UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] 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
Lexington, Massachusetts 02421
(Address of principal executive offices) (Zip Code)
(781) 860-5150
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par value
Preferred Stock Purchase Rights,
$.001 Par Value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting common equity held by
non-affiliates of the registrant was $25,164,644 as of April 12, 1999. For
purposes of determining this number, 4,049,249 shares of common stock held by
affiliates are excluded.
As of April 12, 1999, the registrant had 15,080,326 shares of Common
Stock outstanding. As of April 12, 1999, 386 persons held common stock of the
registrant.
Documents Incorporated by Reference
None.
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UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE DATA IN THIS REPORT
HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT A 1-FOR-10 REVERSE STOCK SPLIT OF
THE COMPANY'S COMMON STOCK EFFECTIVE AS OF APRIL 7, 1997.
The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the 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: the obtaining of sufficient financing to
maintain the Company's planned operations; the timely development, receipt of
necessary regulatory approvals and acceptance of new products; the successful
application of the Company's technology to produce new products; the obtaining
of proprietary protection for any such technology and products; the impact of
competitive products and pricing and reimbursement policies; the changing of
market conditions and the other risks detailed in the Certain Trends and
Uncertainties section of Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") in this Annual Report on Form 10-K
and elsewhere herein. The Company does not undertake to update any
forward-looking statements.
See "MD&A--Certain Trends and Uncertainties" for a discussion of certain
risks and uncertainties applicable to the Company and its stockholders,
including the Company's need for additional funds to sustain its operations.
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PART I
ITEM 1. BUSINESS
Overview
Genta Incorporated ("Genta" or the "Company"), incorporated under the
laws of the State of Delaware on February 4, 1988, is an emerging
biopharmaceutical company. The Company's research efforts have been focused on
the development of proprietary oligonucleotide pharmaceuticals intended to block
or regulate the production of disease-related proteins at the genetic level. The
Company's oligonucleotide programs are focused primarily in the area of cancer.
In late 1995, a phase I/IIa clinical trial was initiated in the United Kingdom
using Genta's anti-bcl-2 Anticode(TM) oligonucleotide, G3139, in non-Hodgkin's
lymphoma patients for whom prior therapies have failed. This clinical trial,
which was conducted in collaboration with the Royal Marsden NHS Trust and the
Institute for Cancer Research, is now complete. In late 1996, an Investigational
New Drug application ("IND") for the G3139 clinical program was filed in the
United States and allowed to proceed by the United States Food and Drug
Administration ("FDA"). In late 1997, a Phase I trial was initiated in the
United States at the Memorial Sloan-Kettering Cancer Center (the "MSKCC") in New
York City using G3139 in patients diagnosed with various types of cancer to be
followed by a phase IIa trial in prostate cancer. In 1998, several additional
trials were initiated in North America and Europe. In each of these trials,
G3139 is being investigated for safety and preliminary evidence of effectiveness
when administered with standard chemotherapeutic agents in different cancers.
The Company also has manufactured and marketed specialty biochemicals
and intermediate products to the in vitro diagnostic and pharmaceutical
industries through its manufacturing subsidiary, JBL Scientific, Inc. ("JBL"), a
California corporation acquired by the Company in February 1991.
The Company owns 50% of a drug delivery system joint venture, Genta Jago
Technologies B.V. ("Genta Jago"), with SkyePharma, PLC ("SkyePharma," formerly
with Jagotec AG ("Jagotec"), which was acquired by SkyePharma) established to
develop oral controlled-release drugs. To date, no products from this joint
venture have been commercialized, although an Abbreviated NDA was submitted in
1998 by the joint venture's marketing partner for one product. The joint
venture's original plan was to use Jagotec's patented GEOMATRIX(R) drug delivery
technology ("GEOMATRIX") in a two-pronged commercialization strategy: the
development of generic versions of successful brand-name controlled-release
drugs; and the development of controlled-release formulations of drugs currently
marketed in only immediate-release form. The only products in development to
date are those intended to be comparable to the commercially available,
brand name, controlled-release drugs.
Since 1997, the Company has been reducing its human and other resources
to reduce expenses while focusing its Research and Development efforts on its
Anticode(TM) brand of antisense products intended to treat cancer at its genetic
source. To this end the Company's primary efforts are directed toward the
clinical development of G3139.
Consistent with this strategic direction, on March 19, 1999, the Company
entered into an Asset Purchase Agreement with Promega Corporation whereby
Promega will acquire substantially all of the assets and certain liabilities of
JBL. The transaction will be consummated upon the satisfaction of certain
closing conditions. JBL has been reported as a discontinued operation in the
accompanying consolidated financial statements.
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
joint venture development costs and funding obligations. SkyePharma agreed to be
responsible for substantially all of 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 therefrom to be allocated in agreed-upon
percentages between Genta and SkyePharma as set forth in such interim agreement.
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In 1998, the Company completed the closure of its R&D facilities in San
Diego, California, and in the second quarter of 1999 is moving its headquarters
from San Diego, California, to Lexington, Massachusetts.
Summary of Business and Research and Development Programs
The Company is currently focusing its research and product development
efforts on Genta's lead anti-bcl-2 molecule, G3139, and the related Anticode(TM)
brand of antisense oligonucleotide programs.
Anticode(TM) Brand of Antisense Oligonucleotide Programs
Oligonucleotides represent a modern approach to drug development based
upon genetic control of disease. Many human diseases have genetic origins that
involve either the expression of a harmful foreign gene or the aberrant
expression of a normal or mutated human gene. The Company's Anticode(TM)
oligonucleotides are short strands of synthetic nucleic acids designed to bind
to ("hybridize" with) specific sequences of disease-related RNA or DNA, thereby
blocking or controlling production of disease-related proteins. The Company
believes that, because of their selective binding properties, Anticode(TM)
oligonucleotides should not interfere with the function of normal cells, and
therefore, should elicit significantly fewer side effects than traditional
drugs. Oligonucleotide drugs may attack a disease at one of two levels. One
approach is to prevent the synthesis of essential disease-related proteins. In
this approach, certain oligonucleotides are used to interrupt the processing of,
or selectively to bind to and destroy, individual messenger RNA (mRNA)
sequences, which leads to the down-regulation (lowering of levels) of specific
proteins and thereby effectively eliminates the disease or the disease promoter.
This is referred to as the "antisense" mechanism of action. A second therapeutic
opportunity is to prevent transcription of disease-causing DNA into the mRNA
copy of the gene. This is referred to as the "triple-strand to DNA" mechanism of
activity.
Genta has focused its Anticode(TM) research on oligonucleotides with
mixed phosphorothioate and methylphosphonate backbones. The Company has licensed
patents covering phosphorothioate oligonucleotide constructions and has applied
for patents covering the mixed backbone constructions. Genta's scientists have
improved the backbone technologies by introducing mixed chirally-enriched or
chirally-pure oligonucleotides. In preclinical studies, these oligonucleotides
effectively interfere with the action of targeted mRNA sequences inside cells.
Intravenous administration of the improved technology oligonucleotides to
certain animals demonstrates that these compounds have greater stability in the
circulatory system and are eventually excreted intact in the urine. These
improved backbone technologies represent opportunities for second generation
Anticode(TM) antisense oligonucleotides, none of which are currently in
development. Management believes that the Company has the ability to acquire or
produce quantities of oligonucleotides sufficient to support its present needs
for research and its projected needs for initial clinical development programs,
assuming adequate funding. However, in order to obtain oligonucleotides
sufficient to meet the volume and cost requirements needed for certain
commercial applications of Anticode(TM) oligonucleotide products, Genta requires
raw materials currently provided by a single supplier, and there can be no
assurance that such supplier will continue satisfactorily to provide the
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requisite raw materials. See "MD&A--Certain Trends and Uncertainties--Difficult
Manufacturing Process; Access to Certain Raw Materials."
The Company's oligonucleotide research and development efforts are
currently focused on its cancer program as described below. Extensive additional
development will be required, and there can be no assurance that any product
will be successfully developed or will receive the necessary regulatory
approvals. See "MD&A--Certain Trends and Uncertainties--No Assurance of
Regulatory Approval; Government Regulation," "MD&A--Certain Trends and
Uncertainties--Dependence on Others" and "MD&A--Certain Trends and
Uncertainties--Uncertainty of Clinical Trials and Results."
Bcl-2 Gene Target.
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The bcl-2 gene is a proto-oncogene and a major inhibitor of apoptosis
(programmed cell death) of cancerous cells. The protein produced by this gene
has two known critical functions in the progression of cancer: it makes cancer
cells immortal, creating a survival advantage of malignant over normal cells;
and confers resistance to radiation and chemotherapy, rendering those treatments
ineffective in the late stages of many types of cancer. Genta's lead anti-bcl-2
molecule, G3139, is designed to bind to and destroy the mRNA that produces the
bcl-2 protein product, thereby interfering with the cellular production of the
protein. High levels of bcl-2 are associated with a poor clinical prognosis in
many solid tumor and hematological malignancies such as lymphoma, leukemia,
melanoma, multiple myeloma, prostate and breast cancers. The Company believes
that its Anticode(TM) antisense strategy against the bcl-2 gene has the
potential to represent a significant therapeutic opportunity in many of these
cancers.
In preclinical studies conducted by Dr. Finbarr Cotter, at the Institute
for Child Health in London, an anti-bcl-2 oligonucleotide was shown to cure
lymphoma-like disease induced by the injection of human B-cell lymphoma cells in
immunodeficient mice. Similar findings in another mouse lymphoma model were
reported to the Company by another collaborator, Dr. Richard Klasa of the
British Columbia Cancer Agency. In addition, in a variety of other animal
studies, anti-bcl-2 Anticode(TM) oligonucleotides have been found to inhibit the
growth of human lymphoma, melanoma, colon, prostate and breast cancer tumors in
immunodeficient mice when administered alone or in combination with
chemotherapeutic agents. In the February 1998 issue of Nature Medicine, Dr.
Burkhard Jansen and colleagues published a report entitled "bcl-2 antisense
therapy chemosensitizes human melanoma in SCID mice." They describe studies
showing that G3139 administered with dacarbazine produced significantly greater
tumor volume reduction than dacarbazine alone or than G3139 alone. In ten of
thirteen animals there was no tumor after the combination treatment.
In late 1995, a Phase I/IIa clinical trial was initiated in the United
Kingdom using Genta's anti-bcl-2 Anticode(TM) oligonucleotide, G3139, in human
non-Hodgkin's lymphoma patients for whom prior therapies had failed. The
clinical trial was conducted in collaboration with the Royal Marsden NHS Trust
("Royal Marsden") and the Institute for Cancer Research under the direction of
Dr. David Cunningham. The principal aim of this Phase I/IIa study was to define
the maximum tolerated dose of G3139. Secondary objectives included measurement
of clinical and biochemical disease parameters. The trial with Royal Marsden is
complete, and the Company believes that, other than mild irritation at the site
of the subcutaneous infusion in most of the patients or a low-grade reversible
thrombocytopenia (decrease in number of blood platelets), no serious
drug-attributable or dose-limiting adverse effects were seen until the maximum
tolerated dose was reached. Initial results in the first nine patients were
reported in The Lancet ("BCL-2 antisense therapy in patients with non-Hodgkin
lymphoma," A. Webb, et al., Vol. 349; pages 1137-1141, April 19, 1997). This
report revealed that four of the nine patients observed showed improvements in
their disease and in one patient the tumor had completely disappeared. Of the 21
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patients treated to date, three suffered what were considered to be drug-related
serious adverse events at high levels of drug presentation above the predicted
efficacy range. These events included a skin reaction due to the subcutaneous
method of administration in the study; hypotension, and thrombocytopenia. These
patients were removed from the study and recovered from the reaction. The
patient who had experienced hypotension was later rechallenged at a lower dose
without any untoward event. The investigators at the Royal Marsden Hospital have
recently initiated a Phase II trial in lymphoma using G3139 in addition to a
chemotherapeutic regimen which in the specific patient had failed to produce a
response.
The Company has an IND, granted by the FDA in December 1996, to initiate
clinical trials under an IND for the use of G3139. The Company also initiated
several trials in 1998 and the on-going trials are summarized in the table
below. Additional trials are also under review.
Status of G3139 Clinical Trials
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<TABLE>
<CAPTION>
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<S> <C> <C> <C>
Trial Location/Investigator Status Indication Treatment
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Royal Marsden Hospital Phase I Completed Non-Hodgkin's Lymphoma G3139
David Cunningham, MD
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Royal Marsden Hospital Phase II in Non-Hodgkin's Lymphoma G3139 with Standard
David Cunningham, MD Progress Chemo Regimens
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MSKCC Phase I in Androgen Insensitive G3139
Howard Scher, MD Progress Metastatic Prostate Cancer
and Other Solid Tumors
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Sidney Kimmel Cancer Center Phase I/IIA in Androgen Insensitive G3139 with Androgen
John Gutheil, MD Progress Metastatic Prostate Cancer Blockade
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University of Vienna Phase I/IIA in Metastatic Malignant G3139 with DTK
Burkhard Jansen, MD Progress Melanoma
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British Columbia Cancer Agency Phase I/IIA in Androgen Insensitive G3139 with Mitoxantrone
Richard Klasa, MD Progress Metastatic Prostate Cancer
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British Columbia Cancer Agency Phase I/IIA in Non-Hodgkin's Lymphoma G3139 with
Richard Klasa, MD Progress Cyclophosphamide
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</TABLE>
In addition, the Company has had discussions with the National Cancer
Institute ("NCI") regarding additional Phase I and II clinical trials. Assuming
the Company and NCI agree to move forward with such NCI sponsored trials, the
Company will collaborate with NCI on the design of such clinical studies and the
selection of tumor targets. Under the arrangement, NCI would cover the costs of
running both pre-clinical and clinical studies while Genta would be responsible
for supplying NCI with necessary quantities of G3139 to carry out this work. See
"MD&A--Certain Trends and Uncertainties--No Assurance of Regulatory Approval;
Government Regulation," "MD&A--Certain Trends and Uncertainties--Dependence on
Others" and "MD&A--Certain Trends and Uncertainties--Uncertainty of Clinical
Trials and Results."
On March 31, 1998, the United States Patent and Trademark Office issued
a patent to which the Company has an exclusive license, for claims covering
antisense oligonucleotide compounds targeted against bcl-2. These claims cover
the Company's proprietary Anticode(TM) oligonucleotide molecules that target
bcl-2, including its lead clinical candidate, G3139. Other related patents and
claims in the United States and corresponding foreign patent applications are
still pending. See "MD&A--Certain Trends and Uncertainties--Uncertainty
Regarding Patents and Proprietary Technology."
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Oligonucleotide Collaborative and Licensing Agreements.
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Gen-Probe (Chugai). In February 1989, Genta entered into a development,
license and supply agreement with Gen-Probe Incorporated ("Gen-Probe"). Chugai
Pharmaceutical Company, Ltd. ("Chugai"), a Japanese corporation, subsequently
acquired Gen-Probe. Gen-Probe had the option to acquire an exclusive worldwide
license to any product consisting of, including, derived from or based on
oligonucleotides for the treatment or prevention of Epstein-Barr virus,
cytomegalovirus, HIV, human T-cell leukemia virus-1 and all leukemias and
lymphomas. Genta was obligated to pursue the development of a therapeutic
compound for the treatment of one of these indications as its first therapeutic
development program, which it did. In February 1996, Gen-Probe elected not to
exercise such option with respect to Genta's anti-bcl-2 products, waiving any
rights it may have had to develop or commercialize such products. The Gen-Probe
agreement provides for perpetual worldwide licenses in applicable proprietary
rights; royalty payments shall not accrue beyond the later of fifteen years
after the first commercial sale of each product and the duration of patent in
the country of sale.
Ts'o/Miller/Hopkins. In February 1989, the Company entered into a
license agreement with Drs. Paul Ts'o and Paul Miller (the "Ts'o/Miller
Agreement") pursuant to which Drs. Ts'o and Miller (the "Ts'o/Miller
Partnership") granted an exclusive license to the Company to certain issued
patents, patent applications and related technology regarding the use of nucleic
acids and oligonucleotides including methylphosphonates as pharmaceutical
agents. Dr. Ts'o is a Professor of Biophysics, Department of Biochemistry, and
Dr. Miller is a Professor of Biochemistry, both at the School of Public Health
and Hygiene, Johns Hopkins University ("Johns Hopkins"). In May 1990, the
Company entered into a license agreement with Johns Hopkins (the "Johns Hopkins
Agreement," and collectively with the Ts'o/Miller Agreement, referred to herein
as the "Ts'o/Miller/Hopkins Agreements") pursuant to which Johns Hopkins granted
Genta an exclusive license to its rights in certain issued patents, patent
applications and related technology developed as a result of research conducted
at Johns Hopkins by Drs. Ts'o and Miller and related to the use of nucleic acids
and oligonucleotides as pharmaceutical agents. In addition, Johns Hopkins
granted Genta certain rights of first negotiation to inventions made by Drs.
Ts'o and Miller in their laboratories in the area of oligonucleotides and to
inventions made by investigators at Johns Hopkins in the course of research
funded by Genta, which inventions are not otherwise included in the
Ts'o/Miller/Hopkins Agreements. Genta had agreed to pay Dr. Ts'o, Dr. Miller and
Johns Hopkins royalties on net sales of products covered by the issued patents
and patent applications, but not the related technology, licensed to the Company
under the Ts'o/Miller/Hopkins Agreements. The Company also agreed to pay certain
minimum royalties prior to commencement of commercial sales of such products,
which royalties may be credited under certain conditions against royalties
payable on subsequent sales.
On February 14, 1997, the Company received notice from Johns Hopkins
that the Company was in material breach of the Johns Hopkins Agreement. The
Johns Hopkins Agreement provides that, if a material payment default is not
cured within 90 days of receipt of notice of such breach, Johns Hopkins may
terminate the Johns Hopkins Agreement. In February 1997, the Company paid Johns
Hopkins $100,000 towards the post-doctoral support program. On May 15, 1997,
Johns Hopkins sent Genta a letter stating that the Johns Hopkins Agreement was
terminated. On November 26, 1997, the Ts'o/Miller Partnership sent Genta a
letter claiming that Genta was in material breach of the Ts'o/Miller Agreement
for failing to pay royalties from 1995 through 1997. By letter dated April 28,
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1998, the Ts'o/Miller Partnership advised the Company that it was terminating
the license granted pursuant to the Ts'o/Miller Agreement. On June 4, 1998, the
Company's statutory process agent received a Summons and Complainpt in a lawsuit
brought by Johns Hopkins against the Company in Maryland Circuit Court for
Baltimore City (Case No. 98120110). Johns Hopkins alleges in the Complaint that
the Company has breached the Johns Hopkins Agreement and owes it licensing
royalty fees and related expenses in the amount of $308,832.24. Johns Hopkins
also alleges the existence of a separate March 1993 letter agreement wherein the
Company agreed to support a fellowship program at the Johns Hopkins School of
Hygiene and Public Health and the Company's breach thereof, with damages of
$326,829.00. On August 10, 1998, the Company's statutory process agent received
a Summons and Complaint in a related lawsuit brought by the Ts'o/Miller
Partnership and others against the Company in the same court (Case No.
98182113). The Ts'o/Miller Partnership claims that it is owed licensing royalty
fees in the amount of $287,671.23. The Company is currently in settlement
negotiations. The Company believes that no further accrual is necessary pursuant
to this settlement.
Based on a review of the research conducted with the technology provided
by these licenses, the Company concluded that it could not develop potential
products using this technology. Management's current strategy, therefore, is to
employ alternative technologies that are available to it through other licenses
or its own intellectual property. Accordingly, the Company believes no
additional accrual is necessary and the Company does not believe that the
termination of the Ts'o/Miller/Hopkins Agreements will have a material adverse
effect on the Company's antisense research and development activities.
Genta Jago
As previously mentioned, Genta and SkyePharma entered into an interim
agreement pursuant to which the parties to the joint venture released each other
from all liability relating to unpaid development costs and funding obligations,
and SkyePharma agreed to be responsible for substantially all of 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 therefrom to be
allocated in agreed-upon percentages between Genta and SkyePharma as set forth
in such interim agreement. Historical information relative to Genta Jago
follows.
In 1992, Genta and Jagotec determined to enter into a joint venture
(Genta Jago). The Company's purpose in establishing Genta Jago was to develop
products using a limited-scope license to Jagotec's GEOMATRIX technology in the
hopes of producing shorter-term earnings than were expected from the Company's
Anticode(TM) antisense programs. Genta contributed $4 million in cash to Genta
Jago as well as the rights to apply its Anticode(TM) oligonucleotide technology
to six products. Genta issued 120,000 shares of Common Stock valued at $7.2
million to Jagotec and its affiliates in 1992 as consideration for its interest
in Genta Jago, to induce Jagotec to license to Genta Jago, for what the parties
believed was a substantial discount from the underlying value of such license,
Jagotec's GEOMATRIX technology with respect to approximately 25 products (the
"Initial License") and to license to Genta Jagotec's GEOMATRIX technology for
use in Genta's Anticode(TM) oligonucleotide development programs. The Common
Stock issued by Genta was unregistered and therefore was recorded at a discount
to the then-current trading value of registered shares. Jagotec's contribution
to the joint venture consisted of its issuance of the Initial License to Genta
Jago for $425,000, which the parties believed to be a substantial discount from
the underlying value of such license.
In 1994, separate from the original 1992 joint venture agreement, Genta
and Jagotec began negotiations to expand Genta Jago to include the GEOMATRIX
technology as applied to 35 additional products (the "Additional License"). In
1994, Jagotec granted Genta, for $1.85 million, an option (the "Expansion
Option"), exercisable solely at Genta's discretion through April 30, 1995, to
expand the joint venture by requiring Jagotec to contribute rights under the
Additional License at what the parties believed was a substantial discount to
its actual fair value. An additional $2.0 million (the "Deposit") was deposited
with Jagotec in 1994, but would only be retained by Jagotec, as partial payment
of the exercise price for the Expansion Option, if Genta actually exercised the
Expansion Option. If such Expansion Option was not exercised, the $2.0 million
Deposit would be transferred to Genta Jago in the form of working capital loans
payable by Genta Jago to Genta.
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Pursuant to the terms of the Expansion Option, for Genta to exercise the
Expansion Option, Genta would have had to pay Jagotec an aggregate of $3.15
million in cash and 124,000 shares of Common Stock, valued at $1.6 million
(based on the trading price at such time). The parties agreed the $3.15 million
in cash would consist of (i) the $2.0 million Deposit made by Genta in 1994,
which would be applied to the Expansion Option's exercise price upon Genta's
election, in 1995, to exercise such Expansion Option; and (ii) an additional
cash payment of $1.15 million to exercise the Expansion Option to be paid by
Genta in 1995. In 1995, Genta exercised the Expansion Option.
The Company has provided funding to Genta Jago pursuant to a working
capital loan agreement that expired in October 1998. The Company believes it has
fulfilled all obligations of the working capital agreement to the Joint Venture.
See "MD&A--Liquidity and Capital Resources." From 1992 through 1997, Genta
advanced an aggregate of $15.8 million in such working capital loans. In 1995,
Genta Jago returned the Anticode(TM) technology to Genta in exchange for Genta's
forgiveness of $4.4 million of principal and $0.3 million of interest
outstanding under existing working capital loans to Genta Jago. This amount was
determined by an arm's-length negotiation between Genta, Jagotec, and Genta Jago
and was based on the amount actually expended by Genta Jago for research and
development related to the Anticode(TM) technology from the time Genta Jago
originally acquired the relevant license in 1992 through the date of return in
1995.
Genta has the option (the "Purchase Option") to purchase Jagotec's
interest in Genta Jago during the period beginning on December 31, 1998 and
continuing through December 31, 2000 at a purchase price equal to the remainder
of (a) the sum of (i) the lesser of (x) 50% of the fair market value of Genta
Jago, excluding the fair market value of Genta Jago's rights to the Initial
License and the Additional License, or (y) $100 million, plus (ii) 50% of the
fair market value of Genta Jago's rights to the Initial License and the
Additional License, less (b) 1.714286 times the fair market value of the 70,000
shares of Common Stock issued to Jagotec pursuant to a Common Stock Transfer
Agreement dated as of December 15, 1992, between Genta and Jagotec.
Genta Jago has contracted with Genta and Jagotec to conduct research and
development and to provide certain other services.
Oral Controlled-Release Drugs.
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Formulations of drugs using the GEOMATRIX technology are designed to
swell and gel when exposed to gastrointestinal fluids. This swelling and gelling
is designed to allow the active drug component to diffuse from the tablet into
the gastrointestinal fluids, gradually over a period of up to 24 hours. The
Company believes that the GEOMATRIX technology may have other benefits that,
collectively, may distinguish it from competing controlled-release technologies.
More specifically, the Company believes these formulations can control drug
release and potentially modulate pharmacokinetic profiles to produce a variety
of desired clinical effects. For example, the GEOMATRIX technology may be used
to formulate tablets with a rapid or a delayed therapeutic effect by varying the
release characteristics of the drug from the tablet. The GEOMATRIX technology
may also be used to formulate tablets that release two drugs at the same or
different rates, or tablets that release a drug in several pulses after
administration.
Genta Jago may use the GEOMATRIX drug delivery technology to develop
oral controlled-release formulations for a broad range of presently marketed
drugs which have lost, or will, in the near to mid-term, lose patent protection
and/or marketing exclusivity. Certain of these presently marketed drugs are
already available in a controlled-release format, while others are only
available in an immediate release format that requires dosing several times
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daily. In the case of drugs already available in a controlled-release format,
Genta Jago is seeking to develop bioequivalent products which would be
therapeutic substitutes for the branded products. In the case of currently
marketed products that are only available in immediate release form requiring
multiple daily dosing, Genta Jago is seeking to develop once or twice-daily
controlled-release formulations. The potential benefits of Genta Jago's oral
controlled-release formulations may include improved compliance, greater
efficacy and reduced side effects as a result of a more constant drug plasma
concentration than that associated with immediate release drugs administered
several times daily.
Brightstone Pharma, Inc., a subsidiary of SkyePharma and the marketing
partner of Genta Jago for naproxen sodium, submitted an abbreviated NDA in 1998.
(Recently, SkyePharma has announced that it no longer plans to market its
generic pharmaceutical candidates exclusively through its Brightstone subsidiary
and is seeking marketing partners for these products.) Nifedipine (Procardia
XL(R)) and ketoprofen (Oruvail(R)) are currently undergoing formulations
development by SkyePharma. In December 1997, a competitor of the Company, Elan
Corporation, received approval of their ANDA for a generic formulation of
Oruvail(R) (ketoprofen), and another company, Mylan Laboratories, Inc., has
filed an ANDA for a generic formulation of Procardia XL(R) (nifedipine). See
"MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of
Technological Change and Competition."
Oral Controlled-Release Collaborative and Licensing Agreements.
- - ---------------------------------------------------------------
Genta Jago's strategy is to commercialize its GEOMATRIX
controlled-release products worldwide by forming alliances with pharmaceutical
companies. Genta Jago has established three such collaborations.
Genta Jago/Gensia/Brightstone. In January 1993, Genta Jago entered into
a collaboration agreement with Gensia for the development and commercialization
of certain oral controlled-release pharmaceutical products for treatment of
cardiovascular disease. Under the agreement, Gensia provides funding for
formulation and preclinical development to be conducted by Genta Jago and is
responsible for clinical development, regulatory submissions and marketing.
Terms of the agreement provide Gensia exclusive rights to market and distribute
the products in North America, Europe and certain other countries. The agreement
has a term of the longer of twelve years and the patent term in the respective
countries within the territory. Genta Jago received $1.0 million, $1.2 million
and $2.2 million of funding in 1998, 1997, and 1996, respectively, pursuant to
the agreement. Collaborative revenues of $2.2 million, $1.5 million and $2.8
million and were recognized under the agreement during the years ended December
31, 1998, 1997, and 1996, respectively. Effective October 1996, Gensia and
SkyePharma reached an agreement whereby a SkyePharma subsidiary, Brightstone
Pharma, Inc. ("Brightstone"), was assigned Gensia's rights (and those of
Gensia's partner, Boehringer Mannheim) to develop and co-promote the potentially
bioequivalent nifedipine product under the collaboration agreement with Genta
Jago. The assignment was accepted by Genta Jago and has no impact on the terms
of the original agreement. Genta Jago is still entitled to receive additional
milestone payments from Brightstone triggered upon regulatory submissions
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and approvals, as well as royalties or profit sharing ranging from 10% to 21% of
product sales, if any.
Genta Jago/Apothecon. In March 1996, Genta Jago entered into a
collaborative licensing and development agreement (the "Genta Jago/Apothecon
Agreement") with Apothecon, Inc. ("Apothecon"). In 1998, Apothecon advised Genta
Jago that it was terminating its license. Genta Jago is seeking an alternative
partner for future development and marketing of this product.
Genta Jago/Krypton. In October 1996, Genta Jago entered into five
collaborative licensing and development agreements (the "Genta Jago/Krypton
Agreements") with Krypton, Ltd. ("Krypton"), a subsidiary of SkyePharma, whereby
Genta Jago would sublicense to Krypton rights to develop and commercialize
potentially bioequivalent GEOMATRIX(R) versions of five currently marketed
products, as well as another agreement granting Krypton an option to sublicense
rights to develop and commercialize an improved version of a sixth product. The
Genta Jago/Krypton Agreements have terms of the shorter of fifteen years from
first commercial sale and the expiration of the patent term on a
territory-by-territory basis. During 1997, Genta Jago received funding of $1.9
million under the Genta Jago/Krypton Agreements and recognized $2.3 million of
collaborative revenue therefrom. There were no revenues under this agreement in
1998.
Research and Development
In an effort to focus its research and development efforts on areas that
provide the most significant commercial opportunities, the Company continually
evaluates its ongoing programs in light of the latest market information and
conditions, availability of third-party funding, technological advances, and
other factors. As a result of such evaluation, the Company's product development
plans have changed from time to time, and the Company anticipates that they will
continue to do so in the future. The Company recorded research and development
expenses of $4.6 million, $3.3 million, and $2.1 million during 1996, 1997, and
1998, respectively, of which approximately $50,000, $50,000 and zero,
respectively, were funded pursuant to collaborative research and development
agreements and of which approximately $1.6 million, $0.3 million, and $0.1
million, respectively, were funded pursuant to a related party contract revenue
agreement with Genta Jago. See "MD&A--Results of Operations."
Manufacturing/JBL
On March 19, 1999, the Company signed an Asset Purchase Agreement with
Promega Corporation whereby a wholly-owned subsidiary of Promega will acquire
substantially all of the assets and certain liabilities of JBL. The transaction
will be consummated upon the satisfaction of certain closing conditions. The
accompanying financial information therefore reflects JBL as a discontinued
operation for all periods presented.
All of the Company's product sales are attributable to its manufacturing
subsidiary, JBL Scientific, Inc. ("JBL"). The products JBL manufactures include:
enzyme substrates that are used as color-generating reagents in clinical
diagnostic tests, such as pregnancy tests, developed by JBL's customers; and
fine chemical raw materials used in pharmaceutical research and development and
manufacturing, such as those used to make biological polymers like peptides and
oligonucleotides. JBL manufactures approximately 110-125 products on a recurring
basis.
Genta acquired JBL in early 1991. JBL is a manufacturer of high-quality
specialty chemicals and intermediate products for the pharmaceutical and in
vitro diagnostic industries. A number of Fortune 500 companies use JBL products
as raw material in the production of a final product. JBL markets its products
to over 100 purchasers in the pharmaceutical and diagnostic industries. See
"MD&A--Certain Trends and Uncertainties--Difficult Manufacturing Process; Access
to Certain Raw Materials." JBL holds a California site license to manufacture
drugs for use in clinical research, but the manufacturing facilities at JBL have
not been inspected by the FDA for compliance with requirements for Good
Manufacturing Practices ("GMP"). The Company is currently having G3139 made on a
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contract manufacturing basis by a third party supplier and is evaluating the
establishment of affiliate relationships with third parties for the long term
manufacture of oligonucleotides. See "MD&A--Certain Trends and
Uncertainties--Difficult Manufacturing Process; Access to Certain Raw
Materials."
On March 19, 1999, the Company signed an Asset Purchase Agreement with
Promega Corporation whereby a wholly owned subsidiary of Promega will acquire
substantially all of the assets and certain liabilities of JBL. The transaction
will be consummated upon the satisfaction of certain closing conditions. The
accompanying financial information therefore reflects JBL as a discontinued
operation for all periods presented.
Genta Europe
During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe") received
approximately 5.4 million French Francs (or, as of April 8, 1999, approximately
$885,060) 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 Genta. 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. The Company does not believe that under the terms of the
ANVAR Agreement ANVAR is entitled to request early repayment. ANVAR notified
Genta Incorporated that it was responsible as a guarantor of the note for the
repayment. Genta's agent in Europe has again notified ANVAR that it 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.
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. The
Company's attorney in France notified the plaintiff of the decision and that
they have 30 days from such notice to appeal. The 30-day appeal period has
elapsed and the Company is awaiting formal notification by the court that an
appeal has not been made. The decision of the Court in Marseilles does not
preclude Marseille Amenagement from pursuing its claims in other courts in
France or the United States, and there can be no assurance that they will not do
so.
Sales and Marketing
Genta Jago has secured collaborative agreements with three entities for
the development and commercialization of selected controlled-release
pharmaceuticals. See "Genta Jago--Oral Controlled-Release Collaborative and
Licensing Agreements." Genta Jago's collaborative agreements generally provide
the collaborative partner exclusive rights to market and distribute the products
in exchange for royalty payments to Genta Jago on product sales. Genta Jago's
goal is to form additional collaborations to develop and market a number of its
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GEOMATRIX controlled-release products. There can be no assurance that any such
potential product will be successfully developed or that any prospective
collaborations or licensing arrangements will be entered into.
Patents and Proprietary Technology
The Company's policy is to protect its technology by, among other
things, filing patent applications with respect to technology considered
important to the development of its business. The Company also relies upon trade
secrets, unpatented know-how, continuing technological innovation and the
pursuit of licensing opportunities to develop and maintain its competitive
position.
Genta has a portfolio of intellectual property rights to aspects of
oligonucleotide technology, which includes novel compositions of matter, methods
of large-scale synthesis, methods of controlling gene expression and cationic
lipid delivery systems. In addition, foreign counterparts of certain
applications have been filed or will be filed at the appropriate time. Allowed
patents generally would not expire until 17 years after the date of allowance if
filed in the United States before June 8, 1995 or, in other cases, 20 years from
the date of application. Generally, it is the Company's strategy to apply for
patent protection in the United States, Canada, Western Europe, Japan, Australia
and New Zealand.
Since its incorporation, Genta has separately filed an aggregate of over
400 United States and foreign patent applications covering new compositions and
improved methods to use, synthesize and purify oligonucleotides, linker-arm
technology, and compositions for their delivery. Thirty patents have been
issued; seventeen in the United States (thirteen in 1998), and thirteen have
issued overseas.
Under the agreement with Gen-Probe, Genta gained non-exclusive access to
all technology developed by Gen-Probe, as of February 1989, related to the use
of DNA probes for therapeutic applications. This technology is related to
nucleic acid probes for quantitation of organisms and viruses, methods for their
production, including nonnucleotide linking reagents, labeling, and
purification, and methods for their use including hybridization and enhanced
hybridization. This includes rights to 14 issued patents and several pending
United States patent applications and corresponding issued and pending
applications in foreign countries. See "Genta Jago--Oligonucleotide
Collaborative and Licensing Agreements--Gen-Probe (Chugai)."
Genta also gained access to certain rights from the National Institutes
of Health ("NIH") covering phosphorothioate oligonucleotides. This includes
rights to three United States issued patents, one issued European patent and
other corresponding foreign applications that are still pending. In addition,
under an agreement with the University of Pennsylvania, Genta has acquired
exclusive rights to antisense oligonucleotides directed against the bcl-2 gene
as well as methods of their use for the treatment of cancer. On March 31, 1998
and November 3, 1998, two United States patents were issued encompassing the
Company's licensed antisense oligonucleotide compounds targeted against the
bcl-2 gene and in vitro uses of the same. These claims cover the Company's
proprietary Anticode(TM) oligonucleotide molecules which target the bcl-2 gene
including its lead clinical candidate, G3139. Other related United States and
corresponding foreign patent applications are still pending.
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Jagotec's GEOMATRIX technology is the subject of issued patents and
pending applications. Jagotec currently holds four issued United States patents,
five granted foreign patents, and other corresponding foreign patent
applications still pending that cover the GEOMATRIX technology. Certain rights
to GEOMATRIX technology have been licensed to Genta Jago. See "Genta Jago."
The patent positions of biopharmaceutical and biotechnology firms,
including Genta, can be uncertain and involve complex legal and factual
questions. Consequently, even though Genta is currently prosecuting its patent
applications with the United States and foreign patent offices, the Company does
not know whether any of its applications will result in the issuance of any
patents or if any issued patents will provide significant proprietary protection
or will be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, Genta cannot be certain that others have not
filed patent applications directed to inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions.
Competitors or potential competitors may have filed applications for, or
have received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes competitive with those of the Company. See
"Competition." Accordingly, there can be no assurance that the Company's patent
applications will result in issued patents or that, if issued, the patents will
afford protection against competitors with similar technology; nor can there be
any assurance that any patents issued to Genta will not be infringed or
circumvented by others; nor can there be any assurance that others will not
obtain patents that the Company would need to license or design around. There
can be no assurance that the Company will be able to obtain a license to
technology that it may require or that, if obtainable, such a license would be
available on reasonable terms.
There can be no assurance that the Company's patents, if issued, would
be held valid by a court of competent jurisdiction. Moreover, the Company may
become involved in interference proceedings declared by the United States Patent
and Trademark Office (or comparable foreign office or process) in connection
with one or more of its patents or patent applications to determine priority of
invention, which could result in substantial cost to the Company, as well as a
possible adverse decision as to priority of invention of the patent or patent
application involved.
The Company also relies upon unpatented trade secrets and no assurance
can be given that third parties will not independently develop substantially
equivalent proprietary information and techniques or gain access to the
Company's trade secrets or disclose such technologies to the public, or that the
Company can meaningfully maintain and protect unpatented trade secrets.
Genta requires its employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. The agreement generally provides that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Genta shall be kept confidential
and shall not be disclosed to third parties except in specific circumstances. In
the case of employees, the agreement generally provides that all inventions
conceived by the individual shall be assigned to, and made the exclusive
property of, the Company. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets or
adequate remedies in the event of unauthorized use or disclosure of such
information, or in the event of an employee's refusal to assign any patents to
the Company in spite of such contractual obligation. See "MD&A--Certain Trends
and Uncertainties--Uncertainty Regarding Patents and Proprietary Technology."
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Government Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of the
Company's proposed products and in its ongoing research and product development
activities. All of the Company's therapeutic products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and premarket approval procedures by the FDA and similar authorities in
foreign countries. Various federal, and in some cases state, statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The lengthy process of
seeking these approvals, and the subsequent compliance with applicable federal,
and in some cases state, statutes and regulations, require the expenditure of
substantial resources. Any failure by the Company, its collaborators or its
licensees to obtain, or any delay in obtaining, regulatory approvals could
adversely affect the marketing of any products developed by the Company and its
ability to receive product or royalty revenue.
The activities required before a new pharmaceutical agent may be
marketed in the United States begin with preclinical testing. Preclinical tests
include laboratory evaluation of product chemistry and animal studies to assess
the potential safety and efficacy of the product and its formulations. The
results of these studies must be submitted to the FDA as part of an IND. An IND
becomes effective within 30 days of filing with the FDA unless the FDA imposes a
clinical hold on the IND. In addition, the FDA may, at any time, impose a
clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold,
clinical trials cannot commence or recommence, as the case may be, without prior
FDA authorization and then only under terms authorized by the FDA. Typically,
clinical testing involves a three-phase process. In Phase I, clinical trials are
conducted with a small number of subjects to determine the early safety profile
and the pattern of drug distribution and metabolism. In Phase II, clinical
trials are conducted with groups of patients afflicted with a specific disease
in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety. In Phase III, large-scale, multi-center, comparative
clinical trials are conducted with patients afflicted with a target disease in
order to provide enough data for the statistical proof of efficacy and safety
required by the FDA and others. In the case of products for life-threatening
diseases, the initial human testing is generally done in patients rather than in
healthy volunteers. Since these patients are already afflicted with the target
disease, it is possible that such studies may provide results traditionally
obtained in Phase II trials. These trials are frequently referred to as "Phase
I/IIa" trials.
The results of the preclinical and clinical testing, together with
chemistry, manufacturing and control information, are then submitted to the FDA
for a pharmaceutical product in the form of a New Drug Application ("NDA"), for
a biological product in the form of a Product License Application ("PLA") or for
medical devices in the form of a Premarket Approval Application ("PMA") for
approval to commence commercial sales. In responding to an NDA, PLA or PMA, the
FDA may grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. There can be no assurance that approvals will be
granted on a timely basis, if at all, or if granted will cover all the clinical
indications for which the Company is seeking approval or will not contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
In circumstances where a company intends to develop and introduce a
novel formulation of an active drug ingredient already approved by the FDA,
clinical and preclinical testing requirements may not be as extensive. Limited
additional data about the safety and/or effectiveness of the proposed new drug
formulation, along with chemistry and manufacturing information and public
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information about the active ingredient, may be satisfactory for product
approval. Consequently, the new product formulation may receive marketing
approval more rapidly than a traditional full NDA, although no assurance can be
given that a product will be granted such treatment by the FDA.
For clinical investigation and marketing outside the United States, the
Company is or may be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. The Company's approach is to design its European
clinical trials studies to meet FDA, European Economic Community ("EEC") and
other European countries' standards. At present, the marketing authorizations
are applied for at a national level, although certain EEC procedures are
available to companies wishing to market a product in more than one EEC member
state. If the competent authority is satisfied that adequate evidence of safety,
quality and efficacy has been presented, a market authorization will be granted.
The registration system proposed for medicines in the EEC after 1992 is a dual
one in which products, such as biotechnology and high technology products and
those containing new active substances, will have access to a central regulatory
system that provides registration throughout the entire EEC. Other products will
be registered by national authorities under the local laws of each EEC member
state. With regulatory harmonization finalized in the EEC, the Company's
clinical trials will be designed to develop a regulatory package sufficient for
multi-country approval in the Company's European target markets without the need
to duplicate studies for individual country approvals. This approach also takes
advantage of regulatory requirements in some countries, such as in the United
Kingdom, which allow Phase I studies to commence after appropriate toxicology
and preclinical pharmacology studies, prior to formal regulatory approval.
Prior to the enactment of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman/Hatch Act"), the FDA, by regulation,
permitted certain pre-1962 drugs to be approved under an abbreviated procedure
which waived submission of the extensive animal and human studies of safety and
effectiveness normally required to be in a NDA. Instead, the manufacturer only
needed to provide an Abbreviated New Drug Application ("ANDA") containing
labeling, information on chemistry and manufacturing procedures and data
establishing that the original "pioneer" product and the proposed "generic"
product are bioequivalent when administered to humans.
Originally, the FDA's regulations permitted this abbreviated procedure
only for copies of a drug that was approved by the FDA as safe before 1962 and
which was subsequently determined by the FDA to be effective for its intended
use. In 1984, the Waxman/Hatch Act extended permission to use the abbreviated
procedure established by the FDA to copies of post-1962 drugs subject to the
submission of the required data and information, including data establishing
bioequivalence. However, effective approval of such ANDAs were dependent upon
there being no outstanding patent or non-patent exclusivities.
Additionally, the FDA allows, under section 505(b)(2) of the Food Drug
and Cosmetic Act, for the submission and approval of a hybrid application for
certain changes in drugs which, but for the changes, would be eligible for an
effective ANDA approval. Under these procedures the applicant is required to
submit the clinical efficacy and/or safety data necessary to support the changes
from the ANDA eligible drug (without submitting the basic underlying safety and
efficacy data for the chemical entity involved) plus manufacturing and chemistry
data and information. Effective approval of a 505(b)(2) application is dependent
upon the ANDA-eligible drug upon which the applicant relies for the basic safety
and efficacy data being subject to no outstanding patent or non-patent
exclusivities. As compared to a NDA, an ANDA or a 505(b)(2) application
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typically involves reduced research and development costs. However, there can be
no assurance that any such applications will be approved. Furthermore, the
supply of raw materials must also be approved by the FDA.
The Company is also subject to various foreign, federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, manufacture, storage, handling and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research and development work and
manufacturing processes. Although the Company believes it is in compliance with
these laws and regulations in all material respects (except as disclosed under
"MD&A--Liquidity and Capital Resources"), there can be no assurance that the
Company will not be required to incur significant costs to comply with such
regulations in the future. See "MD&A--Certain Trends and Uncertainties--No
Assurance of Regulatory Approval; Government Regulation."
Competition
For many of their applications, the Company's and Genta Jago's products
under development will be competing with existing therapies for market share. In
addition, a number of companies are pursuing the development of antisense
technology and controlled-release formulation technology and the development of
pharmaceuticals utilizing such technologies. The Company competes with fully
integrated pharmaceutical companies that have more substantial experience,
financial and other resources and superior expertise in research and
development, manufacturing, testing, obtaining regulatory approvals, marketing
and distribution. Smaller companies may also prove to be significant
competitors, particularly through their collaborative arrangements with large
pharmaceutical companies or academic institutions. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations have conducted and will continue to conduct research, seek patent
protection and establish arrangements for commercializing products. Such
products may compete directly with any products that may be offered by the
Company. In December 1997, a competitor of the Company, Elan Corporation,
received approval of their ANDA for a generic formulation of Oruvail(R)
(ketoprofen), and another company, Mylan Laboratories, Inc., filed an ANDA for a
generic formulation of procardia XL(R) (nifedipine). See "MD&A--Certain Trends
and Uncertainties--Potential Adverse Effect of Technological Change and
Competition."
The Company's competition will be determined in part by the potential
indications for which the Company's products are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of the Company's or competitors' products. See "MD&A--Certain
Trends and Uncertainties--Potential Adverse Effect of Technological Change and
Competition." Accordingly, the relative speed with which Genta and Genta Jago
can develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market are expected to be
important competitive factors. The Company expects that competition among
products approved for sale will be based, among other things, on product
efficacy, safety, reliability, availability, price, patent position and sales,
marketing and distribution capabilities. The development by others of new
treatment methods could render the Company's and Genta Jago's products under
development non-competitive or obsolete.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often substantial period between technological conception and
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commercial sales. See "MD&A--Certain Trends and Uncertainties--Need for and
Dependence on Qualified Personnel," "MD&A--Certain Trends and
Uncertainties--Uncertainty Regarding Patents and Proprietary Technology" and
"MD&A--Certain Trends and Uncertainties--Need for Additional Funds; Risk of
Insolvency."
JBL's products address several markets, including clinical chemistry,
diagnostics, molecular biology and pharmaceutical development. While many
customers have specified JBL products in their manufacturing protocols,
competition from several international competitors, many of whom have more
substantial experience, financial and other resources and superior expertise in
research and development, manufacturing, testing, obtaining regulatory
approvals, marketing and distribution, could undermine JBL's competitive
position. Competition has come primarily on price for some key JBL products for
pharmaceutical development, and from competing technologies in diagnostics and
molecular biology.
Human Resources
As of April 1, 1999, Genta, JBL and Genta Europe had eight, 50 and zero
employees, respectively, 10 of whom held doctoral degrees. Eleven employees were
engaged in research and development activities, of which 9 were JBL, 27 were
engaged in manufacturing (all of which were JBL) and 20 were in administration,
sales and marketing positions (of which 14 were JBL). Most of the management and
professional employees of the Company and JBL have had prior experience and
positions with pharmaceutical and biotechnology companies. Genta believes it
maintains satisfactory relations with its employees.
In 1998, Genta Europe terminated its sole employee. The Company's
overall staff was increased by a net of six employees in 1998, and one more to
date in 1999. In October and November the Company hired two Vice Presidents, one
for Corporate Development and one for Clinical and Regulatory Affairs. In
February 1999, the Company hired a Vice President and Chief Financial Officer.
See "MD&A--Certain Trends and Uncertainties--Need for and Dependence on
Qualified Personnel."
ITEM 2. PROPERTIES
Genta's principal administrative offices were located in San Diego,
California where the Company occupied approximately 8,500 square feet. Effective
March 1, 1998, the Company reduced its leased space in San Diego to 4,732 square
feet and closed its laboratory facilities at this site. The Company further
reduced its leased space in December 1, 1998 to 3,944 square feet. The Company
moved its headquarters to Lexington, Massachusetts, and entered into a two year
lease effective April 1, 1999 for 2,400 square feet.
JBL leases and occupies approximately 30,000 square feet of office,
laboratory and manufacturing space in San Luis Obispo, California. This lease
expires in 2000. The lease calls for rent of approximately $414,200 in 1999 with
amounts generally increasing annually thereafter to reflect cost of living
related increases. The Company currently uses substantially all of the
manufacturing capacity of this facility. The Company also has an option to
purchase property adjacent to this facility, for expansion, if necessary. A
director and officer and another officer of the Company, Drs. Klem and Brown,
respectively, are affiliated with the owners of the leased and adjacent
properties. See "Business".
Genta Pharmaceuticals Europe, S.A., the Company's European subsidiary,
leased approximately 10,000 square feet of office, laboratory and manufacturing
space in Marseilles, France. The lease was cancelable in 2003 and expired in
2005. In June 1998, Marseille Amenagement, a company affiliated with the city of
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Marseilles, France, filed suit in France to evict Genta Europe from its
facilities in Marseille. Following the filing of this claim and in consideration
of the request for payment of the loan from the ANVAR, Genta Europe's Board of
Directors directed management to declare a "Cessation of Payment". In December
1998, the Court in Marseilles dismissed the case against Genta Europe and
indicated that it had no jurisdiction against Genta Incorporated. The Company's
attorney notified the plaintiff of the decision and that they have 30 days from
such notice to appeal. The 30-day period has elapsed and the Company is awaiting
formal notification by the court that an appeal has not been made. The decision
of the Court in Marseilles does not preclude Marseille Amenagement from pursuing
its claims in other courts in France or the United States, and there can be no
assurance that they will not do so.
ITEM 3. LEGAL PROCEEDINGS
On June 4, 1998, the Company's statutory process agent received a
Summons and Complaint in a lawsuit brought by Johns Hopkins against the Company
in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins
alleges in the Complaint that the Company has breached the Johns Hopkins
Agreement (see "Business--Anticode(TM) Brand of Antisense Oligonucleotide
Programs -- Oligonucleotide Collaborative and Licensing Agreements --
Ts'o/Miller/Hopkins") and owes it licensing royalty fees and related expenses in
the amount of $308,832.24. Johns Hopkins also alleges the existence of a
separate March 1993 letter agreement wherein the Company agreed to support a
fellowship program at the Johns Hopkins School of Hygiene and Public Health and
the Company's breach thereof, with damages of $326,829.00. On August 10, 1998,
the Company's statutory process agent received a Summons and Complaint in a
related lawsuit brought by the Ts'o/Miller Partnership and others against the
Company in the same court (Case No. 98182113). The Ts'o/Miller Partnership
claims that it is owed licensing royalty fees in the amount of $287,671.23. The
Company is currently in settlement negotiations. The Company believes that no
further accrual is necessary pursuant to this settlement.
On June 30, 1998, Marseille Amenagement, the manager of the Company's
facilities in Marseilles, served notice of a suit in Marseilles, France to the
Director General of the Company's subsidiary, Genta Europe. On July 30, 1998,
the Company's office in San Diego, California was also served notice of the
suit. The suit seeks the payment of unpaid past rents in the amount of
473,464.50 FF (as of April 8, 1999, approximately $77,601), the removal of the
Company from the facility and an indemnity payment of 1,852,429 FF (as of April
8, 1999, approximately $303,613),
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<PAGE>
which is allegedly equal to the balance of the first nine years' rent. On July
1, 1998, the ANVAR notified Genta Europe by letter of its claim that the Company
remains liable for 4,187,423 FF (as of April 8, 1999, approximately $686,319),
and is required to pay this amount immediately. In view of these events, the
Board of Directors of Genta Europe directed the Director General to declare
"Cessation of Payment" in the commercial court of France, which declaration was
made in July 1998. 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. The
Company's attorney in France notified the plaintiff of the decision and that
they have 30 days from such notice to appeal. The 30-day appeal period has
elapsed and the Company is awaiting formal notification by the court that an
appeal has not been made. The decision of the Court in Marseilles does not
preclude Marseille Amenagement from pursuing its claims in other courts in
France or the United States, and there can be no assurance that they will not do
so.
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. JBL is
conducting a quarterly groundwater monitoring program, under the supervision of
the California Regional Water Quality Control Board, for purposes of determining
whether the levels of chloroform and perchloroethylenes ("PCEs") have decreased
over time. The results of the latest sampling conducted by JBL show that PCEs
and chloroform have decreased in all but one of the monitoring sites. 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 de minimis PRPs will be
required to pay as little as $75,000 and as much as $750,000 to settle their
potential liability, depending upon the volume of wastes attributed to them. The
Company received an estimated volume calculation from the EPA, and a response,
which is due on June 9, 1999, is currently under review. While the terms of the
settlement with the EPA have not been finalized, they should contain standard
contribution protection and release language. The Company has accrued $75,000
during 1998. 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.
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<PAGE>
LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based
broker/dealer, asserted claims against the Company and others, including
Paramount Capital Inc., of which Dr. Rosenwald is the sole stockholder and Mr.
Weiss was a Senior Managing Director, and various related entities and persons.
LBC's claims relate to the alleged breach by the Company of certain letter
agreements, allegedly entered into by LBC and the Company in 1995 and 1996 with
respect to brokerage and/or investment banking services, particularly in
connection with a $3 million investment, for which LBC was seeking a fee. LBC
sought damages in the form of cash (in excess of $4 million), stock, warrants,
and other securities. A complaint was filed in the United States District Court
for the Southern District of New York (98 Civ. 2491) by LBC against the Company
and the same other parties.
The Company entered into a Settlement Agreement and Release dated as of
November 30, 1998 (the "Settlement Agreement") with LBC Capital Resources, Inc.
("LBC") and others. Pursuant to the Settlement Agreement, the Company agreed: to
issue to LBC 2,900 shares of Series D Convertible Preferred Stock; to issue to
LBC or its designee five-year warrants (the "LBC Warrants") to acquire 700,000
shares of Common Stock at an exercise price of $0.52 per share; to make certain
payments to LBC totalling approximately $182,000; and to pay to LBC, upon the
exercise of certain warrants, a commission equal to up to $150,000 in the
aggregate. The respective conversion and exercise prices of the Series D
Preferred Stock and the LBC Warrants are subject to adjustment upon the
occurrence of certain events. The fair value attributed to the 2,900 shares of
Series D Preferred Stock and the Class D Warrants approximated $965,000. The
Company provided for $600,000 of this $1,147,000 settlement in 1997 and the
remaining amount in 1998.
(b) The LBC claim was the only material legal proceeding terminated in the
quarter ending December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
Throughout 1996 and in the beginning of 1997, the Company's common stock
was traded on the Nasdaq National Market under the symbol "GNTA." Beginning
February 7, 1997, the Company's common stock traded in the over-the-counter
market on the Nasdaq SmallCap Market, initially under the symbol "GNTAC." During
the 20 trading days immediately following the Company's reverse stock split
effected on April 7, 1997, the Company's common stock traded under the symbol
"GNTCD." Genta resumed trading under the symbol "GNTA" on July 24, 1997. The
following table sets forth, for the periods indicated, the high and low sales
prices for the common stock as reported by Nasdaq (as adjusted for the Reverse
Stock Split).
High Low
1997
First Quarter 9 11/16 2 1/2
Second Quarter 6 1/2 1 3/4
Third Quarter 3 3/4 1 5/16
Fourth Quarter 2 3/4 25/32
1998
First Quarter 1 5/32 3/4
Second Quarter 1 1/2 23/32
Third Quarter 1 5/32 5/8
Fourth Quarter 1 11/32 7/8
1999
First Quarter 3 1 9/32
(b) Holders
There were 386 holders of record of the Company's common stock as of
April 12, 1999.
(c) Dividends
The Company has never paid cash dividends on its common stock and does
not anticipate paying any such dividends in the foreseeable future. In addition,
the Company is restricted from paying cash dividends on its common stock until
such time as all cumulative dividends have been paid on outstanding shares of
its Series A and Series D convertible preferred stocks. The Company currently
intends to retain its earnings, if any, after payment of dividends on
outstanding shares of Series A and Series D convertible preferred stock, for the
development of its business. See "MD&A--Liquidity and Capital Resources."
(d) Recent Sales of Unregistered Securities
In February 1997, the Company raised gross proceeds of $3 million in a
private placement, to The Aries Fund, a Cayman Islands Trust, and the Aries
Domestic Fund, L.P. (collectively the "Aries Funds"), of Convertible Notes and
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<PAGE>
warrants to purchase common stock ("Bridge Warrants"). The Convertible Notes,
together with accrued interest thereon, were converted pursuant to their terms
into an aggregate of 65,415 shares of Series D Preferred Stock, which in turn
are convertible, at $0.94375 per share, into 6,931,391 shares of common stock.
The Bridge Warrants permit the purchase of up to an aggregate of 6,357,616
shares of Common Stock at an exercise price of $0.471875 per share (subject to
adjustment upon the occurrence of certain events). Pursuant to the Note and
Warrant Purchase Agreement dated as of January 28, 1997 between the Company and
the Aries Funds (the "Note and Warrant Purchase Agreement"), the Aries Funds
have the right to appoint a majority of the members of the Board of Directors of
the Company. See "MD&A--Certain Trends and Uncertainties--Certain Interlocking
Relationships; Potential Conflicts of Interest."
On June 6, 1997, the Aries Funds entered into a Line of Credit Agreement
with the Company pursuant to which the Aries Funds provided the Company with a
line of credit of up to $500,000, which subsequently was repaid, in
consideration for warrants (the "Line of Credit Warrants") to purchase 50,000
shares of Common Stock exercisable at $2.50 per share, subject to adjustment
upon the occurrence of certain events.
As of August 27, 1997, the Company entered into separate consulting
agreements with each of Dr. Paul O.P. Ts'o and Dr. Sharon B. Webster (both
former directors of the Company), pursuant to which, in addition to certain
other compensation for consulting services to be rendered thereunder, the
Company issued 15,400 shares of Common Stock to Dr. Ts'o and 15,500 shares of
Common Stock to Dr. Webster.
On June 30, 1997, a total of 161.58 Premium Preferred Units(TM)
("Units") were sold to accredited investors in a private placement (the "Private
Placement"). Such sale was made in reliance on the exemption from registration
pursuant to Rule 506 of Regulation D of the Securities Act. Each unit sold in
the Private Placement consists of 1,000 shares of Premium Preferred Stock(TM)
(Series D Preferred Stock), par value $0.001 per share, stated value $100.00 per
share, and warrants to purchase 5,000 shares of the Company's common stock, par
value $0.001 per share, at any time prior to the fifth anniversary of the final
closing date. A total of $16,158,000 was raised. The net proceeds to the Company
were $13,957,262. The respective conversion and exercise price of the Series D
Preferred Stock and the Class D Warrants is $0.94375 per share of common stock,
subject to adjustment upon the occurrence of certain events. In connection with
the Private Placement, the placement agent -- Paramount Capital, Inc.-- received
cash commissions equal to 9% of the gross sales price and a non-accountable
expense allowance equal to 4% of the gross sales price, and the placement agent
received warrants (the "Placement Warrants") to purchase up to 10% of the Units
sold in the Private Placement for 110% of the offering price per Unit.
Furthermore, the Company has entered into a financial advisory agreement with
the placement agent pursuant to which the financial advisor is entitled to
receive certain cash fees and has received warrants (the "Advisory Warrants") to
purchase up to 15% of the Units sold in the Private Placement for 110% of the
offering price per Unit.
The Company was contractually required to file, and had filed, a
Registration Statement on Form S-3 with the Securities and Exchange Commission
(the "SEC") under the Securities Act with respect to the common stock issuable
upon conversion and upon exercise of the securities issued in the private
placement consummated in February 1997 and the Private Placement. This
registration statement has not been declared effective. There can be no
assurance that such registration statement will ever become effective or that
any delay or failure to have such registration statement declared effective will
not have a material adverse effect on the Company.
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<PAGE>
On May 29, 1998, the Company requested, and subsequently received,
consents (the "Letter Agreements") from the holders of a majority of the Series
D Preferred Stock to waive the Company's obligation to use best efforts to
obtain the effectiveness of a registration statement with the SEC as to Common
Stock issuable upon conversion of Series D Preferred Stock and exercise of Class
D Warrants. In exchange, the Company agreed to waive the contractual "lock-up"
provisions to which such consenting holders were subject and which provisions
would have prevented the sale of up to 75% of their securities for a nine-month
period following the effectiveness of the registration statement; and to extend
to January 29, 1999 from June 29, 1998 the Reset Date referred to in the
Certificate of Designation of the Series D Preferred Stock. In addition, through
the Letter Agreements, the Company agreed to issue to such holders warrants to
purchase at $0.94375 per share, an aggregate of up to 807,900 shares of Common
Stock, subject to certain anti-dilution adjustments, exercisable until June 29,
2002. The shares were valued at approximately $633,000 and recorded as a
dividend. The Company had conditioned the effectiveness of such consent on its
acceptance by a majority of the Series D Preferred Stockholders. The Series D
Preferred Stock began earning dividends, payable in shares of the Company's
Common Stock, at the rate of 10% per annum subsequent to the new Reset Date of
January 29, 1999.
See "MD&A--Certain Trends and Uncertainties--Subordination of Common
Stock to Series A and Series D Preferred Stock; Risk of Dilution; Anti-Dilution
Adjustments."
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share amount)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Gain on sale of technology ......... $ -- $ -- $ 373 $ -- $ --
Related party contract revenue ..... -- -- 1,559 350 55
Collaborative research and
development ...................... 3,142 1,125 -- 50 50
-------- -------- -------- -------- --------
3,142 1,125 1,932 400 105
-------- -------- -------- -------- --------
Costs and expenses:
Research and development ......... 12,104 9,764 4,592 3,309 2,116
LBC Settlement ................... -- -- -- 600 547
Charge for acquired in-process
research and development....... 1,850 4,762 -- -- --
General and administrative ......... 5,483 4,493 5,096 6,132 4,020
-------- -------- -------- -------- --------
19,437 19,019 9,688 10,041 6,683
-------- -------- -------- -------- --------
Loss from operations ............... (16,295) (17,894) (7,757) (9,641) (6,578)
Equity in net loss of joint venture (7,425) (6,913) (2,712) (1,193) (132)
Net loss of liquidated
foreign subsidiary ................ -- -- -- -- (98)
Other income (expense), net ........ 721 7 (745) (2,851) (38)
-------- -------- -------- -------- --------
Net loss from continuing operations $(22,999) $(24,800) $(11,213) $(13,684) $ (6,846)
Loss from discontinued operations .. (449) (566) (878) (1,741) (739)
--------- --------- --------- --------- ---------
Net loss ........................... (23,448) (25,366) (12,092) (15,425) (7,586)
Dividends on preferred stock ....... (2,550) (2,551) (2,525) (1,695) (633)
Dividends imputed on preferred stock -- $ (1,000) (2,348) (16,158) --
-------- -------- -------- -------- --------
Net loss applicable to common shares $(25,998) $(28,917) $(16,965) $(33,278) $ (8,219)
-------- -------- -------- -------- --------
Continuing Operations .............. $ (18.67) $ (14.53) $ (5.39) $ (7.13) $ (1.06)
Discontinued Operations ............ $ (0.33) $ (0.29) (0.30) (0.39) (0.11)
Net loss per share (1) ............. $ (19.00) $ (14.82) $ (5.69) $ (7.52) $ (1.17)
-------- -------- -------- -------- --------
Shares used in computing net
loss per share ................... 1,371 1,952 2,983 4,422 7,000
Deficiency of earnings to meet
combined fixed charges and
preferred stock dividends (2)..... $(25,998) $(28,917) $(16,965) $(33,278) $ (8,219)
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents and short-term $ 11,003 $ 262 $ 532 $ 8,456 $ 2,458
investments
Working capital (deficit) ........... 4,285 (2,981) (3,816) 5,807 3,629
Total assets ........................ 19,415 11,351 8,806 15,079 7,551
Notes payable and capital lease
obligations, less current portion 1,871 2,334 118 -- --
Total stockholders' equity .......... 13,912 4,258 4,074 9,425 2,959
</TABLE>
(1) Computed on the basis of net loss per common share described in Note 1 of
Notes to Consolidated Financial Statements.
(2) The Company has incurred losses and, thus, has had a deficiency in fixed
charges and preferred stock dividend coverage since inception.
THE ABOVE SELECTED FINANCIAL DATA REFLECTS DISCONTINUED OPERATIONS AND BALANCE
SHEET DATA OF JBL AS A RESULT OF THE AGREEMENT TO SELL JBL IN MARCH 1999. SEE
NOTE 2 OF THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
- 26 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Since its inception in February 1988, Genta has devoted its principal
efforts toward drug discovery, research and development. Genta has been
unprofitable to date and, even if it obtains financing to continue its
operations, expects to incur substantial operating losses due to continued
requirements for ongoing research and development activities, preclinical and
clinical testing, manufacturing activities, regulatory activities, and
establishment of a sales and marketing organization. From the period since its
inception to December 31, 1998, the Company has incurred a cumulative net loss
of $132.1 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 mitigated by recent
developments.
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<PAGE>
The Company has been reducing its human and other resources to reduce
expenses while focusing its research and development ("R&D") efforts. Genta's
strategy is to build a product and technology portfolio focusing on its
Anticode(TM) (antisense) products intended to treat cancer at its genetic
source. To this end, the Company has reduced its R&D expenses by about 36% from
last year and has significantly reduced its involvement with respect to its 50%
investment in an R&D joint venture, Genta Jago, through an interim agreement
reached in March 1999. The Company also entered into an Asset Purchase Agreement
on March 19, 1999 for the sale of substantially all of the assets and certain
liabilities of the Company's wholly owned specialty chemicals subsidiary JBL
Scientific, Inc. ("JBL") for cash, a promissory note and certain pharmaceutical
development services in support of Genta's G3139 development project. The
transaction will be consummated upon the satisfaction of certain closing
conditions and, while there can be no assurances, is expected to be completed in
the second quarter of 1999. Following the pending sale of JBL, the Company will
operate as one business segment. Accordingly, the following information and
accompanying financial statements reflect JBL as a discontinued operation. The
Company has closed its operation in France. The Company has also closed its
facilities in San Diego, California and has moved its headquarters to Lexington,
Massachusetts as of the second quarter of 1999.
The Company's independent auditors have included an explanatory
paragraph in their report on the Company's consolidated financial statements at
December 31, 1998, that expresses substantial doubt as to the Company's ability
to continue as a going concern. The Company has very limited cash resources. Its
ability to continue operations in 1999 depends upon the consummation of the JBL
transaction and the Company's success in obtaining funding. There can be no
assurance that the JBL transaction will be consummated or as to the timing
thereof or that the Company will be able to obtain additional funds on
satisfactory terms or at all. There are several factors that must be considered
risks in that regard and those that are known to management are discussed in
"MD&A--Certain Trends and Uncertainties."
The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements reflect the Company's views as of the date they
are made with respect to future events and financial performance, but are
subject to many risks and uncertainties, which could cause the actual results of
the Company to differ materially from any future results expressed or implied by
such forward-looking statements. Examples of such risks and uncertainties
include, but are not limited to, obtaining sufficient financing to maintain the
Company's planned operations, the timely development, receipt of necessary
regulatory approvals and acceptance of new products, the successful application
of the Company's technology to produce new products, the obtaining of
proprietary protection for any such technology and products, the impact of
competitive products and pricing and reimbursement policies, changing market
conditions and the other risks detailed in the Certain Trends and Uncertainties
section of this Management's Discussion and Analysis of Financial Condition and
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<PAGE>
Results of Operations and elsewhere in this Annual Report on Form 10-K. 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.
Operating revenues totaled $1.9 million in 1996 compared to $0.4 million
in 1997 and $0.1 million in 1998. The changes in operating revenue have largely
reflected the Company's lessened involvement in Genta Jago development
activities. Related party contract revenues decreased from $1.6 million in 1996,
to $350,000 in 1997 and $55,000 in 1998. The expenses for which these revenues
are recognized as Costs and Expenses in the same period such that the net effect
on Genta's consolidated statements is zero (see below). It is anticipated that,
as the Company has reduced its resources and focused them on its development of
its lead Anticode(TM) oligonucleotide, G3139, this trend will continue. It
should be noted that at the same time, the Company is reducing its commitment to
provide funds to Genta Jago. On March 4, 1999, Genta and SkyePharma (on behalf
of itself and its affiliates) entered into an interim agreement pursuant to
which the parties to the joint venture released each other from all liability
relating to unpaid development costs and funding obligations. 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 therefrom to be allocated in agreed-upon
percentages between Genta and SkyePharma as set forth in such interim agreement.
It is also expected that the completion of the sale of the assets of JBL will
result in a significant decrease in ongoing revenues, as all of the Company's
product sales have been attributable to JBL.
Collaborative research and development revenues were $50,000 annually in
1997 and in 1998, representing deferred revenues recognized pursuant to the
Company's collaboration with Johnson & Johnson Consumer Products, Inc. See
"Business--Anticode(TM) Brand of Antisense Oligonucleotide Programs--
Oligonucleotide Collaborative and Licensing Agreements--Other Anticode
Agreements." The above agreement has expired.
Costs and expenses totaled $9.7 million in 1996 compared to $10.0
million in 1997 and $6.7 million in 1998. Primarily, the overall decrease
reflects reduced research and development and general and administrative charges
offset by nonrecurring charges related to restructuring. The decrease in R&D
expenses is the result of work force reductions and related closure of research
and development facilities in San Diego.
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<PAGE>
Services and capabilities that have not been retained within the Company
are out-sourced through short-term contracts or from consultants. All
preclinical biology and clinical trial work is now conducted through such
collaborations with external scientists and clinicians. The Company anticipates
that, if sufficient collaborative revenues and other funding are available,
research and development expenses may increase in future years due to
requirements for preclinical studies, clinical trials, the G3139 Anticode
oligonucleotide program and increased regulatory costs. The Company will be
required to assess the potential costs and benefits of developing its own
Anticode(TM) oligonucleotide manufacturing, marketing and sales activities if
and as such products are successfully developed and approved for marketing, as
compared to establishing a corporate partner relationship.
Research and development expenses totaled $4.6 million in 1996, $3.3
million in 1997, and $2.1 million in 1998. The decrease in research and
development expenses is primarily attributable to the Company's redeployment of
certain employees, and related workforce reductions implemented in 1996 and 1997
(see below) together with the discontinuation of several programs. Research and
development and certain other services the Company provided to Genta Jago under
the terms of the joint venture were significantly reduced over the period from
1996 through 1998. These amounts were $1.6 million in 1996, $350,000 in 1997 and
$55,000 in 1998. There is, however, no net effect of these reductions in
services to Genta Jago as they are offset by related party contract revenues.
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, 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.
In an effort to focus its research and development on areas that provide
the most significant commercial opportunities, the Company continually evaluates
its ongoing programs in light of the latest market information and conditions,
availability of third-party funding, technological advances, and other factors.
As a result of such evaluation, the Company's product development plans have
changed from time to time, and the Company anticipates that they will continue
to do so in the future.
General and administrative expenses were $5.1 million in 1996, $6.1
million in 1997, and $4.0 million in 1998. The $2.1 million decrease in 1998
reflects reductions in staff and in accounting and legal expenses. Legal
expenses were higher in 1997 due to several factors: successfully defending the
litigation brought by certain of the Company's preferred stockholders
challenging a $3.0 million investment made in February 1997, which litigation
was resolved in the Company's favor in April 1997; and the Company's successful
efforts to avoid a potential Nasdaq delisting associated with the equity
offerings consummated in 1997. See "Legal Proceedings" and "Market for
Registrant's Common Equity and Related Stockholder Matters--Recent Sales of
Unregistered Securities."
As a continuation of its 1995 restructuring plan, in October 1996 Genta
reassessed its personnel requirements and established a termination plan whereby
the Company terminated 16 research and administrative employees and recorded
General and Administrative expenses of $850,000 for accrued severance. In May
1997, Genta again reassessed its personnel requirements and established another
termination plan involving the termination of 12 research and administrative
employees. The Company recorded General and Administrative expenses of $868,000
in the second quarter of 1997 for accrued severance costs. In 1998, three
additional staff personnel left the Company, and two senior managers joined the
Company. Another senior manager joined the Company in 1999. Although the Company
has reduced its work force to a core group of corporate personnel, the remaining
team is able to maintain Genta's operations in the development of G3139.
Chemical and manufacturing development and quality assurance and control is
managed or conducted at JBL, in coordination with Genta's core staff. It is
expected that these services will continue in 1999 following the completion of
- 30 -
<PAGE>
the sale of substantially all of JBL's assets and certain liabilities. The JBL
Asset Purchase Agreement contemplates that, after the closing of the sale, the
acquiring company will provide pharmaceutical development services to the
Company at no additional charge.
The Company recorded charges to general and administrative expenses of
$600,000 and $577,000, in 1997 and 1998 respectively to account for the value of
abandoned patents no longer related to the research and development efforts of
the Company. The Company's policy is to evaluate the appropriateness of carrying
values of the unamortized balances of intangible assets on the basis of
estimated future cash flows (undiscounted) and other factors. If such evaluation
were to identify a material impairment of these intangible assets, such
impairment would be recognized by a write-down of the applicable assets. The
Company continues to evaluate the continuing value of patents and patent
applications, particularly as expenses to prosecute or maintain these patents
come due. Through this evaluation, the Company may elect to continue to maintain
these patents, seek to out-license them, or abandon them.
The Company's equity in net loss of its joint venture (Genta Jago)
totaled $2.7 million in 1996, compared to $1.2 million in 1997 and $132,000 in
1998. The decrease in the Company's equity in net loss of its joint venture
during 1998 relative to 1997 and 1996 is largely attributable to the fact that
development efforts are now focused exclusively on GEOMATRIX-based products and
a greater portion of development activities were funded pursuant to Genta Jago's
collaborative agreements with third parties. The operating results of Genta Jago
are based primarily on three factors. First, Genta Jago receives collaborative
research and development revenue from third parties. Secondly, Genta Jago is
billed by Jagotec and Genta for research and development costs associated with
Genta Jago projects. Thirdly, there are general and administrative costs
associated with the joint venture. Through May 1995, Genta Jago's development
efforts were not strictly GEOMATRIX-based products. Genta Jago also had the
right to develop six Anticode(TM) oligonucleotide products licensed from Genta.
However, in 1995 the parties elected to focus Genta Jago's activities
exclusively on GEOMATRIX-based products. In connection with the return of the
Anticode(TM) oligonucleotide technology license rights to Genta in May 1995,
Genta Jago's note payable to Genta was credited with approximately $4.4 million
in principal and $0.3 million in accrued interest. Genta Jago recorded the loan
credit and related accrued interest as a gain on waiver of debt in exchange for
return of license rights to related party. Furthermore, since Genta Jago was no
longer responsible for developing Anticode(TM) oligonucleotide products, its
future working capital requirements were reduced. The equity in net loss of
joint venture is determined by reducing the loss per Genta Jago financials by
Genta's 20% markup on internal costs for which the joint venture is billed plus
the interest accrued on the working capital loans.
Since the formation of Genta Jago, no products have been successfully
developed and marketed. Since the initial plans called for earlier introductions
and since there have been significant changes in the market environment since
the Company entered into the joint venture, there is reason to believe that any
products that may be marketed in the future could represent significantly poorer
financial opportunities than those that were anticipated in the earlier plans.
This reduction in opportunity derives from factors such as the presence of
direct competitors to Genta Jago's products being in the marketplace before
Genta Jago, and increasing pricing pressures on pharmaceuticals, particularly
multisource or generic products from payers such as reimbursers and government
buyers. See "MD&A--Certain Trends and Uncertainties--Uncertainty of
Technological Change and Competition" and "MD&A--Certain Trends and
Uncertainties--Uncertainty of Product Pricing, Reimbursement and Related
Matters." Both of these factors may adversely affect Genta Jago even if it is
successful in developing products to obtain regulatory approval. As a result and
in consideration of the Company's need to reduce expenses and focus its efforts,
the Company is directing its resources from the joint venture to its Anticode
development, specifically G3139, for the immediate future. On March 4, 1999,
Genta and SkyePharma (on behalf of itself and its affiliates) entered into an
interim agreement pursuant to which the parties to the joint venture released
each other from all liability relating to unpaid development costs and funding
obligations.
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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 therefrom to be allocated in
agreed-upon percentages between Genta and SkyePharma as set forth in such
interim agreement.
Interest income has fluctuated significantly each year and is
anticipated to continue to fluctuate primarily due to changes in the levels of
cash, investments and interest rates each period.
Interest expense was $9,000 in 1998, $3,309,000 in 1997, and $886,000 in
1996. In consideration of EITF D-60 which was issued by the FASB in March 1997,
the Company recorded $666,667 in imputed interest on $2.0 million in 4%
Convertible Debentures due August 1, 1997, that were originally issued in
September 1996 and were converted at a 25% discount to market. The discount
represents an effective interest rate of 38%. The charge has been included in
interest expense in 1996. The Company also recorded a $3.0 million charge to
imputed interest in 1997 related to value associated with 6.4 million Bridge
Warrants issued in connection with a $3.0 million debt issue in February 1997.
In consideration of EITF D-60, the Company recorded $2,348,000 and
$1,000,000 in imputed dividends in 1996 and 1995, respectively, for discounted
conversion terms related to convertible preferred stock issued in 1996 and 1995.
The preferred stock was convertible into common shares based on a conversion
price equal to 75% of the average closing bid prices of the Company's common
stock for a specified period. In 1997, the Company recorded $16,158,000 in
imputed dividends for discounted conversion terms and liquidation preference of
the Series D Preferred Stock issued in the Private Placement. The charges have
been recorded as dividends imputed on preferred stock.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 requires that all components of comprehensive
income, including net income, be reported in the financial statements in the
period in which they are recognized. Other than Net Loss, the Company had no
material components of comprehensive income.
On June 16, 1998 the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
standard is effective for fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
instruments at fair value. The Company is currently evaluating the impact of
this pronouncement and does not believe adoption of SFAS No. 133 will have a
material impact on the Company's consolidated financial statements.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily from
private and public offerings of its equity securities. Cash provided from these
offerings totaled approximately $124.5 million through December 31, 1998,
including net proceeds of $17.0 million raised during 1997. At December 31,
1998, the Company had cash, cash equivalents and short-term investments totaling
$2.5 million compared to $8.5 million at December 31, 1997.
The Company will need substantial additional funds before it can expect
to realize significant product revenue. The Company projects that at its current
rate of spending and for its current activities, assuming consummation of the
sale of JBL, its 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 or in expanding its
development portfolio or acquiring or adding new development candidates, the
current cash resources would be consumed at a greater rate. Similarly, the
Company had been seeking to identify and hire additional senior managers to
direct the business of the Company. In this regard the Company has hired a Vice
President of Regulatory and Clinical Affairs, Vice President of Corporate
Development and a Vice President and Chief Financial Officer. Certain parties
with whom the Company has agreements have claimed default and, should the
Company be obligated to pay these claims or should the Company engage legal
services to defend or negotiate its positions or both, its ability to continue
operations could be significantly reduced or shortened. See "MD&A--Certain
Trends and Uncertainties--Claims of Genta's Default Under Various Agreements."
The Company anticipates that significant additional sources of financing,
including equity financings, will be required in order for the Company to
continue its planned 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
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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 "MD&A--Certain
Trends and Uncertainties--Need for Additional Funds; Risk of Insolvency."
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of financing, it expects to use such financing to
continue to expand its ongoing research and development activities, preclinical
testing and clinical trials, costs associated with the market introduction of
potential products, and expansion of its administrative activities. As
previously discussed in the MD&A Overview, the Company entered into an Asset
Purchase Agreement with Promega Corporation on March 19, 1999. Under the
agreement, a wholly owned subsidiary of Promega acquires substantially all of
the assets and certain liabilities of JBL for a cash payment, a promissory note,
and pharmaceutical development services to be provided to Genta.
In connection with the Genta Jago joint venture formed in late 1992 and
expanded in May 1995, the Company provided funding to Genta Jago pursuant to a
working capital loan agreement that expired in October 1998. Such working
capital loans to Genta Jago are recorded by Genta as Loans receivable from joint
venture and are expensed on Genta's books as funds are spent by Genta Jago, as
the collectibility of such loans is no longer assured. In connection with Genta
Jago's return of the Anticode(TM) oligonucleotide license rights to Genta in May
1995, the working capital loan payable by Genta Jago to Genta was credited with
a principal reduction of approximately $4.4 million and reduction of interest
thereon of approximately $0.3 million. As of December 31, 1998, the Company had
advanced working capital loans of approximately $15.8 million to Genta Jago, net
of principal repayments and the aforementioned credit, which amount fully
satisfied what the Company believes is the loan commitment established by the
parties through December 31, 1998. Such loans bore interest at rates per annum
ranging from 5.81% to 7.5%, and were payable in full on October 20, 1998. Genta
Jago repaid Genta $1 million in principal of its working capital loans, in
November 1996, from license fee revenues.
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
development costs and funding obligations and SkyePharma agreed to be
responsible for 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 therefrom to be allocated in agreed-upon percentages between Genta and
SkyePharma as set forth in such interim agreement. See "MD&A--Certain Trends and
Uncertainties--Claims of Genta's Default Under Various Agreements."
In 1998, the Company purchased property and equipment of $304,000, of
which $272,000 pertains to JBL, and received proceeds from the disposition of
property and equipment of $58,000. Through December 31, 1998, the Company had
acquired $10.4 million in property and equipment of which $5.5 million was
financed through capital leases and other equipment financing arrangements, $3.6
million was funded in cash and the remainder was acquired through the Company's
acquisition of JBL. The Company has commitments associated with its capital
leases and operating leases as discussed further in Note 7 to the Company's
consolidated financial statements. In 1997, the Company bought out its equipment
finance loan balance with the $251,000 in security deposits then held by the
equipment finance company. During 1998, fixed assets decreased due to the sale
of furniture and equipment incident to the reduction of operations at Genta
Pharmaceuticals Europe and the closure of the research and development
laboratory at Genta's San Diego facility. Leasehold improvements were written
off by approximately $353,000 to general and
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administrative expense due to the elimination of operations at Genta
Pharmaceuticals Europe. In 1997, the Company discontinued its effort to develop
a capability at JBL to manufacture oligonucleotides and wrote off $530,000 to
research and development expense.
In October 1996, JBL retained a chemical consulting firm to advise it
with respect to an incident of soil and groundwater contamination. Sampling
conducted at the JBL facility revealed the presence of chloroform and
perchloroethylenes ("PCEs") in the soil and groundwater at this site. JBL is
conducting a quarterly groundwater monitoring program, under the supervision of
the California Regional Water Quality Control Board, for purposes of determining
whether the levels of chloroform and perchloroethylenes ("PCEs") have decreased
over time. The results of the latest sampling conducted by JBL show that PCEs
and chloroform have decreased in all but one of the monitoring sites. The
Company believes that any 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.
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 de minimis PRPs will be
required to pay as little as $75,000 and as much as $750,000 to settle their
potential liability, depending upon the volume of wastes attributed to them. The
EPA plans on sending by the beginning of January 1999 individual volume
calculations to each de minimis PRP that received the aforementioned notice
letter. While the terms of a settlement with the EPA have not been finalized,
they should contain standard contribution, protection and release language. The
Company has accrued $75,000 during 1998. JBL is investigating all factual and
legal defenses that are available to it and plans on responding to this matter
accordingly. See "MD&A--Certain Trends and Uncertainties--No Assurance of
Regulatory Approval; Government Regulation." The Company believes that any costs
associated with further investigating or remediating this contamination will not
have a material adverse effect on the business of the Company, although there
can be no assurance thereof.
In June 1997, the Company raised gross proceeds of approximately $16.2
million (approximately $14 million net of placement costs) through the private
placement of 161.58 Premium Preferred Units(TM). Each unit sold in the private
placement consists of (i) 1,000 shares of Premium Preferred Stock(TM), par value
$.001 per share, stated value $100 per share (the "Series D Preferred Stock"),
and (ii) warrants to purchase 5,000 shares of the Company's common stock at any
time prior to the fifth anniversary of the final closing (the "Class D
Warrants"). The Series D Preferred Stock is immediately convertible at the
option of the holder into shares of common stock at an initial conversion price
of $0.94375 per share (subject to antidilution adjustment).
On May 29, 1998, the Company requested, and subsequently received,
consents (the "Letter Agreements") from the holders of a majority of the Series
D Preferred Stock to waive the Company's obligation to use best efforts to
obtain the effectiveness of a registration statement with the SEC as to Common
Stock issuable upon conversion of Series D Preferred Stock and exercise of Class
D Warrants. In exchange, the Company agreed to waive the contractual "lock-up"
provisions to which such consenting holders were subject and which provisions
would have prevented the sale of up to 75% of their securities for a nine-month
period following the effectiveness of the registration statement; and to extend
to January 29, 1999 from June 29, 1998 the Reset Date referred to in the
Certificate of Designation of the Series D Preferred Stock. In addition, through
the Letter Agreements, the Company agreed to issue and did issue to such holders
warrants to purchase at $0.94375 per share, an aggregate of up to 807,900 shares
of Common Stock, subject to certain anti-dilution adjustments, exercisable until
June 29, 2002. The shares were valued at approximately $633,000 and recorded as
a dividend. The Company had conditioned the effectiveness of such consent on its
acceptance by a majority of the Series D Preferred Stockholders. The Series D
Preferred Stock began earning dividends, payable in shares of the Company's
Common Stock, at the rate of 10% per annum subsequent to the new Reset Date of
January 29, 1999.
In February 1997, the Company raised gross proceeds of $3 million in a
private placement of units consisting of (i) Senior Secured Convertible Bridge
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Notes (the "Convertible Notes") that bore interest at a stated rate of 12% per
annum and matured on December 31, 1997, as extended, and (ii) warrants to
purchase an aggregate of approximately 6.4 million shares of common stock. The
Convertible Notes were convertible into Series D Convertible Preferred Stock at
the option of the holder, at an initial conversion price of $50.00 per share,
subject to antidilution adjustments. In May 1997, $650,000 of the Convertible
Notes were converted into 13,000 shares of Series D Preferred Stock and in
December 1997, the remaining $2,350,000 of the Convertible Notes and accrued
interest were converted into 52,415 shares of common stock.
In September 1996, the Company raised gross proceeds of $2 million
(approximately $1.9 million net of offering costs) through the sale of
Convertible Debentures to investors in a private placement outside the United
States. The Convertible Debentures were convertible, at the option of the
holders, at any time on or after October 23, 1996, into shares of common stock
at a conversion price equal to 75% of the average Nasdaq closing bid price of
Genta's common stock for a specified period prior to the date of conversion.
Terms of the Convertible Debentures also provided for interest payable in shares
of the Company's common stock. In November 1996, $1.65 million of the
Convertible Debentures and the related accrued interest was converted into
approximately 590,000 shares of common stock and in 1997, the remaining $350,000
and related accrued interest was converted into 204,263 shares of common stock.
In March 1996, the Company raised gross proceeds of $6 million
(approximately $5.5 million net of offering fees) through the issuance of Series
C Convertible Preferred Stock (the "Series C Preferred Stock") sold to
institutional investors in a private placement. The Series C Preferred Stock was
immediately convertible, at the option of the holder, into shares of common
stock at a conversion price equal to 75% of the average Nasdaq closing bid price
of Genta's common stock for a specified period prior to the date of conversion.
In 1996, 5,620 shares of the Series C Preferred Stock and accrued dividends were
converted at the option of the holders into 524,749 shares of Genta's common
stock. In 1997, 1,424 shares of the Series C Preferred Stock and accrued
dividends was converted at the option of the holders into 952,841 shares of
Genta's common stock. In April 1998, in consideration of EITF D-60, which was
issued in March 1997, the Company recorded imputed non-cash dividends on
preferred stock totaling $2,348,000 in 1996 for discounted conversion terms
related to Series C convertible preferred stock.
In December 1995, the Company completed the sale of 3,000 shares of
Series B Convertible preferred stock (the "Series B Preferred Stock") at a price
of $1,000 per share to institutional investors outside of the United States.
Proceeds from the offering totaling approximately $2.8 million were reflected as
a receivable from sale of preferred stock at December 31, 1995 and were received
by the Company on January 2, 1996. The Series B Preferred Stock was immediately
convertible, at the option of the holder, into shares of common stock at a
conversion price equal to 75% of the average Nasdaq closing bid prices of
Genta's common stock for a specified period prior to the date of conversion. The
Series B Preferred Stock was converted into 226,943 shares of the Company's
common stock in February 1996 pursuant to terms of the Series B stock purchase
agreements. In April 1998, in consideration of EITF D-60, which was issued in
March 1997, the Company recorded imputed non-cash dividends on preferred stock
totaling $1.0 million in 1995 for discounted conversion terms related to Series
B convertible preferred stock.
In October 1993, the Company completed the sale of 600,000 shares of
Series A convertible preferred stock ("the Series A Preferred Stock") in a
private placement of units consisting of (i) one share of Series A Preferred
Stock and (ii) one warrant to acquire one share of common stock, sold at an
aggregate price of $50 per unit. Each share of Series A Preferred Stock is
immediately convertible, at any time prior to redemption, into shares of the
Company's common stock, at a rate determined by dividing the aggregate
liquidation preference of the Series A Preferred Stock by the conversion price.
The conversion price is subject to adjustment for antidilution. From January 1
through October 31, 1998, each share of Series A Preferred Stock was convertible
into 7.255 shares of Common Stock. From November 1 through December 31, 1998,
each share of Series A Preferred Stock was convertible into 7.333 shares of
Common Stock.
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Terms of the Company's Series A Preferred Stock require the payment of
dividends annually in amounts ranging from $3 per share per annum for the first
year to $5 per share per annum in the third and fourth years. Dividends were to
be paid in cash or common stock or a combination thereof, at the Company's
option. Dividends on the Series A Preferred Stock accrued on a daily basis
(whether or not declared) and accumulated to the extent not paid on the annual
dividend payment date following the dividend period for which they accrued. The
Company may redeem the Series A Preferred Stock under certain circumstances, and
was required to redeem the Series A Preferred Stock, subject to certain
conditions, in September 1996 at a redemption price of $50 per share, plus
accrued and unpaid dividends (the "Redemption Price"). The Company elected to
pay the Redemption Price in Common Stock in order to conserve cash and was
required under the terms of the Series A Preferred Stock to use its best efforts
to arrange for a firm commitment underwriting for the resale of such Common
Stock which would allow the holders ultimately to receive cash instead of
securities for their Series A Preferred Stock. Despite using its best efforts,
the Company was unable to arrange for a firm commitment underwriting. Therefore,
under the terms of the Series A Preferred Stock, Genta was not required to
redeem such Series A Preferred Stock in cash, but rather was required to redeem
all shares of Series A Preferred Stock held by holders who elected to waive the
firm commitment underwriting requirement and receive the redemption price in
shares of Common Stock. A waiver of the firm commitment underwriting was
included as a condition of such redemption. The terms of the Series A Preferred
Stock do not impose adverse consequences on the Company if it is unable to
arrange for such an underwriting despite its reasonable efforts in such regard.
In September 1996, holders of 55,900 shares of Series A Preferred Stock redeemed
such shares and related accrued and unpaid dividends for an aggregate of 242,350
shares of the Company's Common Stock. The effect on the financial statements of
the redemptions was a reduction in Accrued dividends on preferred stock, a
reduction in the Par value of convertible preferred stock, an increase in the
Par value of Common Stock, and an increase in Additional paid-in capital. Should
the remaining shares of Series A Preferred stock be redeemed for, or converted
into, the Company's Common Stock, the effect on the financial statements will be
the same as that previously described. The Company is restricted from paying
cash dividends on Common Stock until such time as all cumulative dividends on
outstanding shares of Series A and Series D Preferred Stock have been paid. The
Company currently intends to retain its earnings, if any, after payment of
dividends on outstanding shares of Series A and Series D Preferred Stock, for
the development of its business. See "MD&A--Certain Trends and
Uncertainties--Subordination of Common Stock to Series A and Series D Preferred
Stock; Risk of Dilution; Anti-Dilution Adjustments."
The Company continually evaluates its intangible assets for impairment.
If evidence of impairment is noted, the Company determines the amount of
impairment and charges such impairment to expense in the period that impairment
is determined. Through December 31, 1998, management has considered projected
future cash flows from product sales, collaborations and proceeds on sale of
such assets and, other than the $600,000 and $577,000 charge recorded in 1997
and 1998 respectively, related to the disposal of certain patents, has
determined that no additional impairment exists. See "MD&A--Results of
Operations."
Impact of Year 2000
Some older computer programs were written using two digits rather than
four to define the applicable year. As a result, those computer programs have
time sensitive software that recognizes a date using 00 as the year 1900 rather
than the year 2000 (the "Year 2000 Issue"). This could cause a system failure or
miscalculations causing disruption of operations, including a temporary
inability to process transactions or engage in similar normal business
activities.
The Company has completed an assessment of whether it would be necessary
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
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Company has implemented a plan to acquire and install new computer hardware and
upgraded software in its facilities that will accommodate dating beyond 1999.
The total year 2000 project cost will not be material and (subject to the
Company's receipt of adequate additional funds) is expected to be completed not
later than October 31, 1999, which is prior to any anticipated impact on its
operating systems. The Company believes that with 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 and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material adverse effect on the operations of the
Company.
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 those third parties' failure to remediate their own
Year 2000 Issues. If through such communication or otherwise the Company becomes
aware of any such failures and is not satisfied that those failures are 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 costs of the project and the date
on which the Company believes it will complete the year 2000 modifications are
based on management's best estimates, which were derived using numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
It has been acknowledged by government authorities that year 2000
problems have the potential to disrupt global economies, that no business is
immune from the potentially far-reaching effects of the 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 Annual Report on
Form 10-K, the following factors should be considered carefully.
Need for Additional Funds; Risk of Insolvency
Genta's operations to date have consumed substantial amounts of cash.
The Company's auditors have included an explanatory paragraph in their opinion
with respect to the Company's ability to continue as a going concern. See
"Independent Auditors Reports" and "MD&A--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, pre-clinical
development and clinical trials necessary to bring its products to market and to
establish production and marketing capabilities. The Company intends to seek
additional funding through public or private financings, including equity
financings, and through collaborative arrangements or the sale of key assets.
Adequate funds for these purposes, whether obtained through financial markets or
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds may require the Company: to delay, scale back or eliminate
some or all of its research and product development programs; to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself; to sell itself to a third party; to cease
operations; or to declare bankruptcy. The Company's future cash requirements
will be affected by results of research and development, results of pre-clinical
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studies and bioequivalence and clinical trials, relationships with corporate
collaborators, changes in the focus and direction of the Company's research and
development programs, competitive and technological advances, resources devoted
to Genta Jago, the FDA and foreign regulatory processes, potential litigation by
companies seeking to prevent or delay marketing approval of Genta Jago's
products and other factors.
Loss History; Uncertainty of Future Profitability.
- - --------------------------------------------------
Genta has been unprofitable to date, incurring substantial operating
losses associated with ongoing research and development activities, pre-clinical
testing, clinical trials, manufacturing activities and development activities
undertaken by Genta Jago. From the period since its inception to December 31,
1998, the Company has incurred a cumulative net loss of $132.1 million. The
Company has experienced significant quarterly fluctuations in operating results
and expects that these fluctuations in revenues, expenses and losses will
continue. The Company's independent auditors have included an explanatory
paragraph in their report on the Company's consolidated financial statements at
December 31, 1998, which paragraph expresses substantial doubt as to the
Company's ability to continue as a going concern. See "Independent Auditors
Reports" and "MD&A--Certain Trends and Uncertainties--Need for Additional Funds;
Risk of Insolvency."
Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of
Dilution; Anti-Dilution Adjustments.
- - --------------------------------------------------------------------------------
In the event of the liquidation, dissolution or winding up of the
Company, the Common Stock is expressly subordinate to the approximately $26.9
million preference of the 447,600 outstanding shares of Series A Preferred Stock
and the approximately $31.7 million preference of 226,416 shares of Series D
Preferred Stock (including 40,395 shares of Series D Preferred Stock issuable
upon exercise of certain warrants). Dividends may not be paid on the Common
Stock unless full cumulative dividends on the Series A and Series D Preferred
Stocks 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 $67.50 per share or less. As of
April 12, 1999, each share of Series A Preferred Stock is convertible into
aproximately 7.430 shares of Common Stock at a conversion price of $8.08 per
share. On September 24, 1998, all outstanding Series A Warrants expired. The
conversion rate of the Series D Preferred Stock and the exercise price of the
Series 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. In addition, the Conversion Price of the Series
D Preferred Stock in effect on January 29, 1999 (the "Reset Date") would have
been adjusted and reset effective as of the Reset Date if the average closing
bid price of the Common Stock for the 20 consecutive trading days immediately
preceding the Reset Date (the "12 Month Trading Price") were less than 140% of
the then applicable Conversion Price (a "Reset Event"). The Trading Price on the
Reset Date was above the calculated amount based on the above formula, thereby
eliminating the Reset Event. Accordingly, each share of Series D Preferred Stock
is presently convertible into approximately 106 shares of Common Stock at a
conversion price of $0.94375 per share of Common Stock, and the exercise price
of the Class D Warrants is presently $0.94375 per share. There are 1,615,800
Class D Warrants outstanding and another 201,975 Class D Warrants issuable upon
the exercise of certain warrants. An additional 807,900 Class D Warrants have
been authorized and all were issued pursuant to a May 29, 1998 letter and
subsequent acceptance by the Series D holders. Finally, the Company has
outstanding Bridge Warrants to purchase an aggregate of 6,357,616 shares of
Common Stock at an exercise price of $0.471875 per share, Line of Credit
Warrants to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price of $2.50 per share, LBC Warrants to purchase an aggregate of
700,000 shares of Common Stock at an exercise price of $0.52 per share, and
warrants to purchase an aggregate of 95,768 shares of Common Stock at various
exercise prices between approximately $13 and $21 per share and outstanding
employee stock options. The Note and Warrant Purchase Agreement provides that a
number of additional Bridge Warrants ("Penalty Warrants") equal to 1.5% of the
number of Bridge Warrants then held by the Aries Funds shall be issued to the
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Aries Funds for each day beyond 30 days after the final closing of the Private
Placement that a shelf registration statement covering the Common Stock
underlying the securities purchased pursuant to the Note and Warrant Purchase
Agreement is not filed with the SEC and for each day beyond 210 days after the
closing date of the investment contemplated by the Note and Warrant Purchase
Agreement that such shelf registration statement is not declared effective by
the SEC. The Company filed such shelf registration statement with the SEC on
September 9, 1997, but such shelf registration statement has not been declared
effective by the SEC. As a result, the Company could be obligated to issue
Penalty Warrants to the Aries Funds. The Aries Funds have not, to date,
requested that the Company issue such Penalty Warrants. The Company and the
Aries Funds are currently conducting negotiations to determine whether, and to
what extent, Penalty Warrants will be issued. See "Market for Registrant's
Common Equity and Related Stockholder Matters--Recent Sales of Unregistered
Securities."
Claims of Genta's Default Under Various Agreements.
- - ---------------------------------------------------
On May 15, 1997, Johns Hopkins University ("Johns Hopkins") sent Genta a
letter stating that the license agreement entered into between the Company and
Johns Hopkins in May 1990 (the "Johns Hopkins Agreement") was terminated. On
November 26, 1997, Drs. Paul O.P. Ts'o and Paul Miller (the "Ts'o/Miller
Partnership") sent Genta a letter claiming that Genta was in material breach of
the February 1989 license agreement between the Company and the Ts'o/Miller
Partnership (the "Ts'o/Miller Agreement") for failing to pay royalties from 1995
through 1997. By letter dated April 28, 1998, the Ts'o/Miller Partnership
advised the Company that it was terminating the license granted pursuant to the
Ts'o/Miller Agreement. On June 4, 1998, the Company's statutory process agent
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received a Summons and Complaint in a lawsuit brought by Johns Hopkins against
the Company in Maryland Circuit Court for Baltimore City (Case No. 98120110).
Johns Hopkins alleges in the Complaint that the Company has breached the Johns
Hopkins Agreement and owes it licensing royalty fees and related expenses in the
amount of $308,832.24. Johns Hopkins also alleges the existence of a separate
March 1993 letter agreement wherein the Company agreed to support a fellowship
program at the Johns Hopkins School of Hygiene and Public Health and the
Company's breach thereof, with damages of $326,829.00. On August 10, 1998, the
Company's statutory process agent received a Summons and Complaint in a related
lawsuit brought by the Ts'o/Miller Partnership and others against the Company in
the same court (Case No. 98182113). The Ts'o/Miller Partnership claims that it
is owed licensing royalty fees in the amount of $287,671.23. The Company is
currently in settlement negotiations. See "Business--Anticode(TM) Brand of
Antisense Oligonucleotide Programs--Oligonucleotide Collaborative and Licensing
Agreements--Ts'o/Miller/Hopkins" and "Legal Proceedings."
The French government agency L'Agence Nationale de Valorisation de la
Recherche (ANVAR) asserted, in a letter dated February 13, 1998, that Genta
Europe was not in compliance with the ANVAR Agreement, and that ANVAR might
request the immediate repayment of such loan. On July 1, 1998, ANVAR notified
Genta Europe by letter of its claim that the Company remains liable for
4,187,423 FF (as of April 8, 1999, approximately $686,319) 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. See "Business--Genta Europe" and "Legal
Proceedings." There can be no assurance that the Company will not incur material
costs in relation to these terminations and/or assertions of default or
liability. See "MD&A--Liquidity and Capital Resources."
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.
- - ------------------------------------------------------
Genta is at an early stage of development. All of the Company's
potential therapeutic products are in research or development, and no revenues
have been generated from therapeutic product sales. To date, most of the
Company's resources have been dedicated to applying molecular biology and
medicinal chemistry to the research and development of potential Anticode(TM)
pharmaceutical products based upon oligonucleotide technology. While the Company
has demonstrated the activity of Anticode(TM) oligonucleotide technology in
model systems in vitro and the activity of antisense technology in animals and
has identified compounds that the Company believes are worthy of additional
testing, only one of these potential Anticode(TM) oligonucleotide products has
begun to be tested in humans, with such testing in its early stages. There can
be no assurance that the novel approach of oligonucleotide technology will
result in products that will receive necessary regulatory approvals or that will
be successful commercially. Further, results obtained in pre-clinical studies or
early clinical investigations or pilot bioequivalence trials are not necessarily
indicative of results that will be obtained in pivotal human clinical or
bioequivalence trials. There can be no assurance that any of the Company's or
Genta Jago's potential products can be successfully developed. Furthermore, the
Company's products in research or development may prove to have undesirable and
unintended side effects or other characteristics that may prevent or limit their
commercial use. The Company is pursuing research and development through Genta
Jago of a range of oral controlled-release formulations of currently available
pharmaceuticals. Many of the products to be developed through Genta Jago have
not yet been formulated using GEOMATRIX(R) technology. On July 27, 1998,
SkyePharma PLC, the parent company to Jago, 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. There can be no assurance that any of the Company's or
Genta Jago's products will obtain FDA or foreign regulatory approval for any
indication or that an approved compound would be capable of being produced in
commercial quantities at reasonable costs and successfully marketed. Products,
if any, resulting from Genta's or Genta Jago's research and development programs
are not expected to be commercially available for a number of years. Certain
competitive products have already been filed with and/or approved by the FDA.
See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of
Technological Change and Competition."
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Limited Availability of Net Operating Loss Carry Forwards.
- - ----------------------------------------------------------
At December 31, 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
carryforward expired during 1997 and 1998, respectively and the related deferred
tax asset and tax loss carryforward amounts have been reduced accordingly. The
remaining California tax loss will continue to expire in 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, 1997 and 1998. Because of the decrease
in value of the Company's stock, the ownership changes which occurred in 1996,
1997 and 1998 will have a material adverse impact on the Company's ability to
utilize these carryforwards. See "Market for Registrant's Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered Securities."
Dividends.
- - ----------
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying any such dividends in the foreseeable future. In addition,
the Company is restricted from paying cash dividends on its Common Stock until
such time as all cumulative dividends have been paid on outstanding shares of
its Series A and Series D Preferred Stocks. The Company currently intends to
retain its earnings, if any, after payment of dividends on outstanding shares of
Series A and Series D Preferred Stocks, for the development of its business. See
"MD&A--Liquidity and Capital Resources."
No Assurance of Regulatory Approval; Government Regulation.
- - -----------------------------------------------------------
The FDA and comparable agencies in foreign countries impose substantial
premarket approval requirements on the introduction of pharmaceutical products
through lengthy and detailed pre-clinical and clinical testing procedures and
other costly and time-consuming procedures. Satisfaction of these requirements,
which includes demonstrating to the satisfaction of the FDA and foreign
regulatory agencies that the product is both safe and effective, typically takes
several years or more depending upon the type, complexity and novelty of the
product. There can be no assurance that such testing will show any product to be
safe or efficacious or, in the case of certain of Genta Jago's products, to be
bioequivalent to a currently marketed pharmaceutical. Government regulation also
affects the manufacture and marketing of pharmaceutical products. The effect of
government regulation may be to delay marketing of any new products for a
considerable or indefinite period of time, to impose costly procedures upon the
Company's or Genta Jago's activities and to diminish any competitive advantage
that the Company or Genta Jago may have attained. It may take years before
marketing approvals are obtained for the Company's or Genta Jago's products, if
at all. There can be no assurance that FDA or other regulatory approval for any
products developed by the Company or Genta Jago will be granted on a timely
basis, if at all, or, if granted, that such approval will cover all the clinical
indications for which the Company or Genta Jago is seeking approval or will not
sustain significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use. Further, with respect to
the reformulated versions of currently available pharmaceuticals being developed
through Genta Jago, there is a substantial risk that the manufacturers or
marketers of such currently available pharmaceuticals will seek to delay or
block regulatory approval of any reformulated versions of such pharmaceuticals
through litigation or other means. Any significant delay in obtaining, or
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failure to obtain, such approvals could materially adversely affect the
Company's or Genta Jago's revenue. Moreover, additional government regulation
from future legislation or administrative action may be established which could
prevent or delay regulatory approval of the Company's or Genta Jago's products
or further regulate the prices at which the Company's or Genta Jago's proposed
products may be sold.
The Company is also subject to various foreign, federal, state and local
laws, regulations and recommendations (collectively "Governmental Regulations")
relating to safe working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use, manufacture, storage, handling and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the Company's
research and development work and manufacturing processes. In October 1996, JBL
retained 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. Six soil borings were drilled and
groundwater wells were installed at several locations around the site. 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.
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 de minimis PRPs will be
required to pay as little as $75,000 and as much as $750,000 to settle their
potential liability, depending upon the volume of wastes attributed to them. On
this basis the Company accrued $75,000 in 1998. The EPA planned on sending by
the beginning of January 1999 individual income calculations to each de minimis
PRP that received the aforementioned notice letter. While the terms of the
settlement have not been finalized, they should contain standard contribution
release, and protection language.
Uncertainty Regarding Patents and Proprietary Technology.
- - ---------------------------------------------------------
The Company's and Genta Jago's success will depend, in part, on their
respective abilities to obtain patents, maintain trade secrets and operate
without infringing the proprietary rights of others. No assurance can be given
that patents issued to or licensed by the Company or Genta Jago will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
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<PAGE>
will provide competitive advantages to the Company or Genta Jago. There can be
no assurance that the Company's or Genta Jago's patent applications will be
approved, that the Company or Genta Jago will develop additional products that
are patentable, that any issued patent will provide the Company or Genta Jago
with any competitive advantage or adequate protection for its inventions or will
not be challenged by others, or that the patents of others will not have an
adverse effect on the ability of the Company or Genta Jago to do business.
Competitors may have filed applications, may have been issued patents or may
obtain additional patents and proprietary rights relating to products or
processes competitive with those of the Company or Genta Jago. Furthermore,
there can be no assurance that others will not independently develop similar
products, duplicate any of the Company's or Genta Jago's products or design
around any patented products developed by the Company or Genta Jago. The Company
and Genta Jago rely on secrecy to protect technology in addition to patent
protection, especially where patent protection is not believed to be appropriate
or obtainable. No assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's or Genta Jago's trade secrets, or that
the Company or Genta Jago can effectively protect its rights to its unpatented
trade secrets.
Genta and Genta Jago have obtained licenses or other rights to patents
and other proprietary rights of third parties, and may be required to obtain
licenses to additional patents or other proprietary rights of third parties. No
assurance can be given that any existing licenses and other rights will remain
in effect or that any licenses required under any such additional patents or
proprietary rights would be made available on terms acceptable to the Company or
Genta Jago, if at all. If Genta's or Genta Jago's licenses and other rights are
terminated or if Genta or Genta Jago cannot obtain such additional licenses,
Genta or Genta Jago could encounter delays in product market introductions while
it attempts to design around such patents or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed. In
addition, the Company or Genta Jago could incur substantial costs, including
costs caused by delays in obtaining regulatory approval and bringing products to
market, in defending itself in any suits brought against the Company or Genta
Jago claiming infringement of the patent rights of third parties or in asserting
the Company's or Genta Jago's patent rights, including those granted by third
parties, in a suit against another party. The Company or Genta Jago may also
become involved in interference proceedings declared by the United States Patent
and Trademark Office (or any foreign counterpart) in connection with one or more
of its patents or patent applications, which could result in substantial cost to
the Company or Genta Jago, as well as an adverse decision as to priority of
invention of the patent or patent application involved. There can be no
assurance that the Company or Genta Jago will have sufficient funds to obtain,
maintain or enforce patents on their respective products or technology, to
obtain or maintain licenses that may be required in order to develop and
commercialize their respective products, to contest patents obtained by third
parties, or to defend against suits brought by third parties.
Dependence on Others.
- - ---------------------
The Company's and Genta Jago's strategy for the research, development
and commercialization of their products requires negotiating, entering into and
maintaining various arrangements with corporate collaborators, licensors,
licensees and others, and is dependent upon the subsequent success of these
outside parties in performing their responsibilities. No assurance can be given
that they will obtain such collaborative arrangements on acceptable terms, if at
all, nor can any assurance be given that any current collaborative arrangements
will be maintained.
Technology Licensed From Third Parties.
- - ---------------------------------------
The Company has entered into certain agreements with, and licensed
certain technology and compounds from, third parties. The Company has relied on
scientific, technical, clinical, commercial and other data supplied and
disclosed by others in entering into these agreements, including the Genta Jago
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<PAGE>
agreements, and will rely on such data in support of development of certain
products. Although the Company has no reason to believe that this information
contains errors of omission or fact, there can be no assurance that there are no
errors of omission or fact that would materially affect the future approvability
or commercial viability of these products.
Potential Adverse Effect of Technological Change and Competition.
- - -----------------------------------------------------------------
The biotechnology industry is subject to intense competition and rapid
and significant technological change. The Company and Genta Jago have numerous
competitors in the United States and other countries for their respective
technologies and products under development, including among others, major
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions. There can be no assurance that the
Company's or Genta Jago's competitors will not succeed in developing products or
other novel technologies that are more effective than any which have been or are
being developed by the Company or Genta Jago or which would render the Company's
or Genta Jago's technology and products non-competitive. Many of the Company's
and Genta Jago's competitors have substantially greater financial, technical,
marketing and human resources than the Company or Genta Jago. In addition, many
of those competitors have significantly greater experience than the Company or
Genta Jago in undertaking pre-clinical testing and human clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in healthcare. Accordingly, the Company's or Genta Jago's
competitors may succeed in obtaining regulatory approval for products more
rapidly than the Company or Genta Jago and such competitors may succeed in
delaying or blocking regulatory approvals of the Company's or Genta Jago's
products. As competitors of the Company or of Genta Jago receive approval for
products that share the same potential market as the Company's or Genta Jago's
potential products, the market share available to the Company or Genta Jago will
likely be reduced, thereby reducing the potential revenues and earnings
available to the Company or Genta Jago. In addition, increased pricing
competition would also likely result, further reducing the earnings potential of
the Company's or Genta Jago's products. The Company is aware that certain
competitors of Genta Jago have filed, and received approval of, an ANDA for a
generic formulation of drugs of which Genta Jago was working to develop generic
formulations. Furthermore, if the Company or Genta Jago is permitted to commence
commercial sales of products, it will also be competing with respect to
marketing capabilities, an area in which it has limited or no experience, and
manufacturing efficiency. There are many public and private companies that are
conducting research and development activities based on drug delivery or
antisense technologies. The Company believes that the industry-wide interest in
such technologies will accelerate and competition will intensify as the
techniques which permit drug design and development based on such technologies
are more widely understood.
Uncertainty of Clinical Trials and Results.
- - -------------------------------------------
The results of clinical trials and pre-clinical testing are subject to
varying interpretations. Even if the development of the Company's or Genta
Jago's respective products advances to the clinical stage, there can be no
assurance that such products will prove to be safe and effective. The products
that are successfully developed, if any, will be subject to requisite regulatory
approval prior to their commercial sale, and the approval, if obtainable, may
take several years. Generally, only a very small percentage of the number of new
pharmaceutical products initially developed is approved for sale. Even if
products are approved for sale, there can be no assurance that they will be
commercially successful. The Company or Genta Jago may encounter unanticipated
problems relating to development, manufacturing, distribution and marketing,
some of which may be beyond the Company's or Genta Jago's respective financial
and technical capacity to solve. The failure to address such problems adequately
could have a material adverse effect on the Company's or Genta Jago's respective
businesses, financial conditions, prospects and results of operations. No
assurance can be given that the Company or Genta Jago will succeed in the
development and marketing of any new drug products, or that they will not be
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rendered obsolete by products of competitors. "See "MD&A--Certain Trends and
Uncertainties--Potential Adverse Effect of Technological Change and
Competition."
Difficult Manufacturing Process; Access to Certain Raw Materials.
- - -----------------------------------------------------------------
The manufacture of Anticode(TM) oligonucleotides is a time-consuming and
complex process. Management believes that the Company has the ability to acquire
or produce quantities of oligonucleotides sufficient to support its present
needs for research and its projected needs for its initial clinical development
programs. However, in order to obtain oligonucleotides sufficient to meet the
volume and cost requirements needed for certain commercial applications of
Anticode(TM) oligonucleotide products, Genta requires raw materials currently
provided by a single supplier which is itself a development stage biotechnology
company (and a competitor of the Company) and is subject to uncertainties
including the potential for a decision by such supplier to discontinue
production of such raw materials, the insolvency of such supplier, or the
failure of such supplier to follow applicable regulatory guidelines. Products
based on chemically modified oligonucleotides have never been manufactured on a
commercial scale. The manufacture of all of the Company's and Genta Jago's
products will be subject to current GMP requirements prescribed by the FDA or
other standards prescribed by the appropriate regulatory agency in the country
of use. There can be no assurance that the Company or Genta Jago will be able to
manufacture products, or have products manufactured for it, in a timely fashion
at acceptable quality and prices, that they or third party manufacturers can
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 and Genta Jago have very limited experience in
pharmaceutical sales, marketing and distribution. In order to market and sell
certain products directly, the Company or Genta Jago would have to develop or
subcontract a sales force and a marketing group with technical expertise. There
can be no assurance that any direct sales or marketing efforts would be
successful.
Uncertainty of Product Pricing, Reimbursement and Related Matters.
- - ------------------------------------------------------------------
The Company's and Genta Jago's business may be materially adversely
affected by the continuing efforts of governmental and third party payers to
contain or reduce the costs of healthcare through various means. For example, in
certain foreign markets the pricing or profitability of healthcare products is
subject to government control. In the United States, there have been, and the
Company expects that there will continue to be, a number of federal and state
proposals to implement similar governmental control. While the Company cannot
predict whether any such legislative or regulatory proposals or reforms will be
adopted, the adoption of any such proposal or reform could adversely affect the
commercial viability of the Company's and Genta Jago's potential products. In
addition, in both the United States and elsewhere, sales of healthcare products
are dependent in part on the availability of reimbursement to the consumer from
third party payers, such as government and private insurance plans. Third party
payers are increasingly challenging the prices charged for medical products and
services, and therefore significant uncertainty exists as to the reimbursement
of existing and newly-approved healthcare products. If the Company or Genta Jago
succeeds in bringing one or more products to market, there can be no assurance
that these products will be considered cost effective and that reimbursement to
the consumer will be available or will be sufficient to allow the Company or
Genta Jago to sell its products on a competitive basis. Finally, given the above
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potential market constraints on pricing, the availability of competitive
products in these markets may further limit the Company's and Genta Jago's
flexibility in pricing and in obtaining adequate reimbursement for its potential
products. See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect
of Technological Change and Competition."
Need for and Dependence on Qualified Personnel.
- - -----------------------------------------------
The Company's success is highly dependent on the hiring and retention of
key personnel and scientific staff. The loss of key personnel or the failure to
recruit necessary additional personnel or both is likely further to impede the
achievement of development objectives. There is intense competition for
qualified personnel in the areas of the Company's activities, and there can be
no assurance that Genta will be able to attract and retain the qualified
personnel necessary for the development of its business. The Company has hired a
Vice President and Chief Financial Officer, a Vice President of Corporate
Development and a Vice President of Clinical and Regulatory Affairs.
Product Liability Exposure; Limited Insurance Coverage.
- - -------------------------------------------------------
The Company's, JBL's and Genta Jago's businesses expose them to
potential product liability risks that are inherent in the testing,
manufacturing, marketing and sale of human therapeutic products. 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.
Fundamental Change.
- - -------------------
In 1999, the Board of Directors of the Company and certain holders of
Common Stock and Series A and Series D Preferred Stock approved, in accordance
with Delaware law, an amendment to the Restated Certificate of Incorporation to
remove the "Fundamental Change" redemption right. The Company recently
distributed to its stockholder's an Information Statement on Form 14C describing
this stockholder action and expects formally to amend the Restated Certificate
of Incorporation after the expiration of the 20 day period provided for in Rule
14c-5 promulgated under the Exchange Act. The Company's Restated Certificate of
Incorporation currently provides that upon the occurrence of a "Fundamental
Change," the holders of Series A Preferred Stock have the option of requiring
the Company to repurchase all of each such holder's shares of Series A Preferred
Stock at the Redemption Price, an event that could result in the Company being
required to pay to the holders of Series A Preferred Stock stock or (in certain
circumstances) cash in the aggregate amount of approximately $26.9 million.
Furthermore, if the Company is required to redeem the Series A Preferred Stock,
it would also be required (subject to certain conditions) to offer to redeem the
Series D Preferred Stock, on a pari passu basis with the Series A Preferred
Stock and with the same type of consideration paid in redemption of the Series A
Preferred Stock. Upon a Fundamental Change, the Company could, under certain
circumstances, be required to pay the holders of Series D Preferred Stock cash
in the aggregate amount of approximately $26.0 million (not including an
additional $5.7 million that could be payable upon redemption of 40,395 shares
of Series D Preferred Stock issuable upon exercise of certain warrants).
"Fundamental Change" is defined as: (i) a "person" or "Group" (as defined),
together with any affiliates thereof, becoming the beneficial owner (as defined)
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of Voting Shares (as defined) of the Company entitled to exercise more than 60%
of the total voting power of all outstanding Voting Shares of the Company
(including any Voting Shares that are not then outstanding of which such person
or Group is deemed the beneficial owner) (subject to certain exceptions); (ii)
any consolidation of the Company with, or merger of the Company into, any other
person, any merger of another person into the Company, or any sale, lease or
transfer of all or substantially all of the assets of the Company to another
person (subject to certain exceptions); (iii) the sale, transfer or other
disposition (or the entry into a commitment to sell, transfer or otherwise
dispose) of all or any portion of the shares of Genta Jago held at any time by
the Company (or the imposition of any material lien on such shares which lien is
not removed within 30 days of imposition) and the sale (or functional equivalent
of a sale) of all or substantially all of the assets of Genta Jago; or (iv) the
substantial reduction or elimination of a public market for the Common Stock as
the result of repurchases, delisting or deregistration of the Common Stock or
corporate reorganization or recapitalization undertaken by the Company.
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 "MD&A--Certain Trends
and Uncertainties--No Assurance of Regulatory Approval; Government Regulation"
for a discussion of the Spill.
Volatility of Stock Price; Market Overhang from Outstanding Convertible
Securities and Warrants.
- - --------------------------------------------------------------------------------
The market price of the Company's Common Stock, like that of the common
stock of many other biopharmaceutical companies, has been highly volatile and
may be so in the future. Factors such as, among other things, the results of
pre-clinical studies and clinical trials by Genta, Genta Jago or their
competitors, other evidence of the safety or efficacy of products of Genta,
Genta Jago or their competitors, announcements of technological innovations or
new therapeutic products by the Company, Genta Jago or their competitors,
governmental regulation, developments in patent or other proprietary rights of
the Company, Genta Jago or their respective competitors, including litigation,
fluctuations in the Company's operating results, and market conditions for
biopharmaceutical stocks in general could have a significant impact on the
future price of the Common Stock. As of April 12, 1999, the Company had
15,080,326 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
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referred to under the caption "MD&A--Certain Trends and
Uncertainties--Subordination of Common Stock to Series A and Series D Preferred
Stock; Risk of Dilution; Anti-dilution Adjustments," or the availability of such
securities for sale, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the perception that such sales might occur, could adversely affect prevailing
market prices.
Certain Interlocking Relationships; Potential Conflicts of Interest.
- - --------------------------------------------------------------------
The Aries Funds have the contractual right to appoint a majority of the
members of the Board of Directors of the Company. The Aries Funds have
designated Michael S. Weiss, Glenn L. Cooper, M.D., Donald G. Drapkin, Bobby W.
Sandage, Jr., Ph.D., and Andrew J. Stein as nominees to the Board of Directors.
Such persons were elected as Directors of the Company. Paramount Capital Asset
Management, Inc. ("PCAM") is the investment manager and general partner of The
Aries Trust and the Aries Domestic Fund, L.P., respectively. The Aries Funds
currently do not hold a controlling block of voting stock, although the Aries
Funds have the present right to appoint a majority of the Board of Directors,
and to convert and exercise their securities into a significant portion of the
outstanding Common Stock. See "MD&A--Certain Trends and
Uncertainties--Concentration of Ownership and Control" below. Dr. Lindsay A.
Rosenwald, the President and sole stockholder of PCAM, is also the President of
Paramount Capital, Inc. and of Paramount Capital Investments LLC ("PCI"), a New
York-based merchant banking and venture capital firm specializing in
biotechnology companies. 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.
- 48 -
<PAGE>
Concentration of Ownership and Control.
- - ---------------------------------------
The Company's directors, executive officers and principal stockholders
and certain of their affiliates have the ability to influence the election of
the Company's directors and most other stockholder actions. See "MD&A--Certain
Trends and Uncertainties--Certain Interlocking Relationships; Potential
Conflicts of Interest." Accordingly, the Aries Funds have the ability to exert
significant influence over the election of the Company's Board of Directors and
other matters submitted to the Company's stockholders for approval. These
arrangements may discourage or prevent any proposed takeover of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over the then current market prices. Such stockholders may
influence corporate actions, including influencing elections of directors and
significant corporate events. See also "MD&A--Certain Trends and
Uncertainties--Effect of Certain Anti-Takeover Provisions" below.
Effect of Certain Anti-Takeover Provisions.
- - -------------------------------------------
The Company's Restated Certificate of Incorporation and By-laws include
provisions that could discourage potential takeover attempts and make attempts
by stockholders to change management more difficult. The approval of 66-2/3% of
the Company's voting stock is required to approve certain transactions and to
take certain stockholder actions, including the amendment of the By-laws and the
amendment, if any, of the anti-takeover provisions contained in the Company's
Restated Certificate of Incorporation.
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
- 49 -
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Since the Company has liquidated its Genta Europe subsidiary, the
Company has no material currency exchange or interest rate risk exposure as of
December 31, 1998. With the liquidation, there will be no ongoing exposure to
material adverse effect on the Company's business, financial condition, or
results of operation for sensitivity to changes in interest rates or to changes
in currency exchange rates.
- 50 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Genta Incorporated
Index to Financial Statements Covered
by Reports of Independent Auditors
<TABLE>
<CAPTION>
<S> <C>
Genta Incorporated
Reports of Independent Auditors ............................................................52
Consolidated Balance Sheets at December 31, 1997 and 1998...................................54
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998............................................................55
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1997 and 1998........................................56
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998............................................................59
Notes to Consolidated Financial Statements..................................................60
Genta Jago Technologies B.V. (a development stage company)
Reports of Independent Auditors.............................................................83
Balance Sheets at December 31, 1997 and 1998................................................85
Statements of Operations for the years ended December 31, 1996, 1997 and 1998
and for the period December 15, 1992 (inception) through December 31, 1998..................86
Statement of Stockholders' Equity (Net Capital Deficiency) for the Period
December 15, 1992 (inception) through December 31, 1998.....................................87
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and for the period December 15, 1992 (inception) through December 31, 1998.............88
Notes to Financial Statements...............................................................89
</TABLE>
- 51 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Genta Incorporated
We have audited the accompanying consolidated balance sheet of Genta
Incorporated and its subsidiaries as of December 31, 1998 and the related
statement of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements present fairly, in
all material respects, the financial position of the companies as of December
31, 1998, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the recurring losses from operations, and expectations of
continued losses in the foreseeable future, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 15, 1999
- 52 -
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Genta Incorporated
We have audited the accompanying consolidated balance sheet of Genta
Incorporated as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Genta Incorporated
at December 31, 1997, and the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has
incurred substantial and continuing operating losses since inception and
management expects that these losses will continue for the foreseeable future.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans as to this matter are also described in
Note 1. The 1997 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 8 to the financial statements, the Company restated its
operating results for 1996 to include the effects of recording imputed non-cash
interest costs totaling $666,667 and imputed non-cash dividends on preferred
stock totaling $2,348,000 not previously recorded in operating results for 1996.
This had the effect of increasing net loss applicable to common stockholders by
$3,014,667 in 1996, and increasing net loss per share (basic and diluted) by
$(1.01) in 1996.
ERNST & YOUNG LLP
San Diego, California
June 18, 1998
- 53 -
<PAGE>
Genta Incorporated
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------------ -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $2,194,424 $1,566,288
Short-term investments, available-for-sale 6,262,000 892,372
Prepaid expenses -- 405,700
Property held for sale -- 290,000
Other current assets 218,513 176,700
Net current assets of discontinued operations 582,100 2,606,304
------------------ -----------------
Total current assets 9,257,037 5,937,364
Property and equipment, net 892,608 148,245
Intangibles, net 2,435,172 1,460,383
Deposits and other assets 627,230 5,301
Net non-current assets of discontinued operations 1,866,902 --
------------------ -----------------
Total assets $15,078,949 $7,551,293
================== =================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 556,823 $ 432,116
Payable to research institution 635,661 635,661
Accrued compensation 427,536 84,888
LBC Settlement 568,420 --
Other accrued expenses 162,330 580,779
Deferred revenue 198,570 --
Current portion of long term debt 900,558 --
Net liabilities of liquidated foreign subsidiary -- 574,812
------------------ ----------------
Total current liabilities 3,449,898 2,308,256
Deficit in joint venture 2,204,053 2,284,018
Commitments and contingencies (Notes 7, 8 and 14)
Stockholders equity:
Preferred stock; 5,000,000 shares authorized, convertible
preferred shares outstanding:
Series A convertible preferred stock, $.001 par value;
456,600 and 447,600 shares issued and outstanding at
December 31, 1997 and 1998, respectively; liquidation value is
$26,856,000 at December 31, 1998 457 448
Series D convertible preferred stock, $.001 par value; $100 stated
value, 226,995 and 186,021 shares issued and
outstanding at December 31, 1997 and 1998,
respectively; liquidation value is $26,042,940 at
December 31, 1998
Common stock, $.001 par value; 70,000,000 shares 227 186
authorized; 5,712,363 and 10,426,215 shares issued and outstanding at
December 31, 1997 and 1998, respectively 5,712 10,426
Additional paid-in capital 129,320,493 130,627,251
Accumulated deficit (124,467,891) (132,053,657)
Accrued dividends payable 4,566,000 5,108,790
Deferred compensation -- (734,425)
--------------- -------------
Total stockholders' equity 9,424,998 2,959,019
--------------- -------------
Total liabilities and stockholders' equity $15,078,949 $ 7,551,293
=============== =============
</TABLE>
See accompanying notes.
- 54 -
<PAGE>
Genta Incorporated
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1996 1997 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Revenues: (restated)
Related party contract revenue $1,558,962 $350,097 $55,087
Collaborative research and
development -- 50,000 50,000
Gains on sale of technology 373,261 -- --
-------------- -------------- ------------
1,932,223 400,097 105,087
Costs and expenses:
Research and development 4,592,537 3,309,216 2,115,954
LBC settlement -- 600,000 547,000
General and administrative 5,096,304 6,131,355 4,020,169
---------- -------------- ---------
9,688,841 10,040,571 6,683,123
---------- -------------- ----------
Loss from operations (7,756,618) (9,640,474) (6,578,036)
Equity in net loss of joint venture (2,712,183) (1,193,321) (131,719)
Net loss of liquidated foreign subsidiary -- -- (98,134)
Other income (expense):
Interest income 140,932 458,437 272,336
Interest expense (885,602) (3,309,120) (8,661)
Other income (expense) -- -- (301,587)
-------------- -------------- ------------
Net loss from continuing operations (11,213,471) (13,684,478) (6,845,801)
Discontinued operations:
loss from discontinued operations (878,978) (1,741,339) (739,965)
Net loss (12,092,449) (15,425,817) (7,585,766)
Dividends accrued on preferred stock (2,524,701) (1,694,677) (632,790)
Dividends imputed on preferred stock (2,348,000) (16,158,000) --
-------------- ------------- -------------
--
Net loss applicable to common shares $(16,965,150) $(33,278,494) $ (8,218,556)
=================================================
Net loss per share (basic and diluted):
Continuing operations $(5.39) $(7.13) $(1.06)
=================================================
Discontinued operations (0.30) (0.39) (0.11)
=================================================
Net loss applicable to common shares $(5.69) $(7.52) $(1.17)
=================================================
Shares used in computing net loss per share 2,983,449 4,422,409 7,000,191
=================================================
</TABLE>
See accompanying notes.
- 55 -
<PAGE>
Genta Incorporated
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Additional Accrued
Preferred Stock Common Stock paid-in Accumulated Dividends
Shares Amount Shares Amount Capital Deficit Payable
-------------------- ---------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 603,000 603 2,396,557 2,396 102,395,673 (96,949,625) 1,572,588
Issuance of Series C
convertible preferred 6,000 6 -- -- 5,492,633 -- --
stock
Issuance of Series C
convertible preferred 1,044 1 -- -- 1,044,000 -- --
stock upon conversion of
promissory notes
Issuance of common stock upon
conversion of
Series A convertible (71,900) (72) 255,446 255 326,838 -- (327,021)
preferred stock and
related accrued dividends
Issuance of common stock
upon conversion
of Series B convertible (3,000) (3) 226,943 227 33,783 -- (34,007)
preferred stock and
related accrued dividends
Issuance of common stock upon
conversion of Series C Convertible (5,620) (6) 524,749 525 64,210 -- (64,729)
preferred stock and
related accrued
dividends
Issuance of common stock upon
conversion of -- -- 587,790 588 1,598,011 -- --
convertible debentures
Issuance of warrants to
purchase common -- -- -- -- 221,543 -- --
stock for patent legal
services
Issuance of common stock on -- -- 7,882 8 171,565 -- --
exercise of
options
Dividends accrued on preferred -- -- -- -- (2,524,701) -- 2,524,701
stock
Interest imputed on convertible -- -- -- -- 666,667 -- --
debentures
Net loss -- -- -- -- -- (12,092,449) --
------- --- --------- ----- ----------- ------------- ----------
Balance at December 31, 1996 529,524 529 3,999,367 3,999 109,490,222 (109,042,074) 3,671,532
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable Total
from Deferred Stockholders'
Stockholders Compensation Equity
------------ ------------ ---------------
<S> <C> <C>
Balance at December 31, 1995 (49,976) -- 6,971,659
Issuance of Series C
convertible preferred -- -- 5,492,639
stock
Issuance of Series C
convertible preferred -- -- 1,044,001
stock upon conversion of
promissory notes
Issuance of common stock upon
conversion of
Series A convertible -- -- --
preferred stock and
related accrued dividends
Issuance of common stock
upon conversion
of Series B convertible -- -- --
preferred stock and
related accrued dividends
Issuance of common stock upon
conversion
of Series Convertible -- -- --
preferred stock and
related accrued
dividends
Issuance of common stock upon
conversion of -- -- 1, 598,599
convertible debentures
Issuance of warrants to
purchase common -- -- 221,543
stock for patent legal
services
Issuance of common stock on -- -- 171,573
exercise of
options
Dividends accrued on preferred -- -- --
stock
Interest imputed on convertible -- -- 666,667
debentures
Net loss -- -- (12,092,449)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (49,976) -- 4,074,232
</TABLE>
- 56 -
<PAGE>
Genta Incorporated
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
--------------------- ----------------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 529,524 529 3,999,367 3,999 109,490,222 (109,042,074)
Issuance of common stock for -- -- 38,400 38 42,000 --
services rendered and severance
Return of common stock in exchange for
forgiveness of note receivable -- -- (1,250) (1) -- --
Issuance of common stock upon conversion
of Series A convertible preferred stock
and related accrued dividends (71,500) (71) 518,742 519 714,552 --
Issuance of common stock upon conversion
of Series C convertible preferred stock
and related accrued dividends (1,424) (1) 952,841 953 84,257 --
Issuance of common stock upon conversion
of convertible debentures -- -- 204,263 204 358,355 --
Issuance of Series D convertible stock
preferred stock 161,580 162 -- -- 13,957,100 --
Issuance of Series D convertible
preferred
stock upon conversion of senior 65,415 65 -- -- 3,270,684 --
secured
convertible bridge notes and accrued
interest
Dividends accrued on preferred stock -- -- -- -- (1,694,677) --
Issuance of warrants to purchase common
stock in connection with line of -- -- -- -- 98,000
credit
Interest imputed on convertible -- -- -- -- 3,000,000
debentures
Net loss -- -- -- -- -- (15,425,817)
========= ====== =========== ======== ============== ==============
Balance at December 31, 1997 683,595 $ 684 5,712,363 $ 5,712 $ 129,320,493 $(124,467,891)
</TABLE>
<TABLE>
<CAPTION>
Notes
Accrued Receivable Total
Dividend from Deferred Stockholders'
Payable Stockholders Compensation Equity
------------- -------------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 3,671,532 (49,976) -- 4,074,232
Issuance of common stock for -- -- -- 42,038
services rendered and severance
Return of common stock in exchange for
forgiveness of note receivable -- 49,976 49,975
Issuance of common stock upon conversion
of Series A convertible preferred stock
and related accrued dividends (715,000) -- -- --
Issuance of common stock upon conversion
of Series C convertible preferred stock
and related accrued dividends (85,209) -- -- --
Issuance of common stock upon conversion
of convertible debentures -- -- -- 358,559
Issuance of Series D convertible stock
preferred stock -- -- 13,957,262
Issuance of Series D convertible
preferred
stock upon conversion of senior -- -- -- 3,270,749
secured
convertible bridge notes and accrued
interest
Dividends accrued on preferred stock 1,694,677 -- --
Issuance of warrants to purchase common
stock in connection with line of -- -- -- 98,000
credit
Interest imputed on convertible -- -- -- 3,000,000
debentures
Net loss -- -- (15,425,817)
=========== =========== ======== ============
Balance at December 31, 1997 $ 4,566,000 $ -- $ -- $9,424,998
</TABLE>
- 57 -
<PAGE>
<TABLE>
<CAPTION>
Convertible Additional Accrued
Preferred Stock Common Stock paid-in Accumulated Dividends
Shares Amount Shares Amount Capital Deficit Payable
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 683,595 $684 5,712,363 $5,712 $129,320,493 $(124,467,891) $4,566,000
Issuance of common stock upon conversion
of Series A convertible preferred stock (9,000) (9) 65,295 65 89,944 -- (90,000)
and related accrued dividends
Issuance of common stock upon conversion
of Series D convertible preferred
stock (43,874) (44) 4,648,557 4,649 (4,605) -- --
Shares and warrants issued in connection
with LBC settlement 2,900 3 -- -- 965,417 -- --
Deferred compensation -- -- -- -- 888,792 -- --
Amortization of deferred compensation -- -- -- -- -- -- --
Dividends accrued on preferred stock -- -- -- -- (632,790) -- 632,790
Net loss -- -- -- -- -- (7,585,766) --
---------------------------------------------------------------------------------------
Balance at December 31, 1998 633,621 $634 10,426,215 $10,426 $130,627,251 $(132,053,657) $5,108,790
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable Total
From Deferred Stockholders'
Stockholders Compensation Equity
---------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ -- $ -- $9,424,998
Issuance of common stock upon conversion
of Series A convertible preferred stock -- -- --
and related accrued dividends
Issuance of common stock upon conversion of
Series D convertible preferred stock
-- -- --
Shares and warrants issued in connection
with LBC settlement -- -- 965,420
Deferred Compensation -- (888,792) --
Amortization of deferred compensation -- 154,367 154,367
Dividends accrued on preferred stock
Net loss -- -- (7,585,766)
---------------------------------------------
Balance at December 31, 1998 -- $(734,425) $2,959,019
=============================================
</TABLE>
See accompanying notes.
- 58 -
<PAGE>
Genta Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1996 1997 1998
------------------------------------------------------
(restated)
<S> <C> <C> <C>
Operating activities
Net loss $(12,092,449) $(15,425,817) $(7,585,766)
Items reflected in net loss not requiring cash:
Depreciation and amortization 1,518,142 1,022,432 957,583
Equity in net loss of joint venture 2,712,183 1,193,321 131,719
Loss on disposal of fixed assets -- 1,130,809 340,808
Loss on abandonment of patents -- 600,000 576,544
Interest accrued on convertible notes and debentures -- 279,308 --
Fair value of warrants issued in connection with line of credit -- 98,000 --
LBC settlement -- 568,420 547,000
Forgiveness of shareholder note -- 49,976 --
Fair value of common stock issued for severance and services -- 42,038 --
Compensation expense related to stock options -- -- 154,367
Interest imputed on convertible debentures 666,667 3,000,000 --
Changes in operating assets and liabilities:
Accounts and notes receivable 168,600 233,650 (400,972)
Inventories (289,599) 166,235 (137,603)
Prepaids and other assets (33,241) (33,349) (382,166)
Accounts payable, accrued expenses and other (803,347) (1,036,342) 268,278
Deferred revenue 44,589 5,449 (198,570)
----------- ---------- ----------
Net cash used in operating activities (8,108,455) (8,105,870) (5,728,768)
Investing activities
Purchase of short-term investments (1,497,775) (8,771,737) (1,882,290)
Maturities of short-term investments 1,497,775 2,509,737 7,251,918
Purchase of property and equipment (115,922) (34,246) (303,556)
Proceeds from sale of property and equipment -- 70,691 57,686
Loans receivable from joint venture (846,784) (595,771) (51,754)
Deposits and other 642,654 (67,331) 37,575
----------- ---------- ----------
Net cash provided (used in) by investing activities (320,052) (6,888,657) 5,109,579
Financing activities
Proceeds from notes payable 2,176,500 3,000,000 --
Repayment of notes payable and capital leases (1,948,438) (300,324) --
Proceeds from issuance of preferred stock, net 8,267,539 13,957,262 --
Proceeds from issuance of common stock, net 171,573 -- --
Other 21,591 -- --
----------- ---------- ----------
Net cash provided by financing activities 8,688,765 16,656,938 --
Increase in cash and cash equivalents 260,258 1,662,411 (619,189)
Less cash at liquidated foreign subsidiary -- -- (8,947)
Cash and cash equivalents at beginning of year 271,755 532,013 2,194,424
----------- ---------- ----------
Cash and cash equivalents at end of year $ 532,013 $2,194,424 $1,566,288
=========== ========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 225,186 $ 33,914 $ 8,661
=========== ========= ===========
Supplemental disclosure of noncash investing and financing activities:
Warrant dividend -- -- 632,790
Preferred stock dividend accrued 2,524,701 1,694,677 --
Dividends imputed on preferred stock 2,348,000 16,158,000 --
Common stock issued in payment of dividends on preferred stock 425,757 800,209 90,000
Preferred stock issued upon conversion of notes payable and accrued interest 1,044,001 -- --
--
Common stock issued upon conversion of notes and convertible debentures and 1,598,599 358,559 --
accrued interest
Exchange of deposits for purchase of equipment 1,200,000 251,000 --
Preferred stock issued upon conversion of short-term notes payable and accrued -- 3,270,749 --
interest -- -- --
Conversion of accrued expenses into paid in capital related to LBC settlement 418,417
</TABLE>
See accompanying notes.
- 59 -
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization and Significant Accounting Policies
Organization and Business
Genta Incorporated ("Genta" or the "Company") is an emerging
biopharmaceutical company engaged in the development of a pipeline of
pharmaceutical products. The Company has a 50% equity interest in a drug
delivery system joint venture with SkyePharma, PLC ("SkyePharma", formerly with
Jagotec AG ("Jagotec"), Genta Jago Technologies B.V. ("Genta Jago"), established
to develop oral controlled-release drugs. The Company's research efforts have
been focused on the development of proprietary oligonucleotide pharmaceuticals
intended to block or regulate the production of disease-related proteins at the
genetic level. The Company had also manufactured and marketed specialty
biochemicals and intermediate products to the in vitro diagnostic and
pharmaceutical industries through its manufacturing subsidiary, JBL Scientific,
Inc. ("JBL"), until the Company entered into an Asset Purchase Agreement with
Promega Corporation on March 19, 1999. JBL is presented as discontinued
operations. See Note 2.
Basis of Presentation
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, the Company has had
recurring operating losses since inception and management expects that they will
continue for the next several years. Management's plans for funding future
losses includes amending its agreement with Genta Jago on March 4, 1999, and the
Company has entered into an Asset Purchase Agreement with Promega Corporation
for the sale of certain assets and liabilities of JBL on March 19, 1999 (Note
2).
The Company is also actively seeking collaborative agreements, equity
financing and other financing arrangements with potential corporate partners and
other sources. However, there can be no assurance that any such collaborative
agreements or other sources of funding will be available on favorable terms, if
at all. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The 1998 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, JBL and Genta Pharmaceuticals Europe,
S.A. ("Genta Europe"), the Company's European subsidiary based in Marseilles,
France. During 1998, pursuant to a filing for "Cessation of Payment" in
Marseilles, France, the Company has deconsolidated the accounts for Genta Europe
and has recorded all remaining net liabilities at their estimated liquidation
value. All significant intercompany accounts and transactions have been
eliminated in consolidation.
- 60 -
<PAGE>
Investment in Joint Venture
The Company has a 50% ownership interest in a joint venture, Genta Jago,
a Netherlands corporation. The investment in joint venture is accounted for
under the equity method (Note 5).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements.
Actual results could differ from those estimates.
Revenue Recognition and Major Customers
Revenue from product sales is recognized upon shipment. As a result of
the Company's decision to sell JBL in March 1999, all product sales are reported
in discontinued operations.
Collaborative research and development revenues are recorded as earned,
generally ratably, as research and development activities are performed under
the terms of the contracts. Royalty revenues from license arrangements are
recognized when earned. Payments received in excess of amounts earned are
deferred.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of money market type funds and highly
liquid debt instruments with remaining maturities of three months or less when
purchased. Short-term investments consist of corporate notes, all of which
mature within 90 days from December 31, 1998. The estimated fair value of each
investment security approximates the amortized cost and, therefore, no
unrealized gains or losses existed as of December 31, 1998.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, and accounts payable
approximates fair value due to the short-term nature of these instruments. The
fair value of investments available for sale is based on current market value.
Concentration of Credit Risk
The Company markets its specialty biochemical and intermediate products
to the pharmaceutical and diagnostic industries. Generally, collateral is not
required on the Company's sales. Credit losses have historically been
insignificant and within management's expectations.
The Company invests its excess cash primarily in debt instruments of
domestic corporations with "AA" or greater credit ratings as defined by Standard
and Poors, although the Company's investment guidelines permit investment in "A"
rated domestic corporate obligations and other eligible investments. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.
- 61 -
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. As a result of the Company's decision to sell JBL in March 1999, all
inventories are included in net current assets of discontinued operations. See
Note 2.
Property Held for Sale
The Company acquired a pill machine on July 1, 1996 for $757,465 on
which it has recorded depreciation of $243,471 for a net book value of $513,994.
The Company has entered into an agreement to sell the machine for $290,000 and
has, therefore, recorded this asset held for sale at that net realizable value
and has recorded a $223,994 loss on the impairment of this asset.
Property and Equipment
Property and equipment is stated at cost and depreciated over the
estimated useful lives, ranging from 2 to 7 years, of the assets using the
straight-line method. Leasehold improvements are stated at cost and amortized
over the shorter of the estimated useful lives of the assets or the lease term.
Amortization of equipment under capital leases is reported with depreciation of
property and equipment. The Company's policy is to evaluate the appropriateness
of the carrying value of the undepreciated value of the long-lived assets on the
basis of estimated future cash flows (undiscounted) and other factors.
Intangible Assets
Intangible assets, consisting primarily of capitalized patent costs
(as well as purchased proprietary technology at JBL), are amortized using the
straight line basis over a term of 5 years for issued patents, 14 years for
purchased proprietary technology and 5-7 years for organizational and other
amortizable costs. The Company's policy is to evaluate the appropriateness of
the carrying values of the unamortized balances of intangible assets on the
basis of estimated future cash flows (undiscounted) and other factors. If such
evaluation were to indicate an impairment of these intangible assets, such
impairment would be recognized by a write-down of the applicable assets. The
Company evaluates, each financial reporting period, the continuing value of
patents and patent applications. Through this evaluation, the Company may elect
to continue to maintain these patents; seek to out-license them; or abandon
them. As a result of such evaluation, the Company recorded charges in the fourth
quarter to general and administrative expenses of $600,000 and $577,000 in 1997
and 1998, respectively, for specific capitalized patents no longer related to
the research and development efforts of the Company.
Dividends
The number of shares of common stock issued in payment of dividends on
Series A Preferred Stock, is based on the fair market value of such shares of
common stock on the date the dividends become due.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109 the Company records valuation allowances against net deferred tax
assets. If based upon the available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. In assessing the
realizability of deferred assets, management considers whether it is more likely
than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income and when temporary differences become deductible. The
Company considers, among other available information, uncertainties surrounding
the recoverability of deferred tax assets, scheduled reversals of deferred tax
liabilities, projected future taxable income, and other matters in making this
assessment.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), requires use of option valuation
models that were not developed for use in valuing employee stock options. The
Company provides pro forma disclosure pursuant to SFAS No. 123 in Note 9 to the
financial statements.
Under APB 25, deferred compensation is recorded for the excess of the
fair value of the stock on the measurement date (which is the latter of the date
of the option grant or the date of stockholder approval of options available for
grant), over the exercise price of the option (intrinsic value method). The
deferred compensation is amortized over the vesting period of the option.
The Company accounts for stock option grants and similar equity
instruments granted to non-employees under the fair value method provided for in
SFAS No. 123.
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<PAGE>
Net Loss Per Common Share
Under SFAS No. 128, the Company is required to present basic and
diluted earnings per share if applicable. Basic earnings per share is based upon
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 years ended December 31, 1996, 1997
and 1998 is based on the 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.
All share data and per share amounts have been retroactively restated to reflect
a ten for one reverse stock split authorized by the Board of Directors on April
4, 1997.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income"
("SFAS No. 130") and SFAS No. 131, "Segment Information" ("SFAS No. 131"), and
which were both adopted by the Company in 1998. SFAS No. 130 requires that all
components of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized. Other than Net
Loss, the Company had no other material components of comprehensive income.
SFAS No. 131 amends the requirements for public enterprises to report
financial and descriptive information about its enterprise for which separate
financial information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance. The financial
information is required to be reported, as disclosed in Note 17, on the basis
that is used internally for evaluating the segment performance.
On June 16, 1998 the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
standard is effective for fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
instruments at fair value. The Company is currently evaluating the impact of
this pronouncement and does not believe adoption of SFAS No. 133 will have a
material impact on the Company's financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. Discontinued Operation
On March 19, 1999, the Company entered into an Asset Purchase Agreement
with Promega Corporation whereby a wholly-owned subsidiary of Promega will
acquire substantially all of the assets and certain liabilities of JBL for cash,
a promissory note, and certain pharmaceutical development services in support of
Genta's development project.
As a result of the pending sale, the Company's specialty biochemical
manufacturing segment (JBL) has been presented as discontinued operations. The
assets and liabilities relating to the discontinued operations are included in
net assets of discontinued operations in the consolidated balance sheets at
December 31, 1997 and 1998. The results of operations for the discontinued
segment are included in discontinued operations in the consolidated statements
of operations for the years ended December 31, 1996, 1997 and 1998.
- 63 -
<PAGE>
Net assets of discontinued operations consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Accounts receivable, net.................... $ 431,046 $ 832,018
Inventories, net............................ 826,008 963,611
Property and equipment, net................. 825,542 763,082
Other assets................................ 1,041,360 897,399
Liabilities................................. (674,954) (849,806)
-------- ---------
Total.................................. $ 2,449,002 $ 2,606,304
============ ==============
Less current portion........................ (582,100) (2,606,304)
------------- --------------
$ 1,866,902 $ --
Operating results of the discontinued segment consisted of the following:
Year Ended
December 31,
-------------------------------------------------
1996 1997 1998
---- ---- ----
Product sales..................................... $ 4,924,694 $ 4,701,649 $ 5,346,795
Operating expenses................................ (5,821,905) (6,520,831) (6,087,565)
Other income...................................... 18,233 77,843 805
----------- ------------ ------------
Loss.............................................. $ (878,978) $(1,741,339) $ (739,965)
=========== ============ ============
</TABLE>
One customer, a European distributor, accounted for approximately 27%,
25% and 14% of product sales during the years ended December 31, 1996, 1997 and
1998, respectively. One other customer, who accounted for less than 10% of
product sales in 1997, accounted for approximately 19% of product sales during
the year ended December 31, 1998.
3. Property and Equipment
Property and equipment is comprised of the following:
December 31,
1997 1998
-----------------------------------
Equipment .................................. $1,661,612 $ 148,997
Leasehold improvements...................... 75,331 --
Furniture and fixtures...................... 14,338 9,768
-----------------------------------
1,751,281 158,765
Less accumulated depreciation and
amortization ............................ (858,673) (10,520)
-----------------------------------
$ 892,608 $148,245
===================================
4. Notes Receivable from Officers and Employees
At December 31, 1996, notes receivable consisted of loans made to
officers and employees to facilitate their relocation. Generally, such loans are
secured by each individual's residence, bear interest at approximately 7.0% per
annum, and mature on the earlier of: (i) such officer's or employee's
termination, (ii) five years from the date of issuance, or (iii) on the date of
sale of the property. The notes were repaid in fiscal 1997 in connection with
the termination of the related employees' employment.
5. Genta Jago Joint Venture
Beginning in 1996 and through the first quarter of 1999, the Company has
significantly reduced its involvement in Genta Jago. The following represents a
history of the formation, activities and accounting of Genta Jago.
In 1992, Genta and Jagotec determined to enter into a joint venture
(Genta Jago). The Company's purpose in establishing Genta Jago was to develop
products using a limited-scope license to Jagotec's GEOMATRIX technology with
the objective of producing shorter-term earnings than were expected from the
Company's Anticode(TM) antisense programs. Genta originally contributed $4
million in cash to Genta Jago as well as the rights to apply its Anticode(TM)
oligonucleotide technology to six products. Genta issued 120,000 shares of
Common Stock valued at $7.2 million to Jagotec and its affiliates in 1992 as
consideration for its interest in Genta Jago, to induce Jagotec to license to
Genta Jago, for what the parties believed was a substantial discount from the
underlying value of such license, Jagotec's GEOMATRIX technology with respect to
approximately 25 products (the "Initial License") and to license to Genta
Jagotec's GEOMATRIX technology for use in Genta's Anticode(TM) oligonucleotide
development programs. The $7.2 million fair value assigned to the 120,000
unregistered common shares issued to Jagotec by Genta for the GEOMATRIX license
represented a 33% discount from the trading market price of registered shares on
the date of formation of the joint venture (December 15, 1992) and was expensed
by Genta as acquired in-process research and development in 1992 as there were
no alternative future uses for the acquired technology, and realization of
ultimate profits from the acquired technology was not assured. Since Genta had
no carrying value assigned to the technology Genta contributed to Genta Jago,
there was no accounting for such capital contribution. The Common Stock issued
by Genta was unregistered and therefore was recorded at a discount to the
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<PAGE>
then-current trading value of registered shares. The $4.0 million in cash paid
to Genta Jago was recorded by Genta as investment in joint venture.
In 1994, separate from the original 1992 joint venture agreement, Genta
and Jagotec began negotiations to expand Genta Jago to include the GEOMATRIX
technology as applied to 35 additional products (the "Additional License"). In
1994, Jagotec granted Genta, for $1.85 million, an option (the "Expansion
Option"), exercisable solely at Genta's discretion through April 30, 1995, to
expand the joint venture by requiring Jagotec to contribute rights under the
Additional License at what the parties believed was a substantial discount to
its actual fair value. The $1.85 million was considered by Genta to be a partial
cost of acquiring the Additional License, and, since it was not refundable under
any circumstances and there was no assurance of future recoverability of the
$1.85 million (i.e. recoverability was dependent upon Genta Jago achieving
profitability), Genta expensed such payment in 1994 as acquired in-process
research and development. An additional $2.0 million (the "Deposit") was
deposited with Jagotec in 1994, but would only be retained by Jagotec, as
partial payment of the exercise price for the Expansion Option, if Genta
actually exercised the Expansion Option. If such Expansion Option was not
exercised, the $2.0 million Deposit would be transferred to Genta Jago in the
form of working capital loans payable by Genta Jago to Genta. Accordingly, at
December 31, 1994, the Deposit was recorded by Genta as a loan receivable from
joint venture, and would remain so until its ultimate use was identified.
Pursuant to the terms of the Expansion Option, for Genta to exercise the
Expansion Option Genta would have had to pay Jagotec an aggregate of $3.15
million in cash and 124,000 shares of Common Stock, valued at $1.6 million
(based on the trading price at such time). The parties agreed the $3.15 million
in cash would consist of (i) the Deposit made by Genta in 1994, which would be
applied to the Expansion Option's exercise price upon Genta's election, in 1995,
to exercise such Expansion Option; and (ii) an additional cash payment of $1.15
million to exercise the Expansion Option to be paid by Genta in 1995. In 1995,
Genta exercised the Expansion Option. Consideration for the Expansion Option
exercise paid in 1995 represented an aggregate amount of $4.8 million. This
amount was expensed as acquired in-process research and development in 1995, as
there were no identified alternative future uses for the Additional License and
recoverability of the $4.8 million was not assured.
In each instance, the technological feasibility of the aforementioned
acquired in-process research and development had not yet been established and
the technology had no future alternative uses at the dates of the acquisitions.
Furthermore, due to continuing uncertainties regarding the Company's ability to
demonstrate bioequivalence of potential products at that time, management was
unable to make estimates regarding the remaining efforts necessary to develop
the acquired, in-process technology into a commercially viable product. However,
it was expected that any such development would require significant cash
resources.
From 1992 through December 31, 1998, the Company has provided funding to
Genta Jago pursuant to a working capital loan agreement which expired in October
1998. These advances were structured as working capital loans, to give Genta the
protections of a debt holder with respect to such amounts and to maintain
Genta's and Jagotec's respective equity ownership in Genta Jago at a 50/50
ratio. The Company has recorded all of the net losses incurred by Genta Jago as
a reduction of the Company's investment in joint venture or loans receivable
from joint venture. Genta initially carried the advances as "loans receivable
from joint venture" until Genta Jago actually spent the funds, since Genta
believed it had the legal right to recover any unexpended funds as a
debtholder. However, as the funds were spent by Genta Jago, Genta was no longer
assured of the collectibility of such loans, so the carrying value was reduced
accordingly as the offset to Genta's recognition of its equity in the net loss
of Genta Jago. Therefore, at all times Genta's recorded asset "loans receivable
from joint venture" never exceeded the amount of Genta Jago's unexpended cash.
Genta did not believe it was appropriate to carry its investment in or loans
receivable from Genta Jago at any amount in excess of Genta Jago's cash, as
there was no assurance of recoverability of such additional amounts.
Accordingly, Genta recognized 100% of the losses of Genta Jago.
In 1995, Genta Jago returned certain Anticode(TM) technology to Genta in
exchange for Genta's forgiveness of $4.4 million of principal and $0.3 million
of interest outstanding under existing working capital loans to Genta Jago. This
amount was determined by an arm's length negotiation between Genta and Jagotec
and was based on the amount actually expended by Genta Jago for research and
development related to such Anticode(TM) oligonucleotide technology from the
time Genta Jago originally acquired the relevant technology in 1992 through the
date of return in 1995. This forgiveness had no impact on Genta's financial
statements, as Genta had already expensed Genta Jago's expenditures of such
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<PAGE>
cash, and had no carrying value for the loans at the time of the forgiveness.
Genta Jago treated the forgiveness as a gain on the waiver of debt because this
reflected the legal form of the transaction. As of December 31, 1998, the
Company had advanced working capital loans of approximately $15.8 million to
Genta Jago, net of principal repayments and $4.4 million in forgiven principal
and $0.3 million in forgiven interest accrued thereon. Such loans bore interest
at rates per annum ranging from 5.81% to 7.5%, and were payable in full on
October 20, 1998. However, Genta Jago did not repay such loans to Genta as Genta
and Jagotec were in the process of renegotiating the terms of the joint venture
agreement.
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
development costs and funding obligations and SkyePharma agreed to be
responsible for substantially all of 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 therefrom to be allocated in agreed-upon
percentages between Genta and SkyePharma as set forth in such interim agreement.
Under terms of the joint venture, Genta Jago contracted with the Company
to conduct research and development and provide certain other services. Revenues
associated with providing such services totaled $1.6 million, $350,000, and
$55,000 for the years ended December 31, 1996, 1997, and 1998 respectively.
Terms of the arrangement also grant the Company an option to purchase Jagotec's
interest in Genta Jago exercisable from December 31, 1998 through December 31,
2000.
Genta Jago entered into collaborative development agreements with
Gensia, Inc., Apothecon, Inc., a subsidiary of Bristol-Myers Squibb Co., and
Krypton, Ltd., a subsidiary of SkyePharma, during January 1993, March 1996 and
October 1996, respectively. Such agreements provide funding to Genta Jago for
the development and clinical testing of selected controlled-release
pharmaceuticals in addition to potential milestone payments and royalties on
future product sales. Effective October 1996, Gensia and SkyePharma reached an
agreement whereby a SkyePharma subsidiary, Brightstone Pharma, Inc.
("Brightstone"), was assigned Gensia's rights (and those of Gensia's partner,
Boehringer Mannheim) to develop and co-promote the potentially bioequivalent
nifedipine product under the collaboration agreement with Genta Jago. The
assignment was accepted by Genta Jago and has no impact on the terms of the
original agreement.
Condensed financial information for Genta Jago Technologies B.V. is set forth
below.
- 66 -
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997 1998
--------------------------------------
--------------------------------------
<S> <C> <C>
Balance Sheet Data:
Receivables under collaboration
agreements.......................... $ 1,400,000 $ 3,348,000
Other current assets.................. 31,000 24,000
--------------------------------------
Total current assets.................. 1,431,000 3,372,000
Other assets.......................... 4,000 12,000
--------------------------------------
Total Assets $ 1,435,000 $ 3,384,000
======================================
Current liabilities................... $ 5,213,000 $ 8,426,000
Notes payable to Genta ............... 15,837,000 15,837,000
Net capital deficiency................ (19,615,000) (20,879,000)
----------- -----------
Total liabilities and capital deficiency $ 1,435,000 $ 3,384,000
======================================
Year ended December 31,
1996 1997 1998
--------------------------------------------------
Statements of Operations Data:
Collaborative research and development
revenues $ 5,477,000 $ 3,634,000 $ 2,162,000
Costs and expenses....................... 8,453,000 4,791,000 2,112,000
--------------------------------------------------
Income (loss) from operations............ (2,976,000) (1,157,000) 50,000
Interest expense to Genta, net of
interest income..................... (956,000) (1,175,000) (1,314,000)
---------- ---------- ----------
Net loss................................. $ (3,932,000) $ (2,332,000) $ (1,264,000)
==================================================
</TABLE>
- 67 -
<PAGE>
6. Intangibles
Intangibles consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
------------------------------------------
<S> <C> <C>
Patent and patent applications............ $ 2,529,510 $ 1,952,956
Organizational and other amortizable
costs.................................. 134,521 134,521
------------------------------------------
2,664,031 2,087,477
Less accumulated amortization............. (228,859) (627,094)
---------- ----------
$ 2,435,172 $ 1,460,383
==========================================
</TABLE>
7. Debt
In February 1997, the Company raised gross proceeds of $3 million in a
private placement of units consisting of (i) Senior Secured Convertible Bridge
Notes (the "Convertible Notes") that bore interest at a stated rate of 12% per
annum and matured on December 31, 1997, as extended, and (ii) warrants to
purchase an aggregate of approximately 6.4 million shares of common stock. The
Convertible Notes were convertible into Series D Convertible Preferred Stock at
the option of the holder, at an initial conversion price of $50.00 per share,
subject to antidilution adjustments. In May 1997, $650,000 of the Convertible
Notes were converted into 13,000 shares of Series D Preferred Stock and in
December 1997, the remaining $2,350,000 of the Convertible Notes and accrued
interest were converted into 52,415 shares of Series D Preferred Stock. Since it
is unclear that the bridge notes had any value as indebtedness, all of the $3.0
million proceeds were allocated to the warrants. Accordingly, the $3.0 million
attributed to the value of the warrants as well as interest at the stated rate
of 12% on the Convertible Notes were recorded during the period the notes were
outstanding as interest expense.
In September 1996, the Company raised gross proceeds of $2 million
(approximately $1.9 million net of offering costs) through the sale of
Convertible Debentures to investors in a private placement outside the United
States. The Convertible Debentures were convertible, at the option of the
holders, at any time on or after October 23, 1996, into shares of common stock
at a conversion price equal to 75% of the average Nasdaq closing bid price of
Genta's common stock for a specified period prior to the date of conversion.
Terms of the Convertible Debentures also provided for interest payable in shares
of the Company's common stock. In November 1996, $1.65 million of the
Convertible Debentures and the related accrued interest was converted into
approximately 590,000 shares of common stock and in 1997, the remaining $350,000
and related accrued interest was converted into 204,263 shares of common stock.
In accordance with the Emerging Issues Task Force Bulletin D-60, "Accounting for
the Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature" ("EITF D-60"), the Company recorded non-cash
imputed interest costs totaling $666,667 in 1996 related to the discounted
conversion terms. The Convertible Debentures bore interest at an effective
interest rate of 38% per annum.
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<PAGE>
Notes payable at Genta Europe consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
------------------------------------------
<S> <C> <C>
Research financing obligation payable to a
French governmental agency, non-interest
bearing, maturing through 2002.............. $ 897,627 $ --
Other....................................... 2,931 --
------------------------------------------
900,558 --
Less current portion........................ (900,558) --
------------------------------------------
$ -- $ --
==========================================
</TABLE>
As previously described, Genta Europe is in the process of liquidation
and the fair value of its debt obligations is not readily determinable. The
carrying value at December 31, 1998, approximately $964,000, represents the
value of the original issuance of such debt instruments, which may be liquidated
against Genta Europe's $590,000 deposit with such French governmental agency. As
previously mentioned, pursuant to a filing for "Cessation of Payment", the
Company has deconsolidated the accounts for Genta Europe and accordingly the
aforementioned note payable and deposit are recorded in net liabilities of
liquidated foreign subsidiary at December 31, 1998. The following represents a
history of the funding obligations of Genta Europe.
During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe") received
approximately $1,100,000 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 Genta. 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. 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.
In June 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; payment of alleged back rent due; and payment of a
lease guarantee for nine years' rent (see Note 14). 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. The
Company's attorney in France notified the plaintiff of the decision and that
they have 30 days from such notice to appeal. The 30-day appeal period has
elapsed, and the Company is awaiting formal notification by the court that an
appeal has not been made. Such decision does not preclude Marseille Amenagement
from pursuing its claims in other courts in France or in the United States, and
there can be no assurance that they will not do so. However, in the opinion of
French counsel, it is highly remote that Marseille Amenagement will bring an
action against Genta before U.S. courts.
- 69 -
<PAGE>
8. Operating Leases
The Company leases its facilities under operating leases that generally
provide for annual cost of living related increases. The JBL facilities are
leased from its prior owners, who include a director, an executive officer and
other stockholders of the Company. Minimum future obligations under operating
leases at December 31, 1998 are as follows:
Operating Leases
-------------------------------
Related
parties (JBL) Others
--------------------------------
1999.................................... $414,231 $ 46,127
2000.................................... 207,641 43,454
2001.................................... -- 10,864
--------------------------------
Total future minimum lease payments $621,872 $100,445
================================
Total rent expense under operating leases for the years ended December
31, 1996, 1997 and 1998 was $1,043,000, $774,000, and $465,000, respectively, of
which approximately $428,000 annually was for discontinued operations and the
balance for continuing operations.
9. Stockholders' Equity
Common Stock
In August 1997, 7,500 shares of common stock were issued to a former
Officer of the Company pursuant to the terms of a severance agreement. In
December 1997, 30,900 shares of common stock were issued to two former Board
Members of the Company pursuant to the terms of their consulting agreements.
Also in December 1997, 1,250 shares of common stock that had been previously
issued to a former Board Member were returned to the Company in exchange for the
forgiveness of a note receivable from such former Board Member.
On April 4, 1997, the Board of Directors authorized, and the
Shareholders approved, a ten for one reverse stock split. All share and per
share amounts and stock option data have been restated to reflect the stock
split retroactively.
In September 1996, the Company raised gross proceeds of $2 million
(approximately $1.9 million net of offering costs) through the sale of
Convertible Debentures to investors in a private placement outside the United
States. The Convertible Debentures were convertible, at the option of the
holders, at any time on or after October 23, 1996, into shares of common stock
at a conversion price equal to 75% of the average Nasdaq closing bid price of
Genta's common stock for a specified period prior to the date of conversion.
Terms of the Convertible Debentures also provided for interest payable in shares
of the Company's common stock. In November 1996, $1.65 million of the
Convertible Debentures and the related accrued interest was converted into
approximately 590,000 shares of common stock and in 1997, the remaining $350,000
and related accrued interest was converted into 204,263 shares of common stock.
The Company recorded non-cash inputed interest costs totalling $666,667 in 1996
related to the discounted conversion terms.
- 70 -
<PAGE>
Preferred Stock
The Company entered into a Settlement Agreement and Release dated as of
November 30, 1998 (the "Settlement Agreement") with LBC Capital Resources, Inc.
("LBC") and others. Pursuant to the Settlement Agreement, the Company agreed to
issue to LBC 2,900 shares of Series D Convertible Preferred Stock; to issue to
LBC or its designee five year warrants (the "LBC Warrants") to acquire 700,000
shares of Common Stock at an exercise price of $0.52 per share; to make certain
payments to LBC totaling approximately $182,000; and to pay to LBC, upon the
exercise of certain warrants, a commission equal to up to $150,000 in the
aggregate. The respective conversion and exercise prices of the Series D
Preferred Stock and the LBC Warrants are subject to adjustment upon the
occurrence of certain events. Such Series D Preferred Stock and LBC Warrants
were valued at $965,000 aggregating a total settlement of $1,147,000 of which
$600,000 in 1997 and $547,000 in 1998 were charged to operations. The $150,000
in commissions was not accrued as such commissions are contingent upon the
occurrence of future events.
In June 1997, the Company raised gross proceeds of approximately $16.2
million (approximately $14 million net of placement costs) through the private
placement of 161.58 Premium Preferred Units(TM). Each unit sold in the private
placement consists of (i) 1,000 shares of Premium Preferred Stock(TM), par value
$.001 per share, stated value $100 per share (the "Series D Preferred Stock"),
and (ii) warrants to purchase 5,000 shares of the Company's common stock, (the
"Class D Warrants") at any time prior to the fifth anniversary of the final
closing (the "Class D Warrants"). The Series D Preferred Stock is immediately
convertible at the option of the holder into shares of common stock at an
initial conversion price of $0.94375 per share (subject to antidilution
adjustment). In addition, the holders of the Series D Preferred Stock sold in
the Private Placement are entitled to a liquidation preference aggregating
$26,043,000. Due to the increase in value associated with the discounted
conversion terms and liquidation preference of the Series D Preferred Stock, the
Company has accounted for such increase by charging $16,158,000 to dividends
imputed on preferred stock.
On May 29, 1998, the Company requested, and subsequently received,
consents (the "Letter Agreements") from the holders of a majority of the Series
D Preferred Stock to waive the Company's obligation to use best efforts to
obtain the effectiveness of a registration statement with the SEC as to Common
Stock issuable upon conversion of Series D Preferred Stock and exercise of Class
D Warrants. In exchange, the Company agreed to waive the contractual "lock-up"
provisions to which such consenting holders were subject and which provisions
would have prevented the sale of up to 75% of their securities for a nine-month
period following the effectiveness of the registration statement; and to extend
to January 29, 1999 from June 29, 1998 the Reset Date referred to in the
Certificate of Designation of the Series D Preferred Stock. In addition, through
the Letter Agreements, the Company agreed to issue to such holders warrants to
purchase at $0.94375 per share, an aggregate of up to 807,900 shares of Common
Stock, subject to certain anti-dilution adjustments, exercisable until June 29,
2002. The shares were valued at approximately $633,000 and recorded as a
dividend. The Company had conditioned the effectiveness of such consent on its
acceptance by a majority of the Series D Preferred Stockholders. The Series D
Preferred Stock began earning dividends, payable in shares of the Company's
Common Stock, at the rate of 10% per annum subsequent to the new Reset Date of
January 29, 1999.
In February 1997, the Company raised gross proceeds of $3 million in a
private placement of units consisting of (i) Senior Secured Convertible Bridge
Notes (the "Convertible Notes") that bore interest at a stated rate of 12% (see
Warrants) per annum and matured on December 31, 1997, as extended, and (ii)
warrants to purchase an aggregate of approximately 6.4 million shares of common
stock. The Convertible Notes were convertible into Series D Convertible
Preferred Stock at the option of the holder, at an initial conversion price of
$50.00 per share, subject to antidilution adjustments. In May 1997, $650,000 of
the Convertible Notes were converted into 13,000 shares of Series D Preferred
Stock and in December 1997, the remaining $2,350,000 of the Convertible Notes
and accrued interest were converted into 52,415 shares of Series D Preferred
Stock. Since it is unclear that the bridge notes had any value as indebtedness,
all of the $3.0 million proceeds were allocated to the warrants. Accordingly,
the $3.0 million attributed to the value of the warrants, as well as interest at
the stated rate of 12% on the Convertible Notes, was recorded during the period
the notes were outstanding.
In March 1996, the Company raised gross proceeds of $6 million
(approximately $5.5 million net of offering fees) through the issuance of Series
C Convertible Preferred Stock (the "Series C Preferred Stock") sold to
institutional investors in a private placement. The Series C Preferred Stock was
immediately convertible, at the option of the holder, into shares of common
stock at a conversion price equal to 75% of the average Nasdaq closing bid price
of Genta's common stock for a specified period prior to the date of conversion.
In 1996, 5,620 shares of the Series C Preferred Stock and accrued dividends were
converted at the option of the holders into 524,749 shares of Genta's common
- 71 -
<PAGE>
stock. In 1997, 1,424 shares of the Series C Preferred Stock and accrued
dividends were converted at the option of the holders into 952,841 shares of
Genta's common stock. In connection with a restatement of the Company's 1996
financial statements included in its Annual Report on Form 10-K and in
consideration of EITF D-60, which was issued in March 1997, the Company recorded
imputed non-cash dividends on preferred stock totaling $2,348,000 in 1996 for
discounted conversion terms related to Series C convertible preferred stock.
In December 1995, the Company completed the sale of 3,000 shares of
Series B Convertible preferred stock (the "Series B Preferred Stock") at a price
of $1,000 per share to institutional investors outside of the United States. The
Series B Preferred Stock was immediately convertible, at the option of the
holder, into shares of common stock at a conversion price equal to 75% of the
average Nasdaq closing bid prices of Genta's common stock for a specified period
prior to the date of conversion. The Series B Preferred Stock was converted into
226,943 shares of the Company's common stock in February 1996 pursuant to terms
of the Series B stock purchase agreements. In connection with a restatement of
the Company's 1996 financial statements included in its Annual Report on Form
10K and in consideration of EITF D-60, the Company recorded imputed non-cash
dividends on preferred stock totaling $1.0 million in 1995 for discounted
conversion terms related to Series B convertible preferred stock.
In December 1993, the Board of Directors of the Company adopted a
Stockholder Rights Plan which provides for the distribution of a preferred stock
purchase right ("Right") as a dividend for each share of the Company's common
stock held of record at the close of business on January 21, 1994. Under certain
circumstances involving an acquisition of 15% or more of the Company's common
stock or a specified business combination (a "Trigger Event"), the Rights would
permit the holder (other than the 15% holder) to purchase shares of the
Company's common stock or, if applicable, common stock of an acquirer at a 50%
discount upon payment of an exercise price of $50 per Right. The Rights expire
in December 2003 and may be redeemed by the Company prior to a Trigger Event at
a price of $.01 per Right.
In October 1993, the Company completed the sale of 600,000 shares of
Series A convertible preferred stock ("the Series A Preferred Stock") in a
private placement of units consisting of (i) one share of Series A Preferred
Stock and (ii) one warrant to acquire one share of common stock, sold at an
aggregate price of $50 per unit. Each share of Series A Preferred Stock is
immediately convertible, at any time prior to redemption, into shares of the
Company's common stock, at a rate determined by dividing the aggregate
liquidation preference of the Series A Preferred Stock by the conversion price.
The conversion price is subject to adjustment for antidilution. From January 1
through October 31, 1998, each share of Series A Preferred Stock was convertible
into 7.255 shares of Common Stock. From November 1, 1998 through December 31,
1998, each share of Series A Preferred Stock was convertible into 7.333 shares
of Common Stock.
Terms of the Company's Series A Preferred Stock required the payment of
dividends annually in amounts ranging from $3 per share per annum for the first
year to $4 per share in the second year to $5 per share per annum in the third
and fourth years. Dividends were paid in Common Stock in September 1996, for the
first and second year as described below, at the Company's option. As 1998
represents the fifth year of the Series A Preferred Stock, no further dividends
were accrued.
The Company may redeem the Series A Preferred Stock under certain
circumstances, and was required to redeem the Series A Preferred Stock, subject
to certain conditions, in September 1996 at a redemption price of $50 per share,
plus accrued and unpaid dividends (the "Redemption Price"). The Company elected
to pay the Redemption Price in Common Stock in order to conserve cash and was
required under the terms of the Series A Preferred Stock to use its best efforts
to arrange for a firm commitment underwriting for the resale of such Common
- 72 -
<PAGE>
Stock which would allow the holders ultimately to receive cash instead of
securities for their Series A Preferred Stock. Despite using its best efforts,
the Company was unable to arrange for a firm commitment underwriting. Therefore,
under the terms of the Series A Preferred Stock, Genta was not required to
redeem such Series A Preferred Stock in cash, but rather was required to redeem
all shares of Series A Preferred Stock held by holders who elected to waive the
firm commitment underwriting requirement and receive the redemption price in
shares of Common Stock. A waiver of the firm commitment underwriting was
included as a condition of such redemption. Through December 31, 1998, holders
of 152,400 shares of Series A Preferred Stock redeemed such shares and related
accrued and unpaid dividends for an aggregate of 839,483 shares of the Company's
Common Stock. The effect on the financial statements was a reduction in accrued
dividends on preferred stock, a reduction in the Par value of convertible
preferred stock, an increase in the Par value of Common Stock, and an increase
in additional paid-in capital. Should the remaining shares of Series A Preferred
stock be redeemed through conversion into the Company's Common Stock, the effect
on the financial statements would be the same as that previously described. The
terms of the Series A Preferred Stock do not impose adverse consequences on the
Company if it is unable to arrange for such an underwriting despite its
reasonable efforts in such regard.
The Company is restricted from paying cash dividends on Common Stock
until such time as all cumulative dividends on outstanding shares of Series A
and Series D Preferred Stock have been paid. The Company currently intends to
retain its earnings, if any, after payment of dividends on outstanding shares of
Series A and Series D Preferred Stock, for the development of its business.
Warrants
Series A Warrants were originally issued in connection with the Series A
Preferred Stock in 1993. The Series A Warrants expired in September 1998. The
Company also issued a five year warrant to purchase 23,525 shares of common
stock at an exercise price of $17.00 per share in connection with a private
placement of common stock in May 1995. In addition, five year warrants to
purchase an aggregate of 24,731 shares of common stock at exercise prices
ranging from $19.40 to $21.30 per share were issued to two equipment financing
companies during 1995. In October 1996, the Company issued a five year warrant
to purchase 37,512 shares of common stock at an exercise price of $13.20 per
share to a patent law firm, in exchange for legal services. In October 1996, the
Company also issued a five year warrant to purchase 10,000 shares of common
stock at an exercise price of $15.00 per share in connection with the
Convertible Debentures issued in September 1996.
In connection with the Convertible Notes issued in February 1997, the
Company issued warrants to purchase 6.4 million shares of common stock at
$0.471875 per share (subject to antidilution adjustments). In the absence of
objective evidence of the separate values of the Convertible Notes and the
related warrants, the Company allocated the entire $3.0 million cash
- 73 -
<PAGE>
consideration to the warrants. The Convertible Notes were accreted from the
original recorded value of zero to the face amount of $3.0 million over the
original maturity of the Convertible Notes, resulting in $3.0 million of
interest expense in 1997.
In 1997, the Company issued warrants to purchase 50,000 warrants at
$2.50 per share exercisable for five years in connection with a short-term line
of credit which expired prior to December 31, 1997. The Company valued these
warrants using the Black-Scholes valuation model and recorded interest expense
of $98,000 for the year ended December 31, 1997. In connection with the issuance
of the Premium Preferred Units(TM) in June 1997, the placement agent received
warrants (the "Placement Warrants") to purchase up to 10% of the Units sold in
the Private Placement for 110% of the offering price per Unit. Furthermore, the
Company has entered into a financial advisory agreement with the placement agent
pursuant to which the financial advisor is entitled to receive certain cash fees
and has received warrants (the "Advisory Warrants") to purchase up to 15% of the
Units sold in the Private Placement for 110% of the offering price per Unit. The
Placement Warrants and the Advisory Warrants expire on June 29, 2007.
The Note and Warrant Purchase Agreement provides that a number of
additional Bridge Warrants ("Penalty Warrants") equal to 1.5% of the number of
Bridge Warrants then held by the Aries Funds shall be issued to the Aries Funds
for each day beyond 30 days after the final closing of the Private Placement
that a shelf registration statement covering the Common Stock underlying the
securities purchased pursuant to the Note and Warrant Purchase Agreement is not
filed with the SEC and for each day beyond 210 days after the closing date of
the investment contemplated by the Note and Warrant Purchase Agreement that such
shelf registration statement is not declared effective by the SEC. The Company
filed such shelf registration statement with the SEC on September 9, 1997;
however the Company has to date been unable to have such shelf registration
statement declared effective by the SEC. As a result, the Company could be
obligated to issue Penalty Warrants to the Aries Funds. The Aries Funds have
not, to date, requested that the Company issue such Penalty Warrants. The
Company and the Aries Funds are currently conducting negotiations to determine
whether, and to what extent, Penalty Warrants will be issued.
Stock Benefit Plans
1991 Plan
The Company's 1991 Stock Plan (the "Plan") provides for the sale of
stock and the grant of stock options to employees, directors, consultants and
advisors of the Company. Options may be designated as incentive stock options or
non-statutory stock options; however, incentive stock options may be granted
only to employees of the Company. Options under the Plan have a term of up to
ten years and must be granted at not less than the fair market value (85% of
fair market value for non-statutory options) on the date of grant. Common stock
sold and options granted pursuant to the Plan generally vest over a period of
four to five years. Information with respect to the Company's 1991 Stock Plan is
as follows:
- 74 -
<PAGE>
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Exercise Price
Option Per Share
------ ---------
<S> <C> <C>
Balance at December 31, 1995 188,884 $ 23.96
Granted.......................................... 13,677 17.71
Exercised........................................ (7,882) 21.77
Cancelled........................................ (29,749) 22.32
--------
Balance at December 31, 1996 164,930 23.77
Granted.......................................... 6,670 3.71
Exercised........................................ -- --
Cancelled........................................ (48,688) 23.21
--------
Balance at December 31, 1997 122,912 22.90
Granted......................................... 100,000 3.00
Exercised....................................... -- --
Cancelled....................................... (88,674) 24.75
--------
Balance at December 31, 1998 134,238 $ 6.85
======== ======
</TABLE>
In April 1995, the Stock Plan Committee of the Board of Directors
approved a program whereby employees (including executive officers) of the
Company and certain other option holders could exchange their unexercised
options ("Old Options") on a one-for-one basis for new options ("New Options")
priced at the market value on April 20, 1995. The New Options have the same
vesting schedule and contractual terms as the Old Options. However, the New
Options held by employees (excluding executive officers) and certain other
holders were not exercisable until April 20, 1996 and the New Options held by
executive officers of the Company were not exercisable until April 20, 1997
unless the holder is involuntarily terminated without cause prior to such date.
An aggregate of 158,133 options with an average exercise price of approximately
$78.40 per share were exchanged for New Options with an exercise price of $22.50
per share on April 20, 1995. All of the replacement options are included in
options granted and canceled in the above summary of stock option activity.
At December 31, 1998, options to purchase approximately 97,000 shares of
common stock were exercisable at a weighted average exercise price of
approximately $7.06 per share and approximately 144,276 shares of common stock
were available for grant or sale under the Plan.
1998 Plan
Pursuant to the Company's 1998 Stock Plan (the "Plan"), 6,750,000 shares
have been provided for the grant of stock options to employees, directors,
consultants and advisors of the Company. Options may be designated as incentive
stock options or non-statutory stock options; however, incentive stock options
may be granted only to employees of the Company. Options under the Plan have a
term of up to ten years and must be granted at not less than the fair market
value, 85% of fair market value for nonstatutory options, on the date of the
grant. Common stock sold and options granted pursuant to the Plan generally vest
over a period of four to five years. The Company granted stock options to
purchase 3,961,263 shares of common stock in May 1998 subject to shareholder
approval which was received in July 1998. As a result of an increase in the
stock price between May and July 1998, the Company recorded deferred
compensation of approximately $841,000 of which approximately $123,000 was
expensed in the fourth quarter of 1998. Information with respect to the
Company's 1998 Stock Plan is as follows:
- 75 -
<PAGE>
Weighted
Average
Shares Under Exercise Price
1998 Plan Option Per Share
--------- -------------- --------------
Balance at December 31, 1997
Granted -- --
Exercised 2,836,263 $0.94
Cancelled -- --
-------------- --------------
Balance at December 31, 1998 2,836,263 $0.94
============== ==============
At December 31, 1998, options to purchase approximately 495,000 shares
of common stock were exercisable at a weighted average exercise price of
approximately $0.94 per share and approximately 2,188,737 shares of common stock
were available for grant or sale under the Plan.
Pursuant to the Company's Non-Employee Directors' 1998 Stock Plan (the
"Directors' Plan"), 3,000,000 shares have been provided for the grant of stock
options to directors of the Company who are not Company employees. Options under
the Plan have a term of up to ten years and must be granted at not less than the
fair market value on the date of grant. Each option granted shall become
exercisable in full on the date of the Annual Meeting next following the date of
grant provided tha the optionee continues to serve as a member of the Board of
Directors immediately following such Annual Meeting.
Weighted
Average
Shares under Exercise Price
1998 Directors' Plan Option per share
-------------------- ------------- --------------
Balance at December 31, 1997 -- --
Granted 1,725,000 $0.94
Exercised -- --
Cancelled -- --
--------- -----
Balance at December 31, 1998 1,725,000 $0.94
========= =====
Pro forma information regarding net loss is required by SFAS 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the Black-Scholes method for
option pricing with the following weighted-average assumptions for 1996, 1997,
and 1998: volatility factors of the expected market value of the Company's
common stock of 80%, 102%, and 72% respectively; risk-free interest rates of 6%;
dividend yields of 0%; and a weighted-average expected life of the options of
four to five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Years ended December 31,
1996 1997 1998
-------------------------------------------
Pro forma net loss per
common shareholder $(17,294,920) $(33,493,186) $(8,699,775)
Pro forma loss per share $ (5.80) $ (7.57) $ (1.24)
The results above are not likely to be representative of the effects of
applying SFAS 123 on reported net income or loss for future years.
The weighted-average grant-date fair value of the options granted during
the years ended December 31, 1996, 1997 and 1998 was $11.59, $2.75 and $0.50,
respectively. Following is a further breakdown of the options outstanding as of
December 31, 1998:
- 76 -
<PAGE>
<TABLE>
<CAPTION>
Weighted
Weighted Weighted average
average average exercise price of
Range Options remaining exercise Options options
of prices outstanding life in years price exercisable exercisable
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.88 - $0.97 4,561,263 9.46 $ 0.94 495,158 $ 0.94
$2.50 - $5.00 106,750 8.28 $ 3.04 81,570 $ 3.03
$5.31 -$20.00 3,316 7.55 $14.62 1,227 $15.77
$20.63 -$26.25 24,172 6.44 $22.65 13,952 $22.68
------------------------------------------------------------------------------------
4,695,501 9.42 $ 1.11 591,907 $ 1.77
====================================================================================
</TABLE>
Common Stock Reserved
An aggregate of approximately 51,381,265 shares of common stock were
reserved for the conversion of preferred stock and the exercise of outstanding
options and warrants at December 31, 1998.
- 77 -
<PAGE>
10. Research, Development and Licensing Arrangements
The Company has entered into various license, royalty and sponsored
research agreements which provide the Company with rights to develop and market
products covered under the agreements. In connection with certain license
agreements entered into with a director of the Company and two other
stockholders, JBL recorded royalty expense of $100,000, $87,500 and $0 in 1996,
1997, and 1998, respectively, which are recorded in the Company's discontinued
operations.
The Company was not obligated to repay any funding received under the
collaborative research and development agreements under any circumstances.
11. Income Taxes
Significant components of the Company's deferred tax assets as of
December 31, 1997 and 1998 are shown below. A 100% valuation allowance has been
recognized at December 31, 1997 and 1998 to offset the deferred tax assets as it
is more likely than not that the net deferred tax assets will not be realized.
The valuation allowance at December 31, 1996 approximated $32,508,000.
<TABLE>
<CAPTION>
December 31,
1997 1998
-------------------------------------
<S> <C> <C>
Deferred tax assets:
Capitalized research expense.............. $ 2,778,000 $ 2,922,000
Net operating loss carryforwards.......... 25,969,000 29,559,000
Research and development credits.......... 3,703,000 4,028,000
Purchased technology and license fees..... 4,491,000 4,491,000
Other, net................................ 497,000 1,130,000
-------------------------------------
Total deferred tax assets................. 37,438,000 42,130,000
Valuation allowance for deferred tax
assets................................. (36,456,000) (41,214,000)
-------------------------------------
982,000 916,000
Deferred tax liabilities:
Patent expenses........................... (729,000) (585,000)
Net depreciation.......................... (253,000) (331,000)
-------------------------------------
(982,000) (916,000)
-------------------------------------
Net deferred tax assets..................... $ -- $ --
=====================================
</TABLE>
At December 31, 1998, the Company has federal and California net
operating loss carryforwards of approximately $82,037,000 and $14,721,000
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards. The federal tax loss carryforwards
will begin expiring in 2003, unless previously utilized. Approximately
$2,767,000 and $532,000 of the California tax loss carryforward expired during
1997 and 1998, respectively, and the related deferred tax asset and tax loss
carryforward amounts have been reduced accordingly. The remaining California tax
loss will continue to expire in 1999, unless utilized. The Company also has
federal and California research and development tax credit carryforwards of
$3,160,000 and $1,335,000 respectively, which will begin expiring in 2003,
unless previously utilized.
Federal and California tax laws limit the utilization of income tax net
operating loss and credit carryforwards that arise prior to certain cumulative
changes in a corporation's ownership resulting in change of control of the
Company. The future annual use of net operating loss carryforwards and research
and development tax credits will be limited due to the ownership changes that
occurred during 1990, 1991, 1993, 1996, 1997 and 1998.
- 78 -
<PAGE>
12. Employee Savings Plan
The Company began a 401(k) program in 1994, which allowed participating
employees to contribute up to 15% of their salary, subject to annual limits. In
January 1998, the Board of Directors approved an increase to 20%, effective
April 1, 1998, and subject to annual limits as established by the IRS. The Board
of Directors may, at its sole discretion, approve Company contributions. No such
contributions have been approved or made.
13. Employee Terminations
In October 1996, Genta reassessed its personnel requirements and
established a termination plan whereby the Company terminated 16 research and
administrative employees and recorded general and administrative expenses of
$850,000 for the related accrued severance costs.
In May 1997, Genta again reassessed its personnel requirements and
established another termination plan involving the termination of an aggregate
of 12 research and administrative employees at Genta and Genta Europe. The
Company recorded general and administrative expenses of $868,000 in the second
quarter of 1997 for related accrued severance costs. There have subsequently
been no adjustments to the liabilities originally recorded and the actual
termination benefits paid were equal to the liabilities recorded.
14. Contingencies
Pursuant to the Settlement Agreement (note 9), the Company agreed: to
issue to LBC 2,900 shares of Series D Convertible Preferred Stock: to issue to
LBC or its designee five-year warrants (the "LBC Warrants") to acquire 700,000
shares of Common Stock at an exercise price of $0.52 per share; to make certain
payments to LBC totaling approximately $182,000; and to pay to LBC, upon the
exercise of certain warrants, a commission equal to up to $150,000 in the
aggregate. The respective conversion and exercise prices of the Series D
Preferred Stock and the LBC Warrants are subject to adjustment upon the
occurrence of certain events. The fair value attributed to the 2,900 shares of
Series D Preferred Stock and the Class D Warrants approximated $965,000. The
Company provided for $600,000 of this $1,147,000 settlement in 1997 and the
remaining amount in 1998.
On June 4, 1998, the Company's statutory process agent received a
Summons and Complaint in a lawsuit brought by Johns Hopkins against the Company
in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins
alleges in the Complaint that the Company has breached the Johns Hopkins
Agreement and owes them licensing royalty fees and related expenses in the
amount of $308,832. Johns Hopkins also alleges the existence of a separate March
1993 letter agreement wherein the Company agreed to support a fellowship program
at the Johns Hopkins School of Hygiene and Public Health and the Company's
breach thereof, with damages of $326,829. On August 10, 1998 the Company's
statutory process agent received a Summons and Complaint in a related lawsuit
brought by the Ts'o/Miller Partnership and others
- 79 -
<PAGE>
against the Company in the same court (Case No. 98182113). The Ts'o/Miller
Partnership claims that it is owed licensing royalty fees in the amount of
$287,671. The Company is currently in settlement negotiations. The Company
believes that no further accrual is necessary pursuant to this settlement.
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. JBL is
conducting a quarterly groundwater monitoring program, under the supervision of
the California Regional Water Quality Control Board, for purposes of determining
whether the levels of chloroform and perchloroethylenes ("PCEs") have decreased
over time. The results of the latest sampling conducted by JBL show that PCEs
and chloroform have decreased in all but one of the monitoring sites. 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 de minimis PRPs will be
required to pay as little as $75,000 and as much as $750,000 to settle their
potential liability, depending upon the volume of wastes attributed to them. The
Company received an estimated volume calculation from the EPA, and a response,
which is due on June 9, 1999, is currently under review. While the terms of the
settlement with the EPA have not been finalized, they should contain standard
contribution protection and release language. The Company has accrued $75,000
during 1998. 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.
On June 30, 1998, the Director General of the Company's subsidiary,
Genta Pharmaceuticals Europe, SA ("Genta Europe"), was served notice of a suit
in Marseilles, France by Marseille Amenagement, the manager of the Company's
facilities in Marseilles. On July 30, 1998, the Company's office in San Diego,
California was also served notice of the suit. The suit seeks the payment of
unpaid past rents in the amount of 473,465 FF (as of April 8, 1999,
approximately $77,601), the removal of the Company from the facility and an
indemnity payment of 1,852,429 FF (as of April 8, 1999, approximately $303,613),
which is allegedly equal to the balance of the first nine years' rent.
On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that
the Company remains liable for 4,187,423 FF (as of April 8, 1999, approximately
$686,319) and is required to pay this amount immediately. In view of these
events, The Board of Directors of Genta Europe directed the Director General to
declare "Cessation of Payment" in the commercial court of France, which
declaration was made in July 1998. 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. The Company's attorney in France notified the plaintiff of the
decision and that they have 30 days from such notice to appeal. The 30-day
appeal period has elapsed and the Company is awaiting formal notification by the
court that an appeal had not been made. Such decision does not preclude
Marseille Amenagement from pursuing its claims in other courts in France or the
United States, and there can be no assurance that it will not do so. However,
the Company's legal counsel has represented that the probability of such action
is remote.
- 80 -
<PAGE>
15. Genta Europe
The Company's loss on its European operations for the years ended
December 31, 1996, 1997 and 1998 were $1,247,713, $806,687, and $98,134
respectively.
16. Gain on Sale of Technology
In December 1996, the Company sold the rights to two development-stage
dermatological products for cash of $373,261
17. Business Segments
The Company has had two reportable segments: pharmaceutical (drug)
research and development at Genta and chemical manufacturing at JBL. Genta is an
emerging biopharmaceutical company. The Company's research efforts have been
focused on the development of proprietary oligonucleotide pharmaceuticals
intended to block or regulate the production of disease related proteins at the
genetic level. The Company's oligonucleotide programs are focused primarily in
the area of cancer. JBL is a manufacturer of high-quality specialty chemicals
and intermediate products for the pharmaceutical and in vitro diagnostic
industries. A Number of Fortune 500 companies use JBL products as raw material
in the production of a final product. JBL markets its products to over 100
purchasers in the pharmaceutical and diagnostic industries.
Business segment accounting policies are the same as those described in
the summary of significant accounting policies. As further described in Note 2,
as a result of its pending sale, JBL has been presented as discontinued
operations. The Company evaluates performance based on profit or loss from
operations before income taxes, interest expense, and interest revenue. The
Company also accounts for intersegment sales as if the sales were to third
parties.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business unit requires different technology and marketing strategies.
The following table presents certain segment financial information and
the reconciliation of segment financial information to consolidated totals as of
and for the years ended December 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
Revenues:
Drug Development - external customers $ -- $ 50,000 $ 50,000
Drug Development - related party 1,558,962 350,097 55,087
Drug development gain on sale of
technology 373,261
Total revenues from continuing
operation $ 1,932,223 $ 400,097 $ 105,087
Chemical Mfg. - discontinued operations 4,924,694 4,701,649 5,346,795
Cost and Expenses:
Drug Development - continuing operations $ 9,688,841 $10,040,571 $ 6,683,123
Chemical Mfg. - discontinuing operations 5,821,905 6,520,831 6,087,565
Net Loss from operations
Drug Development $(7,756,618) $(9,640,474) $(6,578,036)
Loss from discontinued operations (878,978) (1,741,339) (739,965)
Net loss of liquidated foreign subsidiary (98,134)
Other income and (expenses) (744,670) (2,850,683) (37,912)
Equity in net loss of joint venture (2,712,183) (1,193,321) (131,719)
------------ ------------ ------------
Total Net Loss $(12,092,449) $(15,425,817) $(7,585,766)
Segment Assets
Drug Development - continuing operations $ 8,805,726 $ 15,078,949 $ 7,551,293
Chemical Mfg. - discontinuing operations 3,843,733 2,449,002 2,606,304
</TABLE>
Assuming the closing of the sale of JBL, Genta's revenues from product
sales will be discontinued. Accordingly, historical revenue trends follow.
Europa Bioproducts ("Europa"), JBL's European distributor, accounted for
approximately 27% of product sales in 1996, 25% in 1997, and 14% in 1998. The
decrease primarily reflects a changing product and customer mix. One other
customer, who accounted for less than 10% of product sales in 1997, accounted
for more than 19% of products sales in 1998. Individual customers' demands for
JBL products generally fluctuate with the outcomes of clinical trials or the
availability of funding.
- 81 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Genta Jago Technologies B.V.
We have audited the accompanying balance sheet of Genta Jago Technologies B.V.
(a development stage company) (the "Company") as of December 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows for the
year then ended, and for the period from December 15, 1992 (date of inception)
to December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The Company's financial statements for
the period December 15, 1992 (date of inception) through December 31, 1997 were
audited by other auditors whose report, dated June 18, 1998, expresses an
unqualified opinion and includes an explanatory paragraph which indicates that
there are matters that raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements for the period December
15, 1992 (date of inception) through December 31, 1997 reflect total revenues
and net loss of $19,040,894 and $23,868,479, respectively, of the related
totals. The other auditors' report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for such prior period, is based
solely on the report of such other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 1998, and the results of its
operations and its cash flows for the year then ended, and for the period from
December 15, 1992 (date of inception) to December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing and commercializing pharmaceuticals. As
discussed in Note 1 to the financial statements, the deficiency in working
capital and net capital deficiency at December 31, 1998 and the Company's
operating losses since inception, raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
DELOITTE & TOUCHE EXPERTA LTD.
Basel, Switzerland
April 15, 1999
- 82 -
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Genta Jago Technologies, B.V.
We have audited the accompanying balance sheet of Genta Jago Technologies, B.V.
(a development stage company) as of December 31, 1997, and the related
statements of operations, stockholders' equity (net capital deficiency) and cash
flows for each of the two years in the period ended December 31, 1997 and for
the period December 15, 1992 (inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Genta Jago Technologies, B.V.
(a development stage company) at December 31, 1997, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1997 and for the period December 15, 1992 (inception) through
December 31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company has incurred
operating losses since inception and requires substantial additional sources of
financing to fund its continuing operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The 1997
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
June 18, 1998
- 83 -
<PAGE>
Genta Jago Technologies B.V.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
Assets 1997 1998
-------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 9,247 $ --
Receivables under collaboration agreements............... 1,399,854 3,348,178
Other current assets..................................... 22,246 24,349
-------------------------------
Total current assets....................................... 1,431,347 3,372,527
Property and equipment, net................................ 2,300 1,000
Other assets............................................... 1,672 10,927
-------------------------------
$1,435,319 3,384,454
===============================
Liabilities and net capital deficiency Current liabilities:
Accounts payable and accrued expenses.................... $1,792,293 440,458
Payable to related parties............................... 3,420,456 7,985,810
-------------------------------
Total current liabilities.................................. 5,212,749 8,426,268
Notes payable to Genta Incorporated........................ 15,837,099 15,837,099
Stockholders' equity (net capital deficiency):
Common Stock, 14,700 shares authorized, 10,000
shares issued and outstanding at stated value............ 512,000 512,000
Additional paid-in capital............................... 3,741,950 3,741,950
Deficit accumulated during the development stage......... (23,868,479) (25,132,863)
-------------------------------
Net capital deficiency..................................... (19,614,529) (20,878,913)
-------------------------------
$ 1,435,319 $ 3,384,454
===============================
</TABLE>
See accompanying notes.
- 84 -
<PAGE>
Genta Jago Technologies B.V.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
Cumulative from
December 15, 1992
inception) through
Years ended December 31, December 31,
Revenues: 1996 1997 1998 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Collaborative research and development $ 5,477,059 $ 3,634,516 $2,161,954 $ 21,202,848
Cost and expenses:
Research and development, including
contractual amounts to related parties of
$7,040,438,and $4,540,067, $1,876,444 and
$40,169,225 in 1996, 1997, 1998 and the
period from December 15, 1992 (inception)
to December 31, 1998, respectively 8,091,465 4,740,299 1,963,326 44,967,209
General and administrative 361,920 50,869 148,241 1,584,493
-------------------------------------------------------------
8,453,385 4,791,168 2,111,567 46,551,702
-------------------------------------------------------------
Loss from operations (2,976,326) (1,156,652) 50,387 (25,348,854)
Other income (expense):
Gain on waiver of debt in exchange for return
of license rights to related party -- -- -- 4,703,352
Interest income 5,814 209 92 19,847
Interest expense (961,075) (1,175,411) (1,314,863) (4,507,208)
-------------------------------------------------------------
(955,261) (1,175,202) (1,314,771) 215,991
-------------------------------------------------------------
Net loss $ (3,931,587) $(2,331,854) $(1,264,384) $(25,132,863)
=============================================================
See accompanying notes.
- 85 -
<PAGE>
Genta Jago Technologies B.V.
(a development stage company)
Statement of Stockholders' Equity (Net Capital Deficiency)
December 15, 1992 (inception) to December 31, 1998
Deficit
accumulated Stockholders'
during the equity
Common stock Additional development (net capital
shares amount paid-in capital stage deficiency)
----------------------------------------------------------------------------------
Issuance of common stock at $51.20 per share
for cash...................................... 2,940 $150,528 $ -- $ -- $ 150,528
Capital contributions in excess of stated value -- -- 12,882 -- 12,882
----------------------------------------------------------------------------------
Balance at December 31, 1992..................... 2,940 150,528 12,882 -- 163,410
Issuance of common stock at $51.20 per share
for cash......................................... 7,060 361,472 -- -- 361,472
Capital contributions in excess of stated value.. -- -- 3,729,068 -- 3,729,068
Net Loss ........................................ -- -- -- (5,842,165) (5,842,165)
----------------------------------------------------------------------------------
Balance at December 31, 1993..................... 10,000 512,000 3,741,950 (5,842,165) (1,588,215)
Net Loss......................................... -- -- -- (8,351,381) (8,351,381)
----------------------------------------------------------------------------------
Balance at December 31, 1994..................... 10,000 512,000 3,741,950 (14,193,546) (9,939,596)
Net Loss......................................... -- -- -- (3,411,492) (3,411,492)
----------------------------------------------------------------------------------
Balance at December 31, 1995..................... 10,000 512,000 3,741,950 (17,605,038) (13,351,088)
Net Loss......................................... -- -- -- (3,931,587) (3,931,587)
----------------------------------------------------------------------------------
Balance at December 31, 1996..................... 10,000 512,000 3,741,950 (21,536,625) (17,282,675)
Net Loss......................................... -- -- -- (2,331,854) (2,331,854)
----------------------------------------------------------------------------------
Balance at December 31, 1997..................... 10,000 $512,000 $ 3,741,950 $(23,868,479)$ (19,614,529)
----------------------------------------------------------------------------------
Net Loss......................................... -- -- -- (1,264,384) (1,264,384)
----------------------------------------------------------------------------------
Balance at December 31, 1998 10,000 $512,000 $ 3,741,950 (25,132,863) (20,878,913)
----------------------------------------------------------------------------------
See accompanying note.
- 86 -
<PAGE>
Genta Jago Technologies B.V.
(a development stage company)
Statements of Cash Flows
Cumulative from
December 15, 1992
(inception) to
Years ended December 31, December 31,
1996 1997 1998 1998
------------------------------------------ -------------------
Operating Activities
Net loss $(3,931,587) $(2,331,854) $(1,264,384) $(25,132,863)
Items reflected in net loss not requiring
cash:
Depreciation and amortization 2,600 2,600 1,300 17,068
Technology license fee -- -- -- 192,580
Gain on waiver of debt in exchange for
return of license rights to related party -- -- -- (4,703,352)
Changes in operating assets and liabilities:
Advance contract payments to related
parties 1,538,594 -- -- --
Receivables under collaboration
agreements (903,838) (496,016) (1,948,324) (3,348,178)
Other current assets (105,934) 83,688 (11,358) (33,604)
Accounts payable and accrued
expenses 324,185 1,220,754 (1,351,835) 440,458
Payable to related parties 1,686,614 939,004 4,565,354 7,985,810
Deferred contract revenue (317,555) -- -- --
------------------------------------------ -------------------
Net cash used in operating activities (1,706,921) (581,824) (9,247) (24,582,081)
Investing Activities
Purchase of property and equipment and (2,159) 4,979 -- (19,740)
other
------------------------------------------ -------------------
Net cash provided by (used in) investing
activities (2,159) 4,979 -- (19,740)
Financing Activities
Proceeds from issuance of common stock
and capital contributions -- -- -- 4,061,370
Proceeds from notes payable to related party 1,500,000 550,000 -- 21,140,643
Repayment of notes payable to related party -- -- -- (600,192)
------------------------------------------ -------------------
Net cash provided by financing activities 1,500,000 550,000 -- 24,601,821
------------------------------------------ -------------------
Increase (decrease) in cash and cash
equivalents (209,080) (26,845) (9,247) --
Cash and cash equivalents at beginning of
period 245,172 36,092 9,247 --
------------------------------------------ -------------------
Cash and cash equivalents at end of period $ 36,092 $ 9,247 $ -- $ --
========================================== ===================
Supplemental disclosure of cash flow
information:
==============================================================
Interest paid $ -- $ $ -- $ 299,808
==============================================================
</TABLE>
See accompanying notes.
- 87 -
<PAGE>
Genta Jago Technologies B.V.
(a development stage company)
Notes to Financial Statements
December 31, 1998
1. Organization and Significant Accounting Policies
Organization and Business
Genta Jago Technologies B.V. ("Genta Jago") was incorporated in December
1992 under the laws of the Netherlands. Genta Jago is a joint venture owned and
controlled 50% by Genta Incorporated ("Genta") and 50% by Jagotec AG
("Jagotec"), a subsidiary of Jago Holding AG which was acquired by SkyePharma in
May 1996. Genta Jago was formed to develop and commercialize pharmaceuticals in
six major therapeutic areas, and commenced research and development activities
in January 1993. Genta Jago is managed under the direction of a Board of
Managing Directors consisting of two members appointed from each of Genta and
Jagotec and one outside member.
In connection with the formation of the joint venture in 1992, Genta
Jago obtained from Jagotec an exclusive license to GEOMATRIX oral
controlled-release technology for the development and commercialization of
approximately 25 specified products. In May 1995, Genta and Jagotec entered into
an agreement to expand Genta Jago by adding the rights to develop and
commercialize an additional 35 products (see note 2, "Expansion of Genta Jago").
Genta Jago maintains the rights to develop and to commercialize
controlled-release formulations of approximately 60 products using Jagotec's
GEOMATRIX technology.
Genta Jago is dependent on future funding from Genta (see Note 2
"Capital Contributions and Working Capital Agreement") and corporate partners
and is considered a development stage company. Genta has incurred significant
operating losses since inception and expects that they will continue for the
next several years. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
development costs and funding obligations and 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 therefrom to be allocated in agreed-upon percentages
between Genta and SkyePharma as set forth in such interim agreement.
Revenue Recognition
Collaborative research and development revenues are recorded as earned
as research and development activities are performed under the terms of the
contracts, with such revenues generally approximating costs incurred on the
programs. Payments received in excess of amounts earned are deferred.
- 88 -
<PAGE>
Research and Development Expenses
Research and development costs are expensed as incurred.
Depreciation
The costs of furniture and equipment are depreciated over the estimated
useful lives of the assets using the straight-line method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109 the Company records valuation allowances against net deferred tax
assets. If based upon the available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. In assessing the
realizability of deferred assets, management considers whether it is more likely
than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income and when temporary differences become deductible. The
Company considers, among other available information, uncertainties surrounding
the recoverability of deferred tax assets, scheduled reversals of deferred tax
liabilities, projected future taxable income, and other matters in making this
assessment.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS
No. 130") and SFAS No. 131, Segment Information. Both of these standards are
effective for fiscal years beginning after December 15, 1997 and have been
adopted by the Company in 1998. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Genta Jago had no
material component of comprehensive income other than net loss. SFAS No. 131
amends the requirements for public enterprises to report financial and
descriptive information about their enterprises for which separate financial
information is available and is evaluated regularly by the Company in deciding
how to allocate resources and in assessing performance. The financial
information is required to be reported, as disclosed in Note 17, on the basis
that is used internally for evaluating the segment performance. Genta Jago
operates in only one business segment.
In June 16, 1998 the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
standard is effective for fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
instruments at fair value. The Company is currently evaluating the impact of
this pronouncement and does not believe adoption of SFAS No. 133 will have a
material impact on the Company's financial statements.
2. Related Party Transactions
License Agreements
Genta Jago entered into license agreements with Genta in connection with
the planned development and commercialization of Anticode(TM) oligonucleotide
products and with Jagotec in connection with the planned development and
commercialization of GEOMATRIX oral controlled-release products. Genta Jago's
license with Genta in relation to the Anticode(TM) oligonucleotide products was
terminated in 1995; however, the license in relation to the GEOMATRIX oral
controlled-release products with Jagotec was not terminated. Pursuant to such
agreements, Genta Jago recorded license fee expense of $620,000, $85,000, and
zero during the years ended December 31, 1996, 1997, and 1998, respectively.
Research and Development and Service Agreements
Genta Jago has contracted with Genta and Jagotec to conduct research and
development and provide certain other services. Under terms of such agreements,
Genta Jago generally is required to reimburse the parties for their respective
costs incurred plus a specified mark-up. Payments for research and development
services are generally made in advance and are refundable if the services are
not performed. For the years ended December 31, 1996, 1997, and 1998, Genta Jago
incurred expenditures of $7 million, $4.5 million, and $1.9, respectively,
- 89 -
<PAGE>
pursuant to such research and development and service agreements.
Capital Contributions and Working Capital Agreement
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
development costs and funding obligations and 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 veture's products, with any
net income resulting therefrom to be allocated in agreed-upon percentages
between Genta and SkyePharma as set forth in such interim agreement. However,
historically and in connection with the formation of the joint venture, Genta
contributed $4 million in cash to Genta Jago as well as the rights to apply its
Anticode(TM) oligonucleotide technology to six products. Genta issued 120,000
shares of Common Stock valued at $7.2 million to Jagotec and its affiliates in
1992, for its interest in Genta Jago, to induce Jagotec to license to Genta
Jago, for what the parties believed was a substantial discount from the
underlying value of such license, Jagotec's GEOMATRIX technology with respect to
approximately 25 products (the "Initial License") and to license to Genta
Jagotec's GEOMATRIX technology for use in Genta's Anticode(TM) oligonucleotide
development programs. In addition, Genta Jago entered into a working capital
agreement with Genta which expired in October 1998. Pursuant to this agreement,
Genta was required to make working capital loans to Genta Jago up to a mutually
agreed upon maximum principal amount, which amount is established by Genta and
Genta Jago not less than once each calendar quarter, if necessary, based upon
the review and consideration by the parties of mutually-acceptable budgets,
expense reports, forecasts and workplans for research and development of the
products by Genta Jago. Genta was not required to fund amounts in excess of the
agreed-upon commitment amount. Working capital loans consist of cash advances to
Genta Jago from Genta and research expenses incurred by Genta on behalf of Genta
Jago. As of December 31, 1998, Genta had advanced working capital loans of
approximately $15.8 million to Genta Jago, net of principal repayments and the
loan credit discussed below. Such loans bore interest at rates per annum ranging
from 5.81% to 7.5%, and were payable in full on October 20, 1998, but payment
has not been received. As a result of the March 4, 1999 agreement, it is not
expected that the working capital loans will be paid.
Expansion of Genta Jago
In 1995, Genta Jago obtained from Jagotec the rights to develop and
commercialize an additional 35 products (the "Additional Products") using
Jagotec's GEOMATRIX technology. With these Additional Products, Genta Jago now
maintains the rights to develop controlled-release formulations of approximately
60 products using Jagotec's GEOMATRIX technology. Genta Jago is required to pay
certain additional fees to Jagotec upon Genta Jago's receipt of revenues from
third parties, and pay manufacturing royalties to Jagotec.
Return of Anticode(TM) Antisense License
Also in 1995, the parties elected to focus Genta Jago's activities
exclusively on GEOMATRIX oral-controlled release products. As a result, Genta
Jago returned to Genta the rights to develop six Anticode(TM) Oligonucleotide
products originally licensed from Genta in connection with the formation of
Genta Jago in 1992. In connection with the return of the Anticode(TM)
Oligonucleotide license rights to Genta in May 1995, Genta Jago's note payable
to Genta was credited with a principal reduction of approximately $4.4 million
and accrued interest payable to Genta was reduced by approximately $300,000.
Genta Jago recorded the loan credit and related accrued interest as a gain on
waiver of debt in exchange for return of license rights to Genta, based on the
legal structure of the transaction.
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<PAGE>
3. Collaborative Research and Development Agreements
Genta Jago/Gensia/Brightstone. In January 1993, Genta Jago entered into
a collaboration agreement with Gensia for the development and commercialization
of certain oral controlled-release pharmaceutical products for treatment of
cardiovascular disease. Under the agreement, Gensia provides funding for
formulation and preclinical development to be conducted by Genta Jago and is
responsible for clinical development, regulatory submissions and marketing.
Terms of the agreement provide Gensia exclusive rights to market and distribute
the products in North America, Europe and certain other countries. The agreement
has a term of the longer of twelve years and the patent term in the respective
countries within the territory. Genta Jago received $2.2 million, $1.2 million
and $1.0 million of funding in 1996, 1997 and 1998, respectively, pursuant to
the agreement. Collaborative revenues of $2.8 million, $1.5 million and $2.2
million were recognized under the agreement during the years ended December 31,
1996, 1997 and 1998, respectively. Effective October 1996, Gensia and SkyePharma
reached an agreement whereby a SkyePharma subsidiary, Brightstone Pharma, Inc.
("Brightstone"), was assigned Gensia's rights (and those of Gensia's partner,
Boehringer Mannheim) to develop and co-promote the potentially bioequivalent
nifedipine product under the collaboration agreement with Genta Jago. The
assignment was accepted by Genta Jago and has no impact on the terms of the
original agreement. Genta Jago is still entitled to receive additional milestone
payments from Brightstone triggered upon regulatory submissions and approvals,
as well as royalties or profit sharing ranging from 10% to 21% of product sales,
if any.
Genta Jago/Apothecon. In March 1996, Genta Jago entered into a
collaborative licensing and development agreement (the "Genta Jago/Apothecon
Agreement") with Apothecon, Inc. ("Apothecon"). Under the terms of the Genta
Jago/Apothecon Agreement, Apothecon will provide funding to Genta Jago up to a
specified maximum amount for the formulation of Q-CR ketoprofen (Oruvail(R)).
The Genta Jago/Apothecon Agreement expires upon the expiration of the relevant
patents in each covered country subject to certain early termination rights. The
agreement also provides for Genta Jago to receive potential milestone payments
and royalties on product sales. Terms of the agreement provide Apothecon
exclusive rights to market and distribute the products on a worldwide basis.
Genta Jago/Krypton. In October 1996, Genta Jago entered into five
collaborative licensing and development agreements (the "Genta Jago/Krypton
Agreements") with Krypton, Ltd. ("Krypton"), a subsidiary of SkyePharma, whereby
Genta Jago would sublicense to Krypton rights to develop and commercialize
potentially bioequivalent GEOMATRIX(R) versions of five currently marketed
products, as well as another agreement granting Krypton an option to sublicense
rights to develop and commercialize an improved version of a sixth product. The
Genta Jago/Krypton Agreements have terms of the shorter of fifteen years from
first commercial sale and the expiration of the patent term on a
territory-by-territory basis. During 1997, Genta Jago received funding of $1.9
million under the Genta Jago/Krypton Agreements and recognized $2.1 million of
collaborative revenue therefrom.
4. Income Taxes
Significant components of Genta Jago's deferred tax assets as of
December 31, 1997 and 1998 are shown below. A valuation allowance has been
recognized to offset the deferred tax assets as it is more likely than not that
the net deferred tax assets will not be realized.
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<PAGE>
December 31,
1997 1998
-------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 2,387,000 $ 2,513,000
Valuation allowance for deferred tax assets (2,387,000) (2,513,000)
-------------------------------
Net deferred tax assets $ -- $ --
===============================
At December 31, 1998, Genta Jago has foreign net operating loss
carryforwards of approximately $25,133,000. The foreign tax loss carryforwards
will begin expiring in 2000, unless previously utilized.
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<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Changes in Accountants
On November 3, 1998, the Company filed a Form 8-K announcing that Ernst
& Young LLP had resigned as the Company's principal independent accountant on
October 28, 1998.
On February 10, 1999, the Company engaged Deloitte & Touche LLP as the
principal independent accountant to audit the Company's 1998 financial
statements.
Disagreements With Accountants
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy
Statement are incorporated herein by reference.
(b) The section entitled "Executive Officers" appearing in the Company's
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Company's
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Stock Ownership of Management and Certain
Beneficial Owners" appearing in the Company's Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions"
appearing in the Company's Proxy Statement is incorporated herein by reference.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial statements
Reference is made to the Index to Financial Statements under Item 8 of this
report on Form 10-K.
(2) All schedules are omitted because they are not
required, are not applicable, or the required
information is included in the consolidated
financial statements or notes thereto.
(3) Reference is made to Paragraph (c) below for
Exhibits required by Item 601 of Regulation
S-K, including management contracts and
compensatory plans and arrangements.
(b) Reports on Form 8-K. The Company filed the following
reports on Forms 8-K:
(i) On February 10, 1999, the Company engaged
Deloitte & Touche LLP ("D&T") as the principal
accountant to audit the Company's financial
statements.
(ii) On November 3, 1998, the Company filed a Form
8-K announcing that Ernst & Young LLP had
resigned as the Company's principal
independent accountant on October 28, 1998.
(c) Exhibits required by Item 601 of Regulation S-K with
each management contract, compensatory plan or
arrangement required to be filed identified.
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<PAGE>
Exhibit
Number Description of Document
3(i).1(1) Restated Certificate of Incorporation as amended by the
Certificate of the Powers, Designations, Preferences and Rights
of the Series B Convertible Preferred Stock as amended by the
Certificate of the Powers, Designations, Preferences and Rights
of the Series C Convertible Preferred Stock.
3(i).2(18) Certificate of Designations of Series D Convertible Preferred
Stock of the Company.
3(i).3(25) Certificate of Amendment of Restated Certificate of
Incorporation.
3(i).4(25) Certificate of Amendment of Restated Certificate of
Incorporation.
3(ii).1(25) Amended and Restated Bylaws of the Company.
4.1(5) Specimen Common Stock Certificate.
4.2(4) Specimen Series A Convertible Preferred Stock Certificate.
4.3(4) Specimen Warrant.
4.4(4) Form of Unit Purchase Agreement dated as of September 23, 1993 by
and between the Company and the Purchasers of the Series A
Convertible Preferred Stock and Warrants.
4.5(11) Form of Rights Agreement dated as of December 16, 1993 between
Genta Incorporated and First Interstate Bank of California, which
includes as Exhibit A the form of Certificate of Designations,
Rights and Preferences of Series F Participating Preferred Stock.
4.6(8) Form of Regulation S Subscription Agreement entered into between
the Company and certain purchasers of the Series B Convertible
Preferred Stock.
4.7(1) Form of Securities Subscription Agreement entered into between
the Company and certain purchasers of the Series C Convertible
Preferred Stock.
4.8(1) Common Stock Purchase Warrant dated December 14, 1995 between the
Company and Lease Management Services, Inc.
4.9(17) Warrant for the Purchase of 213,415 Shares of Common Stock issued
to Lyon & Lyon in October 1996.
4.10(17) Warrant for the Purchase of 100,000 Shares of Common Stock issued
to Michael Arnouse in October 1996.
10.1(3)(6) Amended and Restated 1991 Stock Plan of Genta Incorporated.
10(iii)(A).1
(25) Non-Employee Directors' 1998 Stock Option Plan
10(iii)(A).2
(25) Stock Incentive Plan
10.2(5) Master Lease Agreement No. 10300 dated as of May 4, 1989 between
the Company and Lease Management Services, Inc. and Master Lease
Agreement No. 10428 dated as of August 15, 1991 between the
Company and Lease Management Services, Inc.
10.2(5) Sublease Agreement dated April 1, 1999 between the Company and
Interneuron Pharmaceutical. Inc.
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<PAGE>
10.3(5) Standard Industrial Lease dated October 24, 1988, as amended,
between the Company and General Atomics.
10.4(5) Revised and Restated Lease dated as of March 1, 1990 between JBL
Scientific, Inc. and Granada Associates.
10.5(5)(6) Employment Agreement dated February 20, 1991 between the Company
and Dr. Robert E. Klem.
10.6(5)(6) Employment Agreement dated February 20, 1991 between the Company
and Dr. Lauren R. Brown.
10.7(5)(6) Form of Indemnification Agreement entered into between the
Company and its directors and officers.
10.8(5) Preferred Stock Purchase Agreement dated September 30, 1991 and
Amendment Agreement dated October 2, 1991.
10.9(5)(6) Consulting Agreement dated February 2, 1989 between the Company
and Dr. Paul O.P. Ts'o.
10.10(5)(7) Development, License and Supply Agreement dated February 2, 1989
between the Company and Gen-Probe Incorporated.
10.12(5)(7) License Agreement dated February 2, 1989 among the Company, Dr.
Ts'o, Dr. Miller and Mr. Finch.
10.13(5)(7) License Agreement dated May 15, 1990 between the Company and The
Johns Hopkins University.
10.19(6)(1) Promissory Note dated March 7, 1996 between the Company and Dr.
Donald Picker.
10.21(7)(9) Common Stock Transfer Agreement dated as of December 15, 1992,
between the Company and Dr. Jacques Gonella.
10.32(9) Consulting Agreement dated as of December 15, 1992, between the
Company and Dr. Jacques Gonella.
10.36(7)(9) Common Stock Transfer Agreement dated as of December 15, 1992,
between the Company and Jagotec AG.
10.37(7)(9) Collaboration Agreement dated as of January 22, 1993, between
Jobewol Investments B.V. (now known as Genta Jago Technologies
B.V.) and Gensia, Inc.
10.46(10) Form of Purchase Agreement between the Company and certain
purchasers of Common Stock.
10.47(10) Common Stock Purchase Warrant dated May 8, 1995 between the
Company and Index Securities S.A.
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<PAGE>
10.48(7)(12) Restated Joint Venture and Shareholders Agreement dated as of May
12, 1995 between the Company, Jagotec AG, Jago Holding AG, Jago
Pharma AG and Genta Jago Technologies B.V.
10.50(7)(12) Limited Liability Company Agreement of Genta Jago Delaware LLC
dated as of May 12, 1995 between GPM Generic Pharmaceuticals
Manufacturing Inc. and the Company.
10.51(7)(12) Restated Transfer Restriction Agreement dated as of May 12, 1995
between the Company and Jagotec AG.
10.52(7)(12) Transfer Restriction Agreement dated as of May 12, 1995 between
the Company, GPM Generic Pharmaceuticals Manufacturing Inc. and
Jago Holding AG.
10.53(7)(12) Common Stock Transfer Agreement dated as of May 30, 1995 between
the Company and Jago Finance Limited.
10.54(7)(12) Stockholders' Agreement dated as of May 30, 1995 between the
Company, Jagotec AG, Dr. Jacques Gonella and Jago Finance
Limited.
10.55(7)(12) Restated GEOMATRIX Research and Development Agreement dated as of
May 12, 1995 between Jago Pharma AG, the Company, Genta Jago
Delaware, L.L.C. and Genta Jago Technologies B.V.
10.56(7)(12) Restated Services Agreement dated as of May 12, 1995 between Jago
Pharma AG, the Company, Genta Jago Delaware, L.L.C. and Genta
Jago Technologies B.V.
10.57(7)(12) Restated Working Capital Agreement dated as of May 12, 1995 and
Amendment No. 1 to Restated Working Capital Agreement dated as of
July 11, 1995 between the Company and Genta Jago Technologies
B.V.
10.58(7)(12) Restated Promissory Note dated as of January 1, 1994 between
Genta Jago Technologies B.V. and the Company.
10.59(7)(12) Restated License Agreement dated as of May 12, 1995 between
Jagotec AG and the Company.
10.61(7)(12) Restated GEOMATRIX License Agreement dated as of May 12, 1995
between Jagotec AG and Genta Jago Technologies B.V.
10.62(7)(12) GEOMATRIX Manufacturing License Agreement dated as of May 12,
1995 between Jagotec AG and Genta Jago Technologies B.V.
10.63(7)(12) Restated GEOMATRIX Supply Agreement dated as of May 12, 1995
between Jago Pharma AG and Genta Jago Technologies B.V.
10.65(13) Form of Regulation S Subscription Agreement entered into between
the Company and certain purchasers of the Series B Convertible
Preferred Stock.
10.66(1) Promissory Note dated November 8, 1995 between the Company and
Domain Partners, L.P.
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<PAGE>
10.67(1) Promissory Note dated November 8, 1995 between the Company and
Domain Partners II, L.P.
10.68(1) Promissory Note dated November 8, 1995 between the Company and
Institutional Venture Partners, IV.
10.69(14) Amendment to Promissory Note effective March 22, 1996 between the
Company and Institutional Venture Partners, IV.
10.70(14) Amendment to Promissory Note effective March 22, 1996 between the
Company and Domain Partners, L.P.
10.71(14) Amendment to Promissory Note effective March 22, 1996 between the
Company and Domain Partners II, L.P.
10.72(15) Amendments to the Series C Securities Subscription Agreement
dated April 23, 1996.
10.73(16) Form of Regulation S Securities Subscription Agreement entered
into between the Company and certain purchasers of the 4%
Convertible Debentures, Due August 1, 1997.
10.74(16) Form of 4% Convertible Debenture Due August 1, 1997.
10.75(19) Note and Warrant Purchase Agreement dated as of January 28, 1997,
by and among the Company, The Aries Fund, A Cayman Island Trust
(the "Trust") and The Aries Domestic Fund, L.P. (the
"Partnership").
10.76(19) Letter dated January 28, 1997 from Genta Incorporated.
10.77(19) Senior Secured Convertible Bridge Note of the Company dated
January 28, 1997 for $1,050,000.
10.78(19) Senior Secured Convertible Bridge Note of the Company dated
January 28, 1997 for $1,950,000.
10.79(19) Class A Bridge Warrant of the Company for the purchase of
2,730,000 shares of Common Stock.
10.80(19) Class A Bridge Warrant of the Company for the purchase of
5,070,000 shares of Common Stock.
10.81(19) Class B Bridge Warrant of the Company for the purchase of
4,270,000 shares of Common Stock.
10.82(19) Class B Bridge Warrant of the Company for the purchase of
7,930,000 shares of Common Stock.
10.83(19) Security Agreement dated as of January 28, 1997 between the
Company and Paramount Capital, Inc.
10.84(19) Letter Agreement dated January 28, 1997 among the Company,
Paramount Capital, Inc., the Partnership and the Trust.
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<PAGE>
10.85(19) Amendment No. 1 dated as of January 28, 1997 to Rights Agreement,
dated as of December 16, 1997, between the Company and
ChaseMellon Shareholder Services L.L.C.
10.86(20)(6) Executive Compensation Agreement dated as of January 1, 1996
between the Company and Howard Sampson.
10.87(20) Collaboration Agreement dated December 26, 1995 between the
Company and Johnson & Johnson Consumer Products, Inc.
10.88(20) Assignment Agreement (of Gensia Inc.'s rights in the
Collaboration Agreement between Genta Jago and Gensia, Inc.,
dated January 23, 1993) to Brightstone Pharma, Inc., dated
October 1, 1996 among Gensia, Inc., Genta Jago Technologies B.V.,
Brightstone Pharma, Inc., and SkyePharma PLC.
10.89(20)(7) Development and Marketing Agreement effective February 28, 1996
between Genta Jago Technologies B.V., a Dutch company, and
Apothecon, Inc., a Delaware corporation.
10.90(20)(7) License Agreement effective February 28, 1996 between Genta Jago
Technologies B.V., a Dutch company, and Apothecon, Inc., a
Delaware corporation.
10.91(20)(7) Option, Development & Sub-License Agreement (The Company has
requested confidential treatment for the name of this element)
dated as of October 31, 1996 between Genta Jago Technologies
B.V., a Dutch company, and Krypton Ltd., a Gibraltar limited
company.
10.92(20)(7) Development and Sub-License Agreement (The Company has requested
confidential treatment for the name of this element) dated as of
October 31, 1996 between Genta Jago Technologies B.V., a Dutch
company, and Krypton Ltd., a Gibraltar limited company.
10.93(20)(7) Development and Sub-License Agreement (The Company has requested
confidential treatment for the name of this element) dated as of
October 31, 1996 between Genta Jago Technologies B.V., a Dutch
company, and Krypton Ltd., a Gibraltar limited company.
10.94(20)(7) Development and Sub-License Agreement/Diclofenac dated as of
October 31, 1996 between Genta Jago Technologies B.V., a Dutch
company, and Krypton Ltd., a Gibraltar limited company.
10.95(20)(7) Development and Sub-License Agreement/Naproxen dated as of
October 31, 1996 between Genta Jago Technologies B.V., a Dutch
company, and Krypton Ltd., a Gibraltar limited company.
10.96(20)(7) Development and Sub-License Agreement/Verapamil dated as of
October 31, 1996 between Genta Jago Technologies B.V., a Dutch
company, and Krypton Ltd., a Gibraltar limited company.
10.97(20)(7) License Termination Agreement dated December 2, 1996 between the
Company and Wilton Licensing AG.
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<PAGE>
10.98(20) Contract for Regional Aid for Innovation, effective July 1, 1993,
between L'Agence Nationale de Valorisation de la Recherche, Genta
Pharmaceuticals Europe SA and the Company.
10.99(22) Warrant for the purchase of 32,500 shares of Common Stock of the
Issuer, issued to the Aries Fund pursuant to a Senior Secured
Line of Credit Agreement between the Company and the Aries Funds.
10.100(22) Warrant for the purchase of 17,500 shares of Common Stock of the
Issuer, issued to the Aries Domestic Fund, L.P. pursuant to the
Senior Secured Line of Credit Agreement between the Company and
the Aries Funds.
10.101(22) Amended and Restated Amendment Agreement between the Company and
the Aries Funds.
10.102(22) Amended and Restated Senior Secured Convertible Bridge Note for
$1,050,000 issued to the Aries Domestic Fund, L.P.
10.103(22) Amended and Restated Senior Secured Convertible Bridge Note for
$1,950,000 issued to The Aries Fund.
10.104(22) New Class A Bridge Warrant for the Purchase of 350,000 shares of
Common Stock issued to The Aries Fund.
10.105(22) New Class A Bridge Warrant for the Purchase of 650,000 shares of
Common Stock issued to The Aries Fund.
10.106(22) New Class B Bridge Warrant for the Purchase of 350,000 shares of
Common Stock issued to The Aries Fund.
10.107(22) New Class B Bridge Warrant for the Purchase of 650,000 shares of
Common Stock issued to The Aries Fund.
10.108(22) Consulting Agreement dated as of August 27, 1997 by and between
the Company and Paul O.P. Ts'o, Ph.D.
10.109(22) Consulting Agreement dated as of August 27, 1997 by and between
the Company and Sharon B. Webster, Ph.D.
10.110(24) Severance Agreement, Release and Covenant Not to Sue between
Thomas H. Adams, Ph.D. and the Company dated May 5, 1998.
10.111(24) Consulting Agreement between the Company and Thomas H. Adams,
Ph.D., dated May 5, 1998.
10.112 Severance Agreement No. 1, Release and Covenant Not to Sue dated
July 30, 1997, between the Company and Zofia Dziewanowska.
10.113 Severance Agreement No. 2, Release and Covenant Not to Sue dated
August 1, 1997, between the Company and Zofia Dziewanowska.
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<PAGE>
10.114 Consulting Agreement dated as of July 31, 1997 between the
Company and Zofia Dziewanowska.
22.1(20) Subsidiaries of the Registrant.
23.1(25) Consent of Deloitte & Touche LLP, Independent Auditors.
23.2(25) Consent of Deloitte & Touche Experta Ltd., Independent Auditors.
23.3(25) Consent of Ernest & Young LLP, Independent Auditors.
24.1 Power of Attorney (included on the signature page of the
Company's Annual Report on Form 10-K, filed on April 15, 1998).
27.1(25) Financial Data Schedule
* Before giving effect to the one for ten reverse stock split
effected by the Company on April 7, 1997.
(1) Incorporated herein by reference to the exhibits of the same
number to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, Commission File No. 0-19635.
(2) Exhibit 3(ii).1 is incorporated herein by reference to the
Exhibit of the same number contained in Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-3,
Registration No. 33-72130.
(3) Exhibit 10.1 is incorporated herein by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-8, Registration
No. 33-85887.
(4) Exhibits 4.2, 4.3, and 4.4 are incorporated by reference to
Exhibits of the same number to the Company's Report on Form 8-K
dated as of September 24, 1993, Commission File No. 0-19635.
(5) Incorporated herein by reference to the exhibit of the same
number to the Company's Registration Statement on Form S-1,
Registration No. 33-43642.
(6) Indicates management contract, compensatory plan or arrangement.
(7) The Company has been granted confidential treatment of certain
portions of this exhibit.
(8) Exhibit 4.6 is incorporated by reference to Exhibit 10.65 to the
Company's Report on Form 8-K dated as of December 29, 1995,
Commission File No. 0-19635.
(9) Incorporated by reference to the exhibits of the same number to
the Company's Registration Statement on Form S-3, Registration
No. 33-58362.
(10) Incorporated by reference to the exhibits of the same number to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995, Commission File No. 0- 19635.
(11) Incorporated by reference to Exhibit 5.1 to the Company's Report
on Form 8-K dated as of December 16, 1993, Commission File No.
0-19635.
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<PAGE>
(12) Incorporated by reference to the exhibits of the same number to
the Company's Quarterly Report on Form 10-Q/A for the quarter
ended June 30, 1995, Commission File No. 0- 19635.
(13) Incorporated herein by reference to the exhibit of the same
number to the Company's Report on Form 8-K dated as of December
29, 1995.
(14) Incorporated herein by reference to exhibits 10.1, 10.2 and 10.3,
respectively, to the Company's Registration Statement on Form S-3
(Registration No. 333-3846).
(15) Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, Commission File No. 0-19635.
(16) Exhibits 10.73 and 10.74 are incorporated herein by reference to
Exhibits 10.1 and 10.2 to the Company's Report on Form 8-K dated
as of September 17, 1996, Commission File No. 0-19635.
(17) Exhibits 4.9 and 4.10 are incorporated herein by reference to
Exhibits 4.1 and 4.2 respectively to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996,
Commission File No. 0-19635.
(18) Exhibit 3(i).2 is incorporated by reference to Exhibit 3(i) to
the Company's Report on Form 8-K dated as of January 28, 1997,
Commission File No. 0-19635.
(19) Exhibits 10.75, 10.76, 10.77, 10.78, 10.79, 10.80, 10.81, 10.82,
10.83, 10.84 and 10.85 are incorporated herein by reference to
Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9,
10.10 and 10.11 respectively to the Company's Report on Form 8-K
dated as of January 28, 1997, Commission File No. 0-19635.
(20) Incorporated herein by reference to the exhibits of the same
numbers to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, as amended, Commission File No. 0-19635.
(21) Exhibit 3(ii).2 is incorporated herein by reference to Exhibit
3(ii) to the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1997, Commission File No. 0-19635.
(22) Incorporated herein by reference to the exhibits of the same
numbers to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, Commission File No. 0-19635.
(23) Incorporated herein by reference to the exhibits of the same
numbers to the Company's Annual Report on Form 10-K (Amendment
No. 1) for the year ended December 31, 1997, Commission File No.
0-19635.
(24) Exhibits 10.110 and 10.111 are incorporated herein by reference
to Exhibits 10.1 and 10.2, respectively, to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, Commission File No. 0-19635.
(25) Filed herewith.
(d) See (a)(2) above.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
15th day of April, 1999.
Genta Incorporated
/s/ Kenneth G. Kasses, Ph.D.
------------------------------------------
Kenneth G. Kasses, Ph.D.
President, Principal Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by Kenneth G. Kasses and Robert E.
Klem, in their respective individual capacities and by Kenneth G. Kasses on
behalf of the following persons, pursuant to the Power of Attorney constituting
Exhibit 24.1 hereto, in the capacities and on the dates indicated.
Signature Capacity Date
- - --------- -------- ----
/s/ Kenneth G. Kasses, Ph.D. President, Principal April 15, 1999
- - ---------------------------- Executive Officer
Kenneth G. Kasses, Ph.D. and Chairman of the
Board of Directors
/s/ Gerald M. Schimmoeller Principal Accounting April 15, 1999
- - ---------------------------- Officer, Principal
Gerald M. Schimmoeller Financial Officer,
Vice President
/s/ Glenn L. Cooper, M.D. Director April 15, 1999
- - ----------------------------
Glenn L. Cooper, M.D.
/s/ Donald G. Drapkin Director April 15, 1999
- - ----------------------------
Donald G. Drapkin
Director April 15, 1999
- - ----------------------------
Lawrence J. Kessel, M.D.
/s/ Robert E. Klem Director April 15, 1999
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Robert E. Klem, Ph.D.
/s/ Peter Salomon Director April 15, 1999
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Peter Salomon, M.D.
/s/ Bobby W. Sandage, Jr. Director April 15, 1999
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Bobby W. Sandage, Jr., Ph.D.
Director April 15, 1999
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Andrew J. Stein
/s/ Harlan J. Wakoff Director April 15, 1999
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Harlan J. Wakoff
/s/ Michael S. Wiess Director April 15, 1999
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Michael S. Wiess
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As Amended and Restated March 5, 1999
BYLAWS
OF
GENTA INCORPORATED
ARTICLE I
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the stockholders shall be
held at such place within or without the state of Delaware as may be fixed from
time to time by the Board of Directors or the chief executive officer, or if not
so designated, at the registered office of the corporation.
Section 2. Annual Meeting. Annual meetings of stockholders shall be held
at such date and time as shall be designated from time to time by the Board of
Directors and stated in the notice of meeting. At the annual meeting the
stockholders shall elect by a plurality vote the number of directors equal to
the number of directors of the class whose term expires at such meetings (or, if
fewer, the number of directors properly nominated and qualified for election) to
hold office until the third succeeding annual meeting of stockholders after
their election.
Section 3. Business Properly Conducted at Annual Meetings. At an annual
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an
annual meeting, business must be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors,
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or otherwise properly brought before the meeting by a
stockholder. In addition to any other applicable requirements, for business to
be properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the corporation, not less
than fifty days nor more than seventy-five days prior to the meeting; provided,
however, that in the event that less than sixty-five days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the
<PAGE>
secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder and (iv) any material interest
of the stockholder in such business. The chairman of an annual meeting shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section, and if the chairman should so determine, the chairman shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted.
Section 4. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, may be called only by the chairman of the board or the
chief executive officer or by the Board of Directors pursuant to a resolution
approved by a majority of the Board of Directors.
Section 5. Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of stockholders, annual or special, stating the
place, date and hour of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given not less
than ten nor more than sixty days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
Section 6. Voting List. The officer who has charge of the stock ledger
of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city or town where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 7. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business,
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except as otherwise provided by statute, the certificate of incorporation or
these bylaws.
Section 8. Adjournments. Any meeting of stockholders may be adjourned
from time to time to any other time and to any other place at which a meeting of
stockholders may be held under these bylaws, which time and place shall be
announced at the meeting, by a majority of the stockholders present in person or
represented by proxy at the meeting and entitled to vote, though less than a
quorum, or, if no stockholder is present or represented by proxy, by any officer
entitled to preside at or to act as secretary of such meeting, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the original meeting. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 9. Action at Meetings. When a quorum is present at any meeting,
the vote of the holders of a majority of the stock present in person or
represented by proxy and entitled to vote on the question shall decide any
question brought before such meeting, unless the question is one upon which by
express provision of law, the certificate of incorporation or these bylaws, a
different vote is required, in which case such express provisions shall govern
and control the decision of such question.
Section 10. Voting and Proxies. Unless otherwise provided in the
certificate of incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote for each share of capital stock having
voting power held of record by such stockholder. Each stockholder entitled to
vote at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may authorize another person or persons to
act for such stockholder by proxy; provided that the instrument authorizing such
proxy to act shall have been executed in writing (which shall include
telegraphing, cabling or other means of electronically transmitted written copy)
by the stockholder personally or by the stockholder's duly authorized attorney
in fact. No such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
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ARTICLE II
DIRECTORS
Section 1. Number, Election, Tenure and Qualification. The number of
directors which shall constitute the whole board shall not be less than three
nor more than twelve. Within such limit, the number of directors shall be
determined by resolution of the Board of Directors or by the stockholders at the
annual meeting or at any special meeting of stockholders. The directors shall be
elected at the annual meeting or at any special meeting of the stockholders,
except as provided in Section 3 of this Article II, and each director elected
shall hold office until such director's successor is elected and qualified,
unless sooner displaced. Directors need not be stockholders.
Section 2. Enlargement. The number of directors which shall constitute
the whole board may be increased at any time by vote of seventy-five percent
(75%) of the directors then in office.
Section 3. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office until
the next annual election at which the term of the class to which they have been
elected expires and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. In the event of a
vacancy in the Board of Directors, the remaining directors, except as otherwise
provided by law or these bylaws, may exercise the powers of the full board until
the vacancy is filled.
Section 4. Resignation and Removal. Any director may resign at any time
upon written notice to the corporation at its principal place of business or to
the chief executive officer or the secretary. Such resignation shall be
effective upon receipt of such notice unless the notice specifies such
resignation to be effective at some other time or upon the happening of some
other event. Any director or the entire Board of Directors may be removed, but
only for cause, by the holders of a majority of the shares then entitled to vote
at an election of directors, unless otherwise specified by law or the
certificate of incorporation.
Section 5. General Powers. The business of the corporation shall be
managed by or under the direction of its Board of Directors, which may exercise
all powers of the corporation and do all such lawful acts and things as are not
by statute or by
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the certificate of incorporation or by these bylaws directed or required to be
exercised or done by the stockholders.
Section 6. Place of Meetings. The Board of Directors of the corporation
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 7. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such time and at such place as shall from time to
time be determined by the board; provided that any director who is absent when
such a determination is made shall be given prompt notice of such determination.
A regular meeting of the Board of Directors may be held without notice
immediately after and at the same place as the annual meeting of stockholders.
Section 8. Special Meetings. Special meetings of the board may be called
by the chief executive officer, president, secretary, or on the written request
of two or more directors, or by one director in the event that there is only one
director in office. Four hours' notice to each director, either personally or by
telegram cable, telecopy, commercial delivery service, telex or similar means
sent to such director's business or home address, or two days' notice by written
notice deposited in the mail or delivered by a nationally recognized courier
service, shall be given to each director by the secretary or by the officer or
one of the directors calling the meeting. A notice or waiver of notice of a
meeting of the Board of Directors need not specify the purposes of the meeting.
Section 9. Quorum, Action at Meeting, Adjournments. At all meetings of
the board a majority of the directors then in office, but in no event less than
one third of the whole board, shall constitute a quorum for the transaction of
business and, except as provided in this Section 9 and in Article VIII of these
bylaws, the act of a majority of the directors present at any meeting at which
there is a quorum shall be the act of the Board of Directors, except as may be
otherwise specifically provided by law or by the certificate of incorporation.
For purposes of this section, the term "whole board" shall mean the number of
directors last fixed by the stockholders or directors, as the case may be, in
accordance with law and these bylaws; provided, however, that if less than all
the number so fixed of directors were elected, the "whole board" shall mean the
greatest number of directors so elected to hold office at any one time pursuant
to such authorization. If a quorum shall not be present at any meeting of the
Board of Directors, a majority of the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
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Notwithstanding any other provision of this Section 9, the approval of
at least seventy-five percent (75%) of the directors then in office shall be
required for board action with respect to:
(a) the merger or consolidation of this corporation with or into
another corporation or other entity or person, or any other corporate
reorganization in which this corporation shall not be the continuing or
surviving entity in such merger, consolidation or reorganization, or the
sale of all or substantially all of this corporation's properties and
assets to any other person, or any transaction or series of related
transactions by this corporation in which in excess of fifty percent
(50%) of this corporation's voting power is transferred;
(b) the offer of any shares of, or securities convertible into or
exercisable for, any class of the corporation's capital stock;
(c) the amendment of Sections 5 or 7 of Article III of these
bylaws, as the case may be, to change the individuals who have been
designated as the chairman of the board and chairman of the scientific
advisory board, respectively.
Section 10. Action by Consent. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
Section 11. Telephonic Meetings. Unless otherwise restricted by the
certificate of incorporation or these bylaws, members of the Board of Directors
or of any committee thereof may participate in a meeting of the Board of
Directors or of any committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
Section 12. Committees. The Board of Directors may, by resolution passed
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a
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committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. Any such
committee to the extent permitted by law and provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution designating such committee or the certificate of
incorporation expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Each committee
shall keep regular minutes of its meetings and make such reports to the Board of
Directors as the Board of Directors may request. Except as the Board of
Directors may otherwise determine, any committee may make rules for the conduct
of its business, but unless otherwise provided by the directors or in such
rules, its business shall be conducted as nearly as possible in the same manner
as is provided in these bylaws for the conduct of its business by the Board of
Directors.
Section 13. Compensation. Unless otherwise restricted by the certificate
of incorporation or these bylaws, the Board of Directors shall have the
authority to fix from time to time the compensation of directors. The directors
may be paid their expenses, if any, of attendance at each meeting of the Board
of Directors and the performance of their responsibilities as directors and may
be paid a fixed sum for attendance at each meeting of the Board of Directors
and/or a stated salary as director. No such payment shall preclude any director
from serving the corporation or its parent or subsidiary corporations in any
other capacity and receiving compensation therefor. The Board of Directors may
also allow compensation for members of special or standing committees for
service on such committees.
Section 14. Nominating Procedures. Subject to the rights of holders of
any class or series of stock having a preference over the common stock as to
dividends or upon liquidation, nominations for election to the Board of
Directors of the corporation at a meeting of stockholders may be made on behalf
of
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the board by the nominating committee appointed by the board, or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting. Such nominations, other than those made by the nominating
committee on behalf of the board, shall be made by notice in writing delivered
or mailed by first-class United States mail or a nationally recognized courier
service, postage prepaid, to the secretary or assistant secretary of the
corporation, and received by him not less than one hundred twenty (120) days
prior to any meeting of stockholders called for the election of directors;
provided, however, that if less than one hundred (100) days' notice of the
meeting is given to stockholders, such nomination shall have been mailed or
delivered to the secretary or the assistant secretary of the corporation not
later than the close of business on the seventh (7th) day following the day on
which the notice of meeting was mailed. Such notice shall set forth as to each
proposed nominee who is not an incumbent director (i) the name, age, business
address and, if known, residence address of each nominee proposed in such
notice, (ii) the principal occupation or employment of each such nominee, (iii)
the number of shares of stock of the corporation which are beneficially owned by
each such nominee and by the nominating stockholder, and (iv) any other
information concerning the nominee that must be disclosed of nominees in proxy
solicitations regulated by Regulation 14A of the Securities Exchange Act of
1934. The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if the chairman should so determine, the chairman shall
so declare to the meeting and the defective nomination shall be disregarded.
ARTICLE III
OFFICERS
Section 1. Enumeration. The officers of the corporation shall be chosen
by the Board of Directors and shall be a president and a secretary. The Board of
Directors may elect from among its members a chairman of the board and a vice
chairman of the board. The Board of Directors may also choose such other
officers with such titles, terms of office and duties as the Board of Directors
may from time to time determine, including a chief executive officer, one or
more vice-presidents, a treasurer and one or more assistant secretaries and
assistant treasurers. If authorized by resolution of the Board of Directors, the
chief executive officer may be empowered to appoint from time to time assistant
secretaries and assistant treasurers. Any number of offices may be held by the
same person, unless the certificate of incorporation or these bylaws otherwise
provide.
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Section 2. Election. The Board of Directors at its first meeting after
each annual meeting of stockholders shall choose a president and a secretary.
Other officers may be appointed by the Board of Directors at such meeting, at
any other meeting, or by written consent.
Section 3. Compensation. The salaries of all officers of the corporation
shall be fixed by the Board of Directors.
Section 4. Tenure. The officers of the corporation shall hold office
until their successors are chosen and qualify, unless a different term is
specified in the vote choosing or appointing such officer, or until such
officer's earlier death, resignation or removal. Any officer elected or
appointed by the Board of Directors or by the chief executive officer may be
removed at any time by the affirmative vote of a majority of the Board of
Directors or a committee duly authorized to do so, except that any officer
appointed by the chief executive officer may also be removed at any time by the
chief executive officer. Any vacancy occurring in any office of the corporation
may be filled by the Board of Directors, at its discretion. Any officer may
resign by delivering such officer's written resignation to the corporation at
its principal place of business or to the chief executive officer or the
secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
Section 5. Chairman of the Board. If the Board of Directors appoints a
chairman of the board, such chairman shall, when present, preside at all
meetings of the stockholders and the Board of Directors. The chairman shall
perform such duties and possess such powers as are customarily vested in the
office of the chairman of the board or as may be vested in the chairman by the
Board of Directors.
Section 6. Vice Chairman of the Board. If the Board of Directors
appoints a vice chairman of the board, in the absence of the chairman of the
board, such vice chairman shall, when present, preside at all meetings of the
Board of Directors and of the stockholders. The vice chairman shall perform such
duties and possess such powers as may be prescribed by the Board of Directors
and, to the extent not so provided, as are customarily vested in the office of
the vice chairman of the board, subject to the control of the Board of
Directors.
Section 7. Chairman of the Scientific Advisory Board. If the Board of
Directors appoints a chairman of the scientific advisory board, such chairman
shall, when present, preside at all meetings of the scientific advisory board.
The chairman of the scientific advisory board shall perform such duties and
possess such powers as may be prescribed by the Board of Directors and,
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to the extent not so provided, as are customarily vested in the office of the
chairman of the scientific advisory board, subject to the control of the Board
of Directors.
Section 8. Chief Executive Officer. The chairman of the board shall be
the chief executive officer of the corporation unless the Board of Directors
otherwise provides. The chief executive officer shall have general supervision,
direction and control of the business and officers of the corporation. He or she
shall perform such other duties and possess such other powers as may be
prescribed by the Board of Directors and, to the extent not so provided, as are
customarily vested in the office of the chief executive officer, subject to the
control of the Board of Directors.
Section 9. President. The president shall also be the chief operating
officer of the corporation. In the absence or disability of the chief executive
officer, or if there be none, the president shall perform all of the duties of
the chief executive officer, and when so acting shall have all of the powers of
and be subject to all of the restrictions of the chief executive officer. The
president shall perform such other duties and possess such other powers as from
time to time may be prescribed for the president by the Board of Directors.
Section 10. Vice Presidents. In the absence of the president or in the
event of the president's inability or refusal to act, the vice president, if any
(or in the event there be more than one vice president, the vice presidents in
the order designated by the directors, or in the absence of any designation,
then in the order determined by their tenure in office), shall perform the
duties of the president, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the president. The vice presidents shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 11. Secretary. The secretary shall have such powers and perform
such duties as are customarily incident to the office of secretary. The
secretary shall maintain a stock ledger and prepare lists of stockholders and
their addresses as required and shall be the custodian of corporate records. The
secretary shall attend all meetings of the Board of Directors and all meetings
of the stockholders and record all the proceedings of the meetings of the
corporation and of the Board of Directors in a book to be kept for that purpose
and shall perform like duties for the standing committees when required. The
secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be from time to time prescribed by the Board of
Directors or president, under whose
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supervision the secretary shall be. The secretary shall have custody of the
corporate seal of the corporation and the secretary, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the secretary's signature or by the signature
of such assistant secretary. The Board of Directors may give general authority
to any other officer to affix the seal of the corporation and to attest the
affixing by such officer's signature.
Section 12. Assistant Secretaries. The assistant secretary, or if there
be more than one, the assistant secretaries in the order determined by the Board
of Directors, the chief executive officer or the secretary (or if there be no
such determination, then in the order determined by their tenure in office),
shall, in the absence of the secretary or in the event of the secretary's
inability or refusal to act, perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as the
Board of Directors, the chief executive officer or the secretary may from time
to time prescribe. In the absence of the secretary or any assistant secretary at
any meeting of stockholders or directors, the person presiding at the meeting
shall designate a temporary or acting secretary to keep a record of the meeting.
Section 13. Treasurer. The treasurer shall perform such duties and shall
have such powers as may be assigned to him or her by the Board of Directors or
the chief executive officer. In addition, the treasurer shall perform such
duties and have such powers as are customarily incident to the office of
treasurer. The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. The treasurer
shall disburse the funds of the corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the chief executive officer and the Board of Directors, when the chief executive
officer or Board of Directors so requires, an account of all such person's
transactions as treasurer and of the financial condition of the corporation.
Section 14. Assistant Treasurers. The assistant treasurer, or if there
shall be more than one, the assistant treasurers in the order determined by the
Board of Directors, the chief executive officer or the treasurer (or if there be
no such determination, then in the order determined by their tenure in office),
shall, in the absence of the treasurer or in the event of the treasurer's
inability or refusal to act, perform the
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duties and exercise the powers of the treasurer and shall perform such other
duties and have such other powers as the Board of Directors, the chief executive
officer or the treasurer may from time to time prescribe.
Section 15. Bond. If required by the Board of Directors, any officer
shall give the corporation a bond in such sum and with such surety or sureties
and upon such terms and conditions as shall be satisfactory to the Board of
Directors, including without limitation a bond for the faithful performance of
the duties of such officer's office and for the restoration to the corporation
of all books, papers, vouchers, money and other property of whatever kind in
such officer's possession or under such officer's control and belonging to the
corporation.
Section 16. Delegation of Authority. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
ARTICLE IV
NOTICES
Section 1. Delivery. Whenever, under the provisions of law, or of the
certificate of incorporation or these bylaws, written notice is required to be
given to any director or stockholder, such notice may be given by mail,
addressed to such director or stockholder, at such person's address as it
appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail or delivered to a nationally recognized
courier service or other commercial delivery service. Unless written notice by
mail is required by law, written notice may also be given by telegram, cable,
telecopy, telex or similar means, addressed to such director or stockholder at
such person's address as it appears on the records of the corporation, in which
case such notice shall be deemed to be given when delivered into the control of
the persons charged with effecting such transmission the transmission charge to
be paid by the corporation or the person sending such notice. Oral notice or
other in-hand delivery (in person or by telephone) shall be deemed given at the
time it is actually given.
Section 2. Waiver of Notice. Whenever any notice is required to be given
under the provisions of law or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
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ARTICLE V
CAPITAL STOCK
Section 1. Certificates of Stock. Every holder of stock in the
corporation shall be entitled to have a certificate signed by, or in the name of
the corporation by, the chairman or vice chairman of the Board of Directors, or
the president or a vice president and the treasurer or an assistant treasurer,
or the secretary or an assistant secretary of the corporation, certifying the
number of shares owned by such stockholder in the corporation. Certificates may
be issued for partly paid shares and in such case upon the face or back of the
certificates issued to represent any such partly paid shares, the total amount
of the consideration to be paid therefor, and the amount paid thereon shall be
specified. Any or all of the signatures on the certificate may be a facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if such person were
such officer, transfer agent or registrar at the date of issue.
Section 2. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such owner's legal representative, to
give reasonable evidence of such loss, theft or destruction, to advertise the
same in such manner as it shall require and/or to give the corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed or the issuance of such new certificate.
Section 3. Transfer of Stock. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares, duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, and proper evidence of compliance with other conditions to rightful
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 4. Record Date for Action at a Meeting or for Other Purposes. In
order that the corporation may determine the stockholders entitled to notice of
- 13 -
<PAGE>
or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty days nor less than ten days before the date of such meeting, nor
more than sixty days prior to any other action to which such record date
relates. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting. If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders for any
other purpose within this Section 4 shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
Section 5. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE VI
CERTAIN TRANSACTIONS
Section 1. Transactions with Interested Parties. No contract or
transaction between the corporation and one or more of its directors or
officers, or between the corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present at
or participates in the meeting of the board or committee thereof which
authorizes the contract or transaction or solely because the vote or votes of
such director or officer are counted for such purpose, if:
- 14 -
<PAGE>
(a) the material facts as to such person's relationship or
interest and as to the contract or transaction are disclosed or are
known to the Board of Directors or the committee, and the board or
committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or
(b) the material facts as to such person's relationship or
interest and as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
stockholders; or
(c) the contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the stockholders.
Section 2. Quorum. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the Board of Directors at any regular or special meeting
or by written consent, pursuant to law. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
certificate of incorporation.
Section 2. Reserves. The directors may set apart out of any funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve.
Section 3. Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
- 15 -
<PAGE>
Section 5. Seal. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the corporation, the year of its
organization and the word "Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise. The
seal may be altered from time to time by the Board of Directors.
ARTICLE VIII
AMENDMENTS
The Board of Directors is expressly empowered to adopt, amend or repeal
these bylaws, provided, however, that any adoption, amendment or repeal of these
bylaws by the Board of Directors shall require the approval of at least
sixty-six and two-thirds percent (66-2/3%) of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any resolution providing for adoption, amendment or
repeal is presented to the board). The stockholders shall also have power to
adopt, amend or repeal these bylaws, provided, however, that in addition to any
vote of the holders of any class or series of stock of this corporation required
by law or by the certificate of incorporation of this corporation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then outstanding shares of the stock
of the corporation entitled to vote generally in the election of directors,
voting together as a single class, shall be required for such adoption,
amendment or repeal by the stockholders of any provisions of these bylaws.
Notwithstanding anything to the contrary in this Article VIII, the second
paragraph of Section 9 of Article II of these bylaws, shall be amended only by
the act of at least seventy-five percent (75%) of the directors then in office
or by the affirmative vote of the holders of at least seventy-five percent (75%)
of the voting power of all of the then outstanding shares of the stock of the
corporation entitled to vote generally in the election of directors, voting
together as a single class.
- 16 -
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
GENTA INCORPORATED
GENTA INCORPORATED, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Genta
Incorporated, resolutions were duly adopted setting forth a proposed amendment
of the Restated Certificate of Incorporation of the corporation, and declaring
that such amendment is advisable and that such amendment should be submitted to
the stockholders of the corporation for approval. The resolution setting forth
the proposed amendment is as follows:
RESOLVED, that Article X of the Certificate of Incorporation be
deleted and replaced with the following:
The number of directors which shall constitute the whole Board
of Directors of the corporation shall be determined in the by-laws as
provided therein. The directors of the corporation shall be elected by
the stockholders entitled to vote thereon at each annual meeting of
stockholders and shall hold office until the next annual meeting of
stockholders and until their respective successors shall have been
elected and qualified, subject, however, to prior death, resignation,
retirement, disqualification or removal from office. The term of office
of each director in office at the time this amendment to Article X of
the Restated Certificate of Incorporation of the corporation becomes
effective shall expire at the time of the opening of the polls for the
election of directors at the next annual meeting of stockholders of the
corporation held after the time this amendment to Article X becomes
effective.
SECOND: Thereafter, pursuant to resolutions of the corporation's Board
of Directors, the amendment was submitted to the stockholders of the corporation
for approval at a Meeting of Stockholders, and such meeting was called and held
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware. The necessary number of shares as required by statute were
voted in favor of the amendment.
THIRD: The said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said corporation has caused this certificate to be
signed by Kenneth G. Kasses, Ph.D., its President, as of this 11th day of March,
1999.
GENTA INCORPORATED
By:
-------------------------
Kenneth G. Kasses, Ph.D.
President
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
GENTA INCORPORATED
GENTA INCORPORATED, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Genta
Incorporated, resolutions were duly adopted setting forth a proposed amendment
of the Restated Certificate of Incorporation of the corporation, and declaring
that such amendment is advisable and that such amendment should be submitted to
the stockholders of the corporation for approval. The resolution setting forth
the proposed amendment is as follows:
RESOLVED, that the first sentence of Article XI of the Restated
Certificate of Incorporation, as amended, of the Company be, and hereby is,
deleted.
SECOND: Thereafter, pursuant to resolutions of the corporation's Board
of Directors, the amendment was submitted to the stockholders of the corporation
for approval at a Meeting of Stockholders, and such meeting was called and held
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware. The necessary number of shares as required by statute were
voted in favor of the amendment.
THIRD: The said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said corporation has caused this certificate to be
signed by Kenneth G. Kasses, Ph.D., its President, as of this 26th day of
February, 1999.
GENTA INCORPORATED
By:
-------------------------
Kenneth G. Kasses, Ph.D.
President
GENTA INCORPORATED
NON-EMPLOYEE DIRECTORS' 1998 STOCK OPTION PLAN
1. Purpose
-------
The purpose of the Genta Incorporated Non-Employee Directors'
1998 Stock Option Plan (the "Plan") is to provide an incentive to those
directors of Genta Incorporated (the "Company") who are not employees of the
Company to serve on the board of directors of the Company (the "Board") and to
maintain and enhance the Company's long-term performance.
2. Administration
--------------
The terms of the stock options to be awarded under the Plan are
set forth herein and may not be varied other than by amendment of the Plan in
accordance with Section 10. To the extent that any administrative action is
required in connection with the Plan, such action shall be taken by the Board,
whose determination in such case shall be final, binding and conclusive.
3. Shares Available for Awards
---------------------------
The total number of shares of common stock of the Company, par
value $.001 per share ("Common Stock"), which may be transferred upon the
exercise of options granted under the Plan shall not exceed 3,000,000 shares
plus the number of shares underlying the options referred to in Section 5(c) (as
adjusted as provided therein). Such shares may be authorized and unissued
shares, treasury shares or shares acquired by the Company for the purposes of
the Plan. Any shares of Common Stock that are subject to a stock option under
the Plan and that have not been transferred at the time such option is cancelled
or terminated shall again be available for options under the Plan.
4. Persons Eligible for Stock Options
Stock options shall be granted under the Plan only to persons who
are members of the Board and are not employees of the Company or any subsidiary
thereof ("Eligible Directors").
<PAGE>
5. Grant of Stock Options
-----------------------
(a) Every option granted under the Plan shall be subject to the
terms and conditions set forth in the Plan, and shall be evidenced by an option
agreement which shall not be inconsistent with the provisions of the Plan.
(b) As of the close of each annual meeting of the Company's
shareholders ("Annual Meeting"), commencing with the Annual Meeting in 1999,
each individual who qualifies as an Eligible Director at the conclusion of such
meeting, excluding any Eligible Director who is then receiving a grant under the
Company's 1998 Stock Incentive Plan or any other stock-based compensation plan
or arrangement of the Company in connection with his or her initial election or
appointment to the Board, shall be granted an option to purchase 50,000 shares
of Common Stock, provided that the Eligible Director has served as a director of
the Company for at least six months prior to the date of such Annual Meeting.
(c) Each Eligible Director serving as a director on May 28, 1998
shall be granted stock options to purchase the number of shares of Common Stock
set forth below under the heading "Number of Initial Shares" at an exercise
price of $.94375 per share (subject to proportional adjustment for any stock
split or reverse stock split of the Common Stock). The exercise price and number
of shares subject to such stock options shall be subject to adjustment if the
number of shares of Fairly-Diluted Common Stock (as defined below) as of
February 26, 1999 (the "Adjustment Date") is other than 44,725,266 shares
(subject to proportional adjustment for any stock split or reverse stock split
of the Common Stock) as a result of any and all Covered Events (as defined
below) occurring prior to such time, in which case (x) the number of shares of
Common Stock covered by the stock option shall increase by a number of shares
equal to the percentage set forth below under the caption "Applicable
Percentage" of the number of shares of Fairly-Diluted Common Stock as of the
Adjustment Date in excess of 44,725,266 that are attributable to Covered Events
and (y) the per share exercise price shall be adjusted to equal the conversion
price of the Company's Series D Convertible Preferred Stock immediately after
the Reset (as defined in the fifth paragraph of Subsection 4(a) of the
Certificate of Designations for the Series D Convertible Preferred Stock, as
amended from time to time) as modified by any contractual modification to such
Reset agreed to by at least a majority of the holders of Series D Preferred
Stock. "Fairly-Diluted Common Stock" shall mean, as of a specified date, the
number of shares of Common Stock that would be outstanding on such date assuming
(i) the conversion into Common Stock on such date of all preferred stock of the
Company outstanding on May 28, 1998 or issuable upon exercise of warrants
outstanding on May 28, 1998; and (ii) the exercise of all warrants of the
Company outstanding on May 28, 1998 or contractually required to be issued
pursuant to an agreement in effect on May 28, 1998, in each case having an
exercise price per share of Common Stock of less than $2.00 on May 28, 1998
(subject to proportional adjustment for any stock split or reverse stock split
of the Common Stock) including, but not limited to, any Penalty Warrants (as
defined in the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1997) that may be issued. "Covered Events" mean any issuance
of Penalty Warrants or alteration of the conversion price of the Series D
Preferred Stock pursuant to the Reset referred to above or any contractual
modification thereof.
2
<PAGE>
Applicable
Director Number of Initial Shares Percentage (%)
- - -------- ------------------------ --------------
Drapkin 675,000 1.5
Cooper 337,500 .75
Sandage 337,500 .75
Kessel 75,000 .167
Salomon 75,000 .167
Stein 75,000 .167
Wakoff 75,000 .167
Weiss 75,000 .167
6. Terms of Stock Options
(a) The exercise price per share of Common Stock under each
option granted under Section 5(b) shall be equal to the "Fair Market Value" per
share of Common Stock on the date of option grant. For purposes of the Plan, the
"Fair Market Value" of a share of Common Stock on any day shall be as follows:
(i) if the principal market for the Common Stock (the "Market") is a national
securities exchange or the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") National Market or SmallCap Market, the last sale
price or, if no reported sales take place on the applicable date, the average of
the high bid and low asked price of Common Stock as reported for such Market on
such date or, if no such quotation is made on such date, on the next preceding
day on which there were quotations, provided that such quotations shall have
been made within the ten (10) business days preceding the applicable date; (ii)
If the Common Stock is actively traded but clause (i) does not apply, the
average of the high bid and low asked price for Common Stock on the applicable
date, or, if no such quotations shall have been made on such date, on the next
preceding day on which there were quotations, provided that such quotations
shall have been made within the ten (10) business days preceding the applicable
date; or (iii) In the event that neither clause (i) or (ii) shall apply, the
Fair Market Value of a share of Common Stock on any day shall be determined in
good faith by the Board. The exercise price of each option granted under Section
5(c) shall be $0.94375 per share, subject to adjustment as provided in Section
5(c).
(b) Each option granted under the Plan shall have a term of ten
years, and shall not be exercisable after the tenth anniversary of the date of
grant.
(c) Each option granted under Section 5(b) shall become
exercisable in full on the date of the Annual Meeting next following the date of
grant provided that the optionee continues to serve as a member of the Board of
Directors immediately following such Annual Meeting. Each option granted under
3
<PAGE>
Section 5(c) shall become exercisable in 16 substantially equal installments on
the last day of each calendar quarter after October 1, 1997 provided that
adjustments to the number of options contemplated by Section 5(c) shall be
pro-rated as to vesting over the remaining quarterly periods after the
adjustment. An option may be exercised from time to time for all or part of the
shares as to which it is then exercisable (but, in any event, only for whole
shares).
7. Exercise of Options
-------------------
(a) An option shall be exercised by the filing of a written
notice with the Company, on such form and in such manner as the Company shall
prescribe, accompanied by payment for the shares being purchased. Such payment
shall be made: (i) by certified or official bank check (or the equivalent
thereof acceptable to the Company) for the full option exercise price; (ii) by
delivery of shares of Common Stock (which, if acquired pursuant to the exercise
of a stock option, were acquired at least six months prior to the option
exercise date) and having a Fair Market Value (determined as of the exercise
date) equal to all or part of the option exercise price and a certified or
official bank check (or the equivalent thereof acceptable to the Company) for
any remaining portion of the full option exercise price; or (iii) at the
discretion of the Board and to the extent permitted by law, by such other method
as the Board may authorize, including, without limitation, at the discretion of
the Board, by the withholding of shares (valued at their Fair Market Value on
the date of exercise) underlying the Option.
(b) Promptly after receiving payment of the full option exercise
price, the Company shall deliver to the Eligible Director, or to such other
person as may then have the right to exercise the option, a certificate for the
shares of Common Stock for which the option has been exercised.
(c) The holder of a stock option (or other person having the
right to exercise the option) shall have none of the rights of a shareholder of
the Company with respect to the shares subject to the option until the issuance
of a stock certificate to such person for such shares. Except as otherwise
provided in Section 9, no adjustment shall be made for dividends, distributions
or other rights (whether ordinary or extraordinary, and whether in cash,
securities or other property) for which the record date is prior to the date
such stock certificate is issued.
8. Termination of Directorship; Change of Control
----------------------------------------------
(a) If an optionee's membership on the Board terminates for any
reason other than death, the optionee may exercise any outstanding option to the
extent that the optionee was entitled to exercise it on the date of termination.
Exercise must occur within six months after termination, except that the
six-month period shall be increased to one year if the termination is by reason
of disability, but in no event after the expiration date of the option.
4
<PAGE>
(b) If an optionee dies while serving on the Board, or during the
period in which an option is exercisable pursuant to paragraph (a) of this
Section 8, any outstanding option shall be exercisable to the extent that the
optionee was entitled to exercise it on the date of death. Exercise must occur
by the earlier of the first anniversary of death or the expiration date of the
option. Such exercise shall be made only by the optionee's executor or
administrator, unless the optionee's will specifically disposes of the option,
in which case exercise shall be made only by the recipient of such specific
disposition. If an optionee's personal representative or the recipient of a
specific disposition under the optionee's will shall be entitled to exercise any
award pursuant to the preceding sentence, such representative or recipient shall
be bound by all the terms and conditions of the Plan and the applicable
agreement which would have applied to the optionee including, without
limitation, the provisions of Section 11 hereof.
(c) Upon expiration of the applicable six-month or one-year
period described in paragraph (a) or (b) of this Section 8, any unexercised
option shall be null and void.
(d) Upon the happening of a change in control (as hereinafter
defined) notwithstanding any other provision of this Plan, any option granted
under Section 5(c) then outstanding shall become fully vested and immediately
exercisable (i) upon the termination of the Eligible Director's status as an
Eligible Director as a result of the removal of such person from the Board
(other than for cause) by shareholder action within one year of such change in
control or (ii) in the case of any liquidation, sale, disposition or other
transaction described in clause (D) of the next sentence, immediately upon the
consummation of such liquidation, sale, disposition or other transaction. A
"change in control" shall have occurred if: (A) any "person", as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "1934 Act") (other than (i) the shareholders of the Company as of
the effective date of the Plan (the "Current Shareholders", such term to include
their heirs or estates, or trusts or other entities the primary beneficiaries of
which are the Current Shareholders or persons designated by them, (ii) the
Company or any subsidiary of the Company, (iii) any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any
subsidiary of the Company, or (iv) any company owned, directly or indirectly, by
the shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities
of the Company representing more than 50% of the combined voting power of the
Company's then outstanding securities without the prior written consent of the
Board; or (B) during any period of twenty-four (24) consecutive months,
individuals who at the effective date of the Plan constitute the Board and any
new director whose election by the Board or nomination for election by the
Company shareholders was approved by a vote of at least a majority of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority thereof; or (C) the
shareholders of the Company approve a merger or consolidation of the Company
with any other company (other than a wholly-owned subsidiary of the Company),
5
<PAGE>
other than (i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) 50% or more of the combined voting power of
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (ii) a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction)
in which no "person" (as defined in clause (A) above with the exceptions noted
in said clause (A)) acquires more than 50% of the combined voting power of the
Company's then outstanding securities; or (D) the shareholders of the Company
approve a plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the Company's
assets (or any transaction having a similar effect).
(e) In the event of a merger or consolidation ("merger") of the
Company with or into any other corporation or entity ("successor corporation"),
outstanding awards granted under this Plan shall be assumed or an equivalent
option or right shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation. For the purposes of this paragraph
(e), an award shall be considered assumed if, for every share of Common Stock
subject thereto immediately prior to the merger, the grantee has the right,
following the merger, to acquire the consideration received in the merger
transaction by holders of shares of Common Stock (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares); provided, however, that if such
consideration received in the merger was not solely common stock of the
successor corporation or its parent, the Board may, with the consent of the
successor corporation and the participant, provide for the consideration to be
acquired pursuant to the award, for each share of Common Stock subject thereto,
to be solely common stock of the successor corporation or its parent equal in
fair market value to the per share consideration received by holders of Common
Stock in the merger. For purposes hereof, the term "merger" shall include any
transaction in which another corporation acquires all of the issued and
outstanding Common Stock of the Company.
9. Change in Capitalization
------------------------
In the event of any change in the Common Stock by reason of a
stock split, reverse stock split, stock dividend, recapitalization,
reclassification, merger, consolidation, split-up, combination, exchange of
shares or the like, the Board shall appropriately adjust the number and kind of
shares authorized for issuance under the Plan, the number of shares subject to
each option then outstanding or subsequently granted under the Plan and the
exercise price of each such option. The Board's determination as to what, if
any, adjustments shall be made shall be final, binding and conclusive on the
Company and on all Eligible Directors who receive option grants under the Plan.
6
<PAGE>
10. Amendment of the Plan
---------------------
(a) The Board may from time to time suspend, discontinue, revise
or amend the Plan in any respect whatsoever; provided, however, that no such
amendment shall impair any material rights or increase any material obligations
under any option theretofore granted under the Plan without the consent of the
optionee (or, after the optionee's death, the person having the right to
exercise the option). For purposes of this Section 10, any action of the Board
that alters or affects the tax treatment of any option shall not be considered
to materially impair any rights of any optionee.
(b) Shareholder approval shall be required with respect to any
amendment if the failure to obtain such approval would adversely affect the
compliance of the Plan with the requirements of any applicable law, rule or
regulation.
11. Restrictions
------------
(a) If the Board shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any option under the Plan, the issuance or
purchase of shares or other rights thereunder, or the taking of any other action
thereunder (each such action being hereinafter referred to as a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained to the full satisfaction of
the Board.
(b) The term "Consent" as used herein with respect to any Plan
Action means (i) any and all listings, registrations or qualifications in
respect thereof upon any securities exchange or under any federal, state or
local law, rule or regulation, (ii) any and all written agreements and
representations by the optionee with respect to the disposition of shares, or
with respect to any other matter, which the Board shall deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification or to obtain an exemption from the requirement that any such
listing, qualification or registration be made and (iii) any and all consents,
clearances and approvals in respect of a Plan Action by any governmental or
other regulatory bodies.
12. Nonassignability
----------------
No award or right granted to any person under the Plan shall be
assignable or transferable other than by will or by the laws of descent and
distribution, and all such awards and rights shall be exercisable during the
life of the grantee only by the grantee or the grantee's legal representative.
13. No Right to Re-election
-----------------------
Nothing in the Plan shall be deemed to create any obligation on
the part of the Board to nominate any of its members for re-election by the
Company's shareholders, nor confer upon any Eligible Director the right to
remain a member of the Board for any period of time or at any particular rate of
compensation.
7
<PAGE>
14. No Limitation on Corporate Actions
----------------------------------
This Plan shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of stock or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are superior to or
affect the Common Stock or the rights thereof or which are convertible into or
exchangeable for Common Stock, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
15. Section Headings
----------------
The section headings contained herein are for the purpose of
convenience only and are not intended to define or limit the contents of the
sections.
16. Effective Date and Term of Plan
-------------------------------
The Plan was adopted by the Board on May 28, 1998, subject to
approval by the Company's shareholders. Unless sooner terminated by the Board,
the Plan shall terminate on the date when no more shares are available for
transfer under the Plan. Options outstanding upon Plan termination shall
continue in effect in accordance with their terms.
17. Governing Law
-------------
All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of Delaware, without giving
effect to principles of conflict of laws.
8
GENTA INCORPORATED
1998 STOCK INCENTIVE PLAN
Table of Contents
Page
ARTICLE I
GENERAL
1.1 Purpose......................................................... 1
1.2 Administration.................................................. 1
1.3 Persons Eligible for Awards..................................... 2
1.4 Types of Awards Under Plan...................................... 2
1.5 Shares Available for Awards..................................... 2
1.6 Definitions of Certain Terms.................................... 4
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards.................................... 5
2.2 No Rights as a Shareholder...................................... 6
2.3 Grant of Stock Options, Stock Appreciation
Rights and Reload Options..................................... 6
2.4 Exercise of Options and Stock Appreciation Rights............... 8
2.5 Termination of Employment; Death................................ 8
2.6 Grant of Restricted Stock....................................... 9
2.7 Grant of Restricted Stock Units................................. 10
2.8 Other Stock-Based Awards........................................ 10
2.9 Grant of Dividend Equivalent Rights............................. 11
2.10 Right of Recapture 11
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards................... 11
3.2 Tax Withholding................................................. 12
3.3 Restrictions.................................................... 12
3.4 Nonassignability................................................ 13
3.5 Requirement of Notification of Election
Under Section 83(b) of the Code............................... 13
3.6 Requirement of Notification Upon Disqualifying Disposition
Under Section 421(b) of the Code.............................. 13
3.7 Change in Control, Dissolution, Liquidation, Merger............. 13
3.8 Right of Discharge Reserved..................................... 15
3.9 Nature of Payments.............................................. 15
3.10 Non-Uniform Determinations...................................... 16
3.11 Other Payments or Awards........................................ 16
3.12 Section Headings................................................ 16
3.13 Effective Date and Term of Plan................................. 16
3.14 Governing Law................................................... 16
<PAGE>
ARTICLE I
GENERAL
1.1 Purpose
The purpose of the Genta Incorporated 1998 Stock Incentive Plan
(the "Plan") is to provide for officers, other employees and directors of, and
consultants to, Genta Incorporated (the "Company") and its subsidiaries an
incentive (a) to enter into and remain in the service of the Company, (b) to
enhance the long-term performance of the Company, and (c) to acquire a
proprietary interest in the success of the Company.
1.2 Administration
1.2.1 Subject to Section 1.2.6, the Plan shall be administered by
the Compensation Committee (the "Committee") of the board of directors of the
Company (the "Board"), which shall consist of not less than two directors. The
members of the Committee shall be appointed by, and serve at the pleasure of,
the Board. To the extent required for transactions under the Plan to qualify for
the exemptions available under Rule 16b-3 ("Rule 16b-3") promulgated under the
Securities Exchange Act of 1934 (the "1934 Act"), all actions relating to awards
to persons subject to Section 16 of the 1934 Act shall be taken by the Board
unless each person who serves on the Committee is a "non-employee director"
within the meaning of Rule 16b-3 or such actions are taken by a sub-committee of
the Committee (or the Board) comprised solely of "non-employee directors". To
the extent required for compensation realized from awards under the Plan to be
deductible by the Company pursuant to section 162(m) of the Internal Revenue
Code of 1986 (the "Code"), the members of the Committee shall be "outside
directors" within the meaning of section 162(m).
1.2.2 The Committee shall have the authority (a) to exercise all
of the powers granted to it under the Plan; (b) to construe, interpret and
implement the Plan and any plan agreements executed pursuant to Section 2.1; (c)
to prescribe, or amend and rescind rules and regulations relating to the Plan,
including rules governing its own operations; (d) to make all determinations
necessary or advisable in administering the Plan; (e) to correct any defect,
supply any omission and reconcile any inconsistency in the Plan; (f) to amend
the Plan to reflect changes in applicable law; (g) to determine whether, to what
extent and under what circumstances awards may be settled or exercised in cash,
Shares of Common Stock, other securities, other awards or other property, or
canceled, forfeited or suspended and the method or methods by which awards may
be settled, canceled, forfeited or suspended; and (h) to determine whether, to
what extent and under what circumstances cash, shares of Common Stock, other
securities, other awards or other property and other amounts payable with
respect to an award shall be deferred either automatically or at the election of
the holder thereof or of the Committee.
1.2.3 Actions of the Committee shall be taken by the vote of a
majority of its members. Any action may be taken by a written instrument signed
by a majority of the Committee members, and action so taken shall be fully as
effective as if it had been taken by a vote at a meeting.
1.2.4 The determination of the Committee on all matters relating
to the Plan or any plan agreement shall be final, binding and conclusive.
1.2.5 No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any award
thereunder.
1.2.6 Notwithstanding anything to the contrary contained herein:
(a) until the Board shall appoint the members of the Committee, the Plan shall
be administered by the Board; and (b) the Board may, in its sole discretion, at
any time and from time to time, grant awards or resolve to administer the Plan.
In either of the foregoing events, the Board shall have all of the authority and
responsibility granted to the Committee herein.
1.3 Persons Eligible for Awards
<PAGE>
Awards under the Plan may be made to such directors (including
directors who are not employees), officers and other employees of the Company
and its subsidiaries (including prospective employees conditioned on their
becoming employees), and to such consultants, advisers and other independent
contractors of the Company and its subsidiaries (collectively, "key persons"),
as the Committee shall select in its discretion.
1.4 Types of Awards Under Plan
Awards may be made under the Plan in the form of (a) incentive
stock options (within the meaning of section 422 of the Code); (b) non-qualified
stock options; (c) stock appreciation rights; (d) dividend equivalent rights;
(e) restricted stock; (f) restricted stock units; and (g) other stock-based
awards, all as more fully set forth in Article II. The term "award" means any of
the foregoing. No incentive stock option (other than an incentive stock option
that may be assumed or issued by the Company in connection with a transaction to
which section 424(a) of the Code applies) may be granted to a person who is not
an employee of the Company on the date of grant.
1.5 Shares Available for Awards
1.5.1 Total shares available. The total number of shares of
common stock of the Company, par value $.001 per share ("Common Stock"), which
may be transferred pursuant to awards granted under the Plan shall not exceed
6,750,000; provided, however, that such number of shares may be increased at any
time or from time to time, at the discretion of the Board of Directors, by an
aggregate amount up to the product of (x) .15 and (y) the sum of (1) the
difference between (A) the number of shares of Common Stock which may be
obtained upon conversion of the Series D Convertible Preferred Stock pursuant to
the modification in the conversion price effected by the Reset, as defined in
the fifth paragraph of Subsection 4 (a) of the Certificate of Designations for
the Series D Convertible Preferred Stock, as amended from time to time, or any
contractual modification to such Reset (collectively, the "Reset"); and (B) the
number of shares of Common Stock obtainable upon conversion of the Series D
Convertible Preferred Stock immediately prior to such Reset and (2) the number
of shares of Common Stock which may be obtained upon the exercise of any Penalty
Warrants (as defined in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997). Notwithstanding the foregoing, the total number of
incentive stock options (as defined in Section 1.6.2) which may be granted may
not exceed 5,000,000 shares. Such shares may be authorized but unissued Common
Stock or authorized and issued Common Stock held in the Company's treasury or
acquired by the Company for the purposes of the Plan. The Committee may direct
that any stock certificate evidencing shares issued pursuant to the Plan shall
bear a legend setting forth such restrictions on transferability as may apply to
such shares pursuant to the Plan. If, after the effective date of the Plan, any
award is forfeited or any award otherwise terminates or is cancelled without the
delivery of shares of Common Stock, then the shares covered by such award or to
which such award relates shall again become available for transfer pursuant to
awards granted or to be granted under this Plan. Any shares of Common Stock
delivered by the Company, any shares of Common Stock with respect to which
awards are made by the Company and any shares of Common Stock with respect to
which the Company becomes obligated to make awards, through the assumption of,
or in substitution for, outstanding awards previously granted by an acquired
entity, shall not be counted against the shares available for awards under this
Plan.
1.5.2 Individual Limit. The total number of shares of Common
Stock with respect to which stock options and stock appreciation rights may be
granted to any one employee of the Company or a subsidiary during any two-year
period shall not exceed 8,000,000 shares.
1.5.3 Adjustments. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding award, the number of shares available for awards, the number of
shares that may be subject to awards to any one employee, and the price per
share of Common Stock covered by each such outstanding award shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number
<PAGE>
of issued shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein or in the applicable plan agreement, no issuance by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common Stock
subject to an award. After any adjustment made pursuant to this Section 1.5.3,
the number of shares subject to each outstanding award shall be rounded to the
nearest whole number.
1.5.4 Except as provided in this Section 1.5 and in Section
2.3.8, there shall be no limit on the number or the value of the shares of
Common Stock that may be subject to awards to any individual under the Plan.
1.6 Definitions of Certain Terms
1.6.1 The "Fair Market Value" of a share of Common Stock on any
day shall be determined as follows.
(a) If the principal market for the Common Stock (the
"Market") is a national securities exchange or the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") National Market or
Small Cap Market, the last sale price or, if no reported sales take place on the
applicable date, the average of the high bid and low asked price of Common Stock
as reported for such Market on such date or, if no such quotation is made on
such date, on the next preceding day on which there were quotations, provided
that such quotations shall have been made within the ten (10) business days
preceding the applicable date;
(b) If the Common Stock is actively traded but paragraph (a)
does not apply, the average of the high bid and low asked price for Common Stock
on the applicable date, or, if no such quotations shall have been made on such
date, on the next preceding day on which there were quotations, provided that
such quotations shall have been made within the ten (10) business days preceding
the applicable date; or,
(c) In the event that neither paragraph (a) nor (b) shall
apply, the Fair Market Value of a share of Common Stock on any day shall be
determined in good faith by the Committee.
1.6.2 The term "incentive stock option" means an option that is
intended to qualify for special federal income tax treatment pursuant to
sections 421 and 422 of the Code, as now constituted or subsequently amended, or
pursuant to a successor provision of the Code, and which is so designated in the
applicable plan agreement. Any option that is not specifically designated as an
incentive stock option shall under no circumstances be considered an incentive
stock option. Any option that is not an incentive stock option is referred to
herein as a "nonqualified stock option."
1.6.3 The term "employment" means, in the case of a grantee of an
award under the Plan who is not an employee of the Company, the grantee's
association with the Company or a subsidiary as a director, consultant, adviser,
other independent contractor or otherwise.
1.6.4 A grantee shall be deemed to have a "termination of
employment" upon ceasing to be employed by the Company and all of its
subsidiaries or by a corporation assuming awards in a transaction to which
section 424(a) of the Code applies. The Committee may in its discretion
determine (a) whether any leave of absence constitutes a termination of
employment for purposes of the Plan; (b) the impact, if any, of any such leave
of absence on awards theretofore made under the Plan; and (c) when a change in a
non-employee's association with the Company constitutes a termination of
employment for purposes of the Plan. The Committee shall have the right to
determine whether a grantee's termination of employment is a dismissal for cause
and
<PAGE>
the date of termination in such case, which date the Committee may retroactively
deem to be the date of the action that is cause for dismissal. Such
determinations of the Committee shall be final, binding and conclusive.
1.6.5 The term "cause," when used in connection with termination
of a grantee's employment, shall have the meaning set forth in any
then-effective employment agreement between the grantee and the Company or a
subsidiary thereof. In the absence of such an employment agreement provision,
"cause" means: (a) conviction of any crime (whether or not involving the Company
or its subsidiaries) constituting a felony in the jurisdiction involved; (b)
engaging in any act which, in each case, subjects, or if generally known would
subject, the Company or its subsidiaries to public ridicule or embarrassment;
(c) material violation of the Company's or a subsidiary's policies, including,
without limitation, those relating to sexual harassment or the disclosure or
misuse of confidential information; (d) serious neglect or misconduct in the
performance of the grantee's duties for the Company or a subsidiary or willful
or repeated failure or refusal to perform such duties; in each case as
determined by the Committee, which determination shall be final, binding and
conclusive.
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards
Each award granted under the Plan (except an award of
unrestricted stock) shall be evidenced by a written agreement ("plan agreement")
which shall contain such provisions as the Committee in its discretion deems
necessary or desirable. Such provisions may include, without limitation, a
requirement that the grantee become a party to a shareholders' agreement with
respect to any shares of Common Stock acquired pursuant to the award, a
requirement that the grantee acknowledge that such shares are acquired for
investment purposes only, and a right of first refusal exercisable by the
Company in the event that the grantee wishes to transfer any such shares. The
Committee may grant awards in tandem with or in substitution for any other award
or awards granted under this Plan or any award granted under any other plan of
the Company or any subsidiary. Payments or transfers to be made by the Company
or any subsidiary upon the grant, exercise or payment of an award may be made in
such form as the Committee shall determine, including cash, shares of Common
Stock, other securities, other awards or other property and may be made in a
single payment or transfer, in installments or on a deferred basis, in each case
in accordance with rules established by the Committee. By accepting an award
pursuant to the Plan, a grantee thereby agrees that the award shall be subject
to all of the terms and provisions of the Plan and the applicable plan
agreement.
2.2 No Rights as a Shareholder
No grantee of an option or stock appreciation right (or other
person having the right to exercise such award) shall have any of the rights of
a shareholder of the Company with respect to shares subject to such award until
the issuance of a stock certificate to such person for such shares. Except as
otherwise provided in Section 1.5.3, no adjustment shall be made for dividends,
distributions or other rights (whether ordinary or extraordinary, and whether in
cash, securities or other property) for which the record date is prior to the
date such stock certificate is issued.
2.3 Grant of Stock Options, Stock Appreciation
Rights and Reload Options
2.3.1 The Committee may grant incentive stock options and
nonqualified stock options (collectively, "options") to purchase shares of
Common Stock from the Company, to such key persons, in such amounts and subject
to such terms and conditions, as the Committee shall determine in its
discretion, subject to the provisions of the Plan.
2.3.2 The Committee may grant stock appreciation rights to such
key persons, in such amounts and subject to such terms and conditions, as the
Committee shall determine in its discretion, subject to
<PAGE>
the provisions of the Plan. Stock appreciation rights may be granted in
connection with all or any part of, or independently of, any option granted
under the Plan. A stock appreciation right granted in connection with a
nonqualified stock option may be granted at or after the time of grant of such
option. A stock appreciation right granted in connection with an incentive stock
option may be granted only at the time of grant of such option.
2.3.3 The grantee of a stock appreciation right shall have the
right, subject to the terms of the Plan and the applicable plan agreement, to
receive from the Company an amount equal to (a) the excess of the Fair Market
Value of a share of Common Stock on the date of exercise of the stock
appreciation right over (b) the exercise price of such right as set forth in the
plan agreement (or over the option exercise price if the stock appreciation
right is granted in connection with an option), multiplied by (c) the number of
shares with respect to which the stock appreciation right is exercised. Payment
upon exercise of a stock appreciation right shall be in cash or in shares of
Common Stock (valued at their Fair Market Value on the date of exercise of the
stock appreciation right) or both, all as the Committee shall determine in its
discretion. Upon the exercise of a stock appreciation right granted in
connection with an option, the number of shares subject to the option shall be
correspondingly reduced by the number of shares with respect to which the stock
appreciation right is exercised. Upon the exercise of an option in connection
with which a stock appreciation right has been granted, the number of shares
subject to the stock appreciation right shall be correspondingly reduced by the
number of shares with respect to which the option is exercised.
2.3.4 Each plan agreement with respect to an option shall set
forth the amount (the "option exercise price") payable by the grantee to the
Company upon exercise of the option evidenced thereby. The option exercise price
per share shall be determined by the Committee in its discretion; provided,
however, that the option exercise price of an incentive stock option shall be at
least 100% of the Fair Market Value of a share of Common Stock on the date the
option is granted (except as permitted in connection with the assumption or
issuance of options in a transaction to which section 424(a) of the Code
applies), and provided further that in no event shall the option exercise price
be less than the par value of a share of Common Stock.
2.3.5 Each plan agreement with respect to an option or stock
appreciation right shall set forth the periods during which the award evidenced
thereby shall be exercisable, whether in whole or in part. Such periods shall be
determined by the Committee in its discretion; provided, however, that no
incentive stock option (or a stock appreciation right granted in connection with
an incentive stock option) shall be exercisable more than 10 years after the
date of grant.
2.3.6 The Committee may in its discretion include in any plan
agreement with respect to an option (the "original option") a provision that an
additional option (the "additional option") shall be granted to any grantee who,
pursuant to Section 2.4.3(b), delivers shares of Common Stock in partial or full
payment of the exercise price of the original option. The additional option
shall be for a number of shares of Common Stock equal to the number thus
delivered, shall have an exercise price equal to the Fair Market Value of a
share of Common Stock on the date of exercise of the original option, and shall
have an expiration date no later than the expiration date of the original
option. In the event that a plan agreement provides for the grant of an
additional option, such Agreement shall also provide that the exercise price of
the original option be no less than the Fair Market Value of a share of Common
Stock on its date of grant, and that any shares that are delivered pursuant to
Section 2.4.3(b) in payment of such exercise price shall have been held for at
least six months.
2.3.7 To the extent that the aggregate Fair Market Value
(determined as of the time the option is granted) of the stock with respect to
which incentive stock options granted under this Plan and all other plans of the
Company and any subsidiary are first exercisable by any employee during any
calendar year shall exceed the maximum limit (currently, $100,000), if any,
imposed from time to time under section 422 of the Code, such options shall be
treated as nonqualified stock options.
2.3.8 Notwithstanding the provisions of Sections 2.3.4 and 2.3.5,
to the extent required under section 422 of the Code, an incentive stock option
may not be granted under the Plan to an individual who, at the time the option
is granted, owns stock possessing more than 10% of the total combined voting
power of all classes of stock of his employer corporation or of its parent or
subsidiary corporations (as such ownership may
<PAGE>
be determined for purposes of section 422(b)(6) of the Code) unless (a) at the
time such incentive stock option is granted the option exercise price is at
least 110% of the Fair Market Value of the shares subject thereto and (b) the
incentive stock option by its terms is not exercisable after the expiration of
five (5) years from the date it is granted.
2.4 Exercise of Options and Stock Appreciation Rights
Subject to the provisions of this Article II, each option or
stock appreciation right granted under the Plan shall be exercisable as follows:
2.4.1 Unless the applicable plan agreement otherwise provides, an
option or stock appreciation right shall become exercisable in four
substantially equal installments, on each of the first, second, third and fourth
anniversaries of the date of grant, and each installment, once it becomes
exercisable, shall remain exercisable until expiration, cancellation or
termination of the award.
2.4.2 Unless the applicable plan agreement otherwise provides, an
option or stock appreciation right may be exercised from time to time as to all
or part of the shares as to which such award is then exercisable (but, in any
event, only for whole shares). A stock appreciation right granted in connection
with an option may be exercised at any time when, and to the same extent that,
the related option may be exercised. An option or stock appreciation right shall
be exercised by the filing of a written notice with the Company, on such form
and in such manner as the Committee shall prescribe.
2.4.3 Any written notice of exercise of an option shall be
accompanied by payment for the shares being purchased. Such payment shall be
made: (a) by certified or official bank check (or the equivalent thereof
acceptable to the Company) for the full option exercise price; or (b) unless the
applicable plan agreement provides otherwise, by delivery of shares of Common
Stock (which, if acquired pursuant to exercise of a stock option, were acquired
at least six months prior to the option exercise date) and having a Fair Market
Value (determined as of the exercise date) equal to all or part of the option
exercise price and a certified or official bank check (or the equivalent thereof
acceptable to the Company) for any remaining portion of the full option exercise
price; or (c) at the discretion of the Committee and to the extent permitted by
law, by such other method as the Committee may from time to time prescribe.
2.4.4 Promptly after receiving payment of the full option
exercise price, or after receiving notice of the exercise of a stock
appreciation right for which payment will be made partly or entirely in shares,
the Company shall, subject to the provisions of Section 3.3 (relating to certain
restrictions), deliver to the grantee or to such other person as may then have
the right to exercise the award, a certificate or certificates for the shares of
Common Stock for which the award has been exercised. If the method of payment
employed upon option exercise so requires, and if applicable law permits, an
optionee may direct the Company to deliver the certificate(s) to the optionee's
stockbroker.
2.5 Termination of Employment; Death
2.5.1 Except to the extent otherwise provided in Section 2.5.2 or
2.5.3 or in the applicable plan agreement, all options and stock appreciation
rights not theretofore exercised shall terminate upon termination of the
grantee's employment for any reason (including death).
2.5.2 Except to the extent otherwise provided in the applicable
plan agreement, if a grantee's employment terminates for any reason other than
death or dismissal for cause, the grantee may exercise any outstanding option or
stock appreciation right on the following terms and conditions: (a) exercise may
be made only to the extent that the grantee was entitled to exercise the award
on the date of employment termination; and (b) exercise must occur within ninety
(90) days after employment terminates, except that this ninety day period shall
be increased to one year if the termination is by reason of disability, but in
no event after the expiration date of the award as set forth in the plan
agreement. In the case of an incentive stock option, the term
<PAGE>
"disability" for purposes of the preceding sentence shall have the meaning given
to it by section 422(c)(6) of the Code.
2.5.3 Except to the extent otherwise provided in the applicable
plan agreement, if a grantee dies while employed by the Company or any
subsidiary, or after employment termination but during the period in which the
grantee's awards are exercisable pursuant to Section 2.5.2, any outstanding
option or stock appreciation right shall be exercisable on the following terms
and conditions: (a) exercise may be made only to the extent that the grantee was
entitled to exercise the award on the date of death; and (b) exercise must occur
by the earlier of the first anniversary of the grantee's death or the expiration
date of the award. Any such exercise of an award following a grantee's death
shall be made only by the grantee's executor or administrator, unless the
grantee's will specifically disposes of such award, in which case such exercise
shall be made only by the recipient of such specific disposition. If a grantee's
personal representative or the recipient of a specific disposition under the
grantee's will shall be entitled to exercise any award pursuant to the preceding
sentence, such representative or recipient shall be bound by all the terms and
conditions of the Plan and the applicable plan agreement which would have
applied to the grantee.
2.6 Grant of Restricted Stock
2.6.1 The Committee may grant restricted shares of Common Stock
to such key persons, in such amounts, and subject to such terms and conditions
as the Committee shall determine in its discretion, subject to the provisions of
the Plan. Restricted stock awards may be made independently of or in connection
with any other award under the Plan. A grantee of a restricted stock award shall
have no rights with respect to such award unless such grantee accepts the award
within such period as the Committee shall specify by executing a plan agreement
in such form as the Committee shall determine and, if the Committee shall so
require, makes payment to the Company by certified or official bank check (or
the equivalent thereof acceptable to the Company) in such amount as the
Committee may determine.
2.6.2 Promptly after a grantee accepts a restricted stock award,
the Company shall issue in the grantee's name a certificate or certificates for
the shares of Common Stock covered by the award. Upon the issuance of such
certificate(s), the grantee shall have the rights of a shareholder with respect
to the restricted stock, subject to the non-transferability restrictions and
Company repurchase rights described in Sections 2.6.4 and 2.6.5 and to such
other restrictions and conditions as the Committee in its discretion may include
in the applicable plan agreement.
2.6.3 Unless the Committee shall otherwise determine, any
certificate issued evidencing shares of restricted stock shall remain in the
possession of the Company until such shares are free of any restrictions
specified in the applicable plan agreement.
2.6.4 Shares of restricted stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in this Plan or the applicable plan agreement. The
Committee at the time of grant shall specify the date or dates (which may depend
upon or be related to the attainment of performance goals and other conditions)
on which the non-transferability of the restricted stock shall lapse. Unless the
applicable plan agreement provides otherwise, additional shares of Common Stock
or other property distributed to the grantee in respect of shares of restricted
stock, as dividends or otherwise, shall be subject to the same restrictions
applicable to such restricted stock.
2.6.5 During the 120 days following termination of the grantee's
employment for any reason, the Company shall have the right to require the
return of any shares to which restrictions on transferability apply, in exchange
for which the Company shall repay to the grantee (or the grantee's estate) any
amount paid by the grantee for such shares.
2.7 Grant of Restricted Stock Units
<PAGE>
2.7.1 The Committee may grant awards of restricted stock units to
such key persons, in such amounts, and subject to such terms and conditions as
the Committee shall determine in its discretion, subject to the provisions of
the Plan. Restricted stock units may be awarded independently of or in
connection with any other award under the Plan.
2.7.2 At the time of grant, the Committee shall specify the date
or dates on which the restricted stock units shall become fully vested and
nonforfeitable, and may specify such conditions to vesting as it deems
appropriate. In the event of the termination of the grantee's employment by the
Company and its subsidiaries for any reason, restricted stock units that have
not become nonforfeitable shall be forfeited and cancelled.
2.7.3 At the time of grant, the Committee shall specify the
maturity date applicable to each grant of restricted stock units, which may be
determined at the election of the grantee. Such date may be later than the
vesting date or dates of the award. On the maturity date, the Company shall
transfer to the grantee one unrestricted, fully transferable share of Common
Stock for each restricted stock unit scheduled to be paid out on such date and
not previously forfeited. The Committee shall specify the purchase price, if
any, to be paid by the grantee to the Company for such shares of Common Stock.
2.8 Other Stock-Based Awards
The Committee may grant other types of stock-based awards
(including the grant of unrestricted shares) to such key persons, in such
amounts and subject to such terms and conditions, as the Committee shall in its
discretion determine, subject to the provisions of the Plan. Such awards may
entail the transfer of actual shares of Common Stock to Plan participants, or
payment in cash or otherwise of amounts based on the value of shares of Common
Stock.
2.9 Grant of Dividend Equivalent Rights
The Committee may in its discretion include in the plan agreement
with respect to any award a dividend equivalent right entitling the grantee to
receive amounts equal to the ordinary dividends that would be paid, during the
time such award is outstanding and unexercised, on the shares of Common Stock
covered by such award if such shares were then outstanding. In the event such a
provision is included in a plan agreement, the Committee shall determine whether
such payments shall be made in cash, in shares of Common Stock or in another
form, whether they shall be conditioned upon the exercise of the award to which
they relate, the time or times at which they shall be made, and such other terms
and conditions as the Committee shall deem appropriate.
2.10 Right of Recapture
2.10.1 If at any time within one year after the date on which a
participant exercises an option or stock appreciation right, or on which
restricted stock vests, or which is the maturity date of restricted stock units,
or on which income is realized by a participant in connection with any other
stock-based award (each of which events is a "realization event"), the
participant (a) is terminated for cause or (b) engages in any activity
determined in the discretion of the Committee to be in competition with any
activity of the Company, or otherwise inimical, contrary or harmful to the
interests of the Company (including, but not limited to, accepting employment
with or serving as a consultant, adviser or in any other capacity to an entity
that is in competition with or acting against the interests of the Company),
then any gain realized by the participant from the realization event shall be
paid by the participant to the Company upon notice from the Company. Such gain
shall be determined as of the date of the realization event, without regard to
any subsequent change in the Fair Market Value of a share of Common Stock. The
Company shall have the right to offset such gain against any amounts otherwise
owed to the participant by the Company (whether as wages, vacation pay, or
pursuant to any benefit plan or other compensatory arrangement).
<PAGE>
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards
3.1.1 The Board may from time to time suspend, discontinue,
revise or amend the Plan in any respect whatsoever, except that no such
amendment shall materially impair any rights or materially increase any
obligations under any award theretofore made under the Plan without the consent
of the grantee (or, after the grantee's death, the person having the right to
exercise the award). For purposes of this Section 3.1, any action of the Board
or the Committee that alters or affects the tax treatment of any award shall not
be considered to materially impair any rights of any grantee.
3.1.2 Shareholder approval of any amendment shall be obtained to
the extent necessary to comply with section 422 of the Code (relating to
incentive stock options) or other applicable law or regulation.
3.1.3 The Committee may amend any outstanding plan agreement,
including, without limitation, by amendment which would accelerate the time or
times at which the award becomes unrestricted or may be exercised, or waive or
amend any goals, restrictions or conditions set forth in the Agreement. However,
any such amendment (other than an amendment pursuant to Section 3.7.2, relating
to change in control) that materially impairs the rights or materially increases
the obligations of a grantee under an outstanding award shall be made only with
the consent of the grantee (or, upon the grantee's death, the person having the
right to exercise the award).
3.2 Tax Withholding
3.2.1 As a condition to the receipt of any shares of Common Stock
pursuant to any award or the lifting of restrictions on any award, or in
connection with any other event that gives rise to a federal or other
governmental tax withholding obligation on the part of the Company relating to
an award (including, without limitation, FICA tax), the Company shall be
entitled to require that the grantee remit to the Company an amount sufficient
in the opinion of the Company to satisfy such withholding obligation.
3.2.2 If the event giving rise to the withholding obligation is a
transfer of shares of Common Stock, then, unless otherwise specified in the
applicable plan agreement, the grantee may satisfy the withholding obligation
imposed under Section 3.2.1 by electing to have the Company withhold shares of
Common Stock having a Fair Market Value equal to the amount of tax to be
withheld. For this purpose, Fair Market Value shall be determined as of the date
on which the amount of tax to be withheld is determined (and any fractional
share amount shall be settled in cash).
3.3 Restrictions
3.3.1 If the Committee shall at any time determine that any
consent (as hereinafter defined) is necessary or desirable as a condition of, or
in connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder, or the taking of any other action
thereunder (each such action a "plan action"), then such plan action shall not
be taken, in whole or in part, unless and until such consent shall have been
effected or obtained to the full satisfaction of the Committee.
3.3.2 The term "consent" as used herein with respect to any plan
action means (a) any and all listings, registrations or qualifications in
respect thereof upon any securities exchange or under any federal, state or
local law, rule or regulation, (b) any and all written agreements and
representations by the grantee with respect to the disposition of shares, or
with respect to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification or to obtain an exemption from the requirement that any such
listing, qualification or registration be made and (c) any and all consents,
clearances and approvals in respect of a plan action by any governmental or
other regulatory bodies.
<PAGE>
3.4 Nonassignability
Except to the extent otherwise provided in the applicable plan
agreement, no award or right granted to any person under the Plan shall be
assignable or transferable other than by will or by the laws of descent and
distribution, and all such awards and rights shall be exercisable during the
life of the grantee only by the grantee or the grantee's legal representative.
3.5 Requirement of Notification of
Election Under Section 83(b) of the Code
If any grantee shall, in connection with the acquisition of
shares of Common Stock under the Plan, make the election permitted under section
83(b) of the Code (that is, an election to include in gross income in the year
of transfer the amounts specified in section 83(b)), such grantee shall notify
the Company of such election within ten (10) days of filing notice of the
election with the Internal Revenue Service, in addition to any filing and
notification required pursuant to regulations issued under the authority of Code
section 83(b).
3.6 Requirement of Notification Upon Disqualifying
Disposition Under Section 421(b) of the Code
If any grantee shall make any disposition of shares of Common
Stock issued pursuant to the exercise of an incentive stock option under the
circumstances described in section 421(b) of the Code (relating to certain
disqualifying dispositions), such grantee shall notify the Company of such
disposition within 10 days thereof.
3.7 Change in Control, Dissolution, Liquidation, Merger
3.7.1 For purposes of this Section 3.7, a "change in control"
shall have occurred if:
(a) any "person", as such term is used in Sections 13(d) and
14(d) of the 1934 Act (other than (i) the shareholders of the Company as of the
effective date of the Plan (the "Current Shareholders", such term to include
their heirs or estates, or trusts or other entities the primary beneficiaries of
which are the Current Shareholders or persons designated by them), (ii) the
Company or any subsidiary of the Company, (iii) any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any
subsidiary of the Company, or (iv) any company owned, directly or indirectly, by
the shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities
of the Company representing more than 50% of the combined voting power of the
Company's then outstanding securities without the prior written consent of the
Committee or the Board; or
(b) during any period of twenty-four (24) consecutive
months, individuals who at the effective date of the Plan constitute the Board
and any new director whose election by the Board or nomination for election by
the Company shareholders was approved by a vote of at least a majority of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority thereof;
(c) the shareholders of the Company approve a merger or
consolidation of the Company with any other company (other than a wholly-owned
subsidiary of the Company), other than (i) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) 50% or more of the
combined voting power of voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation or (ii) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no
<PAGE>
"person" (as defined in Section 3.7.1(a) above with the exceptions noted in
section 3.7.1(a)) acquires more than 50% of the combined voting power of the
Company's then outstanding securities; or
(d) the shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or any
transaction having a similar effect).
3.7.2 Upon the happening of a change in control:
(a) notwithstanding any other provision of this Plan, any
option or stock appreciation right then outstanding shall become fully vested
and immediately exercisable upon the subsequent termination of employment of the
grantee by the Company or its successors without cause within one year of such
change in control unless the applicable plan agreement expressly provides
otherwise;
(b) to the fullest extent permitted by law, the Committee
may, in its sole discretion, amend any plan agreement in such manner as it deems
appropriate, including, without limitation, by amendments that advance the dates
upon which any or all outstanding awards of any type shall terminate.
3.7.3 In the event of the proposed dissolution or liquidation of
the Company, all outstanding awards will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. The Committee may, in the exercise of its sole discretion in such
instances, accelerate the date on which any award becomes exercisable or fully
vested and/or declare that any award shall terminate as of a specified date.
3.7.4 In the event of a merger or consolidation ("merger") of the
Company with or into any other corporation or entity ("successor corporation"),
outstanding awards shall be assumed or an equivalent option or right shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Committee determines, in the exercise of its
sole discretion, to accelerate the date on which an award becomes exercisable or
fully vested. In the absence of an assumption or substitution of awards, awards
shall, to the extent not exercised, terminate as of the date of the closing of
the merger. For the purposes of this Section 3.7.4, an award shall be considered
assumed if, for every share of Common Stock subject thereto immediately prior to
the merger, the grantee has the right, following the merger, to acquire the
consideration received in the merger transaction by holders of shares of Common
Stock (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding shares);
provided, however, that if such consideration received in the merger was not
solely common stock of the successor corporation or its parent, the Committee
may, with the consent of the successor corporation and the participant, provide
for the consideration to be acquired pursuant to the award, for each share of
Common Stock subject thereto, to be solely common stock of the successor
corporation or its parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger. For purposes
hereof, the term "merger" shall include any transaction in which another
corporation acquires all of the issued and outstanding Common Stock of the
Company.
3.8 Right of Discharge Reserved
Nothing in the Plan or in any plan agreement shall confer upon
any grantee the right to continue in the employ of the Company or any subsidiary
or affect any right which the Company or any subsidiary may have to terminate
such employment.
3.9 Nature of Payments
3.9.1 Any and all grants of awards and issuances of shares of
Common Stock under the Plan shall be in consideration of services performed for
the Company by the grantee.
<PAGE>
3.9.2 All such grants and issuances shall constitute a special
incentive payment to the grantee and shall not be taken into account in
computing the amount of salary or compensation of the grantee for the purpose of
determining any benefits under any pension, retirement, profit-sharing, bonus,
life insurance or other benefit plan of the Company or of any subsidiary or
under any agreement with the grantee, unless such plan or agreement specifically
provides otherwise.
3.10 Non-Uniform Determinations
The Committee's determinations under the Plan need not be uniform
and may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the Committee shall
be entitled, among other things, to make non-uniform and selective
determinations, and to enter into non-uniform and selective Plan agreements, as
to (a) the persons to receive awards under the Plan, (b) the terms and
provisions of awards under the Plan and (c) the treatment of leaves of absence
pursuant to Section 1.6.4.
3.11 Other Payments or Awards
Nothing contained in the Plan shall be deemed in any way to limit
or restrict the Company from making any award or payment to any person under any
other plan, arrangement or understanding, whether now existing or hereafter in
effect.
3.12 Section Headings
The section headings contained herein are for the purpose of
convenience only and are not intended to define or limit the contents of the
sections.
3.13 Effective Date and Term of Plan
3.13.1 The Plan was adopted by the Board on May 28, 1998 (the
"effective date"), subject to approval by the Company's shareholders. All awards
under the Plan prior to such shareholder approval are subject in their entirety
to such approval. If such approval is not obtained prior to the first
anniversary of the date of adoption of the Plan, the Plan and all awards
thereunder shall terminate on that date.
3.13.2 Unless sooner terminated by the Board, the provisions of
the Plan respecting the grant of incentive stock options shall terminate on the
day before the tenth anniversary of the effective date of the Plan, and no
incentive stock option awards shall thereafter be made under the Plan. All
awards made under the Plan prior to its termination shall remain in effect until
such awards have been satisfied or terminated in accordance with the terms and
provisions of the Plan and the applicable plan agreements.
3.14 Governing Law
All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of Delaware, without giving
effect to principles of conflict of laws.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-72130, 33-58362 and 333-3846 of Genta Incorporated on Form S-3 and
Registration Statement No. 33-85887 of Genta Incorporated on Form S-8 of our
report dated April 15, 1999 with respect to the consolidated financial
statements of Genta Incorporated and subsidiaries, appearing in this Annual
Report on Form 10-K for the year ended December 31, 1998 (which report expresses
an unqualified opinion and includes an explanatory paragraph which indicates
that there are matters that raise substantial doubt about the Company's ability
to continue as a going concern).
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 15, 1999
INDEPENDENT AUDITORS'S CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-72130, 33-58362 and 33-33846 of Genta Incorporated on Form S-3 and
Registration Statement No. 33-85887 of Genta Incorporated on Form S-8 of our
report dated April 15, 1999, with respect to the financial statements of Genta
Jago Technologies B.V., appearing in this Annual Report on Form 10-K of Genta
Incorporated for the year ended December 31, 1998 (which report expressed an
unqualified opinion and includes an explanatory paragraph which ibdicates that
there are matters that raise substantial doubt about the Company's ability to
continue as a going concern).
DELOITTE & TOUCHE EXPERTA LTD.
Basel, Switzerland
April 15, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-3 and S-8 of our reports dated June 18, 1998 with respect to the
consolidated financial statements of Genta Incorporated and the financial
statements of Genta Jago Technologies B.V. included in the Genta Incorporated
Annual Report on Form 10-K for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Diego, California
April 15, 1999
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