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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 September 30, 1999
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)
99 Hayden Avenue, Suite 200 02421-7966
Lexington, Massachusetts (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(781) 860-5150
(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 November 5, 1999, the registrant had 21,005,394 shares of
common stock outstanding.
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GENTA INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December
31, 1998 and September 30, 1999 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September
30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998
and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
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GENTA INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ ------------
ASSETS 1998 1999
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents.......................... $ 1,566,288 $ 1,489,173
Short term investments............................. 892,372 --
Notes receivable................................... -- 1,372,739
Prepaid expenses................................... 405,700 475,000
Property held for sale............................. 290,000 --
Other current assets............................... 176,700 31,554
Net current assets of discontinued operations ..... 2,606,304 --
------------ ------------
Total current assets.................................. 5,937,364 3,368,466
------------ ------------
Property and equipment, net........................... 148,245 32,910
Intangibles, net ..................................... 1,460,383 660,907
Deposits and other assets............................. 5,301 --
------------ ------------
Total assets ......................................... $ 7,551,293 $ 4,062,283
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 432,116 $ 199,333
Payable to research institutions .................. 635,661 115,000
Accrued compensation .............................. 84,888 70,087
Other accrued expenses ............................ 580,779 522,886
Net liabilities of liquidated foreign subsidiary .. 574,812 574,812
------------ ------------
Total current liabilities ............................ 2,308,256 1,482,118
------------ ------------
Deficit in joint venture ............................. 2,284,018 --
Commitments ..........................................
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized,
convertible preferred shares outstanding:
Series A convertible preferred stock, $.001 par
value; 447,600 and 278,300 shares issued and
outstanding at December 31, 1998 and September
30, 1999, respectively, liquidation value is
$13,915,000 at September 30, 1999 ............. 448 279
Series D convertible preferred stock, $.001 par
value; 186,021 and 121,717 shares issued and
outstanding at December 31, 1998 and
September 30, 1999, respectively; liquidation
value is $17,040,380 at September 30, 1999 .... 186 121
Common stock; $.001 par value; 70,000,000 shares
authorized, 10,426,215 and 20,957,799 shares
issued and outstanding at December 31, 1998
and September 30, 1999, respectively ............ 10,426 20,957
Additional paid-in capital ........................ 130,627,251 137,987,846
Accumulated deficit................................ (132,053,657) (134,873,711)
Accrued dividends payable ......................... 5,108,790 1,148,392
Deferred compensation ............................. (734,425) (1,703,719)
------------ ------------
Total stockholders' equity ........................... 2,959,019 2,580,165
------------ ------------
Total liabilities and stockholders' equity ........... $ 7,551,293 $ 4,062,283
============ ============
</TABLE>
See accompanying notes.
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GENTA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(restated) (restated)
Revenues:
<S> <C> <C> <C> <C>
Collaborative research and development ........... $ 17,396 $ -- $ 52,188 $ --
----------- ----------- ----------- -----------
17,396 -- 52,188 --
Operating expenses:
Research and development ......................... 321,058 924,327 1,706,760 2,767,284
General and administrative ....................... 829,245 1,079,947 2,574,543 3,393,974
----------- ----------- ----------- -----------
1,150,303 2,004,274 4,281,303 6,161,258
----------- ----------- ----------- -----------
Loss from operations ............................. (1,132,907) (2,004,274) (4,229,115) (6,161,258)
Equity in net (loss) income of
joint venture .................................. (29,306) -- (114,203) 2,284,018
Other income (expense):
Interest income ................................ 91,452 55,098 275,118 138,202
Interest expense ............................... (3,385) -- (10,154) (173)
Other income (expense) ......................... -- 85 -- (149,029)
----------- ----------- ----------- -----------
Net loss from continuing operations .............. (1,074,146) (1,949,091) (4,078,354) (3,888,240)
Income (loss) from discontinued operations ....... 50,689 -- (222,688) (189,407)
Gain on sale of discontinued operations .......... -- -- -- 1,606,956
----------- ----------- ----------- -----------
Net loss ......................................... (1,023,457) (1,949,091) (4,301,042) (2,470,691)
Dividends accrued on preferred stock ............. -- (657,260) -- (1,399,689)
----------- ----------- ----------- -----------
Net loss applicable to common shares ............. $(1,023,457) $(2,606,351) $(4,301,042) $(3,870,380)
=========== =========== =========== ===========
Net (loss) income per share
Continuing operations .......................... $ (0.15) $ (0.13) $ (0.65) $ (0.33)
Discontinued operations ........................ 0.01 -- (0.04) 0.09
----------- ----------- ----------- -----------
Net loss per common share ........................ $ (0.14) $ (0.13) $ (0.69) $ (0.24)
=========== =========== =========== ===========
Shares used in computing net
loss per common share .......................... 7,128,658 19,318,756 6,239,148 16,228,162
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
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GENTA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999
----------- -----------
(restated)
Operating activities
<S> <C> <C>
Net loss ......................................................................... $(4,301,042) $(2,470,691)
Items reflected in net loss not requiring cash:
Depreciation and amortization .................................................... 778,745 444,198
Equity in net loss (gain) of joint venture ....................................... 114,203 (2,284,018)
Gain on sale of discontinued operations .......................................... -- (1,606,956)
Loss on abandonment of patents ................................................... -- 513,169
Compensation expense related to stock options .................................... -- 709,060
Loss on sale of fixed assets ..................................................... -- 149,026
Changes in operating assets and liabilities ...................................... (1,507,124) (1,264,733)
----------- -----------
Net cash used in operating activities ............................................ (4,915,218) (5,810,945)
INVESTING ACTIVITIES
Purchase of short-term investments ............................................... -- (501,400)
Maturities of short-term investments ............................................. 3,776,403 1,393,772
Purchase of property and equipment ............................................... -- (36,862)
Sale of property and equipment ................................................... -- 126,087
Purchase of intangibles .......................................................... -- (100,000)
Acquisition of Androgenics ....................................................... -- (131,967)
Deposits and other ............................................................... 11,650 5,069
----------- -----------
Net cash provided by investing activities ........................................ 3,788,053 754,699
FINANCING ACTIVITIES
Issuance of common stock upon exercise of warrants ............................... -- 136,883
Proceeds from equipment conversion to lease ...................................... -- 51,827
Proceeds from sale of discontinued operations .................................... -- 4,799,368
Increase in current portion capital leases ....................................... 213,312 --
----------- -----------
Net cash provided by financing activities ........................................ 213,312 4,988,078
----------- -----------
(Decrease) increase in cash and cash equivalents ................................. (913,853) (68,168)
Less cash at liquidated foreign subsidiary ....................................... -- (8,947)
Cash and cash equivalents at beginning of period ................................. 1,202,668 1,566,288
----------- -----------
Cash and cash equivalents at end of period ....................................... $ 288,815 $ 1,489,173
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid .................................................................... $ 7,269 $ 173
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock dividends accrued ................................................ -- 1,399,689
Common stock issued in payment of dividends on preferred stock ................... 55,000 38,147
Note Receivable from sale of discontinued operations ............................. -- 1,200,000
Note Receivable from sale of equipment ........................................... -- 140,000
John Hopkins University settlement ............................................... 200,000
Warrants issued related to Androgenics acquisition ............................... 217,395
</TABLE>
See accompanying notes.
5
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GENTA INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Genta
Incorporated, a Delaware corporation (the "Company"), presented herein 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 note disclosures required to be
presented for a complete set of 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 1998 have been reclassified to conform with the presentation in 1999.
Research and development and general and administrative expenses were restated
for the three and nine months ended September 30, 1998 to reflect the
reclassification of amortization and depreciation expenses to research and
development. Research and development expenses were restated for the three and
nine months ended September 30, 1998 to reflect intercompany charges. Also,
equity in net loss of joint venture was restated for the three and nine months
ended September 30, 1998. The weighted average shares were restated due to
improper weighting of shares issued in the previously filed 10Q for the three
and the nine months ended September 30, 1998. The impact for the three and nine
months ended September 30, 1998, was a reduction in net loss of $152,484 or
$0.02 per share and $431,167 or $0.07 per share, respectively.
The unaudited 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 consolidated
financial statements for the preceding fiscal year. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the related notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended (the "1998 Form 10-K").
The Company has experienced significant quarterly fluctuations in
operating results and it expects that these fluctuations in revenues, expenses
and losses will continue, although, as a result of the sale of the business of
JBL Scientific, Inc. ("JBL"), a subsidiary of the Company which was engaged in
the specialty chemicals business, to Promega Corporation ("Promega") in May
1999, revenues from product sales have discontinued. The Company's independent
auditors have included an explanatory paragraph in their report to the 1998 Form
10-K with respect to the Company's ability to continue as a going concern.
(2) DISCONTINUED OPERATIONS
On March 19, 1999, the Company entered into an Asset Purchase Agreement
(the "JBL Agreement") with Promega, whereby a wholly owned subsidiary of Promega
acquired substantially all of the assets and assumed certain liabilities of JBL
for approximately $4.8 million in cash, a promissory note for $1.2 million, and
certain pharmaceutical development services in support of the Company's
development activities. The closing of the sale of JBL was completed on May 10,
1999 with a gain on the sale of approximately $1.6 million being recognized,
based upon the purchase price of JBL less its net assets and costs and expenses
associated with the sale, including lease termination costs of $1.1 million, JBL
losses of $147,000, and legal, accounting, tax and other miscellaneous costs of
disposing JBL of approximately $653,000.
As a result of the sale of JBL's business, the Company's specialty
biochemical manufacturing segment (JBL) has been presented as discontinued
operations for the nine months ended September 30, 1998 and through May 10,
1999. The assets and liabilities relating to the discontinued operations are
included in net assets of discontinued operations in the consolidated balance
sheet at December 31, 1998 and have been charged to gain on sale of JBL as of
May 10, 1999. The results of operations for the discontinued segment are
included in discontinued operations in the
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condensed consolidated statements of operations for the three and nine months
ended September 30, 1998. In connection with the sale of JBL's business and
pursuant to a lease termination agreement, the Company granted stock options to
acquire 450,000 shares of the Company's common stock, par value $.001 per share
("Common Stock"), to the owners of the building previously leased to JBL, who
were also employees of JBL and one of whom is a Director of the Company. Those
options have been accounted for pursuant to guidelines in Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," and EITF 96-18 using the Black-Scholes method and have an
approximate value of $1.0 million and have been charged against the gain on the
sale of JBL. In addition, there were 246,000 options granted to the former
employees of JBL upon the closing of the sale of JBL's business in connection
with an ongoing service arrangement between Promega and the Company, which will
be accounted for prospectively pursuant to SFAS No. 123 using the Black-Scholes
guidelines. These options were granted at $2.03 per share with a one year
vesting period and will expire two years after the date of grant. The estimated
value of these options totaled $283,500 as of September 30, 1999 of which
$67,000 and $119,300 is included in continuing operations for the three and nine
months ended September 30, 1999, respectively, and is based on services provided
and have been charged to research and development expense. The Company will
continue to estimate and expense the value of these options over the vesting
period, which will be no later than one year from the closing date of the sale.
Net current assets of discontinued operations consisted of the
following:
December 31, 1998 May 10, 1999
----------------- ------------
Accounts receivable, net ............. $ 832,018 $ 479,608
Inventories, net ..................... 963,611 973,098
Property and equipment, net .......... 763,082 605,364
Other assets ......................... 897,399 940,542
Liabilities .......................... (849,806) (546,171)
---------- ----------
Total ................................ $2,606,304 $2,452,441
========== ==========
Operating results of the discontinued segment consisted of the
following:
Three Months Ended Nine Months Ended Period from January 1,
September 30, 1998 September 30, 1998 1999 to May 10, 1999
------------------ ------------------ --------------------
Product sales ......... $1,482,772 $4,141,750 $1,718,721
Operating expenses .... (1,431,987) (4,363,842) (2,051,720)
Other expense ......... (96) (596) (3,835)
---------- ---------- ----------
Income (loss).......... $ 50,689 $ (222,688) $ (336,834)
========== ========== ==========
(3) NET LOSS PER COMMON SHARE
Under SFAS No. 128, "Earnings per Share," the Company is required to
present basic and diluted earnings per share if applicable. Basic earnings per
share include 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 and nine months ended September
30, 1998 and 1999 is based on the
7
<PAGE> 8
weighted average number of shares of Common Stock outstanding during the
periods. Basic and diluted loss per share are the same for all periods presented
as potentially dilutive securities, including options, warrants and convertible
preferred stock have not been included in the calculation of the net loss per
common share as their effect is antidilutive.
(4) STOCKHOLDERS' EQUITY
During the nine months ended September 30, 1999, an aggregate of 66,040
shares of the Company's Series D Convertible Preferred Stock, par value $.001
per share ("Series D Preferred Stock"), were converted at the option of the
holders thereof into an aggregate of 7,038,026 shares of Common Stock at a
conversion price of $0.94375 per share. An aggregate of 169,300 shares of the
Company's Series A Preferred Stock, par value $.001 per share ("Series A
Preferred Stock"), were converted at the option of the holders thereof into an
aggregate of 1,248,578 shares of Common Stock at a conversion price of $8.08 per
share. An aggregate of 121,000 and 24,000 shares of Common Stock were issued
pursuant to the exercise of warrants and options, respectively. During the third
quarter 1999, the Company issued 1,085,420 and 924,519 shares of Common Stock to
Series A and D Preferred Stockholders, respectively in payment of accrued
dividends. The Series A and D dividends were distributed at $2.61 and $.94375
per share respectively.
In 1999, the Board of Directors of the Company and certain holders of
Common Stock, Series A and D Preferred Stock approved, in accordance with
Delaware law, an amendment to the Company's Restated Certificate of
Incorporation to remove the "Fundamental Change" redemption right. The Company
has formally amended its Restated Certificate of Incorporation after the
expiration of the 20-day period provided for in Rule 14c-5 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Also in August 1999, the Company settled lawsuits with Johns Hopkins
University ("Johns Hopkins") and Drs. Paul Ts'o and Paul Miller ("Ts'o/Miller
Partnership"). As part of the settlement of claims in excess of $635,000 against
the Company, the Company will pay $180,000 in cash over a six-month period and
issue 90,000 shares of Common Stock to Johns Hopkins, acting on its behalf and
on behalf of Ts'o/Miller Partnership, sufficient to provide a value of $200,000.
The stock is expected to be sold by a broker under an agreement between the
Company and Johns Hopkins over a six-month period, with the proceeds from such
sales to be delivered to Johns Hopkins. The reduction in total estimated costs
accrued of $210,000 was credited to general and administrative expenses.
(5) NOTES RECEIVABLE
The Company accepted a $1.2 million promissory note (accruing 7% annual
interest rate) from Promega as part of the sale price of JBL (see Note 2). The
principal of the note and accrued interest is due and payable as follows:
$700,000 plus interest is due on June 30, 2000 and $500,000 plus interest is due
on the later of June 30, 2000 or the Environmental Compliance Date as defined in
the JBL Agreement (see Note 2). Accrued interest on September 30, 1999 was
$32,700.
The Company also accepted a non-interest bearing promissory note in May
1999 from HealthStar, Inc. in the amount of $200,000 for the sale of equipment
to be paid in 10 equal monthly installments with an aggregate principal balance
due of $140,000 on September 30, 1999.
(6) GENTA JAGO
On March 4, 1999, the Company and SkyePharma (on behalf of itself and
its affiliates) entered into an interim agreement (the "Interim JV Agreement")
pursuant to which the Company was released from all liability relating to unpaid
development costs and funding obligations of Genta Jago Technologies B.V.
("Genta Jago"), the joint venture between the Company and SkyePharma. SkyePharma
agreed to be responsible for substantially all the obligations of the joint
venture to third parties and for the further development of the joint venture's
products, with any net income resulting from certain products of the joint
venture to be allocated in agreed-upon percentages between the Company and
SkyePharma. As a result of the Interim JV Agreement, the Company wrote off its
equity interest in the net loss of the joint venture and, as such, recorded a
gain of approximately $2.3 million for the three months ended March 31, 1999.
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(7) ANDROGENICS
In August 1999, the Company acquired Androgenics Technologies, Inc.
("Androgenics"), a wholly owned entity of the Company's majority stockholder. As
consideration for the acquisition, the Company paid $132,000 in cash (including
reimbursements of pre-closing expenses and on-going research funding) and issued
warrants (with exercise prices ranging from $1.25 to $2.50 per share) to
purchase an aggregate of 1,000,000 shares of Common Stock, 90% of which will not
become exercisable until the successful conclusion of certain development
milestones, ranging from the initial clinical patient trial through the
submission of an application for marketing authorization. The acquisition was
accounted for as a transfer between companies under common control. The cash and
warrants were issued in exchange for 100% of the shares of Androgenics and
licensed technology and the assumption of a research and development agreement
with the University of Maryland, Baltimore. The 1,000,000 warrants were
accounted for as a deemed distribution based on their fair value of $217,400. As
a result of the acquisition, the assets and liabilities of Androgenics required
to be reflected at their historical cost basis in the Company's condensed
consolidated financial statements as of September 30, 1999 and the results of
operations of Androgenics as if the acquisition took place at the beginning of
the year. However, assets, liabilities and operations are considered to be
immaterial.
(8) LEGAL PROCEEDINGS
In October 1996, JBL retained a chemical 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. A
semi-annual groundwater-monitoring program is being conducted, under the
supervision of the California Regional Water Quality Control Board for the
purposes of determining whether the levels of chloroform and PCEs have decreased
over time. The results of the latest sampling conducted show that PCEs and
chloroform have decreased in all but one of the monitoring sites. The Company
accrued $65,000 in 1999 to pay for any potential liability. The
Company has agreed to indemnify Promega in respect of this matter. The Company
believes that any costs stemming from 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.
JBL received notice on October 16, 1998 from Region IX of the
Environmental Protection Agency (the "EPA") that it had been identified as a
potentially responsible party ("PRP") at the Casmalia Disposal Site, which is
located in Santa Barbara, California. JBL has been designated as a de minimis
PRP by the EPA. The EPA currently estimates that the Company will be required to
pay approximately $63,200 to settle their potential liability. The Company
expects to receive a revised settlement proposal from the EPA by the first
quarter of 2000. While the terms of a settlement have not been finalized, they
should contain standard contribution protection and release language. The
settlement deadline has been extended to December 6, 1999. The Company accrued
$75,000 in 1998 to pay for any potential liability. The Company believes that
any costs stemming from 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 has agreed to indemnify Promega
in respect of this matter.
During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a
wholly-owned subsidiary of the Company, received approximately 5.4 million
French Francs (as of October 28, 1999, approximately $870,300) of funding in the
form of a loan from the French government agency L'Agence Nationale de
Valorisation de la Recherche ("ANVAR") towards research and development
activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta
Europe and the Company. In October 1996, as part of the Company's restructuring
program, Genta Europe terminated all scientific personnel. 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. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that
the Company remains liable for FF4,187,423 (as of October 28, 1999,
approximately $674,900) and is required to pay this amount immediately. The
Company does not believe that under the terms of the ANVAR Agreement ANVAR is
entitled to request early repayment. ANVAR notified the Company that it was
responsible as a guarantor of the note for the repayment. The Company's agent in
Europe, Ernst & Young LLP, has again notified ANVAR that the Company does not
agree that the
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<PAGE> 10
note is payable. The Company is working with ANVAR to achieve a mutually
satisfactory resolution. However, there can be no assurance that such a
resolution will be obtained. 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.
On June 30, 1998, Marseille Amenagement, a company affiliated with the
city of Marseilles, France, filed suit in France to evict Genta Europe from its
facilities in Marseilles and to demand payment of alleged back rent due and of a
lease guarantee for nine years' rent. Following the filing of this claim and in
consideration of the request for repayment of the loan from ANVAR, Genta
Europe's Board of Directors directed management to declare a "Cessation of
Payment." Under this procedure, Genta Europe ceased any operations and
terminated its only employee. A liquidator was appointed by the Court to take
control of any assets of Genta Europe and to make payment to creditors. In
December 1998, the Court in Marseilles dismissed the case against Genta Europe
and indicated that it had no jurisdiction against Genta Incorporated. In August
1999, Marseille Amenagement instituted legal proceedings against the Company at
the Commercial Court in France, claiming alleged back rent payment of
FF663,412.64 (as of October 28, 1999, approximately $106,900) and early
termination payment of FF1,852,429 (as of October 28, 1999, approximately
$298,600). A court hearing has been scheduled for December 7, 1999. The company
is working with its counsel in France to achieve a mutually satisfactory
resolution. However, there can be no assurance that such a resolution will be
obtained. On September 30, 1999, the Company has $574,800 of net liabilities of
liquidated subsidiary recorded and, therefore, management believes no additional
accrual is necessary. There can be no assurance that the Company will not incur
material costs in relation to this claim.
(9) OTHER DEVELOPMENTS
The Company has amended its Rights Agreement to accelerate the
agreement's final expiration date to May 15, 1999.
The Company has entered into an agreement with a placement agent, which
contemplates the raising of additional capital through the issuance of Common
Stock and warrants to purchase Common Stock (the "Offering"). The securities to
be sold in the offering will not be registered under the Securities Act of 1933,
as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration. There can be no
assurance that such Offering will be completed.
In November 1999, the Company issued warrants to acquire 550,000 shares
of Common Stock in full satisfaction of its obligation to file and have declared
effective a shelf registration statement pursuant to the Note and Warrant
Purchase Agreement dated as of January 28, 1997, among the Company and the Aries
Funds.
On Form 8-K filed November 12, 1999, the Company reported that it has
elected a new CEO and a new Chairman of the Board. The current Chairman and CEO
will continue as a member of the Board and will be compensated approximately
$300,000, to be paid in installments over the next 12 months. This cost will be
recognized in 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception in February 1988, the Company has devoted its
principal efforts toward drug discovery and research and development. The
Company 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 activities, regulatory
activities, possible establishment of manufacturing activities and a sales and
marketing organization. From the period since its inception to September 30,
1999, the Company has incurred a cumulative net loss of approximately $134.9
million. The Company has experienced significant quarterly fluctuations in
operating results and it expects that these fluctuations in revenues, expenses
and losses will continue, although, as a result of the sale of JBL's business,
revenues from product sales have discontinued.
The unaudited condensed consolidated financial 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 Exchange Act, 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 and 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 ("MD&A") and elsewhere in this Quarterly
Report on Form 10-Q. The Company does not undertake to update any
forward-looking statements.
RESULTS OF OPERATIONS
The following discussion of results of operations relates to the
Company's continuing business and accordingly excludes the operations of the
Company's discontinued segment JBL Scientific.
Operating revenues totaled $17,396 for the three months ended September
30, 1998, and decreased to $0 for the same period in 1999, and $52,188 for the
nine months ended September 30, 1998 and $0 for the same period in 1999. The
changes in operating revenue are the result of the Company's lessened
involvement in Genta Jago development activities. The expenses relating to these
revenues were recognized as operating expenses in the same period such that the
net effect on the Company's condensed consolidated financial statements is zero.
The Company has focused its resources on development of its lead AnticodeTM
oligonucleotide, G3139.
On March 19, 1999, the Company entered into an Asset Purchase Agreement
with Promega, whereby a wholly owned subsidiary of Promega acquired
substantially all of the assets and assumed certain liabilities of JBL for cash,
a promissory note and certain pharmaceutical development services in support of
the Company's development activities. (See Note 2 to the Company's condensed
consolidated financial statements.) The sale of the assets of JBL was completed
on May 10, 1999, and the purchase price was finalized during the third quarter
ended September 30, 1999 and has resulted in a significant decrease in ongoing
revenues, as all of the Company's product sales have been attributable to JBL.
Operating expenses totaled $1.2 million in the three months ended
September 30, 1998, and increased to $2.0 million for the same period in 1999,
and $4.3 million for the nine months ended September 30, 1998 compared with $6.2
million for the same period in 1999. Primarily, the overall increase reflects
greater activity in clinical trials along with an increase in general and
administrative expenses for legal, accounting, non-cash charges for certain
abandoned patents and costs related to stock options to employees and
consultants that are accounted for pursuant to SFAS No. 123 and using the
Black-Scholes guidelines.
Research and development expenses totaled $0.3 million in the three
months ended September 30, 1998, and increased to $0.9 million for the same
period in 1999, and $1.7 million for the nine months ended September 30, 1998
compared with $2.8 million for the same period in 1999. The increase in research
and development expenses is primarily attributable to the cost of the drug
supplies associated with more clinical trials and patients being treated at
higher doses. During the nine months ended September 30, 1999, $1,618,500 was
recorded for clinical trials and for related drug supplies compared with
$814,000 for the same period in the previous year.
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It is anticipated that research and development expenses may increase
in the future, assuming the Company obtains sufficient financing, as the
development program for G3139 expands and more patients are treated in clinical
trials at higher doses, through longer or more treatment cycles, or both.
Furthermore, the Company is pursuing other opportunities for new product
development candidates which pursuits, if successful, will require additional
research and development expenses. There can be no assurance, however, that the
trials will proceed in this manner or that the Company will initiate new
development programs.
General and administrative expenses were $0.8 million for the three
months ended September 30, 1998, and increased to $1.1 million for the same
period in 1999, and $2.6 million for the nine months ended September 30, 1998
compared with $3.4 million for the same period in 1999. The increase reflects
non-cash charges for certain abandoned patents, higher legal and accounting
costs associated with the Company's filings with the Securities and Exchange
Commission (the "SEC"), the costs associated with the relocation of its
headquarters from California to Massachusetts and consulting expenses as a
result of amortization of deferred compensation related to SFAS No. 123
recording of stock options. This was partially offset by a reduction in the cost
on a settlement with Johns Hopkins University.
On March 4, 1999, the Company and SkyePharma (on behalf of itself and
its affiliates) entered into the Interim JV Agreement pursuant to which the
Company was released from all liability relating to unpaid development costs and
funding obligations of Genta Jago, the joint venture between the Company and
SkyePharma. SkyePharma agreed to be responsible for substantially all the
obligations of the joint venture to third parties and for the further
development of the joint venture's products, with any net income resulting from
certain products of the joint venture to be allocated in agreed-upon percentages
between the Company and SkyePharma. As a result of the Interim JV Agreement, the
Company wrote off its equity interest in the net loss of the joint venture and,
as such, recorded a gain of approximately $2.3 million for the three months
ended March 31, 1999.
Interest income has fluctuated significantly each year and is
anticipated to continue to fluctuate primarily due to changes in the levels of
cash, investments and interest rates for each period.
For the nine months ended September 30, 1999, other expenses include a
loss on the sale of fixed assets as a result of the headquarters relocation.
The Company's net loss from continuing operations before accrued
dividends totaled $1.1 million, or $0.15 per share of Common Stock, for the
three months ended September 30, 1998 compared to a net loss from continuing
operations before accrued dividends of $2.0 million, or $0.10 per share of
Common Stock, for the same period in 1999. For the nine months ended September
30, 1998, the Company's net loss from continuing operations before accrued
dividends totaled $4.1 million, or $0.65 per share compared with a net loss from
continuing operations before accrued dividends of $3.9 million, or $0.24 per
share for the same period in 1999. The Company's net loss for the nine months
ended September 30, 1999 was lower than those reported for the comparable period
of 1998 primarily as a result of recording non-recurring income of approximately
$2.3 million relating to its equity interest in the net loss of the joint
venture and recording a gain on the sale of its discontinued operations of $1.6
million.
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
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since the Company entered into the joint venture, any products that may be
marketed in the future would have 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 competing
products currently in the marketplace, and increasing pricing pressures on
pharmaceuticals, particularly multisource or generic products, from governmental
and third-party payers. On May 20, 1998, Genta Jago received notice from
Apothecon that they had terminated the agreement for the development of
ketoprofen. Apothecon stated that their decision to terminate was based on the
facts that a competing generic is already being successfully marketed, other
competitors already have Abbreviated New Drug Applications (ANDAs ) pending for
their own generic formulations and they consider the GEOMATRIX(R) capsule size
competitively disadvantageous. These factors may adversely affect Genta Jago
even if it is successful in developing products that obtain regulatory approval.
As a result and in consideration of the Company's need to reduce expenses and
focus its efforts, the Company has directed its resources away from the joint
venture to its Anticode(TM) drug development, specifically G3139, for the
immediate future. On July 27, 1998, SkyePharma PLC, the parent company to
SkyePharma, announced that an ANDA for naproxen sodium filed by Brightstone
Pharma, its U.S. sales and marketing subsidiary, had been accepted for filing by
the FDA. Brightstone has a license from Genta Jago to market this product.
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 $124.5 million through September 30, 1999. At September 30,
1999, the Company had cash and cash equivalents totaling $1.5 million compared
to $2.5 million at December 31, 1998.
As discussed in Note 2 to the Company's condensed consolidated
financial statements, the Company entered into an Asset Purchase Agreement with
Promega on March 19, 1999. Under the agreement, a wholly owned subsidiary of
Promega acquired substantially all of the assets and assumed certain liabilities
of JBL for approximately $4.8 million in cash, a promissory note for $1.2
million at a 7% annual interest rate maturing on the later of June 30, 2000 or
the Environmental Compliance Date, as defined in the JBL Agreement, and certain
pharmaceutical development services in support of the Company's development
activities. The closing of the sale of JBL was completed on May 10, 1999.
In August 1999, the Company settled lawsuits with Johns Hopkins and
Ts'o/Miller Partnership. As part of the settlement of claims in excess of
$635,000 against the Company, the Company will pay $180,000 in cash over a
six-month period and issue 90,000 shares of Common Stock to Johns Hopkins,
acting on its behalf and on behalf of Ts'o/Miller Partnership, sufficient to
provide a value of $200,000. The stock is expected to be sold by a broker under
an agreement between the Company and Johns Hopkins over a six-month period, with
the proceeds from such sales to be delivered to Johns Hopkins. The reduction in
total estimated costs accrued of $210,000 was credited to general and
administrative expenses.
Also in August 1999, the Company acquired Androgenics. As consideration
for the acquisition, the Company paid $132,000 in cash (including reimbursements
of pre-closing expenses and on-going research funding) and issued warrants (with
exercise prices ranging from $1.25 to $2.50 per share) to purchase an aggregate
of 1,000,000 shares of Common Stock, 90% of which will not become exercisable
until the successful conclusion of certain development milestones, ranging from
the initial clinical patient trial through the submission of an application for
marketing authorization. The cash and warrants were issued in exchange for 100%
of the shares of Androgenics, and license technology and the assumption of a
research and development agreement with the University of Maryland, Baltimore.
On Form 8-K filed on November 12, 1999, the Company reported that it
has elected a new CEO and a new Chairman of the Board. The current Chairman and
CEO will continue as a member of the Board and will be compensated approximately
$300,000, to be paid in installments over the next 12 months.
The Company will require 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, funds from the
consummation of the JBL sale and its existing cash funds will enable the Company
to maintain its present operations into the first quarter of 2000. To the extent
that the Company is successful in accelerating its development of G3139,
expanding its development portfolio or acquiring or adding new development
candidates, the current cash resources
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will be consumed at a greater rate. This will cause the rate of cash utilization
to 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
"Certain Trends and Uncertainties--Claims of the Company's Default Under Various
Agreements." The Company anticipates that significant additional sources of
financing, including equity financing 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 that the Company devotes to sales
and marketing capabilities; (iv) technological advances; (v) the activities of
competitors; and (vi) 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 "Certain Trends
and Uncertainties--Need for Additional Funds; Risk of Insolvency."
The Company has entered into an agreement with a placement agent, which
contemplates the raising of additional capital through the issuance of Common
Stock and warrants to purchase common stock. The securities to be sold in the
offering will not be registered under the Securities Act of 1933, as amended,
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration. There can be no assurance that such
Offering will be completed.
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
and clinical testing activities, the manufacturing and/or market introduction of
potential products and expansion of its administrative activities.
In the nine months ended September 30, 1999, the holders of an
aggregate of 66,040 shares of Series D Preferred Stock converted those shares
into an aggregate of 7,038,026 shares of Common Stock, and the holders of an
aggregate of 169,300 shares of Series A Preferred Stock converted those shares
into an aggregate of 1,248,578 shares of Common Stock. During the third quarter
1999, the Company issued 1,085,420 and 924,519 shares of Common Stock to Series
A and D Preferred Stockholders, respectively, in payment of accrued dividends.
The Company also issued 90,000 shares of Common Stock to John Hopkins University
in settlement of a lawsuit (see note 4). An aggregate of 121,000 and 24,000
shares of common stock were issued pursuant to the exercise of warrants and
options, respectively.
IMPACT OF YEAR 2000
The Company has completed its assessment of whether it will have to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company has acquired and installed new computer hardware and upgraded software
in its facility. The total year 2000 project cost was $31,600 and has been
completed. The Company believes that with the modifications to existing software
and conversions to new software the year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
are not effective, the year 2000 issue could have a material adverse effect on
the operations of the Company.
In addition, the Company has initiated formal communications with all
of its significant suppliers to determine the extent to which the Company's
interface systems are vulnerable to the failure of those third-party suppliers
to remediate their own year 2000 issues. If through such communication or
otherwise the Company becomes aware of any such failure and is not satisfied
that such failure is being adequately addressed, it will take appropriate steps
to find alternative suppliers. There is no assurance that the systems of other
companies on which the Company's systems rely will be timely converted and will
not have a material adverse effect on the Company's systems.
The Company has evaluated all non-information technology systems and
has determined that they are Y2K compliant.
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It has been acknowledged by governmental authorities that year 2000
problems have the potential to disrupt global economies, that no business is
immune from the potentially far-reaching effects of year 2000 problems, and that
it is difficult to predict with certainty what will happen after December 31,
1999. Consequently, it is possible that year 2000 problems will have a material
effect on the Company's business even if the Company takes all appropriate
measures to ensure that it and its key suppliers are year 2000 compliant.
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.
Need for Additional Funds; Risk of Insolvency
The Company's operations to date have consumed substantial amounts of
cash. The Company's independent auditors have included an explanatory paragraph
in their report to the 1998 Form 10-K with respect to the Company's ability to
continue as a going concern. See "Liquidity and Capital Resources." The Company
will need to raise substantial additional funds to continue its operations and
conduct the costly and time-consuming research, preclinical 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 or the sale of key assets. Adequate funds for
these purposes, whether obtained through financial markets, collaborative
agreements, 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 preclinical
studies and bioequivalence and clinical trials, relationships with corporate
collaborators, changes in the focus and direction of the Company's research and
development programs, competitive and technological advances, the FDA and
foreign regulatory processes, and other factors.
Loss History; Uncertainty of Future Profitability.
The Company 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
September 30, 1999, the Company has incurred a cumulative net loss of
approximately $134.9 million. The Company has experienced significant quarterly
fluctuations in operating results and expects that these fluctuations in
revenues, expenses and losses will continue, although, as a result of the sale
of JBL's business, revenues from product sales have discontinued. See "Need for
Additional Funds; Risk of Insolvency."
Authorized Capital Stock
Following completion of the contemplated offering, it is expected that
the Company will have an insufficient number of authorized shares of Common
Stock to raise additional capital through the issuance of equity securities. The
Company intends, at its next annual meeting of stockholders, to submit to a vote
of its stockholders an amendment to its Amended and Restated Certificate of
Incorporation to increase the number of shares of Common Stock that the company
is authorized to issue. Approval of this amendment will require the favorable
vote of the holders of a majority of the voting power of the outstanding stock
entitled to vote thereon. There can be no assurance that the Company's
stockholders will approve such amendment.
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Subordination of Common Stock to Series A Preferred Stock and Series D Preferred
Stock; Risk of Dilution.
In the event of the liquidation, dissolution or winding up of the
Company, the Common Stock is expressly subordinate to the approximately $13.9
million preference of the 278,300 outstanding shares of Series A Preferred Stock
and the approximately $17.0 million preference of the 121,717 outstanding shares
of Series D Preferred Stock (not including an additional 38,104 shares of Series
D Preferred Stock that are issuable upon exercise of certain warrants).
Dividends may not be paid on the Common Stock unless full cumulative dividends
on the 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 is subject to
adjustment, among other things, upon certain issuances of Common Stock or
securities convertible into Common Stock at $7.40 per share or less. As of
September 30, 1999, each share of Series A Preferred Stock is convertible into
approximately 6.7523 shares of Common Stock at a conversion price of $7.40 per
share. As of September 30, 1999, each share of Series D Preferred Stock is
convertible into 108.34 shares of Common Stock at a conversion price of $0.92302
per share of Common Stock, and the exercise price of the Class D Warrants is
$0.91342 per share. The conversion rate of the Series D Preferred Stock and the
exercise price of the Class D Warrants are subject to adjustment, among other
things, upon certain issuances of Common Stock or securities convertible into
Common Stock at prices per share below certain levels. As of September 30, 1999,
there are 1,494,759 Class D Warrants outstanding and another 190,521 Class D
Warrants issuable upon the exercise of certain warrants. In addition, the
Company has outstanding Bridge Warrants to purchase an aggregate of 7,065,473
shares of Common Stock at an exercise price of $0.4246 per share, Line of Credit
Warrants to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price of $2.21 per share, Class C Warrants to purchase an aggregate of
700,000 shares of Common Stock at an exercise price of $0.52 per share, warrants
to purchase an aggregate of 5,820,860 shares of Common Stock at various exercise
prices between approximately $0.9134 and $21 per share, 107,568 outstanding
employee stock options under the Company's Amended and Restated 1991 Stock Plan
at various exercise prices between $2.50 and $25.00 per share, and 6,802,763
outstanding employee stock options under the Company's 1998 Stock Incentive Plan
and Non-Employee Directors' 1998 Stock Option Plan at various exercise prices
between $0.88 and $3.25 per share.
Claims of the Company's Default Under Various Agreements.
The French government agency 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. On
July 1, 1998, ANVAR notified Genta Europe by letter of its claim that the
Company remains liable for FF 4,187,423 (as of October 28, 1999, approximately
$674,900) and is required to pay this amount immediately. The Company is working
with ANVAR to achieve a mutually satisfactory resolution; however, there can be
no assurance that such a resolution will be obtained. 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.
On June 30, 1998, the Director General of the Company's subsidiary,
Genta Europe, was served notice of a suit in Marseilles, France by Marseille
Amenagement, the Manager of the Company's facilities in Marseilles. See "Legal
Proceedings."
Early Stage of Development; Technological Uncertainty.
The Company 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,
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results obtained in preclinical 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 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
any of the Company'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 the Company'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 "Potential Adverse Effect of Technological Change and Competition."
Limited Availability of Net Operating Loss Carryforwards.
At December 31, 1998, the Company has federal and California net
operating loss carryforwards of approximately $82.0 million and $14.7 million,
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 $2.8 million and $0.5 million of the California tax loss
carryforwards expired during 1997 and 1998, respectively, and the related
deferred tax asset and tax loss carryforwards amounts have been reduced
accordingly. The remaining California tax loss will continue to expire in 1999,
unless utilized. The Company also has federal and California research and
development tax credit carryforwards of $3.2 million and $1.3 million,
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 have a material adverse impact on the Company's ability to utilize
these carryforwards.
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 D Preferred Stock. The Company currently intends to retain its
earnings, if any, after payment of dividends on outstanding shares of Series D
Preferred Stock, for the development of its business.
No Assurance of Regulatory Approval; Government Regulation.
The FDA and comparable agencies in foreign countries impose substantial
pre-market approval requirements on the introduction of pharmaceutical products
through lengthy and detailed preclinical and clinical testing procedures and
other costly and time-consuming procedures. Satisfaction of these requirements,
which includes demonstrating to the satisfaction of the FDA and foreign
regulatory agencies that the product is both safe and effective, typically takes
several years or more depending upon the type, complexity and novelty of the
product. There can be no assurance that such testing will show any product to be
safe or efficacious or, 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 activities and to diminish any
competitive advantage that the Company may have attained. It may take years
before marketing approvals are obtained for the Company's products, if at all.
There can be no assurance that FDA or other regulatory approval for any products
developed by the Company will be granted on a timely basis, if at all, or, if
granted, that such approval will cover all the clinical indications for
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which the Company is seeking approval or will not sustain significant
limitations in the form of warnings, precautions or contraindications with
respect to conditions of use. Moreover, additional government regulation from
future legislation or administrative action may be established which could
prevent or delay regulatory approval of the Company's products or further
regulate the prices at which the Company'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 a chemical 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
PCEs in the soil and groundwater at this site. A semi-annual
groundwater-monitoring program is being conducted, under the supervision of the
California Regional Water Quality Control Board, for purposes of determining
whether the levels of chloroform and PCEs have decreased over time. The results
of the latest sampling conducted show that chloroform and PCEs have decreased in
all but one of the monitoring sites. The Company recorded a reserve of $65,000
in 1999 to pay for any potential liability. The Company has agreed to indemnify
Promega in respect of this matter. The Company believes that the costs
associated with further investigation or remediation 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. See Note 8 to the Company's condensed consolidated
financial statements.
JBL received notice on October 16, 1998 from Region IX of the
Environmental Protection Agency ("EPA") that it had been identified as a
potentially responsible party ("PRP") at the Casmalia Disposal Site, which is
located in Santa Barbara, California. JBL has been designated as a de minimis
PRP by the EPA. The EPA currently estimates that the Company will be required to
pay approximately $63,200 to settle their potential liability. The Company
expects to receive a revised settlement proposal from the EPA by the first
quarter of 2000. The settlement deadline has been extended to December 6, 1999.
The Company accrued $75,000 in 1998 for any potential liability. While the terms
of the settlement have not been finalized, they should contain standard
contribution release and protection language. The Company believes that any
costs stemming from 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 has agreed to indemnify Promega
in respect of this matter. See Note 8 to the Company's condensed consolidated
financial statements.
Uncertainty Regarding Patents and Proprietary Technology.
The Company's success will depend, in part, on its 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 will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to the
Company. There can be no assurance that the Company's patent applications will
be approved, that the Company will develop additional products that are
patentable, that any issued patent will provide the Company 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 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.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate any of the Company's products or design
around any patented products developed by the Company. The Company relies on
secrecy to protect technology in addition to patent protection; especially where
patent protection is not believed to be appropriate or obtainable. No assurance
can be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets, or that the Company can effectively protect its rights to its
unpatented trade secrets.
18
<PAGE> 19
The Company has 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, if at all. If
the Company's licenses and other rights are terminated or if the Company cannot
obtain such additional licenses, the Company 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 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 claiming infringement of the patent rights of third parties or in
asserting the Company's patent rights, including those granted by third parties,
in a suit against another party. The Company 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, 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 will have sufficient funds to obtain, maintain or enforce patents on its
respective products or technology, to obtain or maintain licenses that may be
required in order to develop and commercialize its respective products, to
contest patents obtained by third parties, or to defend against suits brought by
third parties.
Dependence on Others.
The Company's strategy for the research, development and
commercialization of 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, 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 has numerous competitors in
the United States and other countries for its 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 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
which would render the Company's technology and products non-competitive. Many
of the Company's competitors have substantially greater financial, technical,
marketing and human resources than the Company. In addition, many of those
competitors have significantly greater experience than the Company in
undertaking preclinical testing and human clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals of products for use in
healthcare. Accordingly, the Company's competitors may succeed in obtaining
regulatory approval for products more rapidly than the Company and such
competitors may succeed in delaying or blocking regulatory approvals of the
Company's products. As competitors of the Company receive approval for products
that share the same potential market as the Company's potential products, the
market share available to the Company will likely be reduced, thereby reducing
the potential revenues and earnings available to the Company. In addition,
increased pricing competition would also likely result, further reducing the
earnings potential of
19
<PAGE> 20
the Company's products. Furthermore, if the Company 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 preclinical testing are subject to
varying interpretations. Even if the development of the Company's 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 may encounter unanticipated problems relating to development,
manufacturing, distribution and marketing, some of which may be beyond the
Company's financial and technical capacity to solve. The failure to address such
problems adequately could have a material adverse effect on the Company's
businesses, financial conditions, prospects and results of operations. No
assurance can be given that the Company 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 "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, the Company 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
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 will be able to manufacture
products, or have products manufactured for it, in a timely fashion at
acceptable quality and prices, that it or third party manufacturers can comply
with GMP or that they or third party manufacturers will be able to manufacture
an adequate supply of product. Failure to establish compliance with GMP to the
satisfaction of the FDA can result in delays in, or prohibition from, initiating
clinical trials or commercial marketing of a product.
Limited Sales, Marketing and Distribution Experience.
The Company has very limited experience in pharmaceutical sales,
marketing and distribution. In order to market and sell certain products
directly, the Company 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 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
20
<PAGE> 21
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 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 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 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 flexibility in pricing and in obtaining adequate
reimbursement for its potential products. See " 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 the Company will be able to attract and retain the qualified
personnel necessary for the development of its business.
Product Liability Exposure; Limited Insurance Coverage.
The Company's, business exposes it to potential product liability risks
that are inherent in the testing, manufacturing, marketing and sale of human
therapeutic products. The Company has also obtained a level of 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.
Hazardous Materials; Environmental Matters.
The Company's research and development and manufacturing processes
involve the controlled storage, use and disposal of hazardous materials,
biological hazardous materials and radioactive compounds. The Company is subject
to federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company may be held liable for any damages that result, and any such liability
could exceed the resources of the Company. There can be no assurance that the
Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future, nor that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations. See " 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
preclinical studies and clinical trials by the Company, or its competitors,
other evidence of the safety or efficacy of products of the Company, or its
competitors, announcements of technological innovations or new therapeutic
products by the Company, or its competitors, governmental regulation,
developments in patent or other proprietary rights of the Company, or its
respective competitors, including litigation, fluctuations in the Company's
21
<PAGE> 22
operating results, and market conditions for biopharmaceutical stocks in general
could have a significant impact on the future price of the Common Stock. As of
September 30, 1999, the Company had 20,957,799 shares of Common Stock
outstanding. 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 "Subordination of Common Stock to Series A
Preferred Stock and Series D Preferred Stock; Risk of Dilution," 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 Mark C. Rogers, M.D. as nominees to the Board of
Directors. Such persons were elected as Directors of the Company. Paramount
Capital Asset Management, Inc. ("PCAM") is the investment manager of The Aries
Master Fund and the general partner of each of Aries Domestic Fund, L.P. and
Aries Domestic Fund II, L.P. (collectively, the "Aries Funds"). The Aries Funds
have the present right to convert and exercise their securities into a
significant portion of the outstanding Common Stock. See " Concentration of
Ownership and Control" below. Dr. Lindsay A. Rosenwald, the Chairman and sole
stockholder of PCAM, is also the Chairman of Paramount Capital, Inc. and of
Paramount Capital Investments LLC ("PCI"), a New York-based merchant banking and
venture capital firm specializing in biotechnology companies. Dr. Rogers is the
President of each of Paramount Capital, Inc., PCAM and 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 "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 " 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
22
<PAGE> 23
actions, including the amendment of the By-laws and the amendment, if any, of
the anti-takeover provisions contained in the Company's Restated Certificate of
Incorporation. The Company has amended the Company's Rights Agreement to
accelerate the agreement's final expiration date to May 15, 1999.
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 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 and (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 (both 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.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1996, JBL retained a chemical 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. A
semi-annual groundwater-monitoring program is being conducted, under the
supervision of the California Regional Water Quality Control Board, for purposes
of determining whether the levels of chloroform and PCEs have decreased over
time. The results of the latest sampling conducted show that PCEs and chloroform
have decreased in all but one of the monitoring sites. The Company recorded a
reserve of $65,000 in 1999 to pay for any potential liability. The Company has
agreed to indemnify Promega in respect of this matter. The Company believes that
any costs stemming from 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.
JBL received notice on October 16, 1998 from Region IX of the
Environmental Protection Agency ("EPA") that it had been identified as a
potentially responsible party ("PRP") at the Casmalia Disposal Site, which is
located in Santa Barbara, California. JBL has been designated as a de minimis
PRP by the EPA. The EPA currently estimates that the Company will be required to
pay approximately $63,200 to settle their potential liability. The Company
expects to receive a revised settlement proposal from the EPA by the first
quarter of 2000. While the terms of the settlement with the EPA have not been
finalized, they should contain standard contribution protection and release
language. The settlement deadline has been extended to December 6, 1999. The
Company accrued $75,000 in 1998 for any potential liability. The Company
believes that any costs stemming from 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 has agreed to
indemnify Promega in respect of this matter.
During 1995, Genta Europe received approximately 5.4 million French
Francs (as of October 28, 1999, approximately $870,300) of funding in the form
of a loan from ANVAR towards research and development activities pursuant to the
ANVAR Agreement between ANVAR, Genta Europe and the Company. In October 1996, as
part of the Company's restructuring program, Genta Europe terminated all
scientific personnel. 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. On July 1, 1998, ANVAR
notified Genta Europe by letter of its claim that the Company remains liable for
FF4,187,423 (as of October 28, 1999, approximately $674,900) and is required to
pay this amount immediately. The Company does not believe that under the terms
of the ANVAR Agreement ANVAR is entitled to request early repayment. ANVAR
notified the Company that it was responsible as a guarantor of the note for the
repayment. The Company's agent in Europe, Ernst & Young LLP, has again notified
ANVAR that the Company does not agree that the note is payable. The Company is
working with ANVAR to achieve a mutually satisfactory resolution. However, there
can be no assurance that such a resolution will be obtained. 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.
On June 30, 1998, Marseille Amenagement, a company affiliated with the
city of Marseilles, France, filed suit in France to evict Genta Europe from its
facilities in Marseilles and to demand payment of alleged back rent due and of a
lease guarantee for nine years' rent. Following the filing of this claim and in
consideration of the request for repayment of the loan from ANVAR, Genta
Europe's Board of Directors directed the management to declare a "Cessation of
Payment." Under this procedure, Genta Europe ceased any operations and
terminated its only employee. A liquidator was appointed by the Court to take
control of any assets of Genta Europe and to make payment to creditors. In
December 1998, the Court in Marseilles dismissed the case against Genta Europe
and indicated that it had no jurisdiction against Genta Incorporated. In August
1999, Marseille Amenagement instituted legal proceedings against the Company at
the Commercial Court in France, claiming alleged back rent payment of
FF663,412.64 (as of October 28, 1999, approximately $106,900) and early
termination payment of FF1,852,429 (as of October 28, 1999, approximately
$298,600). A court hearing has been scheduled for December 7, 1999.
24
<PAGE> 25
There can be no assurance that the Company will not incur material costs in
relation to this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
See "Submission of Matters to a Vote of Security Holders" in the
Company's Form 10-Q for the quarterly period ended June 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Document
- ------- -----------------------
4.1 Amendment No. 3 to Rights Agreement, dated as of May 14, 1999,
between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent.
27 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed by the Company to put on
file a press release dated November 11, 1999 announcing a new CEO and a new
Chairman of the Board.
A Current Report on Form 8-K was filed by the Company on August 11,
1999 to put on file a press release dated August 4, 1999 reporting its operating
results for the second quarter ended June 30, 1998.
A Current Report on Form 8-K was filed by the Company on July 20,
1999 to put on file a press release dated July 20, 1999 announcing that the
Company received notice of allowable claims for the U.S. patent for use of Bcl-2
antisense to treat cancer.
25
<PAGE> 26
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: Chairman of the Board of Directors,
President and Principal Executive Officer
By: /s/ Gerald M. Schimmoeller
------------------------------------------
Name: Gerald M. Schimmoeller
Title: Vice President, Chief Financial Officer
and Principal Accounting Officer
Date: November 15, 1999
26
<PAGE> 1
AMENDMENT NO. 3 TO RIGHTS AMENDMENT
-----------------------------------
THIS AMENDMENT NO. 3 (this "Agreement"), dated as of May 14, 1999, to
the Rights Agreement, dated as of December 16, 1993, as amended as of January
28, 1997 and June 30, 1997 (the "Rights Agreement"), between Genta Incorporated,
a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services,
L.L.C., a New Jersey limited liability company, as successor in interest to
First Interstate Bank of California, as Rights Agent (the "Rights Agent"), is
made with reference to the following facts:
A. The Company and the Rights Agent have heretofore entered into the
Rights Agreement. Pursuant to Section 27 of the Rights Agreement, the Company
and the Rights Agent may, from time to time, supplement or amend the Rights
Agreement in accordance with the provisions of such Section.
B. The Company and the Rights Agent wish to amend the Rights Agreement so
as to advance the Final Expiration Date (as defined in the Rights Agreement) and
to revise the definition of "Acquiring Person" therein.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreement
set forth herein, the parties hereto agree as follows:
1. The first sentence of Section 2 of the Rights Agreement is hereby
amended to delete the following words: "and the holders of the Rights (who, in
accordance with Section 3 hereof shall prior to the Distribution Date also be
the holders of the Common Shares)."
2. Subsection 7(a) of the Rights Agreement is hereby amended in its
entirety to read as follows:
(a) The registered holder of any Rights Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole
or in part at any time after the Distribution Date upon presentation of
the Rights Certificate, with the appropriate form of election to
purchase on the reverse side thereof duly executed, to the Rights Agent
as the principal office of the Rights Agent, together with payment of
the Purchase Price for each one-thousandth of a share of Preferred
Stock (or such other number of shares or other securities) as to which
the Rights are exercised, at or prior to the earliest of (i) the close
of business on May 15, 1999 (the "Final Expiration Date"), (ii) the
time at which the Rights are redeemed as provided in Section 24 hereof,
(iii) the consummation of a transaction contemplated by Section 13(d)
hereof or (iv) the time at which the Rights are exchanged as provided
herein provided in Section 24(c) hereof (such earliest time being
herein referred to as the "Expiration Date"). Notwithstanding any other
provision of this Agreement, any Person who prior to the Distribution
Date becomes a record holder of shares of Common Stock may exercise all
of the rights of a
<PAGE> 2
registered holder of a Rights Certificate with respect to the Rights
associated with such shares of Common Stock in accordance with and
subject to the provisions of this Agreement, including the provisions
of Section 7(e) hereof, as of the date such Person becomes a record
holder of shares of Common Stock.
3. The definition of "Acquiring Person" set forth in Section 1(a) of the
Rights Agreement is hereby amended in its entirety to read as follows:
(a) No Person (as such term is hereinafter defined) or other entity
shall be deemed an "Acquiring Person".
4. Section 19 of the Rights Agreement is hereby amended by adding the
following sentence to the end of the first paragraph of such section: "Anything
to the contrary notwithstanding, in no event shall the Rights Agent be liable
for special, punitive, indirect, consequential or incidental loss or damage of
any kind whatsoever (including but not limited to lost profits), even if the
Rights Agent has been advised of the likelihood of such loss or damage."
5. Capitalized terms used in this Amendment, unless otherwise defined
herein, shall have the same meaning provided in the Rights Agreement, as amended
to date.
6. All amendments made to the Rights Agreement in this Amendment shall be
deemed to apply retroactively as well as prospectively.
7. This Amendment shall be governed by and construed in accordance with
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with all the laws of such State applicable to contracts
to be made and performed entirely with such State.
8. This Amendment may be executed in counterparts, each of which shall be
an original, but such counterparts shall together constitute one and the same
instrument.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and attested, all as of the date and year first above written.
Attest: GENTA INCORPORATED
By: /s/ GERALD M. SCHIMMOELLER By: /s/ KENNETH G. KASSES, PH.D.
------------------------------- ---------------------------------
Title: Chief Financial Officer Title: President and Chief Executive
Officer
Attest: CHASEMELLON SHAREHOLDER SERVICES, LLC
By: /s/ JAMES KIRKLAND By: /s/ RONALD LUG
------------------------------- ---------------------------------
Title: Assistant Vice President Title: Vice President
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations contained
in the Company's Quarterly Report on Form 10-Q for period ended September 30,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 288,815 1,489,173
<SECURITIES> 3,477,353 0
<RECEIVABLES> 0 1,372,739
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,873,683 3,368,466
<PP&E> 696,089 32,910
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 14,207,388 4,062,283
<CURRENT-LIABILITIES> 3,592,763 1,482,118
<BONDS> 0 0
654 400
0 0
<COMMON> 8,265 20,957
<OTHER-SE> 8,287,449 2,558,808
<TOTAL-LIABILITY-AND-EQUITY> 14,207,387 4,062,283
<SALES> 0 0
<TOTAL-REVENUES> 52,188 0
<CGS> 0 0
<TOTAL-COSTS> 4,229,115 6,161,258
<OTHER-EXPENSES> 0 149,114
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (264,964) (138,202)
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,078,354) (2,470,691)
<DISCONTINUED> (222,688) (189,407)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,301,042) (3,870,380)
<EPS-BASIC> (0.69) (0.24)
<EPS-DILUTED> (0.69) (0.24)
</TABLE>
