-----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, OAh1I09V/l7gC5gAtvrmntoOxFNaj0a8MRn3VpJOGiWno7DEQXFxLdXbjwlx3Flp PPOwCGU10swQ4RIS0VouGw== 0000922423-99-000549.txt : 19990519 0000922423-99-000549.hdr.sgml : 19990519 ACCESSION NUMBER: 0000922423-99-000549 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 DATE AS OF CHANGE: 19990518 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: 99597694 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-19635 GENTA INCORPORATED (Exact name of Registrant as specified in its certificate of incorporation) Delaware 33-0326866 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 99 Hayden Avenue, Suite 200 Lexington, Massachusetts 02421 (Address of principal executive offices) (Zip Code) (781) 860-5150 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value Preferred Stock Purchase Rights, $.001 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the voting common equity held by non-affiliates of the registrant was $25,164,644 as of April 12, 1999. For purposes of determining this number, 4,049,249 shares of common stock held by affiliates are excluded. As of April 12, 1999, the registrant had 15,080,326 shares of Common Stock outstanding. As of April 12, 1999, 386 persons held common stock of the registrant. Documents Incorporated by Reference None. - 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. - 3 - PART I ITEM 1. BUSINESS Overview Genta Incorporated ("Genta" or the "Company"), incorporated under the laws of the State of Delaware on February 4, 1988, is an emerging biopharmaceutical company. The Company's research efforts have been focused on the development of proprietary oligonucleotide pharmaceuticals intended to block or regulate the production of disease-related proteins at the genetic level. The Company's oligonucleotide programs are focused primarily in the area of cancer. In late 1995, a phase I/IIa clinical trial was initiated in the United Kingdom using Genta's anti-bcl-2 Anticode(TM) oligonucleotide, G3139, in non-Hodgkin's lymphoma patients for whom prior therapies have failed. This clinical trial, which was conducted in collaboration with the Royal Marsden NHS Trust and the Institute for Cancer Research, is now complete. In late 1996, an Investigational New Drug application ("IND") for the G3139 clinical program was filed in the United States and allowed to proceed by the United States Food and Drug Administration ("FDA"). In late 1997, a Phase I trial was initiated in the United States at the Memorial Sloan-Kettering Cancer Center (the "MSKCC") in New York City using G3139 in patients diagnosed with various types of cancer to be followed by a phase IIa trial in prostate cancer. In 1998, several additional trials were initiated in North America and Europe. In each of these trials, G3139 is being investigated for safety and preliminary evidence of effectiveness when administered with standard chemotherapeutic agents in different cancers. The Company also has manufactured and marketed specialty biochemicals and intermediate products to the in vitro diagnostic and pharmaceutical industries through its manufacturing subsidiary, JBL Scientific, Inc. ("JBL"), a California corporation acquired by the Company in February 1991. The Company owns 50% of a drug delivery system joint venture, Genta Jago Technologies B.V. ("Genta Jago"), with SkyePharma, PLC ("SkyePharma," formerly with Jagotec AG ("Jagotec"), which was acquired by SkyePharma) established to develop oral controlled-release drugs. To date, no products from this joint venture have been commercialized, although an Abbreviated NDA was submitted in 1998 by the joint venture's marketing partner for one product. The joint venture's original plan was to use Jagotec's patented GEOMATRIX(R) drug delivery technology ("GEOMATRIX") in a two-pronged commercialization strategy: the development of generic versions of successful brand-name controlled-release drugs; and the development of controlled-release formulations of drugs currently marketed in only immediate-release form. The only products in development to date are those intended to be comparable to the commercially available, brand name, controlled-release drugs. Since 1997, the Company has been reducing its human and other resources to reduce expenses while focusing its Research and Development efforts on its Anticode(TM) brand of antisense products intended to treat cancer at its genetic source. To this end the Company's primary efforts are directed toward the clinical development of G3139. Consistent with this strategic direction, on March 19, 1999, the Company entered into an Asset Purchase Agreement with Promega Corporation whereby Promega will acquire substantially all of the assets and certain liabilities of JBL. The transaction will be consummated upon the satisfaction of certain closing conditions. JBL has been reported as a discontinued operation in the accompanying consolidated financial statements. On March 4, 1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into an interim agreement pursuant to which the parties to the joint venture released each other from all liability relating to unpaid joint venture development costs and funding obligations. SkyePharma agreed to be responsible for substantially all of the obligations of the joint venture to third parties and for the further development of the joint venture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between Genta and SkyePharma as set forth in such interim agreement. - 4 - In 1998, the Company completed the closure of its R&D facilities in San Diego, California, and in the second quarter of 1999 is moving its headquarters from San Diego, California, to Lexington, Massachusetts. Summary of Business and Research and Development Programs The Company is currently focusing its research and product development efforts on Genta's lead anti-bcl-2 molecule, G3139, and the related Anticode(TM) brand of antisense oligonucleotide programs. Anticode(TM) Brand of Antisense Oligonucleotide Programs Oligonucleotides represent a modern approach to drug development based upon genetic control of disease. Many human diseases have genetic origins that involve either the expression of a harmful foreign gene or the aberrant expression of a normal or mutated human gene. The Company's Anticode(TM) oligonucleotides are short strands of synthetic nucleic acids designed to bind to ("hybridize" with) specific sequences of disease-related RNA or DNA, thereby blocking or controlling production of disease-related proteins. The Company believes that, because of their selective binding properties, Anticode(TM) oligonucleotides should not interfere with the function of normal cells, and therefore, should elicit significantly fewer side effects than traditional drugs. Oligonucleotide drugs may attack a disease at one of two levels. One approach is to prevent the synthesis of essential disease-related proteins. In this approach, certain oligonucleotides are used to interrupt the processing of, or selectively to bind to and destroy, individual messenger RNA (mRNA) sequences, which leads to the down-regulation (lowering of levels) of specific proteins and thereby effectively eliminates the disease or the disease promoter. This is referred to as the "antisense" mechanism of action. A second therapeutic opportunity is to prevent transcription of disease-causing DNA into the mRNA copy of the gene. This is referred to as the "triple-strand to DNA" mechanism of activity. Genta has focused its Anticode(TM) research on oligonucleotides with mixed phosphorothioate and methylphosphonate backbones. The Company has licensed patents covering phosphorothioate oligonucleotide constructions and has applied for patents covering the mixed backbone constructions. Genta's scientists have improved the backbone technologies by introducing mixed chirally-enriched or chirally-pure oligonucleotides. In preclinical studies, these oligonucleotides effectively interfere with the action of targeted mRNA sequences inside cells. Intravenous administration of the improved technology oligonucleotides to certain animals demonstrates that these compounds have greater stability in the circulatory system and are eventually excreted intact in the urine. These improved backbone technologies represent opportunities for second generation Anticode(TM) antisense oligonucleotides, none of which are currently in development. Management believes that the Company has the ability to acquire or produce quantities of oligonucleotides sufficient to support its present needs for research and its projected needs for initial clinical development programs, assuming adequate funding. However, in order to obtain oligonucleotides sufficient to meet the volume and cost requirements needed for certain commercial applications of Anticode(TM) oligonucleotide products, Genta requires raw materials currently provided by a single supplier, and there can be no assurance that such supplier will continue satisfactorily to provide the - 5 - 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 many types of cancer. Genta's lead anti-bcl-2 molecule, G3139, is designed to bind to and destroy the mRNA that produces the bcl-2 protein product, thereby interfering with the cellular production of the protein. High levels of bcl-2 are associated with a poor clinical prognosis in many solid tumor and hematological malignancies such as lymphoma, leukemia, melanoma, multiple myeloma, prostate and breast cancers. The Company believes that its Anticode(TM) antisense strategy against the bcl-2 gene has the potential to represent a significant therapeutic opportunity in many of these cancers. In preclinical studies conducted by Dr. Finbarr Cotter, at the Institute for Child Health in London, an anti-bcl-2 oligonucleotide was shown to cure lymphoma-like disease induced by the injection of human B-cell lymphoma cells in immunodeficient mice. Similar findings in another mouse lymphoma model were reported to the Company by another collaborator, Dr. Richard Klasa of the British Columbia Cancer Agency. In addition, in a variety of other animal studies, anti-bcl-2 Anticode(TM) oligonucleotides have been found to inhibit the growth of human lymphoma, melanoma, colon, prostate and breast cancer tumors in immunodeficient mice when administered alone or in combination with chemotherapeutic agents. In the February 1998 issue of Nature Medicine, Dr. Burkhard Jansen and colleagues published a report entitled "bcl-2 antisense therapy chemosensitizes human melanoma in SCID mice." They describe studies showing that G3139 administered with dacarbazine produced significantly greater tumor volume reduction than dacarbazine alone or than G3139 alone. In ten of thirteen animals there was no tumor after the combination treatment. In late 1995, a Phase I/IIa clinical trial was initiated in the United Kingdom using Genta's anti-bcl-2 Anticode(TM) oligonucleotide, G3139, in human non-Hodgkin's lymphoma patients for whom prior therapies had failed. The clinical trial was conducted in collaboration with the Royal Marsden NHS Trust ("Royal Marsden") and the Institute for Cancer Research under the direction of Dr. David Cunningham. The principal aim of this Phase I/IIa study was to define the maximum tolerated dose of G3139. Secondary objectives included measurement of clinical and biochemical disease parameters. The trial with Royal Marsden is complete, and the Company believes that, other than mild irritation at the site of the subcutaneous infusion in most of the patients or a low-grade reversible thrombocytopenia (decrease in number of blood platelets), no serious drug-attributable or dose-limiting adverse effects were seen until the maximum tolerated dose was reached. Initial results in the first nine patients were reported in The Lancet ("BCL-2 antisense therapy in patients with non-Hodgkin lymphoma," A. Webb, et al., Vol. 349; pages 1137-1141, April 19, 1997). This report revealed that four of the nine patients observed showed improvements in their disease and in one patient the tumor had completely disappeared. Of the 21 - 6 - patients treated to date, three suffered what were considered to be drug-related serious adverse events at high levels of drug presentation above the predicted efficacy range. These events included a skin reaction due to the subcutaneous method of administration in the study; hypotension, and thrombocytopenia. These patients were removed from the study and recovered from the reaction. The patient who had experienced hypotension was later rechallenged at a lower dose without any untoward event. The investigators at the Royal Marsden Hospital have recently initiated a Phase II trial in lymphoma using G3139 in addition to a chemotherapeutic regimen which in the specific patient had failed to produce a response. The Company has an IND, granted by the FDA in December 1996, to initiate clinical trials under an IND for the use of G3139. The Company also initiated several trials in 1998 and the on-going trials are summarized in the table below. Additional trials are also under review. Status of G3139 Clinical Trials - - -------------------------------
- - --------------------------------------------------------------------------------------------------------- Trial Location/Investigator Status Indication Treatment - - --------------------------------------------------------------------------------------------------------- Royal Marsden Hospital Phase I Completed Non-Hodgkin's Lymphoma G3139 David Cunningham, MD - - --------------------------------------------------------------------------------------------------------- Royal Marsden Hospital Phase II in Non-Hodgkin's Lymphoma G3139 with Standard David Cunningham, MD Progress Chemo Regimens - - --------------------------------------------------------------------------------------------------------- MSKCC Phase I in Androgen Insensitive G3139 Howard Scher, MD Progress Metastatic Prostate Cancer and Other Solid Tumors - - --------------------------------------------------------------------------------------------------------- Sidney Kimmel Cancer Center Phase I/IIA in Androgen Insensitive G3139 with Androgen John Gutheil, MD Progress Metastatic Prostate Cancer Blockade - - --------------------------------------------------------------------------------------------------------- University of Vienna Phase I/IIA in Metastatic Malignant G3139 with DTK Burkhard Jansen, MD Progress Melanoma - - --------------------------------------------------------------------------------------------------------- British Columbia Cancer Agency Phase I/IIA in Androgen Insensitive G3139 with Mitoxantrone Richard Klasa, MD Progress Metastatic Prostate Cancer - - --------------------------------------------------------------------------------------------------------- British Columbia Cancer Agency Phase I/IIA in Non-Hodgkin's Lymphoma G3139 with Richard Klasa, MD Progress Cyclophosphamide - - ---------------------------------------------------------------------------------------------------------
In addition, the Company has had discussions with the National Cancer Institute ("NCI") regarding additional Phase I and II clinical trials. Assuming the Company and NCI agree to move forward with such NCI sponsored trials, the Company will collaborate with NCI on the design of such clinical studies and the selection of tumor targets. Under the arrangement, NCI would cover the costs of running both pre-clinical and clinical studies while Genta would be responsible for supplying NCI with necessary quantities of G3139 to carry out this work. See "MD&A--Certain Trends and Uncertainties--No Assurance of Regulatory Approval; Government Regulation," "MD&A--Certain Trends and Uncertainties--Dependence on Others" and "MD&A--Certain Trends and Uncertainties--Uncertainty of Clinical Trials and Results." On March 31, 1998, the United States Patent and Trademark Office issued a patent to which the Company has an exclusive license, for claims covering antisense oligonucleotide compounds targeted against bcl-2. These claims cover the Company's proprietary Anticode(TM) oligonucleotide molecules that target bcl-2, including its lead clinical candidate, G3139. Other related patents and claims in the United States and corresponding foreign patent applications are still pending. See "MD&A--Certain Trends and Uncertainties--Uncertainty Regarding Patents and Proprietary Technology." - 7 - 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"). Chugai Pharmaceutical Company, Ltd. ("Chugai"), a Japanese corporation, subsequently acquired Gen-Probe. Gen-Probe had the option to acquire an exclusive worldwide license to any product consisting of, including, derived from or based on oligonucleotides for the treatment or prevention of Epstein-Barr virus, cytomegalovirus, HIV, human T-cell leukemia virus-1 and all leukemias and lymphomas. Genta was obligated to pursue the development of a therapeutic compound for the treatment of one of these indications as its first therapeutic development program, which it did. In February 1996, Gen-Probe elected not to exercise such option with respect to Genta's anti-bcl-2 products, waiving any rights it may have had to develop or commercialize such products. The Gen-Probe agreement provides for perpetual worldwide licenses in applicable proprietary rights; royalty payments shall not accrue beyond the later of fifteen years after the first commercial sale of each product and the duration of patent in the country of sale. Ts'o/Miller/Hopkins. In February 1989, the Company entered into a license agreement with Drs. Paul Ts'o and Paul Miller (the "Ts'o/Miller Agreement") pursuant to which Drs. Ts'o and Miller (the "Ts'o/Miller Partnership") granted an exclusive license to the Company to certain issued patents, patent applications and related technology regarding the use of nucleic acids and oligonucleotides including methylphosphonates as pharmaceutical agents. Dr. Ts'o is a Professor of Biophysics, Department of Biochemistry, and Dr. Miller is a Professor of Biochemistry, both at the School of Public Health and Hygiene, Johns Hopkins University ("Johns Hopkins"). In May 1990, the Company entered into a license agreement with Johns Hopkins (the "Johns Hopkins Agreement," and collectively with the Ts'o/Miller Agreement, referred to herein as the "Ts'o/Miller/Hopkins Agreements") pursuant to which Johns Hopkins granted Genta an exclusive license to its rights in certain issued patents, patent applications and related technology developed as a result of research conducted at Johns Hopkins by Drs. Ts'o and Miller and related to the use of nucleic acids and oligonucleotides as pharmaceutical agents. In addition, Johns Hopkins granted Genta certain rights of first negotiation to inventions made by Drs. Ts'o and Miller in their laboratories in the area of oligonucleotides and to inventions made by investigators at Johns Hopkins in the course of research funded by Genta, which inventions are not otherwise included in the Ts'o/Miller/Hopkins Agreements. Genta had agreed to pay Dr. Ts'o, Dr. Miller and Johns Hopkins royalties on net sales of products covered by the issued patents and patent applications, but not the related technology, licensed to the Company under the Ts'o/Miller/Hopkins Agreements. The Company also agreed to pay certain minimum royalties prior to commencement of commercial sales of such products, which royalties may be credited under certain conditions against royalties payable on subsequent sales. On February 14, 1997, the Company received notice from Johns Hopkins that the Company was in material breach of the Johns Hopkins Agreement. The Johns Hopkins Agreement provides that, if a material payment default is not cured within 90 days of receipt of notice of such breach, Johns Hopkins may terminate the Johns Hopkins Agreement. In February 1997, the Company paid Johns Hopkins $100,000 towards the post-doctoral support program. On May 15, 1997, Johns Hopkins sent Genta a letter stating that the Johns Hopkins Agreement was terminated. On November 26, 1997, the Ts'o/Miller Partnership sent Genta a letter claiming that Genta was in material breach of the Ts'o/Miller Agreement for failing to pay royalties from 1995 through 1997. By letter dated April 28, - 8 - 1998, the Ts'o/Miller Partnership advised the Company that it was terminating the license granted pursuant to the Ts'o/Miller Agreement. On June 4, 1998, the Company's statutory process agent received a Summons and Complainpt in a lawsuit brought by Johns Hopkins against the Company in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins alleges in the Complaint that the Company has breached the Johns Hopkins Agreement and owes it licensing royalty fees and related expenses in the amount of $308,832.24. Johns Hopkins also alleges the existence of a separate March 1993 letter agreement wherein the Company agreed to support a fellowship program at the Johns Hopkins School of Hygiene and Public Health and the Company's breach thereof, with damages of $326,829.00. On August 10, 1998, the Company's statutory process agent received a Summons and Complaint in a related lawsuit brought by the Ts'o/Miller Partnership and others against the Company in the same court (Case No. 98182113). The Ts'o/Miller Partnership claims that it is owed licensing royalty fees in the amount of $287,671.23. The Company is currently in settlement negotiations. The Company believes that no further accrual is necessary pursuant to this settlement. Based on a review of the research conducted with the technology provided by these licenses, the Company concluded that it could not develop potential products using this technology. Management's current strategy, therefore, is to employ alternative technologies that are available to it through other licenses or its own intellectual property. Accordingly, the Company believes no additional accrual is necessary and the Company does not believe that the termination of the Ts'o/Miller/Hopkins Agreements will have a material adverse effect on the Company's antisense research and development activities. Genta Jago As previously mentioned, Genta and SkyePharma entered into an interim agreement pursuant to which the parties to the joint venture released each other from all liability relating to unpaid development costs and funding obligations, and SkyePharma agreed to be responsible for substantially all of the obligations of the joint venture to third parties and for the further development of the joint venture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between Genta and SkyePharma as set forth in such interim agreement. Historical information relative to Genta Jago follows. In 1992, Genta and Jagotec determined to enter into a joint venture (Genta Jago). The Company's purpose in establishing Genta Jago was to develop products using a limited-scope license to Jagotec's GEOMATRIX technology in the hopes of producing shorter-term earnings than were expected from the Company's Anticode(TM) antisense programs. Genta contributed $4 million in cash to Genta Jago as well as the rights to apply its Anticode(TM) oligonucleotide technology to six products. Genta issued 120,000 shares of Common Stock valued at $7.2 million to Jagotec and its affiliates in 1992 as consideration for its interest in Genta Jago, to induce Jagotec to license to Genta Jago, for what the parties believed was a substantial discount from the underlying value of such license, Jagotec's GEOMATRIX technology with respect to approximately 25 products (the "Initial License") and to license to Genta Jagotec's GEOMATRIX technology for use in Genta's Anticode(TM) oligonucleotide development programs. The Common Stock issued by Genta was unregistered and therefore was recorded at a discount to the then-current trading value of registered shares. Jagotec's contribution to the joint venture consisted of its issuance of the Initial License to Genta Jago for $425,000, which the parties believed to be a substantial discount from the underlying value of such license. In 1994, separate from the original 1992 joint venture agreement, Genta and Jagotec began negotiations to expand Genta Jago to include the GEOMATRIX technology as applied to 35 additional products (the "Additional License"). In 1994, Jagotec granted Genta, for $1.85 million, an option (the "Expansion Option"), exercisable solely at Genta's discretion through April 30, 1995, to expand the joint venture by requiring Jagotec to contribute rights under the Additional License at what the parties believed was a substantial discount to its actual fair value. An additional $2.0 million (the "Deposit") was deposited with Jagotec in 1994, but would only be retained by Jagotec, as partial payment of the exercise price for the Expansion Option, if Genta actually exercised the Expansion Option. If such Expansion Option was not exercised, the $2.0 million Deposit would be transferred to Genta Jago in the form of working capital loans payable by Genta Jago to Genta. - 9 - Pursuant to the terms of the Expansion Option, for Genta to exercise the Expansion Option, Genta would have had to pay Jagotec an aggregate of $3.15 million in cash and 124,000 shares of Common Stock, valued at $1.6 million (based on the trading price at such time). The parties agreed the $3.15 million in cash would consist of (i) the $2.0 million Deposit made by Genta in 1994, which would be applied to the Expansion Option's exercise price upon Genta's election, in 1995, to exercise such Expansion Option; and (ii) an additional cash payment of $1.15 million to exercise the Expansion Option to be paid by Genta in 1995. In 1995, Genta exercised the Expansion Option. The Company has provided funding to Genta Jago pursuant to a working capital loan agreement that expired in October 1998. The Company believes it has fulfilled all obligations of the working capital agreement to the Joint Venture. See "MD&A--Liquidity and Capital Resources." From 1992 through 1997, Genta advanced an aggregate of $15.8 million in such working capital loans. In 1995, Genta Jago returned the Anticode(TM) technology to Genta in exchange for Genta's forgiveness of $4.4 million of principal and $0.3 million of interest outstanding under existing working capital loans to Genta Jago. This amount was determined by an arm's-length negotiation between Genta, Jagotec, and Genta Jago and was based on the amount actually expended by Genta Jago for research and development related to the Anticode(TM) technology from the time Genta Jago originally acquired the relevant license in 1992 through the date of return in 1995. Genta has the option (the "Purchase Option") to purchase Jagotec's interest in Genta Jago during the period beginning on December 31, 1998 and continuing through December 31, 2000 at a purchase price equal to the remainder of (a) the sum of (i) the lesser of (x) 50% of the fair market value of Genta Jago, excluding the fair market value of Genta Jago's rights to the Initial License and the Additional License, or (y) $100 million, plus (ii) 50% of the fair market value of Genta Jago's rights to the Initial License and the Additional License, less (b) 1.714286 times the fair market value of the 70,000 shares of Common Stock issued to Jagotec pursuant to a Common Stock Transfer Agreement dated as of December 15, 1992, between Genta and Jagotec. Genta Jago has contracted with Genta and Jagotec to conduct research and development and to provide certain other services. Oral Controlled-Release Drugs. - - ------------------------------ Formulations of drugs using the GEOMATRIX technology are designed to swell and gel when exposed to gastrointestinal fluids. This swelling and gelling is designed to allow the active drug component to diffuse from the tablet into the gastrointestinal fluids, gradually over a period of up to 24 hours. The Company believes that the GEOMATRIX technology may have other benefits that, collectively, may distinguish it from competing controlled-release technologies. More specifically, the Company believes these formulations can control drug release and potentially modulate pharmacokinetic profiles to produce a variety of desired clinical effects. For example, the GEOMATRIX technology may be used to formulate tablets with a rapid or a delayed therapeutic effect by varying the release characteristics of the drug from the tablet. The GEOMATRIX technology may also be used to formulate tablets that release two drugs at the same or different rates, or tablets that release a drug in several pulses after administration. Genta Jago may use the GEOMATRIX drug delivery technology to develop oral controlled-release formulations for a broad range of presently marketed drugs which have lost, or will, in the near to mid-term, lose patent protection and/or marketing exclusivity. Certain of these presently marketed drugs are already available in a controlled-release format, while others are only available in an immediate release format that requires dosing several times - 10 - daily. In the case of drugs already available in a controlled-release format, Genta Jago is seeking to develop bioequivalent products which would be therapeutic substitutes for the branded products. In the case of currently marketed products that are only available in immediate release form requiring multiple daily dosing, Genta Jago is seeking to develop once or twice-daily controlled-release formulations. The potential benefits of Genta Jago's oral controlled-release formulations may include improved compliance, greater efficacy and reduced side effects as a result of a more constant drug plasma concentration than that associated with immediate release drugs administered several times daily. Brightstone Pharma, Inc., a subsidiary of SkyePharma and the marketing partner of Genta Jago for naproxen sodium, submitted an abbreviated NDA in 1998. (Recently, SkyePharma has announced that it no longer plans to market its generic pharmaceutical candidates exclusively through its Brightstone subsidiary and is seeking marketing partners for these products.) Nifedipine (Procardia XL(R)) and ketoprofen (Oruvail(R)) are currently undergoing formulations development by SkyePharma. In December 1997, a competitor of the Company, Elan Corporation, received approval of their ANDA for a generic formulation of Oruvail(R) (ketoprofen), and another company, Mylan Laboratories, Inc., has filed an ANDA for a generic formulation of Procardia XL(R) (nifedipine). See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of Technological Change and Competition." Oral Controlled-Release Collaborative and Licensing Agreements. - - --------------------------------------------------------------- Genta Jago's strategy is to commercialize its GEOMATRIX controlled-release products worldwide by forming alliances with pharmaceutical companies. Genta Jago has established three such collaborations. Genta Jago/Gensia/Brightstone. In January 1993, Genta Jago entered into a collaboration agreement with Gensia for the development and commercialization of certain oral controlled-release pharmaceutical products for treatment of cardiovascular disease. Under the agreement, Gensia provides funding for formulation and preclinical development to be conducted by Genta Jago and is responsible for clinical development, regulatory submissions and marketing. Terms of the agreement provide Gensia exclusive rights to market and distribute the products in North America, Europe and certain other countries. The agreement has a term of the longer of twelve years and the patent term in the respective countries within the territory. Genta Jago received $1.0 million, $1.2 million and $2.2 million of funding in 1998, 1997, and 1996, respectively, pursuant to the agreement. Collaborative revenues of $2.2 million, $1.5 million and $2.8 million and were recognized under the agreement during the years ended December 31, 1998, 1997, and 1996, respectively. Effective October 1996, Gensia and SkyePharma reached an agreement whereby a SkyePharma subsidiary, Brightstone Pharma, Inc. ("Brightstone"), was assigned Gensia's rights (and those of Gensia's partner, Boehringer Mannheim) to develop and co-promote the potentially bioequivalent nifedipine product under the collaboration agreement with Genta Jago. The assignment was accepted by Genta Jago and has no impact on the terms of the original agreement. Genta Jago is still entitled to receive additional milestone payments from Brightstone triggered upon regulatory submissions - 11 - and approvals, as well as royalties or profit sharing ranging from 10% to 21% of product sales, if any. Genta Jago/Apothecon. In March 1996, Genta Jago entered into a collaborative licensing and development agreement (the "Genta Jago/Apothecon Agreement") with Apothecon, Inc. ("Apothecon"). In 1998, Apothecon advised Genta Jago that it was terminating its license. Genta Jago is seeking an alternative partner for future development and marketing of this product. Genta Jago/Krypton. In October 1996, Genta Jago entered into five collaborative licensing and development agreements (the "Genta Jago/Krypton Agreements") with Krypton, Ltd. ("Krypton"), a subsidiary of SkyePharma, whereby Genta Jago would sublicense to Krypton rights to develop and commercialize potentially bioequivalent GEOMATRIX(R) versions of five currently marketed products, as well as another agreement granting Krypton an option to sublicense rights to develop and commercialize an improved version of a sixth product. The Genta Jago/Krypton Agreements have terms of the shorter of fifteen years from first commercial sale and the expiration of the patent term on a territory-by-territory basis. During 1997, Genta Jago received funding of $1.9 million under the Genta Jago/Krypton Agreements and recognized $2.3 million of collaborative revenue therefrom. There were no revenues under this agreement in 1998. Research and Development In an effort to focus its research and development efforts on areas that provide the most significant commercial opportunities, the Company continually evaluates its ongoing programs in light of the latest market information and conditions, availability of third-party funding, technological advances, and other factors. As a result of such evaluation, the Company's product development plans have changed from time to time, and the Company anticipates that they will continue to do so in the future. The Company recorded research and development expenses of $4.6 million, $3.3 million, and $2.1 million during 1996, 1997, and 1998, respectively, of which approximately $50,000, $50,000 and zero, respectively, were funded pursuant to collaborative research and development agreements and of which approximately $1.6 million, $0.3 million, and $0.1 million, respectively, were funded pursuant to a related party contract revenue agreement with Genta Jago. See "MD&A--Results of Operations." Manufacturing/JBL On March 19, 1999, the Company signed an Asset Purchase Agreement with Promega Corporation whereby a wholly-owned subsidiary of Promega will acquire substantially all of the assets and certain liabilities of JBL. The transaction will be consummated upon the satisfaction of certain closing conditions. The accompanying financial information therefore reflects JBL as a discontinued operation for all periods presented. All of the Company's product sales are attributable to its manufacturing subsidiary, JBL Scientific, Inc. ("JBL"). The products JBL manufactures include: enzyme substrates that are used as color-generating reagents in clinical diagnostic tests, such as pregnancy tests, developed by JBL's customers; and fine chemical raw materials used in pharmaceutical research and development and manufacturing, such as those used to make biological polymers like peptides and oligonucleotides. JBL manufactures approximately 110-125 products on a recurring basis. Genta acquired JBL in early 1991. JBL is a manufacturer of high-quality specialty chemicals and intermediate products for the pharmaceutical and in vitro diagnostic industries. A number of Fortune 500 companies use JBL products as raw material in the production of a final product. JBL markets its products to over 100 purchasers in the pharmaceutical and diagnostic industries. See "MD&A--Certain Trends and Uncertainties--Difficult Manufacturing Process; Access to Certain Raw Materials." JBL holds a California site license to manufacture drugs for use in clinical research, but the manufacturing facilities at JBL have not been inspected by the FDA for compliance with requirements for Good Manufacturing Practices ("GMP"). The Company is currently having G3139 made on a - 12 - contract manufacturing basis by a third party supplier and is evaluating the establishment of affiliate relationships with third parties for the long term manufacture of oligonucleotides. See "MD&A--Certain Trends and Uncertainties--Difficult Manufacturing Process; Access to Certain Raw Materials." On March 19, 1999, the Company signed an Asset Purchase Agreement with Promega Corporation whereby a wholly owned subsidiary of Promega will acquire substantially all of the assets and certain liabilities of JBL. The transaction will be consummated upon the satisfaction of certain closing conditions. The accompanying financial information therefore reflects JBL as a discontinued operation for all periods presented. Genta Europe During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe") received approximately 5.4 million French Francs (or, as of April 8, 1999, approximately $885,060) of funding in the form of a loan from the French government agency L'Agence Nationale de Valorisation de la Recherche ("ANVAR") towards research and development activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta Europe and Genta. In October 1996, as part of the Company's restructuring program, Genta Europe terminated all scientific personnel. ANVAR asserted, in a letter dated February 13, 1998, that Genta Europe was not in compliance with the ANVAR Agreement, and that ANVAR might request the immediate repayment of such loan. The Company does not believe that under the terms of the ANVAR Agreement ANVAR is entitled to request early repayment. ANVAR notified Genta Incorporated that it was responsible as a guarantor of the note for the repayment. Genta's agent in Europe has again notified ANVAR that it does not agree that the note is payable. The Company is working with ANVAR to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. On June 30, 1998, Marseille Amenagement, a company affiliated with the city of Marseilles, France, filed suit in France to evict Genta Europe from its facilities in Marseilles and to demand payment of alleged back rent due and of a lease guarantee for nine years' rent. Following the filing of this claim and in consideration of the request for repayment of the loan from ANVAR, Genta Europe's Board of Directors directed the management to declare a "Cessation of Payment". Under this procedure, Genta Europe ceased any operations and terminated its only employee. A liquidator was appointed by the Court to take control of any assets of Genta Europe and to make payment to creditors. In December 1998, the Court in Marseilles dismissed the case against Genta Europe and indicated that it had no jurisdiction against Genta Incorporated. The Company's attorney in France notified the plaintiff of the decision and that they have 30 days from such notice to appeal. The 30-day appeal period has elapsed and the Company is awaiting formal notification by the court that an appeal has not been made. The decision of the Court in Marseilles does not preclude Marseille Amenagement from pursuing its claims in other courts in France or the United States, and there can be no assurance that they will not do so. Sales and Marketing Genta Jago has secured collaborative agreements with three entities for the development and commercialization of selected controlled-release pharmaceuticals. See "Genta Jago--Oral Controlled-Release Collaborative and Licensing Agreements." Genta Jago's collaborative agreements generally provide the collaborative partner exclusive rights to market and distribute the products in exchange for royalty payments to Genta Jago on product sales. Genta Jago's goal is to form additional collaborations to develop and market a number of its - 13 - GEOMATRIX controlled-release products. There can be no assurance that any such potential product will be successfully developed or that any prospective collaborations or licensing arrangements will be entered into. Patents and Proprietary Technology The Company's policy is to protect its technology by, among other things, filing patent applications with respect to technology considered important to the development of its business. The Company also relies upon trade secrets, unpatented know-how, continuing technological innovation and the pursuit of licensing opportunities to develop and maintain its competitive position. Genta has a portfolio of intellectual property rights to aspects of oligonucleotide technology, which includes novel compositions of matter, methods of large-scale synthesis, methods of controlling gene expression and cationic lipid delivery systems. In addition, foreign counterparts of certain applications have been filed or will be filed at the appropriate time. Allowed patents generally would not expire until 17 years after the date of allowance if filed in the United States before June 8, 1995 or, in other cases, 20 years from the date of application. Generally, it is the Company's strategy to apply for patent protection in the United States, Canada, Western Europe, Japan, Australia and New Zealand. Since its incorporation, Genta has separately filed an aggregate of over 400 United States and foreign patent applications covering new compositions and improved methods to use, synthesize and purify oligonucleotides, linker-arm technology, and compositions for their delivery. Thirty patents have been issued; seventeen in the United States (thirteen in 1998), and thirteen have issued overseas. Under the agreement with Gen-Probe, Genta gained non-exclusive access to all technology developed by Gen-Probe, as of February 1989, related to the use of DNA probes for therapeutic applications. This technology is related to nucleic acid probes for quantitation of organisms and viruses, methods for their production, including nonnucleotide linking reagents, labeling, and purification, and methods for their use including hybridization and enhanced hybridization. This includes rights to 14 issued patents and several pending United States patent applications and corresponding issued and pending applications in foreign countries. See "Genta Jago--Oligonucleotide Collaborative and Licensing Agreements--Gen-Probe (Chugai)." Genta also gained access to certain rights from the National Institutes of Health ("NIH") covering phosphorothioate oligonucleotides. This includes rights to three United States issued patents, one issued European patent and other corresponding foreign applications that are still pending. In addition, under an agreement with the University of Pennsylvania, Genta has acquired exclusive rights to antisense oligonucleotides directed against the bcl-2 gene as well as methods of their use for the treatment of cancer. On March 31, 1998 and November 3, 1998, two United States patents were issued encompassing the Company's licensed antisense oligonucleotide compounds targeted against the bcl-2 gene and in vitro uses of the same. These claims cover the Company's proprietary Anticode(TM) oligonucleotide molecules which target the bcl-2 gene including its lead clinical candidate, G3139. Other related United States and corresponding foreign patent applications are still pending. - 14 - Jagotec's GEOMATRIX technology is the subject of issued patents and pending applications. Jagotec currently holds four issued United States patents, five granted foreign patents, and other corresponding foreign patent applications still pending that cover the GEOMATRIX technology. Certain rights to GEOMATRIX technology have been licensed to Genta Jago. See "Genta Jago." The patent positions of biopharmaceutical and biotechnology firms, including Genta, can be uncertain and involve complex legal and factual questions. Consequently, even though Genta is currently prosecuting its patent applications with the United States and foreign patent offices, the Company does not know whether any of its applications will result in the issuance of any patents or if any issued patents will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, Genta cannot be certain that others have not filed patent applications directed to inventions covered by its pending patent applications or that it was the first to file patent applications for such inventions. Competitors or potential competitors may have filed applications for, or have received patents and may obtain additional patents and proprietary rights relating to, compounds or processes competitive with those of the Company. See "Competition." Accordingly, there can be no assurance that the Company's patent applications will result in issued patents or that, if issued, the patents will afford protection against competitors with similar technology; nor can there be any assurance that any patents issued to Genta will not be infringed or circumvented by others; nor can there be any assurance that others will not obtain patents that the Company would need to license or design around. There can be no assurance that the Company will be able to obtain a license to technology that it may require or that, if obtainable, such a license would be available on reasonable terms. There can be no assurance that the Company's patents, if issued, would be held valid by a court of competent jurisdiction. Moreover, the Company may become involved in interference proceedings declared by the United States Patent and Trademark Office (or comparable foreign office or process) in connection with one or more of its patents or patent applications to determine priority of invention, which could result in substantial cost to the Company, as well as a possible adverse decision as to priority of invention of the patent or patent application involved. The Company also relies upon unpatented trade secrets and no assurance can be given that third parties will not independently develop substantially equivalent proprietary information and techniques or gain access to the Company's trade secrets or disclose such technologies to the public, or that the Company can meaningfully maintain and protect unpatented trade secrets. Genta requires its employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. The agreement generally provides that all confidential information developed or made known to the individual during the course of the individual's relationship with Genta shall be kept confidential and shall not be disclosed to third parties except in specific circumstances. In the case of employees, the agreement generally provides that all inventions conceived by the individual shall be assigned to, and made the exclusive property of, the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information, or in the event of an employee's refusal to assign any patents to the Company in spite of such contractual obligation. See "MD&A--Certain Trends and Uncertainties--Uncertainty Regarding Patents and Proprietary Technology." - 15 - Government Regulation Regulation by governmental authorities in the United States and foreign countries is a significant factor in the manufacture and marketing of the Company's proposed products and in its ongoing research and product development activities. All of the Company's therapeutic products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and premarket approval procedures by the FDA and similar authorities in foreign countries. Various federal, and in some cases state, statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable federal, and in some cases state, statutes and regulations, require the expenditure of substantial resources. Any failure by the Company, its collaborators or its licensees to obtain, or any delay in obtaining, regulatory approvals could adversely affect the marketing of any products developed by the Company and its ability to receive product or royalty revenue. The activities required before a new pharmaceutical agent may be marketed in the United States begin with preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulations. The results of these studies must be submitted to the FDA as part of an IND. An IND becomes effective within 30 days of filing with the FDA unless the FDA imposes a clinical hold on the IND. In addition, the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence, as the case may be, without prior FDA authorization and then only under terms authorized by the FDA. Typically, clinical testing involves a three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile and the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large-scale, multi-center, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and others. In the case of products for life-threatening diseases, the initial human testing is generally done in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such studies may provide results traditionally obtained in Phase II trials. These trials are frequently referred to as "Phase I/IIa" trials. The results of the preclinical and clinical testing, together with chemistry, manufacturing and control information, are then submitted to the FDA for a pharmaceutical product in the form of a New Drug Application ("NDA"), for a biological product in the form of a Product License Application ("PLA") or for medical devices in the form of a Premarket Approval Application ("PMA") for approval to commence commercial sales. In responding to an NDA, PLA or PMA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. There can be no assurance that approvals will be granted on a timely basis, if at all, or if granted will cover all the clinical indications for which the Company is seeking approval or will not contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use. In circumstances where a company intends to develop and introduce a novel formulation of an active drug ingredient already approved by the FDA, clinical and preclinical testing requirements may not be as extensive. Limited additional data about the safety and/or effectiveness of the proposed new drug formulation, along with chemistry and manufacturing information and public - 16 - information about the active ingredient, may be satisfactory for product approval. Consequently, the new product formulation may receive marketing approval more rapidly than a traditional full NDA, although no assurance can be given that a product will be granted such treatment by the FDA. For clinical investigation and marketing outside the United States, the Company is or may be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. The Company's approach is to design its European clinical trials studies to meet FDA, European Economic Community ("EEC") and other European countries' standards. At present, the marketing authorizations are applied for at a national level, although certain EEC procedures are available to companies wishing to market a product in more than one EEC member state. If the competent authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a market authorization will be granted. The registration system proposed for medicines in the EEC after 1992 is a dual one in which products, such as biotechnology and high technology products and those containing new active substances, will have access to a central regulatory system that provides registration throughout the entire EEC. Other products will be registered by national authorities under the local laws of each EEC member state. With regulatory harmonization finalized in the EEC, the Company's clinical trials will be designed to develop a regulatory package sufficient for multi-country approval in the Company's European target markets without the need to duplicate studies for individual country approvals. This approach also takes advantage of regulatory requirements in some countries, such as in the United Kingdom, which allow Phase I studies to commence after appropriate toxicology and preclinical pharmacology studies, prior to formal regulatory approval. Prior to the enactment of the Drug Price Competition and Patent Term Restoration Act of 1984 (the "Waxman/Hatch Act"), the FDA, by regulation, permitted certain pre-1962 drugs to be approved under an abbreviated procedure which waived submission of the extensive animal and human studies of safety and effectiveness normally required to be in a NDA. Instead, the manufacturer only needed to provide an Abbreviated New Drug Application ("ANDA") containing labeling, information on chemistry and manufacturing procedures and data establishing that the original "pioneer" product and the proposed "generic" product are bioequivalent when administered to humans. Originally, the FDA's regulations permitted this abbreviated procedure only for copies of a drug that was approved by the FDA as safe before 1962 and which was subsequently determined by the FDA to be effective for its intended use. In 1984, the Waxman/Hatch Act extended permission to use the abbreviated procedure established by the FDA to copies of post-1962 drugs subject to the submission of the required data and information, including data establishing bioequivalence. However, effective approval of such ANDAs were dependent upon there being no outstanding patent or non-patent exclusivities. Additionally, the FDA allows, under section 505(b)(2) of the Food Drug and Cosmetic Act, for the submission and approval of a hybrid application for certain changes in drugs which, but for the changes, would be eligible for an effective ANDA approval. Under these procedures the applicant is required to submit the clinical efficacy and/or safety data necessary to support the changes from the ANDA eligible drug (without submitting the basic underlying safety and efficacy data for the chemical entity involved) plus manufacturing and chemistry data and information. Effective approval of a 505(b)(2) application is dependent upon the ANDA-eligible drug upon which the applicant relies for the basic safety and efficacy data being subject to no outstanding patent or non-patent exclusivities. As compared to a NDA, an ANDA or a 505(b)(2) application - 17 - typically involves reduced research and development costs. However, there can be no assurance that any such applications will be approved. Furthermore, the supply of raw materials must also be approved by the FDA. The Company is also subject to various foreign, federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use, manufacture, storage, handling and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research and development work and manufacturing processes. Although the Company believes it is in compliance with these laws and regulations in all material respects (except as disclosed under "MD&A--Liquidity and Capital Resources"), there can be no assurance that the Company will not be required to incur significant costs to comply with such regulations in the future. See "MD&A--Certain Trends and Uncertainties--No Assurance of Regulatory Approval; Government Regulation." Competition For many of their applications, the Company's and Genta Jago's products under development will be competing with existing therapies for market share. In addition, a number of companies are pursuing the development of antisense technology and controlled-release formulation technology and the development of pharmaceuticals utilizing such technologies. The Company competes with fully integrated pharmaceutical companies that have more substantial experience, financial and other resources and superior expertise in research and development, manufacturing, testing, obtaining regulatory approvals, marketing and distribution. Smaller companies may also prove to be significant competitors, particularly through their collaborative arrangements with large pharmaceutical companies or academic institutions. Furthermore, academic institutions, governmental agencies and other public and private research organizations have conducted and will continue to conduct research, seek patent protection and establish arrangements for commercializing products. Such products may compete directly with any products that may be offered by the Company. In December 1997, a competitor of the Company, Elan Corporation, received approval of their ANDA for a generic formulation of Oruvail(R) (ketoprofen), and another company, Mylan Laboratories, Inc., filed an ANDA for a generic formulation of procardia XL(R) (nifedipine). See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of Technological Change and Competition." The Company's competition will be determined in part by the potential indications for which the Company's products are developed and ultimately approved by regulatory authorities. For certain of the Company's potential products, an important factor in competition may be the timing of market introduction of the Company's or competitors' products. See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of Technological Change and Competition." Accordingly, the relative speed with which Genta and Genta Jago can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market are expected to be important competitive factors. The Company expects that competition among products approved for sale will be based, among other things, on product efficacy, safety, reliability, availability, price, patent position and sales, marketing and distribution capabilities. The development by others of new treatment methods could render the Company's and Genta Jago's products under development non-competitive or obsolete. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes and secure sufficient capital resources for the often substantial period between technological conception and - 18 - commercial sales. See "MD&A--Certain Trends and Uncertainties--Need for and Dependence on Qualified Personnel," "MD&A--Certain Trends and Uncertainties--Uncertainty Regarding Patents and Proprietary Technology" and "MD&A--Certain Trends and Uncertainties--Need for Additional Funds; Risk of Insolvency." JBL's products address several markets, including clinical chemistry, diagnostics, molecular biology and pharmaceutical development. While many customers have specified JBL products in their manufacturing protocols, competition from several international competitors, many of whom have more substantial experience, financial and other resources and superior expertise in research and development, manufacturing, testing, obtaining regulatory approvals, marketing and distribution, could undermine JBL's competitive position. Competition has come primarily on price for some key JBL products for pharmaceutical development, and from competing technologies in diagnostics and molecular biology. Human Resources As of April 1, 1999, Genta, JBL and Genta Europe had eight, 50 and zero employees, respectively, 10 of whom held doctoral degrees. Eleven employees were engaged in research and development activities, of which 9 were JBL, 27 were engaged in manufacturing (all of which were JBL) and 20 were in administration, sales and marketing positions (of which 14 were JBL). Most of the management and professional employees of the Company and JBL have had prior experience and positions with pharmaceutical and biotechnology companies. Genta believes it maintains satisfactory relations with its employees. In 1998, Genta Europe terminated its sole employee. The Company's overall staff was increased by a net of six employees in 1998, and one more to date in 1999. In October and November the Company hired two Vice Presidents, one for Corporate Development and one for Clinical and Regulatory Affairs. In February 1999, the Company hired a Vice President and Chief Financial Officer. See "MD&A--Certain Trends and Uncertainties--Need for and Dependence on Qualified Personnel." ITEM 2. PROPERTIES Genta's principal administrative offices were located in San Diego, California where the Company occupied approximately 8,500 square feet. Effective March 1, 1998, the Company reduced its leased space in San Diego to 4,732 square feet and closed its laboratory facilities at this site. The Company further reduced its leased space in December 1, 1998 to 3,944 square feet. The Company moved its headquarters to Lexington, Massachusetts, and entered into a two year lease effective April 1, 1999 for 2,400 square feet. JBL leases and occupies approximately 30,000 square feet of office, laboratory and manufacturing space in San Luis Obispo, California. This lease expires in 2000. The lease calls for rent of approximately $414,200 in 1999 with amounts generally increasing annually thereafter to reflect cost of living related increases. The Company currently uses substantially all of the manufacturing capacity of this facility. The Company also has an option to purchase property adjacent to this facility, for expansion, if necessary. A director and officer and another officer of the Company, Drs. Klem and Brown, respectively, are affiliated with the owners of the leased and adjacent properties. See "Business". Genta Pharmaceuticals Europe, S.A., the Company's European subsidiary, leased approximately 10,000 square feet of office, laboratory and manufacturing space in Marseilles, France. The lease was cancelable in 2003 and expired in 2005. In June 1998, Marseille Amenagement, a company affiliated with the city of - 19 - Marseilles, France, filed suit in France to evict Genta Europe from its facilities in Marseille. Following the filing of this claim and in consideration of the request for payment of the loan from the ANVAR, Genta Europe's Board of Directors directed management to declare a "Cessation of Payment". In December 1998, the Court in Marseilles dismissed the case against Genta Europe and indicated that it had no jurisdiction against Genta Incorporated. The Company's attorney notified the plaintiff of the decision and that they have 30 days from such notice to appeal. The 30-day period has elapsed and the Company is awaiting formal notification by the court that an appeal has not been made. The decision of the Court in Marseilles does not preclude Marseille Amenagement from pursuing its claims in other courts in France or the United States, and there can be no assurance that they will not do so. ITEM 3. LEGAL PROCEEDINGS On June 4, 1998, the Company's statutory process agent received a Summons and Complaint in a lawsuit brought by Johns Hopkins against the Company in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins alleges in the Complaint that the Company has breached the Johns Hopkins Agreement (see "Business--Anticode(TM) Brand of Antisense Oligonucleotide Programs -- Oligonucleotide Collaborative and Licensing Agreements -- Ts'o/Miller/Hopkins") and owes it licensing royalty fees and related expenses in the amount of $308,832.24. Johns Hopkins also alleges the existence of a separate March 1993 letter agreement wherein the Company agreed to support a fellowship program at the Johns Hopkins School of Hygiene and Public Health and the Company's breach thereof, with damages of $326,829.00. On August 10, 1998, the Company's statutory process agent received a Summons and Complaint in a related lawsuit brought by the Ts'o/Miller Partnership and others against the Company in the same court (Case No. 98182113). The Ts'o/Miller Partnership claims that it is owed licensing royalty fees in the amount of $287,671.23. The Company is currently in settlement negotiations. The Company believes that no further accrual is necessary pursuant to this settlement. On June 30, 1998, Marseille Amenagement, the manager of the Company's facilities in Marseilles, served notice of a suit in Marseilles, France to the Director General of the Company's subsidiary, Genta Europe. On July 30, 1998, the Company's office in San Diego, California was also served notice of the suit. The suit seeks the payment of unpaid past rents in the amount of 473,464.50 FF (as of April 8, 1999, approximately $77,601), the removal of the Company from the facility and an indemnity payment of 1,852,429 FF (as of April 8, 1999, approximately $303,613), - 20 - which is allegedly equal to the balance of the first nine years' rent. On July 1, 1998, the ANVAR notified Genta Europe by letter of its claim that the Company remains liable for 4,187,423 FF (as of April 8, 1999, approximately $686,319), and is required to pay this amount immediately. In view of these events, the Board of Directors of Genta Europe directed the Director General to declare "Cessation of Payment" in the commercial court of France, which declaration was made in July 1998. Under this procedure, Genta Europe ceased any operations and terminated its only employee. A liquidator was appointed by the Court to take control of any assets of Genta Europe and to make payment to creditors. In December 1998, the Court in Marseilles dismissed the case against Genta Europe and indicated that it had no jurisdiction against Genta Incorporated. The Company's attorney in France notified the plaintiff of the decision and that they have 30 days from such notice to appeal. The 30-day appeal period has elapsed and the Company is awaiting formal notification by the court that an appeal has not been made. The decision of the Court in Marseilles does not preclude Marseille Amenagement from pursuing its claims in other courts in France or the United States, and there can be no assurance that they will not do so. In October 1996, JBL retained a chemical consulting firm to advise it with respect to an incident of soil and groundwater contamination (the "Spill"). Sampling conducted at the JBL facility revealed the presence of chloroform and perchloroethylenes ("PCEs") in the soil and groundwater at this site. JBL is conducting a quarterly groundwater monitoring program, under the supervision of the California Regional Water Quality Control Board, for purposes of determining whether the levels of chloroform and perchloroethylenes ("PCEs") have decreased over time. The results of the latest sampling conducted by JBL show that PCEs and chloroform have decreased in all but one of the monitoring sites. The Company believes that any costs stemming from further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. JBL received notice on October 16, 1998 from Region IX of the Environmental Protection Agency ("EPA") that it had been identified as a potentially responsible party ("PRP") at the Casmalia Disposal Site, which is located in Santa Barbara, California. JBL has been designated as a de minimis PRP by the EPA. The EPA currently estimates that the de minimis PRPs will be required to pay as little as $75,000 and as much as $750,000 to settle their potential liability, depending upon the volume of wastes attributed to them. The Company received an estimated volume calculation from the EPA, and a response, which is due on June 9, 1999, is currently under review. While the terms of the settlement with the EPA have not been finalized, they should contain standard contribution protection and release language. The Company has accrued $75,000 during 1998. The Company believes that any costs stemming from further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. - 21 - LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based broker/dealer, asserted claims against the Company and others, including Paramount Capital Inc., of which Dr. Rosenwald is the sole stockholder and Mr. Weiss was a Senior Managing Director, and various related entities and persons. LBC's claims relate to the alleged breach by the Company of certain letter agreements, allegedly entered into by LBC and the Company in 1995 and 1996 with respect to brokerage and/or investment banking services, particularly in connection with a $3 million investment, for which LBC was seeking a fee. LBC sought damages in the form of cash (in excess of $4 million), stock, warrants, and other securities. A complaint was filed in the United States District Court for the Southern District of New York (98 Civ. 2491) by LBC against the Company and the same other parties. The Company entered into a Settlement Agreement and Release dated as of November 30, 1998 (the "Settlement Agreement") with LBC Capital Resources, Inc. ("LBC") and others. Pursuant to the Settlement Agreement, the Company agreed: to issue to LBC 2,900 shares of Series D Convertible Preferred Stock; to issue to LBC or its designee five-year warrants (the "LBC Warrants") to acquire 700,000 shares of Common Stock at an exercise price of $0.52 per share; to make certain payments to LBC totalling approximately $182,000; and to pay to LBC, upon the exercise of certain warrants, a commission equal to up to $150,000 in the aggregate. The respective conversion and exercise prices of the Series D Preferred Stock and the LBC Warrants are subject to adjustment upon the occurrence of certain events. The fair value attributed to the 2,900 shares of Series D Preferred Stock and the Class D Warrants approximated $965,000. The Company provided for $600,000 of this $1,147,000 settlement in 1997 and the remaining amount in 1998. (b) The LBC claim was the only material legal proceeding terminated in the quarter ending December 31, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the quarter ended December 31, 1998. - 22 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information Throughout 1996 and in the beginning of 1997, the Company's common stock was traded on the Nasdaq National Market under the symbol "GNTA." Beginning February 7, 1997, the Company's common stock traded in the over-the-counter market on the Nasdaq SmallCap Market, initially under the symbol "GNTAC." During the 20 trading days immediately following the Company's reverse stock split effected on April 7, 1997, the Company's common stock traded under the symbol "GNTCD." Genta resumed trading under the symbol "GNTA" on July 24, 1997. The following table sets forth, for the periods indicated, the high and low sales prices for the common stock as reported by Nasdaq (as adjusted for the Reverse Stock Split). High Low 1997 First Quarter 9 11/16 2 1/2 Second Quarter 6 1/2 1 3/4 Third Quarter 3 3/4 1 5/16 Fourth Quarter 2 3/4 25/32 1998 First Quarter 1 5/32 3/4 Second Quarter 1 1/2 23/32 Third Quarter 1 5/32 5/8 Fourth Quarter 1 11/32 7/8 1999 First Quarter 3 1 9/32 (b) Holders There were 386 holders of record of the Company's common stock as of April 12, 1999. (c) Dividends The Company has never paid cash dividends on its common stock and does not anticipate paying any such dividends in the foreseeable future. In addition, the Company is restricted from paying cash dividends on its common stock until such time as all cumulative dividends have been paid on outstanding shares of its Series A and Series D convertible preferred stocks. The Company currently intends to retain its earnings, if any, after payment of dividends on outstanding shares of Series A and Series D convertible preferred stock, for the development of its business. See "MD&A--Liquidity and Capital Resources." (d) Recent Sales of Unregistered Securities In February 1997, the Company raised gross proceeds of $3 million in a private placement, to The Aries Fund, a Cayman Islands Trust, and the Aries Domestic Fund, L.P. (collectively the "Aries Funds"), of Convertible Notes and - 23 - warrants to purchase common stock ("Bridge Warrants"). The Convertible Notes, together with accrued interest thereon, were converted pursuant to their terms into an aggregate of 65,415 shares of Series D Preferred Stock, which in turn are convertible, at $0.94375 per share, into 6,931,391 shares of common stock. The Bridge Warrants permit the purchase of up to an aggregate of 6,357,616 shares of Common Stock at an exercise price of $0.471875 per share (subject to adjustment upon the occurrence of certain events). Pursuant to the Note and Warrant Purchase Agreement dated as of January 28, 1997 between the Company and the Aries Funds (the "Note and Warrant Purchase Agreement"), the Aries Funds have the right to appoint a majority of the members of the Board of Directors of the Company. See "MD&A--Certain Trends and Uncertainties--Certain Interlocking Relationships; Potential Conflicts of Interest." On June 6, 1997, the Aries Funds entered into a Line of Credit Agreement with the Company pursuant to which the Aries Funds provided the Company with a line of credit of up to $500,000, which subsequently was repaid, in consideration for warrants (the "Line of Credit Warrants") to purchase 50,000 shares of Common Stock exercisable at $2.50 per share, subject to adjustment upon the occurrence of certain events. As of August 27, 1997, the Company entered into separate consulting agreements with each of Dr. Paul O.P. Ts'o and Dr. Sharon B. Webster (both former directors of the Company), pursuant to which, in addition to certain other compensation for consulting services to be rendered thereunder, the Company issued 15,400 shares of Common Stock to Dr. Ts'o and 15,500 shares of Common Stock to Dr. Webster. On June 30, 1997, a total of 161.58 Premium Preferred Units(TM) ("Units") were sold to accredited investors in a private placement (the "Private Placement"). Such sale was made in reliance on the exemption from registration pursuant to Rule 506 of Regulation D of the Securities Act. Each unit sold in the Private Placement consists of 1,000 shares of Premium Preferred Stock(TM) (Series D Preferred Stock), par value $0.001 per share, stated value $100.00 per share, and warrants to purchase 5,000 shares of the Company's common stock, par value $0.001 per share, at any time prior to the fifth anniversary of the final closing date. A total of $16,158,000 was raised. The net proceeds to the Company were $13,957,262. The respective conversion and exercise price of the Series D Preferred Stock and the Class D Warrants is $0.94375 per share of common stock, subject to adjustment upon the occurrence of certain events. In connection with the Private Placement, the placement agent -- Paramount Capital, Inc.-- received cash commissions equal to 9% of the gross sales price and a non-accountable expense allowance equal to 4% of the gross sales price, and the placement agent received warrants (the "Placement Warrants") to purchase up to 10% of the Units sold in the Private Placement for 110% of the offering price per Unit. Furthermore, the Company has entered into a financial advisory agreement with the placement agent pursuant to which the financial advisor is entitled to receive certain cash fees and has received warrants (the "Advisory Warrants") to purchase up to 15% of the Units sold in the Private Placement for 110% of the offering price per Unit. The Company was contractually required to file, and had filed, a Registration Statement on Form S-3 with the Securities and Exchange Commission (the "SEC") under the Securities Act with respect to the common stock issuable upon conversion and upon exercise of the securities issued in the private placement consummated in February 1997 and the Private Placement. This registration statement has not been declared effective. There can be no assurance that such registration statement will ever become effective or that any delay or failure to have such registration statement declared effective will not have a material adverse effect on the Company. - 24 - On May 29, 1998, the Company requested, and subsequently received, consents (the "Letter Agreements") from the holders of a majority of the Series D Preferred Stock to waive the Company's obligation to use best efforts to obtain the effectiveness of a registration statement with the SEC as to Common Stock issuable upon conversion of Series D Preferred Stock and exercise of Class D Warrants. In exchange, the Company agreed to waive the contractual "lock-up" provisions to which such consenting holders were subject and which provisions would have prevented the sale of up to 75% of their securities for a nine-month period following the effectiveness of the registration statement; and to extend to January 29, 1999 from June 29, 1998 the Reset Date referred to in the Certificate of Designation of the Series D Preferred Stock. In addition, through the Letter Agreements, the Company agreed to issue to such holders warrants to purchase at $0.94375 per share, an aggregate of up to 807,900 shares of Common Stock, subject to certain anti-dilution adjustments, exercisable until June 29, 2002. The shares were valued at approximately $633,000 and recorded as a dividend. The Company had conditioned the effectiveness of such consent on its acceptance by a majority of the Series D Preferred Stockholders. The Series D Preferred Stock began earning dividends, payable in shares of the Company's Common Stock, at the rate of 10% per annum subsequent to the new Reset Date of January 29, 1999. See "MD&A--Certain Trends and Uncertainties--Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of Dilution; Anti-Dilution Adjustments." - 25 - ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (In thousands, except per share amount) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Gain on sale of technology ......... $ -- $ -- $ 373 $ -- $ -- Related party contract revenue ..... -- -- 1,559 350 55 Collaborative research and development ...................... 3,142 1,125 -- 50 50 -------- -------- -------- -------- -------- 3,142 1,125 1,932 400 105 -------- -------- -------- -------- -------- Costs and expenses: Research and development ......... 12,104 9,764 4,592 3,309 2,116 LBC Settlement ................... -- -- -- 600 547 Charge for acquired in-process research and development....... 1,850 4,762 -- -- -- General and administrative ......... 5,483 4,493 5,096 6,132 4,020 -------- -------- -------- -------- -------- 19,437 19,019 9,688 10,041 6,683 -------- -------- -------- -------- -------- Loss from operations ............... (16,295) (17,894) (7,757) (9,641) (6,578) Equity in net loss of joint venture (7,425) (6,913) (2,712) (1,193) (132) Net loss of liquidated foreign subsidiary ................ -- -- -- -- (98) Other income (expense), net ........ 721 7 (745) (2,851) (38) -------- -------- -------- -------- -------- Net loss from continuing operations $(22,999) $(24,800) $(11,213) $(13,684) $ (6,846) Loss from discontinued operations .. (449) (566) (878) (1,741) (739) --------- --------- --------- --------- --------- Net loss ........................... (23,448) (25,366) (12,092) (15,425) (7,586) Dividends on preferred stock ....... (2,550) (2,551) (2,525) (1,695) (633) Dividends imputed on preferred stock -- $ (1,000) (2,348) (16,158) -- -------- -------- -------- -------- -------- Net loss applicable to common shares $(25,998) $(28,917) $(16,965) $(33,278) $ (8,219) -------- -------- -------- -------- -------- Continuing Operations .............. $ (18.67) $ (14.53) $ (5.39) $ (7.13) $ (1.06) Discontinued Operations ............ $ (0.33) $ (0.29) (0.30) (0.39) (0.11) Net loss per share (1) ............. $ (19.00) $ (14.82) $ (5.69) $ (7.52) $ (1.17) -------- -------- -------- -------- -------- Shares used in computing net loss per share ................... 1,371 1,952 2,983 4,422 7,000 Deficiency of earnings to meet combined fixed charges and preferred stock dividends (2)..... $(25,998) $(28,917) $(16,965) $(33,278) $ (8,219) DECEMBER 31, ------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (In thousands) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term $ 11,003 $ 262 $ 532 $ 8,456 $ 2,458 investments Working capital (deficit) ........... 4,285 (2,981) (3,816) 5,807 3,629 Total assets ........................ 19,415 11,351 8,806 15,079 7,551 Notes payable and capital lease obligations, less current portion 1,871 2,334 118 -- -- Total stockholders' equity .......... 13,912 4,258 4,074 9,425 2,959
(1) Computed on the basis of net loss per common share described in Note 1 of Notes to Consolidated Financial Statements. (2) The Company has incurred losses and, thus, has had a deficiency in fixed charges and preferred stock dividend coverage since inception. THE ABOVE SELECTED FINANCIAL DATA REFLECTS DISCONTINUED OPERATIONS AND BALANCE SHEET DATA OF JBL AS A RESULT OF THE AGREEMENT TO SELL JBL IN MARCH 1999. SEE NOTE 2 OF THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. - 26 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since its inception in February 1988, Genta has devoted its principal efforts toward drug discovery, research and development. Genta has been unprofitable to date and, even if it obtains financing to continue its operations, expects to incur substantial operating losses due to continued requirements for ongoing research and development activities, preclinical and clinical testing, manufacturing activities, regulatory activities, and establishment of a sales and marketing organization. From the period since its inception to December 31, 1998, the Company has incurred a cumulative net loss of $132.1 million. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in revenues, expenses and losses will continue, although mitigated by recent developments. - 27 - The Company has been reducing its human and other resources to reduce expenses while focusing its research and development ("R&D") efforts. Genta's strategy is to build a product and technology portfolio focusing on its Anticode(TM) (antisense) products intended to treat cancer at its genetic source. To this end, the Company has reduced its R&D expenses by about 36% from last year and has significantly reduced its involvement with respect to its 50% investment in an R&D joint venture, Genta Jago, through an interim agreement reached in March 1999. The Company also entered into an Asset Purchase Agreement on March 19, 1999 for the sale of substantially all of the assets and certain liabilities of the Company's wholly owned specialty chemicals subsidiary JBL Scientific, Inc. ("JBL") for cash, a promissory note and certain pharmaceutical development services in support of Genta's G3139 development project. The transaction will be consummated upon the satisfaction of certain closing conditions and, while there can be no assurances, is expected to be completed in the second quarter of 1999. Following the pending sale of JBL, the Company will operate as one business segment. Accordingly, the following information and accompanying financial statements reflect JBL as a discontinued operation. The Company has closed its operation in France. The Company has also closed its facilities in San Diego, California and has moved its headquarters to Lexington, Massachusetts as of the second quarter of 1999. The Company's independent auditors have included an explanatory paragraph in their report on the Company's consolidated financial statements at December 31, 1998, that expresses substantial doubt as to the Company's ability to continue as a going concern. The Company has very limited cash resources. Its ability to continue operations in 1999 depends upon the consummation of the JBL transaction and the Company's success in obtaining funding. There can be no assurance that the JBL transaction will be consummated or as to the timing thereof or that the Company will be able to obtain additional funds on satisfactory terms or at all. There are several factors that must be considered risks in that regard and those that are known to management are discussed in "MD&A--Certain Trends and Uncertainties." The statements contained in this Annual Report on Form 10-K that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. The Company intends that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's views as of the date they are made with respect to future events and financial performance, but are subject to many risks and uncertainties, which could cause the actual results of the Company to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such risks and uncertainties include, but are not limited to, obtaining sufficient financing to maintain the Company's planned operations, the timely development, receipt of necessary regulatory approvals and acceptance of new products, the successful application of the Company's technology to produce new products, the obtaining of proprietary protection for any such technology and products, the impact of competitive products and pricing and reimbursement policies, changing market conditions and the other risks detailed in the Certain Trends and Uncertainties section of this Management's Discussion and Analysis of Financial Condition and - 28 - Results of Operations and elsewhere in this Annual Report on Form 10-K. The Company does not undertake to update any forward-looking statements. Results of Operations The following discussion of results of operations relates to the Company's continuing business. Operating revenues totaled $1.9 million in 1996 compared to $0.4 million in 1997 and $0.1 million in 1998. The changes in operating revenue have largely reflected the Company's lessened involvement in Genta Jago development activities. Related party contract revenues decreased from $1.6 million in 1996, to $350,000 in 1997 and $55,000 in 1998. The expenses for which these revenues are recognized as Costs and Expenses in the same period such that the net effect on Genta's consolidated statements is zero (see below). It is anticipated that, as the Company has reduced its resources and focused them on its development of its lead Anticode(TM) oligonucleotide, G3139, this trend will continue. It should be noted that at the same time, the Company is reducing its commitment to provide funds to Genta Jago. On March 4, 1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into an interim agreement pursuant to which the parties to the joint venture released each other from all liability relating to unpaid development costs and funding obligations. SkyePharma agreed to be responsible for substantially all the obligations of the joint venture to third parties and for the further development of the joint venture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between Genta and SkyePharma as set forth in such interim agreement. It is also expected that the completion of the sale of the assets of JBL will result in a significant decrease in ongoing revenues, as all of the Company's product sales have been attributable to JBL. Collaborative research and development revenues were $50,000 annually in 1997 and in 1998, representing deferred revenues recognized pursuant to the Company's collaboration with Johnson & Johnson Consumer Products, Inc. See "Business--Anticode(TM) Brand of Antisense Oligonucleotide Programs-- Oligonucleotide Collaborative and Licensing Agreements--Other Anticode Agreements." The above agreement has expired. Costs and expenses totaled $9.7 million in 1996 compared to $10.0 million in 1997 and $6.7 million in 1998. Primarily, the overall decrease reflects reduced research and development and general and administrative charges offset by nonrecurring charges related to restructuring. The decrease in R&D expenses is the result of work force reductions and related closure of research and development facilities in San Diego. - 29 - Services and capabilities that have not been retained within the Company are out-sourced through short-term contracts or from consultants. All preclinical biology and clinical trial work is now conducted through such collaborations with external scientists and clinicians. The Company anticipates that, if sufficient collaborative revenues and other funding are available, research and development expenses may increase in future years due to requirements for preclinical studies, clinical trials, the G3139 Anticode oligonucleotide program and increased regulatory costs. The Company will be required to assess the potential costs and benefits of developing its own Anticode(TM) oligonucleotide manufacturing, marketing and sales activities if and as such products are successfully developed and approved for marketing, as compared to establishing a corporate partner relationship. Research and development expenses totaled $4.6 million in 1996, $3.3 million in 1997, and $2.1 million in 1998. The decrease in research and development expenses is primarily attributable to the Company's redeployment of certain employees, and related workforce reductions implemented in 1996 and 1997 (see below) together with the discontinuation of several programs. Research and development and certain other services the Company provided to Genta Jago under the terms of the joint venture were significantly reduced over the period from 1996 through 1998. These amounts were $1.6 million in 1996, $350,000 in 1997 and $55,000 in 1998. There is, however, no net effect of these reductions in services to Genta Jago as they are offset by related party contract revenues. It is anticipated that research and development expenses may increase in the future, assuming the Company obtains sufficient financing, as the development program for G3139 expands and more patients are treated in clinical trials at higher doses, through longer or more treatment cycles, or both. Furthermore, the Company is pursuing other opportunities for new product development candidates which, if successful, will require additional research and development expenses. There can be no assurance, however, that the trials will proceed in this manner or that the Company will initiate new development programs. In an effort to focus its research and development on areas that provide the most significant commercial opportunities, the Company continually evaluates its ongoing programs in light of the latest market information and conditions, availability of third-party funding, technological advances, and other factors. As a result of such evaluation, the Company's product development plans have changed from time to time, and the Company anticipates that they will continue to do so in the future. General and administrative expenses were $5.1 million in 1996, $6.1 million in 1997, and $4.0 million in 1998. The $2.1 million decrease in 1998 reflects reductions in staff and in accounting and legal expenses. Legal expenses were higher in 1997 due to several factors: successfully defending the litigation brought by certain of the Company's preferred stockholders challenging a $3.0 million investment made in February 1997, which litigation was resolved in the Company's favor in April 1997; and the Company's successful efforts to avoid a potential Nasdaq delisting associated with the equity offerings consummated in 1997. See "Legal Proceedings" and "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities." As a continuation of its 1995 restructuring plan, in October 1996 Genta reassessed its personnel requirements and established a termination plan whereby the Company terminated 16 research and administrative employees and recorded General and Administrative expenses of $850,000 for accrued severance. In May 1997, Genta again reassessed its personnel requirements and established another termination plan involving the termination of 12 research and administrative employees. The Company recorded General and Administrative expenses of $868,000 in the second quarter of 1997 for accrued severance costs. In 1998, three additional staff personnel left the Company, and two senior managers joined the Company. Another senior manager joined the Company in 1999. Although the Company has reduced its work force to a core group of corporate personnel, the remaining team is able to maintain Genta's operations in the development of G3139. Chemical and manufacturing development and quality assurance and control is managed or conducted at JBL, in coordination with Genta's core staff. It is expected that these services will continue in 1999 following the completion of - 30 - the sale of substantially all of JBL's assets and certain liabilities. The JBL Asset Purchase Agreement contemplates that, after the closing of the sale, the acquiring company will provide pharmaceutical development services to the Company at no additional charge. The Company recorded charges to general and administrative expenses of $600,000 and $577,000, in 1997 and 1998 respectively to account for the value of abandoned patents no longer related to the research and development efforts of the Company. The Company's policy is to evaluate the appropriateness of carrying values of the unamortized balances of intangible assets on the basis of estimated future cash flows (undiscounted) and other factors. If such evaluation were to identify a material impairment of these intangible assets, such impairment would be recognized by a write-down of the applicable assets. The Company continues to evaluate the continuing value of patents and patent applications, particularly as expenses to prosecute or maintain these patents come due. Through this evaluation, the Company may elect to continue to maintain these patents, seek to out-license them, or abandon them. The Company's equity in net loss of its joint venture (Genta Jago) totaled $2.7 million in 1996, compared to $1.2 million in 1997 and $132,000 in 1998. The decrease in the Company's equity in net loss of its joint venture during 1998 relative to 1997 and 1996 is largely attributable to the fact that development efforts are now focused exclusively on GEOMATRIX-based products and a greater portion of development activities were funded pursuant to Genta Jago's collaborative agreements with third parties. The operating results of Genta Jago are based primarily on three factors. First, Genta Jago receives collaborative research and development revenue from third parties. Secondly, Genta Jago is billed by Jagotec and Genta for research and development costs associated with Genta Jago projects. Thirdly, there are general and administrative costs associated with the joint venture. Through May 1995, Genta Jago's development efforts were not strictly GEOMATRIX-based products. Genta Jago also had the right to develop six Anticode(TM) oligonucleotide products licensed from Genta. However, in 1995 the parties elected to focus Genta Jago's activities exclusively on GEOMATRIX-based products. In connection with the return of the Anticode(TM) oligonucleotide technology license rights to Genta in May 1995, Genta Jago's note payable to Genta was credited with approximately $4.4 million in principal and $0.3 million in accrued interest. Genta Jago recorded the loan credit and related accrued interest as a gain on waiver of debt in exchange for return of license rights to related party. Furthermore, since Genta Jago was no longer responsible for developing Anticode(TM) oligonucleotide products, its future working capital requirements were reduced. The equity in net loss of joint venture is determined by reducing the loss per Genta Jago financials by Genta's 20% markup on internal costs for which the joint venture is billed plus the interest accrued on the working capital loans. Since the formation of Genta Jago, no products have been successfully developed and marketed. Since the initial plans called for earlier introductions and since there have been significant changes in the market environment since the Company entered into the joint venture, there is reason to believe that any products that may be marketed in the future could represent significantly poorer financial opportunities than those that were anticipated in the earlier plans. This reduction in opportunity derives from factors such as the presence of direct competitors to Genta Jago's products being in the marketplace before Genta Jago, and increasing pricing pressures on pharmaceuticals, particularly multisource or generic products from payers such as reimbursers and government buyers. See "MD&A--Certain Trends and Uncertainties--Uncertainty of Technological Change and Competition" and "MD&A--Certain Trends and Uncertainties--Uncertainty of Product Pricing, Reimbursement and Related Matters." Both of these factors may adversely affect Genta Jago even if it is successful in developing products to obtain regulatory approval. As a result and in consideration of the Company's need to reduce expenses and focus its efforts, the Company is directing its resources from the joint venture to its Anticode development, specifically G3139, for the immediate future. On March 4, 1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into an interim agreement pursuant to which the parties to the joint venture released each other from all liability relating to unpaid development costs and funding obligations. - 31 - SkyePharma agreed to be responsible for substantially all the obligations of the joint venture to third parties and for the further development of the joint venture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between Genta and SkyePharma as set forth in such interim agreement. Interest income has fluctuated significantly each year and is anticipated to continue to fluctuate primarily due to changes in the levels of cash, investments and interest rates each period. Interest expense was $9,000 in 1998, $3,309,000 in 1997, and $886,000 in 1996. In consideration of EITF D-60 which was issued by the FASB in March 1997, the Company recorded $666,667 in imputed interest on $2.0 million in 4% Convertible Debentures due August 1, 1997, that were originally issued in September 1996 and were converted at a 25% discount to market. The discount represents an effective interest rate of 38%. The charge has been included in interest expense in 1996. The Company also recorded a $3.0 million charge to imputed interest in 1997 related to value associated with 6.4 million Bridge Warrants issued in connection with a $3.0 million debt issue in February 1997. In consideration of EITF D-60, the Company recorded $2,348,000 and $1,000,000 in imputed dividends in 1996 and 1995, respectively, for discounted conversion terms related to convertible preferred stock issued in 1996 and 1995. The preferred stock was convertible into common shares based on a conversion price equal to 75% of the average closing bid prices of the Company's common stock for a specified period. In 1997, the Company recorded $16,158,000 in imputed dividends for discounted conversion terms and liquidation preference of the Series D Preferred Stock issued in the Private Placement. The charges have been recorded as dividends imputed on preferred stock. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Other than Net Loss, the Company had no material components of comprehensive income. On June 16, 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure instruments at fair value. The Company is currently evaluating the impact of this pronouncement and does not believe adoption of SFAS No. 133 will have a material impact on the Company's consolidated financial statements. Liquidity and Capital Resources Since inception, the Company has financed its operations primarily from private and public offerings of its equity securities. Cash provided from these offerings totaled approximately $124.5 million through December 31, 1998, including net proceeds of $17.0 million raised during 1997. At December 31, 1998, the Company had cash, cash equivalents and short-term investments totaling $2.5 million compared to $8.5 million at December 31, 1997. The Company will need substantial additional funds before it can expect to realize significant product revenue. The Company projects that at its current rate of spending and for its current activities, assuming consummation of the sale of JBL, its cash funds will enable the Company to maintain its present operations into the first quarter of 2000. To the extent that the Company is successful in accelerating its development of G3139 or in expanding its development portfolio or acquiring or adding new development candidates, the current cash resources would be consumed at a greater rate. Similarly, the Company had been seeking to identify and hire additional senior managers to direct the business of the Company. In this regard the Company has hired a Vice President of Regulatory and Clinical Affairs, Vice President of Corporate Development and a Vice President and Chief Financial Officer. Certain parties with whom the Company has agreements have claimed default and, should the Company be obligated to pay these claims or should the Company engage legal services to defend or negotiate its positions or both, its ability to continue operations could be significantly reduced or shortened. See "MD&A--Certain Trends and Uncertainties--Claims of Genta's Default Under Various Agreements." The Company anticipates that significant additional sources of financing, including equity financings, will be required in order for the Company to continue its planned operations. The Company also anticipates seeking additional product development opportunities from external sources. Such acquisitions may consume cash reserves or require additional cash or equity. The Company's working capital and additional funding requirements will depend upon numerous factors, including: (i) the progress of the Company's research and development programs; (ii) the timing and results of preclinical testing and clinical trials; (iii) the level of resources that the Company devotes to sales and - 32 - marketing capabilities; (iv) technological advances; (v) the activities of competitors; and (vi) the ability of the Company to establish and maintain collaborative arrangements with others to fund certain research and development efforts, to conduct clinical trials, to obtain regulatory approvals and, if such approvals are obtained, to manufacture and market products. See "MD&A--Certain Trends and Uncertainties--Need for Additional Funds; Risk of Insolvency." If the Company successfully secures sufficient levels of collaborative revenues and other sources of financing, it expects to use such financing to continue to expand its ongoing research and development activities, preclinical testing and clinical trials, costs associated with the market introduction of potential products, and expansion of its administrative activities. As previously discussed in the MD&A Overview, the Company entered into an Asset Purchase Agreement with Promega Corporation on March 19, 1999. Under the agreement, a wholly owned subsidiary of Promega acquires substantially all of the assets and certain liabilities of JBL for a cash payment, a promissory note, and pharmaceutical development services to be provided to Genta. In connection with the Genta Jago joint venture formed in late 1992 and expanded in May 1995, the Company provided funding to Genta Jago pursuant to a working capital loan agreement that expired in October 1998. Such working capital loans to Genta Jago are recorded by Genta as Loans receivable from joint venture and are expensed on Genta's books as funds are spent by Genta Jago, as the collectibility of such loans is no longer assured. In connection with Genta Jago's return of the Anticode(TM) oligonucleotide license rights to Genta in May 1995, the working capital loan payable by Genta Jago to Genta was credited with a principal reduction of approximately $4.4 million and reduction of interest thereon of approximately $0.3 million. As of December 31, 1998, the Company had advanced working capital loans of approximately $15.8 million to Genta Jago, net of principal repayments and the aforementioned credit, which amount fully satisfied what the Company believes is the loan commitment established by the parties through December 31, 1998. Such loans bore interest at rates per annum ranging from 5.81% to 7.5%, and were payable in full on October 20, 1998. Genta Jago repaid Genta $1 million in principal of its working capital loans, in November 1996, from license fee revenues. On March 4, 1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into an interim agreement pursuant to which the parties to the joint venture released each other from all liability relating to unpaid development costs and funding obligations and SkyePharma agreed to be responsible for the obligations of the joint venture to third parties and for the further development of the joint venture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between Genta and SkyePharma as set forth in such interim agreement. See "MD&A--Certain Trends and Uncertainties--Claims of Genta's Default Under Various Agreements." In 1998, the Company purchased property and equipment of $304,000, of which $272,000 pertains to JBL, and received proceeds from the disposition of property and equipment of $58,000. Through December 31, 1998, the Company had acquired $10.4 million in property and equipment of which $5.5 million was financed through capital leases and other equipment financing arrangements, $3.6 million was funded in cash and the remainder was acquired through the Company's acquisition of JBL. The Company has commitments associated with its capital leases and operating leases as discussed further in Note 7 to the Company's consolidated financial statements. In 1997, the Company bought out its equipment finance loan balance with the $251,000 in security deposits then held by the equipment finance company. During 1998, fixed assets decreased due to the sale of furniture and equipment incident to the reduction of operations at Genta Pharmaceuticals Europe and the closure of the research and development laboratory at Genta's San Diego facility. Leasehold improvements were written off by approximately $353,000 to general and - 33 - administrative expense due to the elimination of operations at Genta Pharmaceuticals Europe. In 1997, the Company discontinued its effort to develop a capability at JBL to manufacture oligonucleotides and wrote off $530,000 to research and development expense. In October 1996, JBL retained a chemical consulting firm to advise it with respect to an incident of soil and groundwater contamination. Sampling conducted at the JBL facility revealed the presence of chloroform and perchloroethylenes ("PCEs") in the soil and groundwater at this site. JBL is conducting a quarterly groundwater monitoring program, under the supervision of the California Regional Water Quality Control Board, for purposes of determining whether the levels of chloroform and perchloroethylenes ("PCEs") have decreased over time. The results of the latest sampling conducted by JBL show that PCEs and chloroform have decreased in all but one of the monitoring sites. The Company believes that any costs associated with further investigation or remediation will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. JBL received notice on October 16, 1998 from Region IX of the Environmental Protection Agency (the "EPA") that it had been identified as a potentially responsible party ("PRP") at the Casmalia Disposal Site, which is located in Santa Barbara, California. JBL has been designated as a de minimis PRP by the EPA. The EPA currently estimates that de minimis PRPs will be required to pay as little as $75,000 and as much as $750,000 to settle their potential liability, depending upon the volume of wastes attributed to them. The EPA plans on sending by the beginning of January 1999 individual volume calculations to each de minimis PRP that received the aforementioned notice letter. While the terms of a settlement with the EPA have not been finalized, they should contain standard contribution, protection and release language. The Company has accrued $75,000 during 1998. JBL is investigating all factual and legal defenses that are available to it and plans on responding to this matter accordingly. See "MD&A--Certain Trends and Uncertainties--No Assurance of Regulatory Approval; Government Regulation." The Company believes that any costs associated with further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. In June 1997, the Company raised gross proceeds of approximately $16.2 million (approximately $14 million net of placement costs) through the private placement of 161.58 Premium Preferred Units(TM). Each unit sold in the private placement consists of (i) 1,000 shares of Premium Preferred Stock(TM), par value $.001 per share, stated value $100 per share (the "Series D Preferred Stock"), and (ii) warrants to purchase 5,000 shares of the Company's common stock at any time prior to the fifth anniversary of the final closing (the "Class D Warrants"). The Series D Preferred Stock is immediately convertible at the option of the holder into shares of common stock at an initial conversion price of $0.94375 per share (subject to antidilution adjustment). On May 29, 1998, the Company requested, and subsequently received, consents (the "Letter Agreements") from the holders of a majority of the Series D Preferred Stock to waive the Company's obligation to use best efforts to obtain the effectiveness of a registration statement with the SEC as to Common Stock issuable upon conversion of Series D Preferred Stock and exercise of Class D Warrants. In exchange, the Company agreed to waive the contractual "lock-up" provisions to which such consenting holders were subject and which provisions would have prevented the sale of up to 75% of their securities for a nine-month period following the effectiveness of the registration statement; and to extend to January 29, 1999 from June 29, 1998 the Reset Date referred to in the Certificate of Designation of the Series D Preferred Stock. In addition, through the Letter Agreements, the Company agreed to issue and did issue to such holders warrants to purchase at $0.94375 per share, an aggregate of up to 807,900 shares of Common Stock, subject to certain anti-dilution adjustments, exercisable until June 29, 2002. The shares were valued at approximately $633,000 and recorded as a dividend. The Company had conditioned the effectiveness of such consent on its acceptance by a majority of the Series D Preferred Stockholders. The Series D Preferred Stock began earning dividends, payable in shares of the Company's Common Stock, at the rate of 10% per annum subsequent to the new Reset Date of January 29, 1999. In February 1997, the Company raised gross proceeds of $3 million in a private placement of units consisting of (i) Senior Secured Convertible Bridge - 34 - Notes (the "Convertible Notes") that bore interest at a stated rate of 12% per annum and matured on December 31, 1997, as extended, and (ii) warrants to purchase an aggregate of approximately 6.4 million shares of common stock. The Convertible Notes were convertible into Series D Convertible Preferred Stock at the option of the holder, at an initial conversion price of $50.00 per share, subject to antidilution adjustments. In May 1997, $650,000 of the Convertible Notes were converted into 13,000 shares of Series D Preferred Stock and in December 1997, the remaining $2,350,000 of the Convertible Notes and accrued interest were converted into 52,415 shares of common stock. In September 1996, the Company raised gross proceeds of $2 million (approximately $1.9 million net of offering costs) through the sale of Convertible Debentures to investors in a private placement outside the United States. The Convertible Debentures were convertible, at the option of the holders, at any time on or after October 23, 1996, into shares of common stock at a conversion price equal to 75% of the average Nasdaq closing bid price of Genta's common stock for a specified period prior to the date of conversion. Terms of the Convertible Debentures also provided for interest payable in shares of the Company's common stock. In November 1996, $1.65 million of the Convertible Debentures and the related accrued interest was converted into approximately 590,000 shares of common stock and in 1997, the remaining $350,000 and related accrued interest was converted into 204,263 shares of common stock. In March 1996, the Company raised gross proceeds of $6 million (approximately $5.5 million net of offering fees) through the issuance of Series C Convertible Preferred Stock (the "Series C Preferred Stock") sold to institutional investors in a private placement. The Series C Preferred Stock was immediately convertible, at the option of the holder, into shares of common stock at a conversion price equal to 75% of the average Nasdaq closing bid price of Genta's common stock for a specified period prior to the date of conversion. In 1996, 5,620 shares of the Series C Preferred Stock and accrued dividends were converted at the option of the holders into 524,749 shares of Genta's common stock. In 1997, 1,424 shares of the Series C Preferred Stock and accrued dividends was converted at the option of the holders into 952,841 shares of Genta's common stock. In April 1998, in consideration of EITF D-60, which was issued in March 1997, the Company recorded imputed non-cash dividends on preferred stock totaling $2,348,000 in 1996 for discounted conversion terms related to Series C convertible preferred stock. In December 1995, the Company completed the sale of 3,000 shares of Series B Convertible preferred stock (the "Series B Preferred Stock") at a price of $1,000 per share to institutional investors outside of the United States. Proceeds from the offering totaling approximately $2.8 million were reflected as a receivable from sale of preferred stock at December 31, 1995 and were received by the Company on January 2, 1996. The Series B Preferred Stock was immediately convertible, at the option of the holder, into shares of common stock at a conversion price equal to 75% of the average Nasdaq closing bid prices of Genta's common stock for a specified period prior to the date of conversion. The Series B Preferred Stock was converted into 226,943 shares of the Company's common stock in February 1996 pursuant to terms of the Series B stock purchase agreements. In April 1998, in consideration of EITF D-60, which was issued in March 1997, the Company recorded imputed non-cash dividends on preferred stock totaling $1.0 million in 1995 for discounted conversion terms related to Series B convertible preferred stock. In October 1993, the Company completed the sale of 600,000 shares of Series A convertible preferred stock ("the Series A Preferred Stock") in a private placement of units consisting of (i) one share of Series A Preferred Stock and (ii) one warrant to acquire one share of common stock, sold at an aggregate price of $50 per unit. Each share of Series A Preferred Stock is immediately convertible, at any time prior to redemption, into shares of the Company's common stock, at a rate determined by dividing the aggregate liquidation preference of the Series A Preferred Stock by the conversion price. The conversion price is subject to adjustment for antidilution. From January 1 through October 31, 1998, each share of Series A Preferred Stock was convertible into 7.255 shares of Common Stock. From November 1 through December 31, 1998, each share of Series A Preferred Stock was convertible into 7.333 shares of Common Stock. - 35 - Terms of the Company's Series A Preferred Stock require the payment of dividends annually in amounts ranging from $3 per share per annum for the first year to $5 per share per annum in the third and fourth years. Dividends were to be paid in cash or common stock or a combination thereof, at the Company's option. Dividends on the Series A Preferred Stock accrued on a daily basis (whether or not declared) and accumulated to the extent not paid on the annual dividend payment date following the dividend period for which they accrued. The Company may redeem the Series A Preferred Stock under certain circumstances, and was required to redeem the Series A Preferred Stock, subject to certain conditions, in September 1996 at a redemption price of $50 per share, plus accrued and unpaid dividends (the "Redemption Price"). The Company elected to pay the Redemption Price in Common Stock in order to conserve cash and was required under the terms of the Series A Preferred Stock to use its best efforts to arrange for a firm commitment underwriting for the resale of such Common Stock which would allow the holders ultimately to receive cash instead of securities for their Series A Preferred Stock. Despite using its best efforts, the Company was unable to arrange for a firm commitment underwriting. Therefore, under the terms of the Series A Preferred Stock, Genta was not required to redeem such Series A Preferred Stock in cash, but rather was required to redeem all shares of Series A Preferred Stock held by holders who elected to waive the firm commitment underwriting requirement and receive the redemption price in shares of Common Stock. A waiver of the firm commitment underwriting was included as a condition of such redemption. The terms of the Series A Preferred Stock do not impose adverse consequences on the Company if it is unable to arrange for such an underwriting despite its reasonable efforts in such regard. In September 1996, holders of 55,900 shares of Series A Preferred Stock redeemed such shares and related accrued and unpaid dividends for an aggregate of 242,350 shares of the Company's Common Stock. The effect on the financial statements of the redemptions was a reduction in Accrued dividends on preferred stock, a reduction in the Par value of convertible preferred stock, an increase in the Par value of Common Stock, and an increase in Additional paid-in capital. Should the remaining shares of Series A Preferred stock be redeemed for, or converted into, the Company's Common Stock, the effect on the financial statements will be the same as that previously described. The Company is restricted from paying cash dividends on Common Stock until such time as all cumulative dividends on outstanding shares of Series A and Series D Preferred Stock have been paid. The Company currently intends to retain its earnings, if any, after payment of dividends on outstanding shares of Series A and Series D Preferred Stock, for the development of its business. See "MD&A--Certain Trends and Uncertainties--Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of Dilution; Anti-Dilution Adjustments." The Company continually evaluates its intangible assets for impairment. If evidence of impairment is noted, the Company determines the amount of impairment and charges such impairment to expense in the period that impairment is determined. Through December 31, 1998, management has considered projected future cash flows from product sales, collaborations and proceeds on sale of such assets and, other than the $600,000 and $577,000 charge recorded in 1997 and 1998 respectively, related to the disposal of certain patents, has determined that no additional impairment exists. See "MD&A--Results of Operations." Impact of Year 2000 Some older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time sensitive software that recognizes a date using 00 as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could cause a system failure or miscalculations causing disruption of operations, including a temporary inability to process transactions or engage in similar normal business activities. The Company has completed an assessment of whether it would be necessary to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The - 36 - Company has implemented a plan to acquire and install new computer hardware and upgraded software in its facilities that will accommodate dating beyond 1999. The total year 2000 project cost will not be material and (subject to the Company's receipt of adequate additional funds) is expected to be completed not later than October 31, 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material adverse effect on the operations of the Company. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. If through such communication or otherwise the Company becomes aware of any such failures and is not satisfied that those failures are being adequately addressed, it will take appropriate steps to find alternative suppliers. There is no assurance that the systems of other companies on which the Company's systems rely will be timely converted and will not have a material adverse effect on the Company's systems. The costs of the project and the date on which the Company believes it will complete the year 2000 modifications are based on management's best estimates, which were derived using numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. It has been acknowledged by government authorities that year 2000 problems have the potential to disrupt global economies, that no business is immune from the potentially far-reaching effects of the year 2000 problems, and that it is difficult to predict with certainty what will happen after December 31, 1999. Consequently, it is possible that year 2000 problems will have a material effect on the Company's business even if the Company takes all appropriate measures to ensure that it and its key suppliers are year 2000 compliant. Certain Trends and Uncertainties In addition to the other information contained in this Annual Report on Form 10-K, the following factors should be considered carefully. Need for Additional Funds; Risk of Insolvency Genta's operations to date have consumed substantial amounts of cash. The Company's auditors have included an explanatory paragraph in their opinion with respect to the Company's ability to continue as a going concern. See "Independent Auditors Reports" and "MD&A--Liquidity and Capital Resources." The Company will need to raise substantial additional funds to continue its operations and conduct the costly and time-consuming research, pre-clinical development and clinical trials necessary to bring its products to market and to establish production and marketing capabilities. The Company intends to seek additional funding through public or private financings, including equity financings, and through collaborative arrangements or the sale of key assets. Adequate funds for these purposes, whether obtained through financial markets or collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company: to delay, scale back or eliminate some or all of its research and product development programs; to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself; to sell itself to a third party; to cease operations; or to declare bankruptcy. The Company's future cash requirements will be affected by results of research and development, results of pre-clinical - 37 - studies and bioequivalence and clinical trials, relationships with corporate collaborators, changes in the focus and direction of the Company's research and development programs, competitive and technological advances, resources devoted to Genta Jago, the FDA and foreign regulatory processes, potential litigation by companies seeking to prevent or delay marketing approval of Genta Jago's products and other factors. Loss History; Uncertainty of Future Profitability. - - -------------------------------------------------- Genta has been unprofitable to date, incurring substantial operating losses associated with ongoing research and development activities, pre-clinical testing, clinical trials, manufacturing activities and development activities undertaken by Genta Jago. From the period since its inception to December 31, 1998, the Company has incurred a cumulative net loss of $132.1 million. The Company has experienced significant quarterly fluctuations in operating results and expects that these fluctuations in revenues, expenses and losses will continue. The Company's independent auditors have included an explanatory paragraph in their report on the Company's consolidated financial statements at December 31, 1998, which paragraph expresses substantial doubt as to the Company's ability to continue as a going concern. See "Independent Auditors Reports" and "MD&A--Certain Trends and Uncertainties--Need for Additional Funds; Risk of Insolvency." Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of Dilution; Anti-Dilution Adjustments. - - -------------------------------------------------------------------------------- In the event of the liquidation, dissolution or winding up of the Company, the Common Stock is expressly subordinate to the approximately $26.9 million preference of the 447,600 outstanding shares of Series A Preferred Stock and the approximately $31.7 million preference of 226,416 shares of Series D Preferred Stock (including 40,395 shares of Series D Preferred Stock issuable upon exercise of certain warrants). Dividends may not be paid on the Common Stock unless full cumulative dividends on the Series A and Series D Preferred Stocks have been paid or funds have been set aside, for such preferred dividends by the Company. The conversion rate of the Series A Preferred Stock is subject to adjustment, among other things, upon certain issuances of Common Stock or securities convertible into Common Stock at $67.50 per share or less. As of April 12, 1999, each share of Series A Preferred Stock is convertible into aproximately 7.430 shares of Common Stock at a conversion price of $8.08 per share. On September 24, 1998, all outstanding Series A Warrants expired. The conversion rate of the Series D Preferred Stock and the exercise price of the Series D Warrants are subject to adjustment, among other things, upon certain issuances of Common Stock or securities convertible into Common Stock at prices per share below certain levels. In addition, the Conversion Price of the Series D Preferred Stock in effect on January 29, 1999 (the "Reset Date") would have been adjusted and reset effective as of the Reset Date if the average closing bid price of the Common Stock for the 20 consecutive trading days immediately preceding the Reset Date (the "12 Month Trading Price") were less than 140% of the then applicable Conversion Price (a "Reset Event"). The Trading Price on the Reset Date was above the calculated amount based on the above formula, thereby eliminating the Reset Event. Accordingly, each share of Series D Preferred Stock is presently convertible into approximately 106 shares of Common Stock at a conversion price of $0.94375 per share of Common Stock, and the exercise price of the Class D Warrants is presently $0.94375 per share. There are 1,615,800 Class D Warrants outstanding and another 201,975 Class D Warrants issuable upon the exercise of certain warrants. An additional 807,900 Class D Warrants have been authorized and all were issued pursuant to a May 29, 1998 letter and subsequent acceptance by the Series D holders. Finally, the Company has outstanding Bridge Warrants to purchase an aggregate of 6,357,616 shares of Common Stock at an exercise price of $0.471875 per share, Line of Credit Warrants to purchase an aggregate of 50,000 shares of Common Stock at an exercise price of $2.50 per share, LBC Warrants to purchase an aggregate of 700,000 shares of Common Stock at an exercise price of $0.52 per share, and warrants to purchase an aggregate of 95,768 shares of Common Stock at various exercise prices between approximately $13 and $21 per share and outstanding employee stock options. The Note and Warrant Purchase Agreement provides that a number of additional Bridge Warrants ("Penalty Warrants") equal to 1.5% of the number of Bridge Warrants then held by the Aries Funds shall be issued to the - 38 - Aries Funds for each day beyond 30 days after the final closing of the Private Placement that a shelf registration statement covering the Common Stock underlying the securities purchased pursuant to the Note and Warrant Purchase Agreement is not filed with the SEC and for each day beyond 210 days after the closing date of the investment contemplated by the Note and Warrant Purchase Agreement that such shelf registration statement is not declared effective by the SEC. The Company filed such shelf registration statement with the SEC on September 9, 1997, but such shelf registration statement has not been declared effective by the SEC. As a result, the Company could be obligated to issue Penalty Warrants to the Aries Funds. The Aries Funds have not, to date, requested that the Company issue such Penalty Warrants. The Company and the Aries Funds are currently conducting negotiations to determine whether, and to what extent, Penalty Warrants will be issued. See "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities." Claims of Genta's Default Under Various Agreements. - - --------------------------------------------------- On May 15, 1997, Johns Hopkins University ("Johns Hopkins") sent Genta a letter stating that the license agreement entered into between the Company and Johns Hopkins in May 1990 (the "Johns Hopkins Agreement") was terminated. On November 26, 1997, Drs. Paul O.P. Ts'o and Paul Miller (the "Ts'o/Miller Partnership") sent Genta a letter claiming that Genta was in material breach of the February 1989 license agreement between the Company and the Ts'o/Miller Partnership (the "Ts'o/Miller Agreement") for failing to pay royalties from 1995 through 1997. By letter dated April 28, 1998, the Ts'o/Miller Partnership advised the Company that it was terminating the license granted pursuant to the Ts'o/Miller Agreement. On June 4, 1998, the Company's statutory process agent - 39 - received a Summons and Complaint in a lawsuit brought by Johns Hopkins against the Company in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins alleges in the Complaint that the Company has breached the Johns Hopkins Agreement and owes it licensing royalty fees and related expenses in the amount of $308,832.24. Johns Hopkins also alleges the existence of a separate March 1993 letter agreement wherein the Company agreed to support a fellowship program at the Johns Hopkins School of Hygiene and Public Health and the Company's breach thereof, with damages of $326,829.00. On August 10, 1998, the Company's statutory process agent received a Summons and Complaint in a related lawsuit brought by the Ts'o/Miller Partnership and others against the Company in the same court (Case No. 98182113). The Ts'o/Miller Partnership claims that it is owed licensing royalty fees in the amount of $287,671.23. The Company is currently in settlement negotiations. See "Business--Anticode(TM) Brand of Antisense Oligonucleotide Programs--Oligonucleotide Collaborative and Licensing Agreements--Ts'o/Miller/Hopkins" and "Legal Proceedings." The French government agency L'Agence Nationale de Valorisation de la Recherche (ANVAR) asserted, in a letter dated February 13, 1998, that Genta Europe was not in compliance with the ANVAR Agreement, and that ANVAR might request the immediate repayment of such loan. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that the Company remains liable for 4,187,423 FF (as of April 8, 1999, approximately $686,319) and is required to pay this amount immediately. The Company is working with ANVAR to achieve a mutually satisfactory resolution; however, there can be no assurance that such a resolution will be obtained. See "Business--Genta Europe" and "Legal Proceedings." There can be no assurance that the Company will not incur material costs in relation to these terminations and/or assertions of default or liability. See "MD&A--Liquidity and Capital Resources." On June 30, 1998, the Director General of the Company's subsidiary, Genta Europe was served notice of a suit in Marseilles, France by Marseille Amenagement, the manager of the Company's facilities in Marseilles. See "Legal Proceedings". Early Stage of Development; Technological Uncertainty. - - ------------------------------------------------------ Genta is at an early stage of development. All of the Company's potential therapeutic products are in research or development, and no revenues have been generated from therapeutic product sales. To date, most of the Company's resources have been dedicated to applying molecular biology and medicinal chemistry to the research and development of potential Anticode(TM) pharmaceutical products based upon oligonucleotide technology. While the Company has demonstrated the activity of Anticode(TM) oligonucleotide technology in model systems in vitro and the activity of antisense technology in animals and has identified compounds that the Company believes are worthy of additional testing, only one of these potential Anticode(TM) oligonucleotide products has begun to be tested in humans, with such testing in its early stages. There can be no assurance that the novel approach of oligonucleotide technology will result in products that will receive necessary regulatory approvals or that will be successful commercially. Further, results obtained in pre-clinical studies or early clinical investigations or pilot bioequivalence trials are not necessarily indicative of results that will be obtained in pivotal human clinical or bioequivalence trials. There can be no assurance that any of the Company's or Genta Jago's potential products can be successfully developed. Furthermore, the Company's products in research or development may prove to have undesirable and unintended side effects or other characteristics that may prevent or limit their commercial use. The Company is pursuing research and development through Genta Jago of a range of oral controlled-release formulations of currently available pharmaceuticals. Many of the products to be developed through Genta Jago have not yet been formulated using GEOMATRIX(R) technology. On July 27, 1998, SkyePharma PLC, the parent company to Jago, announced that an ANDA for naproxen sodium filed by Brightstone Pharma, its U.S. sales and marketing subsidiary, had been accepted for filing by the FDA. Brightstone has a license from Genta Jago to market this product. There can be no assurance that any of the Company's or Genta Jago's products will obtain FDA or foreign regulatory approval for any indication or that an approved compound would be capable of being produced in commercial quantities at reasonable costs and successfully marketed. Products, if any, resulting from Genta's or Genta Jago's research and development programs are not expected to be commercially available for a number of years. Certain competitive products have already been filed with and/or approved by the FDA. See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of Technological Change and Competition." - 40 - Limited Availability of Net Operating Loss Carry Forwards. - - ---------------------------------------------------------- At December 31, 1998, the Company has federal and California net operating loss carryforwards of approximately $82.0 million and $14.7 million, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California tax purposes and the fifty percent limitation on California loss carryforwards prior to 1997. The federal tax loss carryforwards will begin expiring in 2003, unless previously utilized. Approximately $2.8 million and $0.5 million of the California tax loss carryforward expired during 1997 and 1998, respectively and the related deferred tax asset and tax loss carryforward amounts have been reduced accordingly. The remaining California tax loss will continue to expire in 1999, unless utilized. The Company also has federal and California research and development tax credit carryforwards of $3.2 million and $1.3 million respectively, which will begin expiring in 2003, unless previously utilized. Federal and California tax laws limit the utilization of income tax net operating loss and credit carryforwards that arise prior to certain cumulative changes in a corporation's ownership resulting in change of control of the Company. The future annual use of net operating loss carryforwards and research and development tax credits will be limited due to the ownership changes that occurred during 1990, 1991, 1993, 1996, 1997 and 1998. Because of the decrease in value of the Company's stock, the ownership changes which occurred in 1996, 1997 and 1998 will have a material adverse impact on the Company's ability to utilize these carryforwards. See "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities." Dividends. - - ---------- The Company has never paid cash dividends on its Common Stock and does not anticipate paying any such dividends in the foreseeable future. In addition, the Company is restricted from paying cash dividends on its Common Stock until such time as all cumulative dividends have been paid on outstanding shares of its Series A and Series D Preferred Stocks. The Company currently intends to retain its earnings, if any, after payment of dividends on outstanding shares of Series A and Series D Preferred Stocks, for the development of its business. See "MD&A--Liquidity and Capital Resources." No Assurance of Regulatory Approval; Government Regulation. - - ----------------------------------------------------------- The FDA and comparable agencies in foreign countries impose substantial premarket approval requirements on the introduction of pharmaceutical products through lengthy and detailed pre-clinical and clinical testing procedures and other costly and time-consuming procedures. Satisfaction of these requirements, which includes demonstrating to the satisfaction of the FDA and foreign regulatory agencies that the product is both safe and effective, typically takes several years or more depending upon the type, complexity and novelty of the product. There can be no assurance that such testing will show any product to be safe or efficacious or, in the case of certain of Genta Jago's products, to be bioequivalent to a currently marketed pharmaceutical. Government regulation also affects the manufacture and marketing of pharmaceutical products. The effect of government regulation may be to delay marketing of any new products for a considerable or indefinite period of time, to impose costly procedures upon the Company's or Genta Jago's activities and to diminish any competitive advantage that the Company or Genta Jago may have attained. It may take years before marketing approvals are obtained for the Company's or Genta Jago's products, if at all. There can be no assurance that FDA or other regulatory approval for any products developed by the Company or Genta Jago will be granted on a timely basis, if at all, or, if granted, that such approval will cover all the clinical indications for which the Company or Genta Jago is seeking approval or will not sustain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use. Further, with respect to the reformulated versions of currently available pharmaceuticals being developed through Genta Jago, there is a substantial risk that the manufacturers or marketers of such currently available pharmaceuticals will seek to delay or block regulatory approval of any reformulated versions of such pharmaceuticals through litigation or other means. Any significant delay in obtaining, or - 41 - failure to obtain, such approvals could materially adversely affect the Company's or Genta Jago's revenue. Moreover, additional government regulation from future legislation or administrative action may be established which could prevent or delay regulatory approval of the Company's or Genta Jago's products or further regulate the prices at which the Company's or Genta Jago's proposed products may be sold. The Company is also subject to various foreign, federal, state and local laws, regulations and recommendations (collectively "Governmental Regulations") relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use, manufacture, storage, handling and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research and development work and manufacturing processes. In October 1996, JBL retained a chemical consulting firm to advise it with respect to an incident of soil and groundwater contamination (the "Spill"). Sampling conducted at the JBL facility revealed the presence of chloroform and perchloroethylenes ("PCEs") in the soil and groundwater at this site. Six soil borings were drilled and groundwater wells were installed at several locations around the site. The Company believes that the costs associated with further investigation or remediation will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. The Company believes that it is in material compliance with Governmental Regulations; however, there can be no assurance that the Company will not be required to incur significant costs to comply with Governmental Regulations in the future. JBL received notice on October 16, 1998 from Region IX of the Environmental Protection Agency ("EPA") that it had been identified as a potentially responsible party ("PRP") at the Casmalia Disposal Site, which is located in Santa Barbara, California. JBL has been designated as a de minimis PRP by the EPA. The EPA currently estimates that the de minimis PRPs will be required to pay as little as $75,000 and as much as $750,000 to settle their potential liability, depending upon the volume of wastes attributed to them. On this basis the Company accrued $75,000 in 1998. The EPA planned on sending by the beginning of January 1999 individual income calculations to each de minimis PRP that received the aforementioned notice letter. While the terms of the settlement have not been finalized, they should contain standard contribution release, and protection language. Uncertainty Regarding Patents and Proprietary Technology. - - --------------------------------------------------------- The Company's and Genta Jago's success will depend, in part, on their respective abilities to obtain patents, maintain trade secrets and operate without infringing the proprietary rights of others. No assurance can be given that patents issued to or licensed by the Company or Genta Jago will not be challenged, invalidated or circumvented, or that the rights granted thereunder - 42 - will provide competitive advantages to the Company or Genta Jago. There can be no assurance that the Company's or Genta Jago's patent applications will be approved, that the Company or Genta Jago will develop additional products that are patentable, that any issued patent will provide the Company or Genta Jago with any competitive advantage or adequate protection for its inventions or will not be challenged by others, or that the patents of others will not have an adverse effect on the ability of the Company or Genta Jago to do business. Competitors may have filed applications, may have been issued patents or may obtain additional patents and proprietary rights relating to products or processes competitive with those of the Company or Genta Jago. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the Company's or Genta Jago's products or design around any patented products developed by the Company or Genta Jago. The Company and Genta Jago rely on secrecy to protect technology in addition to patent protection, especially where patent protection is not believed to be appropriate or obtainable. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's or Genta Jago's trade secrets, or that the Company or Genta Jago can effectively protect its rights to its unpatented trade secrets. Genta and Genta Jago have obtained licenses or other rights to patents and other proprietary rights of third parties, and may be required to obtain licenses to additional patents or other proprietary rights of third parties. No assurance can be given that any existing licenses and other rights will remain in effect or that any licenses required under any such additional patents or proprietary rights would be made available on terms acceptable to the Company or Genta Jago, if at all. If Genta's or Genta Jago's licenses and other rights are terminated or if Genta or Genta Jago cannot obtain such additional licenses, Genta or Genta Jago could encounter delays in product market introductions while it attempts to design around such patents or could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. In addition, the Company or Genta Jago could incur substantial costs, including costs caused by delays in obtaining regulatory approval and bringing products to market, in defending itself in any suits brought against the Company or Genta Jago claiming infringement of the patent rights of third parties or in asserting the Company's or Genta Jago's patent rights, including those granted by third parties, in a suit against another party. The Company or Genta Jago may also become involved in interference proceedings declared by the United States Patent and Trademark Office (or any foreign counterpart) in connection with one or more of its patents or patent applications, which could result in substantial cost to the Company or Genta Jago, as well as an adverse decision as to priority of invention of the patent or patent application involved. There can be no assurance that the Company or Genta Jago will have sufficient funds to obtain, maintain or enforce patents on their respective products or technology, to obtain or maintain licenses that may be required in order to develop and commercialize their respective products, to contest patents obtained by third parties, or to defend against suits brought by third parties. Dependence on Others. - - --------------------- The Company's and Genta Jago's strategy for the research, development and commercialization of their products requires negotiating, entering into and maintaining various arrangements with corporate collaborators, licensors, licensees and others, and is dependent upon the subsequent success of these outside parties in performing their responsibilities. No assurance can be given that they will obtain such collaborative arrangements on acceptable terms, if at all, nor can any assurance be given that any current collaborative arrangements will be maintained. Technology Licensed From Third Parties. - - --------------------------------------- The Company has entered into certain agreements with, and licensed certain technology and compounds from, third parties. The Company has relied on scientific, technical, clinical, commercial and other data supplied and disclosed by others in entering into these agreements, including the Genta Jago - 43 - agreements, and will rely on such data in support of development of certain products. Although the Company has no reason to believe that this information contains errors of omission or fact, there can be no assurance that there are no errors of omission or fact that would materially affect the future approvability or commercial viability of these products. Potential Adverse Effect of Technological Change and Competition. - - ----------------------------------------------------------------- The biotechnology industry is subject to intense competition and rapid and significant technological change. The Company and Genta Jago have numerous competitors in the United States and other countries for their respective technologies and products under development, including among others, major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. There can be no assurance that the Company's or Genta Jago's competitors will not succeed in developing products or other novel technologies that are more effective than any which have been or are being developed by the Company or Genta Jago or which would render the Company's or Genta Jago's technology and products non-competitive. Many of the Company's and Genta Jago's competitors have substantially greater financial, technical, marketing and human resources than the Company or Genta Jago. In addition, many of those competitors have significantly greater experience than the Company or Genta Jago in undertaking pre-clinical testing and human clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals of products for use in healthcare. Accordingly, the Company's or Genta Jago's competitors may succeed in obtaining regulatory approval for products more rapidly than the Company or Genta Jago and such competitors may succeed in delaying or blocking regulatory approvals of the Company's or Genta Jago's products. As competitors of the Company or of Genta Jago receive approval for products that share the same potential market as the Company's or Genta Jago's potential products, the market share available to the Company or Genta Jago will likely be reduced, thereby reducing the potential revenues and earnings available to the Company or Genta Jago. In addition, increased pricing competition would also likely result, further reducing the earnings potential of the Company's or Genta Jago's products. The Company is aware that certain competitors of Genta Jago have filed, and received approval of, an ANDA for a generic formulation of drugs of which Genta Jago was working to develop generic formulations. Furthermore, if the Company or Genta Jago is permitted to commence commercial sales of products, it will also be competing with respect to marketing capabilities, an area in which it has limited or no experience, and manufacturing efficiency. There are many public and private companies that are conducting research and development activities based on drug delivery or antisense technologies. The Company believes that the industry-wide interest in such technologies will accelerate and competition will intensify as the techniques which permit drug design and development based on such technologies are more widely understood. Uncertainty of Clinical Trials and Results. - - ------------------------------------------- The results of clinical trials and pre-clinical testing are subject to varying interpretations. Even if the development of the Company's or Genta Jago's respective products advances to the clinical stage, there can be no assurance that such products will prove to be safe and effective. The products that are successfully developed, if any, will be subject to requisite regulatory approval prior to their commercial sale, and the approval, if obtainable, may take several years. Generally, only a very small percentage of the number of new pharmaceutical products initially developed is approved for sale. Even if products are approved for sale, there can be no assurance that they will be commercially successful. The Company or Genta Jago may encounter unanticipated problems relating to development, manufacturing, distribution and marketing, some of which may be beyond the Company's or Genta Jago's respective financial and technical capacity to solve. The failure to address such problems adequately could have a material adverse effect on the Company's or Genta Jago's respective businesses, financial conditions, prospects and results of operations. No assurance can be given that the Company or Genta Jago will succeed in the development and marketing of any new drug products, or that they will not be - 44 - rendered obsolete by products of competitors. "See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of Technological Change and Competition." Difficult Manufacturing Process; Access to Certain Raw Materials. - - ----------------------------------------------------------------- The manufacture of Anticode(TM) oligonucleotides is a time-consuming and complex process. Management believes that the Company has the ability to acquire or produce quantities of oligonucleotides sufficient to support its present needs for research and its projected needs for its initial clinical development programs. However, in order to obtain oligonucleotides sufficient to meet the volume and cost requirements needed for certain commercial applications of Anticode(TM) oligonucleotide products, Genta requires raw materials currently provided by a single supplier which is itself a development stage biotechnology company (and a competitor of the Company) and is subject to uncertainties including the potential for a decision by such supplier to discontinue production of such raw materials, the insolvency of such supplier, or the failure of such supplier to follow applicable regulatory guidelines. Products based on chemically modified oligonucleotides have never been manufactured on a commercial scale. The manufacture of all of the Company's and Genta Jago's products will be subject to current GMP requirements prescribed by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There can be no assurance that the Company or Genta Jago will be able to manufacture products, or have products manufactured for it, in a timely fashion at acceptable quality and prices, that they or third party manufacturers can comply with GMP or that they or third party manufacturers will be able to manufacture an adequate supply of product. Failure to establish compliance with GMP to the satisfaction of the FDA can result in delays in, or prohibition from, initiating clinical trials or commercial marketing of a product. Limited Sales, Marketing and Distribution Experience. - - ----------------------------------------------------- The Company and Genta Jago have very limited experience in pharmaceutical sales, marketing and distribution. In order to market and sell certain products directly, the Company or Genta Jago would have to develop or subcontract a sales force and a marketing group with technical expertise. There can be no assurance that any direct sales or marketing efforts would be successful. Uncertainty of Product Pricing, Reimbursement and Related Matters. - - ------------------------------------------------------------------ The Company's and Genta Jago's business may be materially adversely affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means. For example, in certain foreign markets the pricing or profitability of healthcare products is subject to government control. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar governmental control. While the Company cannot predict whether any such legislative or regulatory proposals or reforms will be adopted, the adoption of any such proposal or reform could adversely affect the commercial viability of the Company's and Genta Jago's potential products. In addition, in both the United States and elsewhere, sales of healthcare products are dependent in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. Third party payers are increasingly challenging the prices charged for medical products and services, and therefore significant uncertainty exists as to the reimbursement of existing and newly-approved healthcare products. If the Company or Genta Jago succeeds in bringing one or more products to market, there can be no assurance that these products will be considered cost effective and that reimbursement to the consumer will be available or will be sufficient to allow the Company or Genta Jago to sell its products on a competitive basis. Finally, given the above - 45 - potential market constraints on pricing, the availability of competitive products in these markets may further limit the Company's and Genta Jago's flexibility in pricing and in obtaining adequate reimbursement for its potential products. See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect of Technological Change and Competition." Need for and Dependence on Qualified Personnel. - - ----------------------------------------------- The Company's success is highly dependent on the hiring and retention of key personnel and scientific staff. The loss of key personnel or the failure to recruit necessary additional personnel or both is likely further to impede the achievement of development objectives. There is intense competition for qualified personnel in the areas of the Company's activities, and there can be no assurance that Genta will be able to attract and retain the qualified personnel necessary for the development of its business. The Company has hired a Vice President and Chief Financial Officer, a Vice President of Corporate Development and a Vice President of Clinical and Regulatory Affairs. Product Liability Exposure; Limited Insurance Coverage. - - ------------------------------------------------------- The Company's, JBL's and Genta Jago's businesses expose them to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of human therapeutic products. The Company has also obtained a level of liability insurance coverage that it deems appropriate for its current stage of development. However, there can be no assurance that the Company's present insurance coverage is adequate. Such existing coverage may not be adequate as the Company further develops products, and no assurance can be given that, in the future, adequate insurance coverage will be available in sufficient amounts or at a reasonable cost, or that a product liability claim would not have a material adverse effect on the business or financial condition of the Company. Fundamental Change. - - ------------------- In 1999, the Board of Directors of the Company and certain holders of Common Stock and Series A and Series D Preferred Stock approved, in accordance with Delaware law, an amendment to the Restated Certificate of Incorporation to remove the "Fundamental Change" redemption right. The Company recently distributed to its stockholder's an Information Statement on Form 14C describing this stockholder action and expects formally to amend the Restated Certificate of Incorporation after the expiration of the 20 day period provided for in Rule 14c-5 promulgated under the Exchange Act. The Company's Restated Certificate of Incorporation currently provides that upon the occurrence of a "Fundamental Change," the holders of Series A Preferred Stock have the option of requiring the Company to repurchase all of each such holder's shares of Series A Preferred Stock at the Redemption Price, an event that could result in the Company being required to pay to the holders of Series A Preferred Stock stock or (in certain circumstances) cash in the aggregate amount of approximately $26.9 million. Furthermore, if the Company is required to redeem the Series A Preferred Stock, it would also be required (subject to certain conditions) to offer to redeem the Series D Preferred Stock, on a pari passu basis with the Series A Preferred Stock and with the same type of consideration paid in redemption of the Series A Preferred Stock. Upon a Fundamental Change, the Company could, under certain circumstances, be required to pay the holders of Series D Preferred Stock cash in the aggregate amount of approximately $26.0 million (not including an additional $5.7 million that could be payable upon redemption of 40,395 shares of Series D Preferred Stock issuable upon exercise of certain warrants). "Fundamental Change" is defined as: (i) a "person" or "Group" (as defined), together with any affiliates thereof, becoming the beneficial owner (as defined) - 46 - of Voting Shares (as defined) of the Company entitled to exercise more than 60% of the total voting power of all outstanding Voting Shares of the Company (including any Voting Shares that are not then outstanding of which such person or Group is deemed the beneficial owner) (subject to certain exceptions); (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company, or any sale, lease or transfer of all or substantially all of the assets of the Company to another person (subject to certain exceptions); (iii) the sale, transfer or other disposition (or the entry into a commitment to sell, transfer or otherwise dispose) of all or any portion of the shares of Genta Jago held at any time by the Company (or the imposition of any material lien on such shares which lien is not removed within 30 days of imposition) and the sale (or functional equivalent of a sale) of all or substantially all of the assets of Genta Jago; or (iv) the substantial reduction or elimination of a public market for the Common Stock as the result of repurchases, delisting or deregistration of the Common Stock or corporate reorganization or recapitalization undertaken by the Company. Hazardous Materials; Environmental Matters. - - ------------------------------------------- The Company's research and development and manufacturing processes involve the controlled storage, use and disposal of hazardous materials, biological hazardous materials and radioactive compounds. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company may be held liable for any damages that result, and any such liability could exceed the resources of the Company. There can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future, nor that the operations, business or assets of the Company will not be materially adversely affected by current or future environmental laws or regulations. See "MD&A--Certain Trends and Uncertainties--No Assurance of Regulatory Approval; Government Regulation" for a discussion of the Spill. Volatility of Stock Price; Market Overhang from Outstanding Convertible Securities and Warrants. - - -------------------------------------------------------------------------------- The market price of the Company's Common Stock, like that of the common stock of many other biopharmaceutical companies, has been highly volatile and may be so in the future. Factors such as, among other things, the results of pre-clinical studies and clinical trials by Genta, Genta Jago or their competitors, other evidence of the safety or efficacy of products of Genta, Genta Jago or their competitors, announcements of technological innovations or new therapeutic products by the Company, Genta Jago or their competitors, governmental regulation, developments in patent or other proprietary rights of the Company, Genta Jago or their respective competitors, including litigation, fluctuations in the Company's operating results, and market conditions for biopharmaceutical stocks in general could have a significant impact on the future price of the Common Stock. As of April 12, 1999, the Company had 15,080,326 shares of Common Stock outstanding. Future sales of shares of Common Stock by existing stockholders, holders of preferred stock who might convert such preferred stock into Common Stock, and option and warrant holders also could adversely affect the market price of the Common Stock. No predictions can be made of the effect that future market sales of the shares of Common Stock underlying the convertible securities and warrants - 47 - referred to under the caption "MD&A--Certain Trends and Uncertainties--Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of Dilution; Anti-dilution Adjustments," or the availability of such securities for sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales might occur, could adversely affect prevailing market prices. Certain Interlocking Relationships; Potential Conflicts of Interest. - - -------------------------------------------------------------------- The Aries Funds have the contractual right to appoint a majority of the members of the Board of Directors of the Company. The Aries Funds have designated Michael S. Weiss, Glenn L. Cooper, M.D., Donald G. Drapkin, Bobby W. Sandage, Jr., Ph.D., and Andrew J. Stein as nominees to the Board of Directors. Such persons were elected as Directors of the Company. Paramount Capital Asset Management, Inc. ("PCAM") is the investment manager and general partner of The Aries Trust and the Aries Domestic Fund, L.P., respectively. The Aries Funds currently do not hold a controlling block of voting stock, although the Aries Funds have the present right to appoint a majority of the Board of Directors, and to convert and exercise their securities into a significant portion of the outstanding Common Stock. See "MD&A--Certain Trends and Uncertainties--Concentration of Ownership and Control" below. Dr. Lindsay A. Rosenwald, the President and sole stockholder of PCAM, is also the President of Paramount Capital, Inc. and of Paramount Capital Investments LLC ("PCI"), a New York-based merchant banking and venture capital firm specializing in biotechnology companies. In the regular course of its business, PCI identifies, evaluates and pursues investment opportunities in biomedical and pharmaceutical products, technologies and companies. Generally, Delaware corporate law requires that any transactions between the Company and any of its affiliates be on terms that, when taken as a whole, are substantially as favorable to the Company as those then reasonably obtainable from a person who is not an affiliate in an arms-length transaction. Nevertheless, neither such affiliates nor PCI is obligated pursuant to any agreement or understanding with the Company to make any additional products or technologies available to the Company, nor can there be any assurance, and the Company does not expect and investors in the Company should not expect, that any biomedical or pharmaceutical product or technology identified by such affiliates or PCI in the future will be made available to the Company. In addition, certain of the current officers and directors of the Company or certain of any officers or directors of the Company hereafter appointed may from time to time serve as officers or directors of other biopharmaceutical or biotechnology companies. There can be no assurance that such other companies will not have interests in conflict with those of the Company. - 48 - Concentration of Ownership and Control. - - --------------------------------------- The Company's directors, executive officers and principal stockholders and certain of their affiliates have the ability to influence the election of the Company's directors and most other stockholder actions. See "MD&A--Certain Trends and Uncertainties--Certain Interlocking Relationships; Potential Conflicts of Interest." Accordingly, the Aries Funds have the ability to exert significant influence over the election of the Company's Board of Directors and other matters submitted to the Company's stockholders for approval. These arrangements may discourage or prevent any proposed takeover of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over the then current market prices. Such stockholders may influence corporate actions, including influencing elections of directors and significant corporate events. See also "MD&A--Certain Trends and Uncertainties--Effect of Certain Anti-Takeover Provisions" below. Effect of Certain Anti-Takeover Provisions. - - ------------------------------------------- The Company's Restated Certificate of Incorporation and By-laws include provisions that could discourage potential takeover attempts and make attempts by stockholders to change management more difficult. The approval of 66-2/3% of the Company's voting stock is required to approve certain transactions and to take certain stockholder actions, including the amendment of the By-laws and the amendment, if any, of the anti-takeover provisions contained in the Company's Restated Certificate of Incorporation. Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity for the Company's Securities. - - -------------------------------------------------------------------------------- If the Company's securities were not listed on a national securities exchange nor listed on a qualified automated quotation system, they may become subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouses). Rule 15g-9 defines "penny stock" to be any equity security that has a market price (as therein defined) of - 49 - less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions including (i) the securities being quoted on the Nasdaq National Market or SmallCap Market and (ii) the securities' issuer having net tangible assets in excess of $2,000,000 and having been in continuous operation for at least three years (both exceptions enumerated above are currently met by the Company). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. Consequently, such Rule may affect the ability of broker-dealers to sell the Company's securities and may affect the ability of purchasers to sell any of the Company's securities in the secondary market. There can be no assurance that the Company's securities will continue to qualify for exemption from the penny stock restrictions. In any event, even if the Company's securities are exempt from such restrictions, the Company would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest. If the Company's securities were subject to the rules on penny stocks, the market liquidity for the Company's securities could be materially adversely affected. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Since the Company has liquidated its Genta Europe subsidiary, the Company has no material currency exchange or interest rate risk exposure as of December 31, 1998. With the liquidation, there will be no ongoing exposure to material adverse effect on the Company's business, financial condition, or results of operation for sensitivity to changes in interest rates or to changes in currency exchange rates. - 50 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Genta Incorporated Index to Financial Statements Covered by Reports of Independent Auditors
Genta Incorporated Reports of Independent Auditors ............................................................52 Consolidated Balance Sheets at December 31, 1997 and 1998...................................54 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998............................................................55 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998........................................56 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998............................................................59 Notes to Consolidated Financial Statements..................................................60 Genta Jago Technologies B.V. (a development stage company) Reports of Independent Auditors.............................................................83 Balance Sheets at December 31, 1997 and 1998................................................85 Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and for the period December 15, 1992 (inception) through December 31, 1998..................86 Statement of Stockholders' Equity (Net Capital Deficiency) for the Period December 15, 1992 (inception) through December 31, 1998.....................................87 Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and for the period December 15, 1992 (inception) through December 31, 1998.............88 Notes to Financial Statements...............................................................89
- 51 - INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Genta Incorporated We have audited the accompanying consolidated balance sheet of Genta Incorporated and its subsidiaries as of December 31, 1998 and the related statement of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 1998 consolidated financial statements present fairly, in all material respects, the financial position of the companies as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the recurring losses from operations, and expectations of continued losses in the foreseeable future, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Boston, Massachusetts April 15, 1999 - 52 - Report of Independent Auditors The Board of Directors and Stockholders Genta Incorporated We have audited the accompanying consolidated balance sheet of Genta Incorporated as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genta Incorporated at December 31, 1997, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company has incurred substantial and continuing operating losses since inception and management expects that these losses will continue for the foreseeable future. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans as to this matter are also described in Note 1. The 1997 financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 8 to the financial statements, the Company restated its operating results for 1996 to include the effects of recording imputed non-cash interest costs totaling $666,667 and imputed non-cash dividends on preferred stock totaling $2,348,000 not previously recorded in operating results for 1996. This had the effect of increasing net loss applicable to common stockholders by $3,014,667 in 1996, and increasing net loss per share (basic and diluted) by $(1.01) in 1996. ERNST & YOUNG LLP San Diego, California June 18, 1998 - 53 - Genta Incorporated Consolidated Balance Sheets
December 31, December 31, 1997 1998 ------------------ ----------------- Assets Current assets: Cash and cash equivalents $2,194,424 $1,566,288 Short-term investments, available-for-sale 6,262,000 892,372 Prepaid expenses -- 405,700 Property held for sale -- 290,000 Other current assets 218,513 176,700 Net current assets of discontinued operations 582,100 2,606,304 ------------------ ----------------- Total current assets 9,257,037 5,937,364 Property and equipment, net 892,608 148,245 Intangibles, net 2,435,172 1,460,383 Deposits and other assets 627,230 5,301 Net non-current assets of discontinued operations 1,866,902 -- ------------------ ----------------- Total assets $15,078,949 $7,551,293 ================== ================= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 556,823 $ 432,116 Payable to research institution 635,661 635,661 Accrued compensation 427,536 84,888 LBC Settlement 568,420 -- Other accrued expenses 162,330 580,779 Deferred revenue 198,570 -- Current portion of long term debt 900,558 -- Net liabilities of liquidated foreign subsidiary -- 574,812 ------------------ ---------------- Total current liabilities 3,449,898 2,308,256 Deficit in joint venture 2,204,053 2,284,018 Commitments and contingencies (Notes 7, 8 and 14) Stockholders equity: Preferred stock; 5,000,000 shares authorized, convertible preferred shares outstanding: Series A convertible preferred stock, $.001 par value; 456,600 and 447,600 shares issued and outstanding at December 31, 1997 and 1998, respectively; liquidation value is $26,856,000 at December 31, 1998 457 448 Series D convertible preferred stock, $.001 par value; $100 stated value, 226,995 and 186,021 shares issued and outstanding at December 31, 1997 and 1998, respectively; liquidation value is $26,042,940 at December 31, 1998 Common stock, $.001 par value; 70,000,000 shares 227 186 authorized; 5,712,363 and 10,426,215 shares issued and outstanding at December 31, 1997 and 1998, respectively 5,712 10,426 Additional paid-in capital 129,320,493 130,627,251 Accumulated deficit (124,467,891) (132,053,657) Accrued dividends payable 4,566,000 5,108,790 Deferred compensation -- (734,425) --------------- ------------- Total stockholders' equity 9,424,998 2,959,019 --------------- ------------- Total liabilities and stockholders' equity $15,078,949 $ 7,551,293 =============== =============
See accompanying notes. - 54 - Genta Incorporated Consolidated Statements of Operations
Years ended December 31, ------------------------------------------------ 1996 1997 1998 -------------- -------------- ------------ Revenues: (restated) Related party contract revenue $1,558,962 $350,097 $55,087 Collaborative research and development -- 50,000 50,000 Gains on sale of technology 373,261 -- -- -------------- -------------- ------------ 1,932,223 400,097 105,087 Costs and expenses: Research and development 4,592,537 3,309,216 2,115,954 LBC settlement -- 600,000 547,000 General and administrative 5,096,304 6,131,355 4,020,169 ---------- -------------- --------- 9,688,841 10,040,571 6,683,123 ---------- -------------- ---------- Loss from operations (7,756,618) (9,640,474) (6,578,036) Equity in net loss of joint venture (2,712,183) (1,193,321) (131,719) Net loss of liquidated foreign subsidiary -- -- (98,134) Other income (expense): Interest income 140,932 458,437 272,336 Interest expense (885,602) (3,309,120) (8,661) Other income (expense) -- -- (301,587) -------------- -------------- ------------ Net loss from continuing operations (11,213,471) (13,684,478) (6,845,801) Discontinued operations: loss from discontinued operations (878,978) (1,741,339) (739,965) Net loss (12,092,449) (15,425,817) (7,585,766) Dividends accrued on preferred stock (2,524,701) (1,694,677) (632,790) Dividends imputed on preferred stock (2,348,000) (16,158,000) -- -------------- ------------- ------------- -- Net loss applicable to common shares $(16,965,150) $(33,278,494) $ (8,218,556) ================================================= Net loss per share (basic and diluted): Continuing operations $(5.39) $(7.13) $(1.06) ================================================= Discontinued operations (0.30) (0.39) (0.11) ================================================= Net loss applicable to common shares $(5.69) $(7.52) $(1.17) ================================================= Shares used in computing net loss per share 2,983,449 4,422,409 7,000,191 =================================================
See accompanying notes. - 55 - Genta Incorporated Consolidated Statements of Stockholders' Equity
Convertible Additional Accrued Preferred Stock Common Stock paid-in Accumulated Dividends Shares Amount Shares Amount Capital Deficit Payable -------------------- ---------------------- ----------------------------------------- Balance at December 31, 1995 603,000 603 2,396,557 2,396 102,395,673 (96,949,625) 1,572,588 Issuance of Series C convertible preferred 6,000 6 -- -- 5,492,633 -- -- stock Issuance of Series C convertible preferred 1,044 1 -- -- 1,044,000 -- -- stock upon conversion of promissory notes Issuance of common stock upon conversion of Series A convertible (71,900) (72) 255,446 255 326,838 -- (327,021) preferred stock and related accrued dividends Issuance of common stock upon conversion of Series B convertible (3,000) (3) 226,943 227 33,783 -- (34,007) preferred stock and related accrued dividends Issuance of common stock upon conversion of Series C Convertible (5,620) (6) 524,749 525 64,210 -- (64,729) preferred stock and related accrued dividends Issuance of common stock upon conversion of -- -- 587,790 588 1,598,011 -- -- convertible debentures Issuance of warrants to purchase common -- -- -- -- 221,543 -- -- stock for patent legal services Issuance of common stock on -- -- 7,882 8 171,565 -- -- exercise of options Dividends accrued on preferred -- -- -- -- (2,524,701) -- 2,524,701 stock Interest imputed on convertible -- -- -- -- 666,667 -- -- debentures Net loss -- -- -- -- -- (12,092,449) -- ------- --- --------- ----- ----------- ------------- ---------- Balance at December 31, 1996 529,524 529 3,999,367 3,999 109,490,222 (109,042,074) 3,671,532
Notes Receivable Total from Deferred Stockholders' Stockholders Compensation Equity ------------ ------------ --------------- Balance at December 31, 1995 (49,976) -- 6,971,659 Issuance of Series C convertible preferred -- -- 5,492,639 stock Issuance of Series C convertible preferred -- -- 1,044,001 stock upon conversion of promissory notes Issuance of common stock upon conversion of Series A convertible -- -- -- preferred stock and related accrued dividends Issuance of common stock upon conversion of Series B convertible -- -- -- preferred stock and related accrued dividends Issuance of common stock upon conversion of Series Convertible -- -- -- preferred stock and related accrued dividends Issuance of common stock upon conversion of -- -- 1, 598,599 convertible debentures Issuance of warrants to purchase common -- -- 221,543 stock for patent legal services Issuance of common stock on -- -- 171,573 exercise of options Dividends accrued on preferred -- -- -- stock Interest imputed on convertible -- -- 666,667 debentures Net loss -- -- (12,092,449) ------------------------------------------------------------------------------------------------- Balance at December 31, 1996 (49,976) -- 4,074,232
- 56 - Genta Incorporated Consolidated Statements of Stockholders' Equity
Convertible Additional Preferred Stock Common Stock paid-in Accumulated Shares Amount Shares Amount Capital Deficit --------------------- ----------------------- ------------ ---------------- Balance at December 31, 1996 529,524 529 3,999,367 3,999 109,490,222 (109,042,074) Issuance of common stock for -- -- 38,400 38 42,000 -- services rendered and severance Return of common stock in exchange for forgiveness of note receivable -- -- (1,250) (1) -- -- Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends (71,500) (71) 518,742 519 714,552 -- Issuance of common stock upon conversion of Series C convertible preferred stock and related accrued dividends (1,424) (1) 952,841 953 84,257 -- Issuance of common stock upon conversion of convertible debentures -- -- 204,263 204 358,355 -- Issuance of Series D convertible stock preferred stock 161,580 162 -- -- 13,957,100 -- Issuance of Series D convertible preferred stock upon conversion of senior 65,415 65 -- -- 3,270,684 -- secured convertible bridge notes and accrued interest Dividends accrued on preferred stock -- -- -- -- (1,694,677) -- Issuance of warrants to purchase common stock in connection with line of -- -- -- -- 98,000 credit Interest imputed on convertible -- -- -- -- 3,000,000 debentures Net loss -- -- -- -- -- (15,425,817) ========= ====== =========== ======== ============== ============== Balance at December 31, 1997 683,595 $ 684 5,712,363 $ 5,712 $ 129,320,493 $(124,467,891)
Notes Accrued Receivable Total Dividend from Deferred Stockholders' Payable Stockholders Compensation Equity ------------- -------------- ------------- ------------- Balance at December 31, 1996 3,671,532 (49,976) -- 4,074,232 Issuance of common stock for -- -- -- 42,038 services rendered and severance Return of common stock in exchange for forgiveness of note receivable -- 49,976 49,975 Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends (715,000) -- -- -- Issuance of common stock upon conversion of Series C convertible preferred stock and related accrued dividends (85,209) -- -- -- Issuance of common stock upon conversion of convertible debentures -- -- -- 358,559 Issuance of Series D convertible stock preferred stock -- -- 13,957,262 Issuance of Series D convertible preferred stock upon conversion of senior -- -- -- 3,270,749 secured convertible bridge notes and accrued interest Dividends accrued on preferred stock 1,694,677 -- -- Issuance of warrants to purchase common stock in connection with line of -- -- -- 98,000 credit Interest imputed on convertible -- -- -- 3,000,000 debentures Net loss -- -- (15,425,817) =========== =========== ======== ============ Balance at December 31, 1997 $ 4,566,000 $ -- $ -- $9,424,998
- 57 -
Convertible Additional Accrued Preferred Stock Common Stock paid-in Accumulated Dividends Shares Amount Shares Amount Capital Deficit Payable -------------------------------------------------------------------------------------- Balance at December 31, 1997 683,595 $684 5,712,363 $5,712 $129,320,493 $(124,467,891) $4,566,000 Issuance of common stock upon conversion of Series A convertible preferred stock (9,000) (9) 65,295 65 89,944 -- (90,000) and related accrued dividends Issuance of common stock upon conversion of Series D convertible preferred stock (43,874) (44) 4,648,557 4,649 (4,605) -- -- Shares and warrants issued in connection with LBC settlement 2,900 3 -- -- 965,417 -- -- Deferred compensation -- -- -- -- 888,792 -- -- Amortization of deferred compensation -- -- -- -- -- -- -- Dividends accrued on preferred stock -- -- -- -- (632,790) -- 632,790 Net loss -- -- -- -- -- (7,585,766) -- --------------------------------------------------------------------------------------- Balance at December 31, 1998 633,621 $634 10,426,215 $10,426 $130,627,251 $(132,053,657) $5,108,790 =======================================================================================
Notes Receivable Total From Deferred Stockholders' Stockholders Compensation Equity --------------------------------------------- Balance at December 31, 1997 $ -- $ -- $9,424,998 Issuance of common stock upon conversion of Series A convertible preferred stock -- -- -- and related accrued dividends Issuance of common stock upon conversion of Series D convertible preferred stock -- -- -- Shares and warrants issued in connection with LBC settlement -- -- 965,420 Deferred Compensation -- (888,792) -- Amortization of deferred compensation -- 154,367 154,367 Dividends accrued on preferred stock Net loss -- -- (7,585,766) --------------------------------------------- Balance at December 31, 1998 -- $(734,425) $2,959,019 =============================================
See accompanying notes. - 58 - Genta Incorporated Consolidated Statements of Cash Flows
Years ended December 31, ------------------------------------------------------ 1996 1997 1998 ------------------------------------------------------ (restated) Operating activities Net loss $(12,092,449) $(15,425,817) $(7,585,766) Items reflected in net loss not requiring cash: Depreciation and amortization 1,518,142 1,022,432 957,583 Equity in net loss of joint venture 2,712,183 1,193,321 131,719 Loss on disposal of fixed assets -- 1,130,809 340,808 Loss on abandonment of patents -- 600,000 576,544 Interest accrued on convertible notes and debentures -- 279,308 -- Fair value of warrants issued in connection with line of credit -- 98,000 -- LBC settlement -- 568,420 547,000 Forgiveness of shareholder note -- 49,976 -- Fair value of common stock issued for severance and services -- 42,038 -- Compensation expense related to stock options -- -- 154,367 Interest imputed on convertible debentures 666,667 3,000,000 -- Changes in operating assets and liabilities: Accounts and notes receivable 168,600 233,650 (400,972) Inventories (289,599) 166,235 (137,603) Prepaids and other assets (33,241) (33,349) (382,166) Accounts payable, accrued expenses and other (803,347) (1,036,342) 268,278 Deferred revenue 44,589 5,449 (198,570) ----------- ---------- ---------- Net cash used in operating activities (8,108,455) (8,105,870) (5,728,768) Investing activities Purchase of short-term investments (1,497,775) (8,771,737) (1,882,290) Maturities of short-term investments 1,497,775 2,509,737 7,251,918 Purchase of property and equipment (115,922) (34,246) (303,556) Proceeds from sale of property and equipment -- 70,691 57,686 Loans receivable from joint venture (846,784) (595,771) (51,754) Deposits and other 642,654 (67,331) 37,575 ----------- ---------- ---------- Net cash provided (used in) by investing activities (320,052) (6,888,657) 5,109,579 Financing activities Proceeds from notes payable 2,176,500 3,000,000 -- Repayment of notes payable and capital leases (1,948,438) (300,324) -- Proceeds from issuance of preferred stock, net 8,267,539 13,957,262 -- Proceeds from issuance of common stock, net 171,573 -- -- Other 21,591 -- -- ----------- ---------- ---------- Net cash provided by financing activities 8,688,765 16,656,938 -- Increase in cash and cash equivalents 260,258 1,662,411 (619,189) Less cash at liquidated foreign subsidiary -- -- (8,947) Cash and cash equivalents at beginning of year 271,755 532,013 2,194,424 ----------- ---------- ---------- Cash and cash equivalents at end of year $ 532,013 $2,194,424 $1,566,288 =========== ========== ========== Supplemental disclosure of cash flow information: Interest paid $ 225,186 $ 33,914 $ 8,661 =========== ========= =========== Supplemental disclosure of noncash investing and financing activities: Warrant dividend -- -- 632,790 Preferred stock dividend accrued 2,524,701 1,694,677 -- Dividends imputed on preferred stock 2,348,000 16,158,000 -- Common stock issued in payment of dividends on preferred stock 425,757 800,209 90,000 Preferred stock issued upon conversion of notes payable and accrued interest 1,044,001 -- -- -- Common stock issued upon conversion of notes and convertible debentures and 1,598,599 358,559 -- accrued interest Exchange of deposits for purchase of equipment 1,200,000 251,000 -- Preferred stock issued upon conversion of short-term notes payable and accrued -- 3,270,749 -- interest -- -- -- Conversion of accrued expenses into paid in capital related to LBC settlement 418,417
See accompanying notes. - 59 - Notes to Consolidated Financial Statements December 31, 1998 1. Organization and Significant Accounting Policies Organization and Business Genta Incorporated ("Genta" or the "Company") is an emerging biopharmaceutical company engaged in the development of a pipeline of pharmaceutical products. The Company has a 50% equity interest in a drug delivery system joint venture with SkyePharma, PLC ("SkyePharma", formerly with Jagotec AG ("Jagotec"), Genta Jago Technologies B.V. ("Genta Jago"), established to develop oral controlled-release drugs. The Company's research efforts have been focused on the development of proprietary oligonucleotide pharmaceuticals intended to block or regulate the production of disease-related proteins at the genetic level. The Company had also manufactured and marketed specialty biochemicals and intermediate products to the in vitro diagnostic and pharmaceutical industries through its manufacturing subsidiary, JBL Scientific, Inc. ("JBL"), until the Company entered into an Asset Purchase Agreement with Promega Corporation on March 19, 1999. JBL is presented as discontinued operations. See Note 2. Basis of Presentation The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has had recurring operating losses since inception and management expects that they will continue for the next several years. Management's plans for funding future losses includes amending its agreement with Genta Jago on March 4, 1999, and the Company has entered into an Asset Purchase Agreement with Promega Corporation for the sale of certain assets and liabilities of JBL on March 19, 1999 (Note 2). The Company is also actively seeking collaborative agreements, equity financing and other financing arrangements with potential corporate partners and other sources. However, there can be no assurance that any such collaborative agreements or other sources of funding will be available on favorable terms, if at all. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The 1998 financial statements do not include any adjustments that might result from the outcome of this uncertainty. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, JBL and Genta Pharmaceuticals Europe, S.A. ("Genta Europe"), the Company's European subsidiary based in Marseilles, France. During 1998, pursuant to a filing for "Cessation of Payment" in Marseilles, France, the Company has deconsolidated the accounts for Genta Europe and has recorded all remaining net liabilities at their estimated liquidation value. All significant intercompany accounts and transactions have been eliminated in consolidation. - 60 - Investment in Joint Venture The Company has a 50% ownership interest in a joint venture, Genta Jago, a Netherlands corporation. The investment in joint venture is accounted for under the equity method (Note 5). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates. Revenue Recognition and Major Customers Revenue from product sales is recognized upon shipment. As a result of the Company's decision to sell JBL in March 1999, all product sales are reported in discontinued operations. Collaborative research and development revenues are recorded as earned, generally ratably, as research and development activities are performed under the terms of the contracts. Royalty revenues from license arrangements are recognized when earned. Payments received in excess of amounts earned are deferred. Cash, Cash Equivalents and Short-Term Investments Cash and cash equivalents consist of money market type funds and highly liquid debt instruments with remaining maturities of three months or less when purchased. Short-term investments consist of corporate notes, all of which mature within 90 days from December 31, 1998. The estimated fair value of each investment security approximates the amortized cost and, therefore, no unrealized gains or losses existed as of December 31, 1998. Fair Value of Financial Instruments The carrying amount of cash, accounts receivable, and accounts payable approximates fair value due to the short-term nature of these instruments. The fair value of investments available for sale is based on current market value. Concentration of Credit Risk The Company markets its specialty biochemical and intermediate products to the pharmaceutical and diagnostic industries. Generally, collateral is not required on the Company's sales. Credit losses have historically been insignificant and within management's expectations. The Company invests its excess cash primarily in debt instruments of domestic corporations with "AA" or greater credit ratings as defined by Standard and Poors, although the Company's investment guidelines permit investment in "A" rated domestic corporate obligations and other eligible investments. The Company has established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any significant losses on its cash equivalents or short-term investments. - 61 - Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. As a result of the Company's decision to sell JBL in March 1999, all inventories are included in net current assets of discontinued operations. See Note 2. Property Held for Sale The Company acquired a pill machine on July 1, 1996 for $757,465 on which it has recorded depreciation of $243,471 for a net book value of $513,994. The Company has entered into an agreement to sell the machine for $290,000 and has, therefore, recorded this asset held for sale at that net realizable value and has recorded a $223,994 loss on the impairment of this asset. Property and Equipment Property and equipment is stated at cost and depreciated over the estimated useful lives, ranging from 2 to 7 years, of the assets using the straight-line method. Leasehold improvements are stated at cost and amortized over the shorter of the estimated useful lives of the assets or the lease term. Amortization of equipment under capital leases is reported with depreciation of property and equipment. The Company's policy is to evaluate the appropriateness of the carrying value of the undepreciated value of the long-lived assets on the basis of estimated future cash flows (undiscounted) and other factors. Intangible Assets Intangible assets, consisting primarily of capitalized patent costs (as well as purchased proprietary technology at JBL), are amortized using the straight line basis over a term of 5 years for issued patents, 14 years for purchased proprietary technology and 5-7 years for organizational and other amortizable costs. The Company's policy is to evaluate the appropriateness of the carrying values of the unamortized balances of intangible assets on the basis of estimated future cash flows (undiscounted) and other factors. If such evaluation were to indicate an impairment of these intangible assets, such impairment would be recognized by a write-down of the applicable assets. The Company evaluates, each financial reporting period, the continuing value of patents and patent applications. Through this evaluation, the Company may elect to continue to maintain these patents; seek to out-license them; or abandon them. As a result of such evaluation, the Company recorded charges in the fourth quarter to general and administrative expenses of $600,000 and $577,000 in 1997 and 1998, respectively, for specific capitalized patents no longer related to the research and development efforts of the Company. Dividends The number of shares of common stock issued in payment of dividends on Series A Preferred Stock, is based on the fair market value of such shares of common stock on the date the dividends become due. Income Taxes The Company uses the liability method of accounting for income taxes. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109 the Company records valuation allowances against net deferred tax assets. If based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In assessing the realizability of deferred assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and when temporary differences become deductible. The Company considers, among other available information, uncertainties surrounding the recoverability of deferred tax assets, scheduled reversals of deferred tax liabilities, projected future taxable income, and other matters in making this assessment. Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), requires use of option valuation models that were not developed for use in valuing employee stock options. The Company provides pro forma disclosure pursuant to SFAS No. 123 in Note 9 to the financial statements. Under APB 25, deferred compensation is recorded for the excess of the fair value of the stock on the measurement date (which is the latter of the date of the option grant or the date of stockholder approval of options available for grant), over the exercise price of the option (intrinsic value method). The deferred compensation is amortized over the vesting period of the option. The Company accounts for stock option grants and similar equity instruments granted to non-employees under the fair value method provided for in SFAS No. 123. - 62 - Net Loss Per Common Share Under SFAS No. 128, the Company is required to present basic and diluted earnings per share if applicable. Basic earnings per share is based upon the weighted average number of shares outstanding during the period. Diluted earnings per share includes the weighted average number of shares outstanding and gives effect to potentially dilutive common shares such as options, warrants and convertible debt and preferred stock outstanding. Net loss per common share for the years ended December 31, 1996, 1997 and 1998 is based on the weighted average number of shares of common stock outstanding during the periods. Basic and diluted loss per share are the same for all periods presented as potentially dilutive securities including options, warrants and convertible preferred stock, have not been included in the calculation of the net loss per common share as their effect is antidilutive. All share data and per share amounts have been retroactively restated to reflect a ten for one reverse stock split authorized by the Board of Directors on April 4, 1997. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") and SFAS No. 131, "Segment Information" ("SFAS No. 131"), and which were both adopted by the Company in 1998. SFAS No. 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Other than Net Loss, the Company had no other material components of comprehensive income. SFAS No. 131 amends the requirements for public enterprises to report financial and descriptive information about its enterprise for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The financial information is required to be reported, as disclosed in Note 17, on the basis that is used internally for evaluating the segment performance. On June 16, 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure instruments at fair value. The Company is currently evaluating the impact of this pronouncement and does not believe adoption of SFAS No. 133 will have a material impact on the Company's financial statements. Reclassification Certain prior year amounts have been reclassified to conform with the current year presentation. 2. Discontinued Operation On March 19, 1999, the Company entered into an Asset Purchase Agreement with Promega Corporation whereby a wholly-owned subsidiary of Promega will acquire substantially all of the assets and certain liabilities of JBL for cash, a promissory note, and certain pharmaceutical development services in support of Genta's development project. As a result of the pending sale, the Company's specialty biochemical manufacturing segment (JBL) has been presented as discontinued operations. The assets and liabilities relating to the discontinued operations are included in net assets of discontinued operations in the consolidated balance sheets at December 31, 1997 and 1998. The results of operations for the discontinued segment are included in discontinued operations in the consolidated statements of operations for the years ended December 31, 1996, 1997 and 1998. - 63 - Net assets of discontinued operations consisted of the following:
December 31, 1997 December 31, 1998 ----------------- ----------------- Accounts receivable, net.................... $ 431,046 $ 832,018 Inventories, net............................ 826,008 963,611 Property and equipment, net................. 825,542 763,082 Other assets................................ 1,041,360 897,399 Liabilities................................. (674,954) (849,806) -------- --------- Total.................................. $ 2,449,002 $ 2,606,304 ============ ============== Less current portion........................ (582,100) (2,606,304) ------------- -------------- $ 1,866,902 $ -- Operating results of the discontinued segment consisted of the following: Year Ended December 31, ------------------------------------------------- 1996 1997 1998 ---- ---- ---- Product sales..................................... $ 4,924,694 $ 4,701,649 $ 5,346,795 Operating expenses................................ (5,821,905) (6,520,831) (6,087,565) Other income...................................... 18,233 77,843 805 ----------- ------------ ------------ Loss.............................................. $ (878,978) $(1,741,339) $ (739,965) =========== ============ ============
One customer, a European distributor, accounted for approximately 27%, 25% and 14% of product sales during the years ended December 31, 1996, 1997 and 1998, respectively. One other customer, who accounted for less than 10% of product sales in 1997, accounted for approximately 19% of product sales during the year ended December 31, 1998. 3. Property and Equipment Property and equipment is comprised of the following: December 31, 1997 1998 ----------------------------------- Equipment .................................. $1,661,612 $ 148,997 Leasehold improvements...................... 75,331 -- Furniture and fixtures...................... 14,338 9,768 ----------------------------------- 1,751,281 158,765 Less accumulated depreciation and amortization ............................ (858,673) (10,520) ----------------------------------- $ 892,608 $148,245 =================================== 4. Notes Receivable from Officers and Employees At December 31, 1996, notes receivable consisted of loans made to officers and employees to facilitate their relocation. Generally, such loans are secured by each individual's residence, bear interest at approximately 7.0% per annum, and mature on the earlier of: (i) such officer's or employee's termination, (ii) five years from the date of issuance, or (iii) on the date of sale of the property. The notes were repaid in fiscal 1997 in connection with the termination of the related employees' employment. 5. Genta Jago Joint Venture Beginning in 1996 and through the first quarter of 1999, the Company has significantly reduced its involvement in Genta Jago. The following represents a history of the formation, activities and accounting of Genta Jago. In 1992, Genta and Jagotec determined to enter into a joint venture (Genta Jago). The Company's purpose in establishing Genta Jago was to develop products using a limited-scope license to Jagotec's GEOMATRIX technology with the objective of producing shorter-term earnings than were expected from the Company's Anticode(TM) antisense programs. Genta originally contributed $4 million in cash to Genta Jago as well as the rights to apply its Anticode(TM) oligonucleotide technology to six products. Genta issued 120,000 shares of Common Stock valued at $7.2 million to Jagotec and its affiliates in 1992 as consideration for its interest in Genta Jago, to induce Jagotec to license to Genta Jago, for what the parties believed was a substantial discount from the underlying value of such license, Jagotec's GEOMATRIX technology with respect to approximately 25 products (the "Initial License") and to license to Genta Jagotec's GEOMATRIX technology for use in Genta's Anticode(TM) oligonucleotide development programs. The $7.2 million fair value assigned to the 120,000 unregistered common shares issued to Jagotec by Genta for the GEOMATRIX license represented a 33% discount from the trading market price of registered shares on the date of formation of the joint venture (December 15, 1992) and was expensed by Genta as acquired in-process research and development in 1992 as there were no alternative future uses for the acquired technology, and realization of ultimate profits from the acquired technology was not assured. Since Genta had no carrying value assigned to the technology Genta contributed to Genta Jago, there was no accounting for such capital contribution. The Common Stock issued by Genta was unregistered and therefore was recorded at a discount to the - 64 - then-current trading value of registered shares. The $4.0 million in cash paid to Genta Jago was recorded by Genta as investment in joint venture. In 1994, separate from the original 1992 joint venture agreement, Genta and Jagotec began negotiations to expand Genta Jago to include the GEOMATRIX technology as applied to 35 additional products (the "Additional License"). In 1994, Jagotec granted Genta, for $1.85 million, an option (the "Expansion Option"), exercisable solely at Genta's discretion through April 30, 1995, to expand the joint venture by requiring Jagotec to contribute rights under the Additional License at what the parties believed was a substantial discount to its actual fair value. The $1.85 million was considered by Genta to be a partial cost of acquiring the Additional License, and, since it was not refundable under any circumstances and there was no assurance of future recoverability of the $1.85 million (i.e. recoverability was dependent upon Genta Jago achieving profitability), Genta expensed such payment in 1994 as acquired in-process research and development. An additional $2.0 million (the "Deposit") was deposited with Jagotec in 1994, but would only be retained by Jagotec, as partial payment of the exercise price for the Expansion Option, if Genta actually exercised the Expansion Option. If such Expansion Option was not exercised, the $2.0 million Deposit would be transferred to Genta Jago in the form of working capital loans payable by Genta Jago to Genta. Accordingly, at December 31, 1994, the Deposit was recorded by Genta as a loan receivable from joint venture, and would remain so until its ultimate use was identified. Pursuant to the terms of the Expansion Option, for Genta to exercise the Expansion Option Genta would have had to pay Jagotec an aggregate of $3.15 million in cash and 124,000 shares of Common Stock, valued at $1.6 million (based on the trading price at such time). The parties agreed the $3.15 million in cash would consist of (i) the Deposit made by Genta in 1994, which would be applied to the Expansion Option's exercise price upon Genta's election, in 1995, to exercise such Expansion Option; and (ii) an additional cash payment of $1.15 million to exercise the Expansion Option to be paid by Genta in 1995. In 1995, Genta exercised the Expansion Option. Consideration for the Expansion Option exercise paid in 1995 represented an aggregate amount of $4.8 million. This amount was expensed as acquired in-process research and development in 1995, as there were no identified alternative future uses for the Additional License and recoverability of the $4.8 million was not assured. In each instance, the technological feasibility of the aforementioned acquired in-process research and development had not yet been established and the technology had no future alternative uses at the dates of the acquisitions. Furthermore, due to continuing uncertainties regarding the Company's ability to demonstrate bioequivalence of potential products at that time, management was unable to make estimates regarding the remaining efforts necessary to develop the acquired, in-process technology into a commercially viable product. However, it was expected that any such development would require significant cash resources. From 1992 through December 31, 1998, the Company has provided funding to Genta Jago pursuant to a working capital loan agreement which expired in October 1998. These advances were structured as working capital loans, to give Genta the protections of a debt holder with respect to such amounts and to maintain Genta's and Jagotec's respective equity ownership in Genta Jago at a 50/50 ratio. The Company has recorded all of the net losses incurred by Genta Jago as a reduction of the Company's investment in joint venture or loans receivable from joint venture. Genta initially carried the advances as "loans receivable from joint venture" until Genta Jago actually spent the funds, since Genta believed it had the legal right to recover any unexpended funds as a debtholder. However, as the funds were spent by Genta Jago, Genta was no longer assured of the collectibility of such loans, so the carrying value was reduced accordingly as the offset to Genta's recognition of its equity in the net loss of Genta Jago. Therefore, at all times Genta's recorded asset "loans receivable from joint venture" never exceeded the amount of Genta Jago's unexpended cash. Genta did not believe it was appropriate to carry its investment in or loans receivable from Genta Jago at any amount in excess of Genta Jago's cash, as there was no assurance of recoverability of such additional amounts. Accordingly, Genta recognized 100% of the losses of Genta Jago. In 1995, Genta Jago returned certain Anticode(TM) technology to Genta in exchange for Genta's forgiveness of $4.4 million of principal and $0.3 million of interest outstanding under existing working capital loans to Genta Jago. This amount was determined by an arm's length negotiation between Genta and Jagotec and was based on the amount actually expended by Genta Jago for research and development related to such Anticode(TM) oligonucleotide technology from the time Genta Jago originally acquired the relevant technology in 1992 through the date of return in 1995. This forgiveness had no impact on Genta's financial statements, as Genta had already expensed Genta Jago's expenditures of such - 65 - cash, and had no carrying value for the loans at the time of the forgiveness. Genta Jago treated the forgiveness as a gain on the waiver of debt because this reflected the legal form of the transaction. As of December 31, 1998, the Company had advanced working capital loans of approximately $15.8 million to Genta Jago, net of principal repayments and $4.4 million in forgiven principal and $0.3 million in forgiven interest accrued thereon. Such loans bore interest at rates per annum ranging from 5.81% to 7.5%, and were payable in full on October 20, 1998. However, Genta Jago did not repay such loans to Genta as Genta and Jagotec were in the process of renegotiating the terms of the joint venture agreement. On March 4, 1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into an interim agreement pursuant to which the parties to the joint venture released each other from all liability relating to unpaid development costs and funding obligations and SkyePharma agreed to be responsible for substantially all of the obligations of the joint venture to third parties and for the further development of the joint venture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between Genta and SkyePharma as set forth in such interim agreement. Under terms of the joint venture, Genta Jago contracted with the Company to conduct research and development and provide certain other services. Revenues associated with providing such services totaled $1.6 million, $350,000, and $55,000 for the years ended December 31, 1996, 1997, and 1998 respectively. Terms of the arrangement also grant the Company an option to purchase Jagotec's interest in Genta Jago exercisable from December 31, 1998 through December 31, 2000. Genta Jago entered into collaborative development agreements with Gensia, Inc., Apothecon, Inc., a subsidiary of Bristol-Myers Squibb Co., and Krypton, Ltd., a subsidiary of SkyePharma, during January 1993, March 1996 and October 1996, respectively. Such agreements provide funding to Genta Jago for the development and clinical testing of selected controlled-release pharmaceuticals in addition to potential milestone payments and royalties on future product sales. Effective October 1996, Gensia and SkyePharma reached an agreement whereby a SkyePharma subsidiary, Brightstone Pharma, Inc. ("Brightstone"), was assigned Gensia's rights (and those of Gensia's partner, Boehringer Mannheim) to develop and co-promote the potentially bioequivalent nifedipine product under the collaboration agreement with Genta Jago. The assignment was accepted by Genta Jago and has no impact on the terms of the original agreement. Condensed financial information for Genta Jago Technologies B.V. is set forth below. - 66 -
December 31, 1997 1998 -------------------------------------- -------------------------------------- Balance Sheet Data: Receivables under collaboration agreements.......................... $ 1,400,000 $ 3,348,000 Other current assets.................. 31,000 24,000 -------------------------------------- Total current assets.................. 1,431,000 3,372,000 Other assets.......................... 4,000 12,000 -------------------------------------- Total Assets $ 1,435,000 $ 3,384,000 ====================================== Current liabilities................... $ 5,213,000 $ 8,426,000 Notes payable to Genta ............... 15,837,000 15,837,000 Net capital deficiency................ (19,615,000) (20,879,000) ----------- ----------- Total liabilities and capital deficiency $ 1,435,000 $ 3,384,000 ====================================== Year ended December 31, 1996 1997 1998 -------------------------------------------------- Statements of Operations Data: Collaborative research and development revenues $ 5,477,000 $ 3,634,000 $ 2,162,000 Costs and expenses....................... 8,453,000 4,791,000 2,112,000 -------------------------------------------------- Income (loss) from operations............ (2,976,000) (1,157,000) 50,000 Interest expense to Genta, net of interest income..................... (956,000) (1,175,000) (1,314,000) ---------- ---------- ---------- Net loss................................. $ (3,932,000) $ (2,332,000) $ (1,264,000) ==================================================
- 67 - 6. Intangibles Intangibles consist of the following:
December 31, 1997 1998 ------------------------------------------ Patent and patent applications............ $ 2,529,510 $ 1,952,956 Organizational and other amortizable costs.................................. 134,521 134,521 ------------------------------------------ 2,664,031 2,087,477 Less accumulated amortization............. (228,859) (627,094) ---------- ---------- $ 2,435,172 $ 1,460,383 ==========================================
7. Debt In February 1997, the Company raised gross proceeds of $3 million in a private placement of units consisting of (i) Senior Secured Convertible Bridge Notes (the "Convertible Notes") that bore interest at a stated rate of 12% per annum and matured on December 31, 1997, as extended, and (ii) warrants to purchase an aggregate of approximately 6.4 million shares of common stock. The Convertible Notes were convertible into Series D Convertible Preferred Stock at the option of the holder, at an initial conversion price of $50.00 per share, subject to antidilution adjustments. In May 1997, $650,000 of the Convertible Notes were converted into 13,000 shares of Series D Preferred Stock and in December 1997, the remaining $2,350,000 of the Convertible Notes and accrued interest were converted into 52,415 shares of Series D Preferred Stock. Since it is unclear that the bridge notes had any value as indebtedness, all of the $3.0 million proceeds were allocated to the warrants. Accordingly, the $3.0 million attributed to the value of the warrants as well as interest at the stated rate of 12% on the Convertible Notes were recorded during the period the notes were outstanding as interest expense. In September 1996, the Company raised gross proceeds of $2 million (approximately $1.9 million net of offering costs) through the sale of Convertible Debentures to investors in a private placement outside the United States. The Convertible Debentures were convertible, at the option of the holders, at any time on or after October 23, 1996, into shares of common stock at a conversion price equal to 75% of the average Nasdaq closing bid price of Genta's common stock for a specified period prior to the date of conversion. Terms of the Convertible Debentures also provided for interest payable in shares of the Company's common stock. In November 1996, $1.65 million of the Convertible Debentures and the related accrued interest was converted into approximately 590,000 shares of common stock and in 1997, the remaining $350,000 and related accrued interest was converted into 204,263 shares of common stock. In accordance with the Emerging Issues Task Force Bulletin D-60, "Accounting for the Issuance of Convertible Preferred Stock and Debt Securities with a Nondetachable Conversion Feature" ("EITF D-60"), the Company recorded non-cash imputed interest costs totaling $666,667 in 1996 related to the discounted conversion terms. The Convertible Debentures bore interest at an effective interest rate of 38% per annum. - 68 - Notes payable at Genta Europe consist of the following:
December 31, 1997 1998 ------------------------------------------ Research financing obligation payable to a French governmental agency, non-interest bearing, maturing through 2002.............. $ 897,627 $ -- Other....................................... 2,931 -- ------------------------------------------ 900,558 -- Less current portion........................ (900,558) -- ------------------------------------------ $ -- $ -- ==========================================
As previously described, Genta Europe is in the process of liquidation and the fair value of its debt obligations is not readily determinable. The carrying value at December 31, 1998, approximately $964,000, represents the value of the original issuance of such debt instruments, which may be liquidated against Genta Europe's $590,000 deposit with such French governmental agency. As previously mentioned, pursuant to a filing for "Cessation of Payment", the Company has deconsolidated the accounts for Genta Europe and accordingly the aforementioned note payable and deposit are recorded in net liabilities of liquidated foreign subsidiary at December 31, 1998. The following represents a history of the funding obligations of Genta Europe. During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe") received approximately $1,100,000 of funding in the form of a loan from the French government agency L'Agence Nationale de Valorisation de la Recherche ("ANVAR") towards research and development activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta Europe and Genta. In October 1996, as part of the Company's restructuring program, Genta Europe terminated all scientific personnel. ANVAR asserted, in a letter dated February 13, 1998, that Genta Europe was not in compliance with the ANVAR Agreement, and that ANVAR might request the immediate repayment of such loan. The Company is working with ANVAR to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. In June 1998, Marseille Amenagement, a company affiliated with the city of Marseilles, France, filed suit in France to evict Genta Europe from its facilities in Marseilles; payment of alleged back rent due; and payment of a lease guarantee for nine years' rent (see Note 14). Following the filing of this claim and in consideration of the request for repayment of the loan from ANVAR, Genta Europe's Board of Directors directed the management to declare a "Cessation of Payment". Under this procedure, Genta Europe ceased any operations and terminated its only employee. A liquidator was appointed by the Court to take control of any assets of Genta Europe and to make payment to creditors. In December 1998, the Court in Marseilles dismissed the case against Genta Europe and indicated that it had no jurisdiction against Genta Incorporated. The Company's attorney in France notified the plaintiff of the decision and that they have 30 days from such notice to appeal. The 30-day appeal period has elapsed, and the Company is awaiting formal notification by the court that an appeal has not been made. Such decision does not preclude Marseille Amenagement from pursuing its claims in other courts in France or in the United States, and there can be no assurance that they will not do so. However, in the opinion of French counsel, it is highly remote that Marseille Amenagement will bring an action against Genta before U.S. courts. - 69 - 8. Operating Leases The Company leases its facilities under operating leases that generally provide for annual cost of living related increases. The JBL facilities are leased from its prior owners, who include a director, an executive officer and other stockholders of the Company. Minimum future obligations under operating leases at December 31, 1998 are as follows: Operating Leases ------------------------------- Related parties (JBL) Others -------------------------------- 1999.................................... $414,231 $ 46,127 2000.................................... 207,641 43,454 2001.................................... -- 10,864 -------------------------------- Total future minimum lease payments $621,872 $100,445 ================================ Total rent expense under operating leases for the years ended December 31, 1996, 1997 and 1998 was $1,043,000, $774,000, and $465,000, respectively, of which approximately $428,000 annually was for discontinued operations and the balance for continuing operations. 9. Stockholders' Equity Common Stock In August 1997, 7,500 shares of common stock were issued to a former Officer of the Company pursuant to the terms of a severance agreement. In December 1997, 30,900 shares of common stock were issued to two former Board Members of the Company pursuant to the terms of their consulting agreements. Also in December 1997, 1,250 shares of common stock that had been previously issued to a former Board Member were returned to the Company in exchange for the forgiveness of a note receivable from such former Board Member. On April 4, 1997, the Board of Directors authorized, and the Shareholders approved, a ten for one reverse stock split. All share and per share amounts and stock option data have been restated to reflect the stock split retroactively. In September 1996, the Company raised gross proceeds of $2 million (approximately $1.9 million net of offering costs) through the sale of Convertible Debentures to investors in a private placement outside the United States. The Convertible Debentures were convertible, at the option of the holders, at any time on or after October 23, 1996, into shares of common stock at a conversion price equal to 75% of the average Nasdaq closing bid price of Genta's common stock for a specified period prior to the date of conversion. Terms of the Convertible Debentures also provided for interest payable in shares of the Company's common stock. In November 1996, $1.65 million of the Convertible Debentures and the related accrued interest was converted into approximately 590,000 shares of common stock and in 1997, the remaining $350,000 and related accrued interest was converted into 204,263 shares of common stock. The Company recorded non-cash inputed interest costs totalling $666,667 in 1996 related to the discounted conversion terms. - 70 - Preferred Stock The Company entered into a Settlement Agreement and Release dated as of November 30, 1998 (the "Settlement Agreement") with LBC Capital Resources, Inc. ("LBC") and others. Pursuant to the Settlement Agreement, the Company agreed to issue to LBC 2,900 shares of Series D Convertible Preferred Stock; to issue to LBC or its designee five year warrants (the "LBC Warrants") to acquire 700,000 shares of Common Stock at an exercise price of $0.52 per share; to make certain payments to LBC totaling approximately $182,000; and to pay to LBC, upon the exercise of certain warrants, a commission equal to up to $150,000 in the aggregate. The respective conversion and exercise prices of the Series D Preferred Stock and the LBC Warrants are subject to adjustment upon the occurrence of certain events. Such Series D Preferred Stock and LBC Warrants were valued at $965,000 aggregating a total settlement of $1,147,000 of which $600,000 in 1997 and $547,000 in 1998 were charged to operations. The $150,000 in commissions was not accrued as such commissions are contingent upon the occurrence of future events. In June 1997, the Company raised gross proceeds of approximately $16.2 million (approximately $14 million net of placement costs) through the private placement of 161.58 Premium Preferred Units(TM). Each unit sold in the private placement consists of (i) 1,000 shares of Premium Preferred Stock(TM), par value $.001 per share, stated value $100 per share (the "Series D Preferred Stock"), and (ii) warrants to purchase 5,000 shares of the Company's common stock, (the "Class D Warrants") at any time prior to the fifth anniversary of the final closing (the "Class D Warrants"). The Series D Preferred Stock is immediately convertible at the option of the holder into shares of common stock at an initial conversion price of $0.94375 per share (subject to antidilution adjustment). In addition, the holders of the Series D Preferred Stock sold in the Private Placement are entitled to a liquidation preference aggregating $26,043,000. Due to the increase in value associated with the discounted conversion terms and liquidation preference of the Series D Preferred Stock, the Company has accounted for such increase by charging $16,158,000 to dividends imputed on preferred stock. On May 29, 1998, the Company requested, and subsequently received, consents (the "Letter Agreements") from the holders of a majority of the Series D Preferred Stock to waive the Company's obligation to use best efforts to obtain the effectiveness of a registration statement with the SEC as to Common Stock issuable upon conversion of Series D Preferred Stock and exercise of Class D Warrants. In exchange, the Company agreed to waive the contractual "lock-up" provisions to which such consenting holders were subject and which provisions would have prevented the sale of up to 75% of their securities for a nine-month period following the effectiveness of the registration statement; and to extend to January 29, 1999 from June 29, 1998 the Reset Date referred to in the Certificate of Designation of the Series D Preferred Stock. In addition, through the Letter Agreements, the Company agreed to issue to such holders warrants to purchase at $0.94375 per share, an aggregate of up to 807,900 shares of Common Stock, subject to certain anti-dilution adjustments, exercisable until June 29, 2002. The shares were valued at approximately $633,000 and recorded as a dividend. The Company had conditioned the effectiveness of such consent on its acceptance by a majority of the Series D Preferred Stockholders. The Series D Preferred Stock began earning dividends, payable in shares of the Company's Common Stock, at the rate of 10% per annum subsequent to the new Reset Date of January 29, 1999. In February 1997, the Company raised gross proceeds of $3 million in a private placement of units consisting of (i) Senior Secured Convertible Bridge Notes (the "Convertible Notes") that bore interest at a stated rate of 12% (see Warrants) per annum and matured on December 31, 1997, as extended, and (ii) warrants to purchase an aggregate of approximately 6.4 million shares of common stock. The Convertible Notes were convertible into Series D Convertible Preferred Stock at the option of the holder, at an initial conversion price of $50.00 per share, subject to antidilution adjustments. In May 1997, $650,000 of the Convertible Notes were converted into 13,000 shares of Series D Preferred Stock and in December 1997, the remaining $2,350,000 of the Convertible Notes and accrued interest were converted into 52,415 shares of Series D Preferred Stock. Since it is unclear that the bridge notes had any value as indebtedness, all of the $3.0 million proceeds were allocated to the warrants. Accordingly, the $3.0 million attributed to the value of the warrants, as well as interest at the stated rate of 12% on the Convertible Notes, was recorded during the period the notes were outstanding. In March 1996, the Company raised gross proceeds of $6 million (approximately $5.5 million net of offering fees) through the issuance of Series C Convertible Preferred Stock (the "Series C Preferred Stock") sold to institutional investors in a private placement. The Series C Preferred Stock was immediately convertible, at the option of the holder, into shares of common stock at a conversion price equal to 75% of the average Nasdaq closing bid price of Genta's common stock for a specified period prior to the date of conversion. In 1996, 5,620 shares of the Series C Preferred Stock and accrued dividends were converted at the option of the holders into 524,749 shares of Genta's common - 71 - stock. In 1997, 1,424 shares of the Series C Preferred Stock and accrued dividends were converted at the option of the holders into 952,841 shares of Genta's common stock. In connection with a restatement of the Company's 1996 financial statements included in its Annual Report on Form 10-K and in consideration of EITF D-60, which was issued in March 1997, the Company recorded imputed non-cash dividends on preferred stock totaling $2,348,000 in 1996 for discounted conversion terms related to Series C convertible preferred stock. In December 1995, the Company completed the sale of 3,000 shares of Series B Convertible preferred stock (the "Series B Preferred Stock") at a price of $1,000 per share to institutional investors outside of the United States. The Series B Preferred Stock was immediately convertible, at the option of the holder, into shares of common stock at a conversion price equal to 75% of the average Nasdaq closing bid prices of Genta's common stock for a specified period prior to the date of conversion. The Series B Preferred Stock was converted into 226,943 shares of the Company's common stock in February 1996 pursuant to terms of the Series B stock purchase agreements. In connection with a restatement of the Company's 1996 financial statements included in its Annual Report on Form 10K and in consideration of EITF D-60, the Company recorded imputed non-cash dividends on preferred stock totaling $1.0 million in 1995 for discounted conversion terms related to Series B convertible preferred stock. In December 1993, the Board of Directors of the Company adopted a Stockholder Rights Plan which provides for the distribution of a preferred stock purchase right ("Right") as a dividend for each share of the Company's common stock held of record at the close of business on January 21, 1994. Under certain circumstances involving an acquisition of 15% or more of the Company's common stock or a specified business combination (a "Trigger Event"), the Rights would permit the holder (other than the 15% holder) to purchase shares of the Company's common stock or, if applicable, common stock of an acquirer at a 50% discount upon payment of an exercise price of $50 per Right. The Rights expire in December 2003 and may be redeemed by the Company prior to a Trigger Event at a price of $.01 per Right. In October 1993, the Company completed the sale of 600,000 shares of Series A convertible preferred stock ("the Series A Preferred Stock") in a private placement of units consisting of (i) one share of Series A Preferred Stock and (ii) one warrant to acquire one share of common stock, sold at an aggregate price of $50 per unit. Each share of Series A Preferred Stock is immediately convertible, at any time prior to redemption, into shares of the Company's common stock, at a rate determined by dividing the aggregate liquidation preference of the Series A Preferred Stock by the conversion price. The conversion price is subject to adjustment for antidilution. From January 1 through October 31, 1998, each share of Series A Preferred Stock was convertible into 7.255 shares of Common Stock. From November 1, 1998 through December 31, 1998, each share of Series A Preferred Stock was convertible into 7.333 shares of Common Stock. Terms of the Company's Series A Preferred Stock required the payment of dividends annually in amounts ranging from $3 per share per annum for the first year to $4 per share in the second year to $5 per share per annum in the third and fourth years. Dividends were paid in Common Stock in September 1996, for the first and second year as described below, at the Company's option. As 1998 represents the fifth year of the Series A Preferred Stock, no further dividends were accrued. The Company may redeem the Series A Preferred Stock under certain circumstances, and was required to redeem the Series A Preferred Stock, subject to certain conditions, in September 1996 at a redemption price of $50 per share, plus accrued and unpaid dividends (the "Redemption Price"). The Company elected to pay the Redemption Price in Common Stock in order to conserve cash and was required under the terms of the Series A Preferred Stock to use its best efforts to arrange for a firm commitment underwriting for the resale of such Common - 72 - Stock which would allow the holders ultimately to receive cash instead of securities for their Series A Preferred Stock. Despite using its best efforts, the Company was unable to arrange for a firm commitment underwriting. Therefore, under the terms of the Series A Preferred Stock, Genta was not required to redeem such Series A Preferred Stock in cash, but rather was required to redeem all shares of Series A Preferred Stock held by holders who elected to waive the firm commitment underwriting requirement and receive the redemption price in shares of Common Stock. A waiver of the firm commitment underwriting was included as a condition of such redemption. Through December 31, 1998, holders of 152,400 shares of Series A Preferred Stock redeemed such shares and related accrued and unpaid dividends for an aggregate of 839,483 shares of the Company's Common Stock. The effect on the financial statements was a reduction in accrued dividends on preferred stock, a reduction in the Par value of convertible preferred stock, an increase in the Par value of Common Stock, and an increase in additional paid-in capital. Should the remaining shares of Series A Preferred stock be redeemed through conversion into the Company's Common Stock, the effect on the financial statements would be the same as that previously described. The terms of the Series A Preferred Stock do not impose adverse consequences on the Company if it is unable to arrange for such an underwriting despite its reasonable efforts in such regard. The Company is restricted from paying cash dividends on Common Stock until such time as all cumulative dividends on outstanding shares of Series A and Series D Preferred Stock have been paid. The Company currently intends to retain its earnings, if any, after payment of dividends on outstanding shares of Series A and Series D Preferred Stock, for the development of its business. Warrants Series A Warrants were originally issued in connection with the Series A Preferred Stock in 1993. The Series A Warrants expired in September 1998. The Company also issued a five year warrant to purchase 23,525 shares of common stock at an exercise price of $17.00 per share in connection with a private placement of common stock in May 1995. In addition, five year warrants to purchase an aggregate of 24,731 shares of common stock at exercise prices ranging from $19.40 to $21.30 per share were issued to two equipment financing companies during 1995. In October 1996, the Company issued a five year warrant to purchase 37,512 shares of common stock at an exercise price of $13.20 per share to a patent law firm, in exchange for legal services. In October 1996, the Company also issued a five year warrant to purchase 10,000 shares of common stock at an exercise price of $15.00 per share in connection with the Convertible Debentures issued in September 1996. In connection with the Convertible Notes issued in February 1997, the Company issued warrants to purchase 6.4 million shares of common stock at $0.471875 per share (subject to antidilution adjustments). In the absence of objective evidence of the separate values of the Convertible Notes and the related warrants, the Company allocated the entire $3.0 million cash - 73 - consideration to the warrants. The Convertible Notes were accreted from the original recorded value of zero to the face amount of $3.0 million over the original maturity of the Convertible Notes, resulting in $3.0 million of interest expense in 1997. In 1997, the Company issued warrants to purchase 50,000 warrants at $2.50 per share exercisable for five years in connection with a short-term line of credit which expired prior to December 31, 1997. The Company valued these warrants using the Black-Scholes valuation model and recorded interest expense of $98,000 for the year ended December 31, 1997. In connection with the issuance of the Premium Preferred Units(TM) in June 1997, the placement agent received warrants (the "Placement Warrants") to purchase up to 10% of the Units sold in the Private Placement for 110% of the offering price per Unit. Furthermore, the Company has entered into a financial advisory agreement with the placement agent pursuant to which the financial advisor is entitled to receive certain cash fees and has received warrants (the "Advisory Warrants") to purchase up to 15% of the Units sold in the Private Placement for 110% of the offering price per Unit. The Placement Warrants and the Advisory Warrants expire on June 29, 2007. The Note and Warrant Purchase Agreement provides that a number of additional Bridge Warrants ("Penalty Warrants") equal to 1.5% of the number of Bridge Warrants then held by the Aries Funds shall be issued to the Aries Funds for each day beyond 30 days after the final closing of the Private Placement that a shelf registration statement covering the Common Stock underlying the securities purchased pursuant to the Note and Warrant Purchase Agreement is not filed with the SEC and for each day beyond 210 days after the closing date of the investment contemplated by the Note and Warrant Purchase Agreement that such shelf registration statement is not declared effective by the SEC. The Company filed such shelf registration statement with the SEC on September 9, 1997; however the Company has to date been unable to have such shelf registration statement declared effective by the SEC. As a result, the Company could be obligated to issue Penalty Warrants to the Aries Funds. The Aries Funds have not, to date, requested that the Company issue such Penalty Warrants. The Company and the Aries Funds are currently conducting negotiations to determine whether, and to what extent, Penalty Warrants will be issued. Stock Benefit Plans 1991 Plan The Company's 1991 Stock Plan (the "Plan") provides for the sale of stock and the grant of stock options to employees, directors, consultants and advisors of the Company. Options may be designated as incentive stock options or non-statutory stock options; however, incentive stock options may be granted only to employees of the Company. Options under the Plan have a term of up to ten years and must be granted at not less than the fair market value (85% of fair market value for non-statutory options) on the date of grant. Common stock sold and options granted pursuant to the Plan generally vest over a period of four to five years. Information with respect to the Company's 1991 Stock Plan is as follows: - 74 -
Weighted Shares Average Under Exercise Price Option Per Share ------ --------- Balance at December 31, 1995 188,884 $ 23.96 Granted.......................................... 13,677 17.71 Exercised........................................ (7,882) 21.77 Cancelled........................................ (29,749) 22.32 -------- Balance at December 31, 1996 164,930 23.77 Granted.......................................... 6,670 3.71 Exercised........................................ -- -- Cancelled........................................ (48,688) 23.21 -------- Balance at December 31, 1997 122,912 22.90 Granted......................................... 100,000 3.00 Exercised....................................... -- -- Cancelled....................................... (88,674) 24.75 -------- Balance at December 31, 1998 134,238 $ 6.85 ======== ======
In April 1995, the Stock Plan Committee of the Board of Directors approved a program whereby employees (including executive officers) of the Company and certain other option holders could exchange their unexercised options ("Old Options") on a one-for-one basis for new options ("New Options") priced at the market value on April 20, 1995. The New Options have the same vesting schedule and contractual terms as the Old Options. However, the New Options held by employees (excluding executive officers) and certain other holders were not exercisable until April 20, 1996 and the New Options held by executive officers of the Company were not exercisable until April 20, 1997 unless the holder is involuntarily terminated without cause prior to such date. An aggregate of 158,133 options with an average exercise price of approximately $78.40 per share were exchanged for New Options with an exercise price of $22.50 per share on April 20, 1995. All of the replacement options are included in options granted and canceled in the above summary of stock option activity. At December 31, 1998, options to purchase approximately 97,000 shares of common stock were exercisable at a weighted average exercise price of approximately $7.06 per share and approximately 144,276 shares of common stock were available for grant or sale under the Plan. 1998 Plan Pursuant to the Company's 1998 Stock Plan (the "Plan"), 6,750,000 shares have been provided for the grant of stock options to employees, directors, consultants and advisors of the Company. Options may be designated as incentive stock options or non-statutory stock options; however, incentive stock options may be granted only to employees of the Company. Options under the Plan have a term of up to ten years and must be granted at not less than the fair market value, 85% of fair market value for nonstatutory options, on the date of the grant. Common stock sold and options granted pursuant to the Plan generally vest over a period of four to five years. The Company granted stock options to purchase 3,961,263 shares of common stock in May 1998 subject to shareholder approval which was received in July 1998. As a result of an increase in the stock price between May and July 1998, the Company recorded deferred compensation of approximately $841,000 of which approximately $123,000 was expensed in the fourth quarter of 1998. Information with respect to the Company's 1998 Stock Plan is as follows: - 75 - Weighted Average Shares Under Exercise Price 1998 Plan Option Per Share --------- -------------- -------------- Balance at December 31, 1997 Granted -- -- Exercised 2,836,263 $0.94 Cancelled -- -- -------------- -------------- Balance at December 31, 1998 2,836,263 $0.94 ============== ============== At December 31, 1998, options to purchase approximately 495,000 shares of common stock were exercisable at a weighted average exercise price of approximately $0.94 per share and approximately 2,188,737 shares of common stock were available for grant or sale under the Plan. Pursuant to the Company's Non-Employee Directors' 1998 Stock Plan (the "Directors' Plan"), 3,000,000 shares have been provided for the grant of stock options to directors of the Company who are not Company employees. Options under the Plan have a term of up to ten years and must be granted at not less than the fair market value on the date of grant. Each option granted shall become exercisable in full on the date of the Annual Meeting next following the date of grant provided tha the optionee continues to serve as a member of the Board of Directors immediately following such Annual Meeting. Weighted Average Shares under Exercise Price 1998 Directors' Plan Option per share -------------------- ------------- -------------- Balance at December 31, 1997 -- -- Granted 1,725,000 $0.94 Exercised -- -- Cancelled -- -- --------- ----- Balance at December 31, 1998 1,725,000 $0.94 ========= ===== Pro forma information regarding net loss is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes method for option pricing with the following weighted-average assumptions for 1996, 1997, and 1998: volatility factors of the expected market value of the Company's common stock of 80%, 102%, and 72% respectively; risk-free interest rates of 6%; dividend yields of 0%; and a weighted-average expected life of the options of four to five years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: Years ended December 31, 1996 1997 1998 ------------------------------------------- Pro forma net loss per common shareholder $(17,294,920) $(33,493,186) $(8,699,775) Pro forma loss per share $ (5.80) $ (7.57) $ (1.24) The results above are not likely to be representative of the effects of applying SFAS 123 on reported net income or loss for future years. The weighted-average grant-date fair value of the options granted during the years ended December 31, 1996, 1997 and 1998 was $11.59, $2.75 and $0.50, respectively. Following is a further breakdown of the options outstanding as of December 31, 1998: - 76 -
Weighted Weighted Weighted average average average exercise price of Range Options remaining exercise Options options of prices outstanding life in years price exercisable exercisable - - ------------------------------------------------------------------------------------------------------ $0.88 - $0.97 4,561,263 9.46 $ 0.94 495,158 $ 0.94 $2.50 - $5.00 106,750 8.28 $ 3.04 81,570 $ 3.03 $5.31 -$20.00 3,316 7.55 $14.62 1,227 $15.77 $20.63 -$26.25 24,172 6.44 $22.65 13,952 $22.68 ------------------------------------------------------------------------------------ 4,695,501 9.42 $ 1.11 591,907 $ 1.77 ====================================================================================
Common Stock Reserved An aggregate of approximately 51,381,265 shares of common stock were reserved for the conversion of preferred stock and the exercise of outstanding options and warrants at December 31, 1998. - 77 - 10. Research, Development and Licensing Arrangements The Company has entered into various license, royalty and sponsored research agreements which provide the Company with rights to develop and market products covered under the agreements. In connection with certain license agreements entered into with a director of the Company and two other stockholders, JBL recorded royalty expense of $100,000, $87,500 and $0 in 1996, 1997, and 1998, respectively, which are recorded in the Company's discontinued operations. The Company was not obligated to repay any funding received under the collaborative research and development agreements under any circumstances. 11. Income Taxes Significant components of the Company's deferred tax assets as of December 31, 1997 and 1998 are shown below. A 100% valuation allowance has been recognized at December 31, 1997 and 1998 to offset the deferred tax assets as it is more likely than not that the net deferred tax assets will not be realized. The valuation allowance at December 31, 1996 approximated $32,508,000.
December 31, 1997 1998 ------------------------------------- Deferred tax assets: Capitalized research expense.............. $ 2,778,000 $ 2,922,000 Net operating loss carryforwards.......... 25,969,000 29,559,000 Research and development credits.......... 3,703,000 4,028,000 Purchased technology and license fees..... 4,491,000 4,491,000 Other, net................................ 497,000 1,130,000 ------------------------------------- Total deferred tax assets................. 37,438,000 42,130,000 Valuation allowance for deferred tax assets................................. (36,456,000) (41,214,000) ------------------------------------- 982,000 916,000 Deferred tax liabilities: Patent expenses........................... (729,000) (585,000) Net depreciation.......................... (253,000) (331,000) ------------------------------------- (982,000) (916,000) ------------------------------------- Net deferred tax assets..................... $ -- $ -- =====================================
At December 31, 1998, the Company has federal and California net operating loss carryforwards of approximately $82,037,000 and $14,721,000 respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California tax purposes and the fifty percent limitation on California loss carryforwards. The federal tax loss carryforwards will begin expiring in 2003, unless previously utilized. Approximately $2,767,000 and $532,000 of the California tax loss carryforward expired during 1997 and 1998, respectively, and the related deferred tax asset and tax loss carryforward amounts have been reduced accordingly. The remaining California tax loss will continue to expire in 1999, unless utilized. The Company also has federal and California research and development tax credit carryforwards of $3,160,000 and $1,335,000 respectively, which will begin expiring in 2003, unless previously utilized. Federal and California tax laws limit the utilization of income tax net operating loss and credit carryforwards that arise prior to certain cumulative changes in a corporation's ownership resulting in change of control of the Company. The future annual use of net operating loss carryforwards and research and development tax credits will be limited due to the ownership changes that occurred during 1990, 1991, 1993, 1996, 1997 and 1998. - 78 - 12. Employee Savings Plan The Company began a 401(k) program in 1994, which allowed participating employees to contribute up to 15% of their salary, subject to annual limits. In January 1998, the Board of Directors approved an increase to 20%, effective April 1, 1998, and subject to annual limits as established by the IRS. The Board of Directors may, at its sole discretion, approve Company contributions. No such contributions have been approved or made. 13. Employee Terminations In October 1996, Genta reassessed its personnel requirements and established a termination plan whereby the Company terminated 16 research and administrative employees and recorded general and administrative expenses of $850,000 for the related accrued severance costs. In May 1997, Genta again reassessed its personnel requirements and established another termination plan involving the termination of an aggregate of 12 research and administrative employees at Genta and Genta Europe. The Company recorded general and administrative expenses of $868,000 in the second quarter of 1997 for related accrued severance costs. There have subsequently been no adjustments to the liabilities originally recorded and the actual termination benefits paid were equal to the liabilities recorded. 14. Contingencies Pursuant to the Settlement Agreement (note 9), the Company agreed: to issue to LBC 2,900 shares of Series D Convertible Preferred Stock: to issue to LBC or its designee five-year warrants (the "LBC Warrants") to acquire 700,000 shares of Common Stock at an exercise price of $0.52 per share; to make certain payments to LBC totaling approximately $182,000; and to pay to LBC, upon the exercise of certain warrants, a commission equal to up to $150,000 in the aggregate. The respective conversion and exercise prices of the Series D Preferred Stock and the LBC Warrants are subject to adjustment upon the occurrence of certain events. The fair value attributed to the 2,900 shares of Series D Preferred Stock and the Class D Warrants approximated $965,000. The Company provided for $600,000 of this $1,147,000 settlement in 1997 and the remaining amount in 1998. On June 4, 1998, the Company's statutory process agent received a Summons and Complaint in a lawsuit brought by Johns Hopkins against the Company in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins alleges in the Complaint that the Company has breached the Johns Hopkins Agreement and owes them licensing royalty fees and related expenses in the amount of $308,832. Johns Hopkins also alleges the existence of a separate March 1993 letter agreement wherein the Company agreed to support a fellowship program at the Johns Hopkins School of Hygiene and Public Health and the Company's breach thereof, with damages of $326,829. On August 10, 1998 the Company's statutory process agent received a Summons and Complaint in a related lawsuit brought by the Ts'o/Miller Partnership and others - 79 - against the Company in the same court (Case No. 98182113). The Ts'o/Miller Partnership claims that it is owed licensing royalty fees in the amount of $287,671. The Company is currently in settlement negotiations. The Company believes that no further accrual is necessary pursuant to this settlement. In October 1996, JBL retained a chemical consulting firm to advise it with respect to an incident of soil and groundwater contamination (the "Spill"). Sampling conducted at the JBL facility revealed the presence of chloroform and perchloroethylenes ("PCEs") in the soil and groundwater at this site. JBL is conducting a quarterly groundwater monitoring program, under the supervision of the California Regional Water Quality Control Board, for purposes of determining whether the levels of chloroform and perchloroethylenes ("PCEs") have decreased over time. The results of the latest sampling conducted by JBL show that PCEs and chloroform have decreased in all but one of the monitoring sites. The Company believes that any costs stemming from further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. JBL received notice on October 16, 1998 from Region IX of the Environmental Protection Agency ("EPA") that it had been identified as a potentially responsible party ("PRP") at the Casmalia Disposal Site, which is located in Santa Barbara, California. JBL has been designated as a de minimis PRP by the EPA. The EPA currently estimates that the de minimis PRPs will be required to pay as little as $75,000 and as much as $750,000 to settle their potential liability, depending upon the volume of wastes attributed to them. The Company received an estimated volume calculation from the EPA, and a response, which is due on June 9, 1999, is currently under review. While the terms of the settlement with the EPA have not been finalized, they should contain standard contribution protection and release language. The Company has accrued $75,000 during 1998. The Company believes that any costs stemming from further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. On June 30, 1998, the Director General of the Company's subsidiary, Genta Pharmaceuticals Europe, SA ("Genta Europe"), was served notice of a suit in Marseilles, France by Marseille Amenagement, the manager of the Company's facilities in Marseilles. On July 30, 1998, the Company's office in San Diego, California was also served notice of the suit. The suit seeks the payment of unpaid past rents in the amount of 473,465 FF (as of April 8, 1999, approximately $77,601), the removal of the Company from the facility and an indemnity payment of 1,852,429 FF (as of April 8, 1999, approximately $303,613), which is allegedly equal to the balance of the first nine years' rent. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that the Company remains liable for 4,187,423 FF (as of April 8, 1999, approximately $686,319) and is required to pay this amount immediately. In view of these events, The Board of Directors of Genta Europe directed the Director General to declare "Cessation of Payment" in the commercial court of France, which declaration was made in July 1998. Under this procedure, Genta Europe ceased any operations and terminated its only employee. A liquidator was appointed by the Court to take control of any assets of Genta Europe and to make payment to creditors. In December 1998, the Court in Marseilles dismissed the case against Genta Europe and indicated that it had no jurisdiction against Genta Incorporated. The Company's attorney in France notified the plaintiff of the decision and that they have 30 days from such notice to appeal. The 30-day appeal period has elapsed and the Company is awaiting formal notification by the court that an appeal had not been made. Such decision does not preclude Marseille Amenagement from pursuing its claims in other courts in France or the United States, and there can be no assurance that it will not do so. However, the Company's legal counsel has represented that the probability of such action is remote. - 80 - 15. Genta Europe The Company's loss on its European operations for the years ended December 31, 1996, 1997 and 1998 were $1,247,713, $806,687, and $98,134 respectively. 16. Gain on Sale of Technology In December 1996, the Company sold the rights to two development-stage dermatological products for cash of $373,261 17. Business Segments The Company has had two reportable segments: pharmaceutical (drug) research and development at Genta and chemical manufacturing at JBL. Genta is an emerging biopharmaceutical company. The Company's research efforts have been focused on the development of proprietary oligonucleotide pharmaceuticals intended to block or regulate the production of disease related proteins at the genetic level. The Company's oligonucleotide programs are focused primarily in the area of cancer. JBL is a manufacturer of high-quality specialty chemicals and intermediate products for the pharmaceutical and in vitro diagnostic industries. A Number of Fortune 500 companies use JBL products as raw material in the production of a final product. JBL markets its products to over 100 purchasers in the pharmaceutical and diagnostic industries. Business segment accounting policies are the same as those described in the summary of significant accounting policies. As further described in Note 2, as a result of its pending sale, JBL has been presented as discontinued operations. The Company evaluates performance based on profit or loss from operations before income taxes, interest expense, and interest revenue. The Company also accounts for intersegment sales as if the sales were to third parties. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business unit requires different technology and marketing strategies. The following table presents certain segment financial information and the reconciliation of segment financial information to consolidated totals as of and for the years ended December 31, 1996, 1997 and 1998.
FISCAL YEARS ENDED DECEMBER 31, 1996 1997 1998 Revenues: Drug Development - external customers $ -- $ 50,000 $ 50,000 Drug Development - related party 1,558,962 350,097 55,087 Drug development gain on sale of technology 373,261 Total revenues from continuing operation $ 1,932,223 $ 400,097 $ 105,087 Chemical Mfg. - discontinued operations 4,924,694 4,701,649 5,346,795 Cost and Expenses: Drug Development - continuing operations $ 9,688,841 $10,040,571 $ 6,683,123 Chemical Mfg. - discontinuing operations 5,821,905 6,520,831 6,087,565 Net Loss from operations Drug Development $(7,756,618) $(9,640,474) $(6,578,036) Loss from discontinued operations (878,978) (1,741,339) (739,965) Net loss of liquidated foreign subsidiary (98,134) Other income and (expenses) (744,670) (2,850,683) (37,912) Equity in net loss of joint venture (2,712,183) (1,193,321) (131,719) ------------ ------------ ------------ Total Net Loss $(12,092,449) $(15,425,817) $(7,585,766) Segment Assets Drug Development - continuing operations $ 8,805,726 $ 15,078,949 $ 7,551,293 Chemical Mfg. - discontinuing operations 3,843,733 2,449,002 2,606,304
Assuming the closing of the sale of JBL, Genta's revenues from product sales will be discontinued. Accordingly, historical revenue trends follow. Europa Bioproducts ("Europa"), JBL's European distributor, accounted for approximately 27% of product sales in 1996, 25% in 1997, and 14% in 1998. The decrease primarily reflects a changing product and customer mix. One other customer, who accounted for less than 10% of product sales in 1997, accounted for more than 19% of products sales in 1998. Individual customers' demands for JBL products generally fluctuate with the outcomes of clinical trials or the availability of funding. - 81 - INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Genta Jago Technologies B.V. We have audited the accompanying balance sheet of Genta Jago Technologies B.V. (a development stage company) (the "Company") as of December 31, 1998, and the related statements of operations, stockholders' equity, and cash flows for the year then ended, and for the period from December 15, 1992 (date of inception) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The Company's financial statements for the period December 15, 1992 (date of inception) through December 31, 1997 were audited by other auditors whose report, dated June 18, 1998, expresses an unqualified opinion and includes an explanatory paragraph which indicates that there are matters that raise substantial doubt about the Company's ability to continue as a going concern. The financial statements for the period December 15, 1992 (date of inception) through December 31, 1997 reflect total revenues and net loss of $19,040,894 and $23,868,479, respectively, of the related totals. The other auditors' report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such prior period, is based solely on the report of such other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998, and the results of its operations and its cash flows for the year then ended, and for the period from December 15, 1992 (date of inception) to December 31, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is a development stage enterprise engaged in developing and commercializing pharmaceuticals. As discussed in Note 1 to the financial statements, the deficiency in working capital and net capital deficiency at December 31, 1998 and the Company's operating losses since inception, raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. DELOITTE & TOUCHE EXPERTA LTD. Basel, Switzerland April 15, 1999 - 82 - Report of Independent Auditors The Board of Directors and Stockholders Genta Jago Technologies, B.V. We have audited the accompanying balance sheet of Genta Jago Technologies, B.V. (a development stage company) as of December 31, 1997, and the related statements of operations, stockholders' equity (net capital deficiency) and cash flows for each of the two years in the period ended December 31, 1997 and for the period December 15, 1992 (inception) through December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Genta Jago Technologies, B.V. (a development stage company) at December 31, 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997 and for the period December 15, 1992 (inception) through December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, the Company has incurred operating losses since inception and requires substantial additional sources of financing to fund its continuing operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The 1997 financial statements do not include any adjustments that might result from the outcome of this uncertainty. ERNST & YOUNG LLP San Diego, California June 18, 1998 - 83 - Genta Jago Technologies B.V. (a development stage company) Balance Sheets
December 31, Assets 1997 1998 ------------------------------- Current assets: Cash and cash equivalents................................ $ 9,247 $ -- Receivables under collaboration agreements............... 1,399,854 3,348,178 Other current assets..................................... 22,246 24,349 ------------------------------- Total current assets....................................... 1,431,347 3,372,527 Property and equipment, net................................ 2,300 1,000 Other assets............................................... 1,672 10,927 ------------------------------- $1,435,319 3,384,454 =============================== Liabilities and net capital deficiency Current liabilities: Accounts payable and accrued expenses.................... $1,792,293 440,458 Payable to related parties............................... 3,420,456 7,985,810 ------------------------------- Total current liabilities.................................. 5,212,749 8,426,268 Notes payable to Genta Incorporated........................ 15,837,099 15,837,099 Stockholders' equity (net capital deficiency): Common Stock, 14,700 shares authorized, 10,000 shares issued and outstanding at stated value............ 512,000 512,000 Additional paid-in capital............................... 3,741,950 3,741,950 Deficit accumulated during the development stage......... (23,868,479) (25,132,863) ------------------------------- Net capital deficiency..................................... (19,614,529) (20,878,913) ------------------------------- $ 1,435,319 $ 3,384,454 ===============================
See accompanying notes. - 84 - 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: 1996 1997 1998 1998 ------------------------------------------------------------- Collaborative research and development $ 5,477,059 $ 3,634,516 $2,161,954 $ 21,202,848 Cost and expenses: Research and development, including contractual amounts to related parties of $7,040,438,and $4,540,067, $1,876,444 and $40,169,225 in 1996, 1997, 1998 and the period from December 15, 1992 (inception) to December 31, 1998, respectively 8,091,465 4,740,299 1,963,326 44,967,209 General and administrative 361,920 50,869 148,241 1,584,493 ------------------------------------------------------------- 8,453,385 4,791,168 2,111,567 46,551,702 ------------------------------------------------------------- Loss from operations (2,976,326) (1,156,652) 50,387 (25,348,854) Other income (expense): Gain on waiver of debt in exchange for return of license rights to related party -- -- -- 4,703,352 Interest income 5,814 209 92 19,847 Interest expense (961,075) (1,175,411) (1,314,863) (4,507,208) ------------------------------------------------------------- (955,261) (1,175,202) (1,314,771) 215,991 ------------------------------------------------------------- Net loss $ (3,931,587) $(2,331,854) $(1,264,384) $(25,132,863) ============================================================= See accompanying notes. - 85 - Genta Jago Technologies B.V. (a development stage company) Statement of Stockholders' Equity (Net Capital Deficiency) December 15, 1992 (inception) to December 31, 1998 Deficit accumulated Stockholders' during the equity Common stock Additional development (net capital shares amount paid-in capital stage deficiency) ---------------------------------------------------------------------------------- Issuance of common stock at $51.20 per share for cash...................................... 2,940 $150,528 $ -- $ -- $ 150,528 Capital contributions in excess of stated value -- -- 12,882 -- 12,882 ---------------------------------------------------------------------------------- Balance at December 31, 1992..................... 2,940 150,528 12,882 -- 163,410 Issuance of common stock at $51.20 per share for cash......................................... 7,060 361,472 -- -- 361,472 Capital contributions in excess of stated value.. -- -- 3,729,068 -- 3,729,068 Net Loss ........................................ -- -- -- (5,842,165) (5,842,165) ---------------------------------------------------------------------------------- Balance at December 31, 1993..................... 10,000 512,000 3,741,950 (5,842,165) (1,588,215) Net Loss......................................... -- -- -- (8,351,381) (8,351,381) ---------------------------------------------------------------------------------- Balance at December 31, 1994..................... 10,000 512,000 3,741,950 (14,193,546) (9,939,596) Net Loss......................................... -- -- -- (3,411,492) (3,411,492) ---------------------------------------------------------------------------------- Balance at December 31, 1995..................... 10,000 512,000 3,741,950 (17,605,038) (13,351,088) Net Loss......................................... -- -- -- (3,931,587) (3,931,587) ---------------------------------------------------------------------------------- Balance at December 31, 1996..................... 10,000 512,000 3,741,950 (21,536,625) (17,282,675) Net Loss......................................... -- -- -- (2,331,854) (2,331,854) ---------------------------------------------------------------------------------- Balance at December 31, 1997..................... 10,000 $512,000 $ 3,741,950 $(23,868,479)$ (19,614,529) ---------------------------------------------------------------------------------- Net Loss......................................... -- -- -- (1,264,384) (1,264,384) ---------------------------------------------------------------------------------- Balance at December 31, 1998 10,000 $512,000 $ 3,741,950 (25,132,863) (20,878,913) ---------------------------------------------------------------------------------- See accompanying note. - 86 - Genta Jago Technologies B.V. (a development stage company) Statements of Cash Flows Cumulative from December 15, 1992 (inception) to Years ended December 31, December 31, 1996 1997 1998 1998 ------------------------------------------ ------------------- Operating Activities Net loss $(3,931,587) $(2,331,854) $(1,264,384) $(25,132,863) Items reflected in net loss not requiring cash: Depreciation and amortization 2,600 2,600 1,300 17,068 Technology license fee -- -- -- 192,580 Gain on waiver of debt in exchange for return of license rights to related party -- -- -- (4,703,352) Changes in operating assets and liabilities: Advance contract payments to related parties 1,538,594 -- -- -- Receivables under collaboration agreements (903,838) (496,016) (1,948,324) (3,348,178) Other current assets (105,934) 83,688 (11,358) (33,604) Accounts payable and accrued expenses 324,185 1,220,754 (1,351,835) 440,458 Payable to related parties 1,686,614 939,004 4,565,354 7,985,810 Deferred contract revenue (317,555) -- -- -- ------------------------------------------ ------------------- Net cash used in operating activities (1,706,921) (581,824) (9,247) (24,582,081) Investing Activities Purchase of property and equipment and (2,159) 4,979 -- (19,740) other ------------------------------------------ ------------------- Net cash provided by (used in) investing activities (2,159) 4,979 -- (19,740) Financing Activities Proceeds from issuance of common stock and capital contributions -- -- -- 4,061,370 Proceeds from notes payable to related party 1,500,000 550,000 -- 21,140,643 Repayment of notes payable to related party -- -- -- (600,192) ------------------------------------------ ------------------- Net cash provided by financing activities 1,500,000 550,000 -- 24,601,821 ------------------------------------------ ------------------- Increase (decrease) in cash and cash equivalents (209,080) (26,845) (9,247) -- Cash and cash equivalents at beginning of period 245,172 36,092 9,247 -- ------------------------------------------ ------------------- Cash and cash equivalents at end of period $ 36,092 $ 9,247 $ -- $ -- ========================================== =================== Supplemental disclosure of cash flow information: ============================================================== Interest paid $ -- $ $ -- $ 299,808 ==============================================================
See accompanying notes. - 87 - Genta Jago Technologies B.V. (a development stage company) Notes to Financial Statements December 31, 1998 1. Organization and Significant Accounting Policies Organization and Business Genta Jago Technologies B.V. ("Genta Jago") was incorporated in December 1992 under the laws of the Netherlands. Genta Jago is a joint venture owned and controlled 50% by Genta Incorporated ("Genta") and 50% by Jagotec AG ("Jagotec"), a subsidiary of Jago Holding AG which was acquired by SkyePharma in May 1996. Genta Jago was formed to develop and commercialize pharmaceuticals in six major therapeutic areas, and commenced research and development activities in January 1993. Genta Jago is managed under the direction of a Board of Managing Directors consisting of two members appointed from each of Genta and Jagotec and one outside member. In connection with the formation of the joint venture in 1992, Genta Jago obtained from Jagotec an exclusive license to GEOMATRIX oral controlled-release technology for the development and commercialization of approximately 25 specified products. In May 1995, Genta and Jagotec entered into an agreement to expand Genta Jago by adding the rights to develop and commercialize an additional 35 products (see note 2, "Expansion of Genta Jago"). Genta Jago maintains the rights to develop and to commercialize controlled-release formulations of approximately 60 products using Jagotec's GEOMATRIX technology. Genta Jago is dependent on future funding from Genta (see Note 2 "Capital Contributions and Working Capital Agreement") and corporate partners and is considered a development stage company. Genta has incurred significant operating losses since inception and expects that they will continue for the next several years. These conditions raise substantial doubt about the Company's ability to continue as a going concern. On March 4, 1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into an interim agreement pursuant to which the parties to the joint venture released each other from all liability relating to unpaid development costs and funding obligations and SkyePharma agreed to be responsible for substantially all the obligations of the joint venture to third parties and for the further development of the joint venture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between Genta and SkyePharma as set forth in such interim agreement. Revenue Recognition Collaborative research and development revenues are recorded as earned as research and development activities are performed under the terms of the contracts, with such revenues generally approximating costs incurred on the programs. Payments received in excess of amounts earned are deferred. - 88 - Research and Development Expenses Research and development costs are expensed as incurred. Depreciation The costs of furniture and equipment are depreciated over the estimated useful lives of the assets using the straight-line method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Income Taxes The Company uses the liability method of accounting for income taxes. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109 the Company records valuation allowances against net deferred tax assets. If based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In assessing the realizability of deferred assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and when temporary differences become deductible. The Company considers, among other available information, uncertainties surrounding the recoverability of deferred tax assets, scheduled reversals of deferred tax liabilities, projected future taxable income, and other matters in making this assessment. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS No. 130") and SFAS No. 131, Segment Information. Both of these standards are effective for fiscal years beginning after December 15, 1997 and have been adopted by the Company in 1998. SFAS No. 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Genta Jago had no material component of comprehensive income other than net loss. SFAS No. 131 amends the requirements for public enterprises to report financial and descriptive information about their enterprises for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The financial information is required to be reported, as disclosed in Note 17, on the basis that is used internally for evaluating the segment performance. Genta Jago operates in only one business segment. In June 16, 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This standard is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure instruments at fair value. The Company is currently evaluating the impact of this pronouncement and does not believe adoption of SFAS No. 133 will have a material impact on the Company's financial statements. 2. Related Party Transactions License Agreements Genta Jago entered into license agreements with Genta in connection with the planned development and commercialization of Anticode(TM) oligonucleotide products and with Jagotec in connection with the planned development and commercialization of GEOMATRIX oral controlled-release products. Genta Jago's license with Genta in relation to the Anticode(TM) oligonucleotide products was terminated in 1995; however, the license in relation to the GEOMATRIX oral controlled-release products with Jagotec was not terminated. Pursuant to such agreements, Genta Jago recorded license fee expense of $620,000, $85,000, and zero during the years ended December 31, 1996, 1997, and 1998, respectively. Research and Development and Service Agreements Genta Jago has contracted with Genta and Jagotec to conduct research and development and provide certain other services. Under terms of such agreements, Genta Jago generally is required to reimburse the parties for their respective costs incurred plus a specified mark-up. Payments for research and development services are generally made in advance and are refundable if the services are not performed. For the years ended December 31, 1996, 1997, and 1998, Genta Jago incurred expenditures of $7 million, $4.5 million, and $1.9, respectively, - 89 - pursuant to such research and development and service agreements. Capital Contributions and Working Capital Agreement On March 4, 1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into an interim agreement pursuant to which the parties to the joint venture released each other from all liability relating to unpaid development costs and funding obligations and SkyePharma agreed to be responsible for substantially all the obligations of the joint venture to third parties and for the further development of the joint veture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between Genta and SkyePharma as set forth in such interim agreement. However, historically and in connection with the formation of the joint venture, Genta contributed $4 million in cash to Genta Jago as well as the rights to apply its Anticode(TM) oligonucleotide technology to six products. Genta issued 120,000 shares of Common Stock valued at $7.2 million to Jagotec and its affiliates in 1992, for its interest in Genta Jago, to induce Jagotec to license to Genta Jago, for what the parties believed was a substantial discount from the underlying value of such license, Jagotec's GEOMATRIX technology with respect to approximately 25 products (the "Initial License") and to license to Genta Jagotec's GEOMATRIX technology for use in Genta's Anticode(TM) oligonucleotide development programs. In addition, Genta Jago entered into a working capital agreement with Genta which expired in October 1998. Pursuant to this agreement, Genta was required to make working capital loans to Genta Jago up to a mutually agreed upon maximum principal amount, which amount is established by Genta and Genta Jago not less than once each calendar quarter, if necessary, based upon the review and consideration by the parties of mutually-acceptable budgets, expense reports, forecasts and workplans for research and development of the products by Genta Jago. Genta was not required to fund amounts in excess of the agreed-upon commitment amount. Working capital loans consist of cash advances to Genta Jago from Genta and research expenses incurred by Genta on behalf of Genta Jago. As of December 31, 1998, Genta had advanced working capital loans of approximately $15.8 million to Genta Jago, net of principal repayments and the loan credit discussed below. Such loans bore interest at rates per annum ranging from 5.81% to 7.5%, and were payable in full on October 20, 1998, but payment has not been received. As a result of the March 4, 1999 agreement, it is not expected that the working capital loans will be paid. Expansion of Genta Jago In 1995, Genta Jago obtained from Jagotec the rights to develop and commercialize an additional 35 products (the "Additional Products") using Jagotec's GEOMATRIX technology. With these Additional Products, Genta Jago now maintains the rights to develop controlled-release formulations of approximately 60 products using Jagotec's GEOMATRIX technology. Genta Jago is required to pay certain additional fees to Jagotec upon Genta Jago's receipt of revenues from third parties, and pay manufacturing royalties to Jagotec. Return of Anticode(TM) Antisense License Also in 1995, the parties elected to focus Genta Jago's activities exclusively on GEOMATRIX oral-controlled release products. As a result, Genta Jago returned to Genta the rights to develop six Anticode(TM) Oligonucleotide products originally licensed from Genta in connection with the formation of Genta Jago in 1992. In connection with the return of the Anticode(TM) Oligonucleotide license rights to Genta in May 1995, Genta Jago's note payable to Genta was credited with a principal reduction of approximately $4.4 million and accrued interest payable to Genta was reduced by approximately $300,000. Genta Jago recorded the loan credit and related accrued interest as a gain on waiver of debt in exchange for return of license rights to Genta, based on the legal structure of the transaction. - 90 - 3. Collaborative Research and Development Agreements Genta Jago/Gensia/Brightstone. In January 1993, Genta Jago entered into a collaboration agreement with Gensia for the development and commercialization of certain oral controlled-release pharmaceutical products for treatment of cardiovascular disease. Under the agreement, Gensia provides funding for formulation and preclinical development to be conducted by Genta Jago and is responsible for clinical development, regulatory submissions and marketing. Terms of the agreement provide Gensia exclusive rights to market and distribute the products in North America, Europe and certain other countries. The agreement has a term of the longer of twelve years and the patent term in the respective countries within the territory. Genta Jago received $2.2 million, $1.2 million and $1.0 million of funding in 1996, 1997 and 1998, respectively, pursuant to the agreement. Collaborative revenues of $2.8 million, $1.5 million and $2.2 million were recognized under the agreement during the years ended December 31, 1996, 1997 and 1998, respectively. Effective October 1996, Gensia and SkyePharma reached an agreement whereby a SkyePharma subsidiary, Brightstone Pharma, Inc. ("Brightstone"), was assigned Gensia's rights (and those of Gensia's partner, Boehringer Mannheim) to develop and co-promote the potentially bioequivalent nifedipine product under the collaboration agreement with Genta Jago. The assignment was accepted by Genta Jago and has no impact on the terms of the original agreement. Genta Jago is still entitled to receive additional milestone payments from Brightstone triggered upon regulatory submissions and approvals, as well as royalties or profit sharing ranging from 10% to 21% of product sales, if any. Genta Jago/Apothecon. In March 1996, Genta Jago entered into a collaborative licensing and development agreement (the "Genta Jago/Apothecon Agreement") with Apothecon, Inc. ("Apothecon"). Under the terms of the Genta Jago/Apothecon Agreement, Apothecon will provide funding to Genta Jago up to a specified maximum amount for the formulation of Q-CR ketoprofen (Oruvail(R)). The Genta Jago/Apothecon Agreement expires upon the expiration of the relevant patents in each covered country subject to certain early termination rights. The agreement also provides for Genta Jago to receive potential milestone payments and royalties on product sales. Terms of the agreement provide Apothecon exclusive rights to market and distribute the products on a worldwide basis. Genta Jago/Krypton. In October 1996, Genta Jago entered into five collaborative licensing and development agreements (the "Genta Jago/Krypton Agreements") with Krypton, Ltd. ("Krypton"), a subsidiary of SkyePharma, whereby Genta Jago would sublicense to Krypton rights to develop and commercialize potentially bioequivalent GEOMATRIX(R) versions of five currently marketed products, as well as another agreement granting Krypton an option to sublicense rights to develop and commercialize an improved version of a sixth product. The Genta Jago/Krypton Agreements have terms of the shorter of fifteen years from first commercial sale and the expiration of the patent term on a territory-by-territory basis. During 1997, Genta Jago received funding of $1.9 million under the Genta Jago/Krypton Agreements and recognized $2.1 million of collaborative revenue therefrom. 4. Income Taxes Significant components of Genta Jago's deferred tax assets as of December 31, 1997 and 1998 are shown below. A valuation allowance has been recognized to offset the deferred tax assets as it is more likely than not that the net deferred tax assets will not be realized. - 91 - December 31, 1997 1998 ------------------------------- Deferred tax assets: Net operating loss carryforwards $ 2,387,000 $ 2,513,000 Valuation allowance for deferred tax assets (2,387,000) (2,513,000) ------------------------------- Net deferred tax assets $ -- $ -- =============================== At December 31, 1998, Genta Jago has foreign net operating loss carryforwards of approximately $25,133,000. The foreign tax loss carryforwards will begin expiring in 2000, unless previously utilized. - 92 - PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Changes in Accountants On November 3, 1998, the Company filed a Form 8-K announcing that Ernst & Young LLP had resigned as the Company's principal independent accountant on October 28, 1998. On February 10, 1999, the Company engaged Deloitte & Touche LLP as the principal independent accountant to audit the Company's 1998 financial statements. Disagreements With Accountants None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) The sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy Statement are incorporated herein by reference. (b) The section entitled "Executive Officers" appearing in the Company's Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation" appearing in the Company's Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Stock Ownership of Management and Certain Beneficial Owners" appearing in the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Relationships and Related Transactions" appearing in the Company's Proxy Statement is incorporated herein by reference. - 93 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial statements Reference is made to the Index to Financial Statements under Item 8 of this report on Form 10-K. (2) All schedules are omitted because they are not required, are not applicable, or the required information is included in the consolidated financial statements or notes thereto. (3) Reference is made to Paragraph (c) below for Exhibits required by Item 601 of Regulation S-K, including management contracts and compensatory plans and arrangements. (b) Reports on Form 8-K. The Company filed the following reports on Forms 8-K: (i) On February 10, 1999, the Company engaged Deloitte & Touche LLP ("D&T") as the principal accountant to audit the Company's financial statements. (ii) On November 3, 1998, the Company filed a Form 8-K announcing that Ernst & Young LLP had resigned as the Company's principal independent accountant on October 28, 1998. (c) Exhibits required by Item 601 of Regulation S-K with each management contract, compensatory plan or arrangement required to be filed identified. - 94 - Exhibit Number Description of Document 3(i).1(1) Restated Certificate of Incorporation as amended by the Certificate of the Powers, Designations, Preferences and Rights of the Series B Convertible Preferred Stock as amended by the Certificate of the Powers, Designations, Preferences and Rights of the Series C Convertible Preferred Stock. 3(i).2(18) Certificate of Designations of Series D Convertible Preferred Stock of the Company. 3(i).3(25) Certificate of Amendment of Restated Certificate of Incorporation. 3(i).4(25) Certificate of Amendment of Restated Certificate of Incorporation. 3(ii).1(25) Amended and Restated Bylaws of the Company. 4.1(5) Specimen Common Stock Certificate. 4.2(4) Specimen Series A Convertible Preferred Stock Certificate. 4.3(4) Specimen Warrant. 4.4(4) Form of Unit Purchase Agreement dated as of September 23, 1993 by and between the Company and the Purchasers of the Series A Convertible Preferred Stock and Warrants. 4.5(11) Form of Rights Agreement dated as of December 16, 1993 between Genta Incorporated and First Interstate Bank of California, which includes as Exhibit A the form of Certificate of Designations, Rights and Preferences of Series F Participating Preferred Stock. 4.6(8) Form of Regulation S Subscription Agreement entered into between the Company and certain purchasers of the Series B Convertible Preferred Stock. 4.7(1) Form of Securities Subscription Agreement entered into between the Company and certain purchasers of the Series C Convertible Preferred Stock. 4.8(1) Common Stock Purchase Warrant dated December 14, 1995 between the Company and Lease Management Services, Inc. 4.9(17) Warrant for the Purchase of 213,415 Shares of Common Stock issued to Lyon & Lyon in October 1996. 4.10(17) Warrant for the Purchase of 100,000 Shares of Common Stock issued to Michael Arnouse in October 1996. 10.1(3)(6) Amended and Restated 1991 Stock Plan of Genta Incorporated. 10(iii)(A).1 (25) Non-Employee Directors' 1998 Stock Option Plan 10(iii)(A).2 (25) Stock Incentive Plan 10.2(5) Master Lease Agreement No. 10300 dated as of May 4, 1989 between the Company and Lease Management Services, Inc. and Master Lease Agreement No. 10428 dated as of August 15, 1991 between the Company and Lease Management Services, Inc. 10.2(5) Sublease Agreement dated April 1, 1999 between the Company and Interneuron Pharmaceutical. Inc. - 95 - 10.3(5) Standard Industrial Lease dated October 24, 1988, as amended, between the Company and General Atomics. 10.4(5) Revised and Restated Lease dated as of March 1, 1990 between JBL Scientific, Inc. and Granada Associates. 10.5(5)(6) Employment Agreement dated February 20, 1991 between the Company and Dr. Robert E. Klem. 10.6(5)(6) Employment Agreement dated February 20, 1991 between the Company and Dr. Lauren R. Brown. 10.7(5)(6) Form of Indemnification Agreement entered into between the Company and its directors and officers. 10.8(5) Preferred Stock Purchase Agreement dated September 30, 1991 and Amendment Agreement dated October 2, 1991. 10.9(5)(6) Consulting Agreement dated February 2, 1989 between the Company and Dr. Paul O.P. Ts'o. 10.10(5)(7) Development, License and Supply Agreement dated February 2, 1989 between the Company and Gen-Probe Incorporated. 10.12(5)(7) License Agreement dated February 2, 1989 among the Company, Dr. Ts'o, Dr. Miller and Mr. Finch. 10.13(5)(7) License Agreement dated May 15, 1990 between the Company and The Johns Hopkins University. 10.19(6)(1) Promissory Note dated March 7, 1996 between the Company and Dr. Donald Picker. 10.21(7)(9) Common Stock Transfer Agreement dated as of December 15, 1992, between the Company and Dr. Jacques Gonella. 10.32(9) Consulting Agreement dated as of December 15, 1992, between the Company and Dr. Jacques Gonella. 10.36(7)(9) Common Stock Transfer Agreement dated as of December 15, 1992, between the Company and Jagotec AG. 10.37(7)(9) Collaboration Agreement dated as of January 22, 1993, between Jobewol Investments B.V. (now known as Genta Jago Technologies B.V.) and Gensia, Inc. 10.46(10) Form of Purchase Agreement between the Company and certain purchasers of Common Stock. 10.47(10) Common Stock Purchase Warrant dated May 8, 1995 between the Company and Index Securities S.A. - 96 - 10.48(7)(12) Restated Joint Venture and Shareholders Agreement dated as of May 12, 1995 between the Company, Jagotec AG, Jago Holding AG, Jago Pharma AG and Genta Jago Technologies B.V. 10.50(7)(12) Limited Liability Company Agreement of Genta Jago Delaware LLC dated as of May 12, 1995 between GPM Generic Pharmaceuticals Manufacturing Inc. and the Company. 10.51(7)(12) Restated Transfer Restriction Agreement dated as of May 12, 1995 between the Company and Jagotec AG. 10.52(7)(12) Transfer Restriction Agreement dated as of May 12, 1995 between the Company, GPM Generic Pharmaceuticals Manufacturing Inc. and Jago Holding AG. 10.53(7)(12) Common Stock Transfer Agreement dated as of May 30, 1995 between the Company and Jago Finance Limited. 10.54(7)(12) Stockholders' Agreement dated as of May 30, 1995 between the Company, Jagotec AG, Dr. Jacques Gonella and Jago Finance Limited. 10.55(7)(12) Restated GEOMATRIX Research and Development Agreement dated as of May 12, 1995 between Jago Pharma AG, the Company, Genta Jago Delaware, L.L.C. and Genta Jago Technologies B.V. 10.56(7)(12) Restated Services Agreement dated as of May 12, 1995 between Jago Pharma AG, the Company, Genta Jago Delaware, L.L.C. and Genta Jago Technologies B.V. 10.57(7)(12) Restated Working Capital Agreement dated as of May 12, 1995 and Amendment No. 1 to Restated Working Capital Agreement dated as of July 11, 1995 between the Company and Genta Jago Technologies B.V. 10.58(7)(12) Restated Promissory Note dated as of January 1, 1994 between Genta Jago Technologies B.V. and the Company. 10.59(7)(12) Restated License Agreement dated as of May 12, 1995 between Jagotec AG and the Company. 10.61(7)(12) Restated GEOMATRIX License Agreement dated as of May 12, 1995 between Jagotec AG and Genta Jago Technologies B.V. 10.62(7)(12) GEOMATRIX Manufacturing License Agreement dated as of May 12, 1995 between Jagotec AG and Genta Jago Technologies B.V. 10.63(7)(12) Restated GEOMATRIX Supply Agreement dated as of May 12, 1995 between Jago Pharma AG and Genta Jago Technologies B.V. 10.65(13) Form of Regulation S Subscription Agreement entered into between the Company and certain purchasers of the Series B Convertible Preferred Stock. 10.66(1) Promissory Note dated November 8, 1995 between the Company and Domain Partners, L.P. - 97 - 10.67(1) Promissory Note dated November 8, 1995 between the Company and Domain Partners II, L.P. 10.68(1) Promissory Note dated November 8, 1995 between the Company and Institutional Venture Partners, IV. 10.69(14) Amendment to Promissory Note effective March 22, 1996 between the Company and Institutional Venture Partners, IV. 10.70(14) Amendment to Promissory Note effective March 22, 1996 between the Company and Domain Partners, L.P. 10.71(14) Amendment to Promissory Note effective March 22, 1996 between the Company and Domain Partners II, L.P. 10.72(15) Amendments to the Series C Securities Subscription Agreement dated April 23, 1996. 10.73(16) Form of Regulation S Securities Subscription Agreement entered into between the Company and certain purchasers of the 4% Convertible Debentures, Due August 1, 1997. 10.74(16) Form of 4% Convertible Debenture Due August 1, 1997. 10.75(19) Note and Warrant Purchase Agreement dated as of January 28, 1997, by and among the Company, The Aries Fund, A Cayman Island Trust (the "Trust") and The Aries Domestic Fund, L.P. (the "Partnership"). 10.76(19) Letter dated January 28, 1997 from Genta Incorporated. 10.77(19) Senior Secured Convertible Bridge Note of the Company dated January 28, 1997 for $1,050,000. 10.78(19) Senior Secured Convertible Bridge Note of the Company dated January 28, 1997 for $1,950,000. 10.79(19) Class A Bridge Warrant of the Company for the purchase of 2,730,000 shares of Common Stock. 10.80(19) Class A Bridge Warrant of the Company for the purchase of 5,070,000 shares of Common Stock. 10.81(19) Class B Bridge Warrant of the Company for the purchase of 4,270,000 shares of Common Stock. 10.82(19) Class B Bridge Warrant of the Company for the purchase of 7,930,000 shares of Common Stock. 10.83(19) Security Agreement dated as of January 28, 1997 between the Company and Paramount Capital, Inc. 10.84(19) Letter Agreement dated January 28, 1997 among the Company, Paramount Capital, Inc., the Partnership and the Trust. - 98 - 10.85(19) Amendment No. 1 dated as of January 28, 1997 to Rights Agreement, dated as of December 16, 1997, between the Company and ChaseMellon Shareholder Services L.L.C. 10.86(20)(6) Executive Compensation Agreement dated as of January 1, 1996 between the Company and Howard Sampson. 10.87(20) Collaboration Agreement dated December 26, 1995 between the Company and Johnson & Johnson Consumer Products, Inc. 10.88(20) Assignment Agreement (of Gensia Inc.'s rights in the Collaboration Agreement between Genta Jago and Gensia, Inc., dated January 23, 1993) to Brightstone Pharma, Inc., dated October 1, 1996 among Gensia, Inc., Genta Jago Technologies B.V., Brightstone Pharma, Inc., and SkyePharma PLC. 10.89(20)(7) Development and Marketing Agreement effective February 28, 1996 between Genta Jago Technologies B.V., a Dutch company, and Apothecon, Inc., a Delaware corporation. 10.90(20)(7) License Agreement effective February 28, 1996 between Genta Jago Technologies B.V., a Dutch company, and Apothecon, Inc., a Delaware corporation. 10.91(20)(7) Option, Development & Sub-License Agreement (The Company has requested confidential treatment for the name of this element) dated as of October 31, 1996 between Genta Jago Technologies B.V., a Dutch company, and Krypton Ltd., a Gibraltar limited company. 10.92(20)(7) Development and Sub-License Agreement (The Company has requested confidential treatment for the name of this element) dated as of October 31, 1996 between Genta Jago Technologies B.V., a Dutch company, and Krypton Ltd., a Gibraltar limited company. 10.93(20)(7) Development and Sub-License Agreement (The Company has requested confidential treatment for the name of this element) dated as of October 31, 1996 between Genta Jago Technologies B.V., a Dutch company, and Krypton Ltd., a Gibraltar limited company. 10.94(20)(7) Development and Sub-License Agreement/Diclofenac dated as of October 31, 1996 between Genta Jago Technologies B.V., a Dutch company, and Krypton Ltd., a Gibraltar limited company. 10.95(20)(7) Development and Sub-License Agreement/Naproxen dated as of October 31, 1996 between Genta Jago Technologies B.V., a Dutch company, and Krypton Ltd., a Gibraltar limited company. 10.96(20)(7) Development and Sub-License Agreement/Verapamil dated as of October 31, 1996 between Genta Jago Technologies B.V., a Dutch company, and Krypton Ltd., a Gibraltar limited company. 10.97(20)(7) License Termination Agreement dated December 2, 1996 between the Company and Wilton Licensing AG. - 99 - 10.98(20) Contract for Regional Aid for Innovation, effective July 1, 1993, between L'Agence Nationale de Valorisation de la Recherche, Genta Pharmaceuticals Europe SA and the Company. 10.99(22) Warrant for the purchase of 32,500 shares of Common Stock of the Issuer, issued to the Aries Fund pursuant to a Senior Secured Line of Credit Agreement between the Company and the Aries Funds. 10.100(22) Warrant for the purchase of 17,500 shares of Common Stock of the Issuer, issued to the Aries Domestic Fund, L.P. pursuant to the Senior Secured Line of Credit Agreement between the Company and the Aries Funds. 10.101(22) Amended and Restated Amendment Agreement between the Company and the Aries Funds. 10.102(22) Amended and Restated Senior Secured Convertible Bridge Note for $1,050,000 issued to the Aries Domestic Fund, L.P. 10.103(22) Amended and Restated Senior Secured Convertible Bridge Note for $1,950,000 issued to The Aries Fund. 10.104(22) New Class A Bridge Warrant for the Purchase of 350,000 shares of Common Stock issued to The Aries Fund. 10.105(22) New Class A Bridge Warrant for the Purchase of 650,000 shares of Common Stock issued to The Aries Fund. 10.106(22) New Class B Bridge Warrant for the Purchase of 350,000 shares of Common Stock issued to The Aries Fund. 10.107(22) New Class B Bridge Warrant for the Purchase of 650,000 shares of Common Stock issued to The Aries Fund. 10.108(22) Consulting Agreement dated as of August 27, 1997 by and between the Company and Paul O.P. Ts'o, Ph.D. 10.109(22) Consulting Agreement dated as of August 27, 1997 by and between the Company and Sharon B. Webster, Ph.D. 10.110(24) Severance Agreement, Release and Covenant Not to Sue between Thomas H. Adams, Ph.D. and the Company dated May 5, 1998. 10.111(24) Consulting Agreement between the Company and Thomas H. Adams, Ph.D., dated May 5, 1998. 10.112 Severance Agreement No. 1, Release and Covenant Not to Sue dated July 30, 1997, between the Company and Zofia Dziewanowska. 10.113 Severance Agreement No. 2, Release and Covenant Not to Sue dated August 1, 1997, between the Company and Zofia Dziewanowska. - 100 - 10.114 Consulting Agreement dated as of July 31, 1997 between the Company and Zofia Dziewanowska. 22.1(20) Subsidiaries of the Registrant. 23.1(25) Consent of Deloitte & Touche LLP, Independent Auditors. 23.2(25) Consent of Deloitte & Touche Experta Ltd., Independent Auditors. 23.3(25) Consent of Ernest & Young LLP, Independent Auditors. 24.1 Power of Attorney (included on the signature page of the Company's Annual Report on Form 10-K, filed on April 15, 1998). 27.1(25) Financial Data Schedule * Before giving effect to the one for ten reverse stock split effected by the Company on April 7, 1997. (1) Incorporated herein by reference to the exhibits of the same number to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 0-19635. (2) Exhibit 3(ii).1 is incorporated herein by reference to the Exhibit of the same number contained in Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-3, Registration No. 33-72130. (3) Exhibit 10.1 is incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8, Registration No. 33-85887. (4) Exhibits 4.2, 4.3, and 4.4 are incorporated by reference to Exhibits of the same number to the Company's Report on Form 8-K dated as of September 24, 1993, Commission File No. 0-19635. (5) Incorporated herein by reference to the exhibit of the same number to the Company's Registration Statement on Form S-1, Registration No. 33-43642. (6) Indicates management contract, compensatory plan or arrangement. (7) The Company has been granted confidential treatment of certain portions of this exhibit. (8) Exhibit 4.6 is incorporated by reference to Exhibit 10.65 to the Company's Report on Form 8-K dated as of December 29, 1995, Commission File No. 0-19635. (9) Incorporated by reference to the exhibits of the same number to the Company's Registration Statement on Form S-3, Registration No. 33-58362. (10) Incorporated by reference to the exhibits of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0- 19635. (11) Incorporated by reference to Exhibit 5.1 to the Company's Report on Form 8-K dated as of December 16, 1993, Commission File No. 0-19635. - 101 - (12) Incorporated by reference to the exhibits of the same number to the Company's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, Commission File No. 0- 19635. (13) Incorporated herein by reference to the exhibit of the same number to the Company's Report on Form 8-K dated as of December 29, 1995. (14) Incorporated herein by reference to exhibits 10.1, 10.2 and 10.3, respectively, to the Company's Registration Statement on Form S-3 (Registration No. 333-3846). (15) Incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File No. 0-19635. (16) Exhibits 10.73 and 10.74 are incorporated herein by reference to Exhibits 10.1 and 10.2 to the Company's Report on Form 8-K dated as of September 17, 1996, Commission File No. 0-19635. (17) Exhibits 4.9 and 4.10 are incorporated herein by reference to Exhibits 4.1 and 4.2 respectively to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, Commission File No. 0-19635. (18) Exhibit 3(i).2 is incorporated by reference to Exhibit 3(i) to the Company's Report on Form 8-K dated as of January 28, 1997, Commission File No. 0-19635. (19) Exhibits 10.75, 10.76, 10.77, 10.78, 10.79, 10.80, 10.81, 10.82, 10.83, 10.84 and 10.85 are incorporated herein by reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9, 10.10 and 10.11 respectively to the Company's Report on Form 8-K dated as of January 28, 1997, Commission File No. 0-19635. (20) Incorporated herein by reference to the exhibits of the same numbers to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, as amended, Commission File No. 0-19635. (21) Exhibit 3(ii).2 is incorporated herein by reference to Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1997, Commission File No. 0-19635. (22) Incorporated herein by reference to the exhibits of the same numbers to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 0-19635. (23) Incorporated herein by reference to the exhibits of the same numbers to the Company's Annual Report on Form 10-K (Amendment No. 1) for the year ended December 31, 1997, Commission File No. 0-19635. (24) Exhibits 10.110 and 10.111 are incorporated herein by reference to Exhibits 10.1 and 10.2, respectively, to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, Commission File No. 0-19635. (25) Filed herewith. (d) See (a)(2) above. - 102 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 15th day of April, 1999. Genta Incorporated /s/ Kenneth G. Kasses, Ph.D. ------------------------------------------ Kenneth G. Kasses, Ph.D. President, Principal Executive Officer and Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by Kenneth G. Kasses and Robert E. Klem, in their respective individual capacities and by Kenneth G. Kasses on behalf of the following persons, pursuant to the Power of Attorney constituting Exhibit 24.1 hereto, in the capacities and on the dates indicated. Signature Capacity Date - - --------- -------- ---- /s/ Kenneth G. Kasses, Ph.D. President, Principal April 15, 1999 - - ---------------------------- Executive Officer Kenneth G. Kasses, Ph.D. and Chairman of the Board of Directors /s/ Gerald M. Schimmoeller Principal Accounting April 15, 1999 - - ---------------------------- Officer, Principal Gerald M. Schimmoeller Financial Officer, Vice President /s/ Glenn L. Cooper, M.D. Director April 15, 1999 - - ---------------------------- Glenn L. Cooper, M.D. /s/ Donald G. Drapkin Director April 15, 1999 - - ---------------------------- Donald G. Drapkin Director April 15, 1999 - - ---------------------------- Lawrence J. Kessel, M.D. /s/ Robert E. Klem Director April 15, 1999 - - ---------------------------- Robert E. Klem, Ph.D. /s/ Peter Salomon Director April 15, 1999 - - ---------------------------- Peter Salomon, M.D. /s/ Bobby W. Sandage, Jr. Director April 15, 1999 - - ---------------------------- Bobby W. Sandage, Jr., Ph.D. Director April 15, 1999 - - ---------------------------- Andrew J. Stein /s/ Harlan J. Wakoff Director April 15, 1999 - - ---------------------------- Harlan J. Wakoff /s/ Michael S. Wiess Director April 15, 1999 - - ---------------------------- Michael S. Wiess - 103 - EX-3.(II).1 2 BYLAWS As Amended and Restated March 5, 1999 BYLAWS OF GENTA INCORPORATED ARTICLE I MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of the stockholders shall be held at such place within or without the state of Delaware as may be fixed from time to time by the Board of Directors or the chief executive officer, or if not so designated, at the registered office of the corporation. Section 2. Annual Meeting. Annual meetings of stockholders shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of meeting. At the annual meeting the stockholders shall elect by a plurality vote the number of directors equal to the number of directors of the class whose term expires at such meetings (or, if fewer, the number of directors properly nominated and qualified for election) to hold office until the third succeeding annual meeting of stockholders after their election. Section 3. Business Properly Conducted at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors, or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than fifty days nor more than seventy-five days prior to the meeting; provided, however, that in the event that less than sixty-five days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder and (iv) any material interest of the stockholder in such business. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if the chairman should so determine, the chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 4. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, may be called only by the chairman of the board or the chief executive officer or by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors. Section 5. Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of stockholders, annual or special, stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 6. Voting List. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or town where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 7. Quorum. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, - 2 - except as otherwise provided by statute, the certificate of incorporation or these bylaws. Section 8. Adjournments. Any meeting of stockholders may be adjourned from time to time to any other time and to any other place at which a meeting of stockholders may be held under these bylaws, which time and place shall be announced at the meeting, by a majority of the stockholders present in person or represented by proxy at the meeting and entitled to vote, though less than a quorum, or, if no stockholder is present or represented by proxy, by any officer entitled to preside at or to act as secretary of such meeting, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. Action at Meetings. When a quorum is present at any meeting, the vote of the holders of a majority of the stock present in person or represented by proxy and entitled to vote on the question shall decide any question brought before such meeting, unless the question is one upon which by express provision of law, the certificate of incorporation or these bylaws, a different vote is required, in which case such express provisions shall govern and control the decision of such question. Section 10. Voting and Proxies. Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote for each share of capital stock having voting power held of record by such stockholder. Each stockholder entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may authorize another person or persons to act for such stockholder by proxy; provided that the instrument authorizing such proxy to act shall have been executed in writing (which shall include telegraphing, cabling or other means of electronically transmitted written copy) by the stockholder personally or by the stockholder's duly authorized attorney in fact. No such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. - 3 - ARTICLE II DIRECTORS Section 1. Number, Election, Tenure and Qualification. The number of directors which shall constitute the whole board shall not be less than three nor more than twelve. Within such limit, the number of directors shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting or at any special meeting of stockholders. The directors shall be elected at the annual meeting or at any special meeting of the stockholders, except as provided in Section 3 of this Article II, and each director elected shall hold office until such director's successor is elected and qualified, unless sooner displaced. Directors need not be stockholders. Section 2. Enlargement. The number of directors which shall constitute the whole board may be increased at any time by vote of seventy-five percent (75%) of the directors then in office. Section 3. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election at which the term of the class to which they have been elected expires and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law or these bylaws, may exercise the powers of the full board until the vacancy is filled. Section 4. Resignation and Removal. Any director may resign at any time upon written notice to the corporation at its principal place of business or to the chief executive officer or the secretary. Such resignation shall be effective upon receipt of such notice unless the notice specifies such resignation to be effective at some other time or upon the happening of some other event. Any director or the entire Board of Directors may be removed, but only for cause, by the holders of a majority of the shares then entitled to vote at an election of directors, unless otherwise specified by law or the certificate of incorporation. Section 5. General Powers. The business of the corporation shall be managed by or under the direction of its Board of Directors, which may exercise all powers of the corporation and do all such lawful acts and things as are not by statute or by - 4 - the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. Section 6. Place of Meetings. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 7. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board; provided that any director who is absent when such a determination is made shall be given prompt notice of such determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. Section 8. Special Meetings. Special meetings of the board may be called by the chief executive officer, president, secretary, or on the written request of two or more directors, or by one director in the event that there is only one director in office. Four hours' notice to each director, either personally or by telegram cable, telecopy, commercial delivery service, telex or similar means sent to such director's business or home address, or two days' notice by written notice deposited in the mail or delivered by a nationally recognized courier service, shall be given to each director by the secretary or by the officer or one of the directors calling the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. Section 9. Quorum, Action at Meeting, Adjournments. At all meetings of the board a majority of the directors then in office, but in no event less than one third of the whole board, shall constitute a quorum for the transaction of business and, except as provided in this Section 9 and in Article VIII of these bylaws, the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law or by the certificate of incorporation. For purposes of this section, the term "whole board" shall mean the number of directors last fixed by the stockholders or directors, as the case may be, in accordance with law and these bylaws; provided, however, that if less than all the number so fixed of directors were elected, the "whole board" shall mean the greatest number of directors so elected to hold office at any one time pursuant to such authorization. If a quorum shall not be present at any meeting of the Board of Directors, a majority of the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. - 5 - Notwithstanding any other provision of this Section 9, the approval of at least seventy-five percent (75%) of the directors then in office shall be required for board action with respect to: (a) the merger or consolidation of this corporation with or into another corporation or other entity or person, or any other corporate reorganization in which this corporation shall not be the continuing or surviving entity in such merger, consolidation or reorganization, or the sale of all or substantially all of this corporation's properties and assets to any other person, or any transaction or series of related transactions by this corporation in which in excess of fifty percent (50%) of this corporation's voting power is transferred; (b) the offer of any shares of, or securities convertible into or exercisable for, any class of the corporation's capital stock; (c) the amendment of Sections 5 or 7 of Article III of these bylaws, as the case may be, to change the individuals who have been designated as the chairman of the board and chairman of the scientific advisory board, respectively. Section 10. Action by Consent. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 11. Telephonic Meetings. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors or of any committee thereof may participate in a meeting of the Board of Directors or of any committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 12. Committees. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a - 6 - committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee to the extent permitted by law and provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution designating such committee or the certificate of incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and make such reports to the Board of Directors as the Board of Directors may request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these bylaws for the conduct of its business by the Board of Directors. Section 13. Compensation. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix from time to time the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and the performance of their responsibilities as directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors and/or a stated salary as director. No such payment shall preclude any director from serving the corporation or its parent or subsidiary corporations in any other capacity and receiving compensation therefor. The Board of Directors may also allow compensation for members of special or standing committees for service on such committees. Section 14. Nominating Procedures. Subject to the rights of holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations for election to the Board of Directors of the corporation at a meeting of stockholders may be made on behalf of - 7 - the board by the nominating committee appointed by the board, or by any stockholder of the corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by the nominating committee on behalf of the board, shall be made by notice in writing delivered or mailed by first-class United States mail or a nationally recognized courier service, postage prepaid, to the secretary or assistant secretary of the corporation, and received by him not less than one hundred twenty (120) days prior to any meeting of stockholders called for the election of directors; provided, however, that if less than one hundred (100) days' notice of the meeting is given to stockholders, such nomination shall have been mailed or delivered to the secretary or the assistant secretary of the corporation not later than the close of business on the seventh (7th) day following the day on which the notice of meeting was mailed. Such notice shall set forth as to each proposed nominee who is not an incumbent director (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the corporation which are beneficially owned by each such nominee and by the nominating stockholder, and (iv) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations regulated by Regulation 14A of the Securities Exchange Act of 1934. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if the chairman should so determine, the chairman shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III OFFICERS Section 1. Enumeration. The officers of the corporation shall be chosen by the Board of Directors and shall be a president and a secretary. The Board of Directors may elect from among its members a chairman of the board and a vice chairman of the board. The Board of Directors may also choose such other officers with such titles, terms of office and duties as the Board of Directors may from time to time determine, including a chief executive officer, one or more vice-presidents, a treasurer and one or more assistant secretaries and assistant treasurers. If authorized by resolution of the Board of Directors, the chief executive officer may be empowered to appoint from time to time assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. - 8 - Section 2. Election. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president and a secretary. Other officers may be appointed by the Board of Directors at such meeting, at any other meeting, or by written consent. Section 3. Compensation. The salaries of all officers of the corporation shall be fixed by the Board of Directors. Section 4. Tenure. The officers of the corporation shall hold office until their successors are chosen and qualify, unless a different term is specified in the vote choosing or appointing such officer, or until such officer's earlier death, resignation or removal. Any officer elected or appointed by the Board of Directors or by the chief executive officer may be removed at any time by the affirmative vote of a majority of the Board of Directors or a committee duly authorized to do so, except that any officer appointed by the chief executive officer may also be removed at any time by the chief executive officer. Any vacancy occurring in any office of the corporation may be filled by the Board of Directors, at its discretion. Any officer may resign by delivering such officer's written resignation to the corporation at its principal place of business or to the chief executive officer or the secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Section 5. Chairman of the Board. If the Board of Directors appoints a chairman of the board, such chairman shall, when present, preside at all meetings of the stockholders and the Board of Directors. The chairman shall perform such duties and possess such powers as are customarily vested in the office of the chairman of the board or as may be vested in the chairman by the Board of Directors. Section 6. Vice Chairman of the Board. If the Board of Directors appoints a vice chairman of the board, in the absence of the chairman of the board, such vice chairman shall, when present, preside at all meetings of the Board of Directors and of the stockholders. The vice chairman shall perform such duties and possess such powers as may be prescribed by the Board of Directors and, to the extent not so provided, as are customarily vested in the office of the vice chairman of the board, subject to the control of the Board of Directors. Section 7. Chairman of the Scientific Advisory Board. If the Board of Directors appoints a chairman of the scientific advisory board, such chairman shall, when present, preside at all meetings of the scientific advisory board. The chairman of the scientific advisory board shall perform such duties and possess such powers as may be prescribed by the Board of Directors and, - 9 - to the extent not so provided, as are customarily vested in the office of the chairman of the scientific advisory board, subject to the control of the Board of Directors. Section 8. Chief Executive Officer. The chairman of the board shall be the chief executive officer of the corporation unless the Board of Directors otherwise provides. The chief executive officer shall have general supervision, direction and control of the business and officers of the corporation. He or she shall perform such other duties and possess such other powers as may be prescribed by the Board of Directors and, to the extent not so provided, as are customarily vested in the office of the chief executive officer, subject to the control of the Board of Directors. Section 9. President. The president shall also be the chief operating officer of the corporation. In the absence or disability of the chief executive officer, or if there be none, the president shall perform all of the duties of the chief executive officer, and when so acting shall have all of the powers of and be subject to all of the restrictions of the chief executive officer. The president shall perform such other duties and possess such other powers as from time to time may be prescribed for the president by the Board of Directors. Section 10. Vice Presidents. In the absence of the president or in the event of the president's inability or refusal to act, the vice president, if any (or in the event there be more than one vice president, the vice presidents in the order designated by the directors, or in the absence of any designation, then in the order determined by their tenure in office), shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 11. Secretary. The secretary shall have such powers and perform such duties as are customarily incident to the office of secretary. The secretary shall maintain a stock ledger and prepare lists of stockholders and their addresses as required and shall be the custodian of corporate records. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be from time to time prescribed by the Board of Directors or president, under whose - 10 - supervision the secretary shall be. The secretary shall have custody of the corporate seal of the corporation and the secretary, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the secretary's signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by such officer's signature. Section 12. Assistant Secretaries. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors, the chief executive officer or the secretary (or if there be no such determination, then in the order determined by their tenure in office), shall, in the absence of the secretary or in the event of the secretary's inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors, the chief executive officer or the secretary may from time to time prescribe. In the absence of the secretary or any assistant secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary or acting secretary to keep a record of the meeting. Section 13. Treasurer. The treasurer shall perform such duties and shall have such powers as may be assigned to him or her by the Board of Directors or the chief executive officer. In addition, the treasurer shall perform such duties and have such powers as are customarily incident to the office of treasurer. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the chief executive officer and the Board of Directors, when the chief executive officer or Board of Directors so requires, an account of all such person's transactions as treasurer and of the financial condition of the corporation. Section 14. Assistant Treasurers. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors, the chief executive officer or the treasurer (or if there be no such determination, then in the order determined by their tenure in office), shall, in the absence of the treasurer or in the event of the treasurer's inability or refusal to act, perform the - 11 - duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors, the chief executive officer or the treasurer may from time to time prescribe. Section 15. Bond. If required by the Board of Directors, any officer shall give the corporation a bond in such sum and with such surety or sureties and upon such terms and conditions as shall be satisfactory to the Board of Directors, including without limitation a bond for the faithful performance of the duties of such officer's office and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in such officer's possession or under such officer's control and belonging to the corporation. Section 16. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. ARTICLE IV NOTICES Section 1. Delivery. Whenever, under the provisions of law, or of the certificate of incorporation or these bylaws, written notice is required to be given to any director or stockholder, such notice may be given by mail, addressed to such director or stockholder, at such person's address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail or delivered to a nationally recognized courier service or other commercial delivery service. Unless written notice by mail is required by law, written notice may also be given by telegram, cable, telecopy, telex or similar means, addressed to such director or stockholder at such person's address as it appears on the records of the corporation, in which case such notice shall be deemed to be given when delivered into the control of the persons charged with effecting such transmission the transmission charge to be paid by the corporation or the person sending such notice. Oral notice or other in-hand delivery (in person or by telephone) shall be deemed given at the time it is actually given. Section 2. Waiver of Notice. Whenever any notice is required to be given under the provisions of law or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. - 12 - ARTICLE V CAPITAL STOCK Section 1. Certificates of Stock. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice chairman of the Board of Directors, or the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by such stockholder in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 2. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such owner's legal representative, to give reasonable evidence of such loss, theft or destruction, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of such new certificate. Section 3. Transfer of Stock. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and proper evidence of compliance with other conditions to rightful transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Record Date for Action at a Meeting or for Other Purposes. In order that the corporation may determine the stockholders entitled to notice of - 13 - or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action to which such record date relates. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders for any other purpose within this Section 4 shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. Section 5. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VI CERTAIN TRANSACTIONS Section 1. Transactions with Interested Parties. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction or solely because the vote or votes of such director or officer are counted for such purpose, if: - 14 - (a) the material facts as to such person's relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) the material facts as to such person's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Section 2. Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting or by written consent, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Reserves. The directors may set apart out of any funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Section 3. Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 4. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. - 15 - Section 5. Seal. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the word "Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. The seal may be altered from time to time by the Board of Directors. ARTICLE VIII AMENDMENTS The Board of Directors is expressly empowered to adopt, amend or repeal these bylaws, provided, however, that any adoption, amendment or repeal of these bylaws by the Board of Directors shall require the approval of at least sixty-six and two-thirds percent (66-2/3%) of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the board). The stockholders shall also have power to adopt, amend or repeal these bylaws, provided, however, that in addition to any vote of the holders of any class or series of stock of this corporation required by law or by the certificate of incorporation of this corporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for such adoption, amendment or repeal by the stockholders of any provisions of these bylaws. Notwithstanding anything to the contrary in this Article VIII, the second paragraph of Section 9 of Article II of these bylaws, shall be amended only by the act of at least seventy-five percent (75%) of the directors then in office or by the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class. - 16 - EX-3.(I).3 3 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF GENTA INCORPORATED GENTA INCORPORATED, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Genta Incorporated, resolutions were duly adopted setting forth a proposed amendment of the Restated Certificate of Incorporation of the corporation, and declaring that such amendment is advisable and that such amendment should be submitted to the stockholders of the corporation for approval. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Article X of the Certificate of Incorporation be deleted and replaced with the following: The number of directors which shall constitute the whole Board of Directors of the corporation shall be determined in the by-laws as provided therein. The directors of the corporation shall be elected by the stockholders entitled to vote thereon at each annual meeting of stockholders and shall hold office until the next annual meeting of stockholders and until their respective successors shall have been elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. The term of office of each director in office at the time this amendment to Article X of the Restated Certificate of Incorporation of the corporation becomes effective shall expire at the time of the opening of the polls for the election of directors at the next annual meeting of stockholders of the corporation held after the time this amendment to Article X becomes effective. SECOND: Thereafter, pursuant to resolutions of the corporation's Board of Directors, the amendment was submitted to the stockholders of the corporation for approval at a Meeting of Stockholders, and such meeting was called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware. The necessary number of shares as required by statute were voted in favor of the amendment. THIRD: The said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said corporation has caused this certificate to be signed by Kenneth G. Kasses, Ph.D., its President, as of this 11th day of March, 1999. GENTA INCORPORATED By: ------------------------- Kenneth G. Kasses, Ph.D. President EX-3.(I).4 4 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF GENTA INCORPORATED GENTA INCORPORATED, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Genta Incorporated, resolutions were duly adopted setting forth a proposed amendment of the Restated Certificate of Incorporation of the corporation, and declaring that such amendment is advisable and that such amendment should be submitted to the stockholders of the corporation for approval. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the first sentence of Article XI of the Restated Certificate of Incorporation, as amended, of the Company be, and hereby is, deleted. SECOND: Thereafter, pursuant to resolutions of the corporation's Board of Directors, the amendment was submitted to the stockholders of the corporation for approval at a Meeting of Stockholders, and such meeting was called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware. The necessary number of shares as required by statute were voted in favor of the amendment. THIRD: The said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said corporation has caused this certificate to be signed by Kenneth G. Kasses, Ph.D., its President, as of this 26th day of February, 1999. GENTA INCORPORATED By: ------------------------- Kenneth G. Kasses, Ph.D. President EX-10.(III)(A).1 5 NON-EMPLOYEE DIRECTORS' 1998 STOCK OPTION PLAN GENTA INCORPORATED NON-EMPLOYEE DIRECTORS' 1998 STOCK OPTION PLAN 1. Purpose ------- The purpose of the Genta Incorporated Non-Employee Directors' 1998 Stock Option Plan (the "Plan") is to provide an incentive to those directors of Genta Incorporated (the "Company") who are not employees of the Company to serve on the board of directors of the Company (the "Board") and to maintain and enhance the Company's long-term performance. 2. Administration -------------- The terms of the stock options to be awarded under the Plan are set forth herein and may not be varied other than by amendment of the Plan in accordance with Section 10. To the extent that any administrative action is required in connection with the Plan, such action shall be taken by the Board, whose determination in such case shall be final, binding and conclusive. 3. Shares Available for Awards --------------------------- The total number of shares of common stock of the Company, par value $.001 per share ("Common Stock"), which may be transferred upon the exercise of options granted under the Plan shall not exceed 3,000,000 shares plus the number of shares underlying the options referred to in Section 5(c) (as adjusted as provided therein). Such shares may be authorized and unissued shares, treasury shares or shares acquired by the Company for the purposes of the Plan. Any shares of Common Stock that are subject to a stock option under the Plan and that have not been transferred at the time such option is cancelled or terminated shall again be available for options under the Plan. 4. Persons Eligible for Stock Options Stock options shall be granted under the Plan only to persons who are members of the Board and are not employees of the Company or any subsidiary thereof ("Eligible Directors"). 5. Grant of Stock Options ----------------------- (a) Every option granted under the Plan shall be subject to the terms and conditions set forth in the Plan, and shall be evidenced by an option agreement which shall not be inconsistent with the provisions of the Plan. (b) As of the close of each annual meeting of the Company's shareholders ("Annual Meeting"), commencing with the Annual Meeting in 1999, each individual who qualifies as an Eligible Director at the conclusion of such meeting, excluding any Eligible Director who is then receiving a grant under the Company's 1998 Stock Incentive Plan or any other stock-based compensation plan or arrangement of the Company in connection with his or her initial election or appointment to the Board, shall be granted an option to purchase 50,000 shares of Common Stock, provided that the Eligible Director has served as a director of the Company for at least six months prior to the date of such Annual Meeting. (c) Each Eligible Director serving as a director on May 28, 1998 shall be granted stock options to purchase the number of shares of Common Stock set forth below under the heading "Number of Initial Shares" at an exercise price of $.94375 per share (subject to proportional adjustment for any stock split or reverse stock split of the Common Stock). The exercise price and number of shares subject to such stock options shall be subject to adjustment if the number of shares of Fairly-Diluted Common Stock (as defined below) as of February 26, 1999 (the "Adjustment Date") is other than 44,725,266 shares (subject to proportional adjustment for any stock split or reverse stock split of the Common Stock) as a result of any and all Covered Events (as defined below) occurring prior to such time, in which case (x) the number of shares of Common Stock covered by the stock option shall increase by a number of shares equal to the percentage set forth below under the caption "Applicable Percentage" of the number of shares of Fairly-Diluted Common Stock as of the Adjustment Date in excess of 44,725,266 that are attributable to Covered Events and (y) the per share exercise price shall be adjusted to equal the conversion price of the Company's Series D Convertible Preferred Stock immediately after the Reset (as defined in the fifth paragraph of Subsection 4(a) of the Certificate of Designations for the Series D Convertible Preferred Stock, as amended from time to time) as modified by any contractual modification to such Reset agreed to by at least a majority of the holders of Series D Preferred Stock. "Fairly-Diluted Common Stock" shall mean, as of a specified date, the number of shares of Common Stock that would be outstanding on such date assuming (i) the conversion into Common Stock on such date of all preferred stock of the Company outstanding on May 28, 1998 or issuable upon exercise of warrants outstanding on May 28, 1998; and (ii) the exercise of all warrants of the Company outstanding on May 28, 1998 or contractually required to be issued pursuant to an agreement in effect on May 28, 1998, in each case having an exercise price per share of Common Stock of less than $2.00 on May 28, 1998 (subject to proportional adjustment for any stock split or reverse stock split of the Common Stock) including, but not limited to, any Penalty Warrants (as defined in the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 1997) that may be issued. "Covered Events" mean any issuance of Penalty Warrants or alteration of the conversion price of the Series D Preferred Stock pursuant to the Reset referred to above or any contractual modification thereof. 2 Applicable Director Number of Initial Shares Percentage (%) - - -------- ------------------------ -------------- Drapkin 675,000 1.5 Cooper 337,500 .75 Sandage 337,500 .75 Kessel 75,000 .167 Salomon 75,000 .167 Stein 75,000 .167 Wakoff 75,000 .167 Weiss 75,000 .167 6. Terms of Stock Options (a) The exercise price per share of Common Stock under each option granted under Section 5(b) shall be equal to the "Fair Market Value" per share of Common Stock on the date of option grant. For purposes of the Plan, the "Fair Market Value" of a share of Common Stock on any day shall be as follows: (i) if the principal market for the Common Stock (the "Market") is a national securities exchange or the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market or SmallCap Market, the last sale price or, if no reported sales take place on the applicable date, the average of the high bid and low asked price of Common Stock as reported for such Market on such date or, if no such quotation is made on such date, on the next preceding day on which there were quotations, provided that such quotations shall have been made within the ten (10) business days preceding the applicable date; (ii) If the Common Stock is actively traded but clause (i) does not apply, the average of the high bid and low asked price for Common Stock on the applicable date, or, if no such quotations shall have been made on such date, on the next preceding day on which there were quotations, provided that such quotations shall have been made within the ten (10) business days preceding the applicable date; or (iii) In the event that neither clause (i) or (ii) shall apply, the Fair Market Value of a share of Common Stock on any day shall be determined in good faith by the Board. The exercise price of each option granted under Section 5(c) shall be $0.94375 per share, subject to adjustment as provided in Section 5(c). (b) Each option granted under the Plan shall have a term of ten years, and shall not be exercisable after the tenth anniversary of the date of grant. (c) Each option granted under Section 5(b) shall become exercisable in full on the date of the Annual Meeting next following the date of grant provided that the optionee continues to serve as a member of the Board of Directors immediately following such Annual Meeting. Each option granted under 3 Section 5(c) shall become exercisable in 16 substantially equal installments on the last day of each calendar quarter after October 1, 1997 provided that adjustments to the number of options contemplated by Section 5(c) shall be pro-rated as to vesting over the remaining quarterly periods after the adjustment. An option may be exercised from time to time for all or part of the shares as to which it is then exercisable (but, in any event, only for whole shares). 7. Exercise of Options ------------------- (a) An option shall be exercised by the filing of a written notice with the Company, on such form and in such manner as the Company shall prescribe, accompanied by payment for the shares being purchased. Such payment shall be made: (i) by certified or official bank check (or the equivalent thereof acceptable to the Company) for the full option exercise price; (ii) by delivery of shares of Common Stock (which, if acquired pursuant to the exercise of a stock option, were acquired at least six months prior to the option exercise date) and having a Fair Market Value (determined as of the exercise date) equal to all or part of the option exercise price and a certified or official bank check (or the equivalent thereof acceptable to the Company) for any remaining portion of the full option exercise price; or (iii) at the discretion of the Board and to the extent permitted by law, by such other method as the Board may authorize, including, without limitation, at the discretion of the Board, by the withholding of shares (valued at their Fair Market Value on the date of exercise) underlying the Option. (b) Promptly after receiving payment of the full option exercise price, the Company shall deliver to the Eligible Director, or to such other person as may then have the right to exercise the option, a certificate for the shares of Common Stock for which the option has been exercised. (c) The holder of a stock option (or other person having the right to exercise the option) shall have none of the rights of a shareholder of the Company with respect to the shares subject to the option until the issuance of a stock certificate to such person for such shares. Except as otherwise provided in Section 9, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date such stock certificate is issued. 8. Termination of Directorship; Change of Control ---------------------------------------------- (a) If an optionee's membership on the Board terminates for any reason other than death, the optionee may exercise any outstanding option to the extent that the optionee was entitled to exercise it on the date of termination. Exercise must occur within six months after termination, except that the six-month period shall be increased to one year if the termination is by reason of disability, but in no event after the expiration date of the option. 4 (b) If an optionee dies while serving on the Board, or during the period in which an option is exercisable pursuant to paragraph (a) of this Section 8, any outstanding option shall be exercisable to the extent that the optionee was entitled to exercise it on the date of death. Exercise must occur by the earlier of the first anniversary of death or the expiration date of the option. Such exercise shall be made only by the optionee's executor or administrator, unless the optionee's will specifically disposes of the option, in which case exercise shall be made only by the recipient of such specific disposition. If an optionee's personal representative or the recipient of a specific disposition under the optionee's will shall be entitled to exercise any award pursuant to the preceding sentence, such representative or recipient shall be bound by all the terms and conditions of the Plan and the applicable agreement which would have applied to the optionee including, without limitation, the provisions of Section 11 hereof. (c) Upon expiration of the applicable six-month or one-year period described in paragraph (a) or (b) of this Section 8, any unexercised option shall be null and void. (d) Upon the happening of a change in control (as hereinafter defined) notwithstanding any other provision of this Plan, any option granted under Section 5(c) then outstanding shall become fully vested and immediately exercisable (i) upon the termination of the Eligible Director's status as an Eligible Director as a result of the removal of such person from the Board (other than for cause) by shareholder action within one year of such change in control or (ii) in the case of any liquidation, sale, disposition or other transaction described in clause (D) of the next sentence, immediately upon the consummation of such liquidation, sale, disposition or other transaction. A "change in control" shall have occurred if: (A) any "person", as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act") (other than (i) the shareholders of the Company as of the effective date of the Plan (the "Current Shareholders", such term to include their heirs or estates, or trusts or other entities the primary beneficiaries of which are the Current Shareholders or persons designated by them, (ii) the Company or any subsidiary of the Company, (iii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, or (iv) any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities without the prior written consent of the Board; or (B) during any period of twenty-four (24) consecutive months, individuals who at the effective date of the Plan constitute the Board and any new director whose election by the Board or nomination for election by the Company shareholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or (C) the shareholders of the Company approve a merger or consolidation of the Company with any other company (other than a wholly-owned subsidiary of the Company), 5 other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) 50% or more of the combined voting power of voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined in clause (A) above with the exceptions noted in said clause (A)) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (D) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (e) In the event of a merger or consolidation ("merger") of the Company with or into any other corporation or entity ("successor corporation"), outstanding awards granted under this Plan shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. For the purposes of this paragraph (e), an award shall be considered assumed if, for every share of Common Stock subject thereto immediately prior to the merger, the grantee has the right, following the merger, to acquire the consideration received in the merger transaction by holders of shares of Common Stock (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the merger was not solely common stock of the successor corporation or its parent, the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be acquired pursuant to the award, for each share of Common Stock subject thereto, to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger. For purposes hereof, the term "merger" shall include any transaction in which another corporation acquires all of the issued and outstanding Common Stock of the Company. 9. Change in Capitalization ------------------------ In the event of any change in the Common Stock by reason of a stock split, reverse stock split, stock dividend, recapitalization, reclassification, merger, consolidation, split-up, combination, exchange of shares or the like, the Board shall appropriately adjust the number and kind of shares authorized for issuance under the Plan, the number of shares subject to each option then outstanding or subsequently granted under the Plan and the exercise price of each such option. The Board's determination as to what, if any, adjustments shall be made shall be final, binding and conclusive on the Company and on all Eligible Directors who receive option grants under the Plan. 6 10. Amendment of the Plan --------------------- (a) The Board may from time to time suspend, discontinue, revise or amend the Plan in any respect whatsoever; provided, however, that no such amendment shall impair any material rights or increase any material obligations under any option theretofore granted under the Plan without the consent of the optionee (or, after the optionee's death, the person having the right to exercise the option). For purposes of this Section 10, any action of the Board that alters or affects the tax treatment of any option shall not be considered to materially impair any rights of any optionee. (b) Shareholder approval shall be required with respect to any amendment if the failure to obtain such approval would adversely affect the compliance of the Plan with the requirements of any applicable law, rule or regulation. 11. Restrictions ------------ (a) If the Board shall at any time determine that any Consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any option under the Plan, the issuance or purchase of shares or other rights thereunder, or the taking of any other action thereunder (each such action being hereinafter referred to as a "Plan Action"), then such Plan Action shall not be taken, in whole or in part, unless and until such Consent shall have been effected or obtained to the full satisfaction of the Board. (b) The term "Consent" as used herein with respect to any Plan Action means (i) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or under any federal, state or local law, rule or regulation, (ii) any and all written agreements and representations by the optionee with respect to the disposition of shares, or with respect to any other matter, which the Board shall deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made and (iii) any and all consents, clearances and approvals in respect of a Plan Action by any governmental or other regulatory bodies. 12. Nonassignability ---------------- No award or right granted to any person under the Plan shall be assignable or transferable other than by will or by the laws of descent and distribution, and all such awards and rights shall be exercisable during the life of the grantee only by the grantee or the grantee's legal representative. 13. No Right to Re-election ----------------------- Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for re-election by the Company's shareholders, nor confer upon any Eligible Director the right to remain a member of the Board for any period of time or at any particular rate of compensation. 7 14. No Limitation on Corporate Actions ---------------------------------- This Plan shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 15. Section Headings ---------------- The section headings contained herein are for the purpose of convenience only and are not intended to define or limit the contents of the sections. 16. Effective Date and Term of Plan ------------------------------- The Plan was adopted by the Board on May 28, 1998, subject to approval by the Company's shareholders. Unless sooner terminated by the Board, the Plan shall terminate on the date when no more shares are available for transfer under the Plan. Options outstanding upon Plan termination shall continue in effect in accordance with their terms. 17. Governing Law ------------- All rights and obligations under the Plan shall be construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of laws. 8 EX-10.(III)(A).2 6 1998 STOCK INCENTIVE PLAN GENTA INCORPORATED 1998 STOCK INCENTIVE PLAN Table of Contents Page ARTICLE I GENERAL 1.1 Purpose......................................................... 1 1.2 Administration.................................................. 1 1.3 Persons Eligible for Awards..................................... 2 1.4 Types of Awards Under Plan...................................... 2 1.5 Shares Available for Awards..................................... 2 1.6 Definitions of Certain Terms.................................... 4 ARTICLE II AWARDS UNDER THE PLAN 2.1 Agreements Evidencing Awards.................................... 5 2.2 No Rights as a Shareholder...................................... 6 2.3 Grant of Stock Options, Stock Appreciation Rights and Reload Options..................................... 6 2.4 Exercise of Options and Stock Appreciation Rights............... 8 2.5 Termination of Employment; Death................................ 8 2.6 Grant of Restricted Stock....................................... 9 2.7 Grant of Restricted Stock Units................................. 10 2.8 Other Stock-Based Awards........................................ 10 2.9 Grant of Dividend Equivalent Rights............................. 11 2.10 Right of Recapture 11 ARTICLE III MISCELLANEOUS 3.1 Amendment of the Plan; Modification of Awards................... 11 3.2 Tax Withholding................................................. 12 3.3 Restrictions.................................................... 12 3.4 Nonassignability................................................ 13 3.5 Requirement of Notification of Election Under Section 83(b) of the Code............................... 13 3.6 Requirement of Notification Upon Disqualifying Disposition Under Section 421(b) of the Code.............................. 13 3.7 Change in Control, Dissolution, Liquidation, Merger............. 13 3.8 Right of Discharge Reserved..................................... 15 3.9 Nature of Payments.............................................. 15 3.10 Non-Uniform Determinations...................................... 16 3.11 Other Payments or Awards........................................ 16 3.12 Section Headings................................................ 16 3.13 Effective Date and Term of Plan................................. 16 3.14 Governing Law................................................... 16 ARTICLE I GENERAL 1.1 Purpose The purpose of the Genta Incorporated 1998 Stock Incentive Plan (the "Plan") is to provide for officers, other employees and directors of, and consultants to, Genta Incorporated (the "Company") and its subsidiaries an incentive (a) to enter into and remain in the service of the Company, (b) to enhance the long-term performance of the Company, and (c) to acquire a proprietary interest in the success of the Company. 1.2 Administration 1.2.1 Subject to Section 1.2.6, the Plan shall be administered by the Compensation Committee (the "Committee") of the board of directors of the Company (the "Board"), which shall consist of not less than two directors. The members of the Committee shall be appointed by, and serve at the pleasure of, the Board. To the extent required for transactions under the Plan to qualify for the exemptions available under Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934 (the "1934 Act"), all actions relating to awards to persons subject to Section 16 of the 1934 Act shall be taken by the Board unless each person who serves on the Committee is a "non-employee director" within the meaning of Rule 16b-3 or such actions are taken by a sub-committee of the Committee (or the Board) comprised solely of "non-employee directors". To the extent required for compensation realized from awards under the Plan to be deductible by the Company pursuant to section 162(m) of the Internal Revenue Code of 1986 (the "Code"), the members of the Committee shall be "outside directors" within the meaning of section 162(m). 1.2.2 The Committee shall have the authority (a) to exercise all of the powers granted to it under the Plan; (b) to construe, interpret and implement the Plan and any plan agreements executed pursuant to Section 2.1; (c) to prescribe, or amend and rescind rules and regulations relating to the Plan, including rules governing its own operations; (d) to make all determinations necessary or advisable in administering the Plan; (e) to correct any defect, supply any omission and reconcile any inconsistency in the Plan; (f) to amend the Plan to reflect changes in applicable law; (g) to determine whether, to what extent and under what circumstances awards may be settled or exercised in cash, Shares of Common Stock, other securities, other awards or other property, or canceled, forfeited or suspended and the method or methods by which awards may be settled, canceled, forfeited or suspended; and (h) to determine whether, to what extent and under what circumstances cash, shares of Common Stock, other securities, other awards or other property and other amounts payable with respect to an award shall be deferred either automatically or at the election of the holder thereof or of the Committee. 1.2.3 Actions of the Committee shall be taken by the vote of a majority of its members. Any action may be taken by a written instrument signed by a majority of the Committee members, and action so taken shall be fully as effective as if it had been taken by a vote at a meeting. 1.2.4 The determination of the Committee on all matters relating to the Plan or any plan agreement shall be final, binding and conclusive. 1.2.5 No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any award thereunder. 1.2.6 Notwithstanding anything to the contrary contained herein: (a) until the Board shall appoint the members of the Committee, the Plan shall be administered by the Board; and (b) the Board may, in its sole discretion, at any time and from time to time, grant awards or resolve to administer the Plan. In either of the foregoing events, the Board shall have all of the authority and responsibility granted to the Committee herein. 1.3 Persons Eligible for Awards Awards under the Plan may be made to such directors (including directors who are not employees), officers and other employees of the Company and its subsidiaries (including prospective employees conditioned on their becoming employees), and to such consultants, advisers and other independent contractors of the Company and its subsidiaries (collectively, "key persons"), as the Committee shall select in its discretion. 1.4 Types of Awards Under Plan Awards may be made under the Plan in the form of (a) incentive stock options (within the meaning of section 422 of the Code); (b) non-qualified stock options; (c) stock appreciation rights; (d) dividend equivalent rights; (e) restricted stock; (f) restricted stock units; and (g) other stock-based awards, all as more fully set forth in Article II. The term "award" means any of the foregoing. No incentive stock option (other than an incentive stock option that may be assumed or issued by the Company in connection with a transaction to which section 424(a) of the Code applies) may be granted to a person who is not an employee of the Company on the date of grant. 1.5 Shares Available for Awards 1.5.1 Total shares available. The total number of shares of common stock of the Company, par value $.001 per share ("Common Stock"), which may be transferred pursuant to awards granted under the Plan shall not exceed 6,750,000; provided, however, that such number of shares may be increased at any time or from time to time, at the discretion of the Board of Directors, by an aggregate amount up to the product of (x) .15 and (y) the sum of (1) the difference between (A) the number of shares of Common Stock which may be obtained upon conversion of the Series D Convertible Preferred Stock pursuant to the modification in the conversion price effected by the Reset, as defined in the fifth paragraph of Subsection 4 (a) of the Certificate of Designations for the Series D Convertible Preferred Stock, as amended from time to time, or any contractual modification to such Reset (collectively, the "Reset"); and (B) the number of shares of Common Stock obtainable upon conversion of the Series D Convertible Preferred Stock immediately prior to such Reset and (2) the number of shares of Common Stock which may be obtained upon the exercise of any Penalty Warrants (as defined in the Company's Annual Report on Form 10-K for the year ended December 31, 1997). Notwithstanding the foregoing, the total number of incentive stock options (as defined in Section 1.6.2) which may be granted may not exceed 5,000,000 shares. Such shares may be authorized but unissued Common Stock or authorized and issued Common Stock held in the Company's treasury or acquired by the Company for the purposes of the Plan. The Committee may direct that any stock certificate evidencing shares issued pursuant to the Plan shall bear a legend setting forth such restrictions on transferability as may apply to such shares pursuant to the Plan. If, after the effective date of the Plan, any award is forfeited or any award otherwise terminates or is cancelled without the delivery of shares of Common Stock, then the shares covered by such award or to which such award relates shall again become available for transfer pursuant to awards granted or to be granted under this Plan. Any shares of Common Stock delivered by the Company, any shares of Common Stock with respect to which awards are made by the Company and any shares of Common Stock with respect to which the Company becomes obligated to make awards, through the assumption of, or in substitution for, outstanding awards previously granted by an acquired entity, shall not be counted against the shares available for awards under this Plan. 1.5.2 Individual Limit. The total number of shares of Common Stock with respect to which stock options and stock appreciation rights may be granted to any one employee of the Company or a subsidiary during any two-year period shall not exceed 8,000,000 shares. 1.5.3 Adjustments. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding award, the number of shares available for awards, the number of shares that may be subject to awards to any one employee, and the price per share of Common Stock covered by each such outstanding award shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein or in the applicable plan agreement, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an award. After any adjustment made pursuant to this Section 1.5.3, the number of shares subject to each outstanding award shall be rounded to the nearest whole number. 1.5.4 Except as provided in this Section 1.5 and in Section 2.3.8, there shall be no limit on the number or the value of the shares of Common Stock that may be subject to awards to any individual under the Plan. 1.6 Definitions of Certain Terms 1.6.1 The "Fair Market Value" of a share of Common Stock on any day shall be determined as follows. (a) If the principal market for the Common Stock (the "Market") is a national securities exchange or the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market or Small Cap Market, the last sale price or, if no reported sales take place on the applicable date, the average of the high bid and low asked price of Common Stock as reported for such Market on such date or, if no such quotation is made on such date, on the next preceding day on which there were quotations, provided that such quotations shall have been made within the ten (10) business days preceding the applicable date; (b) If the Common Stock is actively traded but paragraph (a) does not apply, the average of the high bid and low asked price for Common Stock on the applicable date, or, if no such quotations shall have been made on such date, on the next preceding day on which there were quotations, provided that such quotations shall have been made within the ten (10) business days preceding the applicable date; or, (c) In the event that neither paragraph (a) nor (b) shall apply, the Fair Market Value of a share of Common Stock on any day shall be determined in good faith by the Committee. 1.6.2 The term "incentive stock option" means an option that is intended to qualify for special federal income tax treatment pursuant to sections 421 and 422 of the Code, as now constituted or subsequently amended, or pursuant to a successor provision of the Code, and which is so designated in the applicable plan agreement. Any option that is not specifically designated as an incentive stock option shall under no circumstances be considered an incentive stock option. Any option that is not an incentive stock option is referred to herein as a "nonqualified stock option." 1.6.3 The term "employment" means, in the case of a grantee of an award under the Plan who is not an employee of the Company, the grantee's association with the Company or a subsidiary as a director, consultant, adviser, other independent contractor or otherwise. 1.6.4 A grantee shall be deemed to have a "termination of employment" upon ceasing to be employed by the Company and all of its subsidiaries or by a corporation assuming awards in a transaction to which section 424(a) of the Code applies. The Committee may in its discretion determine (a) whether any leave of absence constitutes a termination of employment for purposes of the Plan; (b) the impact, if any, of any such leave of absence on awards theretofore made under the Plan; and (c) when a change in a non-employee's association with the Company constitutes a termination of employment for purposes of the Plan. The Committee shall have the right to determine whether a grantee's termination of employment is a dismissal for cause and the date of termination in such case, which date the Committee may retroactively deem to be the date of the action that is cause for dismissal. Such determinations of the Committee shall be final, binding and conclusive. 1.6.5 The term "cause," when used in connection with termination of a grantee's employment, shall have the meaning set forth in any then-effective employment agreement between the grantee and the Company or a subsidiary thereof. In the absence of such an employment agreement provision, "cause" means: (a) conviction of any crime (whether or not involving the Company or its subsidiaries) constituting a felony in the jurisdiction involved; (b) engaging in any act which, in each case, subjects, or if generally known would subject, the Company or its subsidiaries to public ridicule or embarrassment; (c) material violation of the Company's or a subsidiary's policies, including, without limitation, those relating to sexual harassment or the disclosure or misuse of confidential information; (d) serious neglect or misconduct in the performance of the grantee's duties for the Company or a subsidiary or willful or repeated failure or refusal to perform such duties; in each case as determined by the Committee, which determination shall be final, binding and conclusive. ARTICLE II AWARDS UNDER THE PLAN 2.1 Agreements Evidencing Awards Each award granted under the Plan (except an award of unrestricted stock) shall be evidenced by a written agreement ("plan agreement") which shall contain such provisions as the Committee in its discretion deems necessary or desirable. Such provisions may include, without limitation, a requirement that the grantee become a party to a shareholders' agreement with respect to any shares of Common Stock acquired pursuant to the award, a requirement that the grantee acknowledge that such shares are acquired for investment purposes only, and a right of first refusal exercisable by the Company in the event that the grantee wishes to transfer any such shares. The Committee may grant awards in tandem with or in substitution for any other award or awards granted under this Plan or any award granted under any other plan of the Company or any subsidiary. Payments or transfers to be made by the Company or any subsidiary upon the grant, exercise or payment of an award may be made in such form as the Committee shall determine, including cash, shares of Common Stock, other securities, other awards or other property and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules established by the Committee. By accepting an award pursuant to the Plan, a grantee thereby agrees that the award shall be subject to all of the terms and provisions of the Plan and the applicable plan agreement. 2.2 No Rights as a Shareholder No grantee of an option or stock appreciation right (or other person having the right to exercise such award) shall have any of the rights of a shareholder of the Company with respect to shares subject to such award until the issuance of a stock certificate to such person for such shares. Except as otherwise provided in Section 1.5.3, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date such stock certificate is issued. 2.3 Grant of Stock Options, Stock Appreciation Rights and Reload Options 2.3.1 The Committee may grant incentive stock options and nonqualified stock options (collectively, "options") to purchase shares of Common Stock from the Company, to such key persons, in such amounts and subject to such terms and conditions, as the Committee shall determine in its discretion, subject to the provisions of the Plan. 2.3.2 The Committee may grant stock appreciation rights to such key persons, in such amounts and subject to such terms and conditions, as the Committee shall determine in its discretion, subject to the provisions of the Plan. Stock appreciation rights may be granted in connection with all or any part of, or independently of, any option granted under the Plan. A stock appreciation right granted in connection with a nonqualified stock option may be granted at or after the time of grant of such option. A stock appreciation right granted in connection with an incentive stock option may be granted only at the time of grant of such option. 2.3.3 The grantee of a stock appreciation right shall have the right, subject to the terms of the Plan and the applicable plan agreement, to receive from the Company an amount equal to (a) the excess of the Fair Market Value of a share of Common Stock on the date of exercise of the stock appreciation right over (b) the exercise price of such right as set forth in the plan agreement (or over the option exercise price if the stock appreciation right is granted in connection with an option), multiplied by (c) the number of shares with respect to which the stock appreciation right is exercised. Payment upon exercise of a stock appreciation right shall be in cash or in shares of Common Stock (valued at their Fair Market Value on the date of exercise of the stock appreciation right) or both, all as the Committee shall determine in its discretion. Upon the exercise of a stock appreciation right granted in connection with an option, the number of shares subject to the option shall be correspondingly reduced by the number of shares with respect to which the stock appreciation right is exercised. Upon the exercise of an option in connection with which a stock appreciation right has been granted, the number of shares subject to the stock appreciation right shall be correspondingly reduced by the number of shares with respect to which the option is exercised. 2.3.4 Each plan agreement with respect to an option shall set forth the amount (the "option exercise price") payable by the grantee to the Company upon exercise of the option evidenced thereby. The option exercise price per share shall be determined by the Committee in its discretion; provided, however, that the option exercise price of an incentive stock option shall be at least 100% of the Fair Market Value of a share of Common Stock on the date the option is granted (except as permitted in connection with the assumption or issuance of options in a transaction to which section 424(a) of the Code applies), and provided further that in no event shall the option exercise price be less than the par value of a share of Common Stock. 2.3.5 Each plan agreement with respect to an option or stock appreciation right shall set forth the periods during which the award evidenced thereby shall be exercisable, whether in whole or in part. Such periods shall be determined by the Committee in its discretion; provided, however, that no incentive stock option (or a stock appreciation right granted in connection with an incentive stock option) shall be exercisable more than 10 years after the date of grant. 2.3.6 The Committee may in its discretion include in any plan agreement with respect to an option (the "original option") a provision that an additional option (the "additional option") shall be granted to any grantee who, pursuant to Section 2.4.3(b), delivers shares of Common Stock in partial or full payment of the exercise price of the original option. The additional option shall be for a number of shares of Common Stock equal to the number thus delivered, shall have an exercise price equal to the Fair Market Value of a share of Common Stock on the date of exercise of the original option, and shall have an expiration date no later than the expiration date of the original option. In the event that a plan agreement provides for the grant of an additional option, such Agreement shall also provide that the exercise price of the original option be no less than the Fair Market Value of a share of Common Stock on its date of grant, and that any shares that are delivered pursuant to Section 2.4.3(b) in payment of such exercise price shall have been held for at least six months. 2.3.7 To the extent that the aggregate Fair Market Value (determined as of the time the option is granted) of the stock with respect to which incentive stock options granted under this Plan and all other plans of the Company and any subsidiary are first exercisable by any employee during any calendar year shall exceed the maximum limit (currently, $100,000), if any, imposed from time to time under section 422 of the Code, such options shall be treated as nonqualified stock options. 2.3.8 Notwithstanding the provisions of Sections 2.3.4 and 2.3.5, to the extent required under section 422 of the Code, an incentive stock option may not be granted under the Plan to an individual who, at the time the option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of his employer corporation or of its parent or subsidiary corporations (as such ownership may be determined for purposes of section 422(b)(6) of the Code) unless (a) at the time such incentive stock option is granted the option exercise price is at least 110% of the Fair Market Value of the shares subject thereto and (b) the incentive stock option by its terms is not exercisable after the expiration of five (5) years from the date it is granted. 2.4 Exercise of Options and Stock Appreciation Rights Subject to the provisions of this Article II, each option or stock appreciation right granted under the Plan shall be exercisable as follows: 2.4.1 Unless the applicable plan agreement otherwise provides, an option or stock appreciation right shall become exercisable in four substantially equal installments, on each of the first, second, third and fourth anniversaries of the date of grant, and each installment, once it becomes exercisable, shall remain exercisable until expiration, cancellation or termination of the award. 2.4.2 Unless the applicable plan agreement otherwise provides, an option or stock appreciation right may be exercised from time to time as to all or part of the shares as to which such award is then exercisable (but, in any event, only for whole shares). A stock appreciation right granted in connection with an option may be exercised at any time when, and to the same extent that, the related option may be exercised. An option or stock appreciation right shall be exercised by the filing of a written notice with the Company, on such form and in such manner as the Committee shall prescribe. 2.4.3 Any written notice of exercise of an option shall be accompanied by payment for the shares being purchased. Such payment shall be made: (a) by certified or official bank check (or the equivalent thereof acceptable to the Company) for the full option exercise price; or (b) unless the applicable plan agreement provides otherwise, by delivery of shares of Common Stock (which, if acquired pursuant to exercise of a stock option, were acquired at least six months prior to the option exercise date) and having a Fair Market Value (determined as of the exercise date) equal to all or part of the option exercise price and a certified or official bank check (or the equivalent thereof acceptable to the Company) for any remaining portion of the full option exercise price; or (c) at the discretion of the Committee and to the extent permitted by law, by such other method as the Committee may from time to time prescribe. 2.4.4 Promptly after receiving payment of the full option exercise price, or after receiving notice of the exercise of a stock appreciation right for which payment will be made partly or entirely in shares, the Company shall, subject to the provisions of Section 3.3 (relating to certain restrictions), deliver to the grantee or to such other person as may then have the right to exercise the award, a certificate or certificates for the shares of Common Stock for which the award has been exercised. If the method of payment employed upon option exercise so requires, and if applicable law permits, an optionee may direct the Company to deliver the certificate(s) to the optionee's stockbroker. 2.5 Termination of Employment; Death 2.5.1 Except to the extent otherwise provided in Section 2.5.2 or 2.5.3 or in the applicable plan agreement, all options and stock appreciation rights not theretofore exercised shall terminate upon termination of the grantee's employment for any reason (including death). 2.5.2 Except to the extent otherwise provided in the applicable plan agreement, if a grantee's employment terminates for any reason other than death or dismissal for cause, the grantee may exercise any outstanding option or stock appreciation right on the following terms and conditions: (a) exercise may be made only to the extent that the grantee was entitled to exercise the award on the date of employment termination; and (b) exercise must occur within ninety (90) days after employment terminates, except that this ninety day period shall be increased to one year if the termination is by reason of disability, but in no event after the expiration date of the award as set forth in the plan agreement. In the case of an incentive stock option, the term "disability" for purposes of the preceding sentence shall have the meaning given to it by section 422(c)(6) of the Code. 2.5.3 Except to the extent otherwise provided in the applicable plan agreement, if a grantee dies while employed by the Company or any subsidiary, or after employment termination but during the period in which the grantee's awards are exercisable pursuant to Section 2.5.2, any outstanding option or stock appreciation right shall be exercisable on the following terms and conditions: (a) exercise may be made only to the extent that the grantee was entitled to exercise the award on the date of death; and (b) exercise must occur by the earlier of the first anniversary of the grantee's death or the expiration date of the award. Any such exercise of an award following a grantee's death shall be made only by the grantee's executor or administrator, unless the grantee's will specifically disposes of such award, in which case such exercise shall be made only by the recipient of such specific disposition. If a grantee's personal representative or the recipient of a specific disposition under the grantee's will shall be entitled to exercise any award pursuant to the preceding sentence, such representative or recipient shall be bound by all the terms and conditions of the Plan and the applicable plan agreement which would have applied to the grantee. 2.6 Grant of Restricted Stock 2.6.1 The Committee may grant restricted shares of Common Stock to such key persons, in such amounts, and subject to such terms and conditions as the Committee shall determine in its discretion, subject to the provisions of the Plan. Restricted stock awards may be made independently of or in connection with any other award under the Plan. A grantee of a restricted stock award shall have no rights with respect to such award unless such grantee accepts the award within such period as the Committee shall specify by executing a plan agreement in such form as the Committee shall determine and, if the Committee shall so require, makes payment to the Company by certified or official bank check (or the equivalent thereof acceptable to the Company) in such amount as the Committee may determine. 2.6.2 Promptly after a grantee accepts a restricted stock award, the Company shall issue in the grantee's name a certificate or certificates for the shares of Common Stock covered by the award. Upon the issuance of such certificate(s), the grantee shall have the rights of a shareholder with respect to the restricted stock, subject to the non-transferability restrictions and Company repurchase rights described in Sections 2.6.4 and 2.6.5 and to such other restrictions and conditions as the Committee in its discretion may include in the applicable plan agreement. 2.6.3 Unless the Committee shall otherwise determine, any certificate issued evidencing shares of restricted stock shall remain in the possession of the Company until such shares are free of any restrictions specified in the applicable plan agreement. 2.6.4 Shares of restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided in this Plan or the applicable plan agreement. The Committee at the time of grant shall specify the date or dates (which may depend upon or be related to the attainment of performance goals and other conditions) on which the non-transferability of the restricted stock shall lapse. Unless the applicable plan agreement provides otherwise, additional shares of Common Stock or other property distributed to the grantee in respect of shares of restricted stock, as dividends or otherwise, shall be subject to the same restrictions applicable to such restricted stock. 2.6.5 During the 120 days following termination of the grantee's employment for any reason, the Company shall have the right to require the return of any shares to which restrictions on transferability apply, in exchange for which the Company shall repay to the grantee (or the grantee's estate) any amount paid by the grantee for such shares. 2.7 Grant of Restricted Stock Units 2.7.1 The Committee may grant awards of restricted stock units to such key persons, in such amounts, and subject to such terms and conditions as the Committee shall determine in its discretion, subject to the provisions of the Plan. Restricted stock units may be awarded independently of or in connection with any other award under the Plan. 2.7.2 At the time of grant, the Committee shall specify the date or dates on which the restricted stock units shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate. In the event of the termination of the grantee's employment by the Company and its subsidiaries for any reason, restricted stock units that have not become nonforfeitable shall be forfeited and cancelled. 2.7.3 At the time of grant, the Committee shall specify the maturity date applicable to each grant of restricted stock units, which may be determined at the election of the grantee. Such date may be later than the vesting date or dates of the award. On the maturity date, the Company shall transfer to the grantee one unrestricted, fully transferable share of Common Stock for each restricted stock unit scheduled to be paid out on such date and not previously forfeited. The Committee shall specify the purchase price, if any, to be paid by the grantee to the Company for such shares of Common Stock. 2.8 Other Stock-Based Awards The Committee may grant other types of stock-based awards (including the grant of unrestricted shares) to such key persons, in such amounts and subject to such terms and conditions, as the Committee shall in its discretion determine, subject to the provisions of the Plan. Such awards may entail the transfer of actual shares of Common Stock to Plan participants, or payment in cash or otherwise of amounts based on the value of shares of Common Stock. 2.9 Grant of Dividend Equivalent Rights The Committee may in its discretion include in the plan agreement with respect to any award a dividend equivalent right entitling the grantee to receive amounts equal to the ordinary dividends that would be paid, during the time such award is outstanding and unexercised, on the shares of Common Stock covered by such award if such shares were then outstanding. In the event such a provision is included in a plan agreement, the Committee shall determine whether such payments shall be made in cash, in shares of Common Stock or in another form, whether they shall be conditioned upon the exercise of the award to which they relate, the time or times at which they shall be made, and such other terms and conditions as the Committee shall deem appropriate. 2.10 Right of Recapture 2.10.1 If at any time within one year after the date on which a participant exercises an option or stock appreciation right, or on which restricted stock vests, or which is the maturity date of restricted stock units, or on which income is realized by a participant in connection with any other stock-based award (each of which events is a "realization event"), the participant (a) is terminated for cause or (b) engages in any activity determined in the discretion of the Committee to be in competition with any activity of the Company, or otherwise inimical, contrary or harmful to the interests of the Company (including, but not limited to, accepting employment with or serving as a consultant, adviser or in any other capacity to an entity that is in competition with or acting against the interests of the Company), then any gain realized by the participant from the realization event shall be paid by the participant to the Company upon notice from the Company. Such gain shall be determined as of the date of the realization event, without regard to any subsequent change in the Fair Market Value of a share of Common Stock. The Company shall have the right to offset such gain against any amounts otherwise owed to the participant by the Company (whether as wages, vacation pay, or pursuant to any benefit plan or other compensatory arrangement). ARTICLE III MISCELLANEOUS 3.1 Amendment of the Plan; Modification of Awards 3.1.1 The Board may from time to time suspend, discontinue, revise or amend the Plan in any respect whatsoever, except that no such amendment shall materially impair any rights or materially increase any obligations under any award theretofore made under the Plan without the consent of the grantee (or, after the grantee's death, the person having the right to exercise the award). For purposes of this Section 3.1, any action of the Board or the Committee that alters or affects the tax treatment of any award shall not be considered to materially impair any rights of any grantee. 3.1.2 Shareholder approval of any amendment shall be obtained to the extent necessary to comply with section 422 of the Code (relating to incentive stock options) or other applicable law or regulation. 3.1.3 The Committee may amend any outstanding plan agreement, including, without limitation, by amendment which would accelerate the time or times at which the award becomes unrestricted or may be exercised, or waive or amend any goals, restrictions or conditions set forth in the Agreement. However, any such amendment (other than an amendment pursuant to Section 3.7.2, relating to change in control) that materially impairs the rights or materially increases the obligations of a grantee under an outstanding award shall be made only with the consent of the grantee (or, upon the grantee's death, the person having the right to exercise the award). 3.2 Tax Withholding 3.2.1 As a condition to the receipt of any shares of Common Stock pursuant to any award or the lifting of restrictions on any award, or in connection with any other event that gives rise to a federal or other governmental tax withholding obligation on the part of the Company relating to an award (including, without limitation, FICA tax), the Company shall be entitled to require that the grantee remit to the Company an amount sufficient in the opinion of the Company to satisfy such withholding obligation. 3.2.2 If the event giving rise to the withholding obligation is a transfer of shares of Common Stock, then, unless otherwise specified in the applicable plan agreement, the grantee may satisfy the withholding obligation imposed under Section 3.2.1 by electing to have the Company withhold shares of Common Stock having a Fair Market Value equal to the amount of tax to be withheld. For this purpose, Fair Market Value shall be determined as of the date on which the amount of tax to be withheld is determined (and any fractional share amount shall be settled in cash). 3.3 Restrictions 3.3.1 If the Committee shall at any time determine that any consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any award under the Plan, the issuance or purchase of shares or other rights thereunder, or the taking of any other action thereunder (each such action a "plan action"), then such plan action shall not be taken, in whole or in part, unless and until such consent shall have been effected or obtained to the full satisfaction of the Committee. 3.3.2 The term "consent" as used herein with respect to any plan action means (a) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or under any federal, state or local law, rule or regulation, (b) any and all written agreements and representations by the grantee with respect to the disposition of shares, or with respect to any other matter, which the Committee shall deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made and (c) any and all consents, clearances and approvals in respect of a plan action by any governmental or other regulatory bodies. 3.4 Nonassignability Except to the extent otherwise provided in the applicable plan agreement, no award or right granted to any person under the Plan shall be assignable or transferable other than by will or by the laws of descent and distribution, and all such awards and rights shall be exercisable during the life of the grantee only by the grantee or the grantee's legal representative. 3.5 Requirement of Notification of Election Under Section 83(b) of the Code If any grantee shall, in connection with the acquisition of shares of Common Stock under the Plan, make the election permitted under section 83(b) of the Code (that is, an election to include in gross income in the year of transfer the amounts specified in section 83(b)), such grantee shall notify the Company of such election within ten (10) days of filing notice of the election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under the authority of Code section 83(b). 3.6 Requirement of Notification Upon Disqualifying Disposition Under Section 421(b) of the Code If any grantee shall make any disposition of shares of Common Stock issued pursuant to the exercise of an incentive stock option under the circumstances described in section 421(b) of the Code (relating to certain disqualifying dispositions), such grantee shall notify the Company of such disposition within 10 days thereof. 3.7 Change in Control, Dissolution, Liquidation, Merger 3.7.1 For purposes of this Section 3.7, a "change in control" shall have occurred if: (a) any "person", as such term is used in Sections 13(d) and 14(d) of the 1934 Act (other than (i) the shareholders of the Company as of the effective date of the Plan (the "Current Shareholders", such term to include their heirs or estates, or trusts or other entities the primary beneficiaries of which are the Current Shareholders or persons designated by them), (ii) the Company or any subsidiary of the Company, (iii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, or (iv) any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities without the prior written consent of the Committee or the Board; or (b) during any period of twenty-four (24) consecutive months, individuals who at the effective date of the Plan constitute the Board and any new director whose election by the Board or nomination for election by the Company shareholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) the shareholders of the Company approve a merger or consolidation of the Company with any other company (other than a wholly-owned subsidiary of the Company), other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) 50% or more of the combined voting power of voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined in Section 3.7.1(a) above with the exceptions noted in section 3.7.1(a)) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). 3.7.2 Upon the happening of a change in control: (a) notwithstanding any other provision of this Plan, any option or stock appreciation right then outstanding shall become fully vested and immediately exercisable upon the subsequent termination of employment of the grantee by the Company or its successors without cause within one year of such change in control unless the applicable plan agreement expressly provides otherwise; (b) to the fullest extent permitted by law, the Committee may, in its sole discretion, amend any plan agreement in such manner as it deems appropriate, including, without limitation, by amendments that advance the dates upon which any or all outstanding awards of any type shall terminate. 3.7.3 In the event of the proposed dissolution or liquidation of the Company, all outstanding awards will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, accelerate the date on which any award becomes exercisable or fully vested and/or declare that any award shall terminate as of a specified date. 3.7.4 In the event of a merger or consolidation ("merger") of the Company with or into any other corporation or entity ("successor corporation"), outstanding awards shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Committee determines, in the exercise of its sole discretion, to accelerate the date on which an award becomes exercisable or fully vested. In the absence of an assumption or substitution of awards, awards shall, to the extent not exercised, terminate as of the date of the closing of the merger. For the purposes of this Section 3.7.4, an award shall be considered assumed if, for every share of Common Stock subject thereto immediately prior to the merger, the grantee has the right, following the merger, to acquire the consideration received in the merger transaction by holders of shares of Common Stock (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the merger was not solely common stock of the successor corporation or its parent, the Committee may, with the consent of the successor corporation and the participant, provide for the consideration to be acquired pursuant to the award, for each share of Common Stock subject thereto, to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger. For purposes hereof, the term "merger" shall include any transaction in which another corporation acquires all of the issued and outstanding Common Stock of the Company. 3.8 Right of Discharge Reserved Nothing in the Plan or in any plan agreement shall confer upon any grantee the right to continue in the employ of the Company or any subsidiary or affect any right which the Company or any subsidiary may have to terminate such employment. 3.9 Nature of Payments 3.9.1 Any and all grants of awards and issuances of shares of Common Stock under the Plan shall be in consideration of services performed for the Company by the grantee. 3.9.2 All such grants and issuances shall constitute a special incentive payment to the grantee and shall not be taken into account in computing the amount of salary or compensation of the grantee for the purpose of determining any benefits under any pension, retirement, profit-sharing, bonus, life insurance or other benefit plan of the Company or of any subsidiary or under any agreement with the grantee, unless such plan or agreement specifically provides otherwise. 3.10 Non-Uniform Determinations The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Plan agreements, as to (a) the persons to receive awards under the Plan, (b) the terms and provisions of awards under the Plan and (c) the treatment of leaves of absence pursuant to Section 1.6.4. 3.11 Other Payments or Awards Nothing contained in the Plan shall be deemed in any way to limit or restrict the Company from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. 3.12 Section Headings The section headings contained herein are for the purpose of convenience only and are not intended to define or limit the contents of the sections. 3.13 Effective Date and Term of Plan 3.13.1 The Plan was adopted by the Board on May 28, 1998 (the "effective date"), subject to approval by the Company's shareholders. All awards under the Plan prior to such shareholder approval are subject in their entirety to such approval. If such approval is not obtained prior to the first anniversary of the date of adoption of the Plan, the Plan and all awards thereunder shall terminate on that date. 3.13.2 Unless sooner terminated by the Board, the provisions of the Plan respecting the grant of incentive stock options shall terminate on the day before the tenth anniversary of the effective date of the Plan, and no incentive stock option awards shall thereafter be made under the Plan. All awards made under the Plan prior to its termination shall remain in effect until such awards have been satisfied or terminated in accordance with the terms and provisions of the Plan and the applicable plan agreements. 3.14 Governing Law All rights and obligations under the Plan shall be construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of laws. EX-23.1 7 CONSENT OF DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-72130, 33-58362 and 333-3846 of Genta Incorporated on Form S-3 and Registration Statement No. 33-85887 of Genta Incorporated on Form S-8 of our report dated April 15, 1999 with respect to the consolidated financial statements of Genta Incorporated and subsidiaries, appearing in this Annual Report on Form 10-K for the year ended December 31, 1998 (which report expresses an unqualified opinion and includes an explanatory paragraph which indicates that there are matters that raise substantial doubt about the Company's ability to continue as a going concern). DELOITTE & TOUCHE LLP Boston, Massachusetts April 15, 1999 EX-23.2 8 CONSENT OF DELOITTE & TOUCHE EXPERTA LTD INDEPENDENT AUDITORS'S CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-72130, 33-58362 and 33-33846 of Genta Incorporated on Form S-3 and Registration Statement No. 33-85887 of Genta Incorporated on Form S-8 of our report dated April 15, 1999, with respect to the financial statements of Genta Jago Technologies B.V., appearing in this Annual Report on Form 10-K of Genta Incorporated for the year ended December 31, 1998 (which report expressed an unqualified opinion and includes an explanatory paragraph which ibdicates that there are matters that raise substantial doubt about the Company's ability to continue as a going concern). DELOITTE & TOUCHE EXPERTA LTD. Basel, Switzerland April 15, 1999 EX-23.3 9 CONSENT OF ERNST & YOUNG LLP CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-3 and S-8 of our reports dated June 18, 1998 with respect to the consolidated financial statements of Genta Incorporated and the financial statements of Genta Jago Technologies B.V. included in the Genta Incorporated Annual Report on Form 10-K for the year ended December 31, 1998. ERNST & YOUNG LLP San Diego, California April 15, 1999 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,566,288 992,372 0 0 0 5,937,364 148,245 421,887 7,551,293 2,308,256 0 0 634 10,426 2,959,019 7,551,293 0 105,087 0 6,683,123 0 0 8,661 (8,218,556) 0 (6,845,801) (739,965) 0 0 (8,218,556) (1.17) 0
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