-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SbuB+69lGB5pkJueHH8Uc6J/PVVwbFyUkffi8fImRtktiwkVfrsNUDJ42RYLmLdD F6hTXNrmaCS1Emejt8q/wQ== 0000922423-98-000408.txt : 19980420 0000922423-98-000408.hdr.sgml : 19980420 ACCESSION NUMBER: 0000922423-98-000408 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 DATE AS OF CHANGE: 19980417 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENTA INCORPORATED /DE/ CENTRAL INDEX KEY: 0000880643 STANDARD INDUSTRIAL CLASSIFICATION: 2836 IRS NUMBER: 330326866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19635 FILM NUMBER: 98595071 BUSINESS ADDRESS: STREET 1: 3550 GENERAL ATOMICS COURT CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194552700 MAIL ADDRESS: STREET 1: 3550 GENERAL ATOMICS COURT CITY: SAN DIEGO STATE: CA ZIP: 92121 10-K 1 ANNUAL REPORT 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, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-19635 GENTA INCORPORATED (Exact name of Registrant as specified in its certificate of incorporation) Delaware 33-0326866 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3550 General Atomics Court San Diego, California 92121 (Address of principal executive offices) (Zip Code) (619) 455-2700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value Preferred Stock Purchase Rights, Par Value $.001 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the voting common equity held by non-affiliates of the registrant was $5,951,651 million as of April 2, 1998. For purposes of determining this number, 136,202 shares of common stock held by affiliates are excluded. As of April 2, 1998, the registrant had 5,737,756 shares of Common Stock outstanding. Documents Incorporated by Reference Designated portions of Registrant's Definitive Proxy Statement to be furnished for the Annual Meeting of the Stockholders are incorporated by reference in Part III of this Form 10-K. - 2 - 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. PART I ITEM 1. BUSINESS OVERVIEW Genta Incorporated ("Genta" or the "Company"), incorporated under the laws of the State of Delaware on February 4, 1988, is an emerging biopharmaceutical company engaged in the development of a pipeline of pharmaceutical products. Genta's multi-faceted approach has incorporated a product development portfolio with balanced technical risk, a novel drug delivery technology and a United States business base. 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. The clinical trial is being conducted in collaboration with the Royal Marsden NHS Trust and the Institute for Cancer Research. In late 1996, an Investigational New Drug application ("IND") for the G3139 clinical program was filed in the United States and allowed to proceed by the United States Food and Drug Administration ("FDA"). 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 addition, the Company owns 50% of a drug delivery system joint venture with Jagotec AG ("Jagotec"), Genta Jago Technologies B.V. ("Genta Jago") established to develop oral controlled-release drugs. To date, no products from this joint venture have been commercialized. 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. The Company also manufactures and markets specialty biochemicals and intermediate products to the in vitro diagnostic and pharmaceutical industries through its manufacturing subsidiary, JBL Scientific, Inc. ("JBL"), a California corporation acquired by the Company in February, 1991. SUMMARY OF BUSINESS AND RESEARCH AND DEVELOPMENT PROGRAMS The following table describes the major areas to which the Company is currently directing its research and product development efforts and the development - 2 - status of products or product candidates under development, as well as other aspects of the Company's business:
Program Therapeutic Indications Development Status ------- ----------------------- ------------------ 1. Anticode G3139 o Impairs production of key cancer protein, Phase I/IIa clinical trials in BCL2 (non-Hodgkin's lymphoma, the United Kingdom with respect prostate, melanoma, breast and possibly to non-Hodgkin's lymphoma and in others) the U.S. with respect to prostate and possibly other advanced solid tumor malignancies. Anti-FAK Oligonucleotides o Impairs production of key cancer protein, Pre-clinical Focal Adhesion Kinase (melanoma, lymphoma and multiple myeloma) 2. Oral Controlled-Release Drugs Bioequivalent Generics o Various Abbreviated New Drug Applications ("ANDAs") may be filed for up to three products in 1998 3. Biochemical Manufacturing Specialty Biochemicals; $4.7 million in 1997 sales Intermediate Products for biotechnology and pharmaceutical industries
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 - 3 - destroy, individual messenger RNA (mRNA) sequences, which leads to the down-regulation (lowering of levels) of specific proteins and thereby effectively eliminates the disease. This is referred to as the "antisense" mechanism of action. A second therapeutic opportunity is to prevent transcription of disease-causing DNA into the mRNA copy of the gene. This is referred to as the "triple-strand to DNA" mechanism of activity. Genta has focused its Anticode(TM) research on oligonucleotides with phosphorothioate backbones and mixed phosphorothioate and methylphosphonate back- bones. 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. 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 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. 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 - 4 - 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. 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 (DTIC) 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 almost 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 17 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 grade III 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. - 5 - In December 1996, the FDA granted the Company an allowance to initiate clinical trials under an IND for the use of G3139 against non-Hodgkin's lymphoma. In 1997, the Company expanded the IND to include the use of G3139 against prostate cancer. In addition, the Company anticipates that it may expand this IND to include the use of G3139 against other types of cancers, including melanoma and breast. The Company has had discussions with several cancer centers regarding additional Phase I/IIa clinical trials of G3139. The Company is currently discussing protocols with such centers and believes that additional clinical trials could be commenced in 1998. 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 proposed 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. There can be no assurance that such IND for G3139 will be further expanded or that any additional clinical studies will be conducted. See "MD&A--Certain Trends and Uncertainties--No Assurance of Regulatory Approval; Government Regulation," "MD&A--Certain Trends and Uncertainties-- Dependence on Others" and "Risk Factors--Uncertainty of Clinical Trials and Results." In December 1997, the Company initiated a United States Phase I/IIa clinical trial at the MSKCC to evaluate G3139. The first part of the Phase I/IIa study at the MSKCC is designed to define the maximum tolerated dose or optimal biological dose with continuous intravenous infusion; the second part is to determine the efficacy of the drug in advanced, androgen-independent prostate cancer. Three of the first group of three patients in the dose escalation safety phase have started treatment at a low dose of drug. The first two patients completed the study without difficulty during the administration of G3139 and the third is nearing completion. The first patient suffered a seizure after treatment was completed, but the event was not considered to be drug related. 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." Focal Adhesion Kinase (FAK) Gene Target. FAK protein is highly active in the regulation of adhesion dependent growth and motility of cells. In a variety of cancers such as those implicated in melanoma, lymphoma and multiple myeloma, the increase of FAK protein has been detected. - 6 - Moreover, increased synthesis of FAK protein correlates with increased invasiveness and ability of cancer to spread through the body (metastasize). In collaborative preclinical experiments with Dr. William G. Cance at the University of North Carolina, Genta's Anticode(TM) oligonucleotides against FAK were shown to inhibit the growth of a primary tumor (the site at which the cancer is believed to have begun) and virtually to eliminate metastases in human melanoma, immunocompromised mice, xenograft models. Combined with the observation that anti-FAK oligonucleotides appear to show few adverse effects against normal tissues, such results indicate that the FAK target may represent a promising therapeutic opportunity for both the treatment of primary disease and the prevention of metastatic disease. At the current time the Company's development work related to FAK-antisense has been placed on hold pending discussions with Dr. Cance and the University of North Carolina. Oligonucleotide Collaborative and Licensing Agreements. Gen-Probe (Chugai). In February 1989, Genta entered into a development, license and supply agreement with Gen-Probe Incorporated ("Gen-Probe"). Gen-Probe was subsequently acquired by Chugai Pharmaceutical Company, Ltd. ("Chugai"), a Japanese corporation. Gen-Probe has the option to acquire an exclusive worldwide license to any product consisting of, including, derived from or based on oligonucleotides for the treatment or prevention of Epstein-Barr virus, cytomegalovirus, HIV, human T-cell leukemia virus-1 and all leukemias and lymphomas. Genta is obligated to pursue the development of a therapeutic compound for the treatment of one of these indications as its first therapeutic development program. Under the agreement, if Gen-Probe exercises its option to acquire rights to a product in any such indication, the Company will grant Gen-Probe certain rights to sell such product and Gen-Probe must fund Genta's development of any such product, subject to certain limitations and early termination rights. If Gen-Probe fully funds the development of any such product, profits on sales of such product will be shared between the parties. 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. Gen-Probe is a stockholder in the Company. Ts'o/Miller/Hopkins. In February 1989, the Company entered into a license agreement with Drs. Paul Ts'o and Paul Miller (the "Ts'o/Miller Agreement") pursuant to which Drs. Ts'o and Miller (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 - 7 - 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. Subject to certain rights of early termination, the Ts'o/Miller/Hopkins Agreements remain in effect for the life of the last-to-expire patent licensed under the respective agreements or until abandonment of the last-pending patent application licensed under the respective agreements. 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 a letter to the Company stating that the Johns Hopkins Agreement was terminated. According to Johns Hopkins, as of December 31, 1997, the Company owed Johns Hopkins and the Ts'o/Miller Partnership $602,657.52, of which $287,500 consisted of royalty payments to the Partnership for 1995 through 1997 and the balance consisted of the Company's obligations to provide funds to support a post-doctoral research program of Johns Hopkins and to support patent prosecutions. The Company is in negotiations with Johns Hopkins as to payment of the remaining balance although there can be no certainty that such negotiations will be successful. The Company also received notice from the Ts'o/Miller Partnership that it was in material breach of the license agreement for failure to pay royalties for 1995 through 1997, which the Ts'o/Miller Partnership claimed was in the aggregate amount of $275,068.49. This notice also provided that if such breach was not cured within 90 days, the license would be terminated. The negotiations that have been undertaken with Johns Hopkins have included the Ts'o/Miller Partnership as well. 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 - 8 - 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 no longer believes 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 although a requirement of the Company to pay the claimed amounts could have a material adverse effect on its financial condition. Other Anticode(TM) Antisense Agreements. The Company entered into agreements with Johnson & Johnson Consumer Products, Inc. in late 1995 which provided limited funding for preliminary feasibility studies using Genta's Anticode(TM) oligonucleotide compounds. Another agreement entered into in 1991 with Procter and Gamble Company ended in 1995. Under the terms of these agreements, if the collaborative partner elected to pursue the commercial development of an Anticode(TM) oligonucleotide compound upon completion of the feasibility studies, the parties would have entered into mutually acceptable development, license and supply agreements. Neither of these collaborative partners has indicated any interest in entering into such an agreement. 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 obtain 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 and also contributed the Initial License referred to below. Genta issued 120,000 shares of Common Stock valued at $7.2 million to Jagotec in 1992 as consideration for a license (the "Initial License") for Genta to use Jagotec's GEOMATRIX technology with respect to approximately 25 products, under the condition that Genta then contribute such technology to Genta Jago, which Genta did. The value of the Common Stock Genta issued to Jagotec was considered by the parties to be substantially below the actual fair market value of the Initial License. Jagotec's contribution to the joint venture consisted of such discount (coupled with the requirement that Genta contribute the Initial License to the joint venture) as well as certain know-how applicable to the GEOMATRIX technology. 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 purchasing from Jagotec the Additional License at what the parties believed was a substantial - 9 - discount to its actual fair market value on the condition that Genta then contribute it to the joint venture. 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. 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 provides funding to Genta Jago pursuant to a working capital loan agreement that expires in October 1998. See "MD&A--Liquidity and Capital Resources." In 1995, Genta Jago returned the Anticode technology to Genta in exchange for Genta's forgiveness of $4.7 million of principal and 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 also has an exclusive worldwide license to use Jagotec's GEOMATRIX technology in Genta's Anticode antisense development programs. Genta Jago has contracted with Genta and Jagotec to conduct research and development and to provide certain other services. - 10 - The Company is currently in negotiations with Jagotec and its affiliates to reach an agreement under which the terms of the joint venture would be restructured. There can be no assurance that such negotiations will result in a mutually satisfactory agreement. Oral Controlled-Release Drugs Formulations of drugs using the GEOMATRIX technology are designed to swell and gel when exposed to gastrointestinal fluids. This swelling and gelling is designed to allow the active drug component to diffuse from the tablet into the gastrointestinal fluids, gradually over a period of up to 24 hours. The Company believes that the GEOMATRIX technology may have other benefits 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 is using the GEOMATRIX drug delivery technology to develop oral controlled-release formulations for a broad range of presently marketed drugs which have lost, or will, in the near to mid-term, lose patent protection and/or marketing exclusivity. Certain of these presently marketed drugs are already available in a controlled-release format, while others are only available in an immediate release format that requires dosing several times daily. In the case of drugs already available in a controlled-release format, Genta Jago is seeking to develop bioequivalent products which would be therapeutic substitutes for the branded products. In the case of currently marketed products that are only available in immediate release form requiring multiple daily dosing, Genta Jago is seeking to develop once or twice-daily controlled-release formulations. The potential benefits of Genta Jago's oral controlled-release formulations may include improved compliance, greater efficacy and reduced side effects as a result of a more constant drug plasma concentration than that associated with immediate release drugs administered several times daily. Genta Jago currently has eight products in various stages of development that are intended to be bioequivalent generic versions of brand-name, controlled-release drugs currently marketed by others. Four of these products, nifedipine (Procardia XL(R)), ketoprofen (Oruvail(R)), carbidopa/levodopa (Sinemet(R)CR), and naproxen (Naprelan(R)) are currently undergoing manufacturing scale-up after completion of formulations development and pilot human pharmacokinetic studies. During the manufacturing scale-up phase of development, Genta Jago and its collaborators are seeking to proceed from the - 11 - production of small-scale research quantities to the production of larger-scale quantities necessary for commercial scale manufacturing. The scale-up has not yet been successfully completed for these products. Assuming successful completion of manufacturing scale-up, pivotal bioequivalency studies are scheduled to begin for these products in 1998. Genta Jago believes that if such bioequivalency studies are successfully completed, Abbreviated New Drug Applications (each an "ANDA") may be filed with the FDA for two of its products in 1998. In addition, potentially bioequivalent versions of two other products--Voltaren-XR(R) (diclofenac) and Covera-HS(R) (verapamil)--have completed formulations development and pilot pharmacokinetic studies. Genta Jago intends to proceed with manufacturing scale-up on these two products during 1998. 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." Genta Jago has also completed initial formulations development and pilot human pharmacokinetic studies for GEOMATRIX controlled-release formulations of cefaclor (Ceclor CD(R)) and metoprolol tartrate and formulations development is ongoing for additional products including acyclovir (Zovirax(R)). Genta Jago continues to seek collaborative agreements for these products in order to finance the manufacturing scale-up and required bioequivalency or clinical studies. In addition to these products currently in development, Genta Jago maintains the rights to apply the GEOMATRIX technology to the development of up to approximately 50 additional drugs. There can be no assurance that any product will be successfully developed or receive the necessary regulatory approvals. 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 $1.2 million, $2.2 million and $1.9 million of funding in 1997, 1996 and 1995, respectively, pursuant to - 12 - the agreement. Collaborative revenues of $1.5 million, $2.8 million and $3 million were recognized under the agreement during the years ended December 31, 1997, 1996 and 1995, 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 $2.3 million of collaborative revenue therefrom. RESEARCH AND DEVELOPMENT In an effort to focus its research and development efforts on areas which provide the most significant commercial opportunities, the Company continually evaluates its ongoing programs in light of the latest market information and conditions, availability of third-party funding, technological advances, and other factors. As a result of such evaluation, the Company's product development plans have changed from time to time, and the Company anticipates that they will continue to do so in the future. The Company - 13 - recorded research and development expenses of $5.4 million, $6.8 million and $13.1 million during 1997, 1996, and 1995, respectively, of which approximately $50,000, zero dollars and $1.1 million, respectively, were funded pursuant to collaborative research and development agreements and of which approximately $0.3 million, $1.6 million and $2.7 million, respectively, were funded pursuant to a related party contract revenue agreement with Genta Jago. See "MD&A--Results of Operations." MANUFACTURING/JBL 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 obtained its manufacturing capabilities in early 1991 through the acquisition of JBL. 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. JBL might, with additional capital investment, be able to manufacture commercial grade oligonucleotides, including G3139. 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 continuing to review and develop procedures, documentation and facilities for the production of oligonucleotides which it believes will adequately comply with the necessary GMP requirements. The Company is currently having G3139 made on a contract manufacturing basis by a third party supplier. See "MD&A--Certain Trends and Uncertainties--Difficult Manufacturing Process; Access to Certain Raw Materials." To the extent Genta is able to establish its own manufacturing capability for G3139, the Company should be able to reduce the cost of producing such oligonucleotides. The manufacture of all of the Company's and Genta Jago's products will be subject to GMP requirements prescribed by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There can be no assurance that the Company or Genta Jago will be able to manufacture products or have products manufactured for either of them in a timely fashion at acceptable quality and prices, that they or third-party manufacturers can comply with GMP, or that they or third-party - 14 - 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. GENTA EUROPE During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe") received approximately 5.4 million French Francs (or, as of April 1, 1998, approximately $869,000) 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 does not believe that under the terms of the ANVAR Agreement ANVAR is entitled to request early repayment and is working with ANVAR to achieve a mutually satisfactory resolution. 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 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. JBL manufactures and markets specialty biochemicals and intermediate products to over 100 purchasers in the pharmaceutical and diagnostic industries, with the top 10 customers representing more than 70% of JBL's total sales. JBL's products are also sold to the academic, commercial and governmental research markets primarily through distributors. In addition, JBL conducts contract synthesis for pharmaceutical, diagnostic and industrial companies. 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 - 15 - 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 compositions for delivery of oligonucleotides into cells. This portfolio includes issued United States and Canadian patents and patent applications filed by the Company. In addition, foreign counterparts of certain applications have been filed or will be filed at the appropriate time. 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. Of these, over 280 are active. 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, the United States Patent and Trademark Office issued a patent included in the Company's license agreement for claims covering antisense oligonucleotide compounds targeted against the bcl-2 gene. 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. - 16 - 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. - 17 - 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." 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 - 18 - 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 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 - 19 - 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) - 20 - application typically involves reduced research and development costs. However, there can be no assurance that any such applications will be approved. Furthermore, the supply of raw materials must also be approved by the FDA. The Company is also subject to various foreign, federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use, manufacture, storage, handling and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research and development work and manufacturing processes. Although the Company believes it is in compliance with these laws and regulations in all material respects (except as disclosed under "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 and triple-strand technology and controlled-release formulation technology and the development of pharmaceuticals utilizing such technologies. The Company competes with fully integrated pharmaceutical companies which have more substantial experience, financial and other resources and superior expertise in research and development, manufacturing, testing, obtaining regulatory approvals, marketing and distribution. Smaller companies may also prove to be significant competitors, particularly through their collaborative arrangements with large pharmaceutical companies or academic institutions. Furthermore, academic institutions, governmental agencies and other public and private research organizations have conducted and will continue to conduct research, seek patent protection and establish arrangements for commercializing products. Such products may compete directly with any products 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., 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." The Company's products under development are expected to address an array of markets. The Company's competition will be determined in part by the potential indications for which the Company's products are developed and ultimately approved by regulatory authorities. For certain of the Company's potential products, an important factor in competition may be the timing of market introduction of the Company's or - 21 - 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 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 December 31, 1997, Genta, JBL and Genta Europe had nine, 40 and one employees, respectively, nine of whom held doctoral degrees. Seventeen employees were engaged in research and development activities, 19 were engaged in manufacturing and 13 were in administration, sales and marketing positions. 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 1997, the Company terminated 11 employees and Genta Europe terminated one employee. The Company's overall staff was reduced by an additional net reduction of three employees in 1997, and two more to date in 1998, due to attrition. See - 22 - "MD&A--Certain Trends and Uncertainties--Need for and Dependence on Qualified Personnel." ITEM 2. PROPERTIES Genta's principal administrative offices are 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's revised lease for these remaining administrative office facilities extends through August 1998, with the option for additional three-month extensions at the same rate of $6,073 per month. The Company believes this space will be adequate for its activities through 1998. JBL, the Company's manufacturing subsidiary, leases and occupies approximately 30,000 square feet of office, laboratory and manufacturing space in San Luis Obispo, California. This lease expires in 2000. The lease calls for rent of approximately $321,500 in 1998, with amounts generally increasing annually thereafter to reflect cost of living related increases. The Company currently uses substantially all of the manufacturing capacity of this facility. The Company believes that such space will be adequate for its planned operations through 1998. The Company also has an option to purchase property adjacent to this facility, for expansion, if necessary. A director and officer and another officer of the Company, Drs. Klem and Brown, respectively, are affiliated with the owners of the leased and adjacent properties. Genta Pharmaceuticals Europe, S.A., the Company's European subsidiary, leases approximately 10,000 square feet of office, laboratory and manufacturing space in Marseilles, France. The lease is cancelable in 2003 and expires in 2005. The annual lease cost is F.F. 575,319 (or, as of April 1, 1998, approximately $93,000). With the reduction of its operations, Genta Europe is currently seeking to sublet all or a portion of this space. ITEM 3. LEGAL PROCEEDINGS (a) On February 5, 1997, Equity-Linked Investors, L.P. and Equity-Linked Investors-II (collectively, the "Plaintiffs") who, as a group, may be deemed beneficially to own more than five percent of the outstanding shares of the Common Stock of the Company as holders of Series A Preferred Stock, filed suit (the "Suit") in the Delaware Court of Chancery (the "Court") against the Company, each of the Company's directors and the Aries Funds (as hereinafter defined in Item 5). Through the Suit, the Plaintiffs sought to enjoin the transactions contemplated by The Note and Warrant Purchase Agreement (as hereinafter defined in Item 5) (the "Transactions"), rescission of the Transactions, damages, attorney fees, and such other and further relief as the Court may deem just and proper. The Suit alleged that the Board of Directors of the Company - 23 - breached fiduciary duties by failing to consider financing alternatives to the Transactions and further alleged that the Transactions were not in the best interests of the stockholders. Additionally, the Suit alleged that the Aries Funds aided and abetted such breach of fiduciary duty through their participation in the Transactions. On March 4 and 5, 1997, a trial was held before the Court. On April 25, 1997, the Court rejected the plaintiffs' challenge to the Transactions and ruled in favor of Genta, Genta's directors and the Aries Funds, who were the defendants. The Court entered a judgment in favor of Genta and its directors in the Suit. LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based broker/dealer has asserted claims against the Company and others. LBC's claims relate to the alleged breach by the Company of certain letter agreements, allegedly entered into by LBC and the Company in 1995 and 1996 with respect to brokerage and/or investment banking services particularly in connection with a $3 million investment for which LBC is seeking a fee. On March 30, 1998, the Company received a Statement of Claim under NASD arbitration rules, and a request that the Company voluntarily submit to NASD arbitration. The Company has not yet responded to that request. LBC's Statement of Claim seeks damages in the form of cash (in excess of $4 million), stock, warrants and other securities. On April 9, 1998, the Company's counsel learned that, in addition, a Complaint has been filed in the United States District Court for the Southern District of New York (98 Civ. 2491) by LBC against the Company and the same other parties. However, such Complaint has not yet been served upon the Company. The Company believes it has valid legal and equitable defenses to LBC's claim. Whether LBC's claims are ultimately adjudicated in arbitration or litigation, the Company intends to defend vigorously and possibly to assert counterclaims against LBC. (b) No material legal proceedings were terminated in the quarter ending December 31, 1997. 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, 1997. Executive Officers of the Registrant The executive officers of the Company are as follows: Name Age Position Kenneth G. Kasses, Ph.D 53 President, Chief Executive Officer and Director of the Company - 24 - Robert E. Klem, Ph.D. 53 Vice President and Director of the Company and Chairman of the Board of JBL Lauren R. Brown, Ph.D. 55 Vice President of the Company and President of JBL Kenneth G. Kasses, Ph.D., is Genta's President, Chief Executive Officer and a member of the Board of Directors. From 1991-1997, Dr. Kasses was affiliated with the Radiopharmaceutical Division of The DuPont Merck Pharmaceutical Company, serving as Senior Vice President and General Manager until 1994 when he was appointed President. From 1988 through 1990, he served as Director, Business Development and Planning, for the Medical Products Department of E. I. duPont de Nemours & Company, Inc. In that capacity he played a key role in the formation of The DuPont Merck Pharmaceutical Company, a joint venture between DuPont and Merck and Co., Inc. Prior to that he served as Director, U.S. Pharmaceuticals, for DuPont from 1987-1988 and as President of DuPont Critical Care from 1986-1987. Prior to this, Dr. Kasses held a variety of executive positions from 1973-86 at American Critical Care, CIBA-GEIGY Pharmaceuticals, Ayerst Laboratories and Block Drug Company. Dr. Kasses received a B.S. in biology from Dickinson College in 1966 and a Ph.D. in pharmacology from New York Medical College in 1974. Dr. Kasses also currently serves on the Board of Directors of the United Way of Merrimack Valley (Mass.). Robert E. Klem, Ph.D., has been a director of the Company since February 1991, a Vice President of the Company since October 1991 and is currently the Company's Principal Accounting Officer. Dr. Klem co-founded JBL Scientific, Inc. ("JBL"), a wholly owned subsidiary of the Company, in 1973 and, since then, has been Chairman of the Board and Chief Technical Officer of JBL with overall managerial responsibility for JBL. Previously, Dr. Klem was the Plant Manager for The DuPont Company in Victoria, Texas from 1970 to 1974. Dr. Klem received his Ph.D. in Organic Chemistry from the University of California at Riverside. Lauren R. Brown, Ph.D., has been a Vice President of the Company since October 1991. He co-founded JBL Scientific in 1973 and since then has been President of JBL, which Genta acquired in February 1991. He has had significant experience in the scale-up of a wide variety of processes, including many custom syntheses under GMP standards for outside companies. Present responsibilities include oversight of sales and marketing, quality control and process development programs as well as participating in the overall management of JBL. Dr. Brown received his Ph.D. in Organic Chemistry from the University of California at Riverside. He is active in community affairs in San Luis Obispo and presently serves on the Boards for the YMCA and the Chamber of Commerce. - 25 - 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, after having met the terms for continued listing as set forth in the April 11, 1997 revised exception of the Nasdaq Listing Qualifications Panel. 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 ---- --- 1996 First Quarter 29 3/8 18 3/4 Second Quarter 28 3/4 14 3/8 Third Quarter 20 4 3/8 Fourth Quarter 15 2 13/16 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 (b) Holders There were 337 holders of record of the Company's common stock as of April 10, 1998. (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 - 26 - 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 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 UnitsTM ("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 StockTM, 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 - 27 - $14,036,772. The respective conversion and exercise prices 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 agreed to enter into a financial advisory agreement with the placement agent pursuant to which the financial advisor shall 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 has 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. The SEC has not yet declared this registration statement 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. 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." - 28 - ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands, except per share amounts) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Product sales $ 4,702 $ 4,925 $ 3,782 $ 3,574 $ 3,263 Gain on sale of technology -- 373 -- -- -- Related party contract revenue 350 1,559 2,748 2,957 -- Collaborative research and development 50 -- 1,125 3,142 4,733 -------- -------- -------- -------- -------- 5,102 6,857 7,655 9,673 7,996 -------- -------- -------- -------- -------- Costs and expenses: Cost of products sold 3,099 2,479 1,899 1,710 1,593 Research and development 5,387 6,777 13,103 15,835 12,117 Charge for acquired in-process research and development -- -- 4,762 1,850 -- Selling, general and administrative 8,075 6,255 6,361 7,032 5,140 -------- -------- -------- -------- -------- 16,561 15,511 26,125 26,427 18,850 -------- -------- -------- -------- -------- Loss from operations (11,459) (8,654) (18,470) (16,754) (10,854) Equity in net loss of joint venture (1,193) (2,712) (6,913) (7,425) (5,310) Other income, net (2,773) (726) 17 731 646 -------- -------- -------- -------- -------- Net loss $(15,425) $(12,092) $(25,366) $(23,448) $(15,518) Dividends on Preferred Stock (1,695) (2,525) (2,551) (2,550) (671) Dividends imputed on preferred stock (16,158) (2,348) $ (1,000) -- -- -------- -------- -------- -------- -------- Net loss applicable to common shares $(33,278) $(16,965) $(28,917) $(25,998) $(16,189) -------- -------- -------- -------- -------- Net loss per common Share (1) $ (7.52) $ (5.69) $ (14.82) $ (19.00) $ (11.90) -------- -------- -------- -------- -------- Shares used in the calculation of net loss per common share 4,422 2,983 1,952 1,371 1,362 -------- -------- -------- -------- -------- Deficiency of earnings to meet combined fixed charges and preferred stock dividends (2) $(33,278) $(16,965) $(28,917) $(25,998) $(16,189) DECEMBER 31, ----------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ----- (In thousands) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments $ 8,456 $ 832 $ 272 $ 11,103 $34,594 Working capital (deficit) 5,807 (2,995) (1,580) 5,597 30,524 Total assets 15,754 11,169 15,631 23,808 45,486 Notes payable and capital lease obligations, less current portion -- 120 2,334 1,871 1,651 Series A redeemable preferred stock 22,830 26,405 30,000 30,000 30,000 Total Stockholders' equity (deficit) (13,405) (22,331) (23,028) (14,504) 8,064
(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. - 29 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception in February 1988, Genta has devoted its principal efforts toward drug discovery, research and development. Genta has been unprofitable to date and, even if it obtains financing to continue its operations, expects to incur substantial operating losses for the next several years due to continued requirements for ongoing research and development activities, preclinical and clinical testing, manufacturing activities, regulatory activities, establishment of a sales and marketing organization, and development activities undertaken by Genta Jago, the Company's joint venture with Jagotec. From the period since its inception to December 31, 1997, the Company has incurred a cumulative net loss of $124.5 million. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in revenues, expenses and losses will continue. The Company's independent auditors have included an explanatory statement in their report to the Company's financial statements at December 31, 1997, that expresses substantial doubt as to the Company's ability to continue as a going concern. There are several factors that must be considered risks in that regard and those that are known to management are discussed 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 Results of Operations and elsewhere in this Annual Report on Form 10- K. The Company does not undertake to update any forward-looking statements. - 30 - RESULTS OF OPERATIONS Operating revenues totaled $5.1 million in 1997 compared to $6.9 million in 1996 and $7.7 million in 1995. The decreases in revenues over this period is primarily attributable to decreases in revenues from Genta Jago for services provided to Genta Jago by the Company. These "Related party contract revenues" were $350,000 in 1997, $1.6 million in 1996, and $2.7 million in 1997. The expenses for which these revenues are received are recorded 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 oligonucleotide, G3139, this trend will continue in that the Company will continue to minimize the services it provides to Genta Jago. It should be noted that at the same time, the Company is also reducing its commitment to provide funds to Genta Jago. The Company is currently in negotiations with Jagotec and its affiliates to reach an agreement under which the terms of the joint venture would be restructured. There can be no assurance that such negotiations will result in a mutually satisfactory agreement. Collaborative research and development revenues were $50,000 in 1997, representing deferred revenues recognized pursuant to the Company's collaboration with Johnson & Johnson Consumer Products, Inc., and $1.1 million in 1995, earned through the collaboration with The Procter & Gamble Company. See "Business--Anticode(TM) Brand of Antisense Oligonucleotide Programs--Oligonucleotide Collaborative and Licensing Agreements--Other Anticode Agreements." Both of these agreements have ended and there have been no indications that either will produce additional revenues in the future. All of the Company's product sales are attributable to JBL. Sales of specialty chemical and pharmaceutical intermediate products used in the clinical diagnostics, pharmaceutical research and development and pharmaceutical manufacturing decreased to $4.7 million in 1997 from $4.9 million in 1996 and were $3.8 million in 1995. While the annual demand for many of JBL's products is relatively stable, there has been a slight downward trend for clinical diagnostic raw materials and an upward trend for research and development and pharmaceutical manufacturing raw materials. Overall, demand for the Company's products has been increasing, while competition has caused prices to decrease. In 1995 and 1996, sales of products used in pharmaceutical manufacturing and pharmaceutical research and development increased due to increased market penetration while sales of products used in clinical diagnostics trended slightly downward. In 1997, demand for the Company's products continued to increase, particularly intermediates used in pharmaceutical research and development and pharmaceutical manufacturing; however, competition caused sales prices to decrease. - 31 - Europa Bioproducts ("Europa"), JBL's European distributor, accounted for approximately 25%, of product sales in 1997, 27% in 1996, and 21% in 1995. No other customer accounted for more than 10% of product sales in 1997. One other customer who accounted for less than 10% of product sales in 1997 accounted for approximately 16% of product sales during the year ended December 31, 1995. Individual customers' demands for JBL products generally fluctuates with the outcomes of clinical trials or the availability of funding. The Company believes that the loss of any material customer, if not replaced, could have an adverse effect on the Company. Costs and expenses totaled $16.6 million in 1997 compared to $15.5 million in 1996 and $26.1 million in 1995. Over this period the costs of products sold by JBL have increased as market penetration and volumes increased. The increase in costs of products sold in 1997 as compared to 1996 was due to increased labor costs necessary to meet increased production volumes and to the redeployment of certain employees in connection with a reduction in Genta's research and development staff. As a result of these increased costs and reduced selling prices in response to competition, gross margins decreased from 50% in 1995 and 1996 to 34% in 1997. Research and Development expenses as a whole were reduced in 1996 from the prior year by $6.3 million (48%) and an additional $1.4 million (21%) in 1997. The decrease in research and development expenses is primarily attributable to the Company's restructuring and the redeployment of certain employees mentioned above, and related workforce reductions implemented in 1995, 1996 and 1997 (see below) together with the discontinuation or non-initiation 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 1995 through 1997. These amounts were $2.7 million in 1995, $1.6 million in 1996, and $350,000 in 1997 (see above). Also included in Research and Development expenses during 1995 were non- recurring charges for acquired in-process research and development totaling $4.8 million associated with the expansion of Genta Jago to obtain rights to develop additional GEOMATRIX-based products. The technological feasibility of the acquired in-process research and development had not yet been established and the technology had no future alternative uses at the date of acquisition. Furthermore, due to uncertainties regarding the Company's ability to demonstrate bioequivalence of potential products, management is unable to make estimates regarding the efforts necessary to develop the acquired, in- process technology into a commercially viable product. However, it is expected that any such development would require significant cash resources. 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 - 32 - 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. In total, the Company's costs and expenses increased by approximately $1.0 million in 1997 relative to 1996. The decreases in research and development expenses described above were partially offset by a $600,000 non-recurring charge in General and Administrative Expenses recorded in the third quarter of 1997 related to management's decision to abandon certain patents that management determined were no longer germane to the Company's mainstream business (see below). In addition, G&A Expenses also increased as a result of increased legal expenses associated with 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; increased accounting and legal expenses due to the Company's successful efforts to avoid a potential Nasdaq delisting and associated with the equity offerings consummated in 1997; and increased recruiting expenses. See "Legal Proceedings" and "Market for Registrant's Common Equity and Related Stockholder Matters -- Recent Sales of Unregistered Securities." As note above, in an effort to reduce costs and conserve working capital, Genta initiated a termination plan in March 1995, whereby the Company terminated 26 employees involved in the Company's research and development activities. The Company recorded General and Administrative expenses totaling $250,000 for accrued severance costs associated with the 26 terminated employees. In October 1996, Genta again reassessed its personnel requirements and established a second 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 a third 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. The Company has reduced its work force to a core group of corporate personnel 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. 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 - 33 - developed and approved for marketing, as compared to establishing a corporate partner relationship . 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 indentify 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. In 1997, as a result of such evaluation, the Company recorded charges to General & Administrative Expenses of $600,000 to account for the value of the abandoned patents no longer related to the research and development efforts of the Company. The Company's equity in net loss of joint venture (Genta Jago) totaled $1.2 million in 1997 compared to $2.7 million in 1996 and $6.9 million in 1995. The decrease in the Company's equity in net loss of joint venture during 1997 relative to 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 $4.7 million in principal and 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 - 34 - future could represent significantly poorer financial opportunities than those that were anticipated in the earlier plans. This reduction in opportunity derives from factors such as the presence of direct competitors to Genta Jago's products being in the marketplace before Genta Jago, and increasing pricing pressures on pharmaceuticals, particularly multisource or generic products from payers such as reimbursers and government buyers. See "MD&A--Certain Trends and Uncertainties--Uncertainty of Technological Change and Competition" and "MD&A--Certain Trends and Uncertainties--Uncertainty of Product Pricing, Reimbursement and Related Matters." Both of these factors may adversely affect Genta Jago even if it is successful in developing products to obtain regulatory approval. As a result and in consideration of the Company's need to reduce expenses and focus its efforts, the Company is seeking to direct its resources from the joint venture to its Anticode development, specifically G3139, for the immediate future. Interest income has fluctuated significantly each year and is anticipated to continue to fluctuate primarily due to changes in the levels of cash, investments and interest rates each period. Interest expense was $3,323,000 in 1997, $886,000 in 1996, and $323,000 in 1995. In consideration of EITF D-60 which was issued by the SEC 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 April 1998, 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. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily from private and public offerings of its equity securities. Cash provided from these offerings totaled approximately $112.4 million through December 31, 1997, including net proceeds of $17.0 million raised during 1997. At December 31, 1997, the Company had cash, cash - 35 - equivalents and short-term investments totaling $8.5 million compared to $532,000 at December 31, 1996. The increase in cash, cash equivalents and short-term investments during 1997 is largely attributable to proceeds from the Company's private placements, as described in Note 8 to the Company's consolidated financial statements. The Company will need substantial additional funds before it can expect to realize significant product revenue. The Company projects that at its current rate of spending and for its current activities, its existing cash funds will enable the Company to maintain its present operations into the first quarter of 1999. To the extent that the Company is successful in accelerating its development of G3139 or in expanding its development portfolio or acquiring or adding new development candidates, the current cash resources would be consumed at a greater rate. Similarly, the Company has been seeking to identify and hire additional senior managers to direct the business of the Company. To the extent it is successful in these endeavors, the rate of cash utilization would also increase. Certain parties with whom the Company has agreements have claimed default and, should the Company be obligated to pay these claims or should the Company engage legal services to defend or negotiate its positions or both, its ability to continue operations could be significantly reduced or shortened. See "MD&A--Certain Trends and Uncertainties--Claims of Genta's Default Under Various Agreements." The Company anticipates that significant additional sources of financing, including equity financings, will be required in order for the Company to continue its planned principal operations. The Company also anticipates seeking additional product development opportunities from external sources. Such acquisitions may consume cash reserves or require additional cash or equity. The Company's working capital and additional funding requirements will depend upon numerous factors, including: (i) the progress of the Company's research and development programs; (ii) the timing and results of preclinical testing and clinical trials; (iii) the level of resources devoted to Genta Jago; (iv) the level of resources that the Company devotes to sales and marketing capabilities; (v) technological advances; (vi) the activities of competitors; and (vii) the ability of the Company to establish and maintain collaborative arrangements with others to fund certain research and development efforts, Jto conduct clinical trials, to obtain regulatory approvals and, if such approvals are obtained, to manufacture and market products. See "MD&A--Certain Trends and Uncertainties--Need for Additional Funds; Risk of Insolvency." If the Company successfully secures sufficient levels of collaborative revenues and other sources of financing, it expects to use such financing to continue and expand its ongoing research and development activities, preclinical testing and clinical trials, manufacturing activities, costs associated with the market introduction of potential products, expansion of its administrative activities. In connection with the Genta Jago joint venture formed in late 1992 and expanded in May 1995, the Company provides funding to Genta Jago pursuant to a working capital - 36 - loan agreement that expires in October 1998. The loans are advanced up to a mutually agreed upon maximum commitment 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 is 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. 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 and interest reduction of approximately $4.7 million. As of December 31, 1997, 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, 1997. Such loans bear interest at rates per annum ranging from 5.81% to 7.5%, and are payable in full on October 20, 1998, or earlier in the event certain revenues are received by Genta Jago and specified cash balances are maintained by Genta Jago. There can be no assurance, however, that Genta Jago will obtain sufficient financial resources to repay such loans to Genta. Genta Jago repaid Genta $1 million in principal of its working capital loans, in November 1996, from license fee revenues. The amount of future loans by Genta to Genta Jago will depend upon several factors, including the amount of funding obtained by Genta Jago through collaborative arrangements, Genta's ability and willingness to provide loans, and the timing and cost of Genta Jago's preclinical studies, clinical trials and regulatory activities. The Company is currently in negotiations with Jagotec and its affiliates to reach an agreement under which the terms of the joint venture would be restructured. There can be no assurance that such negotiations will result in a mutually satisfactory agreement. See "MD&A-- Certain Trends and Uncertainties--Claims of Genta's Default Under Various Agreements." In 1997, the Company did not acquire additional property or equipment. Through December 31, 1997, the Company acquired $10.1 million in property and equipment of which $5.5 million was financed through capital leases and other equipment financing arrangements, $3.3 million was funded in cash and the remainder was acquired through the Company's acquisition of JBL. 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 1997, 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 - 37 - Administrative expense due to the reduction of operations at Genta Pharmaceuticals Europe. The Company discontinued its effort to develop a capability at JBL to manufacture oligonucluotides 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. 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. Terms of the Company's Series A Preferred Stock require the payment of dividends annually in amounts ranging from $3 per share per annum for the first year to $5 per share per annum in the third and fourth years. Dividends may be paid in cash or common stock or a combination thereof, at the Company's option. Dividends on the Series A Preferred Stock accrue on a daily basis (whether or not declared) and shall accumulate to the extent not paid on the annual dividend payment date following the dividend period for which they accrue. The Company may redeem the Series A Preferred Stock under certain circumstances, and was required to redeem the Series A Preferred Stock, subject to certain conditions, in September 1996 at a redemption price of $50 per share, plus accrued and unpaid dividends (the "Redemption Price"). The Company elected to pay the Redemption Price in Common Stock in 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 Series A redeemable 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 - 38 - 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, 1997 management has considered projected future cash flows from product sales, collaborations and proceeds on sale of such assets and, other than the $600,000 charge recorded in 1997 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 is completing an assessment of whether it will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total year 2000 project cost is not expected to be material. The year 2000 project is expected to be completed not later than December 31, 1998, 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. 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 - 39 - 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. 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 "Report of Ernst & Young, LLP, Independent Auditors" and "MD&A--Liquidity and Capital Resources." The Company will need to raise substantial additional funds to conduct the costly and time-consuming research, pre-clinical development and clinical trials necessary to bring its products to market and to establish production and marketing capabilities. The Company intends to seek additional funding through public or private financings, including equity financings, and through collaborative arrangements. Adequate funds for these purposes, whether obtained through financial markets or collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company: to delay, scale back or eliminate some or all of its research and product development programs; to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself; to sell itself to a third party; to cease operations; or to declare bankruptcy. The Company's future cash requirements will be affected by results of research and development, results of pre-clinical studies and bioequivalence and clinical trials, relationships with corporate collaborators, changes in the focus and direction of the Company's research and development programs, competitive and technological advances, resources devoted to Genta Jago, the FDA and foreign regulatory processes, potential litigation by companies seeking to prevent or delay marketing approval of Genta Jago's products and other factors. Loss History; Uncertainty of Future Profitability. Genta has been unprofitable to date, incurring substantial operating losses associated with ongoing research and development activities, pre-clinical testing, clinical trials, manufacturing activities and development activities undertaken by Genta Jago. - 40 - From the period since its inception to December 31, 1997, the Company has incurred a cumulative net loss of $124.5 million. The Company has experienced significant quarterly fluctuations in operating results and expects that these fluctuations in revenues, expenses and losses will continue. The Company's independent auditors have included an explanatory paragraph in their report to the Company's financial statements at December 31, 1997, which paragraph expresses substantial doubt as to the Company's ability to continue as a going concern. See "Report of Ernst & Young LLP, Independent Auditors" and "MD&A--Certain Trends and Uncertainties--Need for Additional Funds; Risk of Insolvency." Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of Dilution; Anti-Dilution Adjustments. In the event of the liquidation, dissolution or winding up of the Company, the Common Stock is expressly subordinate to the approximately $27.2 million preference of the 453,100 outstanding shares of Series A Preferred Stock and the approximately $37.4 million preference of 267,390 shares of Series D Preferred Stock (including 40,395 shares of Series D Preferred Stock issuable upon exercise of certain warrants). Dividends may not be paid on the Common Stock unless full cumulative dividends on the Series A and Series D Preferred 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 and the exercise price of warrants issued in connection with the Series A Preferred Stock (the "Series A Warrants") are subject to adjustment, among other things, upon certain issuances of Common Stock or securities convertible into Common Stock at $67.50 per share or less. As of March 1, 1998, each share of Series A Preferred Stock is convertible into approximately 7.25 shares of Common Stock at a conversion price of $8.27 per share and the exercise price of the Series A Warrants is presently $9.32 per share. There are outstanding Series A Warrants to purchase an aggregate of 675,966 shares of Common Stock, which expire on September 24, 1998. The conversion rate of the Series D Preferred Stock and the exercise prices of the Class D Warrants are subject to adjustment, among other things, upon certain issuances of Common Stock or securities convertible into Common Stock at prices per share below certain levels. In addition, the Conversion Price of the Series D Preferred Stock in effect on June 29, 1998 (the "Reset Date") will be adjusted and reset effective as of the Reset Date if the average closing bid price of the Common Stock for the 20 consecutive trading days immediately preceding the Reset Date (the "12 Month Trading Price") is less than 140% of the then applicable Conversion Price (a "Reset Event"). Upon the occurrence of a Reset Event, the then applicable Conversion Price will be reduced to be equal to the greater of (i) the 12 Month Trading Price divided by 1.40 and (ii) 25% of the then applicable Conversion Price. Each share of Series D Preferred Stock is presently convertible into approximately 106 shares of Common Stock, at a conversion price of $0.94375 per share - 41 - of Common Stock, and the exercise price of the Class D Warrants is presently $0.94375 per share. There are 807,900 Class D Warrants outstanding and another 201,975 Class D Warrants issuable upon the exercise of certain warrants. Finally, the Company has outstanding Bridge Warrants to purchase an aggregate of 6,357,616 shares of Common Stock at an exercise price of $0.471875 per share, Line of Credit Warrants to purchase an aggregate of 50,000 shares of Common Stock at an exercise price of $2.50 per share, warrants to purchase an aggregate of 95,768 shares of Common Stock at various exercise prices between approximately $13 and $21 per share and outstanding employee stock options. The Note and Warrant Purchase Agreement provides that a number of additional Bridge Warrants ("Penalty Warrants") equal to 1.5% of the number of Bridge Warrants then held by the Aries Funds shall be issued to the Aries Funds for each day beyond 30 days after the final closing of the Private Placement that a shelf registration statement covering the Common Stock underlying the securities purchased pursuant to the Note and Warrant Purchase Agreement is not filed with the SEC and for each day beyond 210 days after the closing date of the investment contemplated by the Note and Warrant Purchase Agreement that such shelf registration statement is not declared effective by the SEC. The Company filed such shelf registration statement with the SEC on September 9, 1997, however, the Company has to date been unable to have such shelf registration statement declared effective by the SEC. As a result, the Company could be obligated to issue Penalty Warrants to the Aries Funds. The Aries Funds have not, to date, requested that the Company issue such Penalty Warrants. The Company and the Aries Funds are currently conducting negotiations to determine whether, and to what extent, Penalty Warrants will be issued. See "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities." Claims of Genta's Default Under Various Agreements. On May 7, 1997 Jago and Jagotec gave Genta Jago formal notices of its assertion that Genta Jago is in breach of the Restated GEOMATRIX(R) Services Agreement, the Restated GEOMATRIX(R) Research and Development Agreement and the Restated GEOMATRIX(R) License Agreement, stating that should the breach not be cured within the applicable cure period, Genta Jago would reserve the right to terminate the agreements in accordance with their terms. Each of these Agreements provides for a cure period of 30 days, except that if the default is not capable of being cured within this period and the defaulting party is diligently undertaking to cure such default as soon as commercially feasible thereafter under the circumstances, then the non-breaching party shall have no right to terminate the agreement. In addition each of these agreements contains a provision providing for the final resolution of any disputes, claims or controversies, whether before or after termination of the agreement, by arbitration in Paris, France. After the 30-day cure period expired, Jago did not take action purporting to terminate these agreements but did not rescind the notices of default. Jago, Jagotec and Jago Holding AG also gave formal notice of default under the Restated Joint Venture and Shareholders Agreement, contending that due to Genta's failure to meet its funding - 42 - obligations to Genta Jago, Genta Jago was unable to fulfill its obligations to Jago. The amount claimed by Jago to be in default is approximately $1.2 million, of which $200,000 relates to 1997 and $1.0 million relates to development costs and license fees for 1996. There is no specific cure period contained in the Restated Joint Venture and Shareholders Agreement but rather a provision providing for resolution of disputes, claims or controversies by arbitration in Paris, France. The Company recently met with Jago and is attempting to resolve the situation without resort to arbitration. While a termination of these agreements may have a material adverse effect on the Company, the Company intends to oppose vigorously Jago's position. Stating that it was without prejudice to Genta's position, Genta provided approximately $129,000 to Genta Jago for the payment by Genta Jago of all amounts claimed by Jago under the Restated GEOMATRIX(R) License Agreement and certain other amounts owed by Genta Jago to third parties (both included in Jago's notice of default). 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. This notice further advised that if the alleged breach were not cured within 90 days of the notice the license would be terminated. See "Business--Anticode(TM) Brand of Antisense Oligonucleotide Programs--Oligonucleotide Collaborative and Licensing Agreements--Ts'o/Miller/Hopkins." The French government agency L'Agence Nationale de Valorisation de la Recherche (ANVAR) asserted, in a letter dated February 13, 1998, that Genta Europe was not in compliance with the ANVAR Agreement, and that ANVAR might request the immediate repayment of such loan. The Company does not believe that under the terms of the ANVAR Agreement, ANVAR is entitled to request early repayment and is working with ANVAR to achieve a mutually satisfactory resolution. See "Business--Genta Europe." LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based broker/dealer, has asserted claims against the Company and others. See "Legal Proceedings." There can be no assurance that the Company will not incur material costs in relation to these terminations and/or assertions of default or liability. See "MD&A--Liquidity and Capital Resources." Early Stage of Development; Technological Uncertainty. Genta is at an early stage of development. All of the Company's potential therapeutic products are in research or development, and no revenues have been generated from therapeutic product sales. To date, most of the Company's resources have been dedicated to applying molecular biology and medicinal chemistry to the research and development of potential Anticode(TM) pharmaceutical products based upon oligonucleotide technology. While the Company has demonstrated the activity of Anticode(TM) oligonucleotide technology in model systems in vitro and the activity of antisense technology in animals and has identified compounds that the Company believes are worthy of additional testing, only one of these potential Anticode(TM) oligonucleotide products has begun to be tested in humans, with such testing in its early stages. There - 43 - can be no assurance that the novel approach of oligonucleotide technology will result in products that will receive necessary regulatory approvals or that will be successful commercially. Further, results obtained in pre-clinical studies or early clinical investigations or pilot bioequivalence trials are not necessarily indicative of results that will be obtained in pivotal human clinical or bioequivalence trials. There can be no assurance that any of the Company's or Genta Jago's potential products can be successfully developed. Furthermore, the Company's products in research or development may prove to have undesirable and unintended side effects or other characteristics that may prevent or limit their commercial use. There can be no assurance that the Company will be permitted to undertake human clinical testing of the Company's products currently in pre-clinical development, or, if permitted, that such products will be demonstrated to be safe and efficacious. The Company is pursuing research and development through Genta Jago of a range of oral controlled-release formulations of currently available pharmaceuticals. Many of the products to be developed through Genta Jago have not yet been formulated using GEOMATRIX technology. In addition, none of the products being developed through Genta Jago has had its manufacturing process successfully scaled-up for commercial production or has started pivotal bioequivalence trials. In addition, there can be no assurance that any of the Company's or Genta Jago's products will obtain FDA or foreign regulatory approval for any indication or that an approved compound would be capable of being produced in commercial quantities at reasonable costs and successfully marketed. Products, if any, resulting from Genta's or Genta Jago's research and development programs are not expected to be commercially available for a number of years. Certain competitive products have already been filed with and/or approved by the FDA. See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of Technological Change and Competition." Limited Availability of Net Operating Loss Carry Forwards. At December 31, 1997, the Company has federal and California net operating loss carryforwards of approximately $71,697,000 and $15,236,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California tax purposes and the fifty percent limitation on California loss carryforwards prior to 1997. The federal tax loss carryforwards will begin expiring in 2003, unless previously utilized. Approximately $2,767,000 of the California tax loss carryforward expired during 1997 and the related deferred tax asset and tax loss carryforward amounts have been reduced accordingly. The remaining California tax loss will continue to expire in 1998, unless utilized. The Company also has federal and California research and development tax credit carryforwards of $2,921,000 and $1,203,000, respectively, which will begin expiring in 2003 unless previously utilized. - 44 - Federal and California tax laws limit the utilization of income tax net operating loss and credit carryforwards that arise prior to certain cumulative changes in a corporation's ownership resulting in change of control of the Company. The future annual use of net operating loss carryforwards and research and development tax credits will be limited due to the ownership changes that occurred during 1990, 1991, 1993, 1996 and 1997. Because of the decrease in value of the Company's stock, the ownership changes which occurred in 1996 and 1997, will have a material adverse impact on the Company's ability to utilize these carryforwards. 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 - 45 - developed through Genta Jago, there is a substantial risk that the manufacturers or marketers of such currently available pharmaceuticals will seek to delay or block regulatory approval of any reformulated versions of such pharmaceuticals through litigation or other means. Any significant delay in obtaining, or failure to obtain, such approvals could materially adversely affect the Company's or Genta Jago's revenue. Moreover, additional government regulation from future legislation or administrative action may be established which could prevent or 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. Chloroform was detected at levels of up to 190 ug/liter on-site, exceeding the California Drinking Water Maximum Contamination Level for trihalomethanes of 100 ug/liter. PCEs were also detected at levels of up to 22 ug/liter on-site, exceeding the California Drinking Water Maximum Contamination Level of 5 ug/liter. In addition, Toluene was detected at levels of up to 2 ug/liter at several points on-site, which is significantly below the California Toxicity Action Level of 100 ug/liter. These toxicity levels are not binding, as the final regulatory maximum levels may be higher or lower. JBL has notified the appropriate regulatory agency, the California Regional Water Quality Control Board, of conditions at the site, and with the agency's approval, JBL is monitoring groundwater conditions at the site on a quarterly basis. JBL is currently in the pre-regulatory action stage with ongoing site monitoring and site assessment. In addition, current sampling results indicate that contaminants may be migrating off-site. An off-site well, used as a domestic and irrigation water source, has shown evidence of being impacted by chloroform at 0.9 ug/liter, significantly below (less than one percent of) the California Drinking Water Maximum Contamination Level for trihalomethanes of 100 ug/liter, and toluene at 0.9 ug/liter, also significantly below (less than one percent of) the California Toxicity Action Level of 100 ug/liter. While another off-site well has been found to contain chloroform, the engineering consultant concluded that the contaminants do not appear to relate to impact from the JBL site. The Company believes that any costs associated with further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. The Company believes that it is in material compliance with - 46 - Governmental Regulations, however there can be no assurance that the Company will not be required to incur significant costs to comply with Governmental Regulations in the future. Uncertainty Regarding Patents and Proprietary Technology. The Company's and Genta Jago's success will depend, in part, on their respective abilities to obtain patents, maintain trade secrets and operate without infringing the proprietary rights of others. No assurance can be given that patents issued to or licensed by the Company or Genta Jago will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company or Genta Jago. There can be no assurance that the Company's or Genta Jago's patent applications will be approved, that the Company or Genta Jago will develop additional products that are patentable, that any issued patent will provide the Company or Genta Jago with any competitive advantage or adequate protection for its inventions or will not be challenged by others, or that the patents of others will not have an adverse effect on the ability of the Company or Genta Jago to do business. Competitors may have filed applications, may have been issued patents or may obtain additional patents and proprietary rights relating to products or processes competitive with those of the Company or Genta Jago. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the Company's or Genta Jago's products or design around any patented products developed by the Company or Genta Jago. The Company and Genta Jago rely on secrecy to protect technology in addition to patent protection, especially where patent protection is not believed to be appropriate or obtainable. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise 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 - 47 - rights, including those granted by third parties, in a suit against another party. The Company or Genta Jago may also become involved in interference proceedings declared by the United States Patent and Trademark Office (or any foreign counterpart) in connection with one or more of its patents or patent applications, which could result in substantial cost to the Company or Genta Jago, as well as an adverse decision as to priority of invention of the patent or patent application involved. There can be no assurance that the Company or Genta Jago will have sufficient funds to obtain, maintain or enforce patents on their respective products or technology, to obtain or maintain licenses that may be required in order to develop and commercialize their respective products, to contest patents obtained by third parties, or to defend against suits brought by third parties. Dependence on Others. The Company's and Genta Jago's strategy for the research, development and commercialization of their products requires negotiating, entering into and maintaining various arrangements with corporate collaborators, licensors, licensees and others, and is dependent upon the subsequent success of these outside parties in performing their responsibilities. No assurance can be given that they will obtain such collaborative arrangements on acceptable terms, if at all, nor can any assurance be given that any current collaborative arrangements will be maintained. Technology Licensed From Third Parties. The Company has entered into certain agreements with, and licensed certain technology and compounds from, third parties. The Company has relied on scientific, technical, clinical, commercial and other data supplied and disclosed by others in entering into these agreements, including the Genta Jago agreements, and will rely on such data in support of development of certain products. Although the Company has no reason to believe that this information contains errors of omission or fact, there can be no assurance that there are no errors of omission or fact that would materially affect the future approvability or commercial viability of these products. Potential Adverse Effect of Technological Change and Competition. The biotechnology industry is subject to intense competition and rapid and significant technological change. The Company and Genta Jago have numerous competitors in the United States and other countries for their respective technologies and products under development, including among others, major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. There can be no assurance that the Company's or Genta Jago's competitors will not succeed in developing products or other novel technologies that are more effective than any which have been or are being developed by the Company or Genta Jago or which - 48 - 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 to products that share the same potential market as the Company's or Genta Jago's potential products, the market share available to the Company or Genta Jago will likely be reduced, thereby reducing the potential revenues and earnings available to the Company or Genta Jago. In addition, increased pricing competition would also likely result, further reducing the earnings potential of Company's or Genta Jago's products. In December 1997, a competitor of the Company, Elan Corporation, received approval of their ANDA for a generic formulation of Oruvail(R) (ketoprofen), and another company, Mylan Laboratories, Inc., has filed an ANDA for a generic formulation of Procardia XL(R) (nifedipine). Furthermore, if the Company or Genta Jago is permitted to commence commercial sales of products, it will also be competing with respect to marketing capabilities, an area in which it has limited or no experience, and manufacturing efficiency. There are many public and private companies that are conducting research and development activities based on drug delivery or antisense technologies. The Company believes that the industry-wide interest in such technologies will accelerate and competition will intensify as the techniques which permit drug design and development based on such technologies are more widely understood. Uncertainty of Clinical Trials and Results. The results of clinical trials and pre-clinical testing are subject to varying interpretations. Even if the development of the Company's or Genta Jago's respective products advances to the clinical stage, there can be no assurance that such products will prove to be safe and effective. The products that are successfully developed, if any, will be subject to requisite regulatory approval prior to their commercial sale, and the approval, if obtainable, may take several years. Generally, only a very small percentage of the number of new pharmaceutical products initially developed is approved for sale. Even if products are approved for sale, there can be no assurance that they will be commercially successful. The Company or Genta Jago may encounter unanticipated problems relating to development, manufacturing, distribution and marketing, some of which may be beyond the Company's or Genta Jago's respective financial and technical capacity to solve. The failure to address such problems adequately could have a material adverse effect on the Company's or Genta Jago's respective businesses, financial conditions, prospects and results of operations. No assurance can be given that the - 49 - Company or Genta Jago will succeed in the development and marketing of any new drug products, or that they will not be rendered obsolete by products of competitors. "See "MD&A--Certain Trends and Uncertainties-- Potential Adverse Effect of Technological Change and Competition." Difficult Manufacturing Process; Access to Certain Raw Materials. The manufacture of Anticode(TM) oligonucleotides is a time-consuming and complex process. Management believes that the Company has the ability to acquire or produce quantities of oligonucleotides sufficient to support its present needs for research and its projected needs for its initial clinical development programs. However, in order to obtain oligonucleotides sufficient to meet the volume and cost requirements needed for certain commercial applications of Anticode(TM) oligonucleotide products, Genta requires raw materials currently provided by a single supplier which is itself a development stage biotechnology company (and a competitor of the Company) and is subject to uncertainties including the potential for a decision by such supplier to discontinue production of such raw materials, the insolvency of such supplier, or the failure of such supplier to follow applicable regulatory guidelines. Products based on chemically modified oligonucleotides have never been manufactured on a commercial scale. The manufacture of all of the Company's and Genta Jago's products will be subject to current GMP requirements prescribed by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There can be no assurance that the Company or Genta Jago will be able to manufacture products, or have products manufactured for it, in a timely fashion at acceptable quality and prices, that they or third party manufacturers can comply with GMP or that they or third party manufacturers will be able to manufacture an adequate supply of product. Limited Sales, Marketing and Distribution Experience. The Company and Genta Jago have very limited experience in pharmaceutical sales, marketing and distribution. In order to market and sell certain products directly, the Company or Genta Jago would have to develop or subcontract a sales force and a marketing group with technical expertise. There can be no assurance that any direct sales or marketing efforts would be successful. Uncertainty of Product Pricing, Reimbursement and Related Matters. The Company's and Genta Jago's business may be materially adversely affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means. For example, in certain foreign markets the pricing or profitability of healthcare products is subject to government control. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar governmental control. - 50 - While the Company cannot predict whether any such legislative or regulatory proposals or reforms will be adopted, the adoption of any such proposal or reform could adversely affect the commercial viability of the Company's and Genta Jago's potential products. In addition, in both the United States and elsewhere, sales of healthcare products are dependent in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. Third party payers are increasingly challenging the prices charged for medical products and services, and therefore significant uncertainty exists as to the reimbursement of existing and newly- approved healthcare products. If the Company or Genta Jago succeeds in bringing one or more products to market, there can be no assurance that these products will be considered cost effective and that reimbursement to the consumer will be available or will be sufficient to allow the Company or Genta Jago to sell its products on a competitive basis. Finally, given the above potential market constraints on pricing, the availability of competitive products in these markets may further limit the Company's and Genta Jago's flexibility in pricing and in obtaining adequate reimbursement for its potential products. See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of Technological Change and Competition." Need for and Dependence on Qualified Personnel. The Company's success is highly dependent on the hiring and retention of key personnel and scientific staff. The loss of key personnel or the failure to recruit necessary additional personnel or both is likely further to impede the achievement of development objectives. There is intense competition for qualified personnel in the areas of the Company's activities, and there can be no assurance that Genta will be able to attract and retain the qualified personnel necessary for the development of its business. The Company is actively engaged in the search for a new Chief Financial Officer and a head of Research and Development. In March 1998, the Company's Controller resigned and a replacement is being sought. At the present time the Company believes its Stock Option Plan is inadequate to provide sufficient incentives for the successful recruitment of key personnel and a new plan will be proposed for stockholder approval at the next annual stockholders' meeting. In addition, the current senior officers and directors have not been granted options in accordance with appointment offers since the current plan does have sufficient options available. There can be no assurance that the stockholders will approve such a plan or that, if approved, it will be adequate to enable recruitment of new, or retention of existing, key employees and directors. Product Liability Exposure; Limited Insurance Coverage. The Company's, JBL's and Genta Jago's businesses expose them to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of human therapeutic products. If available, product liability insurance for the pharmaceutical industry generally is expensive. The Company has obtained a level of - 51 - liability insurance coverage that it deems appropriate for its current stage of development. However, there can be no assurance that the Company's present insurance coverage is adequate. Such existing coverage may not be adequate as the Company further develops products, and no assurance can be given that, in the future, adequate insurance coverage will be available in sufficient amounts or at a reasonable cost, or that a product liability claim would not have a material adverse effect on the business or financial condition of the Company. Fundamental Change. The Company's Restated Certificate of Incorporation currently provides that upon the occurrence of a "Fundamental Change," the holders of Series A Preferred Stock have the option of requiring the Company to repurchase all of each such holder's shares of Series A Preferred Stock at the Redemption Price, an event that could result in the Company being required to pay to the holders of Series A Preferred Stock stock or (in certain circumstances) cash in the aggregate amount of approximately $27.2 million. Furthermore, if the Company is required to redeem the Series A Preferred Stock it would also be required (subject to certain conditions) to offer to redeem the Series D Preferred Stock on a pari passu basis with the Series A Preferred Stock and with the same type of consideration paid in redemption of the Series A Preferred Stock; upon a Fundamental Change, the Company could, under certain circumstances, be required to pay the holders of Series D Preferred Stock cash in the aggregate amount of approximately $31.8 million (not including an additional $5.7 million that could be payable upon redemption of 40,395 shares of Series D Preferred Stock issuable upon exercise of certain warrants). "Fundamental Change" is defined as: (i) a "person" or "Group" (as defined), together with any affiliates thereof, becoming the beneficial owner (as defined) of Voting Shares (as defined) of the Company entitled to exercise more than 60% of the total voting power of all outstanding Voting Shares of the Company (including any Voting Shares that are not then outstanding of which such person or Group is deemed the beneficial owner) (subject to certain exceptions); (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company, or any sale, lease or transfer of all or substantially all of the assets of the Company to another person (subject to certain exceptions); (iii) the sale, transfer or other disposition (or the entry into a commitment to sell, transfer or otherwise dispose) of all or any portion of the shares of Genta Jago held at any time by the Company (or the imposition of any material lien on such shares which lien is not removed within 30 days of imposition) and the sale (or functional equivalent of a sale) of all or substantially all of the assets of Genta Jago or (iv) the substantial reduction or elimination of a public market for the Common Stock as the result of repurchases, delisting or deregistration of the Common Stock or corporate reorganization or recapitalization undertaken by the Company. - 52 - 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. At the Company's Annual Meeting of Stockholders held on April 4, 1997, the stockholders approved an amendment to the Company's Restated Certificate of Incorporation effecting a one-for-ten reverse stock split of its Common Stock. The stockholders also approved a reduction of the Company's authorized shares of Common Stock from 150,000,000 to 70,000,000. The Company commenced trading on a post reverse split basis at the commencement of trading on April 7, 1997. As of March 1, 1998, the Company had 5,737,756 shares of Common Stock outstanding. The Company intends to seek stockholder approval of another reverse stock split at its next annual stockholders' meeting. Future sales of shares of Common Stock by existing stockholders, holders of preferred stock who might convert such preferred stock into Common Stock, and option and warrant holders also could adversely affect the market price of the Common Stock. - 53 - No predictions can be made of the effect that future market sales of the shares of Common Stock underlying the convertible securities and warrants referred to under the caption "MD&A--Certain Trends and Uncertainties--Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of Dilution; Anti-dilution Adjustments," or the availability of such securities for sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales might occur, could adversely affect prevailing market prices. Certain Interlocking Relationships; Potential Conflicts of Interest. The Aries Trust, a Cayman Islands trust, and the Aries Domestic Fund, L.P., a Delaware limited partnership (collectively, 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., PhD., and Andrew J. Stein as nominees to the Board of Directors. Such persons were elected as Directors of the Company. David R. Walner, the Secretary of the Company, is an Associate Director and Secretary of Paramount Capital Asset Management, Inc. ("PCAM"). PCAM is the investment manager and general partner of The Aries Trust and the Aries Domestic Fund, L.P., respectively. The Aries Funds currently do not hold a controlling block of voting stock, although the Aries Funds have the present right to appoint a majority of the Board of Directors, and to convert and exercise their securities into a significant portion of the outstanding Common Stock. See "MD&A--Certain Trends and Uncertainties--Concen- tration of Ownership and Control" below. In addition to the Aries Funds' investments in the Company that are disclosed in "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities," above, the Aries Funds also engaged in the following transactions: the Aries Funds purchased an aggregate of 10,000 shares of Series D Preferred Stock and 50,000 Class D Warrants in the Private Placement; on December 2, 1997, the Aries Funds purchased an aggregate of 54,000 shares of Series A Preferred Stock; on December 29, 1997, warrants to purchase an aggregate of 1,000 shares of Series D Preferred Stock and 5,000 Class D Warrants were allocated to the Aries Funds by Paramount Capital, Inc., which warrants were received in connection with the Private Placement; and on December 31, 1997, the Aries Funds converted the outstanding principal of, and interest on, their respective Senior Secured Convertible Bridge Notes of the Company into an aggregate of 52,415 shares of Series D Preferred Stock. Dr. Lindsay A. Rosenwald, the President and sole stockholder of PCAM, is also the President of Paramount Capital, Inc. and of Paramount Capital Investments LLC, a New York-based merchant banking and venture capital firm specializing in biotechnology companies ("PCI"). In the regular course of its business, PCI identifies, evaluates and pursues investment opportunities in biomedical and pharmaceutical products, technologies and companies. Generally, Delaware corporate law requires that any transactions between the Company and any of its affiliates be on - 54 - terms that, when taken as a whole, are substantially as favorable to the Company as those then reasonably obtainable from a person who is not an affiliate in an arms-length transaction. Nevertheless, neither such affiliates nor PCI is obligated pursuant to any agreement or understanding with the Company to make any additional products or technologies available to the Company, nor can there be any assurance, and the Company does not expect and investors in the Company should not expect, that any biomedical or pharmaceutical product or technology identified by such affiliates or PCI in the future will be made available to the Company. In addition, certain of the current officers and directors of the Company or certain of any officers or directors of the Company hereafter appointed may from time to time serve as officers or directors of other biopharmaceutical or biotechnology companies. There can be no assurance that such other companies will not have interests in conflict with those of the Company. Concentration of Ownership and Control. The Company's directors, executive officers and principal stockholders and certain of their affiliates have the ability to influence the election of the Company's directors and most other stockholder actions. See "MD&A--Certain Trends and Uncertainties--Certain Interlocking Relationships; Potential Conflicts of Interest." Accordingly, the Aries Funds have the ability to exert significant influence over the election of the Company's Board of Directors and other matters submitted to the Company's stockholders for approval. These arrangements may discourage or prevent any proposed takeover of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over the then current market prices. Such stockholders may influence corporate actions, including influencing elections of directors and significant corporate events. See also "MD&A--Certain Trends and Uncertainties--Effect of Certain Anti-Takeover Provisions" below. Effect of Certain Anti-Takeover Provisions. The Company's Restated Certificate of Incorporation and By-laws include provisions that could discourage potential takeover attempts and make attempts by stockholders to change management more difficult. The approval of 66-2/3% of the Company's voting stock is required to approve certain transactions and to take certain stockholder actions, including the amendment of the By-laws and the amendment of any of the anti-takeover provisions contained in the Company's Restated Certificate of Incorporation. The Company's By-laws currently provide that meetings of the stockholders may only be called by the Chairman of the Board, the Chief Executive Officer or the Board of Directors. At its next annual stockholders' meeting the Company intends to seek stockholder approval of an amendment to its Restated Certificate of Incorporation that would have the effect of eliminating the requirement that stockholder action be taken at a meeting. Additionally, the Company has contractual obligations to certain of its security holders that may impair potential takeovers. See - 55 - "MD&A--Certain Trends and Uncertainties--Certain Interlocking Relationships; Potential Conflicts of Interest." Further, pursuant to the terms of its stockholder rights plan adopted in December 1993, the Company has distributed a dividend of one right for each outstanding share of Common Stock. These rights will cause a substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors and may have the effect of deterring hostile takeover attempts. The stockholder rights plan was amended to permit the consummation of the $3 million private placement in February 1997 and the Private Placement in June 1997. Additionally, pursuant to the Company's Restated Certificate of Incorporation, if any "person" or "Group" (as defined), together with any affiliates thereof, becomes the beneficial owner (as defined) of Voting Shares (as defined) of the Company entitled to exercise more than 60% of the total voting power of all outstanding Voting Shares of the Company (including any Voting Shares that are not then outstanding of which such person or Group is deemed the beneficial owner) (subject to certain exceptions), then a Fundamental Change (as defined) would occur and the Company would be obligated to redeem the Series A and Series D Preferred Stocks. See "MD&A--Certain Trends and Uncertainties Fundamental Change." This Fundamental Change provision is a further disincentive for any person attempting to acquire 60% or more of the total voting power of the Company's Voting Shares. Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity for the Company's Securities. If the Company's securities were not listed on a national securities exchange nor listed on a qualified automated quotation system, they may become subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker- dealers that sell such securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouses). Rule 15g-9 defines "penny stock" to be any equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions including (i) the securities being quoted on the Nasdaq National Market or SmallCap Market; (ii) the securities' issuer having net tangible assets in excess of $2,000,000 and having been in continuous operation for at least three years and (iii) the securities' issuer having average revenues of at least $6,000,000 for the last three years (all three exceptions enumerated above are currently met by the Company). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the - 56 - 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. - 57 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Genta Incorporated Index to Financial Statements Covered by Reports of Independent Auditors
GENTA INCORPORATED Report of Ernst & Young LLP, Independent Auditors..........................................59 Consolidated Balance Sheets at December 31, 1996 and 1997..................................61 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997...........................................................62 Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (deficit) for the years ended December 31, 1995, 1996 and 1997......................63 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997...........................................................69 Notes to Consolidated Financial Statements.................................................70 GENTA JAGO TECHNOLOGIES B.V. (A DEVELOPMENT STAGE COMPANY) Report of Ernst & Young LLP, Independent Auditors..........................................93 Balance Sheets at December 31, 1996 and 1997...............................................94 Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for the period December 15, 1992 (inception) through December 31, 1997.................95 Statement of Stockholders' Equity (Net Capital Deficiency) for the Period December 15, 1992 (inception) through December 31, 1997....................................96 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the period December 15, 1992 (inception) through December 15, 1997............97 Notes to Financial Statements..............................................................98
- 58 - Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Genta Incorporated We have audited the accompanying consolidated balance sheets of Genta Incorporated as of December 31, 1996 and 1997 and the related consolidated statements of operations, redeemable preferred stock and stockholders' equity, (deficit) and cash flows for each of the three 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genta Incorporated at December 31, 1996 and 1997 and the consolidated results of its operations and its cash flows for each of the three 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 continued 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. - 59 - As disclosed 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. The Company also restated its operating results for 1995 to include the effect of recording imputed non-cash dividends on preferred stock totaling $1,000,000 not previously recorded in operating results for 1995. This had the effect of increasing net loss applicable to common shareholders by $3,014,667 and $1,000,000 in 1996 and 1995, respectively, and increasing net loss per share (basic and diluted) by $(1.01) and $(.51) in 1996 and 1995, respectively. San Diego, California April 13, 1998 - 60 - Genta Incorporated Consolidated Balance Sheets
December 31, ------------------------------------------ 1996 1997 ------------------------------------------ (restated) Current assets: Cash and cash equivalents $ 532,013 $ 1,202,668 Short-term investments, available-for-sale -- 7,253,756 Trade accounts receivable 602,696 431,046 Notes receivable from officers and employees 62,000 -- Inventories 992,243 826,008 Other current assets 185,164 218,513 ------------------------------------------ Total current assets 2,374,116 9,931,991 Property and equipment, net 3,634,281 1,718,150 Intangibles, net 4,022,242 3,390,032 Deposits and other assets 1,138,745 713,730 ------------------------------------------ Total assets $11,169,384 $15,753,903 ========================================== Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 1,179,056 $ 882,111 Payable to research institution 551,213 602,658 Accrued payroll 782,280 548,295 Other accrued expenses 981,087 992,660 Deferred revenue 193,121 198,570 Short-term notes payable 350,000 -- Current portion of notes payable and capital lease obligations 1,332,304 900,558 ------------------------------------------ Total current liabilities 5,369,071 4,124,852 Notes payable and capital lease obligations, less current portion 119,578 -- Deficit in joint venture 1,606,503 2,204,053 Series A redeemable preferred stock, $.001 par value; 528,100 and 456,600 shares issued and outstanding at December 31, 1996 and 1997, respectively; liquidation value of $29,786,307 and $27,396,000 at December 31, 1996 and 1997, respectively 26,405,000 22,830,000 Stockholders' equity (deficit): Preferred stock; 5,000,000 shares authorized, convertible preferred shares outstanding: Series C convertible preferred stock, $.001 par value; 1,424 and no shares issued and outstanding at December 31, 1996 and 1997, respectively 1 -- Series D convertible preferred stock, $.001 par value; $100 stated value, no shares and 226,995 shares issued and outstanding at December 31, 1996 and 1997, respectively; liquidation value is $31,779,300 at December 31, 1997 -- 227 Common stock, $.001 par value; 70,000,000 shares authorized; 3,999,368 and 5,712,363 shares issued and outstanding at December 31, 1996 and 1997, respectively 3,999 5,712 Additional paid-in capital 83,085,750 106,490,950 Accumulated deficit (109,042,074) (124,467,891) Accrued dividends payable 3,671,532 4,566,000 Notes receivable from stockholders (49,976) -- ------------------------------------------ Total stockholders' equity (deficit) (22,330,768) (13,405,002) ------------------------------------------ Total liabilities and stockholders' equity (deficit) $11,169,384 $15,753,903 ==========================================
See accompanying notes. - 61 - Genta Incorporated Consolidated Statements of Operations
YEARS ENDED DECEMBER 31, -------------------------------------------- 1995 1996 1997 -------------------------------------------- (restated) (restated) Revenues: Product sales $ 3,781,983 $ 4,924,694 $ 4,701,649 Gain on sale of technology -- 373,261 -- Contract revenue from Genta Jago 2,747,678 1,558,962 350,097 Collaborative research and development 1,125,000 -- 50,000 -------------------------------------------- 7,654,661 6,856,917 5,101,746 Costs and expenses: Cost of products sold 1,899,216 2,479,337 3,099,078 Research and development 13,102,821 6,777,043 5,387,095 Charge for acquired in-process research and development 4,762,000 -- -- Selling, general and administrative 6,360,402 6,254,366 8,075,229 -------------------------------------------- 26,124,439 15,510,746 16,561,402 -------------------------------------------- Loss from operations (18,469,778) (8,653,829) (11,459,656) Equity in net loss of joint venture (6,913,180) (2,712,183) (1,193,321) Other income (expense): Interest income 348,470 159,165 550,195 Interest expense (331,226) (885,602) (3,323,035) -------------------------------------------- Net loss (25,365,714) (12,092,449) (15,425,817) Dividends on preferred stock (2,551,726) (2,524,701) (1,694,677) Dividends imputed on preferred stock (1,000,000) (2,348,000) (16,158,000) -------------------------------------------- Net loss applicable to common shares $(28,917,440) $(16,965,150) $(33,278,494) ============================================ Net loss per share (basic and diluted) $ (14.82) $ (5.69) $ (7.52) ============================================ Shares used in computing net loss per share 1,951,862 2,983,449 4,422,409 ============================================
See accompanying notes. - 62 - Genta Incorporated Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit)
Series A Redeemable Preferred Stock Stockholders' Equity Deficit ----------------------- -------------------------------------------- Convertible Preferred Stock Common Stock ----------------------- ------------------ ----------------------- Shares Amount Shares Amount Shares Amount ----------------------- ------------------ ----------------------- Balance at December 31, 1994 600,000 $ 30,000,000 -- $ -- 1,387,731 $ 1,387 Issuance of common stock -- -- -- -- 573,441 573 Issuance of common stock upon conversion of promissory notes -- -- -- -- 177,790 178 Issuance of common stock for acquired in-process research and development -- -- -- -- 124,000 124 Issuance of Series B convertible preferred stock -- -- 3,000 3 -- -- Issuance of warrants to purchase common stock -- -- -- -- -- -- Issuance of common stock on exercise of options -- -- -- -- 732 1 Issuance of common stock as dividend on preferred stock -- -- -- -- 132,863 133 Dividends accrued on preferred stock -- -- -- -- -- -- Repayment of notes receivable from stockholders -- -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- -- Net loss -- -- -- -- -- -- --------------------- --------------------------------------- Balance at December 31, 1995 600,000 30,000,000 3,000 3 2,396,557 2,396 Issuance of Series C convertible preferred stock -- -- 6,000 6 -- -- Issuance of Series C convertible preferred stock upon conversion of promissory notes -- -- 1,044 1 -- -- Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends (71,900) (3,595,000) -- -- 255,446 255 Issuance of common stock upon conversion of Series B convertible preferred stock and related accrued -- -- (3,000) (3) 226,943 227 dividends
- 63 - Genta Incorporated Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit)
Stockholders' Equity (Deficit) -------------------------------------------------------------------------- Accrued Additional Dividends in Notes Receivable paid-in Accumulated Preferred from Deferred Capital Deficit Stock Stockholders Compensation -------------------------------------------------------------------------- Balance at December 31, 1994 $ 55,797,704 $(71,583,911) $ 1,420,862 $ (74,726) $ (64,836) Issuance of common stock 9,164,704 -- -- -- -- Issuance of common stock upon conversion of promissory notes 3,022,260 -- -- -- -- Issuance of common stock for acquired in-process research and development 1,611,876 -- -- -- -- Issuance of Series B convertible preferred stock 2,774,897 -- -- -- -- Issuance of warrants to purchase common stock 173,118 -- -- -- -- Issuance of common stock on exercise of options 3,661 -- -- -- -- Issuance of common stock as dividend on preferred stock 2,399,779 -- (2,400,000) -- -- Dividends accrued on preferred stock (2,551,726) -- 2,551,726 -- -- Repayment of notes receivable from stockholders -- -- -- 24,750 -- Amortization of deferred compensation -- -- -- -- 64,836 Net loss -- (25,365,714) -- -- -- ------------------------------------------------------------------------- Balance at December 31, 1995 72,396,273 (96,949,625) 1,572,588 (49,976) -- Issuance of Series C convertible preferred stock 5,492,633 -- -- -- -- Issuance of Series C convertible preferred stock upon conversion of promissory notes 1,044,000 -- -- -- -- Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends 3,921,766 -- (327,021) -- -- Issuance of common stock upon conversion of Series B convertible preferred stock and related accrued 33,783 -- (34,007) -- -- dividends
--------------- Total Stockholders' Equity (Deficit) --------------- Balance at December 31, 1994 $(14,503,520) Issuance of common stock 9,165,277 Issuance of common stock upon conversion of promissory notes 3,022,438 Issuance of common stock for acquired in-process research and development 1,612,000 Issuance of Series B convertible preferred stock 2,774,900 Issuance of warrants to purchase common stock 173,118 Issuance of common stock on exercise of options 3,662 Issuance of common stock as dividend on preferred stock (88) Dividends accrued on preferred stock -- Repayment of notes receivable from stockholders 24,750 Amortization of deferred compensation 64,836 Net loss (25,365,714) ------------ Balance at December 31, 1995 (23,028,341) Issuance of Series C convertible preferred stock 5,492,639 Issuance of Series C convertible preferred stock upon conversion of promissory notes 1,044,001 Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends 3,595,000 Issuance of common stock upon conversion of Series B convertible preferred stock and related accrued -- dividends - 64 - Genta Incorporated Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit)
Series A Redeemable Preferred Stock Stockholders' Equity (Deficit) --------------------- -------------------------------------------- Convertible Preferred Stock Common Stock --------------------- ------------------ ------------------- Shares Amount Shares Amount Shares Amount --------------------- ------------------ ------------------- Issuance of common stock upon conversion of Series C convertible preferred stock and related accrued dividends -- -- (5,620) (6) 524,749 525 Issuance of common stock upon conversion of convertible debentures -- -- -- -- 587,790 588 Issuance of warrants to purchase common stock for patent legal services -- -- -- -- -- -- Issuance of common stock on exercise of options -- -- -- -- 7,882 8 Dividends accrued on preferred stock -- -- -- -- -- -- Interest imputed on convertible debentures -- -- -- -- -- -- Net loss -- -- -- -- -- -- --------------------- -------------------------------------------- Balance at December 31, 1996 528,100 26,405,000 1,424 1 3,999,367 3,999 Issuance of common stock -- -- -- -- 38,400 38 Retirement 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) (3,575,000) -- -- 518,742 519 Issuance of common stock upon conversion of Series C convertible preferred stock and related accrued dividends -- -- (1,424) (1) 952,841 953 Issuance of common stock upon conversion of convertible debentures -- -- -- -- 204,263 204 Issuance of Series D convertible preferred stock -- -- 161,580 162 -- --
- 65 - Genta Incorporated Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit)
Stockholders' Equity (Deficit) --------------------------------------------------------------------------------- Accrued Notes Additional Dividends on Receivable Total Paid-in Accumulated Preferred from Deferred Stockholders' Capital Deficit Stock Stockholders Compensation Equity (Deficit) --------------------------------------------------------------------------------- Issuance of common stock upon conversion of Series C convertible preferred stock and related accrued dividends 64,210 -- (64,729) -- -- -- Issuance of common stock upon conversion of convertible debentures 1,598,011 -- -- -- -- 1,598,599 Issuance of warrants to purchase common stock for patent legal services 221,543 -- -- -- -- 221,543 Issuance of common stock on exercise of options 171,565 -- -- -- -- 171,573 Dividends accrued on preferred stock (2,524,701) -- 2,524,701 -- -- -- Interest imputed on convertible debentures 666,667 -- -- -- -- 666,667 Net loss -- (12,092,449) -- -- (12,092,449) -------------------------------------------------------------------------------- Balance at December 31, 1996 83,085,750 (109,042,074) 3,671,532 (49,976) -- (22,330,768) Issuance of common stock 42,100 -- -- -- -- 42,038 Retirement 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 4,289,481 -- (715,000) -- -- 3,575,000 Issuance of common stock upon conversion of Series C convertible preferred stock and related accrued dividends 84,257 -- (85,209) -- -- -- Issuance of common stock upon conversion of convertible debentures 358,355 -- -- -- -- 358,559 Issuance of Series D convertible preferred stock 13,957,100 -- -- -- -- 13,957,262
- 66 - Genta Incorporated Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit)
Series A Redeemable Preferred Stock Stockholders' Equity (Deficit) -------------------------- -------------------------------------------------------- Convertible Preferred Stock Common Stock -------------------------- --------------------------- -------------------------- Shares Amount Shares Amount Shares Amount -------------------------- --------------------------- -------------------------- Issuance of Series D convertible preferred stock upon conversion of senior secured convertible bridge notes and accrued interest -- -- 65,415 65 -- -- Dividends accrued on preferred stock -- -- -- -- -- -- Issuance of warrants to purchase common stock in connection with line of credit -- -- -- -- -- -- Interest imputed on convertible debentures -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------------------- ------------------------------------------------------ Balance at December 31, 1997 456,600 $22,830,000 226,995 $ 227 5,712,363 $ 5,712 ========================= ======================================================
See accompanying notes. - 67 - Genta Incorporated Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit)
Stockholders' Equity (Deficit) -------------------------------------------------------------------------------------- Accrued Notes Additional Dividends On Receivable Total Paid-in Accumulated Preferred From Deferred Stockholders' Capital Deficit Stock Stockholders Compensation Equity (Deficit) ----------------------------------------------------------------------------------- Issuance of Series D convertible preferred stock upon conversion of senior secured convertible bridge notes and accrued interest 3,270,684 -- -- - - 3,270,749 Dividends accrued on preferred stock (1,694,677) -- 1,694,677 - - -- Issuance of warrants to purchase common stock in connection with line of credit 98,000 -- -- - - 98,000 Interest imputed on convertible debentures 3,000,000 -- -- - - 3,000,000 Net loss -- (15,425,817) -- - - (15,425,817) --------------------------------------------------------------------------------------- Balance at December 31, 1997 $ 106,490,950 $(124,467,891) $4,566,000 $ - $ - ($ 13,405,002) =======================================================================================
See accompanying notes. - 68 - Genta Incorporated Consolidated Statements of Cash Flows
Years ended December 31, -------------------------------------------------------------- 1995 1996 1997 -------------------------------------------------------------- Operating activities Net loss $(25,365,714) $(12,092,449) $(15,425,817) Items reflected in net loss not requiring cash: Depreciation and amortization 1,761,530 1,518,142 1,022,432 Equity in net loss of joint venture 6,913,180 2,712,183 1,193,321 Loss on disposal of fixed assets -- -- 1,130,809 Loss on abandonment of patents -- -- 600,000 Interest accrued on convertible notes and debentures -- -- 279,308 Fair value of warrants issued in connection with line of -- -- 98,000 credit Forgiveness of shareholder note -- -- 49,976 Fair value of common stock issued for severance and -- -- 42,038 services Charge for acquired in-process research and development and other 3,807,556 -- -- Interest imputed on convertible debentures -- 666,667 3,000,000 Changes in operating assets and liabilities: Accounts and notes receivable 294,012 168,600 233,650 Inventories 106,909 (289,599) 166,235 Other current assets 366,790 (33,241) (33,349) Accounts payable, accrued expenses and other 467,738 (803,347) (467,922) Deferred revenue (976,468) 44,589 5,449 -------------------------------------------------------------- Net cash used in operating activities (12,624,467) (8,108,455) (8,105,870) INVESTING ACTIVITIES Purchase of short-term investments -- (1,497,775) (9,763,493) Maturities of short-term investments 3,843,685 1,497,775 2,509,737 Purchase of property and equipment (778,964) (115,922) (34,246) Proceeds from sale of property and equipment -- -- 70,691 Loans receivable from joint venture (7,722,255) (846,784) (595,771) Deposits and other (2,021,908) 642,654 (67,331) -------------------------------------------------------------- Net cash used in investing activities (6,679,442) (320,052) (7,880,413) FINANCING ACTIVITIES Proceeds from notes payable 4,877,471 2,176,500 3,000,000 Repayment of notes payable and capital leases (1,743,728) (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 9,168,939 171,573 -- Other 13,762 21,591 -- -------------------------------------------------------------- Net cash provided by financing activities 12,316,444 8,688,765 16,656,938 -------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (6,987,465) 260,258 670,655 Cash and cash equivalents at beginning of year 7,259,220 271,755 532,013 -------------------------------------------------------------- Cash and cash equivalents at end of year $ 271,755 $ 532,013 $ 1,202,668 ============================================================== =SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 298,432 $ 225,186 $ 33,914 ============================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations entered into for equipment 622,746 -- -- Preferred stock dividend accrued 2,551,726 2,524,701 1,694,677 Dividends imputed on preferred stock 1,000,000 2,348,000 16,158,000 Common stock issued in payment of dividends on preferred 2,399,912 425,757 800,209 stock Preferred stock issued upon conversion of notes payable and accrued interest -- 1,044,001 -- Preferred stock issued for receivable 2,774,900 -- -- Common stock issued upon conversion of notes and convertible debentures and accrued interest 3,022,438 1,598,599 358,559 Exchange of deposits for purchase of equipment -- 1,200,000 251,000 Preferred stock issued upon conversion of short-term notes payable and accrued interest -- -- 3,270,749
See accompanying notes. - 69 - Genta Incorporated Notes to Consolidated Financial Statements December 31, 1997 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 owns 50% of a drug delivery system joint venture with Jagotec AG ("Jagotec") and 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 also manufactures and markets specialty biochemicals and intermediate products to the in vitro diagnostic and pharmaceutical industries through its manufacturing subsidiary, JBL Scientific, Inc. ("JBL"). 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. The Company is actively seeking collaborative agreements, additional equity financing and other financing arrangements with potential corporate partners and other sources. However, there can be no assurance that any such collaborative agreements or other sources of funding will be available on favorable terms, if at all. 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. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, JBL and Genta Pharmaceuticals Europe, S.A., the Company's European subsidiary based in Marseilles, France. All significant intercompany accounts and transactions have been eliminated in consolidation. Investment in Joint Venture The Company has a 50% ownership interest in a joint venture, Genta Jago, a Netherlands corporation. The investment in joint venture is accounted for under the equity method (Note 5). Use of Estimates -70- Genta Incorporated Notes to Consolidated Financial Statements (continued) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates. Revenue Recognition and Major Customers Revenue from product sales is recognized upon shipment. One customer, a European distributor, accounted for approximately 21%, 27% and 25% of product sales during the years ended December 31, 1995, 1996 and 1997, respectively. One other customer, who accounted for less than 10% of product sales in 1997, accounted for approximately 16% of product sales during the year ended December 31, 1995. Collaborative research and development revenues are recorded as earned, generally ratably, as research and development activities are performed under the terms of the contracts. 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 bonds, all of which mature within one year from December 31, 1997. The estimated fair value of each investment security approximates the amortized cost and therefore, no unrealized gains or losses existed as of December 31, 1997. 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 in debt instruments of corporations with strong credit ratings. 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. -71- Genta Incorporated Notes to Consolidated Financial Statements (continued) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are stated at cost and amortized over the shorter of the estimated useful lives of the assets or the lease term. Amortization of equipment under capital leases is reported with depreciation of property and equipment. Intangible Assets Intangible assets, consisting primarily of capitalized patent costs and purchased proprietary technology, are amortized using the straight line basis over a term of 5-17 years for issued patents, 14 years for purchased proprietary technology and 5-7 years for organizational and other amortizable costs. 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 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. In 1997, as a result of such evaluation, the Company recorded charges to General & Administrative Expenses of $600,000 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 is based on the fair market value of such shares of common stock on the date the dividends become due. 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. -72- Genta Incorporated Notes to Consolidated Financial Statements (continued) Under APB 25, deferred compensation is recorded for the excess of the fair value of the stock on the date of the option grant, over the exercise price of the option. The deferred compensation is amortized over the vesting period of the option. 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. Net Loss Per Common Share As required, the Company adopted SFAS No. 128, "Earnings Per Share," for the year ended December 31, 1997. SFAS No. 128 changes the method used to calculate earnings per share and requires the restatement of all prior periods. Under SFAS No. 128, the Company is required to present basic and diluted earnings per share if applicable. Basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earnings per share includes the weighted average number of shares outstanding and gives effect to potentially dilutive common shares such as options, warrants and convertible debt and preferred stock outstanding. Net loss per common share for the years ended December 31, 1995, 1996 and 1997 is based on the weighted average number of shares of common stock outstanding during the periods. Potentially dilutive securities include options, warrants and convertible preferred stock; however, such securities have not been included in the calculation of the net loss per common share as their effect is antidilutive where, as here, there is loss rather than earnings. Therefore, there is no difference between the basic and diluted net loss per common share for any of the periods presented. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Segment Information." Both of these standards are effective for fiscal years beginning after December 15, 1997. 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. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. The Company does not believe that comprehensive income or loss has been materially different than net income or loss. 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 -73- Genta Incorporated Notes to Consolidated Financial Statements (continued) by the Company in deciding how to allocate resources and in assessing performance. The financial information is required to be reported on the basis that is used internally for evaluating the segment performance. The Company does not believe adoption of SFAS No. 131 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. Inventories Inventories are comprised of the following: December 31, 1996 1997 -------------------------- Raw materials and supplies ................... $342,875 $329,691 Work-in-process .............................. 272,259 141,120 Finished goods ............................... 377,109 355,197 -------------------------- $992,243 $826,008 ========================== -74- Genta Incorporated Notes to Consolidated Financial Statements (continued) 3. Property and Equipment Property and equipment is comprised of the following: December 31, 1996 1997 ------------------------------ Equipment .................................. $ 4,093,563 $ 3,923,653 Leasehold improvements ..................... 1,128,520 724,456 Furniture and fixtures ..................... 105,318 59,739 Construction in progress ................... 624,167 -- ------------------------------ 5,951,568 4,707,848 Less accumulated depreciation and amortization ............................ (2,317,287) (2,989,698) ------------------------------ $ 3,634,281 $ 1,718,150 ============================== Cost and accumulated amortization of equipment under capital leases at December 31, 1996 was $200,000 and $80,000, respectively. No equipment was subject to capital leases at December 31, 1997. 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 In 1992, Genta and Jagotec determined to enter into a joint venture (Genta Jago). The Company's purpose in establishing Genta Jago was to obtain 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 and also contributed the Initial License referred to below. Genta issued 120,000 shares of Common Stock valued at $7.2 million to Jagotec in 1992 as consideration for a license (the "Initial License") for Genta to use Jagotec's GEOMATRIX Technology with respect to -75- Genta Incorporated Notes to Consolidated Financial Statements (continued) approximately 25 products, under the condition that Genta then contribute such technology to Genta Jago, which Genta did. 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). The value of the Common Stock Genta issued to Jagotec was considered by the parties to be substantially below the actual fair market value of the Initial License. The $4.0 million in cash paid to Genta Jago by Genta was recorded on Genta's books as investment in joint venture. The shares of Common Stock issued to Jagotec were valued at their fair market value at the date of issuance and were expensed as Acquired in-process research and development, as there were no alternative future uses for the acquired technology, and realization of ultimate profits from the acquired technology was not assured. Thus, upon the acquisition of the license, Genta had no carrying value assigned to the GEOMATRIX technology, and when Genta contributed both its proprietary Anticode and its recently in-licensed GEOMATRIX technologies to Genta Jago, there was no accounting for such capital contributions. Since its $4 million cash investment in Genta Jago was paid to the joint venture to cover initial funding of development, Genta initially carried it as an Investment in joint venture on its balance sheet. 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 purchasing from Jagotec the Additional License at what the parties believed was a substantial discount to its actual value, on the condition that Genta then contribute it to the joint venture. 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 $2.0 million Deposit was recorded on Genta's books 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 -76- Genta Incorporated Notes to Consolidated Financial Statements (continued) 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. 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. The technological feasibility of the acquired in-process research and development had not yet been established and the technology had no future alternative uses at the date of acquisition. Furthermore, due to continuing uncertainties regarding the Company's ability to demonstrate bioequivalence of potential products, management is unable to make estimates regarding the remaining efforts necessary to develop the acquired, in-process technology into a commercially viable product. However, it is expected that any such development would require significant cash resources. The Company provides funding to Genta Jago pursuant to a working capital loan agreement which expires in October 1998. See "MD&A--Liquidity and Capital Resources." 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. As of December 31, 1997, the Company had advanced working capital loans of approximately $15.8 million to Genta Jago, net of principal repayments and $4.7 million in forgiven principal and accrued interest. Such loans bear interest at rates per annum ranging from 5.81% to 7.5%, and are payable in full on October 20, 1998, or earlier in the event certain revenues are received by Genta Jago and specified cash balances are maintained by Genta Jago. There can be no assurance, however, that Genta Jago will obtain the necessary financial resources to repay such loans to Genta. The Company has recorded 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 spend the funds, since Genta believed it had the legal right to recover any unexpended funds as a debt-holder. 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. -77- Genta Incorporated Notes to Consolidated Financial Statements (continued) In 1995, Genta Jago returned certain Anticode(TM) technology to Genta in exchange for Genta's forgiveness of $4.7 million of principal and 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 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 cash, and had no carrying value for the loans at the time of the forgiveness. The forgiveness was treated by Genta Jago as a gain on the waiver of debt because this reflected the legal form of the transaction. Under terms of the joint venture, Genta Jago has contracted with the Company to conduct research and development and provide certain other services. Revenues associated with providing such services, totaled $2.7 million, $1.6 million and $350,000 for the years ended December 31, 1995, 1996 and 1997, 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. See "Business--Genta Jago." 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. -78- Genta Incorporated Notes to Consolidated Financial Statements (continued) Condensed financial information for Genta Jago Technologies B.V. is set forth below. December 31, 1996 1997 ------------------------------- Balance Sheet Data: Receivables under collaboration agreements ............................... $ 904,000 $ 1,400,000 Other current assets ....................... 142,000 31,000 ------------------------------- Total current assets ....................... 1,046,000 1,431,000 Other assets ............................... 11,000 4,000 ------------------------------- $ 1,057,000 $ 1,435,000 =============================== Current liabilities ........................ $ 3,053,000 $ 5,213,000 Notes payable to Genta Incorporated ........ 15,287,000 15,837,000 Net capital deficiency ..................... (17,283,000) (19,615,000) =============================== $ 1,057,000 $ 1,435,000 ===============================
Year Ended December 31, 1995 1996 1997 --------------------------------------------- Statements of Operations Data: Collaborative research and development revenues ..................... $ 3,634,000 $ 5,477,000 $ 2,968,000 Costs and expenses ......................... 4,791,000 8,453,000 10,336,000 --------------------------------------------- Loss from operations ....................... (1,157,000) (2,976,000) (7,368,000) Gain on waiver of debt in exchange for return of license rights to related party -- -- 4,703,000 Interest expense ........................... (1,175,000) (956,000) (746,000) --------------------------------------------- Net loss ................................... $ (2,332,000) $ (3,932,000) $ (3,411,000) =============================================
-79- Genta Incorporated Notes to Consolidated Financial Statements (continued) 6. Intangibles Intangibles consist of the following: December 31, 1996 1997 ----------------------------- Purchased proprietary technology ........... $ 1,747,082 $ 1,747,082 Patent and patent applications ............. 2,964,193 2,605,539 Organizational and other amortizable costs ................................... 414,521 414,521 ----------------------------- 5,125,796 4,767,142 Less accumulated amortization .............. (1,103,554) (1,377,110) ----------------------------- $ 4,022,242 $ 3,390,032 ============================= 7. Notes Payable and Leases Notes payable consist of the following: December 31, 1996 1997 --------------------------- Note payable with interest at 12.63%, due in monthly installments of $22,407, secured by equipment; extinguished in 1997 through monthly payments and application of $251,000 security deposit to remaining principal balance .......... $ 328,367 $ -- Research financing obligation payable to a French governmental agency, non- interest bearing, maturing through 2002 ........................... 1,040,462 897,627 Other ........................................... 7,435 2,931 --------------------------- 1,376,264 900,558 Less current portion ............................ (1,287,338) (900,558) --------------------------- $ 88,926 $ -- =========================== -80- Genta Incorporated Notes to Consolidated Financial Statements (continued) 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. Accordingly, the Company has included the ANVAR note payable in the current portion of notes payable in the balance sheet. The Company does not believe that under the terms of the ANVAR Agreement ANVAR is entitled to request early repayment and is working with ANVAR to achieve a mutually satisfactory resolution. Contractual principal maturities of notes payable for the years 1998 through 2002 are $86,000, $133,000, $166,000, $332,000 and $184,000, respectively. 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, 1997 are as follows: Operating Leases --------------------------- Related Parties Others --------------------------- 1998 .................................... $ 408,000 $ 131,000 1999 .................................... 429,000 99,000 2000 .................................... 188,000 99,000 2001 .................................... -- 99,000 2002 .................................... -- 99,000 Thereafter .............................. -- 99,000 --------------------------- Total future minimum less payments ...... $1,025,000 $ 626,000 =========================== Total rent expense under operating leases for the years ended December 31, 1995, 1996 and 1997 was $1,117,000, $1,043,000 and $774,000, respectively. 8. Series A Redeemable 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 -81- Genta Incorporated Notes to Consolidated Financial Statements (continued) consisting of one share of Series A Preferred Stock and a warrant to acquire one share of common stock, sold at an aggregate price of $50 per unit. Each share of Series A Preferred Stock is 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. At December 31, 1997, each share of Series A Preferred Stock was convertible into 7.25 shares of Common Stock. Terms of the Company's Series A Preferred Stock require the payment of dividends annually in amounts ranging from $3 per share per annum for the first year to $5 per share per annum in the third and fourth years. Dividends may be paid in cash or Common Stock or a combination thereof at the Company's option. Dividends on the Series A Preferred Stock accrue on a daily basis (whether or not declared) and shall accumulate to the extent not paid on the annual dividend payment date following the dividend period for which they accrue. The Company may redeem the Series A Preferred Stock under certain circumstances, and was required to redeem the Series A Preferred Stock, subject to certain conditions, in September 1996 at a redemption price of $50 per share, plus accrued and unpaid dividends (the "Redemption Price"). The Company elected to pay the Redemption Price in Common Stock in 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. Through December 31, 1997, holders of 143,400 shares of Series A Preferred Stock redeemed or converted such shares and related accrued and unpaid dividends for an aggregate of 774,188 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 Series A redeemable 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 will 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. -82- Genta Incorporated Notes to Consolidated Financial Statements (continued) The SEC Staff is currently in the process of reviewing a registration statement filed by the Company. The SEC Staff has raised certain questions regarding the Company's ability to control the occurrence of a Fundamental Change, as defined in the Company's Restated Certificate of Incorporation, and has asked why the Series A preferred stock should not be reclassified from permanent equity to "mezzanine equity" if such occurrence is outside the Company's control. In the event of a Fundamental Change, which has not occurred, the Company would be required to redeem the Series A preferred stock in cash if its common stock were not then listed on a United States national securities exchange or quoted on the Nasdaq National Market System. The Company has indicated that it disagrees with the SEC Staff's position, and management of the Company intends to continue its efforts to persuade the Staff of the legitimacy of its view. However, pending resolution of such issue with the SEC Staff, the Company has reclassified its Series A preferred stock from permanent equity to "mezzanine equity." If the SEC Staff accepts the Company's position, the Company will file an amendment to this Form 10-K restoring the prior accounting treatment. In light of the foregoing, the Company has classified the redemption value of such Series A preferred stock totaling $26,405,000 and $22,830,000 at December 31, 1996 and 1997 to "mezzanine equity" in these financial statements. 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. 9. Stockholders' Equity Common Stock 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 retroactively reflect the stock split. 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. -83- Genta Incorporated Notes to Consolidated Financial Statements (continued) Preferred Stock 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 1,000 shares of Premium Preferred Stock(TM), par value $.001 per share, stated value $100 per share (the "Series D Preferred Stock"), and 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 $31,779,300. 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. In February 1997, the Company raised gross proceeds of $3 million in a private placement of Senior Secured Convertible Bridge Notes (the "Convertible Notes") that bore interest at an effective rate of 112% (See Warrants) per annum and matured on December 31, 1997, as extended. 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. 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, beginning in October 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 April 1998, in consideration of EITF D-60, which was issued in March 1997, 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. -84- Genta Incorporated Notes to Consolidated Financial Statements (continued) 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 December 1993, the Board of Directors of the Company adopted a Stockholder Rights Plan which provides for the distribution of a preferred stock purchase right ("Right") as a dividend for each share of the Company's common stock held of record at the close of business on January 21, 1994. Under certain circumstances involving an acquisition of 15% or more of the Company's common stock or a specified business combination, the Rights would permit the holder (other than the 15% holder) to purchase shares of the Company's common stock or, if applicable, common stock of an acquirer at a 50% discount upon payment of an exercise price of $50 per Right. The Rights expire in December 2003 and may be redeemed by the Company prior to a 15% acquisition at a price of $.01 per Right. -85- Genta Incorporated Notes to Consolidated Financial Statements (continued) Warrants At December 31, 1997, warrants (the "Series A Warrants") to purchase an aggregate of 675,966 shares of common stock, exercisable at $9.32 per share as adjusted for the effect of anti-dilution provisions, were outstanding. The Series A Warrants were originally issued in connection with the Series A Preferred Stock in 1993. The Series A Warrants expire in September 1998 and are subject to anti-dilution adjustments. 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 $3.0 million 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 cash 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. The warrants were valued at $3.0 million based on the $3.0 million cash consideration received on issue of the deemed relative fair value of $3.0 million in debt and warrants and was charged to interest expense in 1997. The effective interest rate on such debt was 112% per annum. 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 agreed to enter into a financial advisory agreement with the placement agent pursuant to which the financial advisor shall 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. -86- Genta Incorporated Notes to Consolidated Financial Statements (continued) Stock Benefit Plans The Company's 1991 Stock Plan (the "Plan") provides for the sale of stock and the grant of stock options to employees, directors, consultants and advisors of the Company. Options may be designated as incentive stock options or non-statutory stock options; however, incentive stock options may be granted only to employees of the Company. Options under the Plan have a term of up to ten years and must be granted at not less than the fair market value (85% of fair market value for non-statutory options) on the date of grant. Common stock sold and options granted pursuant to the Plan generally vest over a period of four to five years. Information with respect to the Company's 1991 Stock Plan is as follows: Weighted average Shares under exercise price option per share ----------------------------- Balance at December 31, 1994 ................. 174,722 $78.12 Granted ..................................... 198,803 $23.55 Exercised ................................... (732) $ 5.00 Canceled .................................... (183,909) $73.09 --------------- Balance at December 31, 1995 ................. 188,884 $23.96 Granted ..................................... 13,677 $17.71 Exercised ................................... (7,882) $21.77 Canceled .................................... (29,749) $22.32 --------------- Balance at December 31, 1996 .................. 164,930 $23.77 Granted ..................................... 6,670 $ 3.71 Exercised ................................... -- $ -- Canceled .................................... (48,688) $23.21 --------------- Balance at December 31, 1997 ................. 122,912 $22.90 ============================= 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 -87- Genta Incorporated Notes to Consolidated Financial Statements (continued) 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, 1997, options to purchase approximately 109,552 shares of common stock were exercisable at a weighted average price of approximately $23.46 per share and approximately 155,602 shares of common stock were available for grant or sale under the Plan. An aggregate of approximately 39,881,519 shares of common stock were reserved for the conversion of preferred stock and the exercise of outstanding options and warrants at December 31, 1997. Adjusted pro forma information regarding net loss is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the "Black Scholes" method for option pricing with the following weighted-average assumptions for 1995, 1996 and 1997: volatility factors of the expected market value of the Company's common stock of 70%, 80% and 102%, respectively; risk-free interest rates of 6%; dividend yields of 0%; and a weighted-average expected life of the options of five years. For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's adjusted pro forma information follows:
Years Ended December 31, 1995 1996 1997 --------------------------------------------------- Adjusted pro forma net less $ (29,027,475) $ (17,294,920) $ (33,493,186) Adjusted pro forma loss per share $ (14.87) $ (5.80) $ (7.57)
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 as these amounts reflect the expense for only one, two or three years vesting. -88- Genta Incorporated Notes to Consolidated Financial Statements (continued) The weighted-average grant-date fair value of the options granted during the years ended December 31, 1995, 1996 and 1997 was $8.22, $11.59 and $2.75, respectively. Following is a further breakdown of the options outstanding as of December 31, 1997:
Weighted average Weighted Weighted exercise price average average of Range Options remaining exercise Options options of prices outstanding life in years price exercisable exercisable - - ------------------------------------------------------------------------------- $3.13 - $5.00 13,368 6.06 $ 4.27 6,939 $ 3.89 $5.01 -$19.99 6,537 8.56 14.77 3,714 16.90 $20.00 -$75.00 103,007 7.27 25.02 98,899 25.08 ------------------------------------------------------------- 122,912 7.21 $ 22.90 109,552 $ 23.46 =============================================================
10. Research, Development and Licensing Arrangements The Company entered into a collaborative research and development agreements with The Procter & Gamble Company ("P&G") during 1991. The agreement generally provided for the Company to receive research funding for the discovery and development of specified Anticode products. The P&G collaboration, as extended and modified, ended in September 1995. Collaborative revenues of $1.1 million were recognized under this contract during 1995, which amount approximates costs incurred on the programs. In addition to the aforementioned arrangement, the Company has entered into various license, royalty and sponsored research agreements which provide the Company with rights to develop and market products covered under the agreements. In connection with certain license agreements entered into with a director of the Company and two other stockholders, the Company recorded royalty expense of $100,000, $100,000 and $87,500 in 1995, 1996 and 1997, respectively. 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, 1996 and 1997 are shown below. A valuation allowance of $36,456,000 has been recognized to -89- Genta Incorporated Notes to Consolidated Financial Statements (continued) offset the deferred tax assets as it is more likely than not that the net deferred tax assets will not be realized. 1996 1997 ------------------------------- Deferred tax assets: Capitalized research expense ............. $ 2,663,000 $ 2,778,000 Net operating loss carryforwards ......... 22,177,000 25,969,000 Research and development credits ......... 3,248,000 3,703,000 Purchased technology and license fees .... 4,523,000 4,491,000 Other, net ............................... 1,108,000 497,000 ------------------------------- Total deferred tax assets ................ 33,719,000 37,438,000 Valuation allowance for deferred tax assets ................................. `(32,508,000) (36,456,000) ------------------------------- 1,211,000 982,000 Deferred tax liabilities: Patent expenses .......................... (1,211,000) (729,000) Net depreciation ......................... -- (253,000) ------------------------------- (1,211,000) (982,000) ------------------------------- Net deferred tax assets .................... $ -- $ -- =============================== At December 31, 1997, the Company has federal and California net operating loss carryforwards of approximately $71,697,000 and $15,236,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California tax purposes and the fifty percent limitation on California loss carryforwards prior to 1997. The federal tax loss carryforwards will begin expiring in 2003, unless previously utilized. Approximately $2,767,000 of the California tax loss carryforward expired during 1997 and the related deferred tax asset and tax loss carryforward amounts have been reduced accordingly. The remaining California tax loss will continue to expire in 1998, unless utilized. The Company also has federal and California research and development tax credit carryforwards of $2,921,000 and $1,203,000, respectively, which will begin expiring in 2003 unless previously utilized. Federal and California tax laws limit the utilization of income tax net operating loss and credit carryforwards that arise prior to certain cumulative changes in a corporation's ownership resulting in change of control of the Company. The future annual use of net operating loss carryforwards and research and development tax credits will be limited due to the ownership changes that occurred during 1990, 1991, 1993, 1996 and 1997. Because of the decrease in value of the Company's stock, the ownership changes which occurred in 1996 and 1997, will have a material adverse impact on the Company's ability to utilize these -90- Genta Incorporated Notes to Consolidated Financial Statements (continued) carryforwards. See "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities." 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 As noted above, in an effort to reduce costs and conserve working capital, Genta initiated a termination plan in March 1995, whereby the Company terminated 26 employees involved in the Company's research and development activities. The Company recorded General and Administrative expenses totaling $250,000 for accrued severance costs associated with the 26 terminated employees. In October 1996, Genta again reassessed its personnel requirements and established a second 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 a third 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 accrued severance costs. There were no adjustments to the liabilities recorded and actual termination benefits paid were equal to the liabilities recorded. 14. Contingencies LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based broker/dealer, has asserted claims against the Company and others. LBC's claims relate to the alleged breach by the Company of certain letter agreements, allegedly entered into by LBC and the Company in 1995 and 1996 with respect to brokerage and/or investment banking services particularly in connection with a $3 million investment for which LBC is seeking a fee. On March 30, 1998, the Company received a Statement of Claim under NASD arbitration rules, and a request that the Company voluntarily submit to NASD arbitration. The Company has not yet responded to that request. LBC's Statement of Claim seeks damages in the form of cash (in excess of $4 million), stock, warrants and other securities. On April 9, 1998, the Company's counsel learned that, in addition, a Complaint has been filed in the United States District Court for the Southern District of New York (98 Civ. 2491) by LBC against the Company and the same -91- Genta Incorporated Notes to Consolidated Financial Statements (continued) other parties. However, such Complaint has not yet been served upon the Company. The Company believes it has valid legal and equitable defenses to LBC's claim. Whether LBC's claims are ultimately adjudicated in arbitration or litigation, the Company intends to defend vigorously and possibly to assert counterclaims against LBC. 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. Chloroform was detected at levels of up to 190 ug/liter on-site, exceeding the California Drinking Water Maximum Contamination Level for trihalomethanes of 100 ug/liter. PCEs were also detected at levels of up to 22 ug/liter on- site, exceeding the California Drinking Water Maximum Contamination Level of 5 ug/liter. In addition, Toluene was detected at levels of up to 2 ug/liter at several points on-site, which is significantly below the California Toxicity Action Level of 100 ug/liter. These toxicity levels are not binding, as the final regulatory maximum levels may be higher or lower. JBL has notified the appropriate regulatory agency, the California Regional Water Quality Control Board, of conditions at the site, and with the agency's approval, JBL is monitoring groundwater conditions at the site on a quarterly basis. JBL is currently in the pre-regulatory action stage with ongoing site monitoring and site assessment. In addition, current sampling results indicate that contaminants may be migrating off-site. An off-site well, used as a domestic and irrigation water source, has shown evidence of being impacted by chloroform at 0.9 ug/liter, significantly below (less than one percent of) the California Drinking Water Maximum Contamination Level for trihalomethanes of 100 ug/liter, and toluene at 0.9 ug/liter, also significantly below (less than one percent of) the California Toxicity Action Level of 100 ug/liter. While another off-site well has been found to contain chloroform, the engineering consultant concluded that the contaminants do not appear to relate to impact from the JBL site. The Company believes that any costs associated with further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. 15. Genta Europe The Company's loss on its European operations for the years ended December 31, 1995, 1996 and 1997 were $1,266,531, $1,247,713 and $806,687, 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. -92- Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Genta Jago Technologies B.V. We have audited the accompanying balance sheets of Genta Jago Technologies B.V. (a development stage company) as of December 31, 1996 and 1997, and the related statements of operations, stockholders' equity (net capital deficiency) and cash flows for each of the three 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, 1996 and 1997, and the results of its operations and its cash flows for each of the three 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 sources of financing to fund its operations through 1998. 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. San Diego, California April 13, 1998 -93- Genta Jago Technologies B.V. (a development stage company) Balance Sheets December 31, Assets 1996 1997 --------------------------- Current assets: Cash and cash equivalents ........................ $ 36,092 $ 9,247 Receivables under collaboration agreements ....... 903,838 1,399,854 Other current assets ............................. 105,934 22,246 --------------------------- Total current assets ............................... 1,045,864 1,431,347 Property and equipment, net ....................... 4,900 2,300 Other assets ....................................... 6,651 1,672 --------------------------- $ 1,057,415 $ 1,435,319 =========================== Liabilities and net capital deficiancy Current liabilities: Accounts payable and accrued expenses ............ $ 571,539 $ 1,792,293 Payable to related parties ....................... 2,481,452 3,420,456 --------------------------- Total current liabilities .......................... 3,052,991 5,212,749 Notes payable to Genta Incorporated ................ 15,287,099 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 . (21,536,625) (23,868,479) --------------------------- Net capital deficiency ............................. (17,282,675) (19,614,529) --------------------------- $ 1,057,415 $ 1,435,319 =========================== See accompanying notes -94- Genta Jago Technologies B.V. (a development stage company) Statements of Operations
Cumulative from December 15, 1992 (inception) through Years ended December 31, December 31, Revenues: 1995 1996 1997 1997 ------------------------------------------------------------- Collaborative research and development $ 2,968,463 $ 5,477,059 $ 3,634,516 $ 19,040,894 Cost and expenses: Research and development, including contractual amounts to related parties of $9,318,460, $7,040,438, and $4,540,067, and $40,169,225 in 1995, 1996 and 1997 and the period from December 15, 1992 (inception) to December 31, 1997, respectively 9,866,038 8,091,465 4,740,299 43,003,883 General and administrative 470,081 361,920 50,869 1,436,252 ------------------------------------------------------------- 10,336,119 8,453,385 4,791,168 44,440,135 ------------------------------------------------------------- Loss from operations (7,367,656) (2,976,326) (1,156,652) (25,399,241) Other income (expense): Gain on waiver of debt in exchange for return of license rights to related party 4,703,352 -- -- 4,703,352 Interest income 2,620 5,814 209 19,755 Interest expense (749,808) (961,075) (1,175,411) (3,192,345) ------------------------------------------------------------- 3,956,164 (955,261) (1,175,202) 1,530,762 ------------------------------------------------------------- Net loss $ (3,411,492) $ (3,931,587) $ (2,331,854) $(23,868,479) =============================================================
See accompanying notes -95- Genta Jago Technologies B.V. (a development stage company) Statement of Stockholders' Equity (Net Capital Deficiency) December 15, 1992 (inception) to December 31, 1997
Deficit accumulated Stockholders' during the equity (net Common stock Additional development 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) ======================================================================
See accompanying notes. -96- 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, 1995 1996 1997 1997 ------------------------------------------------------------- Operating Activities Net Loss ...................................... $ (3,411,492) $ (3,931,587) $ (2,331,854) $(23,868,479) Items reflected in net loss not requiring cash: Depreciation and amortization ................. 2,600 2,600 2,600 15,768 Technology license fee ........................ -- -- -- 192,580 Gain on waiver of debt in exchange for return of license rights to related party (4,703,352) -- -- (4,703,352) Changes in operating assets and liabilities: Advance contract payments to related parties ............................... 435,276 1,538,594 -- -- Receivables under collaboration agreements ............................ -- (903,838) (496,016) (1,399,854) Other current assets ..................... 68,440 (105,934) 83,688 (22,246) Accounts payable and accrued expenses .... 112,227 324,185 1,220,754 1,792,293 Payable to related parties ............... 277,479 1,686,614 939,004 3,420,456 Deferred contract revenue ................ (1,071,863) (317,555) -- -- ----------------------------------------------- ------------ Net cash used in operating activities ......... (8,290,685) (1,706,921) (581,824) (24,572,834) Investing Activities Purchase of property and equipment and other ..................................... (4,492) (2,159) 4,979 (19,740) ----------------------------------------------- ------------ Net cash provided by (used in) investing activities ................................ (4,492) (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 .. 8,415,407 1,500,000 550,000 21,140,643 Repayment of notes payable to related party ... -- -- -- (600,192) ----------------------------------------------- ------------ Net cash provided by financing activities ..... 8,415,407 1,500,000 550,000 24,601,821 ----------------------------------------------- ------------ Increase (decrease) in cash and cash equivalents ............................... 120,230 (209,080) (26,845) 9,247 Cash and cash equivalents at beginning of period .................................... 124,942 245,172 36,092 -- ----------------------------------------------- ------------ Cash and cash equivalents at end of period .... $ 245,172 $ 36,092 $ 9,247 $ 9,247 =============================================== ============ Supplemental disclosure of cash flow information: =============================================== ============ Interest paid ................................. $ -- $ -- $ -- $ 299,808 =============================================== ============
See accompanying notes. -97- Genta Jago Technologies B.V. (a development stage company) Notes to Financial Statements December 31, 1997 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 obtained from Jagotec and subsequently contributed to Genta Jago 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 "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. 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. -98- Genta Jago Technologies B.V. (a development stage company) Notes to Financial Statements December 31, 1997 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. 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"). 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. Comprehensive income is defined as the change in equity during the period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. The Company does not believe that comprehensive income or loss has been materially different than net income or loss. 2. Related Party Transactions License Agreements Genta Jago entered into license agreements with Genta in connection with the planned development and commercialization of GEOMATRIX oral controlled-release products and Anticode(TM) oligonucleotide products. The license with Genta in relation to the Anticode(TM) oligonucleotide products was terminated in 1995, however, the license in -99- Genta Jago Technologies B.V. (a development stage company) Notes to Financial Statements December 31, 1997 relation to the GEOMATRIX oral controlled-release products with Jagotec was not terminated. Pursuant to such agreements, Genta Jago recorded license fee expense of $85,000, $620,000 and $85,000 during the years ended December 31, 1995, 1996 and 1997, respectively. -100- Genta Jago Technologies B.V. (a development stage company) Notes to Financial Statements December 31, 1997 Research and Development and Service Agreements Genta Jago has contracted with Genta and Jagotec to conduct research and development and provide certain other services. Under terms of such agreements, Genta Jago generally is required to reimburse the parties for their respective costs incurred plus a specified mark-up. Payments for research and development services are generally made in advance and are refundable if the services are not performed. For the years ended December 31, 1995, 1996 and 1997, Genta Jago incurred expenditures of $9.3 million, $7 million and $4.5 million, respectively, pursuant to such research and development and service agreements. Capital Contributions and Working Capital Agreement In connection with the formation of the joint venture, Genta contributed $4 million in cash to Genta Jago as well as the rights to apply its Anticode(TM) oligonucleotide technology to six products and also contributed the Initial License referred to below. Genta issued 120,000 shares of Common Stock valued at $7.2 million to Jagotec in 1992 as consideration for a license (the "Initial License") for Genta to use Jagotec's GEOMATRIX technology with respect to approximately 25 products, under the condition that Genta then contribute such technology to Genta Jago, which Genta did. In addition, Genta Jago entered into a working capital agreement with Genta which expires in October 1998. See "MD&A--Liquidity and Capital Resources." Pursuant to this agreement, Genta is required to make working capital loans to Genta Jago up to a mutually agreed upon maximum principal amount, which amount is established by 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 is 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, 1997, 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 bear interest at rates per annum ranging from 5.81% to 7.5%, and are payable in full on October 20, 1998, or earlier in the event certain revenues are received by Genta Jago and specified cash balances are maintained by Genta Jago. -101- Genta Jago Technologies B.V. (a development stage company) Notes to Financial Statements December 31, 1997 Expansion of Genta Jago In 1995, Genta obtained from Jagotec and subsequently contributed to Genta Jago 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. 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 $1.2 million, $2.2 million and $1.9 million of funding in 1997, 1996 and 1995, respectively, pursuant to the agreement. Collaborative revenues of $1.5 million, $2.8 million and $3 million were recognized under the agreement during the years ended December 31, 1997, 1996 and 1995, respectively. Effective October 1996, Gensia and SkyePharma reached an -102- Genta Jago Technologies B.V. (a development stage company) Notes to Financial Statements December 31, 1997 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 $2.3 million of collaborative revenue therefrom. -103- 4. Income Taxes Significant components of Genta Jago's deferred tax assets as of December 31, 1997 are shown below. A valuation allowance of $2,387,000 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. December 31, 1996 1997 --------------------------------- Deferred tax assets: Net operating loss carryforwards $ 2,154,000 $ 2,387,000 Valuation allowance for deferred tax assets (2,154,000) (2,387,000) --------------------------------- Net deferred tax assets $ -- $ -- ================================= At December 31, 1997, Genta Jago has foreign net operating loss carryforwards of approximately $23,868,000. The foreign tax loss carryforwards will begin expiring in 2000, unless previously utilized. -104- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. -105- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) The sections labeled "Proposal Two--Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy Statement are incorporated herein by reference. (b) Information concerning the Company's Executive Officers is set forth in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The section labeled "Compensation of Executive Officers and Directors" appearing in the Company's Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section labeled "Stock Ownership of Management and Certain Beneficial Owners" appearing in the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section labeled "Certain Relationships and Related Transactions" appearing in the Company's Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial statements Reference is made to the Index to Financial Statements under Item 8 of this report on Form 10-K. (2) All schedules are omitted because they are not required, are not applicable, or the required information is included in the consolidated financial statements or notes thereto. (3) Reference is made to Paragraph (c) below for Exhibits required by Item 601 of Regulation S-K, including management contracts and compensatory plans and arrangements. -106- (b) Reports on Form 8-K. During the fourth quarter of 1997, the Company filed the following reports on Forms 8-K: (i) On November 17, 1997, the Company filed a report on Form 8-K dated November 14, 1997 reporting under Item 5 that the Company issued a press release entitled "Genta Incorporated Announces Third Quarterly 1997 Results. (ii) On December 3, 1997, the Company filed a report on Form 8-K dated December 3, 1997 reporting under Item 5 that the Company issued a press release entitled "Genta Announces Initiation of Phase I/II a Prostate Cancer Trial at Memorial Sloan-Kettering Cancer Center." (c) Exhibits required by Item 601 of Regulation S-K with each management contract, compensatory plan or arrangement required to be filed identified. Exhibit Number Description of Document - - ------ ----------------------- 3(i).1(1) Restated Certificate of Incorporation as amended by the Certificate of the Powers, Designations, Preferences and Rights of the Series B Convertible Preferred Stock as amended by the Certificate of the Powers, Designations, Preferences and Rights of the Series C Convertible Preferred Stock. 3(i).2(18) Certificate of Designations of Series D Convertible Preferred Stock of the Company. 3(ii).1(2) By-laws of the Company. 3(ii).2(21) By-laws of the Company, as amended and restated September 23, 1997. 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 -107- California, which includes as Exhibit A the form of Certificate of Designations, Rights and Preferences of Series F Participating Preferred Stock. 4.6(8) Form of Regulation S Subscription Agreement entered into between the Company and certain purchasers of the Series B Convertible Preferred Stock. 4.7(1) Form of Securities Subscription Agreement entered into between the Company and certain purchasers of the Series C Convertible Preferred Stock. 4.8(1) Common Stock Purchase Warrant dated December 14, 1995 between the Company and Lease Management Services, Inc. 4.9(17) Warrant for the Purchase of 213,415 Shares of Common Stock issued to Lyon & Lyon in October 1996. 4.10(17) Warrant for the Purchase of 100,000 Shares of Common Stock issued to Michael Arnouse in October 1996. 10.1(3)(6)(6) Amended and Restated 1991 Stock Plan of Genta Incorporated. 10.2(5) Master Lease Agreement No. 10300 dated as of May 4, 1989 between the Company and Lease Management Services, Inc. and Master Lease Agreement No. 10428 dated as of August 15, 1991 between the Company and Lease Management Services, Inc. 10.3(5) Standard Industrial Lease dated October 24, 1988, as amended, between the Company and General Atomics. 10.4(5) Revised and Restated Lease dated as of March 1, 1990 between JBL Scientific, Inc. and Granada Associates. 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. -108- 10.9(5)(6) Consulting Agreement dated February 2, 1989 between the Company and Dr. Paul O.P. Ts'o. 10.10(5)(7) Development, License and Supply Agreement dated February 2, 1989 between the Company and Gen-Probe Incorporated. 10.12(5)(7) License Agreement dated February 2, 1989 among the Company, Dr. Ts'o, Dr. Miller and Mr. Finch. 10.13(5)(7) License Agreement dated May 15, 1990 between the Company and The Johns Hopkins University. 10.19(6)(1) Promissory Note dated March 7, 1996 between the Company and Dr. Donald Picker. 10.21(7)(9) Common Stock Transfer Agreement dated as of December 15, 1992, between the Company and Dr. Jacques Gonella. 10.32(9) Consulting Agreement dated as of December 15, 1992, between the Company and Dr. Jacques Gonella. 10.36(7)(9) Common Stock Transfer Agreement dated as of December 15, 1992, between the Company and Jagotec AG. 10.37(7)(9) Collaboration Agreement dated as of January 22, 1993, between Jobewol Investments B.V. (now known as Genta Jago Technologies B.V.) and Gensia, Inc. 10.46(10) Form of Purchase Agreement between the Company and certain purchasers of Common Stock. 10.47(10) Common Stock Purchase Warrant dated May 8, 1995 between the Company and Index Securities S.A. 10.48(7)(12) Restated Joint Venture and Shareholders Agreement dated as of May 12, 1995 between the Company, Jagotec AG, Jago Holding AG, Jago Pharma AG and Genta Jago Technologies B.V. 10.50(7)(12) Limited Liability Company Agreement of Genta Jago Delaware LLC dated as of May 12, 1995 between GPM Generic Pharmaceuticals Manufacturing Inc. and the Company. 10.51(7)(12) Restated Transfer Restriction Agreement dated as of May 12, 1995 between the Company and Jagotec AG. -109- 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. -110- 10.66(1) Promissory Note dated November 8, 1995 between the Company and Domain Partners, L.P. 10.67(1) Promissory Note dated November 8, 1995 between the Company and Domain Partners II, L.P. 10.68(1) Promissory Note dated November 8, 1995 between the Company and Institutional Venture Partners, IV. 10.69(14) Amendment to Promissory Note effective March 22, 1996 between the Company and Institutional Venture Partners, IV. 10.70(14) Amendment to Promissory Note effective March 22, 1996 between the Company and Domain Partners, L.P. 10.71(14) Amendment to Promissory Note effective March 22, 1996 between the Company and Domain Partners II, L.P. 10.72(15) Amendments to the Series C Securities Subscription Agreement dated April 23, 1996. 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. -111- 10.81(19) Class B Bridge Warrant of the Company for the purchase of 4,270,000 shares of Common Stock. 10.82(19) Class B Bridge Warrant of the Company for the purchase of 7,930,000 shares of Common Stock. 10.83(19) Security Agreement dated as of January 28, 1997 between the Company and Paramount Capital, Inc. 10.84(19) Letter Agreement dated January 28, 1997 among the Company, Paramount Capital, Inc., the Partnership and the Trust. 10.85(19) Amendment No. 1 dated as of January 28, 1997 to Rights Agreement, dated as of December 16, 1997, between the Company and ChaseMellon Shareholder Services L.L.C. 10.86(20)(6) Executive Compensation Agreement dated as of January 1, 1996 between the Company and Howard Sampson. 10.87(20) Collaboration Agreement dated December 26, 1995 between the Company and Johnson & Johnson Consumer Products, Inc. 10.88(20) Assignment Agreement (of Gensia Inc.'s rights in the Collaboration Agreement between Genta Jago and Gensia, Inc., dated January 23, 1993) to Brightstone Pharma, Inc., dated October 1, 1996 among Gensia, Inc., Genta Jago Technologies B.V., Brightstone Pharma, Inc., and SkyePharma PLC. 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 -112- 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. 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. -113- 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. 22.1(20) Subsidiaries of the Registrant. 23.1(20) Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney. (See signature page) 27.1(22) 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. -114- (6) Indicates management contract, compensatory plan or arrangement. (7) The Company has been granted confidential treatment of certain portions of this exhibit. (8) Exhibit 4.6 is incorporated by reference to Exhibit 10.65 to the Company's Report on Form 8-K dated as of December 29, 1995, Commission File No. 0-19635. (9) Incorporated by reference to the exhibits of the same number to the Company's Registration Statement on Form S-3, Registration No. 33-58362. (10) Incorporated by reference to the exhibits of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-19635. (11) Incorporated by reference to Exhibit 5.1 to the Company's Report on Form 8-K dated as of December 16, 1993, Commission File No. 0-19635. (12) Incorporated by reference to the exhibits of the same number to the Company's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, Commission File No. 0-19635. (13) Incorporated herein by reference to the exhibit of the same number to the Company's Report on Form 8-K dated as of December 29, 1995. (14) Incorporated herein by reference to exhibits 10.1, 10.2 and 10.3, respectively, to the Company's Registration Statement on Form S-3 (Registration No. 333-3846) (15) Incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File No. 0-19635. (16) Exhibits 10.73 and 10.74 are incorporated herein by reference to Exhibits 10.1 and 10.2 to the Company's Report on Form 8-K dated as of September 17, 1996, Commission File No. 0-19635. (17) Exhibits 4.9 and 4.10 are incorporated herein by reference to Exhibits 4.1 and 4.2 respectively to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, Commission File No. 0-19635. (18) Exhibit 3(i).2 is incorporated by reference to Exhibit 3(i) to the Company's Report on Form 8-K dated as of January 28, 1997, Commission File No. 0-19635. -115- (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, 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) Filed herewith. (d) See (a)(2) above. -116- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 13th day of April, 1998. Genta Incorporated /s/ Kenneth G. Kasses, Ph.D. ---------------------- Kenneth G. Kasses, Ph.D. President, Principal Executive Officer and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kenneth G. Kasses and Robert E. Klem, jointly and each of them severally, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Kenneth G. Kasses - - ------------------------------ President, Principal Executive April 13, 1998 Kenneth G. Kasses, Ph.D. Officer and Director /s/ Robert E. Klem, Ph.D. Principal Accounting Officer, April 13, 1998 - - ------------------------------- Principal Financial Officer, Robert E. Klem, Ph.D. Vice President and Director /s/ Donald G. Drapkin Chairman and Director April 13, 1998 - - ------------------------------- Donald G. Drapkin /s/ Bobby W. Sandage, Jr., Ph.D. Director April 13, 1998 - - -------------------------------- Bobby W. Sandage, Jr., Ph.D. - 117 - /s/ Michael S. Weiss - - ---------------------------- Vice Chairman and Director April 13, 1998 Michael S. Weiss /s/ Glenn L. Cooper, M.D. - - ---------------------------- Director April 13, 1998 Glenn L. Cooper, M.D. /s/ Lawrence J. Kessel, M.D. - - ---------------------------- Director April 13, 1998 Lawrence J. Kessel, M.D. /s/ Peter Salomon, M.D. - - ----------------------- Director April 13, 1998 Peter Salomon, M.D. /s/ Andrew J. Stein - - ----------------------- Director April 13, 1998 Andrew J. Stein /s/ Harlan J. Wakoff - - ----------------------- Director April 13, 1998 Harlan J. Wakoff
- 118 - EX-10.99 2 WARRANT FOR THE PURCHASE OF SHARES THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE SECURITIES LAWS. GENTA INCORPORATED WARRANT FOR THE PURCHASE OF SHARES OF ------------------------------------- COMMON STOCK ------------ NO. 1 32,500 SHARES FOR VALUE RECEIVED, GENTA INCORPORATED, a Delaware corporation (the "Company"), hereby certifies that THE ARIES FUND, A CAYMAN ISLAND TRUST, or its permitted assigns, is entitled to purchase from the Company, at any time or from time to time commencing on June 6, 1997, and prior to 5:00 P.M., New York City time, on June 6, 2002 (the "Termination Date"), thirty-two-thousand five-hundred (32,500) fully paid and non-assessable shares of the Common Stock, $.001 par value per share, of the Company at an exercise price equal two dollars and fifty cents ($2.50) (Hereinafter, (i) said Common Stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "Common Stock", (ii) the shares of the Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to as the "Warrant Shares", (iii) the aggregate purchase price payable for the Warrant Shares hereunder is referred to as the "Aggregate Warrant Price", (iv) the price payable for each of the Warrant Shares hereunder is referred to as the "Per Share Warrant Price", (v) this Warrant, all similar Warrants issued on the date hereof and all warrants hereafter issued in exchange or substitution for this Warrant or such similar Warrants are referred to as the "Warrants" and (vi) the holder of this Warrant is referred to as the "Holder" and the holder of this Warrant and all other Warrants or Warrant Shares issued upon the exercise of any Warrant are referred to as the "Holders"). The Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per Share Warrant Price in effect immediately after such adjustment. 1. Exercise of Warrant. (a) This Warrant may be exercised, in whole at any time or in part from time to time, commencing on June 6, 1997 and prior to the Termination Date, by the holder: (i) by the surrender of this Warrant (with the subscription form at the end hereof duly executed) at the address set forth in Subsection 9(a) hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part, with payment for Warrant Shares made by certified or official bank check payable to the order of the Company; or (ii) by the surrender of this Warrant (with the cashless exercise form at the end hereof duly executed) (a "Cashless Exercise") at the address set forth in Subsection 9(a) hereof. Such presentation and surrender shall be deemed a waiver of the Holder's obligation to pay the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part. In the event of a Cashless Exercise, the Holder shall exchange its Warrant for that number of Warrant Shares subject to such Cashless Exercise multiplied by a fraction, the numerator of which shall be the difference between the then current Market Price per share (as hereinafter defined) of Common Stock and the Per Share Warrant Price, and the denominator of which shall be the then current Market Price per share of Common Stock. The then current market price per share of the Common Stock at any date (the "Market Price") shall be deemed to be the last sale price of the Common Stock on the business day prior to the date of the Cashless Exercise or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by the NASDAQ Bulletin Board (?NASDAQ?), or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price of the Common Stock as determined in good faith by the Board of Directors. (b) If this Warrant is exercised in part, this Warrant must be exercised for a number of whole shares of the Common Stock and the Holder is entitled to receive a new Warrant covering the Warrant Shares which have not been exercised and setting forth the proportionate part of the Aggregate Warrant Price applicable to such Warrant Shares. Upon surrender of this Warrant, the Company will (i) issue a certificate or certificates in the name of the Holder for the largest number of whole shares of the Common Stock to which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional share of the Common Stock to which the Holder shall be entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors of the Company - 2 - shall determine), and (ii) deliver the other securities and properties receivable upon the exercise of this Warrant, if any, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of this Warrant. 2. Reservation of Warrant Shares; Listing. The Company agrees that, prior to the expiration of this Warrant, the Company will at all times (a) have authorized and in reserve, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the shares of the Common Stock and other securities and properties as from time to time shall be receivable upon the exercise of this Warrant, free and clear of all restrictions on sale or transfer, except for the restrictions on sale or transfer set forth in the Securities Act of 1933, as amended (the "Act"), and restrictions created by or on behalf of the Holder, and free and clear of all preemptive rights and rights of first refusal; and (b) when the Company prepares and files a registration statement covering the shares of Common Stock issued or issuable upon exercise of this Warrant with the Securities and Exchange Commission (the "SEC") which registration statement is declared effective by the SEC under the Act and the Company lists its Common Stock on any national securities exchange or other quotation system, it will use its reasonable best efforts to cause the shares of Common Stock subject to this Warrant to be listed on such exchange or quotation system. 3. Protection Against Dilution. (a) If, at any time or from time to time after the date of this Warrant, the Company shall issue or distribute to the holders of shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding a subdivision, combination or reclassification, or dividend or distribution payable in shares of Common Stock, referred to in Subsection 3(b), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor in the full amount thereof, which together with the value of other dividends and distributions made substantially concurrently therewith or pursuant to a plan which includes payment thereof, is equivalent to not more than five percent (5%) of the Company's net worth) (any such non-excluded event being herein called a "Special Dividend"), the Per Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price then in effect by a fraction, the numerator of which shall be the then current Market Price of the Common Stock less the fair market value (as determined in good faith by the Company's Board of Directors) of the evidence of indebtedness, cash, securities or property, or other assets issued or distributed in such Special Dividend applicable to one share of Common Stock and the denominator of which shall be the then current Market Price of the Common Stock. An adjustment made pursuant to this Subsection 3(a) shall become effective immediately after the record date of any such Special Dividend. (b) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Warrant - 3 - Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Warrant Price and the denominator of which shall be the number of shares of Common Stock or other capital stock of the Company which he would have owned immediately following such action had such Warrant been exercised immediately prior thereto. An adjustment made pursuant to this Subsection 3(b) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (c) Except as provided in Subsections 3(a) and 3(d), in case the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such securities plus the total consideration, if any, payable to the Company upon exercise or conversion thereof (the "Total Consideration") by (ii) the number of additional shares of Common Stock issuable upon exercise or conversion of such securities) less than either the then current Market Price of the Common Stock or the current Per Share Warrant Price in effect on the date of such issuance or sale, the Per Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price then in effect by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding on the date of such issuance or sale plus (B) the Total Consideration divided by either the current Market Price of the Common Stock or the current Per Share Warrant Price, whichever is greater, and the denominator of which shall be (y) the number of shares of Common Stock outstanding on the date of such issuance or sale plus the maximum number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities. (d) No adjustment in the Per Share Warrant Price shall be required in the case of the issuance by the Company of (i) Common Stock pursuant to the exercise or conversion of any Warrant or any other options, warrants or any convertible securities currently outstanding or outstanding as a result of securities issued in connection with the Company?s current private placement offering pursuant to the Confidential Term Sheet dated May 20, 1997 (as hereafter supplemented and amended, the ?Term Sheet?) pursuant to a private placement of the Company?s securities (an ?Offering?); provided, that the exercise price or conversion price at which such options, warrants or convertible securities are exercised or converted, as the case may be, is equal to the exercise price or conversion price in effect as of the date of this Warrant or as of the date of issuance with respect to securities issued pursuant to an Offering (except for standard anti-dilution adjustments) and (ii) shares of Common Stock issued or sold pursuant to stock purchase or stock option plans or other similar arrangements that are approved by the Company's Board of Directors. (e) In case of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale - 4 - or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this Subsection 3(e) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than thirty (30) days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (f) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants may appoint a firm of independent public accountants of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. (g) No adjustment in the Per Share Warrant Price shall be required unless such adjustment would require an increase or decrease of at least $0.05 per share of Common Stock; provided, however, that any adjustments which by reason of this Subsection 3(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; provided, further, however, that adjustments shall be required and made in accordance with the provisions of this Section 3 (other than this Subsection 3(g)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the Holder of this Warrant or Common Stock issuable upon - 5 - the exercise hereof. All calculations under this Section 3 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Warrant Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (h) Whenever the Per Share Warrant Price is adjusted as provided in this Section 3 and upon any modification of the rights of a Holder of Warrants in accordance with this Section 3, the Chief Financial Officer of the Company shall promptly prepare a certificate setting forth the Per Share Warrant Price and the number of Warrant Shares after such adjustment or the effect of such modification and a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause copies of such certificate to be mailed to the Holders of the Warrants. In the event of a dispute with respect to any adjustment required pursuant to Section 3, the Holder may appoint, at the Company?s expense, an independent financial advisor (e.g. an investment banking or accounting firm)reasonably acceptable to the Company to calculate such adjustment. Such determination shall be binding upon the Holder and the Company. (i) If the Board of Directors of the Company shall declare any dividend or other distribution with respect to the Common Stock, the Company shall mail notice thereof to the Holders of the Warrants not less than 15 days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. (j) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Warrant Price between or among shares or such classes of capital stock or shares of Common Stock and other capital stock. 4. Fully Paid Stock; Taxes. The Company agrees that the shares of the Common Stock represented by each and every certificate of Warrant Shares delivered on the exercise of this Warrant be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights or rights of first refusal, and the Company will take all such actions as may be necessary to assure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Per Share Warrant Price. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes which may be payable in respect of the issue of any Warrant Share or any certificate thereof. 5. Registration Under Securities Act of 1933. - 6 - (a) The Company shall include the Warrant Shares on the Shelf Registration Statement (as defined in the Term Sheet) and the Holder shall otherwise have the registration rights set forth in Section 5 of the subscription agreement (the "Subscription Agreement") to be entered into between the purchasers of units (as described in the Term Sheet) and the Company. By acceptance of this Warrant, the Holder agrees that it shall have the same obligations, and otherwise comply with, the provisions in such Section 5 of the Subscription Agreement to same extent as if it were a party thereto. To the extent that no Final Closing Date (as defined in the Subscription Agreement) occurs or the Offering is terminated, the rights granted to Holder hereunder to have its shares registered shall begin as of December 6, 1997 on the same terms as provided in Section 5 of the Subscription Agreement. (b) Until all Warrant Shares have been sold under a Registration Statement or pursuant to Rule 144, the Company shall use its reasonable best efforts to file with the Securities and Exchange Commission all current reports and the information as may be necessary to enable the Holder to effect sales of its shares in reliance upon Rule 144 promulgated under the Act. 6. Limited Transferability. This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Act and the applicable state securities "blue sky" laws. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 7. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 8. Warrant Holder Not Shareholder. Except as otherwise provided herein, this Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 9. Communication. No notice or other communication under this Warrant shall be effective unless, but any notice or other communication shall be effective and shall be deemed to have been given if, the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: (a) the Company at 3550 General Atomics Court, San Diego, CA 92121: - 7 - President or other address as the Company has designated in writing to the Holder, or (b) the Holder at c/o Paramount Capital Asset Management, Inc., 787 Seventh Avenue, New York, NY, 10019, Attn: Lindsay A. Rosenwald, M.D. or other such address as the Holder has designated in writing to the Company. 10. Headings. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 11. Applicable Law. This Warrant shall be governed by and construed in accordance with the law of the State of New York without giving effect to the principles of conflicts of law thereof. - 8 - IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its President and its corporate seal to be hereunto affixed and attested by its Secretary this 6th day of June 1997. GENTA INCORPORATED By: ______________________________ Name: Title: ATTEST: - - ------------------------------- Secretary [Corporate Seal] SUBSCRIPTION ------------- The undersigned, ___________________, pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase ____________________ shares of the Common Stock, par value $.001 per share, of Genta Incorporated covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated:_______________ Signature:____________________ Address:______________________ CASHLESS EXERCISE ----------------- The undersigned ___________________, pursuant to the provisions of the foregoing Warrant, hereby elects to exchange its Warrant for ___________________ shares of Common Stock, par value $.001 per share, of Genta Incorporated pursuant to the Cashless Exercise provisions of the Warrant. Dated:_______________ Signature:____________________ Address:______________________ ASSIGNMENT ---------- FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto ____________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________, attorney, to transfer said Warrant on the books of Genta Incorporated. Dated:_______________ Signature:____________________ ADDRESS:______________________ PARTIAL ASSIGNMENT ------------------ FOR VALUE RECEIVED _______________ hereby assigns and transfers unto ____________________ the right to purchase _______ shares of the Common Stock, par value $.001 per share, of Genta Incorporated covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint ____________________, attorney, to transfer that part of said Warrant on the books of Genta Incorporated. Dated:_______________ Signature:____________________ ADDRESS:______________________ EX-10.100 3 WARRANT FOR THE PURCHASE OF SHARES THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE SECURITIES LAWS. GENTA INCORPORATED WARRANT FOR THE PURCHASE OF SHARES OF ------------------------------------- COMMON STOCK ------------ NO. 1 17,500 SHARES FOR VALUE RECEIVED, GENTA INCORPORATED, a Delaware corporation (the "Company"), hereby certifies that ARIES DOMESTIC FUND, L.P., or its permitted assigns, is entitled to purchase from the Company, at any time or from time to time commencing on June 6, 1997, and prior to 5:00 P.M., New York City time, on June 6, 2002 (the "Termination Date"), seventeen-thousand five-hundred (17,500) fully paid and non-assessable shares of the Common Stock, $.001 par value per share, of the Company at an exercise price equal two dollars fifty cents ($2.50) (Hereinafter, (i) said Common Stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "Common Stock", (ii) the shares of the Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to as the "Warrant Shares", (iii) the aggregate purchase price payable for the Warrant Shares hereunder is referred to as the "Aggregate Warrant Price", (iv) the price payable for each of the Warrant Shares hereunder is referred to as the "Per Share Warrant Price", (v) this Warrant, all similar Warrants issued on the date hereof and all warrants hereafter issued in exchange or substitution for this Warrant or such similar Warrants are referred to as the "Warrants" and (vi) the holder of this Warrant is referred to as the "Holder" and the holder of this Warrant and all other Warrants or Warrant Shares issued upon the exercise of any Warrant are referred to as the "Holders"). The Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per Share Warrant Price in effect immediately after such adjustment. 1. Exercise of Warrant. (a) This Warrant may be exercised, in whole at any time or in part from time to time, commencing on June 6, 1997 and prior to the Termination Date, by the holder: (i) by the surrender of this Warrant (with the subscription form at the end hereof duly executed) at the address set forth in Subsection 9(a) hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part, with payment for Warrant Shares made by certified or official bank check payable to the order of the Company; or (ii) by the surrender of this Warrant (with the cashless exercise form at the end hereof duly executed) (a "Cashless Exercise") at the address set forth in Subsection 9(a) hereof. Such presentation and surrender shall be deemed a waiver of the Holder's obligation to pay the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part. In the event of a Cashless Exercise, the Holder shall exchange its Warrant for that number of Warrant Shares subject to such Cashless Exercise multiplied by a fraction, the numerator of which shall be the difference between the then current Market Price per share (as hereinafter defined) of Common Stock and the Per Share Warrant Price, and the denominator of which shall be the then current Market Price per share of Common Stock. The then current market price per share of the Common Stock at any date (the "Market Price") shall be deemed to be the last sale price of the Common Stock on the business day prior to the date of the Cashless Exercise or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by the NASDAQ Bulletin Board (?NASDAQ?), or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price of the Common Stock as determined in good faith by the Board of Directors. (b) If this Warrant is exercised in part, this Warrant must be exercised for a number of whole shares of the Common Stock and the Holder is entitled to receive a new Warrant covering the Warrant Shares which have not been exercised and setting forth the proportionate part of the Aggregate Warrant Price applicable to such Warrant Shares. Upon surrender of this Warrant, the Company will (i) issue a certificate or certificates in the name of the Holder for the largest number of whole shares of the Common Stock to which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional share of the Common Stock to which the Holder shall be entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors of the Company shall determine), and (ii) deliver the other securities and properties receivable upon the exercise of this Warrant, if any, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of - 2 - this Warrant. 2. Reservation of Warrant Shares; Listing. The Company agrees that, prior to the expiration of this Warrant, the Company will at all times (a) have authorized and in reserve, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the shares of the Common Stock and other securities and properties as from time to time shall be receivable upon the exercise of this Warrant, free and clear of all restrictions on sale or transfer, except for the restrictions on sale or transfer set forth in the Securities Act of 1933, as amended (the "Act"), and restrictions created by or on behalf of the Holder, and free and clear of all preemptive rights and rights of first refusal; and (b) when the Company prepares and files a registration statement covering the shares of Common Stock issued or issuable upon exercise of this Warrant with the Securities and Exchange Commission (the "SEC") which registration statement is declared effective by the SEC under the Act and the Company lists its Common Stock on any national securities exchange or other quotation system, it will use its reasonable best efforts to cause the shares of Common Stock subject to this Warrant to be listed on such exchange or quotation system. 3. Protection Against Dilution. (a) If, at any time or from time to time after the date of this Warrant, the Company shall issue or distribute to the holders of shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding a subdivision, combination or reclassification, or dividend or distribution payable in shares of Common Stock, referred to in Subsection 3(b), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor in the full amount thereof, which together with the value of other dividends and distributions made substantially concurrently therewith or pursuant to a plan which includes payment thereof, is equivalent to not more than five percent (5%) of the Company's net worth) (any such nonexcluded event being herein called a "Special Dividend"), the Per Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price then in effect by a fraction, the numerator of which shall be the then current Market Price of the Common Stock less the fair market value (as determined in good faith by the Company's Board of Directors) of the evidence of indebtedness, cash, securities or property, or other assets issued or distributed in such Special Dividend applicable to one share of Common Stock and the denominator of which shall be the then current Market Price of the Common Stock. An adjustment made pursuant to this Subsection 3(a) shall become effective immediately after the record date of any such Special Dividend. (b) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Warrant Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Warrant Price and the denominator of which shall be the number of shares of Common Stock or other capital stock of the Company which he would have owned immediately following - 3 - such action had such Warrant been exercised immediately prior thereto. An adjustment made pursuant to this Subsection 3(b) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (c) Except as provided in Subsections 3(a) and 3(d), in case the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such securities plus the total consideration, if any, payable to the Company upon exercise or conversion thereof (the "Total Consideration") by (ii) the number of additional shares of Common Stock issuable upon exercise or conversion of such securities) less than either the then current Market Price of the Common Stock or the current Per Share Warrant Price in effect on the date of such issuance or sale, the Per Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price then in effect by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding on the date of such issuance or sale plus (B) the Total Consideration divided by either the current Market Price of the Common Stock or the current Per Share Warrant Price, whichever is greater, and the denominator of which shall be (y) the number of shares of Common Stock outstanding on the date of such issuance or sale plus the maximum number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities. (d) No adjustment in the Per Share Warrant Price shall be required in the case of the issuance by the Company of (i) Common Stock pursuant to the exercise or conversion of any Warrant or any other options, warrants or any convertible securities currently outstanding or outstanding as a result of securities issued in connection with the Company?s current private placement offering pursuant to the Confidential Term Sheet dated May 20, 1997 (as hereafter supplemented and amended, the ?Term Sheet?) pursuant to a private placement of the Company?s securities (an ?Offering?); provided, that the exercise price or conversion price at which such options, warrants or convertible securities are exercised or converted, as the case may be, is equal to the exercise price or conversion price in effect as of the date of this Warrant or as of the date of issuance with respect to securities issued pursuant to an Offering (except for standard anti-dilution adjustments) and (ii) shares of Common Stock issued or sold pursuant to stock purchase or stock option plans or other similar arrangements that are approved by the Company's Board of Directors. (e) In case of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right thereafter to receive on the - 4 - exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this Subsection 3(e) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than thirty (30) days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (f) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants may appoint a firm of independent public accountants of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. (g) No adjustment in the Per Share Warrant Price shall be required unless such adjustment would require an increase or decrease of at least $0.05 per share of Common Stock; provided, however, that any adjustments which by reason of this Subsection 3(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; provided, further, however, that adjustments shall be required and made in accordance with the provisions of this Section 3 (other than this Subsection 3(g)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the Holder of this Warrant or Common Stock issuable upon the exercise hereof. All calculations under this Section 3 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Warrant Price, in addition to those required by this Section 3, as it in its discretion shall - 5 - deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (h) Whenever the Per Share Warrant Price is adjusted as provided in this Section 3 and upon any modification of the rights of a Holder of Warrants in accordance with this Section 3, the Chief Financial Officer of the Company shall promptly prepare a certificate setting forth the Per Share Warrant Price and the number of Warrant Shares after such adjustment or the effect of such modification and a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause copies of such certificate to be mailed to the Holders of the Warrants. In the event of a dispute with respect to any adjustment required pursuant to Section 3, the Holder may appoint, at the Company?s expense, an independent financial advisor (e.g. an investment banking or accounting firm)reasonably acceptable to the Company to calculate such adjustment. Such determination shall be binding upon the Holder and the Company. (i) If the Board of Directors of the Company shall declare any dividend or other distribution with respect to the Common Stock, the Company shall mail notice thereof to the Holders of the Warrants not less than 15 days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. (j) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Warrant Price between or among shares or such classes of capital stock or shares of Common Stock and other capital stock. 4. Fully Paid Stock; Taxes. The Company agrees that the shares of the Common Stock represented by each and every certificate of Warrant Shares delivered on the exercise of this Warrant be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights or rights of first refusal, and the Company will take all such actions as may be necessary to assure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Per Share Warrant Price. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes which may be payable in respect of the issue of any Warrant Share or any certificate thereof. 5. Registration Under Securities Act of 1933. (a) The Company shall include the Warrant Shares on the Shelf Registration Statement (as defined in the Term Sheet) and the Holder shall otherwise have the registration rights set forth in Section 5 of the subscription agreement (the "Subscription Agreement") to be entered into between the purchasers of units (as described in the Term - 6 - Sheet) and the Company. By acceptance of this Warrant, the Holder agrees that it shall have the same obligations, and otherwise comply with, the provisions in such Section 5 of the Subscription Agreement to same extent as if it were a party thereto. To the extent that no Final Closing Date (as defined in the Subscription Agreement) occurs or the Offering is terminated, the rights granted to Holder hereunder to have its shares registered shall begin as of December 6, 1997 on the same terms as provided in Section 5 of the Subscription Agreement. (b) Until all Warrant Shares have been sold under a Registration Statement or pursuant to Rule 144, the Company shall use its reasonable best efforts to file with the Securities and Exchange Commission all current reports and the information as may be necessary to enable the Holder to effect sales of its shares in reliance upon Rule 144 promulgated under the Act. 6. Limited Transferability. This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Act and the applicable state securities "blue sky" laws. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 7. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 8. Warrant Holder Not Shareholder. Except as otherwise provided herein, this Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 9. Communication. No notice or other communication under this Warrant shall be effective unless, but any notice or other communication shall be effective and shall be deemed to have been given if, the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: (a) the Company at 3550 General Atomics Court, San Diego, CA 92121: President or other address as the Company has designated in writing to the Holder, or (b) the Holder at c/o Paramount Capital Asset Management, Inc., 787 Seventh Avenue, New York, NY, 10019, Attn: Lindsay A. Rosenwald, M.D. or other such address as the Holder has designated in writing to the Company. - 7 - 10. Headings. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 11. Applicable Law. This Warrant shall be governed by and construed in accordance with the law of the State of New York without giving effect to the principles of conflicts of law thereof. - 8 - IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its President and its corporate seal to be hereunto affixed and attested by its Secretary this 6th day of June 1997. GENTA INCORPORATED By: _______________________ Name: Title: ATTEST: - - ------------------------------- Secretary [Corporate Seal] - 9 - SUBSCRIPTION ------------ The undersigned, ___________________, pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase ____________________ shares of the Common Stock, par value $.001 per share, of Genta Incorporated covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated:_______________ Signature:____________________ Address:______________________ CASHLESS EXERCISE ----------------- The undersigned ___________________, pursuant to the provisions of the foregoing Warrant, hereby elects to exchange its Warrant for ___________________ shares of Common Stock, par value $.001 per share, of Genta Incorporated pursuant to the Cashless Exercise provisions of the Warrant. Dated:_______________ Signature:____________________ Address:______________________ ASSIGNMENT ----------- FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto ____________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________, attorney, to transfer said Warrant on the books of Genta Incorporated. Dated:_______________ Signature:____________________ Address:______________________ PARTIAL ASSIGNMENT ------------------ FOR VALUE RECEIVED _______________ hereby assigns and transfers unto ____________________ the right to purchase _______ shares of the Common Stock, par value $.001 per share, of Genta Incorporated covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint ____________________, attorney, to transfer that part of said Warrant on the books of Genta Incorporated. Dated:_______________ Signature:____________________ Address:______________________ EX-10.101 4 AMENDED AND RESTATED AMENDMENT AGREEMENT AMENDED AND RESTATED AMENDMENT AGREEMENT The undersigned, intending legally to be bound, hereby agree that the Amendment Agreement between the undersigned, dated May 20, 1997, as previously amended, and all the exhibits thereto, shall be amended and restated to read in their entirety as follows and otherwise agree as follows: 1. The Certificate of Designations for the Series D Convertible Preferred Stock of Genta Incorporated (the "Company") shall be amended, effective as of May 20, 1997, to read as set forth in Exhibit A hereto. 2. The Senior Secured Convertible Bridge Notes issued on February 13, 1997 shall be amended, effective as of the date hereof, to read as set forth in Exhibits B-1 and B-2 hereto. 3. The Company's Class A and Class B Bridge Warrants for the Purchase of Shares of Common Stock (numbers CA-1, CA-2, CB-1 and CB-2) (the "Old Bridge Warrants") shall be exchanged, effective as of the date hereof, for New Warrants (the "New Bridge Warrants") which, notwithstanding the provisions of Section 9 of the Bridge Warrants, shall read in their entirety as set forth in Exhibits CA-1, CA-2, CB-1 and CB-2 hereto, and the Old Bridge Warrants shall be cancelled. 4. If Aries Domestic Fund, L.P. and The Aries Trust (collectively, the "Aries Funds") purchase securities in the Company's private placement commenced on May 20, 1997, then the Aries Funds will not vote or dispose of such securities or convert any such securities into, or exercise any such securities for, any shares of Common Stock of the Company, for a period of 90 days from the date of such purchase. 5. Except as amended hereby and except for the exchange of the New Bridge Warrants for Old Bridge Warrants, the instruments and securities referred to herein shall continue in full force and effect. 6. This agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Amendment Agreement as of June 23, 1997. GENTA INCORPORATED ------------------------------------- By: THE ARIES FUND, A CAYMAN ISLAND TRUST By: its Investment Manager, PARAMOUNT CAPITAL ASSET MANAGEMENT, INC. By: ---------------------------- Name: Lindsay A. Rosenwald, M.D. Title: President THE ARIES DOMESTIC FUND, L.P. By: its General Partner, PARAMOUNT CAPITAL ASSET MANAGEMENT, INC. By: ---------------------------- Name: Lindsay A. Rosenwald, M.D. Title: President EX-10.102 5 AMENDED AND RESTATED SENIOR SECURED BRIDGE NOTE THIS NOTE IS NOT TRANSFERABLE WITHOUT THE EXPRESS WRITTEN CONSENT OF GENTA INCORPORATED, (THE "COMPANY"). THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE SECURITIES LAWS. GENTA INCORPORATED No. B-1 AMENDED AND RESTATED SENIOR SECURED CONVERTIBLE BRIDGE NOTE $1,050,000 New York, New York January 28, 1997, as amended and restated on June 23, 1997 Genta Incorporated, a Delaware corporation, (the "Company"), for value received, hereby promises to pay to THE ARIES DOMESTIC FUND, LP (the "Holder"), or registered assigns, the principal sum of ONE MILLION FIFTY THOUSAND DOLLARS ($1,050,000), with interest from the date of original issuance of this Senior Secured Convertible Bridge Note on the unpaid principal balance at a rate equal to twelve percent (12%) per annum, on the earlier of (a) December 31, 1997, (b) September 30, 1997 if on or prior to such date the Company has not received gross proceeds of at least $2,000,000 in respect of its offering of Premium Preferred Units which was commenced in May, 1997 and (c) the date of any decision, order or other determination adverse to the Company or any of its directors by any court or other tribunal in any lawsuit or other proceeding against the Company and/or any of its directors by any of the Company's preferred stockholders, including, without limitation, any adverse result or other determination in connection with an appeal of the decision rendered by the Delaware Court of Chancery in May, 1997 in respect of the suit described in Item 3 of the Company's Form 10-K for the year ended December 31, 1996 (such earliest date, the "Maturity Date"). Payment shall be made at such place as designated by the Holder upon surrender of this Senior Secured Convertible Bridge Note, and shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. This Senior Secured Convertible Bridge Note is one of a duly authorized issue of Genta Incorporated 12% Senior Convertible Bridge Notes in an aggregate principal amount of $3,000,000 (individually a "Note" and collectively the "Notes") issued pursuant to a Note and Warrant Purchase Agreement dated January 28, 1997 between the Company and the Holder (the "Purchase Agreement"). The Senior Secured Convertible Bridge Notes shall be senior to all other indebtedness of the Company ("Other Indebtedness") and all Other Indebtedness shall be subordinated to the Senior Bridge Notes. These Notes are secured pursuant to the Security Agreement dated as of January 28, 1997 by and between the Company, Paramount Capital, Inc. and the Purchasers. SECTION 1. PREPAYMENT. This Note (including interest accrued on the principal hereof) may be prepaid by the Company, at any time without penalty or premium provided that the Company shall provide the holders of the Notes with at least 30 days prior written notice of prepayment, and prior to such prepayment, the holders of the Notes shall have the opportunity to exercise their optional conversion rights pursuant to Section 2 hereof. SECTION 2. OPTIONAL CONVERSION (a) Right of Conversion. (i) Immediately, or, (ii) if the rules of the Nasdaq National Market or any other law or regulation, require the approval of the shareholders of the Company to permit convertibility of the Notes, then upon the receipt of such approvals, the Notes shall be convertible, in whole or in part, at the option of the holder thereof and upon notice to the Corporation as set forth in paragraph 2(b) below, into the number of shares of Series D Preferred Stock of the Company (the "Preferred Stock") equal to the Conversion Amount divided by the then current Conversion Price (as defined below). The Conversion Amount shall be the Liquidation Amount, or in the case of a partial conversion, such lesser amount as designated by the converting holder. The Liquidation Amount shall be the aggregate principal value of the Notes held by such Holder plus any accrued and unpaid interest. The Conversion Price shall initially be $50.00, subject to adjustment as provided below, representing an initial conversion rate (subject to adjustment) of 200 shares of Preferred Stock per $10,000 of Conversion Amount. Notwithstanding anything to the contrary contained in this Note, no right of conversion shall exist if and only to the extent that such conversion would result in the occurrence of a "Fundamental Change" under Article IV of the Corporation's Restated Certificate of Incorporation. (b) Conversion Procedures. Any holder of Notes desiring to convert such Notes into Preferred Stock shall surrender the Notes at the offices of the Company, which Notes shall be accompanied by irrevocable written notice to the Corporation that the holder elects so to convert such Notes and specifying the name or names (with address) in which a certificate or certificates evidencing shares of Preferred Stock are to be issued. The Corporation will make a notation of the date that a notice of conversion is received, which date shall be deemed to be the date of receipt for purposes hereof. The Corporation shall deliver to the holder converting the Notes, or to the nominee or nominees of such person, certificates evidencing the number of full shares of 2 Preferred Stock to which such person shall be entitled as aforesaid, together with a cash adjustment of any fraction of a share as hereinafter provided. Subject to the following provisions of this paragraph, such conversion shall be deemed to have been made as of the date of such surrender of the Notes and the person or persons entitled to receive the Preferred Stock deliverable upon conversion of such Notes shall be treated for all purposes as the record holder or holders of such Preferred Stock on such date; provided, however, that the Corporation shall not be required to convert any Notes while the stock transfer books of the Corporation are closed for any purpose, but the surrender of Notes for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books as if the surrender had been made on the date of such reopening, and the conversion shall be at the conversion rate in effect on such date. All notices of conversion shall be irrevocable; provided, however, that if the Corporation has sent notice of an event pursuant to paragraph 2(e) hereof, a holder of Notes may, at its election, provide in its notice of conversion that the conversion of its Notes shall be contingent upon the occurrence of the record date or effectiveness of such event (as specified by such holder), provided that such notice of conversion is received by the Corporation prior to such record date or effective date, as the case may be. (c) Protection From Dilution. (i) If, at any time or from time to time after the date of this Note, the Company shall issue or distribute to the holders of shares of Preferred Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding a subdivision, combination or reclassification, or dividend or distribution payable solely to holders of Preferred Stock in shares of Preferred Stock, referred to in Subsection (c)(ii), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor in the full amount thereof (any such non-excluded event being herein called a "SPECIAL DIVIDEND"), the Conversion Price shall be adjusted by multiplying the Conversion Price then in effect by a fraction, the numerator of which shall be the then Current Market Price Per Share of Preferred Stock in effect on the record date of such issuance or distribution less the fair market value (as determined in good faith by the Company's Board of Directors) of the evidence of indebtedness, cash, securities or property, or other assets issued or distributed in such Special Dividend applicable to one share of Preferred Stock and the denominator of which shall be the then Current Market Price Per Share of Preferred Stock in effect on the record date of such issuance or distribution. An adjustment made pursuant to this Subsection 2(a) shall become effective immediately after the record date of any such Special Dividend. The then "CURRENT MARKET PRICE PER SHARE OF PREFERRED STOCK" shall equal the then Current Market Price multiplied by the then effective "Conversion Rate" (as defined and used in the Certificate of Designation for the Preferred Stock). The then Current Market Price per share (the "CURRENT MARKET PRICE") shall be deemed to be the last sale price of the Common Stock on the trading day prior to such date or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading 3 on any such exchange, the representative closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no longer reporting such information, or, if the Common Stock is not reported on NASDAQ, the high per share bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization, or if not so available, the fair market value of the Common Stock as determined in good faith by the Board of Directors. (ii) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Preferred Stock, (ii) subdivide its outstanding shares of Preferred Stock into a greater number of shares, (iii) combine its outstanding shares of Preferred Stock into a smaller number of shares or (iv) issue by reclassification of its Preferred Stock any shares of capital stock of the Company (other than the Conversion Shares), the Conversion Price shall be proportionately adjusted so that the Notes shall be convertible into a number and kind of securities which the holders would have been entitled to receive after any such event had they converted the Notes immediately prior thereto. An adjustment made pursuant to this Subsection 2(c)(ii) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (iii) Except as provided in Subsections (c)(i) and (c)(iv), in case the Company shall hereafter issue or sell any Preferred Stock, any securities convertible into Preferred Stock, any rights, options or warrants to purchase Preferred Stock or any securities convertible into Preferred Stock, in each case for a price per share or entitling the holders thereof to purchase Preferred Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such securities plus the total consideration, if any, payable to the Company upon exercise or conversion thereof (the "TOTAL CONSIDERATION") by (ii) the number of additional shares of Preferred Stock issuable upon exercise or conversion of such securities) which is less than either the then Current Market Price Per Share of Preferred Stock in effect on the date of such issuance or sale or the Conversion Price, the Conversion Price shall be adjusted as of the date of such issuance or sale by multiplying the Conversion Price then in effect by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Preferred Stock outstanding on the record date of such issuance or sale plus (B) the Total Consideration divided by the Current Market Price Per Share of Preferred Stock or the current Conversion Price, whichever is greater, and the denominator of which shall be (y) the number of shares of Preferred Stock outstanding on the record date of such issuance or sale plus the maximum number of additional shares of Preferred Stock issued, sold or issuable upon exercise or conversion of such securities. (iv) In case of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as a entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in 4 connection with a merger of a third corporation into the Company), the Holder of this Note shall have the right thereafter to receive on the conversion of this Note the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Note been converted immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 2 with respect to the rights and interests thereafter of the Holder of this Note to the end that the provisions set forth in this Section 2 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the Note. The above provisions of this Subsection (c)(iv) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The Company shall require the issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Note to be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Notes not less than 30 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (v) In case any event shall occur as to which the other provisions of this Section 2 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the conversion rights represented by this Note in accordance with the essential intent and principles hereof then, in each such case, the Holders of Notes may appoint a firm of independent public accountants of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the conversion rights. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Note and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. (vi) For purposes of the anti-dilution protection contained in this Section (c), at all times following the conversion of all shares of Preferred Stock into shares of Common Stock, the term Preferred Stock shall be read to be Common Stock, context permitting, so that the anti-dilution provisions will continue to protect the conversion rights represented by this Note after the conversion of all the Preferred Stock into the Common Stock in accordance with the essential intent and principles of this Section 3 (it being understood that prior to such conversion, the anti-dilution provisions of the Preferred Stock underlying this Note shall be applicable to any dilutive events with respect to the Common Stock and protect the Holder from dilution of the Common Stock). 5 (d) Reservation of Shares; Transfer Taxes; Etc. The Corporation shall at all times reserve and keep available, out of its authorized and unissued shares of Preferred Stock, solely for the purpose of effecting the conversion of the Notes, such number of shares of its Preferred Stock free of preemptive rights as shall be sufficient to effect the conversion of all Notes from time to time outstanding. The Corporation shall use its best efforts from time to time, in accordance with the laws of the State of Delaware, to increase the authorized number of shares of Preferred Stock if at any time the number of shares of Preferred Stock not outstanding shall not be sufficient to permit the conversion of all the then-outstanding Notes. The Corporation shall pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Preferred Stock on conversion of the Notes. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Preferred Stock (or other securities or assets) in a name other than that in which the Notes so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (e) Prior Notice of Certain Events. In case: (i) the Corporation shall declare any dividend (or any other distribution); or (ii) the Corporation shall authorize the granting to the holders of Preferred Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights or warrants; or (iii) of any reclassification of Preferred Stock (other than a subdivision or combination of the outstanding Preferred Stock, or a change in par value, or from par value to no par value, or from no par value to par value); or (iv) of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation shall be required, or of the sale or transfer of all or substantially all of the assets of the Corporation or of any compulsory share exchange whereby the Preferred Stock is converted into other securities, cash or other property; or (v) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be mailed to the holders of Notes, at their last addresses as they shall appear upon the books of the Corporation, at least 20 days prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record (if any) is to be taken for the purpose of such dividend, distribution or granting of rights or warrants or, if a record is not to be taken, the date as of which the holders of Preferred Stock of record to be 6 entitled to such dividend, distribution, rights or warrants are to be determined and a description of the cash, securities or other property to be received by such holders upon such dividend, distribution or granting of rights or warrants or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up or other liquidation event is expected to become effective, the date as of which it is expected that holders of Preferred Stock of record shall be entitled to exchange their shares of Preferred Stock for securities or other property deliverable upon such exchange, dissolution, liquidation or winding up or other liquidation event and the consideration, including securities or other property, to be received by such holders upon such exchange; provided, however, that no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the corporate action required to be specified in such notice. (f) Other Changes in Conversion Rate. The Corporation from time to time may increase the Conversion Rate by any amount for any period of time if the period is at least 20 days and if the increase is irrevocable during the period. Whenever the Conversion Rate is so increased, the Corporation shall mail to holders of record of Notes a notice of the increase at least 15 days before the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period it will be in effect. The Corporation may make such increases in the Conversion Rate, in addition to those required or allowed by this paragraph 4, as shall be determined by it, as evidenced by a resolution of the Board of Directors, to be advisable in order to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. SECTION 3. DEFAULT CONVERSION. (a) If this Note and all accrued interest shall not have been paid in full on or before the Maturity Date or upon the occurrence of an Event of Default (as defined in Section 7 hereof), the Holder shall have the right (the "Default Conversion Right"), in addition to any other available remedies set forth in Section 8 hereof or at law or in equity, to convert up to the lesser of (i) the then outstanding principal amount of this Note or (ii) 10% of the original principal amount of this Note, into the number of shares of Common Stock of the Company ("Common Stock"), equal to the amount converted by the Noteholder upon such Event of Default (the "Default Conversion Amount") divided by $.001 (the "Default Conversion Price"). Upon conversion, the Company shall pay all accrued and unpaid interest on the Default Conversion Amount. (b) To exercise the Default Conversion Right, the Holder, on or before the 60th day after the Maturity Date, but before payment in full of the then outstanding principal and interest under this Note, shall deliver to the Company, at its office at as set forth in section 11, or at such other place as is designated in writing by the Company, a notice (the "Conversion Notice") stating that the Holder is exercising the Default Conversion Right, the Default 7 Conversion Amount and the name or names in which the Holder wishes the certificates for shares of Common Stock to be issued. (c) To the extent permitted by applicable law, upon exercise of the Default Conversion Right, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise (the "Conversion Shares"), notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Conversion Shares shall not then have been actually delivered to the Holder. As soon as practicable and in any event within five (5) days after exercise of the Default Conversion Right, the Company shall issue and deliver to the Holder a certificate or certificates evidencing the Conversion Shares registered in the name of the Holder or its designee, provided that the Company may require the holder, by notice given to the Holder promptly after receipt of the Conversion Notice, as a condition to the delivery of such certificate or certificates, to present this Note to the Company for the placement hereon of a legend indicating that the Default Conversion Right has been exercised to the extent of the Default Conversion Amount, and this Note (unless thereby paid in full) shall be immediately returned to the Holder. (d) The issuance of any shares or other securities upon the exercise of the Default Conversion Right, and the delivery of certificates or other instruments representing such shares or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (e) The Holder shall not have, solely on account of such status as a Holder of this Note, any rights of a stockholder of the Company, either at law or in equity, or any notice of meetings of stockholders or of any other proceedings of the Company except as provided in this Note. (f) The Company shall at all times following the Issuance Date, reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of providing for the exercise of the Default Conversion Right, such number of shares of Common Stock as shall, from time to time, be sufficient for the exercise of the Default Conversion Right in full. The Company covenants that all shares of Common Stock issuable upon exercise of the Default Conversion Right shall be validly issued, fully paid and nonassessable. (g) The anti-dilution protections set forth in Section 2(c) hereof shall apply as well to the Default Conversion Right and the adjustment of the Default Conversion Price hereunder, provided, however, that for purposes of such application all appropriate references to Preferred Stock shall be read as references to Common Stock and all references to the Conversion Price shall be read as references to the Default Conversion Price, so as to give the Default 8 Conversion Rights, as nearly as practicable, the anti-dilution and other protections provided for in section 2(c) with respect to the Optional Conversion Right. SECTION 4. FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise of the Optional and Default Conversion Right. If any fraction of a share would be issuable on any exercise of the Optional or Default Conversion Right (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the closing price for the Common Stock on the trading date immediately preceding the date of exercise of the Optional or Default Conversion Right. SECTION 5. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company covenants and agrees that until the payment in full of this Note, the Company shall: (a) Existence; Business. (i) Preserve, renew and keep in full force and effect its legal existence and (ii) obtain, preserve, renew, extend and keep in full force and effect the licenses, permits, authorizations, patents, trademarks and trade names material to its business. (b) Use of Proceeds. Use the proceeds of the Notes of this issue solely as set forth in Section 7.7 of the Note and Warrant Purchase Agreement between the Company and various purchasers dated the date hereof (the "Purchase Agreement") (c) Reports. Furnish to the Holder, at the time furnished to the Company's stockholders, reports furnished generally to the Company's stockholders, and copies of Current Reports on Form 8-K. (d) Notice of Events of Default. Furnish to the Holder prompt written notice of any Event of Default, specifying the nature and extent thereof and corrective action, if any, proposed to be taken with respect thereto. (e) Authorization of Stock Issuable Upon Conversion. No later than the Maturity Date, authorize and reserve a sufficient number of its shares for exercise of the Default Conversion Right. SECTION 6. NEGATIVE COVENANTS OF THE COMPANY. The Company covenants and agrees with the Holder that until the payment in full of this Note, the Company shall not: 9 (a) Indebtedness. Incur, create, assume or permit to exist any indebtedness except (i) indebtedness represented by the Notes, (ii) indebtedness which by its terms is subordinated to the Notes in an amount less than $25,000 in the aggregate (iii) indebtedness in an amount less than fifty thousand dollars ($50,000) incurred in the ordinary course of business, and (iv) indebtedness for borrowed money existing on the date hereof and disclosed in writing to the Holder on or prior to the date hereof, but not any extensions, renewals or replacements of such indebtedness; (b) Liens. Create, incur, assume or permit to exist any lien on any property or assets (including stock or other securities of any person) now owned or hereafter acquired by the Company, except (i) liens for taxes not yet due or which are being contested by appropriate proceedings; (ii) carriers', warehousemen's, mechanic's, materialmen's, repairmen's or other like liens arising in the ordinary course of business and securing obligations that are not due or which are being contested; or (iii) liens of attachments, judgments or awards against the Company (X) which could not reasonably be expected to have an adverse material effect on the Company or (Y) with respect to which an appeal or proceeding for review shall be pending or a stay of execution shall have been obtained, or which are otherwise being contested in good faith and by appropriate proceedings, or (iv) purchase money liens, equipment leases and financings incurred in the ordinary course of business. (c) Sale and Lease-Back Transactions. Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent (including intellectual property), lease or license such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred. (d) Mergers, Consolidations, Sales of Assets and Acquisitions. Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or a substantial part of its assets (whether now owned or hereafter acquired) or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or a substantial part of the assets of any other person. (e) Dividends and Distributions. Declare or pay, directly or indirectly, any dividend or make any other distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, with respect to any shares of its capital stock or directly or indirectly redeem, purchase, retire or otherwise acquire for value any shares of any class of its capital stock or set aside any amount for any such purpose, except as permitted by Section 7.15 of the Note and Warrant Agreement. (f) No Impairment. By amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as 10 may be necessary or appropriate in order to protect the rights of the Holder of this Note against impairment. SECTION 7. EVENTS OF DEFAULT DEFINED. The following shall each constitute an "Event of Default" hereunder: (a) the failure of the Company to make any payment of principal of or interest on this Note when due and payable; (b) the failure of the Company to observe or perform any covenant in this Note or in the Purchase Agreement, and such failure shall have continued unremedied for a period of five (5) days; (c) if the Company shall: (1) admit in writing its inability to pay its debts generally as they become due, (2) file a petition in bankruptcy or a petition to take advantage of any insolvency act, (3) make an assignment for the benefit of its creditors, (4) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, (5) on a petition in bankruptcy filed against, be adjudicated a bankrupt, or (6) file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof; (d) if a court of competent jurisdiction shall enter an order, judgment or decree appointing, without the consent of the Company, a receiver of the Company or of the whole or any substantial part of its property, or approving a petition filed against it seeking reorganization or arrangement of the Company under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any State thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within thirty (30) days from the date of entry thereof; 11 (e) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Company or the whole or any substantial part of its property and such custody or control shall not be terminated or stayed within thirty (30) days from the date of assumption of such custody or control; (f) the liquidation, dissolution or winding up of the Company; (g) the failure of the shareholders to authorize and approve the issuance of these Notes or the issuance of the shares of Preferred Stock underlying these Notes, the Bridge Warrants or the New Warrants (as such terms are defined in the Purchase Agreement), or any Common Stock underlying the foregoing to the extent such authorization is necessary pursuant to the rules of the Nasdaq National Market or any other applicable law, rule or regulation. (h) A default or event of default which remains uncured following any applicable cure period under the Security Agreement; or (i) A final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate shall be rendered by one or more courts, administrative or arbitral tribunals or other bodies having jurisdiction against the Company and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company shall not, within such 30-day period, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or SECTION 8. REMEDIES UPON EVENT OF DEFAULT. (a) Upon the occurrence of an Event of Default, (i) the entire principal amount of, and all accrued and unpaid interest on, this Note shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company and (ii) additional interest shall begin to accrue, and shall be considered immediately due and payable, on the unpaid principal amount of this Note at the rate of eighteen percent (18%) per annum and shall continue to accrue until the initial interest and additional interest is paid. In addition, the Holder may take any action available to it under the Purchase Agreement or at law or in equity or by statute or otherwise. (b) No remedy herein conferred upon the Holder of this Note is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 12 SECTION 9. NOTE REGISTER. (a) The Company shall keep at its principal executive office a register (herein sometimes referred to as the "Note Register"), in which, subject to such reasonable regulations as it may prescribe, but at its expense (other than transfer taxes, if any), the Company shall provide for the registration and transfer of this Note. (b) Whenever this Note shall be surrendered at the principal executive office of the Company for transfer or exchange, accompanied by a written instrument of transfer in form reasonably satisfactory to the Company duly executed by the Holder hereof or his attorney duly authorized in writing, the Company shall execute and deliver in exchange therefor a new Note or Notes, as may be requested by such Holder, in the same aggregate unpaid principal amount and payable on the same date as the principal amount of the Note or Notes so surrendered; each such new Note shall be dated as of the date to which interest has been paid on the unpaid principal amount of the Note or Notes so surrendered and shall be in such principal amount and registered in such name or names as such Holder may designate in writing. (c) Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note and of indemnity reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Note (in case of mutilation) the Company will make and deliver in lieu of this Note a new Note of like tenor and unpaid principal amount and dated as of the date to which interest has been paid on the unpaid principal amount of this Note in lieu of which such new Note is made and delivered. SECTION 10. REGISTRATION UNDER SECURITIES ACT OF 1933. The Holder of this Note shall have registration rights as provided in Section 8 of the Purchase Agreement, with respect to the shares of Common Stock underlying the Preferred Stock issuable upon conversion of the Notes pursuant to the Optional and Default Conversion Right. If the Holder is not a party to the Purchase Agreement, by acceptance of this Note, the Holder agrees to comply with provisions of Section 8 of the Purchase Agreement to the same extent as if it were a party thereto. SECTION 11. MISCELLANEOUS. (a) Amendments and Waivers. The holders of sixty-six and two-thirds percent (66 2/3%) or more in principal amount of outstanding Notes of this issue may waive or otherwise consent to the amendment of any of the provisions hereof, provided that no such waiver or amendment may reduce the principal amount of or interest on any of the Notes of this issue or change the stated maturity of the principal or reduce the percentage of holders of Notes of this issue necessary to waive or amend the provisions of this Note, without the consent of each holder of any Note affected thereby. 13 (b) Restrictions on Transferability. In addition to the restrictions set forth in Section 9(a) of this Note, the securities represented by this Note have been acquired for investment and have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state or other jurisdiction. Without such registration, such securities may not be sold, pledged, hypothecated or otherwise transferred, except pursuant to exemptions from the Securities Act of 1933, and the securities laws of any state or other jurisdiction. Notwithstanding the above, the holder of this Note has been provided the registration rights contained in Section 8 of the Purchase Agreement with respect to the shares of the Company's Common Stock which may be acquired upon exercise of the Optional and Default Conversion Right. (c) Forbearance from Suit. No holder of Notes of this issue shall institute any suit or proceeding for the enforcement of the payment of principal or interest unless the holders of at least fifty-one percent (51%) in principal amount of all of the outstanding Notes of this issue join in such suit or proceeding. (d) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York, excluding the body of law relating to conflict of laws. Notwithstanding anything to the contrary contained herein, in no event may the effective rate of interest collected or received by the Holder exceed that which may be charged, collected or received by the Holder under applicable law. (e) Interpretation. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby. (f) Successors and Assigns. This Note shall be binding upon the Company and its successors and assigns and shall inure to the benefit of the Holder and its successors and assigns. (g) Notices. All notices, requests, consents and demands shall be made in writing and shall be mailed postage prepaid, or delivered by hand, to the Company or to the Holder thereof at their respective addresses set forth below or to such other address as may be furnished in writing to the other party hereto: If to the Holder: At the address shown on Schedule A attached hereto. with a copy to: Paramount Capital, Inc. 787 Seventh Avenue New York, NY 10019 Attn: David R. Walner If to the Company: Genta Incorporated 3350 General Atomics Court 14 San Diego, CA 92121 Attention: Chief Executive Officer (h) Saturdays, Sundays, Holidays. If any date that may at any time be specified in this Note as a date for the making of any payment of principal or interest under this Note shall fall on Saturday, Sunday or on a day which in New York shall be a legal holiday, then the date for the making of that payment shall be the next subsequent day which is not a Saturday, Sunday or legal holiday. (i) Purchase Agreement. This Note is subject to the terms contained in the Purchase Agreement dated the date hereof between the Company and certain purchasers of the Senior Secured Convertible Bridge Notes and the holder of this Note is entitled to the benefits of such Purchase Agreement and may, in addition to any rights hereunder, enforce the agreements of the Company contained therein and exercise the remedies provided for thereby or otherwise available in respect thereof. 15 IN WITNESS WHEREOF, this Note has been executed and delivered as a sealed instrument on the date first above written by the duly authorized representative of the Company. ATTEST: GENTA INCORPORATED _______________________ By: ________________________________ Name: Its: (Corporate Seal) 16 EX-10.103 6 AMENDED AND RESTATED SENIOR SECURED BRIDGE NOTE THIS NOTE IS NOT TRANSFERABLE WITHOUT THE EXPRESS WRITTEN CONSENT OF GENTA INCORPORATED, (THE "COMPANY"). THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE SECURITIES LAWS. GENTA INCORPORATED No. B-2 AMENDED AND RESTATED SENIOR SECURED CONVERTIBLE BRIDGE NOTE $1,950,000 New York, New York January 28, 1997, as amended and restated on June 23, 1997 Genta Incorporated, a Delaware corporation, (the "Company"), for value received, hereby promises to pay to THE ARIES TRUST (the "Holder"), or registered assigns, the principal sum of ONE MILLION NINE HUNDRED FIFTY THOUSAND DOLLARS ($1,950,000), with interest from the date of original issuance of this Senior Secured Convertible Bridge Note on the unpaid principal balance at a rate equal to twelve percent (12%) per annum, on the earlier of (a) December 31, 1997, (b) September 30, 1997 if on or prior to such date the Company has not received gross proceeds of at least $2,000,000 in respect of its offering of Premium Preferred Units which was commenced in May, 1997 and (c) the date of any decision, order or other determination adverse to the Company or any of its directors by any court or other tribunal in any lawsuit or other proceeding against the Company and/or any of its directors by any of the Company's preferred stockholders, including, without limitation, any adverse result or other determination in connection with an appeal of the decision rendered by the Delaware Court of Chancery in May, 1997 in respect of the suit described in Item 3 of the Company's Form 10-K for the year ended December 31, 1996 (such earliest date, the "Maturity Date"). Payment shall be made at such place as designated by the Holder upon surrender of this Senior Secured Convertible Bridge Note, and shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. This Senior Secured Convertible Bridge Note is one of a duly authorized issue of Genta Incorporated 12% Senior Convertible Bridge Notes in an aggregate principal amount of $3,000,000 (individually a "Note" and collectively the "Notes") issued pursuant to a Note and Warrant Purchase Agreement dated January 28, 1997 between the Company and the Holder (the "Purchase Agreement"). The Senior Secured Convertible Bridge Notes shall be senior to all other indebtedness of the Company ("Other Indebtedness") and all Other Indebtedness shall be subordinated to the Senior Bridge Notes. These Notes are secured pursuant to the Security Agreement dated as of January 28, 1997 by and between the Company, Paramount Capital, Inc. and the Purchasers. SECTION 1. PREPAYMENT. This Note (including interest accrued on the principal hereof) may be prepaid by the Company, at any time without penalty or premium provided that the Company shall provide the holders of the Notes with at least 30 days prior written notice of prepayment, and prior to such prepayment, the holders of the Notes shall have the opportunity to exercise their optional conversion rights pursuant to Section 2 hereof. SECTION 2. OPTIONAL CONVERSION (a) Right of Conversion. (i) Immediately, or, (ii) if the rules of the Nasdaq National Market or any other law or regulation, require the approval of the shareholders of the Company to permit convertibility of the Notes, then upon the receipt of such approvals, the Notes shall be convertible, in whole or in part, at the option of the holder thereof and upon notice to the Corporation as set forth in paragraph 2(b) below, into the number of shares of Series D Preferred Stock of the Company (the "Preferred Stock") equal to the Conversion Amount divided by the then current Conversion Price (as defined below). The Conversion Amount shall be the Liquidation Amount, or in the case of a partial conversion, such lesser amount as designated by the converting holder. The Liquidation Amount shall be the aggregate principal value of the Notes held by such Holder plus any accrued and unpaid interest. The Conversion Price shall initially be $50.00, subject to adjustment as provided below, representing an initial conversion rate (subject to adjustment) of 200 shares of Preferred Stock per $10,000 of Conversion Amount. Notwithstanding anything to the contrary contained in this Note, no right of conversion shall exist if and only to the extent that such conversion would result in the occurrence of a "Fundamental Change" under Article IV of the Corporation's Restated Certificate of Incorporation. (b) Conversion Procedures. Any holder of Notes desiring to convert such Notes into Preferred Stock shall surrender the Notes at the offices of the Company, which Notes shall be accompanied by irrevocable written notice to the Corporation that the holder elects so to convert such Notes and specifying the name or names (with address) in which a certificate or certificates evidencing shares of Preferred Stock are to be issued. The Corporation will make a notation of the date that a notice of conversion is received, which date shall be deemed to be the date of receipt for purposes hereof. The Corporation shall deliver to the holder converting the Notes, or to the nominee or nominees of such person, certificates evidencing the number of full shares of 2 Preferred Stock to which such person shall be entitled as aforesaid, together with a cash adjustment of any fraction of a share as hereinafter provided. Subject to the following provisions of this paragraph, such conversion shall be deemed to have been made as of the date of such surrender of the Notes and the person or persons entitled to receive the Preferred Stock deliverable upon conversion of such Notes shall be treated for all purposes as the record holder or holders of such Preferred Stock on such date; provided, however, that the Corporation shall not be required to convert any Notes while the stock transfer books of the Corporation are closed for any purpose, but the surrender of Notes for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books as if the surrender had been made on the date of such reopening, and the conversion shall be at the conversion rate in effect on such date. All notices of conversion shall be irrevocable; provided, however, that if the Corporation has sent notice of an event pursuant to paragraph 2(e) hereof, a holder of Notes may, at its election, provide in its notice of conversion that the conversion of its Notes shall be contingent upon the occurrence of the record date or effectiveness of such event (as specified by such holder), provided that such notice of conversion is received by the Corporation prior to such record date or effective date, as the case may be. (c) Protection From Dilution. (i) If, at any time or from time to time after the date of this Note, the Company shall issue or distribute to the holders of shares of Preferred Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding a subdivision, combination or reclassification, or dividend or distribution payable solely to holders of Preferred Stock in shares of Preferred Stock, referred to in Subsection (c)(ii), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor in the full amount thereof (any such non-excluded event being herein called a "SPECIAL DIVIDEND"), the Conversion Price shall be adjusted by multiplying the Conversion Price then in effect by a fraction, the numerator of which shall be the then Current Market Price Per Share of Preferred Stock in effect on the record date of such issuance or distribution less the fair market value (as determined in good faith by the Company's Board of Directors) of the evidence of indebtedness, cash, securities or property, or other assets issued or distributed in such Special Dividend applicable to one share of Preferred Stock and the denominator of which shall be the then Current Market Price Per Share of Preferred Stock in effect on the record date of such issuance or distribution. An adjustment made pursuant to this Subsection 2(a) shall become effective immediately after the record date of any such Special Dividend. The then "CURRENT MARKET PRICE PER SHARE OF PREFERRED STOCK" shall equal the then Current Market Price multiplied by the then effective "conversion rate" (as defined and used in the Certificate of Designation for the Preferred Stock). The then Current Market Price per share (the "CURRENT MARKET PRICE") shall be deemed to be the last sale price of the Common Stock on the trading day prior to such date or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading 3 on any such exchange, the representative closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no longer reporting such information, or, if the Common Stock is not reported on NASDAQ, the high per share bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization, or if not so available, the fair market value of the Common Stock as determined in good faith by the Board of Directors. (ii) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Preferred Stock, (ii) subdivide its outstanding shares of Preferred Stock into a greater number of shares, (iii) combine its outstanding shares of Preferred Stock into a smaller number of shares or (iv) issue by reclassification of its Preferred Stock any shares of capital stock of the Company (other than the Conversion Shares), the Conversion Price shall be proportionately adjusted so that the Notes shall be convertible into a number and kind of securities which the holders would have been entitled to receive after any such event had they converted the Notes immediately prior thereto. An adjustment made pursuant to this Subsection 2(c)(ii) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (iii) Except as provided in Subsections (c)(i) and (c)(iv), in case the Company shall hereafter issue or sell any Preferred Stock, any securities convertible into Preferred Stock, any rights, options or warrants to purchase Preferred Stock or any securities convertible into Preferred Stock, in each case for a price per share or entitling the holders thereof to purchase Preferred Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such securities plus the total consideration, if any, payable to the Company upon exercise or conversion thereof (the "TOTAL CONSIDERATION") by (ii) the number of additional shares of Preferred Stock issuable upon exercise or conversion of such securities) which is less than either the then Current Market Price Per Share of Preferred Stock in effect on the date of such issuance or sale or the Conversion Price, the Conversion Price shall be adjusted as of the date of such issuance or sale by multiplying the Conversion Price then in effect by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Preferred Stock outstanding on the record date of such issuance or sale plus (B) the Total Consideration divided by the Current Market Price Per Share of Preferred Stock or the current Conversion Price, whichever is greater, and the denominator of which shall be (y) the number of shares of Preferred Stock outstanding on the record date of such issuance or sale plus the maximum number of additional shares of Preferred Stock issued, sold or issuable upon exercise or conversion of such securities. (iv) In case of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as a entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in 4 connection with a merger of a third corporation into the Company), the Holder of this Note shall have the right thereafter to receive on the conversion of this Note the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Note been converted immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 2 with respect to the rights and interests thereafter of the Holder of this Note to the end that the provisions set forth in this Section 2 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the Note. The above provisions of this Subsection (c)(iv) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The Company shall require the issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Note to be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Notes not less than 30 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (v) In case any event shall occur as to which the other provisions of this Section 2 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the conversion rights represented by this Note in accordance with the essential intent and principles hereof then, in each such case, the Holders of Notes may appoint a firm of independent public accountants of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the conversion rights. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Note and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. (vi) For purposes of the anti-dilution protection contained in this Section (c), at all times following the conversion of all shares of Preferred Stock into shares of Common Stock, the term Preferred Stock shall be read to be Common Stock, context permitting, so that the anti-dilution provisions will continue to protect the conversion rights represented by this Note after the conversion of all the Preferred Stock into the Common Stock in accordance with the essential intent and principles of this Section 3 (it being understood that prior to such conversion, the anti-dilution provisions of the Preferred Stock underlying this Note shall be applicable to any dilutive events with respect to the Common Stock and protect the Holder from dilution of the Common Stock). 5 (d) Reservation of Shares; Transfer Taxes; Etc. The Corporation shall at all times reserve and keep available, out of its authorized and unissued shares of Preferred Stock, solely for the purpose of effecting the conversion of the Notes, such number of shares of its Preferred Stock free of preemptive rights as shall be sufficient to effect the conversion of all Notes from time to time outstanding. The Corporation shall use its best efforts from time to time, in accordance with the laws of the State of Delaware, to increase the authorized number of shares of Preferred Stock if at any time the number of shares of Preferred Stock not outstanding shall not be sufficient to permit the conversion of all the then-outstanding Notes. The Corporation shall pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Preferred Stock on conversion of the Notes. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Preferred Stock (or other securities or assets) in a name other than that in which the Notes so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (e) Prior Notice of Certain Events. In case: (i) the Corporation shall declare any dividend (or any other distribution); or (ii) the Corporation shall authorize the granting to the holders of Preferred Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights or warrants; or (iii) of any reclassification of Preferred Stock (other than a subdivision or combination of the outstanding Preferred Stock, or a change in par value, or from par value to no par value, or from no par value to par value); or (iv) of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation shall be required, or of the sale or transfer of all or substantially all of the assets of the Corporation or of any compulsory share exchange whereby the Preferred Stock is converted into other securities, cash or other property; or (v) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be mailed to the holders of Notes, at their last addresses as they shall appear upon the books of the Corporation, at least 20 days prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record (if any) is to be taken for the purpose of such dividend, distribution or granting of rights or warrants or, if a record is not to be taken, the date as of which the holders of Preferred Stock of record to be 6 entitled to such dividend, distribution, rights or warrants are to be determined and a description of the cash, securities or other property to be received by such holders upon such dividend, distribution or granting of rights or warrants or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up or other liquidation event is expected to become effective, the date as of which it is expected that holders of Preferred Stock of record shall be entitled to exchange their shares of Preferred Stock for securities or other property deliverable upon such exchange, dissolution, liquidation or winding up or other liquidation event and the consideration, including securities or other property, to be received by such holders upon such exchange; provided, however, that no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the corporate action required to be specified in such notice. (f) Other Changes in Conversion Rate. The Corporation from time to time may increase the Conversion Rate by any amount for any period of time if the period is at least 20 days and if the increase is irrevocable during the period. Whenever the Conversion Rate is so increased, the Corporation shall mail to holders of record of Notes a notice of the increase at least 15 days before the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period it will be in effect. The Corporation may make such increases in the Conversion Rate, in addition to those required or allowed by this paragraph 4, as shall be determined by it, as evidenced by a resolution of the Board of Directors, to be advisable in order to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. SECTION 3. DEFAULT CONVERSION. (a) If this Note and all accrued interest shall not have been paid in full on or before the Maturity Date or upon the occurrence of an Event of Default (as defined in Section 7 hereof), the Holder shall have the right (the "Default Conversion Right"), in addition to any other available remedies set forth in Section 8 hereof or at law or in equity, to convert up to the lesser of (i) the then outstanding principal amount of this Note or (ii) 10% of the original principal amount of this Note, into the number of shares of Common Stock of the Company ("Common Stock"), equal to the amount converted by the Noteholder upon such Event of Default (the "Default Conversion Amount") divided by $.001 (the "Default Conversion Price"). Upon conversion, the Company shall pay all accrued and unpaid interest on the Default Conversion Amount. (b) To exercise the Default Conversion Right, the Holder, on or before the 60th day after the Maturity Date, but before payment in full of the then outstanding principal and interest under this Note, shall deliver to the Company, at its office at as set forth in section 11, or at such other place as is designated in writing by the Company, a notice (the "Conversion Notice") stating that the Holder is exercising the Default Conversion Right, the Default 7 Conversion Amount and the name or names in which the Holder wishes the certificates for shares of Common Stock to be issued. (c) To the extent permitted by applicable law, upon exercise of the Default Conversion Right, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise (the "Conversion Shares"), notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Conversion Shares shall not then have been actually delivered to the Holder. As soon as practicable and in any event within five (5) days after exercise of the Default Conversion Right, the Company shall issue and deliver to the Holder a certificate or certificates evidencing the Conversion Shares registered in the name of the Holder or its designee, provided that the Company may require the holder, by notice given to the Holder promptly after receipt of the Conversion Notice, as a condition to the delivery of such certificate or certificates, to present this Note to the Company for the placement hereon of a legend indicating that the Default Conversion Right has been exercised to the extent of the Default Conversion Amount, and this Note (unless thereby paid in full) shall be immediately returned to the Holder. (d) The issuance of any shares or other securities upon the exercise of the Default Conversion Right, and the delivery of certificates or other instruments representing such shares or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (e) The Holder shall not have, solely on account of such status as a Holder of this Note, any rights of a stockholder of the Company, either at law or in equity, or any notice of meetings of stockholders or of any other proceedings of the Company except as provided in this Note. (f) The Company shall at all times following the Issuance Date, reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of providing for the exercise of the Default Conversion Right, such number of shares of Common Stock as shall, from time to time, be sufficient for the exercise of the Default Conversion Right in full. The Company covenants that all shares of Common Stock issuable upon exercise of the Default Conversion Right shall be validly issued, fully paid and nonassessable. (g) The anti-dilution protections set forth in Section 2(c) hereof shall apply as well to the Default Conversion Right and the adjustment of the Default Conversion Price hereunder, provided, however, that for purposes of such application all appropriate references to Preferred Stock shall be read as references to Common Stock and all references to the Conversion Price shall be read as references to the Default Conversion Price, so as to give the Default 8 Conversion Rights, as nearly as practicable, the anti-dilution and other protections provided for in section 2(c) with respect to the Optional Conversion Right. SECTION 4. FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise of the Optional and Default Conversion Right. If any fraction of a share would be issuable on any exercise of the Optional or Default Conversion Right (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the closing price for the Common Stock on the trading date immediately preceding the date of exercise of the Optional or Default Conversion Right. SECTION 5. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company covenants and agrees that until the payment in full of this Note, the Company shall: (a) Existence; Business. (i) Preserve, renew and keep in full force and effect its legal existence and (ii) obtain, preserve, renew, extend and keep in full force and effect the licenses, permits, authorizations, patents, trademarks and trade names material to its business. (b) Use of Proceeds. Use the proceeds of the Notes of this issue solely as set forth in Section 7.7 of the Note and Warrant Purchase Agreement between the Company and various purchasers dated the date hereof (the "Purchase Agreement") (c) Reports. Furnish to the Holder, at the time furnished to the Company's stockholders, reports furnished generally to the Company's stockholders, and copies of Current Reports on Form 8-K. (d) Notice of Events of Default. Furnish to the Holder prompt written notice of any Event of Default, specifying the nature and extent thereof and corrective action, if any, proposed to be taken with respect thereto. (e) Authorization of Stock Issuable Upon Conversion. No later than the Maturity Date, authorize and reserve a sufficient number of its shares for exercise of the Default Conversion Right. SECTION 6. NEGATIVE COVENANTS OF THE COMPANY. The Company covenants and agrees with the Holder that until the payment in full of this Note, the Company shall not: 9 (a) Indebtedness. Incur, create, assume or permit to exist any indebtedness except (i) indebtedness represented by the Notes, (ii) indebtedness which by its terms is subordinated to the Notes in an amount less than $25,000 in the aggregate (iii) indebtedness in an amount less than fifty thousand dollars ($50,000) incurred in the ordinary course of business, and (iv) indebtedness for borrowed money existing on the date hereof and disclosed in writing to the Holder on or prior to the date hereof, but not any extensions, renewals or replacements of such indebtedness; (b) Liens. Create, incur, assume or permit to exist any lien on any property or assets (including stock or other securities of any person) now owned or hereafter acquired by the Company, except (i) liens for taxes not yet due or which are being contested by appropriate proceedings; (ii) carriers', warehousemen's, mechanic's, materialmen's, repairmen's or other like liens arising in the ordinary course of business and securing obligations that are not due or which are being contested; or (iii) liens of attachments, judgments or awards against the Company (X) which could not reasonably be expected to have an adverse material effect on the Company or (Y) with respect to which an appeal or proceeding for review shall be pending or a stay of execution shall have been obtained, or which are otherwise being contested in good faith and by appropriate proceedings, or (iv) purchase money liens, equipment leases and financings incurred in the ordinary course of business. (c) Sale and Lease-Back Transactions. Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent (including intellectual property), lease or license such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred. (d) Mergers, Consolidations, Sales of Assets and Acquisitions. Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or a substantial part of its assets (whether now owned or hereafter acquired) or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or a substantial part of the assets of any other person. (e) Dividends and Distributions. Declare or pay, directly or indirectly, any dividend or make any other distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, with respect to any shares of its capital stock or directly or indirectly redeem, purchase, retire or otherwise acquire for value any shares of any class of its capital stock or set aside any amount for any such purpose, except as permitted by Section 7.15 of the Note and Warrant Agreement. (f) No Impairment. By amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as 10 may be necessary or appropriate in order to protect the rights of the Holder of this Note against impairment. SECTION 7. EVENTS OF DEFAULT DEFINED. The following shall each constitute an "Event of Default" hereunder: (a) the failure of the Company to make any payment of principal of or interest on this Note when due and payable; (b) the failure of the Company to observe or perform any covenant in this Note or in the Purchase Agreement, and such failure shall have continued unremedied for a period of five (5) days; (c) if the Company shall: (1) admit in writing its inability to pay its debts generally as they become due, (2) file a petition in bankruptcy or a petition to take advantage of any insolvency act, (3) make an assignment for the benefit of its creditors, (4) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, (5) on a petition in bankruptcy filed against, be adjudicated a bankrupt, or (6) file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof; (d) if a court of competent jurisdiction shall enter an order, judgment or decree appointing, without the consent of the Company, a receiver of the Company or of the whole or any substantial part of its property, or approving a petition filed against it seeking reorganization or arrangement of the Company under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any State thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within thirty (30) days from the date of entry thereof; 11 (e) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Company or the whole or any substantial part of its property and such custody or control shall not be terminated or stayed within thirty (30) days from the date of assumption of such custody or control; (f) the liquidation, dissolution or winding up of the Company; (g) the failure of the shareholders to authorize and approve the issuance of these Notes or the issuance of the shares of Preferred Stock underlying these Notes, the Bridge Warrants or the New Warrants (as such terms are defined in the Purchase Agreement), or any Common Stock underlying the foregoing to the extent such authorization is necessary pursuant to the rules of the Nasdaq National Market or any other applicable law, rule or regulation. (h) A default or event of default which remains uncured following any applicable cure period under the Security Agreement; or (i) A final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate shall be rendered by one or more courts, administrative or arbitral tribunals or other bodies having jurisdiction against the Company and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company shall not, within such 30-day period, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or SECTION 8. REMEDIES UPON EVENT OF DEFAULT. (a) Upon the occurrence of an Event of Default, (i) the entire principal amount of, and all accrued and unpaid interest on, this Note shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company and (ii) additional interest shall begin to accrue, and shall be considered immediately due and payable, on the unpaid principal amount of this Note at the rate of eighteen percent (18%) per annum and shall continue to accrue until the initial interest and additional interest is paid. In addition, the Holder may take any action available to it under the Purchase Agreement or at law or in equity or by statute or otherwise. (b) No remedy herein conferred upon the Holder of this Note is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 12 SECTION 9. NOTE REGISTER. (a) The Company shall keep at its principal executive office a register (herein sometimes referred to as the "Note Register"), in which, subject to such reasonable regulations as it may prescribe, but at its expense (other than transfer taxes, if any), the Company shall provide for the registration and transfer of this Note. (b) Whenever this Note shall be surrendered at the principal executive office of the Company for transfer or exchange, accompanied by a written instrument of transfer in form reasonably satisfactory to the Company duly executed by the Holder hereof or his attorney duly authorized in writing, the Company shall execute and deliver in exchange therefor a new Note or Notes, as may be requested by such Holder, in the same aggregate unpaid principal amount and payable on the same date as the principal amount of the Note or Notes so surrendered; each such new Note shall be dated as of the date to which interest has been paid on the unpaid principal amount of the Note or Notes so surrendered and shall be in such principal amount and registered in such name or names as such Holder may designate in writing. (c) Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note and of indemnity reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Note (in case of mutilation) the Company will make and deliver in lieu of this Note a new Note of like tenor and unpaid principal amount and dated as of the date to which interest has been paid on the unpaid principal amount of this Note in lieu of which such new Note is made and delivered. SECTION 10. REGISTRATION UNDER SECURITIES ACT OF 1933. The Holder of this Note shall have registration rights as provided in Section 8 of the Purchase Agreement, with respect to the shares of Common Stock underlying the Preferred Stock issuable upon conversion of the Notes pursuant to the Optional and Default Conversion Right. If the Holder is not a party to the Purchase Agreement, by acceptance of this Note, the Holder agrees to comply with provisions of Section 8 of the Purchase Agreement to the same extent as if it were a party thereto. SECTION 11. MISCELLANEOUS. (a) Amendments and Waivers. The holders of sixty-six and two-thirds percent (66 2/3%) or more in principal amount of outstanding Notes of this issue may waive or otherwise consent to the amendment of any of the provisions hereof, provided that no such waiver or amendment may reduce the principal amount of or interest on any of the Notes of this issue or change the stated maturity of the principal or reduce the percentage of holders of Notes of this issue necessary to waive or amend the provisions of this Note, without the consent of each holder of any Note affected thereby. 13 (b) Restrictions on Transferability. In addition to the restrictions set forth in Section 9(a) of this Note, the securities represented by this Note have been acquired for investment and have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state or other jurisdiction. Without such registration, such securities may not be sold, pledged, hypothecated or otherwise transferred, except pursuant to exemptions from the Securities Act of 1933, and the securities laws of any state or other jurisdiction. Notwithstanding the above, the holder of this Note has been provided the registration rights contained in Section 8 of the Purchase Agreement with respect to the shares of the Company's Common Stock which may be acquired upon exercise of the Optional and Default Conversion Right. (c) Forbearance from Suit. No holder of Notes of this issue shall institute any suit or proceeding for the enforcement of the payment of principal or interest unless the holders of at least fifty-one percent (51%) in principal amount of all of the outstanding Notes of this issue join in such suit or proceeding. (d) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York, excluding the body of law relating to conflict of laws. Notwithstanding anything to the contrary contained herein, in no event may the effective rate of interest collected or received by the Holder exceed that which may be charged, collected or received by the Holder under applicable law. (e) Interpretation. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby. (f) Successors and Assigns. This Note shall be binding upon the Company and its successors and assigns and shall inure to the benefit of the Holder and its successors and assigns. (g) Notices. All notices, requests, consents and demands shall be made in writing and shall be mailed postage prepaid, or delivered by hand, to the Company or to the Holder thereof at their respective addresses set forth below or to such other address as may be furnished in writing to the other party hereto: If to the Holder: At the address shown on Schedule A attached hereto. with a copy to: Paramount Capital, Inc. 787 Seventh Avenue New York, NY 10019 Attn: David R. Walner If to the Company: Genta Incorporated 3350 General Atomics Court 14 San Diego, CA 92121 Attention: Chief Executive Officer (h) Saturdays, Sundays, Holidays. If any date that may at any time be specified in this Note as a date for the making of any payment of principal or interest under this Note shall fall on Saturday, Sunday or on a day which in New York shall be a legal holiday, then the date for the making of that payment shall be the next subsequent day which is not a Saturday, Sunday or legal holiday. (i) Purchase Agreement. This Note is subject to the terms contained in the Purchase Agreement dated the date hereof between the Company and certain purchasers of the Senior Secured Convertible Bridge Notes and the holder of this Note is entitled to the benefits of such Purchase Agreement and may, in addition to any rights hereunder, enforce the agreements of the Company contained therein and exercise the remedies provided for thereby or otherwise available in respect thereof. 15 IN WITNESS WHEREOF, this Note has been executed and delivered as a sealed instrument on the date first above written by the duly authorized representative of the Company. ATTEST: GENTA INCORPORATED _______________________ By: ________________________________ Name: Its: (Corporate Seal) 16 EX-10.104 7 NEW CLASS A BRIDGE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE SECURITIES LAWS. GENTA INCORPORATED New Class A Bridge Warrant for the Purchase of Shares of -------------------------------------------------------- Common Stock ------------ No. CA-1 350,000 Shares FOR VALUE RECEIVED, GENTA INCORPORATED., a Delaware corporation (the "COMPANY"), hereby certifies that THE ARIES DOMESTIC FUND, LP or its registered assigns (the "Holder") is entitled to purchase from the Company, subject to the provisions of this Warrant (the "Warrant"), at any time on or after the date hereof (the "INITIAL EXERCISE DATE"), and prior to 5:00 P.M., New York City time, on January 27, 2002 (the "TERMINATION DATE"), 350,000 fully paid and non-assessable shares of the Common Stock, $.001 par value, of the Company ("Common Stock"), at an exercise price of $1.50 per share of Common Stock for an aggregate exercise price of FIVE HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($525,000.00) (the aggregate purchase price payable for the Warrant Shares hereunder is hereinafter sometimes referred to as the "AGGREGATE EXERCISE PRICE"). The number of shares of Common Stock to be received upon exercise of this Warrant and the price to be paid for each share of Common Stock are subject to possible adjustment from time to time as hereinafter set forth. The shares of Common Stock or other securities or property deliverable upon such exercise as adjusted from time to time is hereinafter sometimes referred to as the "WARRANT SHARES." The exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "PER SHARE EXERCISE PRICE." The Per Share Exercise Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall also be adjusted, by dividing the Aggregate Exercise Price by the Per Share Exercise Price in effect immediately after such adjustment. The Aggregate Exercise Price is not subject to adjustment. 1. EXERCISE OF WARRANT. -------------------- (a) This Warrant may be exercised in whole or in part, at any time by its holder commencing on the Initial Exercise Date and prior to the Termination Date, by presentation and surrender of this Warrant, together with the duly executed subscription form attached at the end hereof, at the address set forth in subsection 8(a) hereof, together with payment, by certified or official bank check or wire transfer payable to the order of the Company, of the Aggregate Exercise Price or the proportionate part thereof if exercised in part. (b) If this Warrant is exercised in part only, the Company shall, upon presentation of this Warrant upon such exercise, execute and deliver (along with the certificate for the Warrant Shares purchased) a new Warrant evidencing the rights of the Holder hereof to purchase the balance of the Warrant Shares purchasable hereunder upon the same terms and conditions as herein set forth. Upon proper exercise of this Warrant, the Company promptly shall deliver certificates for the Warrant Shares to the Holder duly legended as authorized by the subscription form. No fractional shares or scrip representing fractional shares shall be issued upon exercise of this Warrant; provided that the Company shall pay to the holders of the Warrant cash in lieu of such fractional shares. 2. RESERVATION OF WARRANT SHARES; FULLY PAID SHARES; TAXES. The Company hereby represents that it has, and until expiration of this Warrant agrees that it shall, reserve for issuance or delivery upon exercise of this Warrant, such number of shares of the Common Stock as shall be required for issuance and/or delivery upon exercise of this Warrant in full, and agrees that all Warrant Shares so issued and/or delivered will be validly issued, fully paid and non-assessable, and further agrees to pay all taxes and charges that may be imposed upon such issuance and/or delivery. 3. PROTECTION AGAINST DILUTION. --------------------------- (a) In the event the Company shall, at any time or from time to time after the date of issuance of this Warrant, issue or distribute to all of the holders of its shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (any such event being herein called a "SPECIAL DIVIDEND"), the Per Share Exercise Price shall be adjusted by multiplying the Per Share Exercise Price then in effect by a fraction, the numerator of which shall be the then Current Market Price (as defined in paragraph 3(k) below) of the Common Stock, less the Current Market Price of the Special Dividend issued or distributed in respect of one share of Common Stock, and the denominator of which shall be the Current Market Price of the Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. (b) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding 2 shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Exercise Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Exercise Price and the denominator of which shall be the number of shares of Common Stock or other capital stock of the Company issuable upon exercise of this Warrant assuming this Warrant had been exercised immediately prior to such action. An adjustment made pursuant to this subsection 3(b) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (c)(i) Except as provided in subsections 3(a) and 3(b)(i), in the event the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such securities plus the consideration, if any, payable to the Company upon exercise or conversion thereof (collectively, the "TOTAL CONSIDERATION") by (ii) the number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities) which is less than the then Current Market Price of the Common Stock (as defined below) but not below the current Per Share Exercise Price (which event is governed by subsection 3(c)(ii)), the Per Share Exercise Price shall be adjusted as of the date of such issuance or sale by multiplying the Per Share Exercise Price then in effect by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding on the record date of such issuance or sale plus (B) the Total Consideration divided by the Current Market Price of the Common Stock, and the denominator of which shall be (y) the number of shares of Common Stock outstanding on the record date of such issuance or sale plus the maximum number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities. (c)(ii) Except as provided in subsection 3(a) and 3(b)(i), in the event the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (the "ISSUE PRICE"), (determined by dividing (i) the Total Consideration by (ii) the number of additional shares of Common Stock issuable upon exercise or conversion of such securities) which is less than the then current Per Share Exercise Price in effect on the record date of such issuance, the Per Share Exercise Price shall be adjusted to equal the Issue Price. (d) In the event of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation 3 (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this subsection 3(e) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than 30 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (e) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants may appoint a firm of independent public accountants of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. (f) Whenever the Per Share Exercise Price payable upon exercise of each Warrant is adjusted pursuant to this Section 3, the number of shares of Common Stock underlying a Warrant shall simultaneously be adjusted to equal the number obtained by dividing the Aggregate Exercise Price by the adjusted Per Share Exercise Price. (g) No adjustment in the Per Share Exercise Price shall be required unless such adjustment would require an increase or decrease of at least $0.01 per share of Common Stock; provided, however, that any adjustments which by reason of this subsection 3(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3 shall be made to the nearest 4 cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Exercise Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (h) Whenever the Per Share Exercise Price is adjusted as provided in this Section 3 and upon any modification of the rights of a Holder of Warrants in accordance with this Section 3, the Company shall promptly obtain, at its expense, a certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular auditors of the Company) setting forth the Per Share Exercise Price and the number of Warrant Shares after such adjustment or the effect of such modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause copies of such certificate to be mailed to the Holders of the Warrants. (i) If the Board of Directors of the Company shall declare any dividend or other distribution with respect to the Common Stock, the Company shall mail notice thereof to the Holders of the Warrants not less than 30 days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. (j) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Exercise Price between or among shares or such classes of capital stock or shares of Common Stock and other capital stock. (k) For the purpose of any computation under Section 3 above, the then Current Market Price per share (the "CURRENT MARKET PRICE") shall be deemed to be the last sale price of the Common Stock on the trading day prior to such date or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no longer reporting such information, or, if the Common Stock is not reported on NASDAQ, the high per share bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization, or if not so available, the fair market value of the Common Stock as determined by agreement between the Company's Board of Directors, on the one part, and the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants, on the second part. If the Board of 5 Directors and such Holders fail to agree on the Current Market Price within 60 days of the date of the action giving rise to any adjustment pursuant to this Section 3, such Holders shall be entitled to appoint a firm of independent public accountants or appraisers of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to such Current Market Price on a basis consistent with the essential intent and principles established herein. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants or appraisers shall be borne by the Company. 4. REGISTRATION UNDER SECURITIES ACT OF 1933. The resale of the Warrant Shares shall be registered on the Shelf Registration Statement (as defined in Article 8 of the Note and Warrant Purchase Agreement (the "Purchase Agreement") dated as of January 28, 1997, by and among the Company, The Aries Fund, a Cayman Island Trust, and The Aries Domestic Fund, L.P., a Delaware limited partnership) and certain purchasers and the Holder of this Warrant shall have the registration rights as provided in Article 8 of the Purchase Agreement. If the Holder is not a party to the Purchase Agreement, by acceptance of this Warrant the Holder agrees to comply with provisions of Article 8 of the Purchase Agreement to the same extent as if it were a party thereto. 5. LIMITED TRANSFERABILITY. This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Act and the applicable state securities "blue sky" laws, and is so transferable only upon the books of the Company which it shall cause to be maintained for such purpose. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All Warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 6. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 7. STATUS OF HOLDER. This Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 8. NOTICES. No notice or other communication under this Warrant shall be effective unless, but any notice or other communication shall be effective and shall be deemed to have been given if, the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: 6 (a) the Company at 3550 General Atomic Corporation, San Diego, California 92121, Attention: Thomas H. Adams, or such other address as the Company has designated in writing to the Holder; or (b) the Holder at the address indicated in the notice provisions to the Purchase Agreement, or other such address as the Holder has designated in writing to the Company. 9. SPECIAL EXERCISE PRICE ADJUSTMENT. The Per Share Exercise Price shall be adjusted at the time of the Final Closing Date (as that term is defined in the Letter between Genta and Paramount Capital Inc., dated January 28, 1997) if the exercise price of the Offering Warrants (as defined below) is less than the exercise price of the Warrants. In such event the Per Share Exercise Price shall be reduced to equal 50% of the then current exercise price of the Offering Warrants (as hereafter defined). "Offering Warrants" shall mean the warrants described in paragraph 7 of the Letter between the Company and Paramount Capital, Inc. dated January 28, 1997. 10. HEADINGS. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 11. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the law of the State of New York without giving effect to principles of conflicts of law thereof. IN WITNESS WHEREOF, Dr. Robert E. Klem, acting for and on behalf of the Company, has executed this Warrant and caused the Company's corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of June 23, 1997. GENTA INCORPORATED By: _______________________ Name: Dr. Robert E. Klem Title: Vice President ATTEST: - - -------------------------------- Secretary or Assistant Secretary [Corporate Seal] 7 SUBSCRIPTION ------------ The undersigned, ____________________________, pursuant to the provisions of the foregoing Warrant, hereby elects to exercise the within Warrant to the extent of purchasing _____________________ shares of Common Stock thereunder and hereby makes payment of $_______________ by certified or official bank check in payment of the exercise price therefor. Dated:_______________ Signature:_____________________________ Address:_______________________________ ASSIGNMENT ---------- FOR VALUE RECEIVED _______________________________________ hereby sells, assigns and transfers unto _____________________________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________________, attorney, to transfer said Warrant on the books of Genta, Inc. Dated:_______________ Signature:_____________________________ Address:_______________________________ PARTIAL ASSIGNMENT ------------------ FOR VALUE RECEIVED __________________________ hereby assigns and transfers unto _________________________ the right to purchase __________ shares of the Common Stock, no par value per share, of Genta, Inc. covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint __________________________, attorney, to transfer that part of said Warrant on the books of Genta, Inc. Dated:_______________ Signature:___________________________ Address:_____________________________ 8 EX-10.105 8 NEW CLASS A BRIDGE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE SECURITIES LAWS. GENTA INCORPORATED New Class A Bridge Warrant for the Purchase of Shares of -------------------------------------------------------- Common Stock ------------ No. CA-2 650,000 Shares FOR VALUE RECEIVED, GENTA INCORPORATED., a Delaware corporation (the "COMPANY"), hereby certifies that THE ARIES TRUST or its registered assigns (the "Holder") is entitled to purchase from the Company, subject to the provisions of this Warrant (the "Warrant"), at any time on or after the date hereof (the "INITIAL EXERCISE DATE"), and prior to 5:00 P.M., New York City time, on January 27, 2002 (the "TERMINATION DATE"), 650,000 fully paid and non-assessable shares of the Common Stock, $.001 par value, of the Company ("Common Stock"), at an exercise price of $1.50 per share of Common Stock for an aggregate exercise price of NINE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($975,000.00) (the aggregate purchase price payable for the Warrant Shares hereunder is hereinafter sometimes referred to as the "AGGREGATE EXERCISE PRICE"). The number of shares of Common Stock to be received upon exercise of this Warrant and the price to be paid for each share of Common Stock are subject to possible adjustment from time to time as hereinafter set forth. The shares of Common Stock or other securities or property deliverable upon such exercise as adjusted from time to time is hereinafter sometimes referred to as the "WARRANT SHARES." The exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "PER SHARE EXERCISE PRICE." The Per Share Exercise Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall also be adjusted, by dividing the Aggregate Exercise Price by the Per Share Exercise Price in effect immediately after such adjustment. The Aggregate Exercise Price is not subject to adjustment. 1. EXERCISE OF WARRANT. -------------------- (a) This Warrant may be exercised in whole or in part, at any time by its holder commencing on the Initial Exercise Date and prior to the Termination Date, by presentation and surrender of this Warrant, together with the duly executed subscription form attached at the end hereof, at the address set forth in subsection 8(a) hereof, together with payment, by certified or official bank check or wire transfer payable to the order of the Company, of the Aggregate Exercise Price or the proportionate part thereof if exercised in part. (b) If this Warrant is exercised in part only, the Company shall, upon presentation of this Warrant upon such exercise, execute and deliver (along with the certificate for the Warrant Shares purchased) a new Warrant evidencing the rights of the Holder hereof to purchase the balance of the Warrant Shares purchasable hereunder upon the same terms and conditions as herein set forth. Upon proper exercise of this Warrant, the Company promptly shall deliver certificates for the Warrant Shares to the Holder duly legended as authorized by the subscription form. No fractional shares or scrip representing fractional shares shall be issued upon exercise of this Warrant; provided that the Company shall pay to the holders of the Warrant cash in lieu of such fractional shares. 2. RESERVATION OF WARRANT SHARES; FULLY PAID SHARES; TAXES. The Company hereby represents that it has, and until expiration of this Warrant agrees that it shall, reserve for issuance or delivery upon exercise of this Warrant, such number of shares of the Common Stock as shall be required for issuance and/or delivery upon exercise of this Warrant in full, and agrees that all Warrant Shares so issued and/or delivered will be validly issued, fully paid and non-assessable, and further agrees to pay all taxes and charges that may be imposed upon such issuance and/or delivery. 3. PROTECTION AGAINST DILUTION. ---------------------------- (a) In the event the Company shall, at any time or from time to time after the date of issuance of this Warrant, issue or distribute to all of the holders of its shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (any such event being herein called a "SPECIAL DIVIDEND"), the Per Share Exercise Price shall be adjusted by multiplying the Per Share Exercise Price then in effect by a fraction, the numerator of which shall be the then Current Market Price (as defined in paragraph 3(k) below) of the Common Stock, less the Current Market Price of the Special Dividend issued or distributed in respect of one share of Common Stock, and the denominator of which shall be the Current Market Price of the Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. (b) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding 2 shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Exercise Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Exercise Price and the denominator of which shall be the number of shares of Common Stock or other capital stock of the Company issuable upon exercise of this Warrant assuming this Warrant had been exercised immediately prior to such action. An adjustment made pursuant to this subsection 3(b) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (c)(i) Except as provided in subsections 3(a) and 3(b)(i), in the event the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such securities plus the consideration, if any, payable to the Company upon exercise or conversion thereof (collectively, the "TOTAL CONSIDERATION") by (ii) the number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities) which is less than the then Current Market Price of the Common Stock (as defined below) but not below the current Per Share Exercise Price (which event is governed by subsection 3(c)(ii)), the Per Share Exercise Price shall be adjusted as of the date of such issuance or sale by multiplying the Per Share Exercise Price then in effect by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding on the record date of such issuance or sale plus (B) the Total Consideration divided by the Current Market Price of the Common Stock, and the denominator of which shall be (y) the number of shares of Common Stock outstanding on the record date of such issuance or sale plus the maximum number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities. (c)(ii) Except as provided in subsection 3(a) and 3(b)(i), in the event the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (the "ISSUE PRICE"), (determined by dividing (i) the Total Consideration by (ii) the number of additional shares of Common Stock issuable upon exercise or conversion of such securities) which is less than the then current Per Share Exercise Price in effect on the record date of such issuance, the Per Share Exercise Price shall be adjusted to equal the Issue Price. (d) In the event of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation 3 (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this subsection 3(e) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than 30 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (e) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants may appoint a firm of independent public accountants of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. (f) Whenever the Per Share Exercise Price payable upon exercise of each Warrant is adjusted pursuant to this Section 3, the number of shares of Common Stock underlying a Warrant shall simultaneously be adjusted to equal the number obtained by dividing the Aggregate Exercise Price by the adjusted Per Share Exercise Price. (g) No adjustment in the Per Share Exercise Price shall be required unless such adjustment would require an increase or decrease of at least $0.01 per share of Common Stock; provided, however, that any adjustments which by reason of this subsection 3(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3 shall be made to the nearest 4 cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Exercise Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (h) Whenever the Per Share Exercise Price is adjusted as provided in this Section 3 and upon any modification of the rights of a Holder of Warrants in accordance with this Section 3, the Company shall promptly obtain, at its expense, a certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular auditors of the Company) setting forth the Per Share Exercise Price and the number of Warrant Shares after such adjustment or the effect of such modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause copies of such certificate to be mailed to the Holders of the Warrants. (i) If the Board of Directors of the Company shall declare any dividend or other distribution with respect to the Common Stock, the Company shall mail notice thereof to the Holders of the Warrants not less than 30 days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. (j) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Exercise Price between or among shares or such classes of capital stock or shares of Common Stock and other capital stock. (k) For the purpose of any computation under Section 3 above, the then Current Market Price per share (the "CURRENT MARKET PRICE") shall be deemed to be the last sale price of the Common Stock on the trading day prior to such date or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no longer reporting such information, or, if the Common Stock is not reported on NASDAQ, the high per share bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization, or if not so available, the fair market value of the Common Stock as determined by agreement between the Company's Board of Directors, on the one part, and the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants, on the second part. If the Board of 5 Directors and such Holders fail to agree on the Current Market Price within 60 days of the date of the action giving rise to any adjustment pursuant to this Section 3, such Holders shall be entitled to appoint a firm of independent public accountants or appraisers of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to such Current Market Price on a basis consistent with the essential intent and principles established herein. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants or appraisers shall be borne by the Company. 4. REGISTRATION UNDER SECURITIES ACT OF 1933. The resale of the Warrant Shares shall be registered on the Shelf Registration Statement (as defined in Article 8 of the Note and Warrant Purchase Agreement (the "Purchase Agreement") dated as of January 28, 1997, by and among the Company, The Aries Fund, a Cayman Island Trust, and The Aries Domestic Fund, L.P., a Delaware limited partnership) and certain purchasers and the Holder of this Warrant shall have the registration rights as provided in Article 8 of the Purchase Agreement. If the Holder is not a party to the Purchase Agreement, by acceptance of this Warrant the Holder agrees to comply with provisions of Article 8 of the Purchase Agreement to the same extent as if it were a party thereto. 5. LIMITED TRANSFERABILITY. This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Act and the applicable state securities "blue sky" laws, and is so transferable only upon the books of the Company which it shall cause to be maintained for such purpose. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All Warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 6. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 7. STATUS OF HOLDER. This Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 8. NOTICES. No notice or other communication under this Warrant shall be effective unless, but any notice or other communication shall be effective and shall be deemed to have been given if, the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: 6 (a) the Company at 3550 General Atomic Corporation, San Diego, California 92121, Attention: Thomas H. Adams, or such other address as the Company has designated in writing to the Holder; or (b) the Holder at the address indicated in the notice provisions to the Purchase Agreement, or other such address as the Holder has designated in writing to the Company. 9. SPECIAL EXERCISE PRICE ADJUSTMENT. The Per Share Exercise Price shall be adjusted at the time of the Final Closing Date (as that term is defined in the Letter between Genta and Paramount Capital Inc., dated January 28, 1997) if the exercise price of the Offering Warrants (as defined below) is less than the exercise price of the Warrants. In such event the Per Share Exercise Price shall be reduced to equal 50% of the then current exercise price of the Offering Warrants (as hereafter defined). "Offering Warrants" shall mean the warrants described in paragraph 7 of the Letter between the Company and Paramount Capital, Inc. dated January 28, 1997. 10. HEADINGS. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 11. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the law of the State of New York without giving effect to principles of conflicts of law thereof. IN WITNESS WHEREOF, Dr. Robert E. Klem, acting for and on behalf of the Company, has executed this Warrant and caused the Company's corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of June 23, 1997. GENTA INCORPORATED By: _______________________ Name: Dr. Robert E. Klem Title: Vice President ATTEST: - - ------------------------- Secretary or Assistant Secretary [Corporate Seal] 7 SUBSCRIPTION ------------ The undersigned, ____________________________, pursuant to the provisions of the foregoing Warrant, hereby elects to exercise the within Warrant to the extent of purchasing _____________________ shares of Common Stock thereunder and hereby makes payment of $_______________ by certified or official bank check in payment of the exercise price therefor. Dated:_______________ Signature:_____________________________ Address:_______________________________ ASSIGNMENT ---------- FOR VALUE RECEIVED _______________________________________ hereby sells, assigns and transfers unto _____________________________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________________, attorney, to transfer said Warrant on the books of Genta, Inc. Dated:_______________ Signature:_____________________________ Address:______________________________ PARTIAL ASSIGNMENT ------------------ FOR VALUE RECEIVED __________________________ hereby assigns and transfers unto _________________________ the right to purchase __________ shares of the Common Stock, no par value per share, of Genta, Inc. covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint __________________________, attorney, to transfer that part of said Warrant on the books of Genta, Inc. Dated:_______________ Signature:___________________________ Address:_____________________________ 8 EX-10.106 9 NEW CLASS B BRIDGE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE SECURITIES LAWS. GENTA INCORPORATED New Class B Bridge Warrant for the Purchase of Shares of -------------------------------------------------------- Common Stock ------------ No. CB-1 350,000 Shares FOR VALUE RECEIVED, GENTA INCORPORATED., a Delaware corporation (the "COMPANY"), hereby certifies that THE ARIES DOMESTIC FUND, LP or its registered assigns (the "Holder") is entitled to purchase from the Company, subject to the provisions of this Warrant (the "Warrant"), at any time on or after the date hereof (the "INITIAL EXERCISE DATE"), and prior to 5:00 P.M., New York City time, on January 27, 2002 (the "TERMINATION DATE"), 350,000 fully paid and non-assessable shares of the Common Stock, $.001 par value, of the Company ("Common Stock"), at an exercise price of $1.50 per share of Common Stock for an aggregate exercise price of FIVE HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($525,000.00) (the aggregate purchase price payable for the Warrant Shares hereunder is hereinafter sometimes referred to as the "AGGREGATE EXERCISE PRICE"). The number of shares of Common Stock to be received upon exercise of this Warrant and the price to be paid for each share of Common Stock are subject to possible adjustment from time to time as hereinafter set forth. The shares of Common Stock or other securities or property deliverable upon such exercise as adjusted from time to time is hereinafter sometimes referred to as the "WARRANT SHARES." The exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "PER SHARE EXERCISE PRICE." The Per Share Exercise Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall also be adjusted, by dividing the Aggregate Exercise Price by the Per Share Exercise Price in effect immediately after such adjustment. The Aggregate Exercise Price is not subject to adjustment. 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole or in part, at any time by its holder commencing on the Initial Exercise Date and prior to the Termination Date, by presentation and surrender of this Warrant, together with the duly executed subscription form attached at the end hereof, at the address set forth in subsection 8(a) hereof, together with payment, by certified or official bank check or wire transfer payable to the order of the Company, of the Aggregate Exercise Price or the proportionate part thereof if exercised in part. (b) If this Warrant is exercised in part only, the Company shall, upon presentation of this Warrant upon such exercise, execute and deliver (along with the certificate for the Warrant Shares purchased) a new Warrant evidencing the rights of the Holder hereof to purchase the balance of the Warrant Shares purchasable hereunder upon the same terms and conditions as herein set forth. Upon proper exercise of this Warrant, the Company promptly shall deliver certificates for the Warrant Shares to the Holder duly legended as authorized by the subscription form. No fractional shares or scrip representing fractional shares shall be issued upon exercise of this Warrant; provided that the Company shall pay to the holders of the Warrant cash in lieu of such fractional shares. 2. RESERVATION OF WARRANT SHARES; FULLY PAID SHARES; TAXES. The Company hereby represents that it has, and until expiration of this Warrant agrees that it shall, reserve for issuance or delivery upon exercise of this Warrant, such number of shares of the Common Stock as shall be required for issuance and/or delivery upon exercise of this Warrant in full, and agrees that all Warrant Shares so issued and/or delivered will be validly issued, fully paid and non-assessable, and further agrees to pay all taxes and charges that may be imposed upon such issuance and/or delivery. 3. PROTECTION AGAINST DILUTION. (a) In the event the Company shall, at any time or from time to time after the date of issuance of this Warrant, issue or distribute to all of the holders of its shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (any such event being herein called a "SPECIAL DIVIDEND"), the Per Share Exercise Price shall be adjusted by multiplying the Per Share Exercise Price then in effect by a fraction, the numerator of which shall be the then Current Market Price (as defined in paragraph 3(k) below) of the Common Stock, less the Current Market Price of the Special Dividend issued or distributed in respect of one share of Common Stock, and the denominator of which shall be the Current Market Price of the Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. (b) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding 2 shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Exercise Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Exercise Price and the denominator of which shall be the number of shares of Common Stock or other capital stock of the Company issuable upon exercise of this Warrant assuming this Warrant had been exercised immediately prior to such action. An adjustment made pursuant to this subsection 3(b) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (c)(i) Except as provided in subsections 3(a) and 3(b)(i), in the event the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such securities plus the consideration, if any, payable to the Company upon exercise or conversion thereof (collectively, the "TOTAL CONSIDERATION") by (ii) the number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities) which is less than the then Current Market Price of the Common Stock (as defined below) but not below the current Per Share Exercise Price (which event is governed by subsection 3(c)(ii)), the Per Share Exercise Price shall be adjusted as of the date of such issuance or sale by multiplying the Per Share Exercise Price then in effect by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding on the record date of such issuance or sale plus (B) the Total Consideration divided by the Current Market Price of the Common Stock, and the denominator of which shall be (y) the number of shares of Common Stock outstanding on the record date of such issuance or sale plus the maximum number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities. (c)(ii) Except as provided in subsection 3(a) and 3(b)(i), in the event the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (the "ISSUE PRICE"), (determined by dividing (i) the Total Consideration by (ii) the number of additional shares of Common Stock issuable upon exercise or conversion of such securities) which is less than the then current Per Share Exercise Price in effect on the record date of such issuance, the Per Share Exercise Price shall be adjusted to equal the Issue Price. (d) In the event of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation 3 (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this subsection 3(e) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than 30 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (e) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants may appoint a firm of independent public accountants of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. (f) Whenever the Per Share Exercise Price payable upon exercise of each Warrant is adjusted pursuant to this Section 3, the number of shares of Common Stock underlying a Warrant shall simultaneously be adjusted to equal the number obtained by dividing the Aggregate Exercise Price by the adjusted Per Share Exercise Price. (g) No adjustment in the Per Share Exercise Price shall be required unless such adjustment would require an increase or decrease of at least $0.01 per share of Common Stock; provided, however, that any adjustments which by reason of this subsection 3(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3 shall be made to the nearest 4 cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Exercise Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (h) Whenever the Per Share Exercise Price is adjusted as provided in this Section 3 and upon any modification of the rights of a Holder of Warrants in accordance with this Section 3, the Company shall promptly obtain, at its expense, a certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular auditors of the Company) setting forth the Per Share Exercise Price and the number of Warrant Shares after such adjustment or the effect of such modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause copies of such certificate to be mailed to the Holders of the Warrants. (i) If the Board of Directors of the Company shall declare any dividend or other distribution with respect to the Common Stock, the Company shall mail notice thereof to the Holders of the Warrants not less than 30 days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. (j) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Exercise Price between or among shares or such classes of capital stock or shares of Common Stock and other capital stock. (k) For the purpose of any computation under Section 3 above, the then Current Market Price per share (the "CURRENT MARKET PRICE") shall be deemed to be the last sale price of the Common Stock on the trading day prior to such date or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no longer reporting such information, or, if the Common Stock is not reported on NASDAQ, the high per share bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization, or if not so available, the fair market value of the Common Stock as determined by agreement between the Company's Board of Directors, on the one part, and the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants, on the second part. If the Board of 5 Directors and such Holders fail to agree on the Current Market Price within 60 days of the date of the action giving rise to any adjustment pursuant to this Section 3, such Holders shall be entitled to appoint a firm of independent public accountants or appraisers of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to such Current Market Price on a basis consistent with the essential intent and principles established herein. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants or appraisers shall be borne by the Company. 4. REGISTRATION UNDER SECURITIES ACT OF 1933. The resale of the Warrant Shares shall be registered on the Shelf Registration Statement (as defined in Article 8 of the Note and Warrant Purchase Agreement (the "Purchase Agreement") dated as of January 28, 1997, by and among the Company, The Aries Fund, a Cayman Island Trust, and The Aries Domestic Fund, L.P., a Delaware limited partnership) and certain purchasers and the Holder of this Warrant shall have the registration rights as provided in Article 8 of the Purchase Agreement. If the Holder is not a party to the Purchase Agreement, by acceptance of this Warrant the Holder agrees to comply with provisions of Article 8 of the Purchase Agreement to the same extent as if it were a party thereto. 5. LIMITED TRANSFERABILITY. This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Act and the applicable state securities "blue sky" laws, and is so transferable only upon the books of the Company which it shall cause to be maintained for such purpose. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All Warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 6. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 7. STATUS OF HOLDER. This Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 8. NOTICES. No notice or other communication under this Warrant shall be effective unless, but any notice or other communication shall be effective and shall be deemed to have been given if, the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: 6 (a) the Company at 3550 General Atomic Corporation, San Diego, California 92121, Attention: Thomas H. Adams, or such other address as the Company has designated in writing to the Holder; or (b) the Holder at the address indicated in the notice provisions to the Purchase Agreement, or other such address as the Holder has designated in writing to the Company. 9. SPECIAL EXERCISE PRICE ADJUSTMENT. The Per Share Exercise Price shall be adjusted at the time of the Final Closing Date (as that term is defined in the Letter between Genta and Paramount Capital Inc., dated January 28, 1997) if the exercise price of the Offering Warrants (as defined below) is less than the exercise price of the Warrants. In such event the Per Share Exercise Price shall be reduced to equal 50% of the then current exercise price of the Offering Warrants (as hereafter defined). "Offering Warrants" shall mean the warrants described in paragraph 7 of the Letter between the Company and Paramount Capital, Inc. dated January 28, 1997. 10. HEADINGS. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 11. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the law of the State of New York without giving effect to principles of conflicts of law thereof. IN WITNESS WHEREOF, Dr. Robert E. Klem, acting for and on behalf of the Company, has executed this Warrant and caused the Company's corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of June 23, 1997. GENTA INCORPORATED By: _____________________ Name: Dr. Robert E. Klem Title: Vice President ATTEST: - - ------------------------- Secretary or Assistant Secretary [Corporate Seal] 7 SUBSCRIPTION ------------ The undersigned, ____________________________, pursuant to the provisions of the foregoing Warrant, hereby elects to exercise the within Warrant to the extent of purchasing _____________________ shares of Common Stock thereunder and hereby makes payment of $_______________ by certified or official bank check in payment of the exercise price therefor. Dated:_______________ Signature:_____________________________ Address:_______________________________ ASSIGNMENT ---------- FOR VALUE RECEIVED _______________________________________ hereby sells, assigns and transfers unto _____________________________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________________, attorney, to transfer said Warrant on the books of Genta, Inc. Dated:_______________ Signature:_____________________________ Address:______________________________ PARTIAL ASSIGNMENT ------------------ FOR VALUE RECEIVED __________________________ hereby assigns and transfers unto _________________________ the right to purchase __________ shares of the Common Stock, no par value per share, of Genta, Inc. covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint __________________________, attorney, to transfer that part of said Warrant on the books of Genta, Inc. Dated:_______________ Signature:___________________________ Address:_____________________________ 8 EX-10.107 10 NEW CLASS B BRIDGE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE SECURITIES LAWS. GENTA INCORPORATED New Class B Bridge Warrant for the Purchase of Shares of -------------------------------------------------------- Common Stock ------------ No. CB-2 650,000 Shares FOR VALUE RECEIVED, GENTA INCORPORATED., a Delaware corporation (the "COMPANY"), hereby certifies that THE ARIES TRUST or its registered assigns (the "Holder") is entitled to purchase from the Company, subject to the provisions of this Warrant (the "Warrant"), at any time on or after the date hereof (the "INITIAL EXERCISE DATE"), and prior to 5:00 P.M., New York City time, on January 27, 2002 (the "TERMINATION DATE"), 650,000 fully paid and non-assessable shares of the Common Stock, $.001 par value, of the Company ("Common Stock"), at an exercise price of $1.50 per share of Common Stock for an aggregate exercise price of NINE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($975,000.00) (the aggregate purchase price payable for the Warrant Shares hereunder is hereinafter sometimes referred to as the "AGGREGATE EXERCISE PRICE"). The number of shares of Common Stock to be received upon exercise of this Warrant and the price to be paid for each share of Common Stock are subject to possible adjustment from time to time as hereinafter set forth. The shares of Common Stock or other securities or property deliverable upon such exercise as adjusted from time to time is hereinafter sometimes referred to as the "WARRANT SHARES." The exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "PER SHARE EXERCISE PRICE." The Per Share Exercise Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall also be adjusted, by dividing the Aggregate Exercise Price by the Per Share Exercise Price in effect immediately after such adjustment. The Aggregate Exercise Price is not subject to adjustment. 1. EXERCISE OF WARRANT. -------------------- (a) This Warrant may be exercised in whole or in part, at any time by its holder commencing on the Initial Exercise Date and prior to the Termination Date, by presentation and surrender of this Warrant, together with the duly executed subscription form attached at the end hereof, at the address set forth in subsection 8(a) hereof, together with payment, by certified or official bank check or wire transfer payable to the order of the Company, of the Aggregate Exercise Price or the proportionate part thereof if exercised in part. (b) If this Warrant is exercised in part only, the Company shall, upon presentation of this Warrant upon such exercise, execute and deliver (along with the certificate for the Warrant Shares purchased) a new Warrant evidencing the rights of the Holder hereof to purchase the balance of the Warrant Shares purchasable hereunder upon the same terms and conditions as herein set forth. Upon proper exercise of this Warrant, the Company promptly shall deliver certificates for the Warrant Shares to the Holder duly legended as authorized by the subscription form. No fractional shares or scrip representing fractional shares shall be issued upon exercise of this Warrant; provided that the Company shall pay to the holders of the Warrant cash in lieu of such fractional shares. 2. RESERVATION OF WARRANT SHARES; FULLY PAID SHARES; TAXES. The Company hereby represents that it has, and until expiration of this Warrant agrees that it shall, reserve for issuance or delivery upon exercise of this Warrant, such number of shares of the Common Stock as shall be required for issuance and/or delivery upon exercise of this Warrant in full, and agrees that all Warrant Shares so issued and/or delivered will be validly issued, fully paid and non-assessable, and further agrees to pay all taxes and charges that may be imposed upon such issuance and/or delivery. 3. PROTECTION AGAINST DILUTION. ---------------------------- (a) In the event the Company shall, at any time or from time to time after the date of issuance of this Warrant, issue or distribute to all of the holders of its shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (any such event being herein called a "SPECIAL DIVIDEND"), the Per Share Exercise Price shall be adjusted by multiplying the Per Share Exercise Price then in effect by a fraction, the numerator of which shall be the then Current Market Price (as defined in paragraph 3(k) below) of the Common Stock, less the Current Market Price of the Special Dividend issued or distributed in respect of one share of Common Stock, and the denominator of which shall be the Current Market Price of the Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. (b) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding 2 shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Exercise Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Exercise Price and the denominator of which shall be the number of shares of Common Stock or other capital stock of the Company issuable upon exercise of this Warrant assuming this Warrant had been exercised immediately prior to such action. An adjustment made pursuant to this subsection 3(b) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (c)(i) Except as provided in subsections 3(a) and 3(b)(i), in the event the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such securities plus the consideration, if any, payable to the Company upon exercise or conversion thereof (collectively, the "TOTAL CONSIDERATION") by (ii) the number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities) which is less than the then Current Market Price of the Common Stock (as defined below) but not below the current Per Share Exercise Price (which event is governed by subsection 3(c)(ii)), the Per Share Exercise Price shall be adjusted as of the date of such issuance or sale by multiplying the Per Share Exercise Price then in effect by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding on the record date of such issuance or sale plus (B) the Total Consideration divided by the Current Market Price of the Common Stock, and the denominator of which shall be (y) the number of shares of Common Stock outstanding on the record date of such issuance or sale plus the maximum number of additional shares of Common Stock issued, sold or issuable upon exercise or conversion of such securities. (c)(ii) Except as provided in subsection 3(a) and 3(b)(i), in the event the Company shall hereafter issue or sell any Common Stock, any securities convertible into Common Stock or any rights, options or warrants to purchase Common Stock or securities convertible into Common Stock, in each case for a price per share or entitling the holders thereof to purchase Common Stock at a price per share (the "ISSUE PRICE"), (determined by dividing (i) the Total Consideration by (ii) the number of additional shares of Common Stock issuable upon exercise or conversion of such securities) which is less than the then current Per Share Exercise Price in effect on the record date of such issuance, the Per Share Exercise Price shall be adjusted to equal the Issue Price. (d) In the event of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation 3 (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this subsection 3(e) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than 30 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (e) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants may appoint a firm of independent public accountants of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. (f) Whenever the Per Share Exercise Price payable upon exercise of each Warrant is adjusted pursuant to this Section 3, the number of shares of Common Stock underlying a Warrant shall simultaneously be adjusted to equal the number obtained by dividing the Aggregate Exercise Price by the adjusted Per Share Exercise Price. (g) No adjustment in the Per Share Exercise Price shall be required unless such adjustment would require an increase or decrease of at least $0.01 per share of Common Stock; provided, however, that any adjustments which by reason of this subsection 3(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3 shall be made to the nearest 4 cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Exercise Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (h) Whenever the Per Share Exercise Price is adjusted as provided in this Section 3 and upon any modification of the rights of a Holder of Warrants in accordance with this Section 3, the Company shall promptly obtain, at its expense, a certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular auditors of the Company) setting forth the Per Share Exercise Price and the number of Warrant Shares after such adjustment or the effect of such modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause copies of such certificate to be mailed to the Holders of the Warrants. (i) If the Board of Directors of the Company shall declare any dividend or other distribution with respect to the Common Stock, the Company shall mail notice thereof to the Holders of the Warrants not less than 30 days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. (j) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Exercise Price between or among shares or such classes of capital stock or shares of Common Stock and other capital stock. (k) For the purpose of any computation under Section 3 above, the then Current Market Price per share (the "CURRENT MARKET PRICE") shall be deemed to be the last sale price of the Common Stock on the trading day prior to such date or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no longer reporting such information, or, if the Common Stock is not reported on NASDAQ, the high per share bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization, or if not so available, the fair market value of the Common Stock as determined by agreement between the Company's Board of Directors, on the one part, and the Holders of Warrants representing the right to purchase a majority of the Warrant Shares subject to all outstanding Warrants, on the second part. If the Board of 5 Directors and such Holders fail to agree on the Current Market Price within 60 days of the date of the action giving rise to any adjustment pursuant to this Section 3, such Holders shall be entitled to appoint a firm of independent public accountants or appraisers of recognized national standing reasonably acceptable to the Company, which shall give their opinion as to such Current Market Price on a basis consistent with the essential intent and principles established herein. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Warrant and shall make the adjustments described therein. The fees and expenses of such independent public accountants or appraisers shall be borne by the Company. 4. REGISTRATION UNDER SECURITIES ACT OF 1933. The resale of the Warrant Shares shall be registered on the Shelf Registration Statement (as defined in Article 8 of the Note and Warrant Purchase Agreement (the "Purchase Agreement") dated as of January 28, 1997, by and among the Company, The Aries Fund, a Cayman Island Trust, and The Aries Domestic Fund, L.P., a Delaware limited partnership) and certain purchasers and the Holder of this Warrant shall have the registration rights as provided in Article 8 of the Purchase Agreement. If the Holder is not a party to the Purchase Agreement, by acceptance of this Warrant the Holder agrees to comply with provisions of Article 8 of the Purchase Agreement to the same extent as if it were a party thereto. 5. LIMITED TRANSFERABILITY. This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Act and the applicable state securities "blue sky" laws, and is so transferable only upon the books of the Company which it shall cause to be maintained for such purpose. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All Warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 6. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 7. STATUS OF HOLDER. This Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 8. NOTICES. No notice or other communication under this Warrant shall be effective unless, but any notice or other communication shall be effective and shall be deemed to have been given if, the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: 6 (a) the Company at 3550 General Atomic Corporation, San Diego, California 92121, Attention: Thomas H. Adams, or such other address as the Company has designated in writing to the Holder; or (b) the Holder at the address indicated in the notice provisions to the Purchase Agreement, or other such address as the Holder has designated in writing to the Company. 9. SPECIAL EXERCISE PRICE ADJUSTMENT. The Per Share Exercise Price shall be adjusted at the time of the Final Closing Date (as that term is defined in the Letter between Genta and Paramount Capital Inc., dated January 28, 1997) if the exercise price of the Offering Warrants (as defined below) is less than the exercise price of the Warrants. In such event the Per Share Exercise Price shall be reduced to equal 50% of the then current exercise price of the Offering Warrants (as hereafter defined). "Offering Warrants" shall mean the warrants described in paragraph 7 of the Letter between the Company and Paramount Capital, Inc. dated January 28, 1997. 10. HEADINGS. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 11. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the law of the State of New York without giving effect to principles of conflicts of law thereof. IN WITNESS WHEREOF, Dr. Robert E. Klem, acting for and on behalf of the Company, has executed this Warrant and caused the Company's corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of June 23, 1997. GENTA INCORPORATED By: _______________________ Name: Dr. Robert E. Klem Title: Vice President ATTEST: - - ------------------------- Secretary or Assistant Secretary [Corporate Seal] 7 SUBSCRIPTION ------------ The undersigned, ____________________________, pursuant to the provisions of the foregoing Warrant, hereby elects to exercise the within Warrant to the extent of purchasing _____________________ shares of Common Stock thereunder and hereby makes payment of $_______________ by certified or official bank check in payment of the exercise price therefor. Dated:_______________ Signature:_____________________________ Address:_______________________________ ASSIGNMENT ---------- FOR VALUE RECEIVED _______________________________________ hereby sells, assigns and transfers unto _____________________________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________________, attorney, to transfer said Warrant on the books of Genta, Inc. Dated:_______________ Signature:_____________________________ Address:______________________________ PARTIAL ASSIGNMENT ------------------ FOR VALUE RECEIVED __________________________ hereby assigns and transfers unto _________________________ the right to purchase __________ shares of the Common Stock, no par value per share, of Genta, Inc. covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint __________________________, attorney, to transfer that part of said Warrant on the books of Genta, Inc. Dated:_______________ Signature:___________________________ Address:_____________________________ 8 EX-10.108 11 AGREEMENT AGREEMENT This AGREEMENT (this "Agreement") dated as of August 27, 1997 (the "Agreement") by and between Genta Incorporated, a Delaware corporation (the "Company"), and Paul O.P. Ts'o, Ph.D. (the "Consultant"); WHEREAS, the Consultant has served as a director of the Company for a number of years, has served as a consultant to the Company pursuant to a Consulting Agreement between the Consultant and the Company, dated February 2, 1989 (the "Prior Agreement") and has considerable and invaluable knowledge of the business and history of the Company; WHEREAS, the Company desires that it be able to call upon the experience and knowledge of the Consultant with respect to the Company from time to time, in accordance with the terms hereof; and WHEREAS, the Consultant is willing to render such services to the Company on the terms and conditions hereinafter set forth in this Agreement; NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term. Subject to paragraph 5, from the date of the Consultant's resignation from the Board of Directors of the Company (the "Commencement Date") and continuing for a 1 (one) year period (the "Term"), the Consultant shall be retained by the Company as a consultant as provided in this Agreement. 2. Position and Responsibilities. (a) The Consultant hereby agrees to make available to the Company and its directors during the Term the benefit of the Consultant's knowledge of the Company's and its subsidiaries' affairs, provided that, except for telephone inquiries, the Consultant shall not be required to devote more than 1 (one) day per calendar month. (b) Prior to entering into this Agreement with the Company, the Consultant was employed, and continues to be employed, by the Johns Hopkins University (the "University"). The Company recognizes that in connection with the Consultant's employment by the University, the Consultant has continuing responsibility to the University. In connection with such employment, the Company acknowledges that the Consultant is subject to a Patent and Invention Policy of the University in the form attached hereto as Exhibit A (the "Patent Policy"). The Company hereby acknowledges the existence of the Patent Policy and agrees to take no actions which would result in the Consultant's violating the Patent Policy. (c) Prior to entering into this Agreement with the Company, the Consultant was employed, and continues to be employed, by CellGene Laboratory, L.P. ("CellGene") as a Managing Director and Chairman of the Board of Managing Directors, and was employed, and continues to be employed by CellGene's General Partner, NAMTA Corporation ("NAMTA") as CEO and Chairman of the Board of Directors. CellGene is a reference laboratory providing tests for prenatal and various cancer cells circulating in blood. NAMTA Corporation is a consulting and management company with a special interest in trading with Asia. The Company recognizes that in connection with the Consultant's employment by CellGene and NAMTA or their successors or other parties in interest, the Consultant's primary responsibilities are to CellGene and NAMTA or their successors or other parties in interest. The Company hereby acknowledges that in connection with such employment, the Consultant may have acquired and may continue to acquire confidential and proprietary information relative to the business and operations of CellGene and NAMTA or their successors or other parties in interest. The Company agrees to take no action which would result in the Consultant being asked or required to use or divulge any such confidential or proprietary information, acquired without violation of law, relative to the business and operations of CellGene or NAMTA or their successors or other parties in interest, and the Company further agrees to make no claim to such confidential or proprietary information, acquired without violation of law, relative to the business and operations of CellGene or NAMTA on the Company's behalf. As used in this paragraph, the term "proprietary information" has the same meaning as it does in paragraph 6 of this Agreement, except that references to the "Company" shall mean CellGene and NAMTA. 3. Compensation. The Company shall issue to the Consultant at the commencement of this Agreement 15,400 shares of Genta common stock. Furthermore, during the Term of this Agreement, the Company shall pay the Consultant at a rate of $1,000 per month. Notwithstanding anything to the contrary in the Prior Agreement, and subject to Section 4, the Consultant shall not be entitled to receive any other payment or benefits. The Consultant acknowledges that all stock options previously granted to him by the Company are hereby cancelled. 4. Expenses. Subject to the Company's prior approval, the Consultant shall be reimbursed for necessary and reasonable expenses incurred by the Consultant in connection with the performance of his duties hereunder including, without limitation, reasonable travel expenses and shall receive an additional $2,500 per day for any in-person attendance at any meeting of the Company. 5. Termination. This Agreement and the Consultant's retention hereunder may be immediately terminated by the Company upon the Consultant's breach of this Agreement. 6. Confidentiality. The Consultant acknowledges that the Company possesses and will continue to possess information that has been created, discovered, developed, acquired or otherwise become known to the Company (including, without limitation, information created, discovered, developed or made known to the Consultant during the period the Consultant was associated with the Company including, without limitation, during the term of this Agreement), which information has commercial business value. All such information, which relates either to (A) the business and operations of the - 2 - Company, including without limitation, strategies, forecasts, potential new products, unpublished financial statements, budgets, projections, patent applications filed by the Company, legal advice rendered to the Company, licenses, prices, costs, and supplier lists, or (B) information disclosed by representatives of the Company to the Consultant relating to its activities in the field of single mismatch discrimination and in the control of gene expression using steric blockers is hereinafter called "Proprietary Information". In consideration of the compensation received by the Consultant from the Company and the covenants contained in this Agreement, the Consultant agrees as follows: (a) All Proprietary Information is and shall continue to be the sole property of the Company and its assigns, and the Company and its assigns are and shall continue to be the sole owner of all rights in connection therewith. The Consultant shall maintain in strictest confidence any and all Proprietary Information and shall not disclose the same to any third party; provided, however, that the obligation of confidentiality by the Consultant shall not apply to any information, documents, materials or things otherwise within the definition of Proprietary Information but which: (i) Consultant receives at any time from a third party lawfully in possession of same and having the right to disclose same; (ii) is, as of the effective date of this Agreement, in the public domain, or subsequently enters the public domain through no fault of the Consultant; (iii) has been previously approved by the Company in writing to be released from the confidentiality obligations hereunder; (iv) is required to be disclosed to (or by) a court or other governmental authority, provided reasonable notice of the impending disclosure is provided to the Company, and the Company has agreed to such disclosure in writing or has exhausted its right to contest such disclosure; (v) consists of intellectual property, including patents, which have been assigned to Johns Hopkins University prior to the date of this Agreement, in which the Company has an interest; or (vi) consists of inventions or improvements or works of authorship set forth on Exhibit C to the Prior Agreement and initialled by the Consultant. (b) The Consultant hereby agrees that he will not use any Proprietary Information, including any Proprietary Information that the Consultant learns or develops in the course of the performance of the Consultant's duties under this Agreement, except exclusively for the purpose contemplated by this Agreement (and then only for the benefit of - 3 - the Company) and for no other purpose. Subsections 6(a) and (b) of this Agreement are intended to, and shall, supersede Section 1 of the Prior Agreement. The Consultant further agrees that he will not intentionally use any confidential information learned by him in connection with his association with the Company in any manner detrimental to the Company. (c) All documents, records, equipment and other physical property, whether or not pertaining to Proprietary Information, furnished to the Consultant by the Company or produced by the Consultant or others in connection with his association with the Company shall be and remain the sole property of the Company. The Consultant will, upon request by the Company, return to the Company all documents, notes, drawings, specifications, programs, data, customer lists and other materials of any nature pertaining to his association and work with the Company, including any copies of such materials, and the Consultant shall not use any of the foregoing or any reproduction of any of the foregoing. All obligations of the parties under this Section 6 shall survive expiration or termination of the Agreement and shall continue in effect for a period of five (5) years from the Commencement Date. 7. Non Public Information. The Consultant recognizes that in the course of his duties hereunder, he may receive from the Company or others information which may be considered "material, nonpublic information" concerning a public company that is subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended. The Consultant agrees not to: (a) Buy or sell any security, option, bond or warrant while in possession of relevant material, nonpublic information received from the Company or others in connection herewith; (b) Provide the Company with information with respect to any public company that may be considered material, nonpublic information, unless first specifically agreed to in writing by the Company; or (c) Provide any person with material, nonpublic information, received from the Company, including any relative, associate or other individual who intends to, or may, (a) trade securities with respect to the Company which is the subject of such information, or (b) otherwise directly or indirectly benefit from such information. This Section shall survive the termination of this Agreement. 8. Indemnification Agreement. The Company hereby confirms the continuing validity of the Indemnification Agreement dated October 4, 1989 (the "Indemnification Agreement") by and between the Company and the Consultant and agrees to indemnify the Consultant to the fullest extent permitted by law for any liability of the Company which may in the future be asserted against the Consultant. Furthermore the Company confirms that, pursuant to its Restated Certificate of Incorporation, the Consultant is - 4 - not personally liable to the Company or any of its stockholders for monetary damages for breach of duty as a director, except for liability: (a) for any breach of the director's duty of loyalty to the Company and its stockholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law; (c) under Section 174 of the Delaware General Corporation Law, relating to the improper payment of dividends or improper redemption; or (d) for any transaction from which the director derived an improper personal benefit. 9. Release. The Consultant hereby releases and forever discharges the Company, its subsidiaries and each of their respective past and present directors, officers, shareholders, employees, agents, attorneys, servants, predecessors, successors and assigns, and each of them separately and collectively (hereinafter referred to separately and collectively as the "Releasees") from any and all claims, liens, causes of action, obligations, damages and liabilities that the Consultant may have against any of the Releasees except under the Consultant's Indemnification Agreement and this Agreement (the "Remaining Obligations"). Without limiting the foregoing, the Consultant acknowledges that no Releasee has any obligation to the Consultant under any agreements previously entered into, other than the Remaining Obligations. The Company hereby releases and forever discharges the Consultant and his agents, attorneys, servants, predecessors, successors and assigns, and each of them separately and collectively (hereinafter referred to separately and collectively as the "Releasors"), from any and all claims, liens, causes of action, obligations, damages and liabilities that the Releasees may have against the Consultant except under applicable law and the Remaining Obligations and obligations in respect of the Consultant's activities undertaken prior to the date hereof under the Prior Agreement (it being understood and agreed that the Consultant shall have no obligation to continue to render the services set forth on Exhibit B of such agreement). 10. Waiver. The Consultant and the Company expressly waive all rights under section 1542 of the Civil Code of California, which provides: " A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The Consultant and the Company acknowledge that this Agreement is intended to include and discharge certain claims as set forth in Section 9 which the parties hereto do not know or suspect to exist at the time of execution and expressly assumes all risks attendant - 5 - to release of claims arising out of facts occurring at any time prior to the execution of this Agreement which are unknown, unforeseen or latent. 11. Sale of Securities. Subject to any requirements of law in relation to the sale of securities, the Company will relieve the Consultant of his contractual obligation previously entered into requiring that the Consultant not sell any common stock held in the Company (the "Common Stock") for a period of 2 (two) years, provided, however, that, the Consultant hereby agrees that from the Commencement Date until all of the Consultant's Common Stock has been sold, the Consultant: (a) will not sell, contract to sell, grant any option for the sale of or otherwise dispose of directly or indirectly, more than 5000 shares of common stock in any week (subject to adjustment for stock splits and the like); (b) will not, directly or indirectly, through related parties, or otherwise sell "short" or "short against the box" (as those terms are generally understood) any equity security of the Company; or (c) will not otherwise engage in any transaction which involves hedging of the Consultant's position in any equity security of the Company. 12. Specific Performance. The Consultant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 6 would be inadequate and, in recognition of this fact, the Consultant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 13. Binding Effect. This Agreement shall bind all of the Consultant's heirs, executors, administrators, successors and assigns; and it shall inure to the benefit of each Releasee and, in addition all heirs, executors, administrators and assigns of each Releasee who is an individual. 14. Non-disparagement. The Consultant and the Company promise not to make any written or oral statements, whether or not true, that disparage the other's reputation or work product. 15. Withholding Taxes. All payments made under this Agreement shall be subject to reduction to reflect taxes required to be withheld by law. 16. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles - 6 - of conflicts of law. The Consultant hereby consents to be subject to the jurisdiction of the courts of the State of New York. (b) Entire Agreement; Amendment; Survival. The Consultant warrants that no promise, inducement or agreement not expressed herein has been made in connection with this Agreement; that this Agreement constitutes the entire agreement between the Consultant and the Company with respect to the consulting arrangement contemplated hereby and the other matters covered hereby and that this Agreement cancels and supersedes all prior communications or understandings between the Company and the Consultant with respect to such subject matter. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the aforesaid subject matter other than those expressly set forth herein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. The provisions of Sections 6, 7, 8, 9, 11 and 14 of this Agreement shall survive any termination of this Agreement and shall survive beyond the expiration of the Term. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term of any other term of this Agreement. (d) Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. (e) Successors; Binding Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors and assigns. This agreement may not be assigned by the Consultant. (f) Counterparts; Effectiveness. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. - 7 - IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Consultant: ---------------------------------- By: Paul O.P. Ts'o, Ph.D. Genta Incorporated: ---------------------------------- By: Michael S. Weiss Its: Interim Chairman - 8 - EX-10.109 12 AGREEMENT AGREEMENT This AGREEMENT (this "Agreement") dated as of August 27, 1997 (the "Agreement") by and between Genta Incorporated, a Delaware corporation (the "Company"), and Sharon B. Webster, Ph.D. (the "Consultant"); WHEREAS, the Consultant has served as a director of the Company for a number of years and has considerable and invaluable knowledge of the business and history of the Company; WHEREAS, the Company desires that it be able to call upon the experience and knowledge of the Consultant with respect to the Company from time to time, in accordance with the terms hereof; and WHEREAS, the Consultant is willing to render such services to the Company on the terms and conditions hereinafter set forth in this Agreement; NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term. Subject to paragraph 5, from the date of the Consultant's resignation from the Board of Directors of the Company (the "Commencement Date") and continuing for a 1 (one) year period (the "Term"), the Consultant shall be retained by the Company as a consultant as provided in this Agreement. 2. Position and Responsibilities. The Consultant hereby agrees to make available to the Company and its directors during the Term the benefit of the Consultant's knowledge of the Company's and its subsidiaries' affairs, provided that, except for telephone inquiries, the Consultant shall not be required to devote more than 1 (one) day per calendar month. 3. Compensation. At the commencement of this Agreement, the Company shall issue to the Consultant 15,500 shares of Genta common stock and shall pay the Consultant $4,000. Furthermore, during the Term of this Agreement, the Company shall pay the Consultant at a rate of $1,000 per month. Subject to Section 4, the Consultant shall not be entitled to receive any other payment or benefits. The Consultant acknowledges that all stock options previously granted to her by the Company are hereby cancelled. 4. Expenses. Subject to the Company's prior approval, the Consultant shall be reimbursed for necessary and reasonable expenses incurred by the Consultant in connection with the performance of her duties hereunder including, without limitation, reasonable travel expenses and shall receive an additional $2,500 per day for any in-person attendance at any meeting of the Company. 5. Termination. This Agreement and the Consultant's retention hereunder may be immediately terminated by the Company upon the Consultant's breach of this Agreement. 6. Confidentiality. The Consultant acknowledges that the Company possesses and will continue to possess information that has been created, discovered, developed, acquired or otherwise become known to the Company (including, without limitation, information created, discovered, developed or made known to the Consultant during the period the Consultant was associated with the Company including, without limitation, during the term of this Agreement), which information has commercial business value. All such information, which relates either to (A) the business and operations of the Company, including without limitation, strategies, forecasts, potential new products, unpublished financial statements, budgets, projections, patent applications filed by the Company, legal advice rendered to the Company, licenses, prices, costs, and supplier lists, or (B) information disclosed by representatives of the Company to the Consultant relating to its activities in the field of single mismatch discrimination and in the control of gene expression using steric blockers is hereinafter called "Proprietary Information". In consideration of the compensation received by the Consultant from the Company and the covenants contained in this Agreement, the Consultant agrees as follows: (a) All Proprietary Information is and shall continue to be the sole property of the Company and its assigns, and the Company and its assigns are and shall continue to be the sole owner of all rights in connection therewith. The Consultant shall maintain in strictest confidence any and all Proprietary Information and shall not disclose the same to any third party; provided, however, that the obligation of confidentiality by the Consultant shall not apply to any information, documents, materials or things otherwise within the definition of Proprietary Information but which: (i) Consultant receives at any time from a third party lawfully in possession of same and having the right to disclose same; (ii) is, as of the effective date of this Agreement, in the public domain, or subsequently enters the public domain through no fault of the Consultant; (iii) has been previously approved by the Company in writing to be released from the confidentiality obligations hereunder; or (iv) is required to be disclosed to (or by) a court or other governmental authority, provided reasonable notice of the impending disclosure is provided to the Company, and the Company has agreed to such disclosure in writing or has exhausted its right to contest such disclosure. - 2 - (b) The Consultant hereby agrees that she will not use any Proprietary Information, including any Proprietary Information that the Consultant learns or develops in the course of the performance of the Consultant's duties under this Agreement, except exclusively for the purpose contemplated by this Agreement (and then only for the benefit of the Company) and for no other purpose. The Consultant further agrees that she will not intentionally use any confidential information learned by her in connection with her association with the Company in any manner detrimental to the Company. (c) All documents, records, equipment and other physical property, whether or not pertaining to Proprietary Information, furnished to the Consultant by the Company or produced by the Consultant or others in connection with her association with the Company shall be and remain the sole property of the Company. The Consultant will, upon request by the Company, return to the Company all documents, notes, drawings, specifications, programs, data, customer lists and other materials of any nature pertaining to her association and work with the Company, including any copies of such materials, and the Consultant shall not use any of the foregoing or any reproduction of any of the foregoing. All obligations of the parties under this Section 6 shall survive expiration or termination of the Agreement and shall continue in effect for a period of five (5) years from the Commencement Date. 7. Non Public Information. The Consultant recognizes that in the course of her duties hereunder, she may receive from the Company or others information which may be considered "material, nonpublic information" concerning a public company that is subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended. The Consultant agrees not to: (a) Buy or sell any security, option, bond or warrant while in possession of relevant material, nonpublic information received from the Company or others in connection herewith; (b) Provide the Company with information with respect to any public company that may be considered material, nonpublic information, unless first specifically agreed to in writing by the Company; or (c) Provide any person with material, nonpublic information, received from the Company, including any relative, associate or other individual who intends to, or may, (a) trade securities with respect to the Company which is the subject of such information, or (b) otherwise directly or indirectly benefit from such information. This Section shall survive the termination of this Agreement. 8. Indemnification Agreement. The Company hereby confirms the continuing validity of the Indemnification Agreement dated October 4, 1989 (the "Indemnification Agreement") by and between the Company and the Consultant and agrees to - 3 - indemnify the Consultant to the fullest extent permitted by law for any liability of the Company which may in the future be asserted against the Consultant. Furthermore the Company confirms that, pursuant to its Restated Certificate of Incorporation, the Consultant is not personally liable to the Company or any of its stockholders for monetary damages for breach of duty as a director, except for liability: (a) for any breach of the director's duty of loyalty to the Company and its stockholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law; (c) under Section 174 of the Delaware General Corporation Law, relating to the improper payment of dividends or improper redemption; or (d) for any transaction from which the director derived an improper personal benefit. 9. Release. The Consultant hereby releases and forever discharges the Company, its subsidiaries and each of their respective past and present directors, officers, shareholders, employees, agents, attorneys, servants, predecessors, successors and assigns, and each of them separately and collectively (hereinafter referred to separately and collectively as the "Releasees") from any and all claims, liens, causes of action, obligations, damages and liabilities that the Consultant may have against any of the Releasees except under the Consultant's Indemnification Agreement and this Agreement (the "Remaining Obligations"). Without limiting the foregoing, the Consultant acknowledges that no Releasee has any obligation to the Consultant under any agreements previously entered into, other than the Remaining Obligations. The Company hereby releases and forever discharges the Consultant and her agents, attorneys, servants, predecessors, successors and assigns, and each of them separately and collectively (hereinafter referred to separately and collectively as the "Releasors"), from any and all claims, liens, causes of action, obligations, damages and liabilities that the Releasees may have against the Consultant except under applicable law and the Remaining Obligations. 10. Waiver. The Consultant and the Company expressly waive all rights under section 1542 of the Civil Code of California, which provides: " A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The Consultant and the Company acknowledge that this Agreement is intended to include and discharge certain claims as set forth in Section 9 which the parties hereto do not know or suspect to exist at the time of execution and expressly assumes all risks attendant - 4 - to release of claims arising out of facts occurring at any time prior to the execution of this Agreement which are unknown, unforeseen or latent. 11. Sale of Securities. Subject to any requirements of law in relation to the sale of securities, the Company will relieve the Consultant of her contractual obligation previously entered into requiring that the Consultant not sell any common stock held in the Company (the "Common Stock") for a period of 2 (two) years, provided, however, that, the Consultant hereby agrees that from the Commencement Date until all of the Consultant's Common Stock has been sold, the Consultant: (a) will not sell, contract to sell, grant any option for the sale of or otherwise dispose of directly or indirectly, more than 5000 shares of common stock in any week (subject to adjustment for stock splits and the like); (b) will not, directly or indirectly, through related parties, or otherwise sell "short" or "short against the box" (as those terms are generally understood) any equity security of the Company; or (c) will not otherwise engage in any transaction which involves hedging of the Consultant's position in any equity security of the Company. 12. Specific Performance. The Consultant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 6 would be inadequate and, in recognition of this fact, the Consultant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 13. Binding Effect. This Agreement shall bind all of the Consultant's heirs, executors, administrators, successors and assigns; and it shall inure to the benefit of each Releasee and, in addition all heirs, executors, administrators and assigns of each Releasee who is an individual. 14. Non-disparagement. The Consultant and the Company promise not to make any written or oral statements, whether or not true, that disparage the other's reputation or work product. 15. Withholding Taxes. All payments made under this Agreement shall be subject to reduction to reflect taxes required to be withheld by law. 16. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles - 5 - of conflicts of law. The Consultant hereby consents to be subject to the jurisdiction of the courts of the State of New York. (b) Entire Agreement; Amendment; Survival. The Consultant warrants that no promise, inducement or agreement not expressed herein has been made in connection with this Agreement; that this Agreement constitutes the entire agreement between the Consultant and the Company with respect to the consulting arrangement contemplated hereby and the other matters covered hereby and that this Agreement cancels and supersedes all prior communications or understandings between the Company and the Consultant with respect to such subject matter. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the aforesaid subject matter other than those expressly set forth herein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. The provisions of Sections 6, 7, 8, 9, 11 and 14 of this Agreement shall survive any termination of this Agreement and shall survive beyond the expiration of the Term. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term of any other term of this Agreement. (d) Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. (e) Successors; Binding Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors and assigns. This agreement may not be assigned by the Consultant. (f) Counterparts; Effectiveness. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. - 6 - IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Consultant: ---------------------------------- By: Sharon B. Webster, Ph.D. Genta Incorporated: ---------------------------------- By: Michael S. Weiss Its: Interim Chairman - 7 - EX-27 13 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,202,668 7,253,756 431,046 0 826,008 9,931,991 4,707,848 2,989,698 15,753,903 5,369,071 2,204,053 0 684 5,712 9,418,602 15,753,903 4,701,649 5,101,746 3,099,078 16,561,402 0 0 227,160 0 0 0 0 0 0 (12,425,817) (6.85) 0
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