum
Contamination Level for trihalomethanes of 100 ug/liter, and toluene at 0.9
ug/liter, also significantly below (less than one percent of) the California
Toxicity Action Level of 100 ug/liter. While another off-site well has been
found to contain chloroform, the engineering consultant concluded that the
contaminants do not appear to relate to impact from the JBL site. The Company
believes that any costs associated with further investigating or remediating
this contamination will not have a material adverse effect on the business of
the Company, although there can be no assurance thereof. The Company believes
that it is in material compliance with Governmental Regulations, however, there
can be no assurance that the Company will not be required to incur significant
costs to comply with Governmental 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
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gain access to the Company's or Genta Jago's trade secrets, or that the Company
or Genta Jago can effectively protect its 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
and Trademark Office (or any foreign counterpart) 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 and Genta Jago's strategy for the research, development and
commercialization of their 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. No assurance can be given
that they will obtain such collaborative arrangements on acceptable terms, if at
all, nor can any assurance be given that any current collaborative arrangements
will be maintained.
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.
Potential Adverse Effect of Technological Change and Competition.
The biotechnology industry is subject to intense competition and rapid and
significant technological change. 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
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experience than the Company or Genta Jago in undertaking pre-clinical 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. As competitors of the Company or of Genta
Jago receive approval to products that share the same potential market as the
Company's or Genta Jago's potential products, the market share available to the
Company or Genta Jago will likely be reduced, thereby reducing the potential
revenues and earnings available to the Company or Genta Jago. In addition,
increased pricing competition would also likely result, further reducing the
earnings potential of the Company's or Genta Jago's products. In December 1997,
a competitor of the Company, Elan Corporation, received approval of their ANDA
for a generic formulation of Oruvail(R) (ketoprofen), and another company, Mylan
Laboratories, Inc., has filed an ANDA for a generic formulation of Procardia
XL(R) (nifedipine). 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 or
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.
Uncertainty of Clinical Trials and Results.
The results of clinical trials and pre-clinical testing are subject to
varying interpretations. Even if the development of the Company's or Genta
Jago's respective products advances to the clinical stage, there can be no
assurance that such products will prove to be safe and effective. The products
that are successfully developed, if any, will be subject to requisite regulatory
approval prior to their commercial sale, and the approval, if obtainable, may
take several years. Generally, only a very small percentage of the number of new
pharmaceutical products initially developed is approved for sale. Even if
products are approved for sale, there can be no assurance that they will be
commercially successful. The Company or Genta Jago may encounter unanticipated
problems relating to development, manufacturing, distribution and marketing,
some of which may be beyond the Company's or Genta Jago's respective financial
and technical capacity to solve. The failure to address such problems adequately
could have a material adverse effect on the Company's or Genta Jago's respective
businesses, financial conditions, prospects and results of operations. No
assurance can be given that the Company or Genta Jago will succeed in the
development and marketing of any new drug products, or that they will not be
rendered obsolete by products of competitors. "See "MD&A -- Certain Trends and
Uncertainties -- Potential Adverse Effect of Technological Change and
Competition."
Difficult Manufacturing Process; Access to Certain Raw Materials.
The manufacture of Anticode(TM) 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, in order to obtain oligonucleotides sufficient to meet the
volume and cost requirements needed for certain commercial applications of
Anticode(TM) oligonucleotide products, Genta requires raw materials currently
provided by a single supplier which is itself a development stage biotechnology
company (and a competitor of the Company) and is subject to uncertainties
including the potential for a decision by such supplier to discontinue
production of such raw materials, the insolvency of such supplier, or the
failure of such supplier to follow applicable regulatory guidelines. 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
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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 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. Finally, given the above
potential market constraints on pricing, the availability of competitive
products in these markets may further limit the Company's and Genta Jago's
flexibility in pricing and in obtaining adequate reimbursement for its potential
products. See "MD&A -- Certain Trends and Uncertainties -- Potential Adverse
Effect of Technological Change and Competition."
Need for and Dependence on Qualified Personnel.
The Company's success is highly dependent on the hiring and retention of
key personnel and scientific staff. The loss of key personnel or the failure to
recruit necessary additional personnel or both is likely further to 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 attract and retain the qualified
personnel necessary for the development of its business. The Company is actively
engaged in the search for a new Chief Financial Officer and a head of Research
and Development. In March 1998, the Company's Controller resigned and a
replacement is being sought. At the present time the Company believes its stock
option plan is inadequate to provide sufficient incentives for the successful
recruitment of key personnel and a new plan will be proposed for stockholder
approval at the next annual stockholders' meeting. In addition, the current
senior officers and directors have not been granted options in accordance with
appointment offers since the current plan does not have sufficient options
available. There can be no assurance that the stockholders will approve such a
plan or that, if approved, it will be adequate to enable recruitment of new, or
retention of existing, key employees and directors.
Product Liability Exposure; Limited Insurance Coverage.
The Company's, JBL's and Genta Jago's businesses expose them to potential
product liability risks that 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
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liability insurance coverage that 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 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.
Fundamental Change.
The Company's Restated Certificate of Incorporation currently provides that
upon the occurrence of a "Fundamental Change," the holders of Series A Preferred
Stock have the option of requiring the Company to repurchase all of each such
holder's shares of Series A Preferred Stock at the Redemption Price, an event
that could result in the Company being required to pay to the holders of Series
A Preferred Stock stock or (in certain circumstances) cash in the aggregate
amount of approximately $27.2 million. Furthermore, if the Company is required
to redeem the Series A Preferred Stock it would also be required (subject to
certain conditions) to offer to redeem the Series D Preferred Stock on a pari
passu basis with the Series A Preferred Stock and with the same type of
consideration paid in redemption of the Series A Preferred Stock; upon a
Fundamental Change, the Company could, under certain circumstances, be required
to pay the holders of Series D Preferred Stock cash in the aggregate amount of
approximately $31.8 million (not including an additional $5.7 million that could
be payable upon redemption of 40,395 shares of Series D Preferred Stock issuable
upon exercise of certain warrants). "Fundamental Change" is defined as: (i) a
"person" or "Group" (as defined), together with any affiliates thereof, becoming
the beneficial owner (as defined) of Voting Shares (as defined) of the Company
entitled to exercise more than 60% of the total voting power of all outstanding
Voting Shares of the Company (including any Voting Shares that are not then
outstanding of which such person or Group is deemed the beneficial owner)
(subject to certain exceptions); (ii) any consolidation of the Company with, or
merger of the Company into, any other person, any merger of another person into
the Company, or any sale, lease or transfer of all or substantially all of the
assets of the Company to another person (subject to certain exceptions); (iii)
the sale, transfer or other disposition (or the entry into a commitment to sell,
transfer or otherwise dispose) of all or any portion of the shares of Genta Jago
held at any time by the Company (or the imposition of any material lien on such
shares which lien is not removed within 30 days of imposition) and the sale (or
functional equivalent of a sale) of all or substantially all of the assets of
Genta Jago or (iv) the substantial reduction or elimination of a public market
for the Common Stock as the result of repurchases, delisting or deregistration
of the Common Stock or corporate reorganization or recapitalization undertaken
by the Company.
The SEC Staff is currently in the process of reviewing a registration
statement filed by the Company, and has raised certain questions regarding the
Company's classification of the Preferred Stock as permanent (rather than
"mezzanine") equity. Management of the Company believes, based upon its
Certificate of Incorporation and the agreement pursuant to which the Preferred
Stock was issued, and after discussion with Company counsel, that the conditions
for redemption of the Preferred Stock require volitional acts undertaken by the
Company and are therefore solely within the control of the Company. If the SEC
Staff does not accept the Company's position, the Company will file an amendment
to this Form 10-Q reclassifying the Preferred Stock as "mezzanine" rather than
permanent equity.
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
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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 or regulations. See "MD&A -- Certain Trends and Uncertainties
- -- No Assurance of Regulatory Approval; Government Regulation" for a discussion
of the Spill.
Volatility of Stock Price; Market Overhang from Outstanding Convertible
Securities and Warrants.
The market price of the Company's Common Stock, like that of the common
stock of many other biopharmaceutical companies, has been highly volatile and
may be so in the future. Factors such as, among other things, the results of
pre-clinical 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, Genta Jago or their respective 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. At the Company's Annual Meeting of
Stockholders held on April 4, 1997, the stockholders approved an amendment to
the Company's Restated Certificate of Incorporation effecting a one-for-ten
reverse stock split of its Common Stock. The stockholders also approved a
reduction of the Company's authorized shares of Common Stock from 150,000,000 to
70,000,000. The Company commenced trading on a post reverse split basis at the
commencement of trading on April 7, 1997. As of March 31, 1998, the Company had
5,737,756 shares of Common Stock outstanding. The Company intends to seek
stockholder approval of another reverse stock split at its next annual
stockholders' meeting. Future sales of shares of Common Stock by existing
stockholders, holders of preferred stock who might convert such preferred stock
into Common Stock, and option and warrant holders also could adversely affect
the market price of the Common Stock.
No predictions can be made of the effect that future market sales of the
shares of Common Stock underlying the convertible securities and warrants
referred to under the caption "MD&A -- Certain Trends and Uncertainties --
Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of
Dilution; Anti-dilution Adjustments," or the availability of such securities for
sale, will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock, or the perception that such
sales might occur, could adversely affect prevailing market prices.
Certain Interlocking Relationships; Potential Conflicts of Interest.
The Aries Funds have the contractual right to appoint a majority of the
members of the Board of Directors of the Company. The Aries Funds have
designated Michael S. Weiss, Glenn L. Cooper, M.D., Donald G. Drapkin, Bobby W.
Sandage, Jr., Ph.D., and Andrew J. Stein as nominees to the Board of Directors.
Such persons were elected as Directors of the Company. David R. Walner, the
Secretary of the Company, is an Associate Director and Secretary of Paramount
Capital Asset Management, Inc. ("PCAM"). PCAM is the investment manager and
general partner of The Aries Trust and the Aries Domestic Fund, L.P.,
respectively. The Aries Funds currently do not hold a controlling block of
voting stock, although the Aries Funds have the present right to appoint a
majority of the Board of Directors, and to convert and exercise their securities
into a significant portion of the outstanding Common Stock. See "MD&A -- Certain
Trends and Uncertainties -- Concentration of Ownership and Control" below. In
addition to the Aries Funds' investments in the Company that are disclosed in
"Market for Registrant's Common Equity and Related Stockholder Matters -- Recent
Sales of Unregistered Securities," in the 1997 Annual Report, the Aries Funds
also engaged in the following transactions: as of June 30, 1997, the Aries Funds
purchased an aggregate of 10,000 shares of Series D Preferred Stock and 50,000
Class D Warrants in a private placement (the "Private Placement"); on December
2, 1997, the Aries Funds purchased an aggregate of 54,000 shares of Series A
Preferred Stock; on December 29, 1997, warrants to purchase an aggregate of
1,000 shares of Series D Preferred Stock and 5,000 Class D Warrants were
allocated to the Aries Funds by Paramount
19
<PAGE>
Capital, Inc., which warrants were received in connection with the Private
Placement; and on December 31, 1997, the Aries Funds converted the outstanding
principal of, and interest on, their respective Senior Secured Convertible
Bridge Notes of the Company into an aggregate of 52,415 shares of Series D
Preferred Stock. Dr. Lindsay A. Rosenwald, the President and sole stockholder of
PCAM, is also the President of Paramount Capital, Inc. and of Paramount Capital
Investments LLC, a New York-based merchant banking and venture capital firm
specializing in biotechnology companies ("PCI"). In the regular course of its
business, PCI identifies, evaluates and pursues investment opportunities in
biomedical and pharmaceutical products, technologies and companies. Generally,
Delaware corporate law requires that any transactions between the Company and
any of its affiliates be on terms that, when taken as a whole, are substantially
as favorable to the Company as those then reasonably obtainable from a person
who is not an affiliate in an arms-length transaction. Nevertheless, neither
such affiliates nor PCI is obligated pursuant to any agreement or understanding
with the Company to make any additional products or technologies available to
the Company, nor can there be any assurance, and the Company does not expect and
investors in the Company should not expect, that any biomedical or
pharmaceutical product or technology identified by such affiliates or PCI in the
future will be made available to the Company. In addition, certain of the
current officers and directors of the Company or certain of any officers or
directors of the Company hereafter appointed may from time to time serve as
officers or directors of other biopharmaceutical or biotechnology companies.
There can be no assurance that such other companies will not have interests in
conflict with those of the Company.
Concentration of Ownership and Control.
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. See "MD&A -- Certain
Trends and Uncertainties -- Certain Interlocking Relationships; Potential
Conflicts of Interest." Accordingly, the Aries Funds have the ability to exert
significant influence over the election of the Company's Board of Directors and
other matters submitted to the Company's stockholders for approval. These
arrangements may discourage or prevent any proposed takeover of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over the then current market prices. Such stockholders may
influence corporate actions, including influencing elections of directors and
significant corporate events. See also "MD&A -- Certain Trends and Uncertainties
- -- Effect of Certain Anti-Takeover Provisions" below.
Effect of Certain Anti-Takeover Provisions.
The Company's Restated Certificate of Incorporation and By-laws 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 amendment of the By-laws and the
amendment of any of the anti-takeover provisions contained in the Company's
Restated Certificate of Incorporation. The Company's By-laws currently provide
that meetings of the stockholders may only be called by the Chairman of the
Board, the Chief Executive Officer or the Board of Directors. At its next annual
stockholders' meeting the Company intends to seek stockholder approval of two
amendments to its Restated Certificate of Incorporation that would have the
effect of (i) eliminating the requirement that stockholder action be taken at a
meeting and (ii) eliminating the classification of the Board of Directors,
respectively. Additionally, the Company has contractual obligations to certain
of its security holders that may impair potential takeovers. See "MD&A --
Certain Trends and Uncertainties -- Certain Interlocking Relationships;
Potential Conflicts of Interest." 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 private placements in February 1997
and June 1997. Additionally, pursuant to the Company's Restated Certificate of
Incorporation, if any "person" or "Group" (as defined), together with any
affiliates thereof, becomes the beneficial owner (as defined) of Voting Shares
(as defined) of the Company entitled to exercise more than 60% of the total
voting power
20
<PAGE>
of all outstanding Voting Shares of the Company (including any Voting Shares
that are not then outstanding of which such person or Group is deemed the
beneficial owner) (subject to certain exceptions), then a Fundamental Change (as
defined) would occur and the Company would be obligated to redeem the Series A
and Series D Preferred Stocks. See "MD&A -- Certain Trends and Uncertainties --
Fundamental Change." This Fundamental Change provision is a further disincentive
for any person attempting to acquire 60% or more of the total voting power of
the Company's Voting Shares.
Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity
for the Company's Securities.
If the Company's securities were not listed on a national securities
exchange nor listed on a qualified automated quotation system, they may become
subject to Rule 15g-9 under the Exchange Act, which imposes additional sales
practice requirements on broker-dealers that sell such securities to persons
other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses). Rule 15g-9 defines "penny
stock" to be any equity security that has a market price (as therein defined) of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions including (i) the securities being quoted
on the Nasdaq National Market or SmallCap Market; (ii) the securities' issuer
having net tangible assets in excess of $2,000,000 and having been in continuous
operation for at least three years and (iii) the securities' issuer having
average revenues of at least $6,000,000 for the last three years (all three
exceptions enumerated above are currently met by the Company). For transactions
covered by Rule 15g-9, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to any transaction in a
penny stock, of a disclosure schedule prepared by the SEC relating to the penny
stock market. Disclosure is also required to be made about sales commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stock. Consequently, such Rule
may affect the ability of broker-dealers to sell the Company's securities and
may affect the ability of purchasers to sell any of the Company's securities in
the secondary market.
There can be no assurance that the Company's securities will continue to
qualify for exemption from the penny stock restrictions. In any event, even if
the Company's securities are exempt from such restrictions, the Company would
remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the
authority to restrict any person from participating in a distribution of penny
stock, if the SEC finds that such a restriction would be in the public interest.
If the Company's securities were subject to the rules on penny stocks, the
market liquidity for the Company's securities could be materially adversely
affected.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based broker/dealer,
has asserted claims against the Company and others, including Paramount Capital
Inc., of which Dr. Rosenwald is the sole stockholder and Mr. Weiss is a Senior
Managing Director, and various related entities and persons. LBC's claims relate
to the alleged breach by the Company of certain letter agreements, allegedly
entered into by LBC and the Company in 1995 and 1996 with respect to brokerage
and/or investment banking services, particularly in connection with a $3 million
investment, for which LBC is seeking a fee. On March 30, 1998, the Company
received a Statement of Claim under NASD arbitration rules, and a request that
the Company voluntarily submit to NASD arbitration. LBC's Statement of Claim
sought damages in the form of cash (in excess of $4 million), stock, warrants
and other securities. Subsequently, LBC abandoned the arbitration, and on April
9, 1998, the Company's counsel learned that a Complaint had been filed in the
United States District Court for the Southern District of New York (98 Civ.
2491) by LBC against the Company and the same other parties. The Company
believes it has valid legal and equitable defenses to LBC's lawsuit. The Company
intends to defend vigorously and possibly to assert counterclaims against LBC.
No material legal proceedings were terminated in the quarter ended March
31, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description of Document
- ------ -----------------------
10.1 Severance Agreement, Release and Covenant Not to Sue between Thomas H.
Adams, Ph.D. and the Company, dated May 5, 1998.
10.2 Consulting Agreement between the Company and Thomas H. Adams, Ph.D.,
dated May 5, 1998.
27.1(1) Financial Data Schedule
(1) Filed herewith.
(b) Reports on Form 8-K
(i) On February 2, 1998, the Company filed a Report on Form 8-K dated as of
February 2, 1998 reporting under Item 5 that the Company issued a press release
entitled "Article in Leading Scientific Journal Spotlights Use of Genta's BCL-2
Antisense Compound in Increasing Response to a Chemotherapeutic Drug."
(ii) On April 2, 1998, the Company filed a Report on Form 8-K dated as of
April 1, 1998 reporting under Item 5 that the Company issued a press release
entitled "Genta Announces Issue of Patent for Lead Antisense Compound that
Targets the BCL-2 Gene, Implicated in Prostate and Other Cancers."
22
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
GENTA INCORPORATED
(Registrant)
By: /s/ Kenneth G. Kasses, Ph.D.
----------------------------
Name: Kenneth G. Kasses, Ph.D.
Title: President and Principal Executive Officer
By: /s/ Robert E. Klem, Ph.D.
----------------------------
Name: Robert E. Klem, Ph.D.
Title: Principal Financial Officer and
Vice-President
Date: May 15, 1998
23
Exhibit 10.1
SEVERANCE AGREEMENT,
RELEASE AND COVENANT NOT TO SUE
THIS SEVERANCE AGREEMENT, RELEASE AND COVENANT NOT TO SUE (the "Release")
is entered into by and between Thomas H. Adams, Ph.D. (the "Employee") and GENTA
INCORPORATED, a Delaware corporation (the "Company").
WHEREAS, the Employee is an employee and officer of the Company, and is
terminating his employment and status as an officer and director effective May
5, 1997; and
WHEREAS, the Employee desires to fully release and discharge all potential
disputes and claims related to his employment with the Company or the
termination thereof and to dispose of all other claims as provided in this
Release, thereby finally disposing of such claims, and to give assurance that he
will not thereafter prosecute such claims or cause them to be prosecuted;
NOW, THEREFORE, it is agreed as follows:
1. Release. The Employee hereby releases and forever discharges the Company
and each of its past and present directors, officers, shareholders, employees,
agents, attorneys, servants, employee benefit plans, predecessors, successors
and assigns, and each of them separately and collectively (hereinafter referred
to separately and collectively as the "Releases") from any and all claims,
liens, demands, causes of action, obligations, damages and liabilities of any
nature whatsoever, known or unknown, that the Employee ever had, now has or may
hereafter claim to have against any of the Releases relating to his employment
or nonemployment by the Company, to the termination of his employment, to any
status, term or condition to such employment, or to any physical or mental harm
or distress from such employment or from termination of such employment,
excluding any claims relating to the enforcement of the terms of this Release
but including, without limitation, (a) any and all claims under the federal Age
Discrimination in Employment Act; (b) any and all claims under California
statutory or decisional law pertaining to wrongful discharge, discrimination or
breach of public policy; (c) any and all claims for employee benefits, including
(without limitation) severance payments, fringe benefits, vacation or disability
payments, use of maintenance of an automobile, retirement benefits, bonuses and
equity-based benefits; and (d) any and all claims relating to the tax obligation
for which the Employee may become liable as a result of this Release or the
payment of consideration referred to above.
2. Definition of Continuation Period. For all purposes under this Release,
"Continuation Period" shall mean the period commencing on May 6, 1997, and
ending on the earlier of:
(a) May 5, 1998;
<PAGE>
(b) The date Employee obtains other employment or is reemployed by the
Company; or
(c) The date of the Employee's death.
3. Amount of Special Severance Pay. During the Continuation Period, the
Company shall pay the Employee Special Severance Pay at an annual rate equal to
his base salary at the rate in effect on May 5, 1997. Such amount shall be paid
at periodic intervals in accordance with the Company's standard payroll
procedures, subject to applicable payroll deductions for withholding taxes and
any required employee payments for employee benefits. Employee promises to
inform the Company as soon as he obtains other employment, if he obtains such
employment prior to May 5, 1998.
In the event of the Employee's death prior to May 5, 1998, the Company
shall continue to make the above-described periodic payments to Employee's
beneficiary (at the rate in effect on May 5, 1997) for the period from the date
of his death to May 5, 1998. The Employee may designate a beneficiary in writing
for this purpose. If no beneficiary so designated survives the Employee, then
the payments shall be made to the Employee's estate. These periodic payments
shall be subject to applicable payroll deductions for withholding taxes.
4. Employee Benefits and Group Insurance. During the Continuation Period,
the Employee (and, where applicable, his dependents) shall be entitled to
continue participation in the group insurance plains maintained by the Company,
including life, disability, medical and dental insurance programs, on the same
basis as Employee participated in these programs prior to May 5, 1997. Where
applicable, the Employee's salary for purposes of such plans shall be deemed to
be equal to this base salary at the rate in effect on May 5, 1997. The foregoing
notwithstanding, in the event that the Employee becomes eligible for comparable
group insurance coverage in connection with new employment, the group insurance
coverage provided by the Company under this Section 4 shall terminate
immediately.
To the extent that the Company finds it impossible to cover the Employee
under a group insurance policy during the Continuation Period, the Company may
require Employee to elect to continue his group medical and dental coverage
under COBRA. To the extent such election is necessary, the Company will pay the
full cost under COBRA to continue Employee's group medical and dental benefits
in accordance with the terms of this Agreement. Thereafter, Employee must pay
the applicable COBRA premiums for such coverage for any remaining COBRA period.
If the Company finds it impossible to provide Employee with group life and
disability coverage during the Continuation Period, it shall use its best
efforts to provide Employee with individual life and disability insurance
policies that (a) offer coverage comparable to the group coverage Employee
received prior to May 5, 1997; and (b) do not impose costs or administrative
burdens on the Company substantially in excess of its costs and administrative
burdens for the group coverage. If the Company is able to provide Employee with
individual
2
<PAGE>
coverage consistent with these requirements, it shall pay the entire premium
under such individual policy.
5. Stock Plan.
The Continuation Period shall be treated as employment for purposes of
determining the Employee's vesting in any Incentive Stock Options (ISO's)
granted to him under the 1991 Stock Plan of Genta Incorporated. Any "cliff"
vesting requirement imposed in connection with the Company's repricing of
options is waived in the Employee's case, and the vested percentage of the
Employee's options shall be determined without regard to such requirement.
The 90-day post-termination exercise grace period under the Employee's
Incentive Stock Options shall commence at the end of the Continuation Period.
The Employee represents that he has consulted or will consult a tax adviser
regarding the impact of this Section 5 on the tax treatment of Incentive Stock
Options.
6. Bonus. The Employee shall not be entitled to any bonus including,
without limitation, for the fiscal year ending December 31, 1997.
7. Expense Reimbursement. By signing this Release, the Employee
acknowledges that the Company has fully discharged all of its obligations to
reimburse him for any business expenses.
8. Waiver. The Employee expressly waives all rights under section 1542 of
the Civil Code of California, which provides:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Employee acknowledges that this General Release is intended to include and
discharge all claims which he does not know or suspect to exist at the time of
execution and expressly assumes all risks attendant to release of claims arising
out of facts occurring at any time prior to the execution of this Agreement
which are unknown, unforeseen or latent.
9. Covenant Not To Sue. The Employee covenants and agrees that he will
never, individually or with any person or in any way, commence, aid in any way
(except as required by legal process), prosecute or cause or permit to be
commenced or prosecuted against any of the Releases any action or other
proceeding based upon any claim which relates to the
3
<PAGE>
subject of this Release, Employee's employment with the Company or his
separation from employment. This Release shall be deemed breached and a cause of
action shall be deemed to have accrued immediately upon the commencement or
prosecution of any action or proceeding contrary to this Release. In the event
of a breach of this Release, Employee shall not receive any further severance
payments or insurance continuation, and shall immediately repay and reimburse
the Company for all separation benefits and insurance coverage previously
received under this Agreement.
In the event of any breach of this Section 9, the aggrieved Releasee shall
be entitled to recover from the Employee not only the amount of judgment which
may be awarded against such Releasee, but also all such other damages, costs and
expenses as may be incurred by such Releasee, including court costs, attorneys'
fees and all costs and expenses, taxable or otherwise, in preparing the defense
of or defending against, or seeking or obtaining an abatement of or injunction
against, any action or proceeding brought in violation of this Section 9 and in
prosecuting any claim, counterclaim or cross-claim based hereon.
10. No Assignment; Authority. The Employee represents and warrants that no
other person had or has or claims any interest in the claims referred to in
Section 1 above; that he has the sole right and exclusive authority to execute
this Release; that he has the sole right to receive the consideration paid
therefor; and that he has not sold, assigned, transferred, conveyed or otherwise
disposed of any claim or demand relating to any matter covered by this Release.
11. No Admission. The Employee acknowledges that the payment of
consideration, referred to herein, is made solely for the purpose of purchasing
peace and preventing involvement in protracted litigation based upon claims that
he could make and does not constitute an admission or concession by any of the
Releasees of any liability on account of any of said claims, liability for which
is expressly denied by the Releasees.
12. Confidentiality. The Employee covenants and agrees that confidentiality
of the payments to be made hereunder, the existence and terms of this Release,
and the circumstances leading to Employee's separation from employment is of
essence. The Employee agrees to maintain the confidentiality of the existence
and terms of this Release and the circumstances leading to it, and to make no
voluntary statement except as may be necessary for the purposes of audit, tax
returns or other disclosures required by law, and to take no other action
whatsoever which might reasonably be expected to result in any disclosure
whatever concerning this Release. The only exception to the foregoing is that
Employee may disclose such information to his spouse, tax adviser or legal
counsel, but if he does so, he must advice all such individuals of this
confidentiality provision and advise them that they too must comply with it.
Employee understands and acknowledges that any breach of this confidentiality
provision caused by a disclosure made by his spouse, legal counsel and/or tax
adviser will be considered to be a breach of this confidentiality provision by
him. Employee acknowledges that this confidentiality provision is a material
term of this Release
4
<PAGE>
Agreement and that damages for a breach of this confidentiality provision
would be impossible to ascertain. Therefore, if Employee breaches this
confidentiality provision, he promises to return to the Company all sums paid to
him pursuant to this Release Agreement, within ten (10) days, plus liquidated
damages thereon (calculated at 20 percent interest) from the date of receipt of
such amount.
13. Continued Confidentiality. The Employee acknowledges that the Company
possesses and will continue to possess information that has been created,
discovered, developed or otherwise become known to the Company (including,
without limitation, information created, discovered, developed or made known by
the Employee during the period of or arising out of his employment by the
Company) or in which property rights have been assigned or otherwise conveyed to
the Company, which information has commercial value in the business in which the
Company is engaged. All such information is hereinafter called "Proprietary
Information." By way of illustration, but not limitation, Proprietary
Information includes processes, formulas, codes, data, programs, know-how,
improvements, discoveries, developments, designs inventions, techniques,
marketing plans, strategies, forecasts, new products, unpublished financial
statements, budgets, projections, licenses, prices, costs, contracts and
customer and supplier lists.
In consideration of the compensation received by the Employee from the
Company and the covenants contained in this Release, the Employee agrees as
follows:
A. All Proprietary Information is and shall continue to be the sole
property of the Company and its assigns, and the Company and its assigns
are and shall continue to be sole owner of all rights in connection
therewith. The Employee will keep in strictest confidence and trust all
Proprietary Information and will not use or disclose any Proprietary
Information without the written consent of the Company.
B. All documents, records, equipment and other physical property,
whether or not pertaining to Proprietary Information, furnished to the
Employee by the Company or produced by the Employee or others in connection
with his employment with the Company and shall be and remain the sole
property of the Company. The Employee has returned to the Company all
documents, notes, drawings, specifications, programs, data, customer lists
and other materials of any nature pertaining to his work with the Company,
including any copies of such materials, and the Employee will not use any
of the foregoing, any reproduction of any of the foregoing, or any
Proprietary Information that is embodied in a tangible medium of
expression.
This Section 13 supplements, but does not supersede, any prior agreement
between the Employee and the Company relating to proprietary information,
confidentiality of trade secrets or inventions.
5
<PAGE>
14. Non-disparagement. Employee promises not to make any written or oral
statements, whether or not true, that disparage the Company or its reputation or
work product, or any of its employees, agents, representatives, officers,
directors or shareholders.
15. Binding Effect. This Release shall bind all of Employee's heirs,
executors, administrators, successors and assigns; and it shall inure to the
benefit of each Releasee and, in addition, all heirs, executors, administrators
and assigns of each Releasee who is an individual.
16. Older Workers' Benefit Protection Act. The Employee acknowledges that
he is aware that under the Older Workers' Benefit Protection Act, he has
forty-five (45) calendar days to decide whether to enter into this Release. The
Employee agrees that he was allowed forty-five (45) calendar days to consider
this Release.
The Employee further acknowledges that he is aware that under the Older
Workers' Benefit Protection Act he may revoke this Release within seven (7)
calendar days after it is signed. He further agrees that this Release shall not
be effective or enforceable until after this revocation period has expired and
that he is aware that in the event he timely exercises his right or rescission
he will have no rights under this Release.
17. Withholding Taxes. The Employee warrants that no promise, inducement or
agreement not expressed herein has been made in connection with this Release;
that this Release constitutes the entire agreement between the Employee and the
Company (except as provided in Section 13 above); and that this Release cancels
and supersedes all prior communications or understandings between the Company
and the Employee with respect to the subject matter of this Release (except as
provided in Section 13 above).
18. Governing Law. This Release shall be construed and enforced pursuant to
the laws of the State of California.
19. Attorneys' Fees. In the event of any dispute relating to the terms of
this Release, the losing party shall pay the reasonable attorneys' fees and
costs of the other party.
The Employee acknowledges and agrees that he has had the opportunity to
seek advice from an attorney with respect to the matters which are the subject
of this Release. The Employee has entered it this Release freely and
voluntarily. All executed copies are duplicate originals, equally admissible in
evidence. This Release may only be varied or modified by a written document
executed by the Employee and the Company.
Dated: ________________, 1998 ____________________________
Thomas H. Adams, Ph.D.
6
<PAGE>
GENTA INCORPORATED
Dated: ________________, 1998 By: ____________________________
Title: __________________________
7
<PAGE>
DESIGNATION OF BENEFICIARY
I understand that whatever Separation Benefits are due me shall be paid in the
Company's sole discretion in the form of salary continuation. In case of my
death after I become entitled to such payment, such amounts remaining due to me
will be paid to my beneficiary as indicated below. I understand that I may
revoke this Agreement up to seven days after I have signed it and that the
Release will not be effective until the eighth day following the date I signed
it.
Name of Beneficiary Relationship
___________________________________ _________________________________
Home Address of Beneficiary Beneficiary's Social Security Number
___________________________________ _________________________________
___________________________________
If the employee is married and the beneficiary named above is someone other than
the employee's spouse, the spouse must sign below indicating consent to the
designated beneficiary.
Signature of Spouse Date
___________________________________ _________________________________
8
Exhibit 10.2
Genta Incorporated
3550 General Atomic Court
San Diego, C 92121
Gentlemen:
The following contains all the items of my consulting agreement (the
"Agreement") with Genta Incorporated, a Delaware corporation (the "Company").
The amount of time I will spend as a consultant to the Company and the
nature of the services provided and my compensation are set forth in Exhibit A
hereto. In rendering such services to the Company, I shall act as an independent
contractor and not as an employee of the Company. The Company or I may terminate
the Agreement at any time, with or without cause, provided that I must devote at
least twenty-four (24) days at the approximate rate of two (2) days per month to
providing services under this Agreement before I may terminate it.
I understand that the Company possesses and will continue to possess
information that has been created, discovered, or developed, or has otherwise
become known to the Company, including without limitation, information created,
discovered, developed or made known by me (and within the scope of the
Agreement) or to me during the period of or arising out of my retention as a
consultant by the Company, and/or in which property rights have been assigned or
otherwise conveyed to the Company, and/or in which property rights have been
assigned or otherwise conveyed to the Company, which information has commercial
value in the business in which the Company is engaged. All of the aforementioned
information is hereinafter called "Proprietary Information." By way of
illustration, but not limitation, Proprietary Information includes all trade
secrets, processes, formulae, data and know-how, improvements, inventions,
techniques and strategies; all administrative, business, financial, managerial
and organization information; and all research, development, manufacturing,
commercialization, sales and marketing information, plans, strategies, forecasts
and customer data.
In consideration of my retention as a consultant to the Company, and the
compensation received by me from the Company from time to time, I hereby agree
as follows:
20. All Proprietary Information shall be the sole property of the Company
and it assigns, and the Company and its assigns shall be the sole owner of all
patents and other rights in connection therewith. I hereby assign to the Company
any rights I may have or acquire in all Proprietary Information. At all times
during my retention as a consultant by the Company and at all time after
termination of such retention as a consultant, I will keep in confidence and
trust all Proprietary Information, and I will not use or disclose any
Proprietary Information or anything relating to it without the written consent
of the Company, except as may be necessary in the ordinary course of performing
my duties as a consultant of the Company.
1
<PAGE>
21. I agree that during the period that I am retained as a consultant to
the Company, I will not, without the Company's express written consent, engage
in any employment or activity (whether as a consultant, adviser or otherwise) in
any business engaged in the field of antisense or triplex technology or any
business funding collaborations or alliances with any other business engaged in
the filed of antisense or triplex technology.
22. All documents, data, records, apparatus, equipment and other physical
property, whether or not pertaining to Proprietary Information, furnished to me
by the Company or produced by myself or others in connection with my retention
as a consultant shall be and remain the sole property of the Company and shall
be returned promptly to the Company as and when requested by the Company. Should
the Company not so request, I shall return and deliver all such property upon
termination of my retention as a consultant by me or by the Company for any
reason and I will not take with me amy such property or any reproduction of such
property upon termination.
23. I agree that for a period of one year following termination of my
retention as a consultant with the Company, I will not solicit or in any manner
encourage employees of the Company to leave its employ.
24. I will promptly disclose to the Company, or any persons designated by
it, all improvements, inventions, formulae, processes, techniques, know-how and
data, whether or not patentable, made or conceived or reduced to practice or
learned by me, either alone or jointly with others, during the period of my
retention as a consultant which are (a) within the scope of the services to be
provided by me under the Agreement and elated to or useful in the business of
the Company, or (b) result from tasks assigned me by the Company, or (c) funded
by the Company, or (d) result from use of premises owed, leased or contracted
for by the Company (all said improvements, inventions, formulae, processes,
techniques, know-how and data shall be collectively hereinafter called
"Inventions"). Such disclosure shall continue for one year after termination of
the Agreement with respect to anything that would be an Invention if made,
conceived, reduced to practice or learned during the term hereof.
25. I agree that all Inventions shall be the sole property of the Company
and its assigns, and the Company and its assigns shall be the sole owner of all
patents and other rights in connection therewith. I hereby assign to the Company
any rights I may have or acquire in all Inventions. I further agree as to all
Inventions to assist the Company in every proper way (but at the Company's
expense) to obtain and from time to time enforce patents on the Inventions in
any and all countries, and to that end I will execute all documents for use in
applying for and obtaining such patents thereon and enforcing same, as the
Company may desire, together with any assignment thereof to the Company or
persons designated by it. My obligation to assist the Company in obtaining and
enforcing patents for the Inventions in any and all countries shall continue
beyond the termination of my retention as a consultant, but the Company's
request on such assistance. In the event that the Company is unable for any
reason whatsoever to secure my signature to any lawful and necessary document
required to apply for or execute any patent application or continuations in part
thereof), I hereby irrevocably designate and appoint the
2
<PAGE>
Company and its duly authorized officers and agents, as my agents and
attorney-in-fact to act for and in behalf and instead of me, to execute and file
any such application and to do all other lawfully permitted acts to further the
prosecution and issuance of patents thereon with the same legal force and
effects as if executed by me.
26. As a matter of record I have attached hereto as Exhibit B a complete
list of all inventions or improvements relevant to the subject matter or my
retention as a consultant by the Company which have been made or conceived or
first reduced to practice by me alone or jointly with others prior to my
engagement by the Company which I desire to remove from the operation of the
Agreement; and I covenant that such list s complete.
27. I represent that my performance of all the terms of the Agreement and
that my retention as a consultant by the Company does not and will not breach
any agreement to keep in confidence proprietary information acquired by me in
confidence or in trust prior to my retention as a consultant by the Company. I
have not entered into, and I agree I will not enter into, any agreement ether
written or oral in conflict herewith.
28. I understand as part of the consideration for the offer to retain me as
a consultant extended to my by the Computer and of my retention as a consultant
by the Company, that I have not brought and will not bring with me to the
Company or use in the performance of my responsibilities at the Company any
equipment, supplies, facility or trade secret information of any current or
former employer which are not generally available to the public, unless I have
obtained written authorization for their possession and use.
29. I also understand that, in my retention as a consultant with the
Company, I am not breach any obligations that I have to others, and I agree that
I shall fulfil all such obligations during my retention as a consultant with the
Company.
30. I agree that in addition to any other rights and remedies available to
the Company for any breach by me of my obligations hereunder, the Company shall
be entitled to enforcement of my obligations hereunder by court jurisdiction.
31. If any provision of the Agreement shall be declared invalid, illegal or
unenforceable, such provision shall be severed and all remaining provisions
shall continue in full force and effect.
32. The Agreement shall be effective as of May 6, 1997 and, unless
termination earlier as set forth above, shall terminate on May 5, 1999,
provided, however, Consultant's obligations under Paragraphs 1, 3, 4, 5, 6 and
11 shall survive the termination of the Agreement.
33. The term Company, as used herein, shall include any subsidiary o
affiliate of Genta Incorporated.
3
<PAGE>
34. The Agreement shall be binding upon me, my heirs, executors, assigns
and administrators and shall inure to the benefit of the Company, its successors
and assigns.
35. The Agreement shall be governed by and construed in accordance with the
laws of the State of California (irrespective of its choice of law provisions).
Dated: ____________________
By: ________________________
Accepted and agreed to
this __ day of __________________, 1998
Genta Incorporated
By _________________________
_________________________
_________________________
4
<PAGE>
EXHIBIT A
Amount:
Consultant shall devote at least 24 days (at the approximate rate of 2 days per
month) to providing services under the Agreement, including without limitation,
serving as the Chairman of the Board of Directors of Genta Pharmaceuticals,
Europe S.A. ("Genta Europe").
Nature of Services:
Consult shall consult with Company in the field of Geomatrix based drug delivery
and antisense technology, and such other services that may be reasonably
requested by the Company, including, without limitation, services needed by the
Company to maintain any rights existing as of the date of this Agreement and to
assist in any management transition. It is understood and agreed that the
October 4, 1989 Indemnification Agreement between the parties shall apply to
Consultant's services as Chairman of the Board of Genta Europe under this
Consulting Agreement.
Consideration:
In consideration for this consulting services under this Agreement, Employee
shall be granted 100,000 shares of Nonstatutory Stock Options (NSO's) under the
Genta Incorporation 1991 Stock Plan. Such options are granted to the Employee at
100% of the fair market value on the Date of the Grant, which is My 5, 1997.
Options will vest over a two-year period commencing on the Date of Grant, except
that vesting shall terminate it Consultant fails to fulfil his obligations under
this Consulting Agreement or if the Company terminates this Consulting Agreement
for cause.
____________________________
Thomas H. Adams, Ph.D.
5
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS
OF OPERATIONS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 453,420
<SECURITIES> 6,380,717
<RECEIVABLES> 938,348
<ALLOWANCES> 0
<INVENTORY> 696,020
<CURRENT-ASSETS> 8,746,720
<PP&E> 4,857,880
<DEPRECIATION> 3,279,480
<TOTAL-ASSETS> 14,273,670
<CURRENT-LIABILITIES> 4,260,883
<BONDS> 2,481,178
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680
<COMMON> 5,738
<OTHER-SE> 7,531,609
<TOTAL-LIABILITY-AND-EQUITY> 14,273,670
<SALES> 1,602,179
<TOTAL-REVENUES> 1,619,575
<CGS> 870,881
<TOTAL-COSTS> 3,309,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (83,087)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (1,893,411)
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