-----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, MFm+FuHEBihPo+3ggnwNeu56RVRjjVeUi4m7NDwf0qmqPwjsHpbWgflZ1WJYdEkd ZGgqB5utBBVOMZQsCu/eXg== 0000950135-00-001832.txt : 20000331 0000950135-00-001832.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950135-00-001832 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENTA INCORPORATED /DE/ CENTRAL INDEX KEY: 0000880643 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [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: 586204 BUSINESS ADDRESS: STREET 1: 99 HAYDEN AVE STREET 2: SUITE 200 CITY: LEXINGTON STATE: MA ZIP: 02421 BUSINESS PHONE: 7818605150 MAIL ADDRESS: STREET 1: 99 HAYDEN AVE STREET 2: SUITE 200 CITY: LEXINGTON STATE: MA ZIP: 02421 10-K 1 GENTA INCORPORATED 1 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, 1999 / / 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 INCORPORATION OR ORGANIZATION) (IRS EMPLOYER 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 $270,069,748 as of March 10, 2000. For purposes of determining this number, 7,874,769 shares of common stock held by affiliates are excluded. As of March 10, 2000, the registrant had 28,649,365 shares of Common Stock outstanding. As of March 10, 2000, 555 persons held common stock of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Certain provisions of the registrant's definitive proxy statement to be filed not later than May 1, 2000 pursuant to Regulation 14A are incorporated by reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K. 2 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. 2 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 in the area of cancer. In late 1995, a Phase 1/2A 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 ("IND") application 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 1 trial was initiated in the United States at the Memorial Sloan-Kettering Cancer Center ("MSKCC") in New York City using G3139 in patients diagnosed with various types of cancer and was followed by a Phase 2A 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. In 1999, the Company entered into a Cooperative Research and Development Agreement ("CRADA") with the National Cancer Institute ("NCI"), acquired Androgenics Technologies, Inc., a company with license rights to a series of compounds that inhibit the growth of prostate cancer cells, granted fast-track designation by the FDA to its bcl-2 antisense compound, G3139, for use in combination with Dacarbazine (DTIC) for treatment of advanced malignant melanoma and initiated three clinical trials sponsored by the NCI. The Company had 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, which was sold in 1999. 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 New Drug Application ("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. 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 its wholly owned subsidiary Promega Biosciences, Inc. ("Promega") acquired substantially all of the assets and assumed certain liabilities of JBL. JBL has been reported as a discontinued operation in the accompanying consolidated financial statements. The closing of the sale of JBL was completed on May 10, 1999. 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 of Genta Jago. 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 3 4 as set forth in such interim agreement. In the first quarter 2000, the Company received $689,500 from SkyePharma as a royalty payment based on SkyePharma's agreement with Elan Pharmaceuticals for the sale of Naproxen. In August 1999, Genta acquired Androgenics Technologies, Inc., ("Androgenics") a company with license rights to a series of compounds invented at the University of Maryland, Baltimore to treat prostate cancer. These compounds have the potential to broaden Genta's product portfolio of drugs. Effective December 1, 1999, Kenneth K. Kasses, Ph.D., resigned as President, Chief Executive Officer and Chairman of the Board of Directors of the Company. Also effective December 1, 1999, the Company appointed Raymond P. Warrell Jr., M.D. to serve as President and Chief Executive Officer and elected Mark C. Rogers, M.D. to serve as Chairman of the Board of Directors of the Company. In 1998, the Company completed the closure of its research and development facilities in San Diego, California and in the second quarter of 1999 moved its headquarters from San Diego, California, to Lexington, Massachusetts. SUMMARY OF BUSINESS AND RESEARCH AND DEVELOPMENT PROGRAMS The Company is currently focusing most of its research and product development efforts on Genta's lead anti-bcl-2 molecule, G3139. The Androgenics program is in early preclinical development. The Company is actively seeking additional products, technologies and alliances to expand its development programs. ANTICODE(TM) BRAND OF ANTISENSE OLIGONUCLEOTIDE PROGRAMS Oligonucleotides represent a new 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, thereby blocking or controlling production of disease-related proteins. Because of their highly selective binding properties, the Company believes that Anticode(TM) oligonucleotides should not interfere with the function of normal cells, and therefore should elicit fewer side effects than traditional drugs. Oligonucleotide drugs may attack a disease at one of two levels. Our 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. 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 advanced generation Anticode(TM) antisense oligonucleotides, and one of these approaches is currently in preclinical development. Management believes that the Company has the ability to acquire 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. There can be no assurance that such supplier will continue satisfactorily to provide the requisite raw materials. See "MD&A -- Certain Trends and Uncertainties -- The Raw Materials for Our Products are Produced by a Limited Number of Suppliers." 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 -- We Cannot Market and Sell Our Products in the United States or in Other Countries if We Fail to Obtain the Necessary Regulatory Approvals" and "Clinical Trials are Costly and Time Consuming and are Subject to Delays." 4 5 Bcl-2 Gene Target The bcl-2 gene is a proto-oncogene and a major inhibitor of the natural process the body uses to eliminate genetically damaged cancerous cells, which is called apoptosis (programmed cell death). The protein produced by this gene has two known critical functions in the progression of cancer: it creates a survival advantage of malignant over normal cells, and it 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. This targeted reduction of the bcl-2 protein may facilitate the natural process of apoptosis to kill the cancer cell. High levels of bcl-2 are associated with a poor clinical prognosis in many solid tumors and hematological cancers such as lymphoma, leukemia, melanoma, multiple myeloma, lung, colon, 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. Preclinical studies showed that an anti-bcl-2 oligonucleotide cured a lymphoma-like disease induced by the injection of human B-cell lymphoma cells in immunodeficient mice. Anti-bcl-2 Anticode(TM) oligonucleotides have also 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, G3139 administered with Dacarbazine was reported to produce 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 1/2A 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. Other than mild irritation at the site of the subcutaneous infusion in most of the patients and 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. Four of nine patients observed showed improvements in their disease and in one patient the tumor had completely disappeared. Of the 21 patients treated to date, three suffered what were considered to be serious drug-related 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 re-challenged at a lower dose without any untoward event. The Company filed an IND, with the FDA in December 1996. The Company initiated several clinical trials in 1998 and 1999, and on-going trials are summarized in the table below. Additional trials are also under review. 5 6 STATUS OF G3139 CLINICAL TRIALS
TRIAL LOCATION/INVESTIGATOR STATUS INDICATION TREATMENT --------------------------- ------ ---------- --------- Royal Marsden Hospital Phase 2 Lymphoma G3139 with Rituxan David Cunningham, MD in Progress London, England MSKCC Phase 1/2 G3139 with Taxotere(R) Howard Scher, MD in Progress Prostate Cancer New York, NY University of Vienna Phase 2 G3139 with DTIC Burkhard Jansen, MD in Progress Melanoma Vienna, Austria Lombardi Cancer Center Phase 1/2 Breast Cancer G3139 with Taxotere(R) Marc Lippmann, MD Washington, DC Institute of Drug Development Phase 2 Prostate Cancer G3139 with Taxotere(R) Anthony Tolcher, MD San Antonio, TX Institute of Drug Development Phase 2 Colo-rectal Cancer G3139 with Camptosar(R) Anthony Tolcher, MD San Antonio, TX Case Western University Timothy Spiro, MD Cleveland, OH University of Chicago Phase 2 Small Cell Lung Cancer G3139 with Taxotere(R) Charles Rudin, MD Chicago, IL Ohio State University Gregg Otterson, MD Columbus, OH Ohio State University Phase 1 Acute Leukemia G3139 Guido Marcucci, MD Fludara(R); Cytosine(R) Columbus, OH
In May 1999, the Company signed a CRADA with the NCI regarding additional Phase 2 clinical trials. The Company will collaborate with the NCI on the design of such clinical studies and the selection of tumor targets. Under the arrangement, NCI will 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 -- We Cannot Market and Sell our Products in the United States or in Other Countries if we Fail to Obtain the Necessary Regulatory Approvals and Clinical Trials are Costly and Time Consuming and are Subject to Delays." On March 31, 1998, the United States Patent and Trademark Office ("USPTO") 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. In July 1999, USPTO issued a notice of allowance for claims covering the use of antisense targeted to the bcl-2 gene, which included Genta's lead drug candidate G3139, to sensitize or kill cancer cells with BCL-2 antisense, 6 7 either alone or in combination with chemotherapy agents. See "MD&A -- Certain Trends and Uncertainties -- We may be Unable to Obtain or Enforce Patents and Proprietary Rights to Protect our Business." 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 methylphosphonate 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, 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 Complaint in a lawsuit brought by Johns Hopkins against the Company in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins alleged in the Complaint that the Company had breached the Johns Hopkins Agreement and owed it licensing royalty fees and related expenses in the amount of $308,832; which amount included, $287,671 representing claims made by the Ts'O/Miller Partnership pursuant in a Summons and Complaint received by the Company's statutory process agent on August 10, 1998. Johns Hopkins also alleged 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. 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. 7 8 In August 1999, the Company settled lawsuits with Johns Hopkins and the Ts'o/Miller Partnership for $380,000. As part of the settlement of claims, the Company agreed to pay $180,000 in cash over a six-month period of which $52,500 remains outstanding as of December 31, 1999 and issued 69,734 shares of Common Stock to Johns Hopkins, acting on its behalf and on behalf of Ts'o/Miller Partnership, sufficient to provide a value of $200,000. GENTA JAGO As previously mentioned, on March 4, 1999, 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 of Genta Jago. 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. In the first quarter 2000, the Company received $689,500 from SkyePharma as a royalty payment based on SkyePharma's agreement with Elan Pharmaceuticals, for the sale of Naproxen, of which $187,500 was attributable to 1999. 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. 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. Genta exercised the Expansion Option in 1995. 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 8 9 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. 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 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 formulation development by SkyePharma. In December 1997, a competitor of the Company, Elan Pharmaceuticals, received approval of its 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 -- Our Business will Suffer if We Fail to Compete Effectively with our Competitors and to Keep Up with New Technologies." 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 9 10 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 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 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 or 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 and 1999. 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 it will continue to do so in the future. The Company recorded research and development expenses of $3.3 million, $2.1 million and $5.3 million during 1997, 1998 and 1999, respectively, of which approximately $50,000, $50,000 and zero, respectively, were funded pursuant to collaborative research and development agreements and of which approximately $0.3 million, $0.1 million and zero, 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 acquired substantially all of the assets and assumed certain liabilities of JBL. The closing of the sale of JBL was completed on May 10, 1999. The accompanying financial information therefore reflects JBL as a discontinued operation for all periods presented. 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. 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. A number of Fortune 500 companies use JBL products as raw material in the production of a final product. JBL markets its products to over 100 purchasers in the pharmaceutical and diagnostic industries. JBL 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 contract-manufacturing basis by a third party supplier and is evaluating the establishment of affiliate relationships 10 11 with third parties for the long-term manufacture of oligonucleotides. See "MD&A - -- Certain Trends and Uncertainties -- The Raw Materials of our Products are Produced by a Limited Number of Suppliers." GENTA EUROPE During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a wholly-owned subsidiary of the Company, received approximately 5.4 million French Francs (as of December 31, 1999, approximately $826,600) 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. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that the Company remains liable for FF4,187,423 (as of December 31, 1999, approximately $641,000) and is required to pay this amount immediately. The Company does not believe that under the terms of the ANVAR Agreement ANVAR is entitled to request early repayment. ANVAR notified Genta Incorporated that it was responsible as a guarantor of the note for the repayment. Genta's legal counsel 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. In August 1999, Marseille Amenagement instituted legal proceedings against the Company at the Commercial Court in France, claiming alleged back rent payment of FF663,413 (as of December 31, 1999, approximately $101,500) and early termination payment of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court hearing has been scheduled for May 15, 2000. The Company is working with its counsel in France to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. On December 31, 1999, the Company has $574,800 of net liabilities of liquidated subsidiary recorded and, therefore, management believes no additional accrual is necessary. There can be no assurance that the Company will not incur material costs in relation to this claim. SALES AND MARKETING Genta Jago has secured collaborative agreements with three entities for the development and commercialization of selected controlled-release pharmaceuticals. See "Genta Jago -- Oral Controlled-Release Collaborative and Licensing Agreements." Genta Jago's collaborative agreements generally provide the collaborative partner exclusive rights to market and distribute the products in exchange for royalty payments to Genta Jago on product sales. Genta Jago's goal is to form additional collaborations to develop and market a number of its GEOMATRIX controlled-release products. There can be no assurance that any such potential product will be successfully developed or that any prospective collaborations or licensing arrangements will be entered into. 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 11 12 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-five patents have been issued; 22 in the United States (13 in 1998 and five in 1999) and 13 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 non-nucleotide 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, one issued in Japan 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. 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. 12 13 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 -- We May be Unable to Obtain or Enforce Patents and Other Proprietary Rights to Protect our Business and We Could Become Involved in Time Consuming and Expensive Patent Litigation and Adverse Decisions in Patent Litigation Could Cause us to Incur Additional Costs and Experience Delays in Bringing New Drugs to Market." 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 pre-market 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 1, 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 2, 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 3, 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 2 trials. These trials are frequently referred to as "Phase 1/2A" 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 13 14 assurance that approvals will be granted on a timely basis, if at all, or if granted will cover all the clinical indications for which the Company is seeking approval or will not contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use. In circumstances where a company intends to develop and introduce a novel formulation of an active drug ingredient already approved by the FDA, clinical and preclinical testing requirements may not be as extensive. Limited additional data about the safety and/or effectiveness of the proposed new drug formulation, along with chemistry and manufacturing information and public information about the active ingredient, may be satisfactory for product approval. Consequently, the new product formulation may receive marketing approval more rapidly than a traditional full NDA, although no assurance can be given that a product will be granted such treatment by the FDA. For clinical investigation and marketing outside the United States, the Company is or may be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. The Company's approach is to design its European clinical trial 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 1 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 was dependent upon there being no outstanding patent or non-patent exclusivity. 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 exclusivity. As compared to a NDA, an ANDA or a 505(b)(2) application typically involves reduced research and development costs. However, there can be no assurance that any such applications will be approved. Furthermore, the supply of raw materials must also be approved by the FDA. The Company is also subject to various foreign, federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use, manufacture, storage, handling and disposal of hazardous or potentially hazardous substances, including 14 15 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 -- We Cannot market and Sell our Products in the United States or in Other Countries if we Fail to Obtain the Necessary Regulatory Approvals." COMPETITION For many of their applications, the Company'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 -- Our Business Will Suffer if We Fail to Compete Effectively with Our Competitors and to Keep up with New Technologies." 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. -- Our Business will Suffer if we Fail to Compete Effectively with Our Competitors and to Keep up with New Technologies." Accordingly, the relative speed with which Genta and Genta Jago can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market are expected to be important competitive factors. The Company expects that competition among products approved for sale will be based, among other things, on product efficacy, safety, reliability, availability, price, patent position and sales, marketing and distribution capabilities. The development by others of new treatment methods could render the Company's and Genta Jago's products under development non-competitive or obsolete. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes and secure sufficient capital resources for the often substantial period between technological conception and commercial sales. See "MD&A -- Certain Trends and Uncertainties -- Need for and Dependence on Qualified Personnel. We may be Unable to Obtain or Enforce Patents and Other Proprietary Rights to Protect our Business and our Business will Suffer if we Fail to Obtain Timely Funding." 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 March 1, 2000, Genta had nine employees, three of whom held doctoral degrees. Four employees were engaged in development activities and five were in administration. Most of the management and professional employees of the Company have had prior experience and positions with pharmaceutical and biotechnology 15 16 companies. Genta believes it maintains satisfactory relations with its employees. See "MD&A -- Certain Trends and Uncertainties -- Need for and Dependence on Qualified Personnel." ITEM 2. PROPERTIES 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. In April 1999, the Company moved its headquarters to Lexington, Massachusetts, and entered into a two-year sub-lease effective April 1, 1999 for 2,400 square feet. In February 2000, the Company received notice of lease cancellation by the overtenant, effective August 31, 2000. The Company is currently searching for new lease space. Genta Europe 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 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. In August 1999, Marseille Amenagement instituted legal proceedings against the Company at the Commercial Court in France, claiming alleged back rent payment of FF663,413 (as of December 31, 1999, approximately $101,500) and early termination payment of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court hearing has been scheduled for May 15, 2000. The Company is working with its counsel in France to achieve a mutually satisfactory resolution. 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 alleged in the Complaint that the Company had breached the Johns Hopkins Agreement (see "Business -- Anticode(TM) Brand of Antisense Oligonucleotide Programs -- Oligonucleotide Collaborative and Licensing Agreements -- Ts'o/Miller/Hopkins") and owed it licensing royalty fees and related expenses in the amount of $308,832; of which amount included, $287,671 representing claims made by the Ts'o/Miller Partnership pursuant in a Summons and Complaint received by the Company's statutory process agent on August 10, 1998. Johns Hopkins also alleged 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. As of December 31, 1998, the Company had accrued $635,000 relating to the estimated cost to settle these claims. In August 1999, the Company settled lawsuits with Johns Hopkins and the Ts'o/Miller Partnership for $380,000. As part of the settlement of claims, the Company agreed to pay $180,000 in cash over a six-month period of which $52,500 remains outstanding as of December 31, 1999 and issued 69,734 shares of Common Stock to Johns Hopkins, acting on its behalf and on behalf of Ts'o/Miller Partnership, sufficient to provide a value of $200,000. The stock was sold by a broker under an agreement between the Company and Johns Hopkins, with the proceeds from such sales delivered to Johns Hopkins. The excess of the previously accrued settlement costs over the actual settlement cost has been recorded as a reduction to general and administrative expenses in 1999. During 1995, Genta Europe received approximately 5.4 million French Francs (as of December 31, 1999, approximately $826,600) of funding in the form of a loan from the French government agency L'Agence Nationale de Valorisation de la Recherche ("ANVAR") towards research and development activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta Europe and the Company. In October 1996, as part of the Company's restructuring program, Genta Europe terminated all scientific personnel. ANVAR asserted, in a letter dated February 13, 1998, that Genta Europe was not in compliance with the ANVAR Agreement, and that ANVAR might request the immediate repayment of such loan. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that the Company remains liable for FF4,187,423 (as of December 31, 1999, approximately $641,000) and is required to pay this amount immediately. The Company does not believe that under the terms of the ANVAR Agreement ANVAR is entitled to request early repayment. ANVAR notified the Company that it was responsible as a guarantor of the note for the repayment. The Company's legal counsel in Europe has again notified ANVAR 16 17 that the Company does not agree that the note is payable. The Company is working with ANVAR to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. There can be no assurance that the Company will not incur material costs in relation to these terminations and/or assertions of default or liability. On June 30, 1998, Marseille Amenagement, a company affiliated with the city of Marseilles, France, filed suit in France to evict Genta Europe from its facilities in Marseilles and to demand payment of alleged back rent due and of a lease guarantee for nine years' rent. Following the filing of this claim and in consideration of the request for repayment of the loan from ANVAR, Genta Europe's Board of Directors directed management to declare a "Cessation of Payment." Under this procedure, Genta Europe ceased any operations and terminated its only employee. A liquidator was appointed by the Court to take control of any assets of Genta Europe and to make payment to creditors. In December 1998, the Court in Marseilles dismissed the case against Genta Europe and indicated that it had no jurisdiction against Genta Incorporated. In August 1999, Marseille Amenagement instituted legal proceedings against the Company at the Commercial Court in France, claiming alleged back rent payment of FF663,413 (as of December 31, 1999, approximately $101,500) and early termination payment of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court hearing has been scheduled for May 15, 2000. The Company is working with its counsel in France to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. On December 31, 1999, the Company has $574,800 of net liabilities of liquidated subsidiary recorded and, therefore, management believes no additional accrual is necessary. There can be no assurance that the Company will not incur material costs in relation to this claim. In October 1996, JBL retained a chemical consulting firm to advise it with respect to an incident of soil and groundwater contamination (the "Spill"). Sampling conducted at the JBL facility revealed the presence of chloroform and perchloroethylenes ("PCEs") in the soil and groundwater at this site. A semi-annual groundwater-monitoring program is being conducted, under the supervision of the California Regional Water Quality Control Board, for purposes of determining whether the levels of chloroform and PCEs have decreased over time. The results of the latest sampling conducted by JBL show that PCEs and chloroform have decreased in all but one of the monitoring sites. Based on an estimate provided to the Company by the consulting firm, the Company accrued $65,000 in 1999 relating to remedial costs. Prior to 1999, such costs were not estimable, and therefore, no loss provision had been recorded. The company has agreed to indemnify Promega in respect of this matter. The Company believes that any costs stemming from further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. JBL received notice on October 16, 1998 from Region IX of the Environmental Protection Agency ("EPA") that it had been identified as a potentially responsible party ("PRP") at the Casmalia Disposal Site, which is located in Santa Barbara, California. JBL has been designated as a de minimis PRP by the EPA. Based on volume amounts from the EPA, the Company concluded that it was probable that a liability had been incurred and accrued $75,000 during 1998. In 1999, the EPA estimated that the Company would be required to pay approximately $63,200 to settle their potential liability. The Company expects to receive a revised settlement proposal from the EPA by the second quarter 2000. While the terms of the settlement with the EPA have not been finalized, they should contain standard contribution protection and release language. The Company believes that any costs stemming from further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. The Company has agreed to indemnify Promega in respect of this matter. 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, 1999. 17 18 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. In February 2000, the Company filed an application to Nasdaq to resume trading on the Nasdaq National Market. 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 ---- --- 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 5/32 Second Quarter.................................................. 4 1/16 1 15/16 Third Quarter................................................... 2 3/32 2 Fourth Quarter.................................................. 8 1/4 2 7/16
(b) Holders There were 555 holders of record of the Company's common stock as of March 10, 2000. (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 D convertible preferred stocks. The Company currently intends to retain its earnings, if any, after payment of dividends on outstanding shares of 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, LP (collectively the "Aries Funds"), of Convertible Notes and warrants to purchase common stock ("Bridge Warrants"). The Convertible Notes, together with accrued interest thereon, were converted pursuant to their terms into an aggregate of 65,415 shares of Series D Preferred Stock, which in turn are convertible, at $ 0.8848 per share, into 7,393,203 shares of common stock. The Bridge Warrants permit the purchase of up to an aggregate of 7,741,935 shares of Common Stock at an exercise price of $0.3875 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 -- There Currently Exists Certain Interlocking Relationships and 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 62,035 shares of Common Stock exercisable at $ 2.015 per share, subject to adjustment upon the occurrence of certain events. 18 19 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 of 1933, as amended ("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 ("Class D Warrants"). 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 $0.8848 and $0.8754 per share of common stock, respectively, 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 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. In November 1999, the Company issued warrants to acquire 550,000 shares of Common Stock in full satisfaction of its obligation to file and have declared effective a shelf registration statement pursuant to the Note and Warrant Purchase Agreement. 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 Designations of the Series D Preferred Stock. In addition, through the Letter Agreements, the Company agreed to issue to such holders warrants to purchase at $0.8754 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 December 1999, the Company raised gross proceeds of approximately $11.4 million (approximately $10.4 million net of placement costs) through the private placement of 114 units at $100,000 per unit or $3.00 per share. Each unit sold in the private placement consisted of (i) 33,333 shares of Common Stock, par value $.001 per share, and (ii) warrants to purchase 8,333 shares of the Company's common stock at any time prior to the fifth anniversary of the final closing (the "Warrants"). The Warrants are convertible at the option of the holder into shares of Common Stock at an initial conversion rate equal to the average closing bid price for 20 days preceding the closing date of the private placement, or $4.83 per share (subject to antidilution adjustment). In connection with the private placement, the placement agent -- Paramount Capital, Inc. -- received cash commissions equal to 7.5% of the gross sales price, reimbursable expenses up to $125,000 and warrants to purchase up to 10% of the units sold in the private placement for 110% of the offering price per unit. See "MD&A -- Certain Trends 19 20 and Uncertainties -- If We Cease Doing Business and Liquidate our Assets, We are Required to Distribute Proceeds to Holders of our Preferred Stock Before we Distribute Proceeds to Holders of our Common Stock and Volatility of Stock Price; Market Overhang From Convertible Securities and Warrants." 20 21 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (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 ......................... 1,125 -- 50 50 -- -------- -------- -------- -------- -------- 1,125 1,932 400 105 -- -------- -------- -------- -------- -------- Costs and expenses Research and development ....................................... 9,764 4,592 3,309 2,116 5,334 Charge for acquired in-process research and development ........ 4,762 -- -- -- -- General and administrative ..................................... 4,493 5,096 6,132 4,020 5,999 LBC Settlement ................................................. -- -- 600 547 -- -------- -------- -------- -------- -------- 19,019 9,688 10,041 6,683 11,333 -------- -------- -------- -------- -------- Loss from operations .............................................. (17,894) (7,756) (9,641) (6,578) (11,333) Equity in net income (loss) of joint venture ...................... (6,913) (2,712) (1,193) (132) 2,449 Net loss of liquidated foreign subsidiary ......................... -- -- -- (98) -- Other income (expense), net ....................................... 7 (745) (2,850) (38) 22 -------- -------- -------- -------- -------- Net loss from continuing operations ............................... $(24,800) $(11,213) $(13,684) $ (6,846) $ (8,862) Loss from discontinued operations ................................. (566) (879) (1,741) (739) (189) Gain on sale of discontinued operations ........................... -- -- -- -- 1,607 -------- -------- -------- -------- -------- Net loss .......................................................... (25,366) (12,092) (15,425) (7,586) (7,444) Preferred Stock dividends ......................................... (3,551) (4,873) (17,853) (633) (10,085) -------- -------- -------- -------- -------- Net loss applicable to common shares .............................. $(28,917) $(16,965) $(33,278) $ (8,219) $(17,529) ======== ======== ======== ======== ======== Continuing operations ............................................. $ (14.53) $ (5.39) $ (7.13) $ (1.06) $ (1.07) Discontinued operations ........................................... (0.29) (0.30) (0.39) (0.11) 0.08 -------- -------- -------- -------- -------- Net loss per share (1) ............................................ $ (14.82) $ (5.69) $ (7.52) $ (1.17) $ (0.99) ======== ======== ======== ======== ======== Weighted average shares used in computing net loss per share ...... 1,952 2,983 4,422 7,000 17,784 Deficiency of earnings to meet combined fixed charges and preferred stock dividends (2) ........................................ $(28,917) $(16,965) $(33,278) $ (8,219) $(17,529)
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments ............... $ 262 $ 532 $ 8,456 $ 2,458 $ 10,101 Working capital (deficit) ...................................... (2,981) (3,816) 5,807 3,629 9,434 Total assets .................................................... 11,351 8,806 15,079 7,551 12,228 Notes payable and capital lease obligations, less current portion 2,334 118 -- -- -- Total stockholders' equity ...................................... 4,258 4,074 9,425 2,959 10,206
(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 sale of JBL in May 1999. See Note 2 of the Notes to Consolidated Financial Statements. 21 22 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, 1999, the Company has incurred a cumulative net loss of $139.5 million. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in revenues, expenses and losses will continue, although mitigated by recent developments. 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, primarily, but not exclusively, focused on its Anticode(TM) (antisense) products. To this end, the Company 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 was completed on May 10, 1999. Following the sale of JBL, the Company is operating 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. In August 1999, the Company acquired Androgenics Technologies, Inc., a wholly owned entity of the Company's majority stockholder. Androgenics is a company with license rights to a series of compounds invented at the University of Maryland, Baltimore to treat prostate cancer. As consideration for the acquisition, the Company paid $132,000 in cash (including reimbursements of pre-closing expenses and on-going research funding) and issued warrants (with exercise prices ranging from $1.25 to $2.50 per share) to purchase an aggregate of 1,000,000 shares of Common Stock, 90% of which will not become exercisable until the successful conclusion of certain development milestones, ranging from the initial clinical patient trial through the submission of an application for marketing authorization. The Company has recently completed a private placement for $11.4 million; however, its ability to continue operations beyond the first quarter of 2001 depends upon the Company's success in obtaining additional funding. There can be no assurance 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 Results of Operations and elsewhere in this Annual Report on Form 10-K. The Company does not undertake to update any forward-looking statements. 22 23 RESULTS OF OPERATIONS The following discussion of results of operations relates to the Company's continuing business. Operating revenues totaled $0.4 million in 1997 compared to $0.1 million in 1998 and zero in 1999. The changes in operating revenue have largely reflected the Company's lessened involvement in Genta Jago development activities. Related party contract revenues decreased from $350,000 in 1997, to $55,000 in 1998 and zero in 1999. 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 has reduced 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 of Genta Jago. 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. The completion of the sale of the assets of JBL resulted in a significant decrease in ongoing revenues, as all of the Company's historical product sales have been attributable to JBL. Collaborative research and development revenues were $50,000 annually in 1997 and 1998 and zero in 1999, 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 and -- Other Anticode Agreements." The above agreement has expired. Costs and expenses totaled $10.0 million in 1997 compared to $6.7 million in 1998 and $11.3 million in 1999. Primarily, the overall decrease between 1997 and 1998 reflects reduced research and development and general and administrative charges offset by non-recurring 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. The increase from 1998 to 1999 reflects increases in clinical trials and related drug supply, salaries and non-cash stock compensation charges. 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 are 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 $3.3 million in 1997, $2.1 million in 1998, and $5.3 million in 1999. The decrease in research and development expenses between 1997 and 1998 is primarily attributable to the Company's re-deployment of certain employees, and related workforce reductions implemented in 1997 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 1997 through 1999. These amounts were $350,000 in 1997, $55,000 in 1998 and zero in 1999. The increase between 1998 and 1999 is due primarily to expanded clinical trials and non-cash stock compensation charges of $1,128,900. It is anticipated that research and development expenses will continue to 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. 23 24 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 $6.1 million in 1997, $4.0 million in 1998, and $6.0 million in 1999. The $2.1 million decrease from 1997 to 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. The increase from 1998 to 1999 reflects primarily non-cash stock compensation charges of $1,945,400 and accrual for severance due to change in management. 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 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. The Company recorded charges to general and administrative expenses of $600,000, $577,000 and $523,400 in 1997, 1998 and 1999, respectively, to account for the carrying 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 $1.2 million in 1997, compared to $0.1 million in 1998 and a net gain of $2.4 million in 1999. The decrease in the Company's equity in net loss of its joint venture during 1998 relative to 1997 is largely attributable to the fact that development efforts became 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. The increase in equity in net income of joint venture from 1998 to 1999 is due to an agreement signed on March 4, 1999, between the Company and SkyePharma (on behalf of itself and its affiliates) entered into an interim agreement (the "Interim JV Agreement") pursuant to which the Company was released from all liability relating to unpaid development costs and funding obligations of Genta Jago, the joint venture between the Company and SkyePharma. SkyePharma agreed to be responsible for substantially all the obligations of the joint venture to third parties and for the further development of the joint venture's products, with any net income resulting therefrom to be allocated in agreed-upon percentages between the Company and SkyePharma. As a result of the Interim JV Agreement, the Company wrote off its liability relative to the Company's recorded deficit in the joint venture and, as such, recorded a gain of approximately $2.3 million for the three months ended March 31, 1999. Also, according to revised revenue sharing agreements, the Company reported approximately $164,500 for its proportionate share of net income of Genta Jago in relation to SkyePharma's royalty agreement, with Elan Pharmaceuticals, for Genta Jago's product, Naproxen. 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 during each period. 24 25 Interest expense was $3.3 million in 1997, $8,700 in 1998 and $ 200 in 1999. In consideration of a beneficial conversion feature on a debt instrument, 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 Company 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 a beneficial conversion feature on a convertible equity security, 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. RECENT ACCOUNTING PRONOUNCEMENTS 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, 2000. 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 $134.9 million through December 31, 1999, including net proceeds of $10.4 million raised in 1999 and $17.0 million raised during 1997. At December 31, 1999, the Company had cash, cash equivalents and short-term investments totaling $10.1 million compared to $2.5 million at December 31, 1998. Management believes that at the current rate of spending, the Company will have sufficient cash funds to maintain its present operations through December 31, 2000. The Company will need substantial additional funds before it can expect to realize significant product revenue. 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. 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 financing, 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 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 -- Our Business Will Suffer if We Fail to Obtain Timely Funding." 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 acquired substantially all of the assets and assumed certain liabilities of JBL for $4.8 million in cash, a $1.2 million promissory note, and pharmaceutical development services to be provided to Genta. 25 26 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. 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 credits, which amount fully satisfied what the Company believes is the loan commitment established by the parties through December 31, 1998 and in relation to the interim agreement signed on March 4, 1999. 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. See "MD&A -- Certain Trends and Uncertainties - -- Claims of Genta's Default Under Various Agreements." On March 4, 1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into the 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 of Genta Jago 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. Accordingly, the Company reversed its $2.3 million deficit in joint venture and effectively forgiving payment of working capital loans to Genta Jago. In August 1999, the Company acquired Androgenics Technologies, Inc. ("Androgenics"), a wholly owned entity of the Company's majority stockholder. As consideration for the acquisition, the Company paid $132,000 in cash (including reimbursements of pre-closing expenses and on-going research funding) and issued warrants (with exercise prices ranging from $1.25 to $2.50 per share) to purchase an aggregate of 1,000,000 shares of Common Stock, 90% of which will not become exercisable until the successful conclusion of certain development milestones, ranging from the initial clinical patient trial through the submission of an application for marketing authorization. The acquisition was accounted for as a transfer between companies under common control. The cash and warrants were issued in exchange for 100% of the shares of Androgenics and licensed technology and the assumption of a research and development agreement with the University of Maryland, Baltimore. The 1,000,000 warrants were accounted for as a deemed distribution based on their fair value of $440,500. The $132,000 in cash was also accounted for as a deemed distribution. The assets and liabilities of Androgenics as of December 31, 1999 and the results of its operations for the year ended are immaterial. Through December 31, 1999, 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 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 and 1999, 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 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. A semi-annual groundwater-monitoring program is being conducted, under the supervision of the California Regional Water Quality Control Board, for purposes of determining whether the levels of chloroform and PCEs have decreased over time. The results of the latest sampling conducted by JBL show that PCEs and chloroform have decreased in all but one of the monitoring sites. Based on an estimate provided to the Company by the consulting firm, the Company accrued $65,000 in 1999, relating to remedial costs. Prior to 1999, such costs were not estimable, and therefore, no loss provisions had been recorded. Pursuant to the JBL agreement, the Company has agreed to indemnify Promega in respect of this matter. 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 26 27 in Santa Barbara, California. JBL has been designated as a de minimis PRP by the EPA. Based on volume amounts from the EPA, the Company concluded that it was probable that a liability had been incurred and accrued $75,000 during 1998. In 1999, the EPA estimated that the Company would be required to pay approximately $63,200 to settle their potential liability. The Company expects to receive a revised settlement proposal from the EPA by the second quarter 2000. While the terms of a settlement with the EPA have not been finalized, they should contain standard contribution, protection and release language. 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 -- We Cannot Market and Sell our Products in the United States or in Other Countries if We Fail to Obtain the Necessary Regulatory Approvals." The Company believes that any costs associated with further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. The Company has agreed to indemnify Promega in respect of this matter. In December 1999, the Company raised gross proceeds of approximately $11.4 million (approximately $10.4 million net of placement costs) through the private placement of 114 units. Each unit sold in the private placement consists of (i) 33,333 shares of Common Stock, par value $.001 per share, and (ii) warrants to purchase 8,333 shares of the Company's common stock at any time prior to the fifth anniversary of the final closing (the "Warrants"). The Warrants are convertible at the option of the holder into shares of Common Stock at an initial conversion rate equal to the market price of $4.83 per share (subject to antidilution adjustment). 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 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. 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 27 28 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 were 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 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. At December 31, 1999 each share of Series A Preferred Stock was convertible into 7.3825 shares of common stock. Terms of the Company's Series A Preferred Stock require the payment of dividends annually in amounts ranging from $3 per share per annum for the first year to $5 per share per annum in the third and fourth years. Dividends 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 redemption 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 28 29 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 -- If We Cease Doing Business and Liquidate our Assets, We are Required to Distribute Proceeds to Holders of our Preferred Stock Before we Distribute Proceeds to Holders of our Common Stock and Volatility of Stock Price; Market Overhang From Convertible Securities and Warrants." 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, $577,000 and $523,400 charge recorded in 1997, 1998 and 1999 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 The Company has acquired and installed new computer hardware and upgraded software in its facility. The total year 2000 project cost was $31,600 and has been completed. As a result of the modifications to existing software and conversions to new software, the Company experienced no significant operational problems for its computer systems related to the year 2000 date change. The Company will continue to monitor its mission critical computer application and those of its suppliers throughout the year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. 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. Our business will suffer if we fail to obtain timely funding. Our operations to date have consumed substantial amounts of cash. Based on our current operating plan, we believe that our available resources, including the proceeds from our recent private offering, will be adequate to satisfy our capital needs into the first quarter 2001. Our future capital requirements will depend on the results of our research and development activities, preclinical studies and bioequivalence and clinical trials, competitive and technological advances, and regulatory processes of the FDA and other regulatory authority. If our operations do not become profitable before we exhaust existing resources, we will need to raise substantial additional financing in order to continue our operations. We may seek additional financing through public and private resources, including debt or equity financing, or through collaborative or other arrangements with research institutions and corporate partners. We may not be able to obtain adequate funds for our operations from these sources when needed or on acceptable terms. If we raise additional capital by issuing equity, or securities convertible into equity, the ownership interest of existing Genta stockholders will be subject to further dilution and share prices may decline. If we are unable to raise additional financing, we will need to do the following: - - delay, scale back or eliminate some or all of our research and product development programs; - - license third parties to commercialize products or technologies that we would otherwise seek to develop ourselves; - - sell Genta to a third party; - - to cease operations; or - - declare bankruptcy. 29 30 Our products are in an early stage of development. Most of our 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 we have demonstrated the activity of Anticode(TM) oligonucleotide technology in model systems in vitro in animals, only one of these potential Anticode(TM) oligonucleotide products, G3139, has begun to be tested in humans. Results obtained in preclinical studies or early clinical investigations are not necessarily indicative of results that will be obtained in extended human clinical trials. Our products may prove to have undesirable and unintended side effects or other characteristics that may prevent our obtaining FDA or foreign regulatory approval for any indication. In addition, it is possible that research and discoveries by others will render our oligonucleotide technology obsolete or noncompetitive. Clinical trials are costly and time consuming and are subject to delays. Clinical trials are very costly and time-consuming. How quickly we are able to complete a clinical study depends upon several factors, including the size of the patient population, how easily patients can get to the site of the clinical study, and the criteria for determining which patients are eligible to join the study. Delays in patient enrollment could delay completion of a clinical study and increase its costs, and could also delay the commercial sale of the drug that is the subject of the clinical trial. Our commencement and rate of completion of clinical trials also may be delayed by many other factors, including the following: - inability to obtain sufficient quantities of materials used for clinical trials; - inability to adequately monitor patient progress after treatment; - unforeseen safety issues; - the failure of the products to perform well during clinical trials; and - government or regulatory delays. We cannot market and sell our products in the United States or in other countries if we fail to obtain the necessary regulatory approvals. The United States Food and Drug Administration and comparable agencies in foreign countries impose substantial premarket approval requirements on the introduction of pharmaceutical products through lengthy and detailed preclinical and clinical testing procedures and other costly and time-consuming procedures. Satisfaction of these requirements typically takes several years or more depending upon the type, complexity and novelty of the product. While limited trials of our products have produced favorable results, we cannot apply for FDA approval to market any of our products under development until the product successfully completes its preclinical and clinical trials. Several factors could prevent successful completion or cause significant delays of these trials, including an inability to enroll the required number of patients or failure to demonstrate adequately that the product is safe and effective for use in humans. If safety concerns develop, the FDA could stop our trials before completion. If we are not able to obtain regulatory approvals for use of our products under development, or if the patient populations for which they are approved are not sufficiently broad, the commercial success of our products could be limited. We cannot assure the commercial success of our products. Even if our products are successfully developed and approved by the FDA and corresponding foreign regulatory agencies, they may not enjoy commercial acceptance or success, which would adversely affect our business and results of operations. Several factors could limit our success, including: - possible limited market acceptance among patients, physicians, medical centers and third-party payors; - our inability to access a sales force capable of marketing the product; 30 31 - our inability to supply a significant amount of product to meet market demand; and - the number an relative efficacy of competitive products that may subsequently enter the market. In addition, it is possible that we, or our collaborative partners, will be unsuccessful in developing, marketing and implementing a commercialization strategy for our products. We may be unable to obtain or enforce patents and other proprietary rights to protect our business. Our success will depend to a large extent on our ability to (1) obtain U.S. and foreign patent or other proprietary protection for our technologies, products and processes, (2) preserve trade secrets and (3) operate without infringing the patent and other proprietary rights of third parties. Legal standards relating to the validity of patents covering pharmaceutical and biotechnological inventions and the scope of claims made under such patents are still developing. There is no consistent policy regarding the breadth of claims allowed in biotechnology patents. As a result, our ability to obtain and enforce patents that protect our drugs is highly uncertain and involves complex legal and factual questions. We have more than 100 U.S. and international patents and applications to aspects of oligonucleotide technology, which includes novel compositions of matter, methods of large-scale synthesis and methods of controlling gene expression. We may not receive any issued patents based on pending or future applications. Our issued patents may not contain claims sufficiently broad to protect us against competitors with similar technology. Additionally, our patents, our partners' patents and patents for which we have license rights may be challenged, narrowed, invalidated or circumvented. Furthermore, rights granted under our patents may not cover commercially valuable drugs or processes and may not provide us with any competitive advantage. We may have to initiate arbitration or litigation to enforce our patent and license rights. If our competitors file patent applications that claim technology also claimed by us, we may have to participate in interference or opposition proceedings to determine the priority of invention. An adverse outcome could subject us to significant liabilities to third parties and require us to cease using the technology or to license the disputed rights from third parties. We may not be able to obtain any required licenses on commercially acceptable terms or at all. The cost to us of any litigation or proceeding relating to patent rights, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because of their substantially greater resources. Uncertainties resulting from the initiation and continuation of any pending patent or related litigation could have a material adverse effect on our ability to compete in the marketplace. We rely on our collaborative arrangements with research institutions and corporate partners for development of our products. Our business strategy depend in part on our continued ability to develop and maintain relationships with leading academic and research institutions and independent researchers. The competition for such relationships is intense, and we can give no assurances that we will be able to develop and maintain such relationships on acceptable terms. We have entered into a number of collaborative relationships relating to specific disease targets and other research activities in order to augment our internal research capabilities and to obtain access to specialized knowledge and expertise. The loss of any of these collaborative relationships could have a material adverse effect on our business. Similarly, strategic alliances with corporate partners, primarily pharmaceutical and biotechnology companies, may help us develop and commercialize drugs. Various problems can arise in strategic alliances. A partner responsible for conducting clinical trials and obtaining regulatory approval may fail to develop a marketable drug. A partner may decide to pursue an alternative strategy or alternative partners. A partner that has been granted marketing rights for a certain drug within a geographic area may fail to market the drug successfully. Consequently, strategic alliances that we may enter into in the future may not be scientifically or commercially successful. We may be unable to negotiate advantageous strategic alliances in the future. The absence of, or failure of, strategic alliances could harm our efforts to develop and commercialize our drugs. 31 32 The raw materials for our products are produced by a limited number of suppliers. The raw materials that we require to manufacture our drugs, particularly oligonucleotides, are available from only a few suppliers, namely those with access to our patented technology. Furthermore, we currently rely on a potential competitor, which is itself a development stage biotechnology company, to supply us with chemical compounds necessary to the development of our drugs. If these few suppliers cease to provide us with the necessary raw materials or fail to provide us with adequate supply of materials at an acceptable price and quality, we could be materially adversely affected. Our business will suffer if we fail to compete effectively with our competitors and to keep up with new technologies. The industries in which we operate are highly competitive and may become even more competitive. We will need to continue to devote substantial efforts and expense to research and development in order to maintain a competitive position. It is possible that developments by others may succeed in developing other new therapeutic drug candidates that are more effective and less costly than those that we propose to develop and may render our current and proposed products or technologies obsolete. Many of our competitors have greater financial and human resources and more experience in research and development than we have. Competitors that complete clinical trials, obtain regulatory approvals and begin commercial sales of their products before us will enjoy a significant competitive advantage. We anticipate that we will face increased competition in the future as new companies enter the market and alternative technologies become available. Furthermore, biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. We expect that the technologies associated with biotechnology research and development will continue to develop rapidly. Our future will depend in large part on our ability to compete with these technologies. Any compounds, drugs or processes that we develop may become obsolete before we recover the expenses incurred in developing them. The successful commercialization of our products will depend on obtaining coverage and reimbursement for use of our products from third-party payors. Our ability to commercialize drugs successfully will depend in part on the extent to which various third parties are willing to reimburse patients for the costs of our drugs and related treatments. These third parties include government authorities, private health insurers, and other organizations, such as health maintenance organizations. Third-party payors often challenge the prices charged for medical products and services. Accordingly, if less costly drugs are available, third party payors may not authorize or may limit reimbursement for our drugs, even if they are safer or more effective than the alternatives. In addition, the federal government and private insurers have considered ways to change, and have changed, the manner in which health care services are provided and paid for in the United States. In particular, these third party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products. In the future, it is possible that the government may institute price controls and further limits on Medicare and Medicaid spending. These controls and limits could affect the payments we collect from sales of our products. Internationally, medical reimbursement systems vary significantly, with some medical centers having fixed budgets, regardless of levels of patient treatment, and other countries requiring application for, and approval of, government or third party reimbursement. Even if we or our partners succeed in bringing therapeutic products to market, uncertainties regarding future health care policy, legislation and regulation, as well as private market practices, could affect our ability to sell our products in commercially acceptable quantities at profitable prices. We could become involved in time-consuming and expensive patent litigation and adverse decisions in patent litigation could cause us to incur additional costs and experience delays in bringing new drugs to market. The pharmaceutical and biotechnology industries have been characterized by time-consuming and extremely expensive litigation regarding patents and other intellectual property rights. We may be required to commence, or may be made a party to, litigation relating to the scope and validity of our intellectual property rights, or the intellectual property rights of others. Such litigation could result in adverse decisions regarding the patentability of our inventions and products, or the enforceability, validity, or scope of protection offered by our patents. Such decisions could make us liable for substantial money damages, or could bar us from the manufacture, use, or sale of 32 33 certain products, resulting in additional costs and delays in bringing drugs to market. We may not have sufficient resources to bring any such proceedings to a successful conclusion. It may be that entry into a licensing arrangement would allow us to avoid any such proceedings. We may not be able, however, to enter into any such licensing arrangement on terms acceptable to us, or at all. We also may be required to participate in interference proceedings declared by the U.S. Patent and Trademark Office and in International Trade Commission proceedings aimed at preventing the importing of drugs that would compete unfairly with our drugs. Such proceedings could cause us to incur considerable costs. Our business exposes us to potential product liability. The nature of our business exposes us to potential product and professional liability risks, which are inherent in the testing, production, marketing and sale of human therapeutic products. While we are covered against those claims by a product liability insurance policy (subject to various deductibles), we cannot be certain that our insurance coverage will be sufficient to cover any claim. Uninsured product liability could have a material adverse effect on our financial results. Additionally, it is possible that any insurance will not provide us with adequate protection against potential liabilities. We have used hazardous materials and could be held liable for damages for past or accidental contamination or injury. In October of 1996, JBL hired an environmental consulting firm to investigate an incident of soil and groundwater contamination at JBL's facility. Sampling of soil and groundwater revealed the presence of contaminants. The California Regional Water Quality Control Board is monitoring the situation. Results of recent testing have indicated a reduction in contaminant levels. The Company accrued $65,000 in 1999 to pay for any potential liability. We have agreed to indemnify Promega Corporation, the purchaser of JBL's assets, for any liability that may result from this alleged contamination. We believe that any costs that result from further investigation or remediation will not have a material adverse effect on our operation, but we can give no assurance to that end. On October 16, 1998, the Environmental Protection Agency identified JBL as a de minimis potentially responsible party at a California waste disposal facility showing evidence of environmental contamination. The EPA currently estimates that Genta will be required to pay approximately $63,200 to settle its potential liability. We have agreed to indemnify Promega Corporation for any costs resulting from this contamination. Based on the volume amount from the EPA, Genta accrued $75,000 to pay for any potential liability arising from this incident. We are expecting to finalize the terms of settlement by the second quarter of 2000. We believe that any costs that result from further investigation or remediation will not have a material adverse affect on our operation, but we can give no assurance to that end. If we cease doing business and liquidate our assets, we are required to distribute proceeds to holders of our preferred stock before we distribute proceeds to holders of our common stock. In the event of a dissolution or liquidation of Genta, holders of Genta common stock will not receive any proceeds until holders of 277,100 outstanding shares of Genta Series A preferred stock are paid a $13.9 million dollar liquidation preference and holders of 123,451 outstanding shares of Genta Series D preferred stock are paid a $18.0 million dollar liquidation preference. We are also obligated to issue an additional 36,838 shares of Series D Preferred Stock, with a liquidation preference of $5.2 million, upon the exercise of some outstanding warrants. Furthermore, holders of shares of Genta Series A and D Preferred Stock are contractually entitled to receive cumulative dividends before any dividend payment may be made on the common stock. There currently exist certain interlocking relationships and potential conflicts of interest. Certain of our affiliates, Aries Domestic Fund, LP, Aries Domestic Fund II, LP, and Aries Trust (together the "Aries Funds") have the contractual right to appoint a majority of the members of our Board of Directors. Paramount Capital Asset Management, Inc. is the investment manager of the Aries Funds. The Aries Funds have the right to convert and exercise their securities into a significant portion of the outstanding common stock. Dr. Lindsay A. Rosenwald, the Chairman and sole stockholder of Paramount Capital Asset Management, is also the 33 34 Chairman of Paramount Capital, Inc. and of Paramount Capital Investments, LLC, a New York-based merchant banking and venture capital firm specializing in biotechnology companies. In the regular course of its business, Paramount Capital Inc. identifies, evaluates and pursues investment opportunities in biomedical and pharmaceutical products, technologies and companies. Generally, the law requires that any transactions between Genta and any of our affiliates be on terms that, when taken as a whole, are substantially as favorable to us as those then reasonably obtainable from a person who is not an affiliate in an arms-length transaction. Nevertheless, our affiliates, including Paramount Capital Asset Management and Paramount Capital Inc., are not 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 we do not expect and you should not expect, that any biomedical or pharmaceutical product or technology developed by any affiliate in the future will be made available to us. In addition, some of our officers and directors may from time to time serve as officers or directors of other biopharmaceutical or biotechnology companies. We cannot assure you that these other companies will not have interests in conflict with ours. Concentration of ownership of our stock could lead to a delay or prevent a change of control. Our directors, executive officers and principal stockholders and their affiliates own a significant percentage of our outstanding common stock and preferred stock. They also own, through the exercise of options and warrants, the right to acquire even more common stock and preferred stock. As a result, these stockholders, if acting together, have the ability to influence the outcome of corporate actions requiring stockholder approval. This concentration of ownership may have the effect of delaying or preventing a change in control of Genta. Anti-takeover provisions in our certificate of incorporation and Delaware law may prevent our stockholders from receiving a premium for their shares. Our certificate of incorporation and by-laws include provisions that could discourage takeover attempts and impede stockholders ability to change management. The approval of 66-2/3% of our 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 our certificate of incorporation. Loss History; Uncertainty of Future Profitability The Company has been unprofitable to date, incurring substantial operating losses associated with ongoing research and development activities, preclinical testing, clinical trials, manufacturing activities and development activities undertaken by Genta Jago. From the period since its inception to December 31, 1999, the Company has incurred a cumulative net loss of $139.6 million. The Company has experienced significant quarterly fluctuations in operating results and expects that these fluctuations in revenues, expenses and losses will continue, although, as a result of the sale of JBL's business, revenues from product sales have discontinued. "MD&A -- Certain Trends and Uncertainties -- Need for Additional Funds; Risk of Insolvency." Authorized Capital Stock Following completion of the Offering, the company has an insufficient number of authorized shares of Common Stock to raise additional capital through the issuance of equity securities. The Company intends, at its next annual meeting of stockholders, to submit to a vote of its stockholders an amendment to its Amended and Restated Certificate of Incorporation to increase the number of shares of Common Stock that the company is authorized to issue. Approval of this amendment will require the favorable vote of the holders of a majority of the voting power of the outstanding stock entitled to vote thereon. There can be no assurance that the Company's stockholders will approve such amendment. Claims of Genta's Default Under Various Agreements During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a wholly-owned subsidiary of the Company, received approximately 5.4 million French Francs (or, as of December 31,1999 approximately $826,600) 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 34 35 program, Genta Europe terminated all scientific personnel. ANVAR asserted, in a letter dated February 13, 1998, that Genta Europe was not in compliance with the ANVAR Agreement, and that ANVAR might request the immediate repayment of such loan. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that the Company remains liable for FF4,187,423 (as of December 31, 1999), approximately $641,000 and is required to pay this amount immediately. The Company does not believe that under the terms of the ANVAR Agreement ANVAR is entitled to request early repayment. ANVAR notified 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. In August 1999, Marseille Amenagement instituted legal proceedings against the Company at the Commercial Court in France, claiming alleged back rent payment of FF663,413 (as of December 31, 1999, approximately $101,500) and early termination payment of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court hearing has been scheduled for May 15, 2000. The Company is working with its counsel in France to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. On December 31, 1999, the Company has $574,800 of net liabilities of liquidated subsidiary recorded and, therefore, management believes no additional accrual is necessary. There can be no assurance that the Company will not incur material costs in relation to this claim. Dividends The Company has never paid cash dividends on its Common Stock and does not anticipate paying any such dividends in the foreseeable future. In addition, the Company is restricted from paying cash dividends on its Common Stock until such time as all cumulative dividends have been paid on outstanding shares of its Series D Preferred Stocks. The Company currently intends to retain its earnings, if any, after payment of dividends on outstanding shares of Series D Preferred Stocks, for the development of its business. See "MD&A -- Liquidity and Capital Resources." 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. 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 the Company or its competitors, other evidence of the safety or efficacy of products of the Company or its competitors, announcements of technological innovations or new therapeutic products by the Company or its competitors, governmental regulation, developments in patent or other proprietary rights of the Company or its respective competitors, including litigation, fluctuations in the Company's 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 March 10, 2000, the Company had 28,549,365 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. 35 36 No predictions can be made of the effect that future market sales of the shares of Common Stock underlying the convertible securities and warrants referred to under the caption "MD&A -- Certain Trends and Uncertainties -- Subordination of Common Stock to Series A and Series D Preferred Stock; Risk of Dilution; Anti-dilution Adjustments," or the availability of such securities for sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales might occur, could adversely affect prevailing market prices. 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, 1999. 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. 36 37 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................................................................................ 38 Consolidated Balance Sheets at December 31, 1998 and 1999...................................................... 40 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999..................... 41 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999........... 42 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999..................... 45 Notes to Consolidated Financial Statements..................................................................... 46 Genta Jago Technologies B.V. (a development stage company) Reports of Independent Auditors................................................................................ 67 Balance Sheets at December 31, 1997 and 1998................................................................... 69 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.................................................... 70 Statement of Stockholders' Equity (Net Capital Deficiency) for the Period December 15, 1992 (inception) Through December 31, 1998....................................................................... 71 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................................................... 72 Notes to Financial Statements.................................................................................. 73
37 38 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Genta Incorporated We have audited the accompanying consolidated balance sheets of Genta Incorporated and its subsidiaries as of December 31, 1998 and 1999 and the related statements of operations, stockholders' equity, and cash flows for the years 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 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 2, 2000 38 39 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Genta Incorporated We have audited the accompanying consolidated statement of operations, stockholders' equity, and cash flows of Genta Incorporated for the year 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 results of Genta Incorporated's operations and its cash flows of for the year ended December 31, 1997, in conformity with generally accepted accounting principles. 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. 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 39 40 GENTA INCORPORATED CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- ASSETS 1998 1999 ---------------------------- Current assets: Cash and cash equivalents .......................................................... $ 1,566,288 $10,100,603 Short term investments ............................................................. 892,372 -- Notes receivable ................................................................... -- 1,333,739 Prepaid expenses ................................................................... 405,700 -- Property held for sale ............................................................. 290,000 -- Other current assets ............................................................... 176,700 22,087 Net current assets of discontinued operations ...................................... 2,606,304 -- ---------------------------- Total current assets .................................................................. 5,937,364 11,456,429 ---------------------------- Property and equipment, net ........................................................... 148,245 30,357 Intangibles, net ...................................................................... 1,460,383 576,904 Deposits and other assets ............................................................. 5,301 164,500 ---------------------------- Total assets .......................................................................... $ 7,551,293 $12,228,190 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................................... $ 432,116 $ 362,465 Payable to research institution .................................................... 635,661 52,500 Accrued compensation ............................................................... 84,888 487,609 Other accrued expenses ............................................................. 580,779 544,728 Net liabilities of liquidated foreign subsidiary ................................... 574,812 574,812 ---------------------------- Total current liabilities ............................................................. 2,308,256 2,022,114 ---------------------------- Deficit in joint venture .............................................................. 2,284,018 -- Stockholders' equity: Preferred stock; 5,000,000 shares authorized, convertible preferred stock outstanding: Series A convertible preferred stock, $.001 par value; 447,600 and 277,100 shares issued and outstanding at December 31, 1998 and December 31, 1999, respectively, liquidation value is $13,855,000 at December 31, 1999 ...................................... 448 277 Series D convertible preferred stock, $.001 par value; 186,021 and 123,451 shares issued and outstanding at December 31, 1998 and December 31, 1999, respectively; liquidation value is $22,418,052 at December 31, 1999 ............ 186 124 Common stock; $.001 par value; 65,000,000 shares authorized, 10,426,215 and 25,456,437 shares issued and outstanding at December 31, 1998 and 1999, respectively ......................................... 10,426 25,456 Additional paid-in capital ......................................................... 131,260,041 146,862,374 Accumulated deficit ................................................................ (132,053,657) (139,497,618) Accrued dividends payable .......................................................... 4,476,000 5,134,912 Deferred compensation .............................................................. (734,425) (2,319,449) ---------------------------- Total stockholders' equity ............................................................ 2,959,019 10,206,076 ---------------------------- Total liabilities and stockholders' equity ............................................ $ 7,551,293 $ 12,228,190 ============================
See accompanying notes. 40 41 GENTA INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ------------------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ Revenues: Related party contract revenue ............................... $ 350,097 $ 55,087 $ -- Collaborative research and development ....................... 50,000 50,000 -- ------------ ------------ ------------ 400,097 105,087 -- Costs and expenses: Research and development (including non-cash stock compensation of zero, $2,410 and $1,128,931) .............................. 3,309,216 2,115,954 5,333,843 General and administrative (including non-cash stock compensation of zero, $151,957 and $1,945,415) ............................ 6,131,355 4,020,169 5,999,295 LBC settlement .................................................. 600,000 547,000 -- ------------ ------------ ------------ 10,040,571 6,683,123 11,333,138 ------------ ------------ ------------ Loss from operations ............................................ (9,640,474) (6,578,036) (11,333,138) Equity in net (loss) income of joint venture ................................................. (1,193,321) (131,719) 2,448,518 Net loss of liquidated foreign subsidiary ....................... -- (98,134) -- Other income (expense): Interest income .............................................. 458,437 272,336 172,310 Interest expense ............................................. (3,309,120) (8,661) (173) Other expense ................................................ -- (301,587) (149,027) ------------ ------------ ------------ Net loss from continuing operations ............................. (13,684,478) (6,845,801) (8,861,510) Loss from discontinued operations ............................... (1,741,339) (739,965) (189,407) Gain on sale of discontinued operations ......................... -- -- 1,606,956 ------------ ------------ ------------ Net loss ........................................................ (15,425,817) (7,585,766) (7,443,961) Preferred stock dividends ....................................... (17,852,677) (632,790) (10,084,580) ------------ ------------ ------------ Net loss applicable to common shares ............................ $(33,278,494) $ (8,218,556) $(17,528,541) ============ ============ ============ Net income (loss) per share : Continuing operations ......................................... $ (7.13) $ (1.06) $ (1.07) Discontinued operations ....................................... (0.39) (0.11) 0.08 ------------ ------------ ------------ Net loss per common share ....................................... $ (7.52) $ (1.17) $ (0.99) ============ ============ ============ Weighted average shares used in computing net income (loss) per common share ................................ 4,422,409 7,000,191 17,783,516 ============ ============ ============
See accompanying notes. 41 42 GENTA INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY For the Years Ended December 31, 1997, 1998 and 1999
Convertible Preferred Stock Common Stock Additional --------------------- --------------------- Paid-in Shares Amount Shares Amount Capital ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1996 .......................... 529,524 $ 529 3,999,367 $ 3,999 $ 109,490,222 Issuance of common stock for services rendered and severance ................. -- -- 38,400 38 42,000 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 preferred stock 161,580 162 -- -- 13,957,100 Issuance of Series D convertible preferred stock upon conversion of senior secured convertible bridge notes and accrued interest .................. 65,415 65 -- -- 3,270,684 Dividends accrued on preferred stock .......... -- -- -- -- (1,694,677) Issuance of warrants to purchase common stock in connection with line of credit ................... -- -- -- -- 98,000 Interest imputed on convertible debentures ... -- -- -- -- 3,000,000 Net loss ...................... -- -- -- -- -- ------- ----- --------- ------- ------------- BALANCE AT DECEMBER 31, 1997 .......................... 683,595 $ 684 5,712,363 $ 5,712 $ 129,320,493
Notes Accrued Receivable Total Accumulated Dividends from Deferred Stockholders' Deficit Payable Stockholders Compensation Equity ------- ------- ------------ ------------ ------ BALANCE AT DECEMBER 31, 1996 .......................... $(109,042,074) $ 3,671,532 $(49,976) $ -- $ 4,074,232 Issuance of common stock for services rendered and severance ................. -- -- -- -- 42,038 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 preferred stock -- -- -- -- 13,957,262 Issuance of Series D convertible preferred stock upon conversion of senior secured convertible bridge notes and accrued interest .................. -- -- -- -- 3,270,749 Dividends accrued on preferred stock .......... -- 1,694,677 -- -- -- Issuance of warrants to purchase common stock in connection with line of credit ................... -- -- -- -- 98,000 Interest imputed on convertible debentures ... -- -- -- -- 3,000,000 Net loss ...................... (15,425,817) -- -- -- (15,425,817) ------------- ----------- ------ ----- ------------ BALANCE AT DECEMBER 31, 1997 .......................... $(124,467,891) $ 4,566,000 $ -- $ -- $ 9,424,998
See accompanying notes. 42 43 GENTA INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY For the Years Ended December 31, 1997, 1998 and 1999
Convertible Preferred Stock Common Stock Additional -------------------- --------------------- Paid-in Shares Amount Shares Amount Capital ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1997 (CONTINUED) ............. 683,595 $ 684 5,712,363 $ 5,712 $ 129,320,493 Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends (9,000) (9) 65,295 65 89,944 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 legal settlement .................. 2,900 3 -- -- 965,417 Deferred Compensation related to stock options .... -- -- -- -- 888,792 Amortization of deferred compensation ................ -- -- -- -- -- Dividends accrued on preferred stock ....................... -- -- -- -- (632,790) Payment of dividend on Series D convertible preferred stock 632,790 Net loss ........................ -- -- -- -- -- --------- --------- ---------- ------- ------------- BALANCE AT DECEMBER 31, 1998 ............................ $ 633,621 $ 634 10,426,215 $10,426 $ 131,260,041 Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends (170,500) (171) 1,366,388 1,366 1,641,805 Issuance of common stock upon conversion of Series D convertible preferred stock . (69,499) (69) 7,552,118 7,552 (7,483) Issuance of common stock in connection with a private placement, net of issuance costs of $1,071,756 ......... -- -- 3,809,502 3,809 10,352,940 Issuance of common stock in connection with legal settlement .................. -- -- 69,734 70 199,930 Dividends accrued on Series D preferred stock ............. -- -- -- -- (7,677,413)
Notes Accrued Receivable Total Accumulated Dividends from Deferred Stockholders' Deficit Payable Stockholders Compensation Equity ------- ------- ------------ ------------ ------ BALANCE AT DECEMBER 31, 1997 (CONTINUED) ............. $(124,467,891) $ 4,566,000 $ -- $ -- $ 9,424,998 Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends -- (90,000) -- -- -- Issuance of common stock upon conversion of Series D convertible preferred stock . -- -- -- -- -- Shares and warrants issued in connection with legal settlement .................. -- -- -- -- 965,420 Deferred Compensation related to stock options .... -- -- -- (888,792) -- Amortization of deferred compensation ................ -- -- -- 154,367 154,367 Dividends accrued on preferred stock ....................... -- 632,790 -- -- -- Payment of dividend on Series D convertible preferred stock (632,790) Net loss ........................ (7,585,766) -- -- -- (7,585,766) ------------- ----------- ---- --------- ------------ BALANCE AT DECEMBER 31, 1998 ............................ $(132,053,657) $ 4,476,000 $ -- $(734,425) $ 2,959,019 Issuance of common stock upon conversion of Series A convertible preferred stock and related accrued dividends -- (1,643,000) -- -- -- Issuance of common stock upon conversion of Series D convertible preferred stock . -- -- -- -- -- Issuance of common stock in connection with a private placement, net of issuance costs of $1,071,756 ......... -- -- -- -- 10,356,749 Issuance of common stock in connection with legal settlement .................. -- -- -- -- 200,000 Dividends accrued on Series D preferred stock ............. -- 7,677,413 -- -- --
See accompanying notes. 43 44 GENTA INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY For the Years Ended December 31, 1997, 1998 and 1999
Convertible Preferred Stock Common Stock Additional --------------------- --------------------- Paid-in Shares Amount Shares Amount Capital ------ ------ ------ ------ ------- Payment of dividends in common stock for Series A and D convertible preferred stock including cash for fractional shares ........... -- -- 2,009,939 2,010 5,373,417 Issuance of Series D convertible preferred stock upon exercise of placement agency warrants ............. 6,929 7 -- -- (7) Exercise of Class D warrants .. -- -- 178,541 179 166,574 Exercise of stock options ....... -- -- 44,000 44 41,981 Deferred Compensation related to stock options .... -- -- -- -- 4,659,370 Amortization of deferred compensation ................ -- -- -- -- -- Preferred stock dividends accrued in connection with related party acquisition ... -- -- -- -- (572,495) Payment of preferred stock dividends in connection with related party acquisition, including warrants and cash of $131,967 ................. -- -- -- -- 440,528 Preferred stock dividends accrued in connection with issuance of penalty warrants .................... -- -- -- -- (1,834,672) Payment of preferred stock dividends in connection with issuance of penalty warrants .................... -- -- -- -- 1,834,672 Issuance of stock options in connection with the sale of discontinued operation ...... -- -- -- -- 983,186 Net loss ........................ -- -- -- -- -- -------- ---------- ---------- ---------- ------------- BALANCE AT DECEMBER 31, 1999 ............................ 400,551 $ 401 25,456,437 $ 25,456 $ 146,862,374 ======== ========== ========== ========== =============
Notes Accrued Receivable Total Accumulated Dividends from Deferred Stockholders' Deficit Payable Stockholders Compensation Equity ------- ------- ------------ ------------ ------ Payment of dividends in common stock for Series A and D convertible preferred stock including cash for fractional shares ........... -- (5,375,501) -- -- (74) Issuance of Series D convertible preferred stock upon exercise of placement agency warrants ............. -- -- -- -- -- Exercise of Class D warrants .. -- -- -- -- 166,753 Exercise of stock options ....... -- -- -- -- 42,025 Deferred Compensation related to stock options .... -- -- -- (4,659,370) -- Amortization of deferred compensation ................ -- -- -- 3,074,346 3,074,346 Preferred stock dividends accrued in connection with related party acquisition ... -- 572,495 -- -- -- Payment of preferred stock dividends in connection with related party acquisition, including warrants and cash of $131,967 ................. -- (572,495) -- -- (131,967) Preferred stock dividends accrued in connection with issuance of penalty warrants .................... -- 1,834,672 -- -- -- Payment of preferred stock dividends in connection with issuance of penalty warrants .................... -- (1,834,672) -- -- -- Issuance of stock options in connection with the sale of discontinued operation ...... -- -- -- -- 983,186 Net loss ........................ (7,443,961) -- -- -- (7,443,961) ------------- ---------- ------ ----------- ------------ BALANCE AT DECEMBER 31, 1999 ............................ $(139,497,618) $5,134,912 $ -- $(2,319,449) $ 10,206,076 ============= ========== ====== =========== ============
See accompanying notes. 44 45 GENTA INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ OPERATING ACTIVITIES: Net loss .............................................................. $(15,425,817) $(7,585,766) $ (7,443,961) Items reflected in net loss not requiring cash: Depreciation and amortization ..................................... 1,022,432 957,583 524,552 Equity in net loss (income) of joint venture ...................... 1,193,321 131,719 (2,448,518) Gain on sale of discontinued operations ........................... -- -- (1,606,956) Loss on disposal of fixed assets .................................. 1,130,809 340,808 149,026 Loss on abandonment of patents .................................... 600,000 576,544 523,786 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 3,074,346 Interest imputed on convertible debentures ........................ 3,000,000 -- -- Changes in operating assets and liabilities: Accounts receivable .......................................... 233,650 (400,962) 352,410 Inventories .................................................. 166,235 (137,603) (2,904) Prepaids and other assets .................................... (33,349) (382,166) 408,944 Accounts payable, accrued expenses and other ................. (1,036,342) 268,278 (789,775) Deferred revenue ............................................. 5,449 (198,570) -- ----------- ------------ ------------ Net cash used in operating activities ................................. (8,105,870) (5,728,768) (7,259,050) INVESTING ACTIVITIES: Purchase of short-term investments ................................ (8,771,737) (1,882,290) (501,400) Maturities of short-term investments .............................. 2,509,737 7,251,918 1,393,772 Purchase of property and equipment ................................ (34,246) (303,556) (37,983) Proceeds from sale of property and equipment ...................... 70,691 57,686 66,087 Principal payments received on notes receivable ................... -- -- 120,000 Proceeds from sale of discontinued operations, net of expenses .... -- -- 4,371,380 Purchase of intangibles ........................................... -- -- (100,000) Acquisition of related party ...................................... -- -- (131,967) Loans receivable from joint venture ............................... (595,771) (51,754) -- Deposits and other ................................................ (67,331) 37,575 5,069 ----------- ------------ ------------ Net cash provided (used in) by investing activities ................... (6,888,657) 5,109,579 5,184,958 FINANCING ACTIVITIES: Proceeds from notes payable ....................................... 3,000,000 -- -- Repayment of notes payable and capital leases ..................... (300,324) -- -- Proceeds from issuance of preferred stock, net .................... 13,957,262 -- -- Proceeds from issuance of common stock for the private placement, net .................................................. -- -- 10,356,749 Issuance of common stock upon exercise of warrants and options .... -- -- 208,778 Proceeds from equipment conversion to lease ....................... -- -- 51,827 ------------ ------------ ------------ Net cash provided by financing activities ............................. 16,656,938 -- 10,617,354 Increase (decrease) in cash and cash equivalents ...................... 1,662,411 (619,189) 8,543,262 Less cash at liquidated foreign subsidiary ............................ -- (8,947) (8,947) Cash and cash equivalents at beginning of year ........................ 532,013 2,194,424 1,566,288 ------------ ------------ ------------ Cash and cash equivalents at end of year .............................. $ 2,194,424 $ 1,566,288 $ 10,100,603 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid ......................................................... $ 33,914 $ 8,661 $ 173 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Warrant dividend ...................................................... -- 632,790 -- Preferred stock dividend accrued ...................................... 1,694,677 -- 7,677,413 Preferred stock dividend imputed on penalty warrants .................. -- -- 1,834,672 Dividends imputed on preferred stock .................................. 16,158,000 -- -- Common stock issued in payment of dividends on preferred stock ........ 800,209 90,000 Common stock issued upon conversion of notes and convertible debentures and accrued interest .............................................. 358,559 -- -- Exchange of deposits for purchase of equipment ........................ 251,000 -- -- Preferred stock issued upon conversion of short-term notes payable and accrued interest .............................................. 3,270,749 -- -- Conversion of accrued expenses into paid in capital related to LBC settlement ........................................................ -- 418,417 -- Notes Receivable and accrued interest from sale of discontinued operations ......................................................... -- -- 1,253,739 Notes Receivable from sale of equipment ............................... -- -- 200,000 Dividends imputed in connection with related party acquisition ........ -- -- 440,528 Issuance of common stock in connection with legal settlement .......... -- -- 200,000
See accompanying notes. 45 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 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'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 ("Promega") on March 19, 1999, which closed on May 10, 1999. Accordingly, JBL is presented as discontinued operations (See Note 2). The Company also 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. On March 4, 1999, 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. In August 1999, the Company acquired Androgenics Technologies, Inc. ("Androgenics"), who is developing a proprietary series of compounds that act to inhibit the growth of prostate cancer cells. 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 include the recent funding from an $11.4 million Private Placement of common stock and warrants, which closed on December 23, 1999. Management believes that at the current rate of spending, the Company will have sufficient cash funds to maintain its present operations through December 31, 2000. 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. The Company will need substantial additional funds before it can expect to realize significant product revenue. Principles of Consolidation The 1997 consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, 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 as of December 31, 1998 and 1999. During 1999, the Company closed on an Asset Purchase Agreement whereby the Company's wholly owned subsidiary JBL was sold to Promega Biosciences, Inc. Accordingly, JBL is presented as discontinued operations in 1997, 1998 and 1999. In August 1999, the Company acquired Androgenics in a transaction accounted for as a transfer of assets between companies under common control. The financial position and results of operations of Androgenics are reflected in the Consolidated Financial Statements included herein. All significant intercompany accounts and transactions have been eliminated in consolidation. Investment in Joint Venture The Company has a 50% ownership interest in a joint venture, Genta Jago, a Netherlands corporation. The investment in joint venture is accounted for under the equity method (Note 5). 46 47 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 Revenue from JBL product sales is recognized upon shipment. As a result of the Company's sale of JBL, all product sales are reported in discontinued operations. Collaborative research and development revenues, including related party contract 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. Cash, Cash Equivalents and Short-Term Investments Cash and cash equivalents consisted of money market funds and highly liquid debt instruments with remaining maturities of three months or less when purchased. Short-term investments consisted of corporate notes, all of which matured 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 amounts of cash, JBL 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. The Company invests its excess cash primarily in debt instruments of domestic corporations with "AA" or greater credit ratings as defined by Standard & 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 material losses on its cash equivalents or short-term investments. Inventories JBL inventories are stated at the lower of cost (first-in, first-out) or market. As a result of the Company's sale of JBL, all inventories are included in net current assets of discontinued operations. See Note 2. Property Held for Sale As of December 31, 1998, the Company had entered into an agreement to sell equipment for $290,000 and, therefore, recorded this asset as property held for sale and correspondingly recorded a $223,994 loss on the impairment of such asset as of December 31, 1998. Pursuant to the agreement, the Company received a $200,000 non-interest bearing promissory note of which $80,000 remains outstanding in notes receivable at December 31, 1999. Property and Equipment Property and equipment is stated at cost and depreciated over the estimated useful lives, ranging from three to five years, of the assets using the straight-line method. 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. 47 48 Intangible Assets Intangible assets, consisting primarily of capitalized patent costs, are amortized using the straight-line method over a term of five years for issued patents and 14 years for purchased proprietary technology. 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 to general and administrative expenses of $600,000, $577,000 and $523,000 in 1997, 1998 and 1999, 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 were based on the fair market value of such shares of common stock on the date the dividends became due. Dividends on Series D Preferred Stock are payable in shares of common stock, and are based on the fair market value of such shares 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 tax 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. Research and Development Research and development costs are expensed as incurred. Stock Options The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options as provided for under SFAS No. 123, "Accounting for Stock-Based Compensation." The Company provides pro forma disclosure pursuant to SFAS No. 123 in Note 10 to the financial statements. Under APB No. 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 and Emerging Issues Task Force ("EITF"), Issue No. 96-18 "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." 48 49 Net Loss Per Common Share Basic earnings per share are 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, 1997, 1998 and 1999 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. Net loss per common share is based on net loss adjusted for imputed and accrued dividends on preferred stock. Comprehensive Loss Other than net loss, the Company had no other material components of comprehensive loss. Recently Issued Accounting Standards 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, 2000. 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 currently does not believe adoption of SFAS No. 133 will have a material impact on the Company's financial statements. 2. DISCONTINUED OPERATION On March 19, 1999 (the "Measurement Date"), the Company entered into an Asset Purchase Agreement (the "JBL Agreement") with Promega whereby its wholly owned subsidiary Promega Biosciences Inc. would acquire substantially all of the assets and assume certain liabilities of JBL for approximately $4.8 million in cash, a promissory note for $1.2 million, and certain pharmaceutical development services in support of the Company's development activities. The closing of the sale of JBL was completed on May 10, 1999 (the "Disposal Date"), with a gain on the sale of approximately $1.6 million being recognized, based upon the purchase price of JBL, less its net assets and costs and expenses associated with the sale, including lease termination costs of $1.1 million, JBL losses of $147,000, and legal, accounting, tax and other miscellaneous costs of the sale approximating $653,000. Additionally, in connection with the sale of JBL's business and pursuant to a lease termination agreement, the Company granted stock options to acquire 450,000 shares of the Company's common stock, par value $.001 per share ("Common Stock"), to the owners of the building previously leased to JBL, some of whom were employees of JBL. Those options have been accounted for pursuant to guidelines in SFAS No. 123 and EITF 96-18 using the Black-Scholes option pricing model and have an approximate value of $1.0 million and have been charged against the gain on the sale of JBL. In addition, there were 246,000 options granted to former employees of JBL upon the closing of the sale of JBL's business in connection with an ongoing service arrangement between Promega and the Company, which has been accounted for prospectively pursuant to SFAS No. 123 using the Black-Scholes guidelines. These options were granted at an exercise price of $2.03 per share with a one year vesting period and will expire two years after the date of grant. The estimated value of these options totaled $1.2 million as of December 31, 1999 of which $756,700 is included in continuing operations for the year ended December 31, 1999, and is based on services provided and have been charged to research and development expense. The Company will continue to estimate and expense the value of these options over the vesting period, which will be no later than one year from the closing date of the sale. As a result of the sale of JBL's business, the Company's specialty biochemical manufacturing segment, JBL, has been presented as discontinued operations for all periods presented. The assets and liabilities relating to the discontinued operations are included in net assets of discontinued operations in the consolidated balance sheet at December 31, 1998 and have been charged to gain on sale of JBL as of May 10, 1999. The results of operations for the discontinued segment are included in discontinued operations in the consolidated statements of operations for the years 49 50 ended December 31, 1997, 1998 for the period January 1, 1999 through the measurement date, March 19, 1999. Losses incurred by JBL from the measurement date through the disposal date have been deferred and charged to gain on sale of JBL Net assets of discontinued operations consisted of the following:
DECEMBER 31, 1998 MAY 10, 1999 ----------------- ------------ Accounts receivable, net ................. $ 832,018 $ 479,608 Inventories, net ......................... 963,611 966,515 Property and equipment, net .............. 763,082 605,364 Other assets ............................. 897,399 947,125 Liabilities .............................. (849,806) (546,171) ----------- ----------- Total .......................... $ 2,606,304 $ 2,452,441 =========== ===========
Results of discontinued operations consisted of the following:
YEAR ENDED YEAR ENDED PERIOD FROM DECEMBER 31, DECEMBER 31, JANUARY 1, 1999 1997 1998 TO MAY 10, 1999 ----------- ----------- --------------- Product sales ............................ $ 4,701,649 $ 5,346,795 $ 1,718,721 Operating expenses ....................... (6,520,831) (6,087,565) (2,051,720) Other income (expense) ................... 77,843 805 (3,835) Losses from March 19, 1999 through May 10, 1999 charged to Gain on Sale of JBL .... -- -- 147,427 ----------- ----------- ----------- Loss ..................................... $(1,741,339) $ (739,965) $ (189,407) =========== =========== ===========
3. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
DECEMBER 31, ESTIMATED ------------------- USEFUL LIVES 1998 1999 ------------ -------- ------- Equipment .................................... 3 $148,997 $30,538 Software ..................................... 3 -- 6,932 Furniture and fixtures ....................... 5 9,768 11,731 -------- ------- 158,765 49,201 Less accumulated depreciation and amortization (10,520) (18,844) -------- ------- Total ............................... $148,245 $ 30,357 ======== =======
4. NOTES RECEIVABLE The Company accepted a $1.2 million promissory note (accruing 7% annual interest rate) from Promega as part of the sale price of JBL (see Note 2). The principal of the note and accrued interest is due and payable as follows: $700,000 plus interest is due on June 30, 2000 and $500,000 plus interest is due on the later of June 30, 2000 or the Environmental Compliance Date as defined in the JBL Agreement (See Note 2). Accrued interest at December 31, 1999 was $53,700. The Company also accepted a non-interest bearing promissory note in May 1999 from HealthStar, Inc. in the amount of $200,000 for the sale of equipment to be paid in 10 equal monthly installments with an aggregate principal balance due of $80,000 on December 31, 1999. 5. GENTA JAGO JOINT VENTURE As previously mentioned, the Company has had a 50% ownership interest in Genta Jago since 1992. However, 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. 50 51 In 1992, Genta and Jagotec AG ("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 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. Genta exercised the Expansion Option in 1995. 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. 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, 51 52 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. 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 debt-holder. However, as the funds were spent by Genta Jago, Genta was no longer assured of the collectibility of such loans, so the carrying value was reduced accordingly as the offset to Genta's recognition of its equity in the net loss of Genta Jago. Therefore, at all times Genta's recorded asset "loans receivable from joint venture" never exceeded the amount of Genta Jago's unexpended cash. Genta did not believe it was appropriate to carry its investment in or loans receivable from Genta Jago at any amount in excess of Genta Jago's cash, as there was no assurance of recoverability of such additional amounts. Accordingly, Genta recognized 100% of the losses of Genta Jago. 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 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, PLC ("SkyePharma" formerly with Jagotec AG ("Jagotec") which was acquired by SkyePharma), on behalf of itself and its affiliates, entered into an interim agreement (the "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. As a result of the interim JV agreement, the Company wrote off its liability relative to the Company's recorded deficit in the joint venture and, as such, recorded a gain of approximately $2.3 million for three months ended March 31, 1999. Accordingly, during 1999, Genta Jago recorded an extraordinary gain for its extinguishment of debt payable to Genta approximating $21.2 million. Pursuant to the Interim Agreement, in the first quarter 2000, the Company received $689,500 from SkyePharma as a royalty payment based on SkyePharma's agreement with Elan Pharmaceuticals, for the sale of Naproxen, of which $187,500 was attributable to 1999 and recorded, net of expenses of approximately $23,000 in equity in net income of joint venture and other assets at December 31, 1999. Additionally, 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 $350,000, $55,000 and zero, for the years ended December 31, 1997, 1998 and 1999 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. 52 53 Condensed financial information for Genta Jago Technologies B.V. is set forth below.
DECEMBER 31, --------------------------- 1998 1999 ------------ ----------- BALANCE SHEET DATA: Receivables under collaboration agreements .... $ 3,348,000 $ 1,000,000 Other current assets .......................... 24,000 9,500 ------------ ----------- Total current assets .......................... 3,372,000 1,009,500 Other assets .................................. 12,000 -- ------------ ----------- Total Assets .................................... $ 3,384,000 $ 1,009,500 ============ =========== Current liabilities ........................... $ 8,426,000 902,800 Payable to Genta .............................. 15,837,000 187,500 Net capital deficiency ........................ (20,879,000) (80,800) ------------ ----------- Total liabilities and capital deficiency ........ $ 3,384,000 $ 1,009,500 ============ ===========
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1998 1999 ----------- ----------- ----------- STATEMENTS OF OPERATIONS DATA: Collaborative research and development revenues . $ 3,634,000 $ 2,162,000 $ 1,000,000 Costs and expenses .............................. 4,791,000 2,112,000 473,000 ----------- ----------- ----------- Income (loss) from operations ................... (1,157,000) 50,000 527,000 Interest expense to Genta, net of interest income (1,175,000) (1,314,000) -- Extraordinary items - extinguishment of debt .... -- -- 21,228,600 ----------- ----------- ----------- Net (loss)/income ............................... $(2,332,000) $(1,264,000) $21,755,600 =========== =========== ===========
6. INTANGIBLES Intangibles consist of the following:
DECEMBER 31, ------------------------------ 1998 1999 ----------- ----------- Patent and patent applications ........... $ 1,952,956 $ 1,429,523 Other amortizable costs .................. 134,521 86,935 ----------- ----------- 2,087,477 1,516,458 Less accumulated amortization ............ (627,094) (939,554) ----------- ----------- $ 1,460,383 $ 576,904 =========== ===========
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. Since it is unclear that the convertible 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. 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 of approximately $271,000, were converted into 52,415 shares of Series D Preferred Stock. In 1997, pursuant to the 1996 sale of $2 million of Convertible Debentures to investors in a private placement outside the United States, the remaining $350,000 of principal and related accrued interest of approximately $8,600, was converted into 204,263 shares of common stock. The Convertible Debentures bore interest at an effective interest rate of 38% per annum. 8. NET LIABILITIES OF LIQUIDATED FOREIGN SUBSIDIARY As previously described, Genta Europe S.A. ("Genta Europe"), a wholly owned subsidiary of the Company, is in the process of liquidation, and the fair value of its debt obligations is not readily determinable. The carrying value at December 31, 1999, approximating $964,000, represents the value of the original issuance of such debt instruments 53 54 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 and 1999. The following represents a history of the funding obligations of Genta Europe. During 1995, Genta Pharmaceuticals Europe received approximately 5.4 million French Francs (or, as of December 31, 1999, approximately $826,600) of funding in the form of a loan from the French government agency L'Agence Nationale de Valorisation de la Recherche ("ANVAR") toward 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. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that the Company remains liable for FF4,187,423 (as of December 31, 1999, approximately $641,000) and is required to pay this amount immediately. The Company does not believe that under the terms of the ANVAR Agreement that ANVAR is entitled to request early repayment. ANVAR notified Genta that it was responsible as a guarantor of the note for the repayment. Genta's legal counsel 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. There can be no assurance that the Company will not incur material costs in relation to these terminations and/or assertions of default or liability. On June 30, 1998, Marseille Amenagement, a company affiliated with the city of Marseilles, France, filed suit in France to evict Genta Europe from its facilities in Marseilles and to demand payment of alleged back rent due and of a lease guarantee for nine years' rent. Following the filing of this claim and in consideration of the request for repayment of the loan from ANVAR, Genta Europe's Board of Directors directed the management to declare a "Cessation of Payment". Under this procedure, Genta Europe ceased any operations and terminated its only employee. A liquidator was appointed by the Court to take control of any assets of Genta Europe and to make payment to creditors. In December 1998, the Court in Marseilles dismissed the case against Genta Europe and indicated that it had no jurisdiction against Genta Incorporated. In August 1999, Marseille Amenagement instituted legal proceedings against the Company at the Commercial Court in France, claiming alleged back rent payment of FF663,413 (as of December 31, 1999, approximately $101,500) and early termination payment of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court hearing has been scheduled for May 15, 2000. The Company is working with its counsel in France to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. On December 31, 1999, the Company has $574,800 of net liabilities of liquidated subsidiary recorded and, therefore, pursuant to guidelines established in SFAS No. 5 "Accounting for Contingencies" and Financial Accounting Standards Board Interpretation No. 14 "Reasonable Estimation of the Amount of a Loss," such amount is sufficient to cover any potential liability. Therefore, management believes no additional accrual is necessary. However, there can be no assurance that the Company will not incur additional material costs in relation to this claim. 9. OPERATING LEASES The Company leases its facility under an operating lease that generally provides for annual cost of living related increases. Minimum future obligations under operating leases at December 31, 1999 are as follows:
OPERATING LEASES ---------------- 2000 ........................................................ $29,000
Total rent expense under operating leases for the years ended December 31, 1997, 1998 and 1999 was $346,000, $57,000 and $42,000, respectively. Rent expense for discontinued operations was approximately $428,000 annually. The JBL facilities were leased from its prior owners, who include an executive officer and other stockholders of the 54 55 Company. In February 2000, the Company received notice of lease cancellation by the overtenant, effective August 31, 2000. The Company is currently searching for new lease space. 10. STOCKHOLDERS' EQUITY Common Stock The Company has authorized 65,000,000 shares of common stock. As of December 31, 1999, the Company has issued and outstanding 25,456,437 shares. On January 12, 2000, the Board of Directors approved an amendment to increase the authorized common stock to 95,000,000 shares. This amendment is subject to shareholder approval at the next annual meeting of stockholders. In December 1999, the Company raised gross proceeds of approximately $11.4 million (approximately $10.4 million net of placement costs) through the private placement of 114 units ("the 1999 Private Placement"). Each unit sold in the 1999 Private Placement consisted of (i) 33,333 shares of Common Stock, par value $.001 per share ("Common Stock"), and (ii) warrants to purchase 8,333 shares of the Company's Common Stock at any time prior to the fifth anniversary of the final closing (the "Warrants"). The Warrants are convertible at the option of the holder into shares of Common Stock at an initial conversion rate equal to the market price of $4.83 per share (subject to antidilution adjustment). There were a total of 3,809,502 shares of Common Stock and 952,388 warrants issued in connection with the 1999 Private Placement. The placement agent, a related party, received cash commissions equal to 7.5% of the gross sales price, reimbursable expenses up to $125,000 and 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. (See Warrants below for Placement Agency Warrants). In August 1999, the Company settled lawsuits with Johns Hopkins University ("Johns Hopkins") and Drs. Paul Ts'o and Paul Miller ("Ts'o/Miller Partnership") for $380,000. As part of the settlement of claims, the Company paid $180,000 in cash and issued 69,734 shares of Common Stock to Johns Hopkins, acting on its behalf and on behalf of Ts'o/Miller Partnership, sufficient to provide a value of $200,000. The stock was sold by a broker under an agreement between the Company and Johns Hopkins, with the proceeds from such sales delivered to Johns Hopkins. On March 24, 1999, the Company agreed to grant 50,000 shares of common stock to Georgetown University ("the University") as consideration for services to be performed pursuant to a clinical trials agreement. ("the Agreement"). According to the terms of the Agreement, the University will perform studies of the Company's leading anticode drug G3139 on 24 patients, commencing April 20, 1999. According to the terms of the grant, Genta is to issue 25,000 of the shares to the University upon the completion of the first 12 patient studies, with the remaining shares to be issued upon the completion of the remaining patients. In accordance with FAS No. 123, "Accounting for Stock Based Compensation," and EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or Conjunction with Selling, Goods or Services," the cost associated with the issuance of these shares will be the fair market value of the shares as of the date on which each tranche of 12 patients studies is completed. As of December 31, 1999, the estimated fair market value of these shares is $321,900, of which $147,537 has been included as a charge to research and development expense in 1999, based on the completion of 11 patient studies. In August and December 1997, 7,500 shares of common stock were issued to a former Officer of the Company pursuant to the terms of a severance agreement and 30,900 shares of common stock were issued to two former board members of the Company pursuant to the terms of their consulting agreements, respectively, resulting in compensation expense of $42,000. 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 1997, pursuant to the 1996 sale of $2 million of Convertible Debentures to investors in a private placement outside the United States, the remaining principle amount of $350,000 and related accrued interest of $8,600, was converted into 204,263 shares of common stock. Preferred Stock The Company has authorized 5,000,000 shares of preferred stock. The Company has issued and outstanding 447,600 and 277,100 shares of Series A Convertible Preferred Stock and 186,021 and 123,451 shares of Series D Convertible Preferred Stock as of December 31, 1998 and 1999, respectively. Previously, the Company's authorized, 55 56 issued, and outstanding Series B and Series C Preferred Stock were converted in their entirety into shares of Common Stock during 1996 and 1997, respectively. The Series B and Series C Preferred Stock have been retired. There are no accrued dividends nor any outstanding warrants relating to the Series B and Series C Preferred Stock at December 31, 1999. The Series A and Series D Preferred Stock are convertible into shares of Common Stock, based on specified conversion rates, and have certain rights as to dividends and a preference upon liquidation, pursuant to the terms and conditions discussed in the following paragraphs. In 1999, the Board of Directors of the Company and certain holders of Common Stock, Series A and D Preferred Stock approved, in accordance with Delaware law, an amendment to the Company's Restated Certificate of Incorporation to remove the "Fundamental Change" redemption right. The Company has formally amended its Restated Certificate of Incorporation after the expiration of the 20-day period provided for in Rule 14c-5 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Series D Preferred Stock History On November 30, 1998, the Company entered into a Settlement Agreement and Release (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 payable upon the exercise of warrants which have not occurred. 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 consisted 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"). Due to the increase in value associated with the discounted conversion terms and liquidation preference of the Series D Preferred Stock, the Company has accounted for such increase by charging $16,158,000 to dividends imputed on preferred stock in fiscal year 1997. 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 holder's 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 in fiscal year 1998. The Company had conditioned the effectiveness of such consent on its acceptance by a majority of the Series D Preferred Stockholders. 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 56 57 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. Series D Preferred Stock Rights and Preferences The Series D Preferred Stock is immediately convertible at the option of the holder into shares of common stock at an initial conversion price ("the Conversion Price") of $0.94375 per share (subject to antidilution adjustment, $0.88477 per share as of December 31, 1999). The Series D conversion factor ("the Conversion Factor") is calculated by dividing 100 shares of Common Stock by the Conversion Price in effect as of the date of the conversion. As of December 31, 1998 and 1999, each share of Series D Preferred Stock was convertible into 105.96 and 113.02 shares of Common Stock, respectively. Additionally, the Company may cause, at its option, a mandatory conversion of all or part of all of the outstanding Series D Preferred Stock, at the applicable Conversion Rate, if the fair market value of the Company's Common Stock exceeds 300% of the then applicable Conversion Price for at least 20 trading days in any 30 consecutive trading day. The Series D Preferred Stock began earning dividends, payable in shares of the Company's Common Stock, at the rate of 10% per annum, based on a stated value of $140 per share, subsequent to the new Reset Date of January 29, 1999. In calculating the number of shares of Common Stock to be paid with respect to each dividend, each share of Common Stock shall be deemed to have the value of the Conversion Price at the time such dividend is paid. The Company is restricted from paying cash dividends on Common Stock until such time as all cumulative dividends on outstanding shares of Series D Preferred Stock have been paid. Additionally, the Company may not declare a dividend to its Common Stock shareholders until such time that a special dividend of $140 per share has been paid on the Series D Preferred Stock. The Company currently intends to retain its earnings, if any, after payment of dividends on outstanding shares of Series D Preferred Stock, for the development of its business. During the third quarter 1999, the Company issued 924,519 shares of Common Stock to Series D Preferred Stockholders, in payment of accrued dividends for the semi-annual period from January 29, 1999 to July 29, 1999. This dividend was recorded based on the fair market value of $2,542,427 as of the record date, July 29, 1999. As of December 31, 1999 the Company had accrued an estimated $5.1 million in Series D Preferred Stock dividends for the period from July 30, 1999 to December 31, 1999 based on the number of shares of Series D Preferred Stock outstanding at December 31, 1999 at the then current fair market value of the common stock. On January 29, 2000, the Company declared such dividend for Series D Preferred Stock Shareholders of record on that date for the semi-annual period from July 30, 1999 to January 29, 2000. Such dividend declaration requires the issuance of 953,000 shares of common stock representing a final dividend amount of $8.6 million. In the event of a liquidation of the Company, the holders of the Series D Preferred Stock are entitled to a liquidation preference equal to $140 per share plus accrued dividends. Series A Preferred Stock History 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. Series A Preferred Stock Rights and Preferences Each share of Series A Preferred Stock is immediately convertible, 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. As of December 31, 1998 and 1999, each share of Series A Preferred Stock was convertible into 7.333 and 7.3825 shares of common stock, respectively. 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, payable in cash or in shares of Common Stock at the option of the Company's Board of Directors. To the extent that the dividend is paid by issuing shares of Common Stock, the number of shares to be issued is equal to the amount that such dividend is payable in cash divided by the fair market value of a share of Common Stock as of the date on which the dividend is paid. Dividends were paid in Common Stock in September 1996, for the first and second year, pursuant to these terms. As 1998 represented the fifth year of the Series A Preferred Stock, no further 57 58 dividends were accrued. During the third quarter 1999, the Company issued 1,085,420 shares of Common Stock to Series A Preferred Stockholders in payment of accrued dividends for the third and fourth year. In the event of a liquidation of the Company, the holders of the Series A Preferred Stock are entitled to a liquidation preference equal to $50 per share. Warrants In 1993, the Company issued five-year warrants to purchase 600,000 shares of Common Stock in connection with a private placement of Series A Preferred Stock ("the Series A Warrants"). The Series A Warrants expired in September 1998. In May 1995, the Company 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. Also in May 1995, 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. As of December 31, 1999, none of the above warrants have been exercised. 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. Also in October 1996, the Company 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. To date, none of the above warrants have been exercised. In connection with the $3.0 million Convertible Notes issued in February 1997, the Company issued warrants to purchase 6.4 million shares of common stock at $0.471875 per share (subject to antidilution adjustments of 1.3 million shares). As of December 31, 1999, 7,741,935 of these warrants were outstanding. 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 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. Also in 1997, the Company issued warrants to purchase 50,000 shares of Common Stock 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 recorded the fair market value of these warrants as interest expense of $98,000 for the year ended December 31, 1997. In June 1997, in connection with the issuance of the Premium Preferred Units, 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 had entered into a financial advisory agreement with the placement agent pursuant to which the financial advisor received 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 Financial Advisory Agreement terminated in June 1999. As of December 31, 1999, 670,957 have been exercised. The Placement Warrants and the Advisory Warrants expire on June 29, 2007. On August 6, 1999, the Company issued warrants to purchase 105,000 shares of Common Stock, at prices ranging from $1.62 to $2.25 per share, to two consultants to the Company for management consulting services previously provided. These warrants have a fair market value of $200,000, which has been included as a charge to general and administrative expense in 1999. As of December 31, 1999, none of these warrants had been exercised. On August 30 1999, the Company acquired Androgenics Technologies, Inc. ("Androgenics"), a wholly owned entity of the Company's majority stockholder. As consideration for the acquisition, the Company paid $132,000 in cash (including reimbursements of pre-closing expenses and on-going research funding) and issued warrants (with exercise prices ranging from $1.25 to $2.50 per share) to purchase an aggregate of 1,000,000 shares of Common Stock, 90% of which will not become exercisable until the successful conclusion of certain development milestones, ranging from the initial clinical patient trial through the submission of an application for marketing authorization. The acquisition was accounted for as a transfer of interest between companies under common control. The cash and warrants were issued in exchange for 100% of the shares of Androgenics and licensed technology and the assumption 58 59 of a research and development agreement with the University of Maryland, Baltimore. The 1,000,000 warrants were accounted for as a deemed distribution based on their fair value of $440,500. The assets and liabilities of Androgenics, as of December 31, 1999 and the results of its operations for the year then ended are immaterial. On November 5, 1999, the Company issued to the Aries Funds 550,000 Bridge Warrants in full settlement of the Company's obligation under the 1997 Note and Warrant Purchase Agreement (the "Purchase Agreement"). The Purchase Agreement provides for additional Bridge Warrants ("Penalty Warrants") equal to 1.5% of the number of Bridge Warrants then held by the Aries Funds to 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 Purchase Agreement is not filed with the Securities and Exchange Commission ("the SEC") and for each day beyond 210 days after the closing date of the investment contemplated by the 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. The settlement of this obligation has been accounted for as a capital distribution, since the Aries Funds are a shareholder of the Company. Accordingly, these warrants have been accounted for at their fair value of $1.8 million and are included in accrued dividends at December 31, 1999. As of December 31, 1999, none of these warrants had been exercised. In connection with the 1999 Private Placement, the placement agent, a related party shareholder, received warrants (the "Related Party Warrants") to purchase up to 10% of the Units sold in the Private Placement for 110% of the offering price per Unit. The Related Party Warrants expire on December 23, 2004. The Related Party Warrants have a fair value at the time of their issuance approximating $1,376,500, resulting in no net effect to the Company's stockholders' equity. 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 nonstatutory 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 10 years and must be granted at not less than the fair market value (85% of fair market value for non-statutory options) on the date of grant. Common stock sold and options granted pursuant to the Plan generally vest over a period of four to five years. Information with respect to the Company's 1991 Stock Plan is as follows:
WEIGHTED AVERAGE SHARES UNDER EXERCISE PRICE 1991 PLAN OPTION PER SHARE - --------- ------------ -------------- BALANCE AT DECEMBER 31, 1996 .................. 164,930 $23.77 Granted ..................................... 6,670 3.71 Exercised ................................... -- -- Canceled .................................... (48,688) 23.21 -------- ------ BALANCE AT DECEMBER 31, 1997 .................. 122,912 22.90 Granted ..................................... 100,000 3.00 Exercised ................................... -- -- Canceled .................................... (88,674) 24.75 -------- ------ BALANCE AT DECEMBER 31, 1998 .................. 134,238 6.85 Granted ..................................... -- -- Exercised ................................... -- -- Canceled .................................... (26,670) 17.55 -------- ------ BALANCE AT DECEMBER 31, 1999 .................. 107,568 $ 4.20 ======== ======
At December 31, 1999, options to purchase approximately 107,397 shares of common stock were exercisable at a weighted average exercise price of approximately $4.17 per share and 170,946 shares of common stock were available for grant or sale under the Plan. 59 60 1998 Plan Pursuant to the Company's 1998 Stock Plan (the "1998 Plan"), 6,750,000 shares have been provided for the grant of stock options to employees, directors, consultants and advisors of the Company. On January 12, 2000 and February 22, 2000 the Board of Directors approved amendments to the 1998 Plan which, if approved, would increase the number of shares authorized for issuance to 11,000,000. Such amendments are subject to shareholder approval at the next annual meeting of stockholders. 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 10 years and must be granted at not less than the fair market value, or 85% of fair market value for non-statutory 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. Grants to Employees and Directors - 1998 Plan In May 1998, the Company granted options to purchase 2,236,263 shares of the Company's Common Stock to the Company's Chief Executive Officer ("CEO"), subject to shareholder approval, which was received in July 1998. As a result of an increase in the Company's stock price between May and July 1998, the Company recorded deferred compensation of $474,647 attributable to these options, $53,000 of which was included as a charge to general and administrative expense in 1998. During the fourth quarter of 1999, the Company's CEO resigned. As of the date of his resignation, the CEO was fully vested in 1,118,132 options and was required to forfeit the remaining unvested 1,118,132 options, pursuant to the terms of his original option grant. However, as a result of the CEO's termination arrangement, the Company modified the CEO's original option grant such that 618,131 of the unvested options would be forfeited and the remaining 500,000 unvested options would continue to vest over a period of one year. Since no further service is required for these options to vest, the company recorded compensation expense of $950,000 attributable to the intrinsic value of the 500,000 options as of the date of the modification. The total amount of compensation expense recognized by the Company in 1999 attributable to the former CEO's option grant is $1,118,200. The Company reversed a total of $237,324 in deferred compensation expense applicable of the 618,131 options, which were forfeited. During 1999, the Company granted to certain key employees, including the new CEO and the new Chairman of the Board, a total of 6,188,250 options with exercise prices below the market value of the Company's Common Stock on the date of grant. The Company recognized total deferred compensation expense of $2,017,832 attributable to the intrinsic value of these options, of which $497,987 has been amortized in 1999. In addition, the Company granted to its employees 495,000 options with exercise prices equal to fair market value on the date of grant. Grants to Non-Employees - 1998 Plan In connection with the sale of JBL's business in May, 1999 and pursuant to a related lease termination agreement, the Company granted stock options to acquire 450,000 shares of Common Stock, to the owners of the building previously leased to JBL, some of whom were also employees of JBL. Those options are accounted for pursuant to guidelines in SFAS No. 123, using the Black-Scholes method and have an approximate value of $1 million, which has been charged against the gain on the sale of JBL. Also in May 1999, a total of 245,500 options were granted to employees of JBL upon the closing of the sale of JBL, in connection with an ongoing service arrangement between Promega and the Company, which will be accounted for pursuant to SFAS No. 123 using the Black-Scholes method. The estimated value of these options will be amortized to research and development expense until the vesting date, which will be no later than one year from the closing date of the sale. The Company has recognized $1,175,310 of deferred compensation expense relative to these JBL options, $756,700 of which is included as a charge to research and development expense in 1999. The Company also granted 50,000 options to purchase Common Stock to certain consultants and advisors to the Company during 1999, for which the Company recognized a total of $136,400 in deferred compensation, of which $99,900 has been included in operating expenses in 1999, as accounted for pursuant to SFAS 123 and EITF 96-18. 60 61 Information with respect to the Company's 1998 Stock Plan is as follows:
WEIGHTED AVERAGE SHARES UNDER EXERCISE PRICE 1998 PLAN OPTION PER SHARE - --------- ------------ -------------- BALANCE AT DECEMBER 31, 1997 ................. -- -- Granted .................................... 2,836,263 $0.94 Exercised .................................. -- -- Canceled ................................... -- -- BALANCE AT DECEMBER 31, 1998 ................. 2,836,263 $0.94 ---------- ----- Granted .................................... 7,428,750 $2.42 Exercised .................................. (44,000) $0.95 Canceled ................................... (618,131) $0.94 ---------- ----- BALANCE AT DECEMBER 31, 1999 ................. 9,602,882 $2.08 ========== =====
At December 31, 1999, options to purchase approximately 2,842,695 shares of common stock were exercisable at a weighted average exercise price of approximately $1.66 per share and approximately 2,852,882 shares of common stock were in excess of the amount authorized in the 1998 Plan. However, stock option grants during 1999 have been approved by the Board of Directors, which now and at the time of grant represented greater than 50% of the shareholders. 1998 Non-Employee Directors' 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. On January 12, 2000, the Board of Directors approved an amendment to the Directors Plan which, if approved, would increase the number of shares authorized for issuance to 4,000,000. The amendment is subject to shareholder approval at the next annual meeting of stockholders. 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 next Annual Meeting 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. The Company granted stock options to purchase 1,725,000 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 expense of approximately $366,000, of which $53,394 and $152,552 was amortized in 1998 and 1999, respectively. In 1999, the Company granted to the Company's directors, options to purchase a total of 350,000 shares of Common Stock. The exercise price of these options was equal to the fair market value of the Common Stock on the date of grant, and therefore no compensation expense has been recognized.
WEIGHTED AVERAGE SHARES UNDER EXERCISE PRICE 1998 DIRECTORS' PLAN OPTION PER SHARE - -------------------- ------------ -------------- BALANCE AT DECEMBER 31, 1997 ................... -- -- Granted ...................................... 1,725,000 $ 0.94 Exercised .................................... -- -- Canceled ..................................... -- -- --------- --------- BALANCE AT DECEMBER 31, 1998 ................... 1,725,000 0.94 Granted ...................................... 350,000 2.88 Exercised .................................... -- -- Canceled ..................................... -- -- --------- --------- BALANCE AT DECEMBER 31, 1999 ................... 2,075,000 $ 1.26 ========= =========
At December 31, 1999, options granted under the Directors' Plan to purchase approximately 970,315 shares of common stock were exercisable at a weighted average exercise price of approximately $.94 per share and approximately 925,000 shares of common stock were available for grant or sale under the Plan. 61 62 In 1997, 100,000 options were granted pursuant to the 1991 Plan with an exercise price above the grant date fair market value of the underlying Common Stock, with a weighted average grant date fair value of $1.61 per share. In 1998, a total of 4,561,263 options were granted pursuant to the 1998 Plan and the 1998 Directors Plan, of which 600,000 options were granted at fair market value with a weighted average grant date fair value of $0.68 per share, and 3,961,263 were granted below fair market value with a weighted average grant date fair value of $0.78 per share. In 1999, a total of 7,778,750 options were granted pursuant to the 1998 Plan and the 1998 Directors Plan, of which 1,570,500 were granted at fair market value with a weighted average grant date fair value of $1.37 per share, and 6,208,250 were granted below fair market value with a weighted average grant date fair value of $1.87 per share. Following is a further breakdown of the options outstanding as of December 31, 1999:
WEIGHTED WEIGHTED AVERAGE AVERAGE WEIGHTED EXERCISE REMAINING AVERAGE PRICE OPTIONS LIFE IN EXERCISE OPTIONS OF OPTIONS RANGE OF PRICES OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE ----------- --------- --------- ----------- ----------- $ 0.88 - $ 0.97... 4,574,132 8.61 $ 0.94 2,574,135 $ 0.94 $ 2.03 - $ 5.00... 7,204,760 9.67 $ 2.59 1,339,881 $ 2.64 $17.50 - $25.00... 6,558 5.49 $22.40 6,391 $22.36 ---------- ---- ------ --------- ------ 11,785,450 9.25 $ 1.96 3,920,407 $ 1.56 ========== ==== ====== ========= ======
Pro Forma Disclosure 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 1997, 1998, and 1999: volatility factors of the expected market value of the Company's common stock of 102%, 72% and 90% 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, ------------------------------------------- 1997 1998 1999 ------------ ----------- ------------ Pro forma net loss per common shareholder $(33,493,186) $(8,699,775) $(21,832,897) Pro forma loss per share ................ $ (7.57) $ (1.24) $ (1.23)
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. Common Stock Reserved An aggregate of 45,086,254 shares of common stock were reserved for the conversion of preferred stock and the exercise of outstanding options and warrants at December 31, 1999. 11. INCOME TAXES Significant components of the Company's deferred tax assets as of December 31, 1998 and 1999 are shown below. A 100% valuation allowance has been recognized at December 31, 1998 and 1999 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, 1997 approximated $36,456,000. 62 63
DECEMBER 31, ---------------------------- 1998 1999 ------------ ------------ DEFERRED TAX ASSETS: Capitalized research expense ................. $ 2,922,000 $ -- Net operating loss carryforwards ............. 29,559,000 33,913,000 Research and development credits ............. 4,028,000 3,456,000 Purchased technology and license fees ........ 4,491,000 4,538,000 Other, net ................................... 1,130,000 857,000 ------------ ------------ Total deferred tax assets .................... 42,130,000 42,764,000 Valuation allowance for deferred tax assets .. (41,214,000) (42,257,000) ------------ ------------ 916,000 507,000 DEFERRED TAX LIABILITIES: Patent expenses .............................. (585,000) (230,000) Net depreciation ............................. (331,000) (277,000) ------------ ------------ (916,000) (507,000) ------------ ------------ Net deferred tax assets ........................ $ -- $ -- ============ ============
At December 31, 1999, the Company has federal and Massachusetts net operating loss carryforwards of approximately $88.6 million and $46.8 million, respectively. The difference between the federal and Massachusetts tax loss carryforwards is primarily attributable to the fact that Massachusetts net operating losses may only be carried forward for five years, as compared to fifteen or twenty years for federal net operating losses, depending on the year the losses were incurred. The federal tax loss carryforwards will begin expiring in 2003, unless previously utilized. Approximately $8.6 million and $11.9 million of the Massachusetts tax loss carryforward expired during 1998 and 1999, respectively, and the related deferred tax asset and tax loss carryforward amounts have been reduced accordingly. The remaining Massachusetts tax loss will continue to expire in 2000, unless utilized. The Company also has federal research and development tax credit carryforwards of $3.5, which will begin expiring in 2003, unless previously utilized. Federal and Massachusetts 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 a 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. 12. EMPLOYEE SAVINGS PLAN The Company adopted the Genta Incorporated Savings and Retirement Plan (the "Genta 401(k) Plan") in 1994, allowing 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 since the inception of the 401K Plan. 13. EMPLOYEE TERMINATIONS In May 1997, Genta assessed its personnel requirements and established a 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. On November 12, 1999, the Company announced that it has elected a new CEO and a new Chairman of the Board. The previous Chairman and CEO while continuing as a member of the Board, will receive severance in the form of salary continuation of approximately $300,000, to be paid in installments over the next 12 months and had his stock option agreement modified as discussed in Note 10, resulting in non-cash compensation expense of $950,000. Since the previous Chairman and CEO has no continuing obligation of service to the Company including in his capacity as a Board Member, these costs were entirely recognized in 1999 as general and administrative expenses. 63 64 14. CONTINGENCIES Pursuant to the Settlement Agreement (Note 10), 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 (as of December 31, 1999, none of said warrants had been exercised). 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 University ("Johns Hopkins") against the Company in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins alleged in the Complaint that the Company has breached the Johns Hopkins Agreement and owed them licensing royalty fees and related expenses in the amount of $308,832; of this amount, $287,671 represented claims by the Ts'o/Miller Partnership pursuant to the terms of a Summons and Complaint received by the Company's statutory process agent on August 10, 1998. Johns Hopkins also alleged 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. As of December 31, 1998, the Company had accrued $635,000 relating to the estimated cost to settle these claims. In August 1999, the Company settled the lawsuits for $380,000. The Company will pay $180,000 in cash over a six-month period of which $52,500 remains outstanding as of December 31, 1999, and issued 69,734 shares of Common Stock to Johns Hopkins, acting on its behalf and on behalf of Ts'o/Miller Partnership, sufficient to provide a value of $200,000. The excess of the previously accrued settlement costs over the actual settlement cost has been recorded as a reduction to general and administrative expenses. In October 1996, JBL retained a chemical consulting firm (the "Consulting Firm") to advise it with respect to an incident of soil and groundwater contamination (the "Spill"). Sampling conducted at the JBL facility revealed the presence of chloroform and perchloroethylenes ("PCEs") in the soil and groundwater at this site. A semi-annual groundwater monitoring program is being conducted, under the supervision of the California Regional Water Quality Control Board, for purposes of determining whether the levels of chloroform and PCEs have decreased over time. The results of the latest sampling conducted by JBL show that PCEs and chloroform have decreased in all but one of the monitoring sites. Based on an estimate provided to the Company by the Consulting Firm, the Company accrued $65,000 in 1999, relating to remedial costs. Prior to 1999, such costs were not estimable, and therefore no loss provisions had been recorded. Pursuant to the JBL agreement the Company has agreed to indemnify Promega in respect of this matter. The Company believes that any costs stemming from further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. JBL received notice on October 16, 1998 from Region IX of the Environmental Protection Agency ("EPA") that it had been identified as a potentially responsible party ("PRP") at the Casmalia Disposal Site, which is located in Santa Barbara, California. JBL has been designated as a de minimis PRP by the EPA. Based on volume amounts from the EPA, the Company concluded that it was probable that a liability had been incurred and accrued $75,000 during 1998. In 1999, the EPA estimated that the Company would be required to pay approximately $63,200 to settle their potential liability. The Company will continue to accrue $75,000 pursuant to SFAS No. 5 "Accounting for Contingencies" until such amount is settled. The Company expects to receive a revised settlement proposal from the EPA by the second quarter 2000. 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 agreed to indemnify Promega in respect of this matter. The Company believes that any costs stemming from further investigating or remediating this contamination will not have a material adverse effect on the business of the Company, although there can be no assurance thereof. During 1995, Genta Pharmaceuticals Europe S.A ("Genta Europe"), a wholly-owned subsidiary of the Company, received approximately 5.4 million French Francs (as of December 31, 1999, approximately $826,600) of funding in the form of a loan from the French government agency L'Agence Nationale de Valorisation de la Recherche ("ANVAR") 64 65 towards research and development activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta Europe and the Company. In October 1996, as part of the Company's restructuring program, Genta Europe terminated all scientific personnel. ANVAR asserted, in a letter dated February 13, 1998, that Genta Europe was not in compliance with the ANVAR Agreement, and that ANVAR might request the immediate repayment of such loan. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that the Company remains liable for FF4,187,423 (as of December 31, 1999, approximately $641,000) and is required to pay this amount immediately. The Company does not believe that under the terms of the ANVAR Agreement ANVAR is entitled to request early repayment. ANVAR notified the Company that it was responsible as a guarantor of the note for the repayment. The Company's legal counsel in Europe, has again notified ANVAR that the Company does not agree that the note is payable. The Company is working with ANVAR to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. There can be no assurance that the Company will not incur material costs in relation to these terminations and/or assertions of default or liability. On June 30, 1998, Marseille Amenagement, a company affiliated with the city of Marseilles, France, filed suit in France to evict Genta Europe from its facilities in Marseilles and to demand payment of alleged back rent due and of a lease guarantee for nine years' rent. Following the filing of this claim and in consideration of the request for repayment of the loan from ANVAR, Genta Europe's Board of Directors directed management to declare a "Cessation of Payment." Under this procedure, Genta Europe ceased any operations and terminated its only employee. A liquidator was appointed by the Court to take control of any assets of Genta Europe and to make payment to creditors. In December 1998, the Court in Marseilles dismissed the case against Genta Europe and indicated that it had no jurisdiction against Genta Incorporated. In August 1999, Marseille Amenagement instituted legal proceedings against the Company at the Commercial Court in France, claiming alleged back rent payment of FF663,413 (as of December 31, 1999, approximately $101,500) and early termination payment of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court hearing has been scheduled for May 15, 2000. The company is working with its counsel in France to achieve a mutually satisfactory resolution. However, there can be no assurance that such a resolution will be obtained. On December 31, 1999, the Company has $574,800 of net liabilities of liquidated subsidiary recorded and, therefore, pursuant to guidelines established in SFAS No. 5 "Accounting for Contingencies" and Financial Accounting Standards Board Interpretation No. 14 "Reasonable Estimation of the Amount of a Loss," such amount is sufficient to cover any potential liability. Therefore, management believes no additional accrual is necessary. However, there can be no assurance that the Company will not incur additional material costs in relation to this claim. 15. GENTA EUROPE The Company's loss on its European operations for the years ended December 31, 1997, 1998 and 1999 was $806,687, $98,134, and zero respectively. 16. 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 the 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 inter-segment 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. 65 66 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, 1997, 1998 and through May 10, 1999.
FISCAL YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 1998 1999 ------------ ----------- ------------ Revenues: Drug Development -- external customers .......................... $ 50,000 $ 50,000 $ -- Drug Development -- related party ............................... 350,097 55,087 -- Drug development gain on sale of technology...................... ------------ ----------- ------------ Total revenues from continuing operations ....................... $ 400,097 $ 105,087 $ -- Chemical Mfg. -- discontinued operations ........................ 4,701,649 5,346,795 1,718,720 Cost and Expenses: Drug Development -- continuing operations ....................... $ 10,040,571 $ 6,683,123 $ 11,333,138 Chemical Mfg. -- discontinued operations ........................ 6,520,831 6,087,565 2,055,554 Net Loss from operations Drug Development ................................................ $ (9,640,474) $(6,578,036) $(11,333,138) Loss from discontinued operations through May 10, 1999 .......... (1,741,339) (739,965) (336,834) Loss from discontinued operations included in gain on sale of JBL 147,427 Net loss of liquidated foreign subsidiary ....................... (98,134) -- Other income and (expenses) ..................................... (2,850,683) (37,912) 23,110 Equity in net loss of joint venture ............................. (1,193,321) (131,719) 2,448,518 Chemical manufacturing - gain on sale of JBL ...................... $ 1,606,956 ------------ ----------- ------------ Total Net Loss .................................................. $(15,425,817) $(7,585,766) $ (7,443,961) ============ =========== ============ Segment Assets: Drug Development -- continuing operations ....................... $ 15,078,949 $ 7,551,293 $ 12,251,190 Chemical Mfg. -- discontinued operations ........................ 2,449,002 2,606,304 3,051,134
As a result of the closing of the sale of JBL, Genta operates in one segment. 66 67 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 is 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 67 68 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Genta Jago Technologies, B.V. We have audited the accompanying statements of operations, stockholders' equity (net capital deficiency) and cash flows of Genta Jago Technologies, B.V. (a development stage company) for the year 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 audit. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the results of operations of Genta Jago Technologies, B.V. (a development stage company) and its cash flows for the year ended December 31, 1997 and for the period December 15, 1992 (inception) through December 31, 1997, in conformity with generally accepted accounting principles. 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 68 69 GENTA JAGO TECHNOLOGIES B.V. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
December 31, --------------------------------- 1997 1998 ------------ ------------ Assets 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. 69 70 GENTA JAGO TECHNOLOGIES B.V. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
Cumulative From Years Ended December 31, December 15, 1992 ---------------------------- (inception) Through 1997 1998 December 31, 1998 ------------ ---------- ------------------ REVENUES: Collaborative research and development $3,634,516 $2,161,954 $21,202,848 COST AND EXPENSES: Research and development, including contractual amounts to related parties of $4,540,067, $1,876,444 and $40,169,225 in 1997, 1998 and the period from December 15, 1992 (inception) to December 31, 1998, respectively 4,740,299 1,963,326 44,967,209 General and administrative.......... 50,869 148,241 1,584,493 ------------ ------------ -------------- 4,791,168 2,111,567 46,551,702 ------------ ------------ -------------- Loss from operations.................. (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....................... 209 92 19,847 Interest expense...................... (1,175,411) (1,314,863) (4,507,208) ------------ ------------ -------------- (1,175,202) (1,314,771) 215,991 ------------ ------------ -------------- Net loss.............................. $(2,331,854) $(1,264,384) $(25,132,863) =========== =========== ==============
See accompanying notes. 70 71 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' Common Stock Additional During the Equity ----------------------- Paid-in Development (net capital Shares Amount 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. 71 72 GENTA JAGO TECHNOLOGIES B.V. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
Cumulative From Years Ended December 31, December 15, 1992 --------------------------- (inception) to 1997 1998 December 31, 1998 ------------ ----------- ----------------- Operating Activities Net loss $(2,331,854) $(1,264,384) $(25,132,863) Items reflected in net loss not requiring cash: Depreciation and amortization 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 -- -- -- Receivables under collaboration agreements (496,016) (1,948,324) (3,348,178) Other current assets 83,688 (11,358) (33,604) Accounts payable and accrued expenses 1,220,754 (1,351,835) 440,458 Payable to related parties 939,004 4,565,354 7,985,810 Deferred contract revenue -- -- -- ------------ ------------ ------------- Net cash used in operating activities (581,824) (9,247) (24,582,081) Investing Activities Purchase of property and equipment and other 4,979 -- (19,740) ------------ ------------ ------------- Net cash provided by (used in) investing activities 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 550,000 -- 21,140,643 Repayment of notes payable to related party -- -- (600,192) ------------ ------------ ------------- Net cash provided by financing activities 550,000 -- 24,601,821 ------------ ------------ ------------- Increase (decrease) in cash and cash equivalents (26,845) (9,247) -- Cash and cash equivalents at beginning of period 36,092 9,247 -- ------------ ------------ ------------- Cash and cash equivalents at end of period $9,247 $ -- $ -- ============ ============ ============= Supplemental disclosure of cash flow information: Interest paid $ $ -- $ 299,808 ============ ============ =============
See accompanying notes. 72 73 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. 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 73 74 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 $85,000, and zero during the years ended December 31, 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, 1997, and 1998, Genta Jago 74 75 incurred expenditures of $4.5 million, and $1.9, respectively, 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 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. 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 work plans 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. 3. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS Genta Jago/Gensia/Brightstone. In January 1993, Genta Jago entered into a collaboration agreement with Gensia for the development and commercialization of certain oral controlled-release pharmaceutical products for treatment of cardiovascular disease. Under the agreement, Gensia provides funding for formulation and preclinical development to be conducted by Genta Jago and is responsible for clinical development, regulatory submissions and marketing. Terms of the agreement provide Gensia exclusive rights to market and distribute the products in North America, Europe and certain other countries. The agreement has a term of the longer of twelve years and the patent term in the respective countries within the territory. Genta Jago received $1.2 million and $1.0 million of funding in 1997 and 1998, respectively, pursuant to the agreement. Collaborative revenues of $1.5 million and $2.2 75 76 million were recognized under the agreement during the years ended December 31, 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.
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. 76 77 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 disclosing 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 financial statements for the fiscal year ended December 31, 1998. Disagreements with Accountants None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required in this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than May 1, 2000 pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1034, as amended ("Regulation 14A") ITEM 11. EXECUTIVE COMPENSATION The information required in this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than May 1, 2000 pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than May 1, 2000 pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than May 1, 2000 pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial statements (1) 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: On November 12, 1999, the Company filed a Current Report on Form 8-K disclosing the appointment of a new Chief Executive Officer and a new Chairman of the Board of Directors. 77 78 (c) Exhibits required by Item 601 of Regulation S-K with each management contract, compensatory plan or arrangement required to be filed identified. 78 79
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 3(i).1(7) Restated Certificate of Incorporation of the Company. 3(i).2(9) Certificate of Designations of Series D Convertible Preferred Stock of the Company. 3(i).3(15) Certificate of Amendment of Restated Certificate of Incorporation of the Company. 3(i).4(15) Amended Certificate of Designations of Series D Convertible Preferred Stock of the Company. 3(i).5(15) Certificate of Increase of Series D Convertible Preferred Stock of the Company. 3(i).6(13) Certificate of Amendment of Restated Certificate of Incorporation of the Company. 3(i).7(13) Certificate of Amendment of Restated Certificate of Incorporation of the Company. 3(i).8(15) Certificate of Amendment of Restated Certificate of Incorporation of the Company. 3(ii).1(13) Amended and Restated Bylaws of the Company. 4.1(1) Specimen Common Stock Certificate. 4.2(4) Specimen Series A Convertible Preferred Stock Certificate. 4.3* Specimen Series D Convertible Preferred Stock Certificate. 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. 10.1(2) Amended and Restated 1991 Stock Plan of Genta Incorporated. 10(iii)(A).1(13) Non-Employee Directors' 1998 Stock Option Plan. 10(iii)(A).2(13) 1998 Stock Incentive Plan. 10.2(1) Form of Indemnification Agreement entered into between the Company and its directors and officers. 10.3(1) Preferred Stock Purchase Agreement dated September 30, 1991 and Amendment Agreement dated October 2, 1991. 10.4(1)+ Development, License and Supply Agreement dated February 2, 1989 between the Company and Gen-Probe Incorporated. 10.5(3)+ Common Stock Transfer Agreement dated as of December 15, 1992, between the Company and Dr. Jacques Gonella. 10.6(3) Consulting Agreement dated as of December 15, 1992, between the Company and Dr. Jacques Gonella. 10.7(3)+ Common Stock Transfer Agreement dated as of December 15, 1992, between the Company and Jagotec AG. 10.8(3)+ Collaboration Agreement dated as of January 22, 1993, between Jobewol Investments B.V. (now known as Genta Jago Technologies B.V.) and Gensia, Inc. 10.9(5) Form of Purchase Agreement between the Company and certain purchasers of Common Stock.
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10.10(5) Common Stock Purchase Warrant dated May 8, 1995 between the Company and Index Securities S.A. 10.11(6)+ 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. 10.12(6)+ Limited Liability Company Agreement of Genta Jago Delaware LLC dated as of May 12, 1995 between GPM Generic Pharmaceuticals Manufacturing Inc. and the Company. 10.13(6)+ Restated Transfer Restriction Agreement dated as of May 12, 1995 between the Company and Jagotec AG. 10.14(6)+ Transfer Restriction Agreement dated as of May 12, 1995 between the Company, GPM Generic Pharmaceuticals Manufacturing Inc. and Jago Holding AG. 10.15(6)+ Common Stock Transfer Agreement dated as of May 30, 1995 between the Company and Jago Finance Limited. 10.16(6)+ Stockholders' Agreement dated as of May 30, 1995 between the Company, Jagotec AG, Dr. Jacques Gonella and Jago Finance Limited. 10.17(6)+ 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. 10.18(6)+ 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. 10.19(6)+ 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. 10.20(6)+ Restated Promissory Note dated as of January 1, 1994 between Genta Jago Technologies B.V. and the Company. 10.21(6)+ Restated License Agreement dated as of May 12, 1995 between Jagotec AG and the Company. 10.22(6)+ Restated GEOMATRIX License Agreement dated as of May 12, 1995 between Jagotec AG and Genta Jago Technologies B.V. 10.23(6)+ GEOMATRIX Manufacturing License Agreement dated as of May 12, 1995 between Jagotec AG and Genta Jago Technologies B.V. 10.24(6)+ Restated GEOMATRIX Supply Agreement dated as of May 12, 1995 between Jago Pharma AG and Genta Jago Technologies B.V. 10.25(7) Common Stock Purchase Warrant dated December 14, 1995 between the Company and Lease Management Services, Inc. 10.26(8) Common Stock Purchase Warrant for 375,123 shares of Common Stock issued to Lyon & Lyon. 10.27(8) Common Stock Purchase Warrant for 100,000 shares of Common Stock issued to Michael Arnouse. 10.28(9) Note and Warrant Purchase Agreement dated as of January 28, 1997 among the Company, The Aries Fund and The Aries Domestic Fund, L.P. 10.29(9) Letter Agreement dated January 28, 1997 from the Company to The Aries Fund and The Aries Domestic Fund, L.P. 10.30(9) Senior Secured Convertible Bridge Note of the Company dated January 28, 1997 for $1,050,000
80 81
issued to The Aries Domestic Fund, L.P. 10.31(9) Senior Secured Convertible Bridge Note of the Company dated January 28, 1997 for $1,950,000 issued to The Aries Trust. 10.32(9) Class A Bridge Warrant for the Purchase of 2,730,000 shares of Common Stock issued to The Aries Domestic Fund, L.P. 10.33(9) Class A Bridge Warrant for the Purchase of 5,070,000 shares of Common Stock issued to The Aries Trust. 10.34(9) Class B Bridge Warrant for the Purchase of 4,270,000 shares of Common Stock issued to The Aries Domestic Fund, L.P. 10.35(9) Class B Bridge Warrant for the Purchase of 7,930,000 shares of Common Stock issued to the Aries Trust. 10.36(9) Security Agreement dated as of January 28, 1997 between the Company and Paramount Capital, Inc., as agent for the holders of the Company's Senior Secured Convertible Bridge Notes 10.37(9) Letter Agreement dated January 28, 1997 among the Company, Paramount Capital, Inc., The Aries Domestic Fund, L.P. and The Aries Trust. 10.38(10) Executive Compensation Agreement dated as of January 1, 1996 between the Company and Howard Sampson. 10.39(10) Collaboration Agreement dated December 26, 1995 between the Company and Johnson & Johnson Consumer Products, Inc. 10.40(10) 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. 10.41(10)+ Development and Marketing Agreement effective February 28, 1996 between Apothecon, Inc. and Genta Jago Technologies B.V. 10.42(10)+ License Agreement effective February 28, 1996 between Apothecon, Inc. and Genta Jago Technologies B.V. 10.43(10)+ 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. and Krypton Ltd. 10.44(10)+ 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. and Krypton Ltd. . 10.45(10)+ 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. and Krypton Ltd. 10.46(10)+ Development and Sub-License Agreement/Diclofenac dated as of October 31, 1996 between Genta Jago Technologies B.V. and Krypton Ltd. 10.47(10)+ Development and Sub-License Agreement/Naproxen dated as of October 31, 1996 between Genta Jago Technologies B.V. and Krypton Ltd. 10.48(10)+ Development and Sub-License Agreement/Verapamil dated as of October 31, 1996 between Genta Jago Technologies B.V. and Krypton Ltd.
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10.49(10)+ License Termination Agreement dated December 2, 1996 between the Company and Wilton Licensing AG and the Company. 10.50(10) Contract for Regional Aid for Innovation, effective July 1, 1993, between L'Agence Nationale de Valorisation de la Recherche, Genta Pharmaceuticals Europe S.A. and the Company. 10.51(11) Warrant for the Purchase of 32,500 shares of Common Stock of the Company, issued to The Aries Fund. 10.52(11) Warrant for the Purchase of 17,500 shares of Common Stock of the Company, issued to The Aries Domestic Fund, L.P. 10.53(11) Amended and Restated Amendment Agreement dated June 23, 1997 among the Company and The Aries Fund and The Aries Domestic Fund L.P. 10.54(11) Amended and Restated Senior Secured Convertible Bridge Note for $1,050,000 issued to The Aries Domestic Fund, L.P. 10.55(11) Amended and Restated Senior Secured Convertible Bridge Note for $1,950,000 issued to The Aries Trust. 10.56(11) New Class A Bridge Warrant for the Purchase of 350,000 shares of Common Stock issued to The Aries Domestic Fund, L.P. 10.57(11) New Class A Bridge Warrant for the Purchase of 650,000 shares of Common Stock issued to The Aries Trust. 10.58(11) New Class B Bridge Warrant for the Purchase of 350,000 shares of Common Stock issued to The Aries Domestic Fund, L.P. 10.59(11) New Class B Bridge Warrant for the Purchase of 650,000 shares of Common Stock issued to The Aries Trust. 10.60(11) Consulting Agreement dated as of August 27, 1997 by and between the Company and Paul O.P. Ts'o, Ph.D. 10.61(11) Consulting Agreement dated as of August 27, 1997 by and between the Company and Sharon B. Webster, Ph.D. 10.62(15) Warrant Agreement, dated as of May 20, 1997, among the Company, ChaseMellon Shareholder Services, L.L.C., as warrant agent, and Paramount Capital, Inc. 10.63(12) Severance Agreement, Release and Covenant Not to Sue dated May 5, 1998 between Thomas H. Adams, Ph.D. and the Company. 10.64(12) Consulting Agreement dated May 5, 1998 between the Company and Thomas H. Adams, Ph.D. 10.65(14) Asset Purchase Agreement, dated as of March 19, 1999, among JBL Acquisition Corp., JBL Scientific Incorporated and the Company. 10.66(14) Agreement of Sublease dated March 31, 1999 between Interneuron Pharmaceuticals, Inc. and the Company 10.67(15) Warrant Agreement, dated as of December 23, 1999, among the Company, ChaseMellon Shareholder Services, L.L.C., as warrant agent, and Paramount Capital, Inc. 10.68(15) Separation Letter Agreement dated December 1, 1999 from the Company to Kenneth G. Kasses, Ph.D.
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10.69(15) Amendment No. 1 to Stock Option Agreement, dated as of December 1, 1999, to the Stock Option Agreement, dated as of May 28, 1998, between the Company and Kenneth G. Kasses, Ph.D. 10.70(15) Employment Letter Agreement, dated as of October 28, 1999, from the Company to Raymond P. Warrell, Jr., M.D. 10.71(15) Stock Option Agreement, dated as of October 28, 1999, between the Company and Raymond P. Warrell, Jr., M.D. 10.72(15) Letter Agreement, dated March 4, 1999, from SkyePharma Plc to the Company. 22.1(10) Subsidiaries of the Registrant. 23.1(15) Consent of Deloitte & Touche LLP, Independent Auditors. 23.2(15) Consent of Deloitte & Touche Experta Ltd., Independent Auditors. 23.3(15) Consent of Ernest & Young LLP, Independent Auditors. 27.1(15) Financial Data Schedule.
- ---------- + The Company has been granted confidential treatment of certain portions of this exhibit. * Filed supplementally. (1) Incorporated herein by reference to the exhibits to the Company's Registration Statement on Form S-1, Registration No. 33-43642. (2) 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. (3) Incorporated by reference to the exhibits to the Company's Registration Statement on Form S-3, Registration No. 33-58362. (4) Incorporated by reference to the exhibits to the Company's Current Report on Form 8-K dated as of September 24, 1993, Commission File No. 0-19635. (5) 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. (6) Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, Commission File No. 0-19635. (7) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 0-19635. (8) Exhibits 10.26 and 10.27 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. (9) Exhibits 3(i).2, 10.28, 10.29, 10.30, 10.31, 10.32, 10.33, 10.34, 10.35, 10.36 and 10.37 are incorporated herein by reference to Exhibits 3(i), 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9 and 10.10, respectively, to the Company's Current Report on Form 8-K filed on February 28, 1997, Commission File No. 0-19635. (10) Exhibits 10.38, 10.39, 10.40, 10.41, 10.42, 10.43, 10.44, 10.45, 10.46, 10.47, 10.48, 10.49, 10.50 and 22.1 are incorporated herein by reference to Exhibits 10.86, 10.87, 10.88, 10.89, 10.90, 10.91, 10.92, 10.93, 10.94, 10.95, 83 84 10.96, 10.97, 10.98 and 22.1, respectively, the Company's Annual Report on Form 10-K (Amendment No. 1) for the year ended December 31, 1996, Commission File No. 0-19635. (11) Exhibits 10.51, 10.52, 10.53, 10.54, 10.55, 10.56, 10.57, 10.58, 10.59, 10.60 and 10.61 are incorporated herein by reference to Exhibits 10.99, 10.100, 10.101, 10.102, 10.103, 10.104, 10.105, 10.106, 10.107, 10.108 and 10.109, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 0-19635. (12) Exhibits 10.63 and 10.64 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. (13) Exhibits 3(i).6, 3(i).7, 3(ii).1, 10(iii)(A).1 and 10(iii)(A).2 are incorporated herein by reference to Exhibits 3(i).4, 3(i).3, 3(ii).1, 10(iii)(A).1 and 10(iii)(A).2, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission File No. 0-19635. (14) Exhibits 10.65 and 10.66 are incorporated herein by reference to Exhibits 10.2 and 10.1, respectively, to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, Commission File No. 0-19635. (15) Filed herewith. 84 85 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 27th day of March, 2000. Genta Incorporated /s/ RAYMOND P. WARRELL, JR., M.D. ---------------------------------- Raymond P. Warrell, Jr., M.D. President, Chief Executive Officer and Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date /s/ MARK C. ROGERS, M.D. Chairman of the Board of Directors March 27, 2000 - ---------------------------------- Mark C. Rogers, M.D. /s/ RAYMOND P. WARRELL, JR., M.D. President, Chief Executive Officer and March 27, 2000 - ---------------------------------- Principal Executive Officer Raymond P. Warrell, Jr., M.D. /s/ GERALD M. SCHIMMOELLER Principal Accounting Officer, Principal March 27, 2000 - ---------------------------------- Financial Officer, Vice President Gerald M. Schimmoeller /s/ DONALD G. DRAPKIN Director March 27, 2000 - ---------------------------------- Donald G. Drapkin /s/ KENNETH G. KASSES, PH.D. Director March 27, 2000 - ---------------------------------- Kenneth G. Kasses, Ph.D. /s/ DANIEL D. VON HOFF, M.D. Director March 27, 2000 - ---------------------------------- Daniel D. Von Hoff, M.D. /s/ HARLAN J. WAKOFF Director March 27, 2000 - ----------------------------------- Harlan J. Wakoff /s/ MICHAEL S. WEISS Director March 27, 2000 - ----------------------------------- Michael S. Weiss
85 EX-3.(I)3 2 CERTIFICATE OF AMENDMENT 1 Exhibit 3(i).3 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF GENTA INCORPORATED GENTA INCORPORATED (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY THAT: FIRST: The name of the Corporation is Genta Incorporated. SECOND: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on February 4, 1988 and the original name of the Corporation was GENTA Incorporated. The Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on August 8, 1994 and was subsequently amended on September 19, 1996. THIRD: The first paragraph of Section A of Article IV of the Restated Certificate of Incorporation of the Corporation is hereby amended to read in its entirety as follows: "A. Classes of Stock. The total number of shares of all classes of capital stock which the corporation shall have authority to issue is seventy-five million (75,000,000) of which seventy million (70,000,000) shares of the par value of One Tenth of One Cent ($.001) each shall be Common Stock (the "Common Stock") and Five Million (5,000,000) shares of the par value of One Tenth of One Cent ($.001) each shall be Preferred Stock (the "Preferred Stock"). At the time this amendment becomes effective, each ten shares of the Common Stock, par value of One Tenth of One Cent ($.001) per share, issued and outstanding at such time shall be, and hereby are, reduced and converted into one fully paid and nonassessable share of Common Stock, par value of One Tenth of One Cent ($.001) per share, of the corporation as herein authorized. Each outstanding stock certificate of this corporation which immediately prior to the time this amendment becomes effective represented one or more shares of Common Stock, par value of One Tenth of One Cent ($.001) per share, shall thereafter represent the number of whole shares of Common Stock, par value of One Tenth of One Cent ($.001) per share, determined by dividing the number of shares represented by such certificate immediately prior to the time this amendment becomes effective by ten and rounding such number up to the next whole integer. The amount of capital represented by the new shares in the aggregate at the time this Certificate of Amendment becomes effective shall be adjusted by the transfer of One Tenth of One Cent ($.001) from the capital account of the Common Stock to the additional paid in capital account for each new share issued (except for new shares issued as the result of rounding up fractional shares in which case no capital adjustment shall be made), such transfer to be made at such time. The corporation shall not be required to issue or deliver any fractional shares of Common Stock. There shall be designated as capital in respect of such new shares an amount equal to the aggregate par value of such shares. Upon surrender by a holder of Common 2 Stock of a certificate or certificates for Common Stock, par value of One Tenth of One Cent ($.001), duly endorsed, at the office of the corporation, the corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Common Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock, par value of One Tenth of One Cent ($.001) per share, to which such holder shall be entitled as aforesaid." FOURTH: This amendment to the Corporation's Restated Certificate of Incorporation 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 Thomas H. Adams, its Chairman of the Board, and by Robert Wang, its Vice President, as of this 4th day of April, 1997. GENTA INCORPORATED By ___________________________ Name: Thomas H. Adams Title: Chairman of the Board By:___________________________ Name: Robert Wang Title: Vice President - 2 - EX-3.(I)4 3 AMENDED CERTIFICATE OF DESIGNATION 1 Exhibit 3(i).4 AMENDED CERTIFICATE OF DESIGNATION for SERIES D CONVERTIBLE PREFERRED STOCK of GENTA INCORPORATED Pursuant to Section 151 of the General Corporation Law of the State of Delaware GENTA INCORPORATED, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), does hereby certify that: FIRST: Pursuant to a Certificate of Designation for Series D Convertible Preferred Stock filed with the Secretary of State of the State of Delaware on February 6, 1997 (the "Original Certificate of Designation"), the Corporation established a series of its authorized preferred stock, par value $.001 per share, designated "Series D Convertible Preferred Stock" consisting of 3,750,000 shares. SECOND: None of the authorized shares of the Corporation's Series D Convertible Preferred Stock established pursuant to the Original Certificate of Designation has been issued. THIRD: In accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, at a duly held meeting of the Board of Directors of the Corporation, resolutions were adopted decreasing the number of shares designated in the Original Certificate of Designation as Series D Preferred Stock and amending and restating in their entirety the powers, preferences and relative participating, optional and other special rights of, and the qualifications, limitations and restrictions upon, the Series D Convertible Preferred Stock, as set forth herein. NOW, THEREFORE, IT IS RESOLVED, that the number of shares of the Corporation's authorized preferred stock, par value $.001 per share, designated in the Original Certificate of Designation as "Series D Convertible Preferred Stock" shall be 223,860 (hereinafter the "Series D Preferred Stock"), and the powers, preferences and relative participating, optional and other special rights of, and the qualifications, limitations and restrictions upon, the Series D Preferred Stock are hereby amended in their entirety and shall be, as follows: 2 Series D Convertible Preferred Stock 1. Designation and Amount and Definitions. (a) There shall be a series of Preferred Stock designated as "Series D Convertible Preferred Stock" and the number of shares constituting such series shall be 223,860. Such series is referred to herein as the "Series D Preferred Stock". Notwithstanding any other provision in the Certificate of Designation of the Series D Preferred Stock, as amended hereby, (the "Certificate of Designation") to the contrary, such series shall be on a parity with the Series A Preferred Stock and Series C Preferred Stock of the Corporation with respect to dividends and the distribution of assets upon liquidation, dissolution or winding up. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series D Preferred Stock to fewer than the number of shares then issued and outstanding. (b) As used in this Certificate of Designation, the following terms shall have the following meanings: (i) The "Closing Bid Price" for any security for each trading day shall be the reported per share closing bid price of such security regular way on the Stock Market on such trading day, or, if there were no transactions on such trading day, the average of the reported closing bid and asked prices, regular way, of such security on the relevant Stock Market on such trading day. (ii) "Fair Market Value" of any asset (including any security) means the fair market value thereof as mutually determined by the Corporation and the holders of a majority of the Series D Preferred Stock then outstanding. If the Corporation and the holders of a majority of the Series D Preferred Stock then outstanding are unable to reach agreement on any valuation matter, such valuation shall be submitted to and determined by a nationally recognized independent investment bank selected by the Board of Directors and the holders of a majority of the Series D Preferred Stock then outstanding (or, if such selection cannot be agreed upon promptly, or in any event within ten days, then such valuation shall be made by a nationally recognized independent investment banking firm selected by the American Arbitration Association in New York City in accordance with its rules), the costs of which valuation shall be paid for by the Corporation. (iii) "Market Price" shall mean the average Closing Bid Price for twenty (20) consecutive trading days, ending with the trading day prior to the date as of which the Market Price is being determined (with appropriate adjustments for subdivisions or combinations of shares effected during such period), provided that if the prices referred to in the definition of Closing Bid Price cannot be determined for such period, "Market Price" shall mean Fair Market Value. (iv) "Registered Holders" shall mean, at any time, the holders of record of the Series D Preferred Stock. (v) The "Stock Market" shall mean, with respect to any security, the principal national securities exchange on which such security is listed or admitted - 2 - 3 to trading or, if such security is not listed or admitted to trading on any national securities exchange, shall mean The Nasdaq National Market System ("NNM") or The Nasdaq SmallCap Market ("SCM" and, together with NNM, "Nasdaq") or, if such security is not quoted on Nasdaq, shall mean the OTC Bulletin Board or, if such security is not quoted on the OTC Bulletin Board, shall mean the over-the-counter market as furnished by any NASD member firm selected from time to time by the Corporation for that purpose. (vi) "Trading Price" shall mean the lower of (i) the average Closing Bid Price of the Common Stock (with appropriate adjustments for subdivisions or combinations of shares effected during such period) for thirty (30) consecutive trading days, ending with the trading day prior to the date as of which the Trading Price is being determined, and (ii) the average Closing Bid Price of the Common Stock (with appropriate adjustments for subdivisions or combinations of shares effected during such period) for five (5) consecutive trading days, ending with the trading day prior to the date as of which the Trading Price is being determined, provided that if the prices referred to in the definition of Closing Bid Price cannot be determined for any of such periods, "Trading Price" shall mean Fair Market Value. (vii) A "trading day" shall mean a day on which the relevant Stock Market is open for the transaction of business. 2. Dividends and Distributions. (a) Commencing on the Reset Date (as defined in Subsection 4(a)), the holders of the Series D Preferred Stock shall be entitled to receive cumulative dividends on each share of Series D Preferred Stock, payable in shares of Common Stock, at the rate of 10% per annum (computed on the basis of a 360-day year of twelve 30 day months) of the Dividend Base Amount (as defined below), payable semi-annually in arrears. Such dividends shall be paid in duly authorized, fully paid and non assessable shares of Common Stock. In calculating the number of shares of Common Stock to be paid with respect to each dividend, each share of Common Stock shall be deemed to have the value of the Conversion Price (as defined in Section 4(a) hereof) at the time such dividend is paid. Such dividends shall accrue and accumulate whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. The "Dividend Base Amount" shall be $140.00 plus all accrued but unpaid dividends (subject to appropriate adjustment to reflect any stock split, combination, reclassification or reorganization of the Series D Preferred Stock). (b) In addition to the foregoing, subject to the rights of the holders of any shares of any series or class of capital stock ranking prior, and superior to, or pari passu with, the shares of Series D Preferred Stock with respect to dividends, the holders of shares of Series D Preferred Stock shall be entitled to receive, as, when and if declared by the Board of Directors, out of assets legally available for that purpose, dividends or distributions in cash, stock or otherwise. (c) The Corporation shall not declare any dividend or distribution on any Junior Stock (as defined below) of the Corporation unless and until a special dividend or - 3 - 4 distribution of $140.00 per share (subject to appropriate adjustment to reflect any stock split, combination, reclassification or reorganization of the Series D Preferred Stock) has been declared and paid on the Series D Preferred Stock. In the event that such special dividend or distribution is declared and paid on the Series D Preferred Stock, an aggregate per share dividend or distribution equal to (i) $140.00 divided by (ii) the effective Conversion Rate (as defined below) at the time of such special dividend or distribution on the Series D Preferred Stock may be declared and paid on the Common Stock. Except as aforesaid, the Corporation shall not declare any dividend or distribution on any Junior Stock or stock on a parity with the Series D Preferred Stock, unless the Corporation shall, concurrently with the declaration of such dividend or distribution on the Junior Stock or stock on a parity with the Series D Preferred Stock, declare a like dividend or distribution, as the case may be, on the Series D Preferred Stock. (d) Any dividend or distribution (other than that referenced in the first sentence of Subsection 2(c)) payable to the holders of the Series D Preferred Stock pursuant to this Section 2 shall be paid to such holders at the same time as the dividend or distribution on the Junior Stock or any other capital stock of the Corporation by which it is measured is paid. (e) All dividends or distributions declared upon the Series D Preferred Stock shall be declared pro rata per share. (f) Any reference to "distribution" contained in this Section 2 shall not be deemed to include any distribution made in connection with or in lieu of any Liquidation Event (as defined below). (g) No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series D Preferred Stock which may be in arrears. (h) So long as any shares of the Series D Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on any class or series of stock of the Corporation ranking, as to dividends, on a parity with the Series D Preferred Stock, for any period unless all dividends have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof set apart for such payment, on the Series D Preferred Stock. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, upon the shares of the Series D Preferred Stock and any other class or series of stock ranking on a parity as to dividends with the Series D Preferred Stock, all dividends declared upon such other stock shall be declared pro rata so that the amounts of dividends per share declared on the Series D Preferred Stock and such other stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of the Series D Preferred Stock and on such other stock bear to each other. (i) So long as any shares of the Series D Preferred Stock are outstanding, no other stock of the Corporation ranking on a parity with the Series D Preferred Stock as to dividends or upon liquidation, dissolution or winding up shall be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund or otherwise for the purchase or redemption of any shares of any such stock) by the - 4 - 5 Corporation unless the dividends, if any, accrued on all outstanding shares of the Series D Preferred Stock shall have been paid or set apart for payment. (j) "Junior Stock" shall mean the Common Stock and any shares of preferred stock of any series or class of the Corporation, whether presently outstanding or hereafter issued, which are junior to the shares of Series D Preferred Stock with respect to (i) the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, (ii) dividends or (iii) voting, except that the Junior Stock shall not include the Series A Preferred Stock nor the Series C Preferred Stock of the Corporation. Notwithstanding the foregoing, this Section 2 shall only be effective insofar as it does not conflict with any provision of the Certificate of Incorporation relating to the rights of the Series A Preferred Stock, and does not cause the Series D Preferred Stock to be senior to the Series A Preferred Stock with respect to dividends. 3. Liquidation Preference. (a) In the event of a (i) liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, (ii) a sale or other disposition of all or substantially all of the assets of the Corporation or (iii) any consolidation, merger, combination, reorganization or other transaction in which the Corporation is not the surviving entity or shares of Common Stock constituting in excess of 50% of the voting power of the Corporation are exchanged for or changed into stock or securities of another entity, cash and/or any other property (a "Merger Transaction") (items (i), (ii) and (iii) of this sentence being collectively referred to as a "Liquidation Event"), after payment or provision for payment of debts and other liabilities of the Corporation and subject to the Corporation's prior compliance with Article IV of the Certificate of Incorporation, the holders of the Series D Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders on a pari passu basis with the shares of Series A Preferred Stock and Series C Preferred Stock of the Corporation, whether such assets are capital, surplus, or earnings, before any payment or declaration and setting apart for payment of any amount shall be made in respect of any Junior Stock of the Corporation, an amount equal to $140.00 per share plus an amount equal to all declared and/or unpaid dividends thereon; provided, however, in the case of a Merger Transaction, such $140.00 per share may be paid in cash, property (valued as provided in Subsection 3(b)) and/or securities (valued as provided in Subsection 3(b)) of the entity surviving such Merger Transaction. In the case of property or in the event that any such securities are subject to an investment letter or other similar restriction on transferability, the value of such property or securities shall be determined by agreement between the Corporation and the holders of a majority of the Series D Preferred Stock then outstanding. If upon any Liquidation Event, whether voluntary or involuntary, the assets to be distributed to the holders of the Series D Preferred Stock shall be insufficient to permit the payment to such shareholders of the full preferential amounts aforesaid, then all of the assets of the Corporation to be distributed shall be so distributed ratably to the holders of the Series D Preferred Stock on the basis of the number of shares of Series D Preferred Stock held. Notwithstanding item (iii) of the first sentence of this Subsection 3(a), any consolidation, merger, combination, reorganization or other transaction in which the Corporation is not the surviving entity but the stockholders of the Corporation immediately prior to such transaction own in excess of 50% of the voting power of the corporation surviving such transaction and own such interest in substantially the same proportions as prior to such transaction, shall not be considered a Liquidation Event provided - 5 - 6 that the surviving corporation shall make appropriate provisions to ensure that the terms of this Certificate of Designation survive any such transaction as provided in Subsection 4(c)(ii). All shares of Series D Preferred Stock shall rank as to payment upon the occurrence of any Liquidation Event senior to the Common Stock as provided herein, on a pari passu basis with the shares of Series A Preferred Stock and Series C Preferred Stock of the Corporation, and unless the terms of such series shall provide otherwise, senior to all other series of the Corporation's preferred stock. (b) Any securities or other property to be delivered to the holders of the Series D Preferred Stock pursuant to Subsection 3(a) hereof shall be valued as follows: (i) Securities not subject to an investment letter or other similar restriction on free marketability: (A) If actively traded on a Stock Market, the value shall be deemed to be the Market Price as of the third day prior to the date of valuation. (B) If not actively traded on a Stock Market, the value shall be the Fair Market Value. (ii) For securities for which there is an active public market but which are subject to an investment letter or other restrictions on free marketability, the value shall be the Fair Market Value thereof, determined by discounting appropriately the Market Price thereof. (iii) For all other securities, the value shall be the Fair Market Value thereof. 4. Conversion. (a) Right of Conversion. The shares of Series D Preferred Stock shall be convertible, in whole or in part, at the option of the holder thereof and upon notice to the Corporation as set forth in Subsection 4(b), into fully paid and nonassessable shares of Common Stock and such other securities and property as hereinafter provided. The initial conversion price per share of Common Stock shall be equal to $3.00 (the "Conversion Price") and shall be subject to adjustment as provided herein. The rate at which each share Series D Preferred Stock is convertible at any time into Common Stock (the "Conversion Rate") shall be determined by dividing the then existing Conversion Price into $100.00. Subject to adjustment pursuant to the provisions of Subsection 4(c) below, in the event that the Conversion Price in effect at the time of the Initial Closing Date (as defined below), any Interim Closing Date (as defined below) or the Final Closing Date (as defined below) is greater than 50% of the Trading Price of the Common Stock as of (x) the initial closing date of the issuance and sale of units (the "Premium Preferred Units") consisting of Series D Preferred Stock and Class D Warrants pursuant to a confidential term sheet dated May 20, 1997 (the "Initial Closing Date"), (y) any interim closing date of the issuance and sale of the Premium Preferred Units (each an "Interim Closing Date") or (z) the final closing date of the issuance and - 6 - 7 sale of the Premium Preferred Units (the "Final Closing Date") pursuant to the subscription agreements entered into in connection therewith, then the Conversion Price shall be adjusted to equal 50% of the lesser of any such Trading Price. If there is any change in Conversion Price as a result of the preceding sentence, then the Conversion Rate shall be changed accordingly as set forth above. In the event that there is no Initial, Interim nor Final Closing Date (as defined above), or the above referenced offering of Premium Preferred Units is otherwise terminated, then "Initial Closing Date", "Interim Closing Date" and "Final Closing Date" as used herein shall refer to the initial, interim and final closing date, respectively, in the next offering or series of related offerings) of equity securities of the Corporation (or any securities convertible into equity securities)("Qualified Offering Securities") with gross proceeds in excess of $2,000,000. The Board of Directors, or a committee designated by it for such purpose, may specify an initial conversion price applicable to the shares of Series D Preferred Stock issued at any closing lower than the initial conversion price that would otherwise obtain pursuant to the preceding paragraphs of this Subsection 4(a) and, in the event an initial conversion price is so specified, it shall be applicable to all shares of the Series D Preferred Stock. The Corporation shall prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Corporation setting forth the Conversion Rate as of the Final Closing Date, showing in reasonable detail the facts upon which such adjusted Conversion Rate is based, and such certificate shall forthwith be filed with the transfer agent of the Series D Preferred Stock. A notice stating that the Conversion Rate has been adjusted pursuant to the second preceding paragraph of this Subsection 4(a), or that no adjustment is necessary, and setting forth the Conversion Rate in effect as of the Final Closing Date shall be mailed as promptly as practicable after the Final Closing Date by the Corporation to all record holders of the Series D Preferred Stock at their last addresses as they shall appear in the stock transfer books of the Corporation. The Conversion Price (subject to adjustment pursuant to the provisions of Subsection 4(c)) in effect immediately prior to the date that is 12 months after the Final Closing Date (the "Reset Date") shall be adjusted and reset effective as of the Reset Date if the Market Price as of the Reset Date (the "12-Month Trading Price") is less than 140% of the then applicable Conversion Price (a "Reset Event"). Upon the occurrence of a Reset Event, the Conversion Price shall be reduced to be equal to the greater of (A) the 12-Month Trading Price divided by 1.40, and (B) 25% of the then applicable Conversion Price. If there is any change in the Conversion Price as a result of the preceding sentence, then the Conversion Rate shall be changed accordingly as set forth above. The Corporation shall prepare a certificate signed by the principal financial officer of the Corporation setting forth the Conversion Rate as of the Reset Date, showing in reasonable detail the facts upon which such Conversion Rate is based, and such certificate shall forthwith be filed with the transfer agent of the Series D Preferred Stock. A notice stating that the Conversion Rate has been adjusted pursuant to this paragraph, or that no adjustment is necessary, and setting forth the Conversion Rate in effect as of the Reset Date shall be mailed as promptly as practicable after the Reset Date by the Corporation to all record holders of the Series D Preferred Stock at their last addresses as they shall appear in the stock transfer books of the Corporation. - 7 - 8 (b) Conversion Procedures. Any holder of shares of Series D Preferred Stock desiring to convert such shares into Common Stock shall surrender the certificate or certificates evidencing such shares of Series D Preferred Stock at the office of the transfer agent for the Series D Preferred Stock, which certificate or certificates, if the Corporation shall so require, shall be duly endorsed to the Corporation or in blank, or accompanied by proper instruments of transfer to the Corporation or in blank, accompanied by irrevocable written notice to the Corporation that the holder elects so to convert such shares of Series D Preferred Stock and specifying the name or names (with address) in which a certificate or certificates evidencing shares of Common Stock are to be issued. The Corporation need not deem a notice of conversion to be received unless the holder complies with all the provisions hereof. The Corporation will instruct the transfer agent (which may be the Corporation) to make a notation of the date that a notice of conversion is received, which date shall be deemed to be the date of receipt for purposes hereof. The Corporation shall, as soon as practicable after such deposit of certificates evidencing shares of Series D Preferred Stock accompanied by the written notice and compliance with any other conditions herein contained, deliver at such office of such transfer agent to the person for whose account such shares of Series D Preferred Stock were so surrendered, or to the nominee or nominees of such person, certificates evidencing the number of full shares of Common Stock to which such person shall be entitled as aforesaid, together with a cash adjustment of any fraction of a share as hereinafter provided. Subject to the following provisions of this paragraph, such conversion shall be deemed to have been made as of the date of such surrender of the shares of Series D Preferred Stock to be converted, and the person or persons entitled to receive the Common Stock deliverable upon conversion of such Series D Preferred Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date; provided, however, that the Corporation shall not be required to convert any shares of Series D Preferred Stock while the stock transfer books of the Corporation are closed for any purpose, but the surrender of Series D Preferred Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books as if the surrender had been made on the date of such reopening, and the conversion shall be at the conversion rate in effect on such date. No adjustments in respect of any dividends on shares surrendered for conversion or any dividend on the Common Stock issued upon conversion shall be made upon the conversion of any shares of Series D Preferred Stock. The Corporation shall at all times, reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series D Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series D Preferred Stock. All notices of conversion shall be irrevocable; provided, however, that if the Corporation has sent notice of an event pursuant to Subsection 4(g) hereof, a holder of Series D Preferred Stock may, at its election, provide in its notice of conversion that the conversion of its shares of Series D Preferred Stock shall be contingent upon the occurrence of the record date or effectiveness of such event (as specified by such holder), provided that such notice of conversion is received by the Corporation prior to such record date or effective date, as the case may be. - 8 - 9 (c) Adjustment of Conversion Rate and Conversion Price. (i) Except as otherwise provided herein, in the event the Corporation shall, at any time or from time to time after the date hereof, (1) sell or issue any shares of Common Stock for a consideration per share less than either (i) the Conversion Price in effect on the date of such sale or issuance or (ii) the Market Price of the Common Stock as of the date of the sale or issuance, (2) issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or (3) subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Conversion Price in effect immediately prior to such Change of Shares shall be changed to a price (rounded to the nearest cent) determined by multiplying the Conversion Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the sale or issuance of such additional shares or such subdivision or combination and the number of shares of Common Stock which the aggregate consideration received (determined as provided in Subparagraph 4(c)(v)(F)) for the issuance of such additional shares would purchase at the greater of (i) the Conversion Price in effect on the date of such issuance or (ii) the Market Price of the Common Stock as of such date, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after the sale or issuance of such additional shares or such subdivision or combination. Such adjustment shall be made successively whenever such an issuance is made. (ii) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Corporation with or into another entity (other than a consolidation or merger in which the Corporation is the continuing entity and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock other than the number thereof), or in case of any sale or conveyance to another entity of the property of the Corporation as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Corporation shall cause effective provision to be made so that each holder of a share of Series D Preferred Stock shall be entitled to receive, upon conversion of such share of Series D Preferred Stock, the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock into which such share of Series D Preferred Stock was convertible immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Subsection 4(c). The Corporation shall not effect any such consolidation, merger or sale unless prior to or simultaneously with the consummation thereof the successor (if other than the Corporation) resulting from such consolidation or merger or the entity purchasing assets or other appropriate entity shall assume, by written instrument executed and delivered to the transfer agent for the Series D Preferred Stock (the "Transfer Agent"), the obligation to deliver to the holder of each share of Series D Preferred Stock such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive and the other obligations under this Agreement. The foregoing provisions shall similarly apply to successive reclassifications, - 9 - 10 capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (iii) [Reserved] (iv) After each adjustment of the Conversion Price pursuant to this Subsection 4(c), the Corporation will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Corporation setting forth: (i) the Conversion Price as so adjusted, (ii) the Conversion Rate corresponding to such Conversion and (iii) a brief statement of the facts accounting for such adjustment. The Corporation will promptly file such certificate with the Transfer Agent and cause a brief summary thereof to be sent by ordinary first class mail to each registered holder of Series D Preferred Stock at his or her last address as it shall appear on the registry books of the Transfer Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of such adjustment. The affidavit of an officer of the Transfer Agent or the Secretary or an Assistant Secretary of the Corporation that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. The Transfer Agent may rely on the information in the certificate as true and correct and has no duty or obligation to independently verify the amounts or calculations set forth therein. (v) For purposes of Subsection 4(c)(i) hereof, the following provisions (A) to (F) shall also be applicable: (A) The number of shares of Common Stock deemed outstanding at any given time shall include all shares of capital stock convertible into, or exchangeable for, Common Stock (on an as converted basis) as well as all shares of Common Stock issuable upon the exercise of (x) any convertible debt, (y) warrants outstanding on the date hereof and (z) options outstanding on the date hereof. (B) No adjustment of the Conversion Price shall be made unless such adjustment would require an increase or decrease of at least $.01 in such price; provided that any adjustments which by reason of this Subparagraph (B) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with adjustments so carried forward, shall require an increase or decrease of at least $.01 in the Conversion Price then in effect hereunder. (C) In case of (1) the sale or other issuance by the Corporation (including as a component of a unit) of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or any securities convertible into or exchangeable for Common Stock (such securities convertible, exercisable or exchangeable into Common Stock being herein called "Convertible Securities"), or (2) the issuance by the Corporation, without the receipt by the Corporation of any consideration therefor, of any rights or warrants to subscribe for or purchase, or any - 10 - 11 options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options, or the right to convert or exchange such Convertible Securities, are immediately exercisable, and the consideration per share for which Common Stock is issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, payable to the Corporation upon the exercise of such rights, warrants or options, plus the consideration received by the Corporation for the issuance or sale of such rights, warrants or options, plus, in the case of such Convertible Securities, the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities issuable upon the exercise of such rights, warrants or options) is less than either the Conversion Price or the Market Price of the Common Stock as of the date of the issuance or sale of such rights, warrants or options, then such total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (as of the date of the issuance or sale of such rights, warrants or options) shall be deemed to be "Common Stock" for purposes of Subsection 4(c)(i) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsection 4(c)(i). (D) In case of the sale by the Corporation of any Convertible Securities, whether or not the right of conversion or exchange thereunder is immediately exercisable, and the price per share for which Common Stock is issuable upon the - 11 - 12 conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount of consideration received by the Corporation for the sale of such Convertible Securities, plus the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities) is less than either the Conversion Price or the Market Price of the Common Stock as of the date of the sale of such Convertible Securities, then such total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities (as of the date of the sale of such Convertible Securities) shall be deemed to be "Common Stock" for purposes of Subsection 4(c)(i) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsection 4(c)(i). (E) In case the Corporation shall modify the rights of conversion, exchange or exercise of any of the securities referred to in (C) and (D) above or any other securities of the Corporation convertible, exchangeable or exercisable for shares of Common Stock, for any reason other than an event that would require adjustment to prevent dilution, so that the consideration per share received by the Corporation after such modification is less than either the Conversion Price or the Market Price as of the date prior to such modification, then such securities, to the extent not theretofore exercised, converted or exchanged, shall be deemed to have expired or terminated immediately prior to the date of such modification and the Corporation shall be deemed for purposes of calculating any adjustments pursuant to this Subsection 4(c) to have issued such new securities upon such new terms on the date of modification. Such adjustment shall become effective as of the date upon which such modification shall take effect. On the expiration or cancellation of any such right, warrant or option or the termination or cancellation of any such right to convert or exchange any such Convertible Securities, the Conversion Price then in effect hereunder shall forthwith be readjusted to such Conversion Price as would have obtained (a) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities and (b) had adjustments been made on the basis of the Conversion Price as adjusted under clause (a) of this sentence for all transactions (which would have affected such adjusted Conversion Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities. (F) In case of the sale of any shares of Common Stock, any Convertible Securities, any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, the consideration received by the Corporation therefor shall be deemed to be the gross sales price therefor without deducting therefrom any expense paid or incurred by the Corporation or any underwriting discounts or commissions or concessions paid or allowed by the - 12 - 13 Corporation in connection therewith. In the event that any securities shall be issued in connection with any other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated among the securities, then each of such securities shall be deemed to have been issued for such consideration as the Board of Directors of the Corporation determines in good faith; provided, however that if the Registered Holders of in excess of 25% of the then outstanding Series D Preferred Stock disagree with such determination, the Corporation shall retain, at its own expense, an independent investment banking firm for the purpose of obtaining an appraisal. (vi) Notwithstanding any other provision hereof, no adjustment to the Conversion Price will be made: (A) upon the exercise of any of the options outstanding on the date hereof under the Corporation's existing stock option plans; or (B) upon the issuance or exercise of options which may hereafter be granted with the approval of the Board of Directors, or exercised, under any employee benefit plan of the Corporation to officers, directors, consultants or employees, but only with respect to such options as are exercisable at prices no lower than the Closing Bid Price (or, if the price referenced in the definition of Closing Bid Price cannot be determined, the Fair Market Value) of the Common Stock as of the date of grant thereof; or (C) upon issuance or exercise of the Placement Warrants, or the Advisory Warrants, (as defined in the Placement Agency Agreement between the Corporation and Paramount Capital, Inc. (the "Placement Agent") dated as of May 1, 1997 (the "Placement Agency Agreement")) (collectively, the "Paramount Warrants"), upon the conversion of the Series D Preferred Stock underlying the Bridge Notes (as defined in the Note and Warrant Purchase Agreement dated as of January 28, 1997 (the "Note and Warrant Purchase Agreement")), upon the exercise of the Class A and Class B Bridge Warrants (as defined in the Note and Warrant Purchase Agreement) or upon the issuance, conversion or exercise of the Series D Preferred Stock or the Class D Warrants included in the Premium Preferred Units of the Corporation issued (i) on or prior to the Final Closing Date or (ii) pursuant to the exercise of the Paramount Warrants, or upon the issuance, conversion or exercise of any Series D Preferred Stock or Class D Warrants approved by the Placement Agent or upon the issuance of any other equity securities of the Corporation to the extent that such issuance causes an adjustment to the Conversion Price pursuant to the second paragraph of Subsection 4(a); or - 13 - 14 (D) upon the issuance or sale of Common Stock or Convertible Securities pursuant to the exercise of any rights, options or warrants to receive, subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options were outstanding on the date of the original issuance of the Series D Preferred Stock or were thereafter issued or sold, provided that an adjustment was either made or not required to be made in accordance with Subsection 4(c)(i) in connection with the issuance or sale of such securities or any modification of the terms thereof; or (E) upon the issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities, provided that any adjustments required to be made upon the issuance or sale of such Convertible Securities or any modification of the terms thereof were so made, and whether or not such Convertible Securities were outstanding on the date of the original sale of the Series D Preferred Stock or were thereafter issued or sold; or upon the issuance of Common Stock upon conversion of principal and interest in respect of $350,000 principal amount of the Company's 4% Convertible Debentures due August 1, 1997 outstanding on February 6, 1997 or upon the conversion of 1,424 shares of the Company's Series C Preferred Stock outstanding on February 6, 1997, provided that any such conversion occurs at a conversion price in excess of the Conversion Price at such time. Subparagraph 4(c)(v)(E) shall nevertheless apply to any modification of the rights of conversion, exchange or exercise of any of the securities referred to in Subparagraphs (A), (B) and (C) of this Subsection 4(c)(vi). (vii) As used in this Subsection 4(c), the term "Common Stock" shall mean and include the Corporation's Common Stock authorized on the date of the original issue of the Series D Preferred Stock and shall also include any capital stock of any class of the Corporation thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Corporation; provided, however, that the shares issuable upon conversion of the Series D Preferred Stock shall include only shares of such class designated in the Certificate of Incorporation as Common Stock on the date of the original issue of the Series D Preferred Stock or (i), in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Subsection 4(c)(ii) hereof, the stock, securities or property provided for in such section or (ii), in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon conversion of the Series D Preferred Stock as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (viii) Any determination as to whether an adjustment in the Conversion Price in effect hereunder is required pursuant to Subsection 4(a) or 4(c), or as to the amount of - 14 - 15 any such adjustment, if required, shall be binding upon the holders of the Series D Preferred Stock and the Corporation if made in good faith by the Board of Directors of the Corporation. (d) No Fractional Shares. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon conversion of Series D Preferred Stock. If more than one certificate evidencing shares of Series D Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series D Preferred Stock so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any shares of Series D Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the same fraction of the Market Price as of the close of business on the day of conversion. (e) Concurrent Grant. If the Corporation shall fix a record date for the making of a Distribution on Common Stock to holders of its Common Stock (other than any distribution referred to in Subsection 4(c) hereof and cash dividends paid out of retained earnings of the Corporation determined under generally accepted accounting principals consistently applied), the Corporation shall set aside in an escrow reasonably acceptable to the holders of the Series D Preferred Stock, the Distribution on Common Stock (as defined below) to which they would have been entitled if they had converted all of the Series D Preferred Stock held by them for the Corporation's Common Stock immediately prior to the record date for the purpose of determining stockholders entitled to receive such Distribution on Common Stock and any such Distribution on Common Stock shall thereafter be distributed from time to time out of such escrow to persons converting the Series D Preferred Stock (immediately upon conversion) to the extent such Distribution on Common Stock relates to the shares of Series D Preferred Stock then being converted. As used herein, the term "Distribution on Common Stock" means a distribution to holders of the Common Stock (including any such distribution made in connection with a consolidation or merger in which the Corporation is the continuing corporation) of (i) assets (including any cash dividends or distributions), (ii) evidences of indebtedness or other securities of the Corporation or of any entity other than the Corporation or (iii) subscription rights, options or warrants to purchase any of the foregoing assets or securities, whether or not such rights, options or warrants are immediately exercisable. (f) Reservation of Shares; Transfer Taxes, Etc. The Corporation shall at all times reserve and keep available, out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series D Preferred Stock, such number of shares of its Common Stock free of preemptive rights as shall be sufficient to effect the conversion of all shares of Series D Preferred Stock from time to time outstanding (including, without limitation, shares of Common Stock issuable upon conversion of the Series D Preferred Stock in the case of a Reset Event. The Corporation shall use its best efforts from time to time, in accordance with the laws of the State of Delaware to increase the authorized number of shares of Common Stock if at any time the number of shares of authorized, unissued and unreserved Common Stock shall not be sufficient to permit the conversion of all the then-outstanding shares of Series D Preferred Stock. The Corporation shall pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of the Series D - 15 - 16 Preferred Stock. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Common Stock (or other securities or assets) in a name other than that in which the shares of Series D Preferred Stock so converted were registered. and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (g) Prior Notice of Certain Events. In case: (i) the Corporation shall declare any dividend (or any other distribution); or (ii) the Corporation shall authorize the granting to the holders of Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights or warrants; or (iii) of any reclassification of Common Stock (other than a subdivision or combination of the outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value); or (iv) of any consolidation or merger (including, without limitation, a Merger Transaction) to which the Corporation is a party and for which approval of any stockholders of the Corporation shall be required, or of the sale or transfer of all or substantially all of the assets of the Corporation or of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property; or (v) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation (including, without limitation, a Liquidation Event); then the Corporation shall cause to be filed with the transfer agent for the Series D Preferred Stock, and shall cause to be mailed to the Registered Holders, at their last addresses as they shall appear upon the stock transfer books of the Corporation, at least 20 days prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record (if any) is to be taken for the purpose of such dividend. distribution or granting of rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined and a description of the cash, securities or other property to be received by such holders upon such dividend, distribution or granting of rights or warrants or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up or other Liquidation Event is expected to become effective, the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such exchange, dissolution, liquidation or winding up or other Liquidation Event and the consideration, including securities or other property, to be received by such holders upon such exchange; provided, however, that no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the corporate action required to be specified in such notice. - 16 - 17 (h) Other Changes in Conversion Rate. The Corporation from time to time may increase the Conversion Rate by any amount for any period of time if the period is at least 20 days and if the increase is irrevocable during the period. Whenever the Conversion Rate is so increased, the Corporation shall mail to the Registered Holders a notice of the increase at least 15 days before the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period it will be in effect. The Corporation may make such increases in the Conversion Rate, in addition to those required or allowed by this Section 4, as shall be determined by it, as evidenced by a resolution of the Board of Directors, to be advisable in order to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. Notwithstanding anything to the contrary herein, in no case shall the Conversion Price be adjusted to an amount less than $.001 per share, the current par value of the Common Stock into which the Series D Preferred Stock is convertible. (i) Ambiguities/Errors. The Board of Directors of the Corporation shall have the power to resolve any ambiguity or correct any error in the provisions relating to the convertibility of the Series D Preferred Stock, and its actions in so doing shall be final and conclusive. 5. Mandatory Conversion. At any time on or after the Reset Date, the Corporation at its option, may cause the Series D Preferred Stock to be converted in whole or in part, on a pro rata basis, into fully paid and nonassessable shares of Common Stock at the then effective Conversion Rate if the Closing Bid Price (or, if the price referenced in the definition of Closing Bid Price cannot be determined, the Fair Market Value) of the Common Stock shall have exceeded 300% of the then applicable Conversion Price for at least 20 trading days in any 30 consecutive trading day period ending three days prior to the date of notice of conversion. Any shares of Series D Preferred Stock so converted shall be treated as having been surrendered by the holder thereof for conversion pursuant to Section 4 on the date of such mandatory conversion (unless previously converted at the option of the holder). No greater than 60 nor fewer than 20 days prior to the date of any such mandatory conversion, notice by first class mail, postage prepaid, shall be given to the holders of record of the Series D Preferred Stock to be converted, addressed to such holders at their last addresses as shown on the stock transfer books of the Corporation. Each such notice shall specify the date fixed for conversion, the place or places for surrender of shares of Series D Preferred Stock, and the then effective Conversion Rate pursuant to Section 4. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given by the Corporation on the date deposited in the mail, whether or not the holder of the Series D Preferred Stock receives such notice; and failure properly to give such notice by mail, or any defect in such notice, to the holders of the shares to be converted shall not affect the validity of the proceedings for the conversion of any other shares of Series D Preferred - 17 - 18 Stock. On or after the date fixed for conversion as stated in such notice, each holder of shares called to be converted shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice for conversion. Notwithstanding that the certificates evidencing any shares properly called for conversion shall not have been surrendered, the shares shall no longer be deemed outstanding and all rights whatsoever with respect to the shares so called for conversion (except the right of the holders to convert such shares upon surrender of their certificates therefor) shall terminate. 6. Voting Rights. (a) General. Except as otherwise provided herein, in the Certificate of Incorporation or the By-laws of the Corporation or as required by applicable law, the holders of shares of Series D Preferred Stock, the holders of shares of Common Stock and the holders of any other class or series of shares entitled to vote with the Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. In any such vote, each share of Series D Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the Common Stock into which such share of Series D Preferred Stock is convertible on the record date for such vote, or if no record date has been established, on the date such vote is taken. Any shares of Series D Preferred Stock held by the Corporation or any entity controlled by the Corporation shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum. (b) Class Voting Rights. In addition to any vote specified in Section 6(a), so long as at least 50% of the shares of Series D Preferred Stock (including those shares of Series D Preferred Stock issued or issuable upon the conversion of the Bridge Notes, the exercise of the warrants issued to Paramount Capital, Inc., the placement agent in connection with the offer and sale of the Series D Preferred Stock or any other warrants or options for the purchase of Series D Preferred Stock) shall be outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least 50% of all outstanding Series D Preferred Stock, voting separately as a class, (i) amend, alter or repeal any provision of the Certificate of Incorporation or the Bylaws of the Corporation so as adversely to affect the relative rights, preferences, qualifications, limitations or restrictions of the Series D Preferred Stock, (ii) approve the alteration or change to the rights, preferences or privileges of the Series D Preferred Stock, (iii) incur or voluntarily repay prior to the maturity thereof any indebtedness (other than the Bridge Notes) in excess of $2,000,000 or (iv) authorize or issue, or increase the authorized amount of, any equity security ranking prior to, or on a parity with, the Series D Preferred Stock (other than additional Series D Preferred Stock approved in writing by the Placement Agent) (A) upon a Liquidation Event, (B) with respect to the payment of any dividends or distributions or (C) with respect to voting rights (except for class voting rights required by law). 7. Outstanding Shares. For purposes of this Certificate of Designation, a share of Series D Preferred Stock, when issued, shall be deemed outstanding except (i) from the date, or the deemed date, of surrender of certificates evidencing shares of Series D Preferred Stock, all shares of Series D Preferred Stock converted into Common Stock and (ii) from the - 18 - 19 date of registration of transfer, all shares of Series D Preferred Stock held of record by the Corporation or any subsidiary of the Corporation. 8. Status of Acquired Shares. Shares of Series D Preferred Stock received upon conversion pursuant to Section 4 or Section 5 or otherwise acquired by the Corporation will be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to class, and may thereafter be issued, but not as shares of Series D Preferred Stock. 9. Preemptive Rights. The Series D Preferred Stock is not entitled to any preemptive or subscription rights in respect of any securities of the Corporation. 10. Severability of Provisions. Whenever possible, each provision hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. If a court of competent jurisdiction should determine that a provision hereof would be valid or enforceable if a period of time were extended or shortened or a particular percentage were increased or decreased, then such court may make such changes as shall be necessary to render the provision in question effective and valid under applicable law. 11. No Amendment or Impairment. The Corporation shall not amend its Certificate of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the rights of the holders of the Series D Preferred Stock against impairment. 12. Redemption Parity. (a) If the Corporation is required to repurchase, redeem or otherwise acquire (collectively, "Redeem") shares of Series A Preferred Stock representing more than 5% of the aggregate stated value of the Series A Preferred Stock, then the Corporation shall, subject to its prior compliance with Article IV of the Certificate of Incorporation, offer to Redeem the shares of Series D Preferred Stock, on a pari passu basis with the Series A Preferred Stock based on the relative liquidation preferences of each such series of Preferred Stock. The Corporation shall Redeem the shares of Series D Preferred Stock with the same type of consideration that is paid to Redeem the Series A Preferred Stock, and the Corporation shall Redeem the shares of Series D Preferred Stock in the same manner, on the same schedule, and upon the same notice (the "Company Notice"), as it Redeems the Series A Preferred Stock. (b) If the Corporation Redeems any Series D Preferred Stock, the redemption price shall be $140.00 per share of Series D Preferred Stock, subject to appropriate adjustment for stock splits, combinations and the like (the "Redemption Price"). - 19 - 20 (c) If the Corporation Redeems any Series D Preferred Stock, the Registered Holders shall be given the opportunity to elect to convert their shares of Series D Preferred Stock at the then applicable Conversion Price in lieu of having such shares Redeemed. If the Corporation uses Common Stock to Redeem any Series D Preferred Stock, then such Common Stock will be valued at its Market Price. (d) The Corporation's obligation to provide moneys to Redeem any Series D Preferred Stock shall be deemed fulfilled if, on or before the redemption date, the Corporation shall deposit with a bank or trust company having an office or agency in the Borough of Manhattan, City of New York, and having a capital and surplus of at least $50,000,000, the principal amount of funds necessary to so Redeem, in trust for the account of the Registered Holders of the shares to be Redeemed (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such funds be applied to Redeem the shares of Series D Preferred Stock so called to be Redeemed. Any interest accrued on such funds shall be paid to the Corporation from time to time. Any funds so deposited and unclaimed at the end of three years from such redemption date shall be released or repaid to the Corporation, after which, subject to any applicable laws relating to escheat or unclaimed property, any Registered Holders of such shares of Series D Preferred Stock so called to be Redeemed shall look only to the Corporation for payment of the Redemption Price. (e) Upon surrender of the certificates for any shares of Series D Preferred Stock to be Redeemed by the Corporation (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the Company Notice shall so state), such shares shall be Redeemed by the Corporation at the Redemption Price. [Signature page follows] - 20 - 21 IN WITNESS WHEREOF, David R. Walner, Secretary of the Corporation, acting for and on behalf of the Corporation, has hereunto subscribed his name this 29th day of May, 1997. GENTA INCORPORATED By: __________________________ Name: David. R. Walner Title: Secretary - 21 - EX-3.(I)5 4 CERTIFICATE OF INCREASE OF PREFERRED STOCK 1 Exhibit 3(i).5 CERTIFICATE OF INCREASE OF SERIES D CONVERTIBLE PREFERRED STOCK OF GENTA INCORPORATED (Pursuant to Section 151 of the General Corporation Law of the State of Delaware) ------------------------------------------ Genta Incorporated (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 151(g) thereof, DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the Company, the Board of Directors of the Company has adopted the following resolution increasing the number of authorized shares of Series D Convertible Preferred Stock of the Company: RESOLVED: That pursuant to the authority expressly granted and vested in the Board of Directors of the Company in accordance with the provisions of its Restated Certificate of Incorporation the number of shares of the series of Preferred Stock of the Company designated as Series D Convertible Preferred Stock be, and hereby is, increased from 223,860 shares to 270,290 shares; and that the appropriate officers of the Company be and hereby are authorized and directed in the name and on behalf of the Company to execute and file a Certificate of Increase with the Secretary of State of the State of Delaware increasing the number of shares constituting the Series D Convertible Preferred Stock from 223,860 to 270,290 and to take any and all other actions deemed necessary or appropriate to effectuate this resolution. IN WITNESS WHEREOF, the Company has caused this Certificate of Increase to be executed by its duly authorized officer on this 15th day of July, 1998. GENTA INCORPORATED By:________________________________ Name: Office: EX-3.(I)8 5 RESTATED CERTIFICATE OF INCORPORATION 1 Exhibit 3(i).8 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF GENTA INCORPORATED Pursuant to Section 242 of the General Corporation Law of the State of Delaware It is hereby certified that: 1. Genta Incorporated (the "Corporation") is a corporation formed under the laws of the State of Delaware, and its Restated Certificate of Incorporation was filed in the office of the Secretary of State on August 8, 1994. 2. The Restated Certificate of Incorporation of the Corporation is hereby amended by making the following changes to Article IV(B): a. The text of Section 1(k) is hereby deleted and replaced with "[Reserved]." b. The text in Section 6(d)(v)(x)(1) that reads "(assuming conversion of all outstanding shares of Series A Preferred Stock into Common Shares)" is hereby deleted. c. The text in Section 6(d)(v)(x)(2) that reads "$6.75 per share" is hereby deleted and replaced with "the Conversion Price in effect on the date of such issuance". d. The text in Section 6(d)(v)(y)(1) that reads "(assuming conversion of all outstanding shares of Series A Preferred Stock into Common Shares)" is hereby deleted. e. The following paragraph is hereby added immediately after Section 6(d)(v)(y)(2): For purposes of this subsection, the number of Common Shares deemed outstanding at any given time shall include all shares of capital stock convertible into, or exchangeable for, Common Shares (on an as converted basis) as well as all Common Shares issuable upon the exercise of (x) any convertible debt, (y) warrants outstanding and (z) options outstanding. f. The text in the first sentence of Section 6(d)(v)(C) that reads ", including, but not limited to, a change resulting from the antidilution provisions thereof" is hereby deleted and replaced with "for any reason other than an event that would require adjustment to prevent dilution". g. The current Section 6(d)(vi) is hereby deleted and replaced with the following new Section 6(d)(vi); 2 (vi) Additional Stock. "Additional Stock" shall mean any Common Share issued by the corporation after the Issue Date for a consideration per share equal to or less than the Conversion Price in effect on the date of such issuance, as adjusted for stock splits, dividends and combinations (or Common Shares issuable pursuant to options or rights or convertible or exchangeable securities as referred to in paragraph (v) above if the consideration therefor as provided in clause (A) therein is equal to or less than the Conversion Price in effect on the date of such issuance, as adjusted as aforesaid), other than (A) Common Shares issued pursuant to any transaction described in Section 2(d) or 6(d)(i)-(iv) hereof, (B) Common Shares and options to purchase Common Shares issued or issuable to employees, directors, consultants or advisors of the corporation directly or pursuant to a stock plan or stock purchase plan or agreement, which have been issued as of the date hereof or are issuable pursuant to agreements entered into on or prior to the date hereof. Any further Common Shares and options to purchase Common Shares issued or issuable to employees, directors, consultants or advisors of the corporation other than those referenced in the preceding sentence but only with respect to such options as are exercisable at prices no lower than the Closing Bid Price (as defined below) of the Common Shares as of the date of grant thereof, (C) Common Shares issued in payment of dividends or upon conversion of the Series A Preferred Stock, (D) Securities issued or issuable for consideration other than solely cash in connection with any license, collaborative, corporate partnership, co-marketing or copromotion, research and development or similar arrangement, (E) upon the issuance or sale of Common Shares or securities convertible into or exchangeable for Common Shares (such securities convertible, exercisable or exchangeable into Common Shares being herein called "Convertible Securities") pursuant to the exercise of any rights, options or warrants to receive, subscribe for or purchase, or any options for the purchase of, Common Shares or Convertible Securities, whether or not such rights, warrants or options were outstanding on the date of the original issuance of the Series A Preferred Stock or were thereafter issued or sold, provided that an adjustment was either made or not required to be made in accordance with Subsection 6(d)(v) in connection with the issuance or sale of such securities or any modification of the terms thereof, or (F) upon the issuance or sale of Common Shares upon conversion or exchange of any Convertible Securities, provided that any adjustments required to be made upon the issuance or sale of such Convertible Securities or any modification of the terms thereof were so made, and whether or not such - 2 - 3 Convertible Securities were outstanding on the date of the original sale of the Series A Preferred Stock or were thereafter issued or sold. For purposed of this section, the "Closing Bid Price" for any security for a trading day shall be the reported per share closing bid price of such security regular way on the Stock Market (as defined below) on such trading day, or, if there were no transactions on such trading day, the average of the reported closing bid and asked prices, regular way, of such security on the relevant Stock Market on such trading day. The "Stock Market" shall mean, with respect to any security, the principal national securities exchange on which such security is listed or admitted to trading or, if such security is not listed or admitted to trading on any national securities exchange, shall mean The Nasdaq National Market System ("NNM") or The Nasdaq SmallCap Market ("SCM" and, together with NNM, "Nasdaq") or, if such security is not quoted on Nasdaq, shall mean the OTC Bulletin Board or, if such security is not quoted on the OTC Bulletin Board, shall mean the over-the-counter market as furnished by any NASD member firm selected from time to time by the corporation for that purpose. h. The text of Section 7 is hereby deleted and replaced with "[Reserved]." 3. This Amendment to the Certificate of Incorporation of the Corporation has been duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware. The undersigned has executed this certificate as of May 4, 1999. GENTA INCORPORATED By: __________________________ Kenneth G. Kasses, Ph.D. President, Chief Executive Officer and Chairman of the Board - 3 - EX-10.62 6 WARRANT AGREEMENT (DECEMBER 23, 1999) 1 Exhibit 10.62 WARRANT AGREEMENT AGREEMENT, dated as of this 20th day of May, 1997, by and among GENTA INCORPORATED, a Delaware corporation ("Company"), CHASEMELLON SHAREHOLDER SERVICES, L.L.C., as warrant agent ("Warrant Agent"), and PARAMOUNT CAPITAL, INC., a New York corporation ("Paramount"). W I T N E S S E T H WHEREAS, the Company has commenced a private placement (the "Private Placement") of a minimum (the "Minimum Offering") of 10 Units (as defined below) and a maximum (the "Maximum Offering") of 75 Units, with an option in favor of Paramount, to offer up to an additional 50 Units to cover over-allotments, each "Unit" consisting of (a) 1,000 shares of Series D Preferred Stock (as defined below) of the Company, convertible into shares of common stock, par value $.001 per share, of the Company, (b) redeemable warrants (the "Class D Warrants") to purchase at any time prior to the fifth anniversary of the Final Closing Date (as defined below) 5,000 shares of Common Stock (as defined below) at the initial conversion price of such Series D Preferred Stock, pursuant to a placement agency agreement dated as of May 1, 1997 (the "Placement Agency Agreement"), between the Company and Paramount; WHEREAS, the Company may issue up to 781,250 Class D Warrants pursuant to the Maximum Offering and the over-allotment option; WHEREAS, each Class D Warrant entitles the Registered Holder (as defined below) thereof to purchase one (1) share of Common Stock; WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Class D Warrants, the issuance of certificates representing the Class D Warrants, the exercise of the Class D Warrants, and the rights of the holders thereof; NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Class D Warrants and the certificates representing the Class D Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Class D Warrants and the Warrant Agent, the parties hereto agree as follows: SECTION 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Common Stock" shall mean stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the distribution of earnings and assets of the Company without limit as to amount or percentage, which at the Initial Closing Date will consist of 4,327,752 (subject to possible adjustment resulting from rounding upwards to the nearest whole share in connection with the one for ten reverse stock split of the Common Stock that was effected on April 4, 1997 and possible conversions, since April 18, 1997, of 2 convertible securities issued by the Company) shares of Common Stock, par value $.001 per share. (b) "Closing Bid Price" for each trading day shall be the reported per share closing bid price of the Common Stock regular way on the Stock Market on such trading day, or, if there were no transactions on such trading day, the average of the reported closing bid and asked prices, regular way, of such security on the relevant Stock Market on such trading day. (c) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which, at any particular time, its principal business shall be administered, which office is located at the date hereof at Overpeck Centre, 85 Challenger Road, Ridgefield Park, New Jersey, 07660. (d) "Exercise Date" shall mean, as to any Class D Warrant, the date on which the Warrant Agent shall have received both (a) the Warrant Certificate representing such Class D Warrant, with the subscription form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the applicable Purchase Price. (e) "Fair Market Value" of any asset (including any security) means the fair market value thereof as mutually determined by the Company and the Registered Holders of a majority of the Class D Warrants then outstanding. If the Company and the Registered Holders of a majority of the Class D Warrants then outstanding are unable to reach agreement on any valuation matter, such valuation shall be submitted to and determined by a nationally recognized independent investment bank selected by the board of directors of the Company and the Registered Holders of a majority of the Class D Warrants then outstanding (or, if such selection cannot be agreed upon promptly, or in any event within ten days, then such valuation shall be made by a nationally recognized independent investment banking firm selected by the American Arbitration Association in New York City in accordance with its rules), the costs of which valuation shall be paid for by the Company. (f) "Final Closing Date" shall mean the final closing date of the Private Placement. (g) "Initial Closing Date" shall mean, as to each Class D Warrant, the date of the initial closing of the Offering. (h) "Initial Warrant Exercise Date" shall mean, as to each Class D Warrant, the Final Closing Date. (i) "Interim Closing Date" shall mean, as to each Class D Warrant, any closing date of the Offering other than the Initial Closing Date and the Final Closing Date. (j) "Market Price" shall mean the average Closing Bid Price for twenty (20) consecutive trading days, ending with the trading day prior to the date as of which the Market Price is being determined (with appropriate adjustments for subdivisions or combinations of shares effected during such period), provided that if the prices referred to in the definition of - 2 - 3 Closing Bid Price cannot be determined for such period, "Market Price" shall mean Fair Market Value. (k) "Preferred Stock" shall mean the Series D Convertible Preferred Stock of the Company, stated value $100.00 per share, par value $.001 per share which at the Initial Closing Date will consist of 223,860 authorized shares. (l) "Purchase Price" shall mean the purchase price to be paid upon exercise of each Class D Warrant in accordance with the terms hereof, which price shall be the lesser of (i) $3.00 and (ii) 50% of the Trading Price as of the day immediately preceding (a) the Initial Closing Date, (b) any Interim Closing Date, or (c) the Final Closing Date of the Offering, whichever is lowest, subject to adjustment from time to time pursuant to the provisions of Section 9, and subject to the Company's right to reduce the Purchase Price upon notice to all warrantholders (which may be given, without limitation, prior to the Final Closing Date). (m) "Redemption Price" shall mean the price at which the Company may, at its option in accordance with the terms hereof, redeem the Class D Warrants, which price shall be $0.10 per share of Common Stock subject to such Class D Warrants, as adjusted as provided in Section 9. (n) "Registered Holder" shall mean, as to any Class D Warrant and as of any particular date, the person in whose name the certificate representing the Class D Warrant shall be registered on that date on the books maintained by the Warrant Agent pursuant to Section 6. (o) "Series A Preferred Stock" means the Series A Preferred Stock described in the Restated Certificate of Incorporation of the Company (the "Certificate of Incorporation"), as in effect on the date hereof. (p) The "Stock Market" shall mean the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, shall mean The Nasdaq National Market System or The Nasdaq SmallCap Market (collectively, "Nasdaq") or, if the Common Stock is not quoted on Nasdaq, shall mean the OTC Bulletin Board or, if the Common Stock is not quoted on the OTC Bulletin Board, shall mean the over-the-counter market as furnished by any NASD member firm selected from time to time by the Company for that purpose. (q) "Trading Price" shall mean the lower of (i) the average Closing Bid Price (with appropriate adjustments for subdivisions or combinations of shares effected during such period) for thirty (30) consecutive trading days, ending with the trading day prior to the date as of which the Trading Price is being determined, and (ii) the average Closing Bid Price (with appropriate adjustments for subdivisions or combinations of shares effected during such period) for five (5) consecutive trading days, ending with the trading day prior to the date as of which the Trading Price is being determined, provided that if the prices referred to in the definition of Closing Bid Price cannot be determined for any of such periods, "Trading Price" shall mean Fair Market Value. (r) A "trading day" shall mean a day on which the Stock Market is open for the transaction of business. - 3 - 4 (s) "Transfer Agent" shall mean ChaseMellon Shareholder Services, L.L.C., as the Company's transfer agent, or its authorized successor, as such. (t) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on the day prior to the fifth anniversary of the Final Closing Date or the Redemption Date as defined in Section 8, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized or required to close, then 5:00 P.M. (New York time) on the next following day which in the State of New York is neither a holiday nor a day on which banks are authorized or required to close. Upon notice to all Registered Holders, the Company shall have the right to extend the Warrant Expiration Date. (u) Unless otherwise stated, section references used within this Warrant Agreement refer to sections of this Warrant Agreement. SECTION 2. Warrants and Issuance of Warrant Certificates. (a) A Class D Warrant initially shall entitle the Registered Holder of the Warrant Certificate representing such Class D Warrant to purchase one share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in Section 9. (b) The Class D Warrants included in the offering of Units will immediately be detachable and separately transferable from the shares of Preferred Stock constituting part of such Units. (c) Within five days after the Final Closing Date, Warrant Certificates representing the number of Class D Warrants sold pursuant to the Private Placement shall be executed by the Company and delivered to the Warrant Agent. Within five days of receipt of the Warrant Certificates by the Warrant Agent, the Warrant Agent shall send the Warrant Certificates to the Registered Holders. The Company shall issue a written order, signed by its Chairman of the Board, President or any Vice President and by its Secretary or an Assistant Secretary, to the Warrant Agent directing that the Warrant Certificates shall be countersigned, issued and delivered by the Warrant Agent in accordance with the preceding sentence. (d) From time to time, until the Warrant Expiration Date, the Transfer Agent shall countersign and deliver stock certificates in required whole number denominations representing up to an aggregate of 781,250 shares of Common Stock, subject to adjustment as described herein, upon the exercise of Class D Warrants in accordance with this Agreement. (e) From time to time, until the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon the exercise of fewer than all Class D Warrants represented by any Warrant Certificate, to evidence any unexercised Class D Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7 and (v) at the option of the - 4 - 5 Company, in such form as may be approved by its Board of Directors, to reflect any adjustment to, or change in: the Purchase Price; the number of shares of Common Stock purchasable upon exercise of the Class D Warrants; the Redemption Price of the Class D Warrants; or the Warrant Expiration Date. SECTION 3. Form and Execution of Warrant Certificates. (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Class D Warrants may be listed, or to conform to usage or to the requirements of Section 2. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrant Certificates shall be numbered serially with the letters DW on Class D Warrants of all denominations. (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be an officer of the Company or to hold the particular office referenced in the Warrant Certificate before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issuance and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be an officer of the Company or to hold such office. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder without further action by the Company, except as otherwise provided by Subsection 4(a). SECTION 4. Exercise. (a) Each Class D Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A Class D Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of those securities upon the exercise of the Class D Warrant as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date the Warrant Agent shall deposit the proceeds received from the exercise of a Class D Warrant and shall notify the Company in writing of the exercise of the Class D Warrants. Promptly following, and in any event within five days after the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, - 5 - 6 a certificate or certificates for the securities deliverable upon such exercise (plus a certificate for any remaining unexercised Class D Warrants of the Registered Holder). In the case of payment made in the form of a check drawn on an account of Paramount or such other investment banks and brokerage houses as the Company shall approve in writing to the Warrant Agent, certificates shall immediately be issued without prior notice to the Company nor any delay. Upon the exercise of any Class D Warrant and clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Class D Warrant (the "Warrant Proceeds") to the Company or as the Company may direct in writing, subject to the provisions of Subsections 4(b) and 4(c). (b) On the Exercise Date in respect of the exercise of any Class D Warrant, the Warrant Agent shall, simultaneously with the distribution of the Warrant Proceeds to the Company, on behalf of the Company, pay from the Warrant Proceeds, a fee of 5% (the "Paramount Fee") of the Purchase Price to Paramount for Class D Warrant exercises solicited by Paramount or its representatives (of which a portion may be reallowed by Paramount to the dealer who solicited the exercise, which may also be Paramount). In the event the Paramount Fee is not received within seven days of the date on which the Company receives Warrant Proceeds, then the Paramount Fee shall begin accruing interest at an annual rate 300 basis points above prime payable by the Company to Paramount at the time Paramount receives the Paramount Fee. Within five days after exercise the Warrant Agent shall send Paramount a copy of the reverse side of each Class D Warrant exercised. In addition, Paramount and the Company may at any time during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant Certificates returned to the Warrant Agent upon exercise of Class D Warrants. Paramount is intended by the parties hereto to be, and is, a third-party beneficiary of this Agreement. The provisions of this paragraph may not be modified, amended or deleted without the prior written consent of Paramount. In addition to the foregoing, any costs incurred by Paramount shall be promptly reimbursed by the Company. (c) In order to enforce the provisions of Subsection 4(b) above, in the event there is any dispute or question as to the amount or payment of the Paramount Fee, the Warrant Agent is hereby expressly authorized to withhold payment to the Company of the Warrant Proceeds unless and until the Company establishes an escrow account for the purpose of depositing the entire amount of the unpaid Paramount Fee claimed by Paramount, which amount will be deducted from the net Warrant Proceeds to be paid to the Company. The funds placed in the escrow account may not be released to the Company without a written agreement from Paramount that the required Paramount Fee has been received by Paramount. Paramount shall promptly notify the Warrant Agent by facsimile and certified mail in the event of any such dispute or when the Paramount Fee has been paid. SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Class D Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Class D Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Class D Warrants shall, at the time of delivery (assuming full payment of the purchase price thereof), be duly and validly issued, fully paid, - 6 - 7 nonassessable and free from all issuance taxes, liens and charges with respect to the issue thereof including, without limitation, adverse claims whatsoever (with the exception of claims arising through the acts of the Registered Holders themselves and except as arising from applicable Federal and state securities laws), that the Company shall have paid all taxes, if any, in respect of the original issuance thereof and that upon issuance such shares, to the extent applicable, shall be listed on, or included in, the Stock Market. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of Class D Warrants hereunder require registration with, or the approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval; provided, however, that the Company shall have no obligation to register such securities under the Securities Act of 1933, as amended, except as provided in the Subscription Agreement dated as of the date hereof between the Company and each Registered Holder. The Company will use reasonable efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws; provided, that the Company shall not be required to qualify as a foreign corporation or file a general or limited consent to service of process in any such jurisdictions or make any changes in its capital structure or any other aspects of its business or enter into any agreements with blue sky commissions, including any agreement to escrow shares of its capital stock. With respect to any such securities, however, Class D Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other similar governmental charges that may be imposed with respect to the issuance of Class D Warrants, or the issuance or delivery of any shares upon exercise of the Class D Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Class D Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock issuable upon exercise of the Class D Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Class D Warrants. SECTION 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Class D Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction of the terms and provisions hereof, the Company shall execute, and the Warrant Agent shall countersign, issue and deliver in - 7 - 8 exchange therefor, the Warrant Certificate or Certificates that the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and any transfers thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Class D Warrants. (c) With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) A service charge may be imposed by the Warrant Agent on holders for any exchange or registration of transfer of Warrant Certificates of such holders. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or governmental or other charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise, or for exchange in case of mutilated Warrant Certificates, shall be promptly cancelled by the Warrant Agent and thereafter retained by the Warrant Agent in a manner consistent with its customary practices until termination of this Warrant Agreement or resignation as Warrant Agent, or, with the prior written consent of Paramount, disposed of or destroyed at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Class D Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Class D Warrants, which are being offered in Units with shares of Preferred Stock pursuant to the Placement Agency Agreement, will immediately be detachable and separately transferable from the Preferred Stock. SECTION 7. Loss or Mutilation. Upon receipt by the Warrant Agent of evidence satisfactory to it of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to it, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Class D Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. - 8 - 9 SECTION 8. Redemption. (a) If there is no Series A Preferred Stock outstanding, at any time after the first anniversary of the Final Closing Date, on no fewer than sixty (60) days' prior written notice to Registered Holders of the Class D Warrants being redeemed, the Company may, at its option, redeem the Class D Warrants at the Redemption Price, provided the Closing Bid Price exceeds 300% of the Purchase Price per share of Common Stock subject to a Class D Warrant for at least 20 trading days in any 30 consecutive trading day period ending three days prior to the date of notice of redemption (which shall be the date of mailing of such notice). In addition, regardless of whether there is any Series A Preferred Stock outstanding at any time after the first anniversary of the Final Closing Date, on no fewer than sixty (60) days' prior written notice to Registered Holders of the Class D Warrants being redeemed, the Company may, at its option, redeem the Class D Warrants at the Redemption Price, provided the Closing Bid Price exceeds 600% of the Purchase Price per share of Common Stock subject to a Class D Warrant for at least 20 trading days in any 30 consecutive trading day period ending three days prior to the date of notice of redemption (which shall be the date of mailing of such notice). All outstanding Class D Warrants must be redeemed if any are redeemed. The date fixed for redemption of the Class D Warrants is referred to herein as the "Redemption Date." (b) If the conditions set forth in Subsection 8(a) are met, and the Company desires to exercise its right to redeem the Class D Warrants, it shall request the Warrant Agent to mail a notice of redemption to each of the Registered Holders of the Class D Warrants to be redeemed, first class, postage prepaid, not later than the sixtieth day before the date fixed for redemption, at their last address as shall appear on the records maintained pursuant to Subsection 6(b). Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. (c) The notice of redemption shall specify (i) the Redemption Price, (ii) the Redemption Date, (iii) the place where the Warrant Certificates shall be delivered and the Redemption Price paid, (iv) that Paramount will assist each Registered Holder of a Class D Warrant and be entitled to a commission and reimbursement of costs in connection with the exercise thereof and (v) that the right to exercise the Class D Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Registered Holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Class D Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Holders of the Class D Warrants shall have no further rights except to receive, upon surrender of the Class D Warrant, the Redemption Price. (e) From and after the Redemption Date, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrant Certificates evidencing Class D - 9 - 10 Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the Redemption Price of such Class D Warrants. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Class D Warrants called for redemption, such Class D Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the Redemption Price, shall cease. SECTION 9. Adjustment of Purchase Price and Number of Shares of Common Stock or Class D Warrants. Upon each adjustment of the Purchase Price pursuant to this Section 9, the total number of shares of Common Stock purchasable upon the exercise of each Class D Warrant shall (subject to the provisions contained in Subsection 9(c)) be such number of shares (calculated to the nearest tenth) purchasable at the Purchase Price in effect immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. (a) Except as otherwise provided herein, in the event the Company shall, at any time or from time to time after the date hereof, (i) sell or issue any shares of Common Stock for a consideration per share less than either (a) the Purchase Price in effect on the date of such sale or issuance or (b) the Market Price of the Common Stock as of the date of the sale or issuance, (ii) issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or (iii) subdivide or combine the outstanding shares of Common Stock into a greater or fewer number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Purchase Price in effect immediately prior to such Change of Shares shall be changed to a price (rounded to the nearest cent) determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding immediately prior to the sale or issuance of such additional shares or such subdivision or combination plus (B) the number of shares of Common Stock that the aggregate consideration received (determined as provided in Paragraph 9(g)(vi)) for the issuance of such additional shares would purchase at the greater of (1) the Purchase Price in effect on the date of such issuance or (2) the Market Price as of such date, and the denominator of which shall be (y) the number of shares of Common Stock outstanding immediately after the sale or issuance of such additional shares or such subdivision or combination. Such adjustment shall be made successively whenever any such issuance is made. (b) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another entity (other than a consolidation or merger in which the Company is the continuing entity and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock other than the number thereof), or in case of any sale or conveyance to another entity of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Class D Warrant then outstanding shall have the right thereafter, by exercising such Class D Warrant, upon the terms and conditions specified in the Class D Warrants and in lieu of the shares of Common Stock immediately theretofore purchasable upon exercise of the Class D Warrants, to purchase the kind - 10 - 11 and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Class D Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 9. The Company shall not effect any such consolidation, merger or sale unless prior to, or simultaneously with, the consummation thereof the successor (if other than the Company) resulting from such consolidation or merger or the entity purchasing assets or other appropriate entity shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Class D Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations under this Agreement. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (c) If, at any time or from time to time, the Company shall issue or distribute to the holders of shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding an issuance or distribution governed by one of the preceding subsections of this Section 9 and also excluding cash dividends or cash distributions paid out of net profits legally available therefor in the full amount thereof (any such non-excluded event being herein called a "Special Dividend")), then in each case the Purchase Price shall be adjusted by multiplying the Purchase Price theretofore in effect by a fraction, the numerator of which shall be the Market Price in effect on the record date of such issuance or distribution less the Fair Market Value of the Special Dividend applicable to one share of Common Stock and the denominator of which shall be such Market Price. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (d) The Company may elect, upon any adjustment of the Purchase Price hereunder, to adjust the number of Class D Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Class D Warrant as hereinabove provided, so that each Class D Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Class D Warrant held of record prior to such adjustment of the number of Class D Warrants shall become that number of Class D Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. Upon each adjustment of the number of Class D Warrants pursuant to this Section 9, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Section 10, the number of additional Class D Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrant Certificates held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) - 11 - 12 new Warrant Certificates evidencing the number of Class D Warrants to which such Holder shall be entitled after such adjustment. (e) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Class D Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Subsection 2(e), continue to express the same Purchase Price per share, number of shares purchasable thereunder and Redemption Price therefor as when the same were originally issued. (f) After each adjustment of the Purchase Price pursuant to this Section 9, the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Class D Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Class D Warrants pursuant to Subsection 9(d), the number of Class D Warrants to which the registered holder of each Class D Warrant shall then be entitled, and the adjustment in Redemption Price resulting therefrom, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by ordinary first class mail to Paramount and to each Registered Holder of Class D Warrants at his or her last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of such adjustment. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. The Warrant Agent may rely on the information in the certificate as true and correct and has no duty or obligation to independently verify the amounts or calculations set forth therein. (g) For purposes of Subsections 9(a) and 9(c), the following provisions (i) to (v) shall also be applicable: (i) the number of shares of Common Stock deemed outstanding at any given time shall include all shares of capital stock convertible into, or exchangeable for, Common Stock (on an as converted basis) as well as all shares of Common Stock issuable upon the exercise of (x) any convertible debt, (y) warrants outstanding on the date hereof and (z) options outstanding on the date hereof. (ii) No adjustment of the Purchase Price shall be made unless such adjustment would require an increase or decrease of at least $.01 in such price; provided that any adjustments which by reason of this Paragraph (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with adjustments so carried forward, shall require an increase or decrease of at least $.01 in the Purchase Price then in effect hereunder. (iii) In case of (1) the sale by the Company (including as a component of a unit) of any rights or warrants to subscribe for or purchase, or any options for the purchase - 12 - 13 of, Common Stock or any securities convertible into or exchangeable for Common Stock (such securities convertible, exercisable or exchangeable into Common Stock being herein called "Convertible Securities"), or (2) the issuance by the Company, without the receipt by the Company of any consideration therefor, of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options, or the right to convert or exchange such Convertible Securities, are immediately exercisable, and the consideration per share for which Common Stock is issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, payable to the Company upon the exercise of such rights, warrants or options, plus the consideration received by the Company for the issuance or sale of such rights, warrants or options, plus, in the case of such Convertible Securities, the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities issuable upon the exercise of such rights, warrants or options) is less than either the Purchase Price or the Market Price of the Common Stock as of the date of the issuance or sale of such rights, warrants or options, then such total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (as of the date of the issuance or sale of such rights, warrants or options) shall be deemed to be "Common Stock" for purposes of Subsections 9(a) and 9(c) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsections 9(a) and 9(c). (iv) In case of the sale or other issuance by the Company of any Convertible Securities, whether or not the right of conversion or exchange thereunder is immediately exercisable, and the price per share for which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount of consideration received by the Company for the sale of such Convertible Securities, plus the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities) is less than either the Purchase Price or the Market Price of the Common Stock as of the date of the sale of such Convertible Securities, then such total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities (as of the date of the sale of such Convertible Securities) shall be deemed to be "Common Stock" for purposes of Subsections 9(a) - 13 - 14 and 9(c) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsections 9(a) and 9(c). (v) In case the Company shall modify the rights of conversion, exchange or exercise of any of the securities referred to in Paragraphs (iii) or (iv) of this Subsection 9(g) or any other securities of the Company convertible, exchangeable or exercisable for shares of Common Stock, for any reason other than an event that would require adjustment to prevent dilution, so that the consideration per share received by the Company after such modification is less than either the Purchase Price or the Market Price as of the date prior to such modification, then such securities, to the extent not theretofore exercised, converted or exchanged, shall be deemed to have expired or terminated immediately prior to the date of such modification and the Company shall be deemed, for purposes of calculating any adjustments pursuant to this Section 9, to have issued such new securities upon such new terms on the date of modification. Such adjustment shall become effective as of the date upon which such modification shall take effect. On the expiration or cancellation of any such right, warrant or option or the termination or cancellation of any such right to convert or exchange any such Convertible Securities, the Purchase Price then in effect hereunder shall forthwith be readjusted to such Purchase Price as would have obtained (a) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities and (b) had adjustments been made on the basis of the Purchase Price as adjusted under clause (a) of this sentence for all transactions (which would have affected such adjusted Purchase Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities. (vi) In case of the sale of any shares of Common Stock, any Convertible Securities, any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, the consideration received by the Company therefor shall be deemed to be the gross sales price therefor without deducting therefrom any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. In the event that any securities shall be issued in connection with any other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated among the securities, then each of such securities shall be deemed to have been issued for such consideration as the Board of Directors of the Company determines in good faith; provided, however that if holders of more than of 10% of the then outstanding Class D Warrants disagree with such determination, the Company shall retain an independent investment banking firm for the purpose of obtaining an appraisal. (h) Notwithstanding any other provision hereof, no adjustment to the Purchase Price of the Class D Warrants or to the number of shares of Common Stock purchasable upon the exercise of each Class D Warrant will be made: (i) upon the exercise of any of the options outstanding on the date hereof under the Company's existing stock option plans; or - 14 - 15 (ii) upon the issuance or exercise of options which may hereafter be granted with the approval of the Board of Directors, or exercised, under any employee benefit plan of the Corporation to officers, directors, consultants or employees, but only with respect to such options as are exercisable at prices no lower than the Closing Bid Price (or, if the price referenced in the definition of Closing Bid Price cannot be determined, the Fair Market Value) of the Common Stock as of the date of grant thereof; or (iii) upon issuance or exercise of the Placement Warrants or the Advisory Warrants (as defined in the Placement Agency Agreement) (collectively, the "Paramount Warrants"), upon the conversion of the Series D Preferred Stock underlying the Bridge Notes (as defined in the Note and Warrant Purchase Agreement dated as of January 28, 1997 (the "Note and Warrant Purchase Agreement")), upon the exercise of the Class A and Class B Bridge Warrants (as defined in the Note and Warrant Purchase Agreement) or upon the issuance, conversion or exercise of the Series D Preferred Stock or the Class D Warrants included in the Units of the Corporation issued (A) on or prior to the Final Closing Date or (B) pursuant to the exercise of the Paramount Warrants, or upon the issuance, conversion or exercise of any Series D Preferred Stock or Class D Warrants approved by Paramount; or (iv) upon the issuance or sale of Common Stock or Convertible Securities pursuant to the exercise of any rights, options or warrants to receive, subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options were outstanding on the date of the original sale of the Class D Warrants or were thereafter issued or sold, provided that an adjustment was either made or not required to be made in accordance with Subsections 9(a) or 9(c) in connection with the issuance or sale of such securities or any modification of the terms thereof; or (v) upon the issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities, provided that any adjustments required to be made upon the issuance or sale of such Convertible Securities or any modification of the terms thereof were so made, and whether or not such Convertible Securities were outstanding on the date of the original sale of the Class D Warrants or were thereafter issued or sold. Paragraph 9(g)(v) shall nevertheless apply to any modification of the rights of conversion, exchange or exercise of any of the securities referred to in Paragraphs (i), (ii) and (iii) of this Subsection 9(h). (i) As used in this Section 9, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the date of the original issue of the Units and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Class D Warrants shall include only shares of such class designated in the Certificate of Incorporation as Common Stock on the date of the original issue of the Units or (i), in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Subsection 9(c), the stock, securities or property provided for in such section or (ii), in the case of any reclassification or change in the outstanding shares of Common - 15 - 16 Stock issuable upon exercise of the Class D Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (j) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to Section 9, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Class D Warrants and the Company if made in good faith by the Board of Directors of the Company. (k) Notwithstanding anything to the contrary herein, in no case shall the Purchase Price be adjusted to an amount less than $.001 per share, the current par value of the Common Stock for which the Class D Warrants are exerciseable. (l) If and whenever the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase, or any options for the purchase of, Common Stock or securities convertible into or exchangeable for or carrying a right, warrant or option to purchase Common Stock, the Company may at its option elect concurrently therewith to grant to each Registered Holder as of the record date for such transaction of the Class D Warrants then outstanding, the rights, warrants or options to which each Registered Holder would have been entitled if, on the record date used to determine the stockholders entitled to the rights, warrants or options being granted by the Company, the Registered Holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise of his or her Class D Warrants. If the Company shall so elect under this Subsection 9(l), then such grant by the Company to the holders of the Class D Warrants shall be in lieu of any adjustment which otherwise might be called for pursuant to this Section 9. SECTION 10. Fractional Warrants and Fractional Shares. If the number of shares of Common Stock purchasable upon the exercise of each Class D Warrant is adjusted pursuant to Section 9, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Class D Warrants or otherwise, nor to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Registered Holder an amount in cash equal to such fraction multiplied by the Market Price of one share of Common Stock as of the date of exercise. SECTION 11. Warrant Holders Not Deemed Stockholders. No holder of Class D Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Class D Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Class D Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Class D Warrants and been issued shares of Common Stock in accordance with the provisions hereof. - 16 - 17 SECTION 12. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Class D Warrants, and any Registered Holder of a Class D Warrant, without consent of the Warrant Agent or of the holder of any other Class D Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Class D Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificate and this Agreement. SECTION 13. Agreement of Warrant Holders. Every holder of any Class D Warrant, by his acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of any Class D Warrant that: (a) The Class D Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his or her attorney duly authorized in writing and only if the Warrant Certificates representing such Class D Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent, in its sole discretion, together with payment of any applicable transfer taxes; and (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Class D Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 6. SECTION 14. Cancellation of Warrant Certificates. If the Company shall purchase or acquire any Class D Warrant or Class D Warrants, the Warrant Certificate or Warrant Certificates evidencing the same, by redemption or otherwise, shall thereupon be delivered to the Warrant Agent and canceled by it and retired. The Warrant Agent shall also cancel the Warrant Certificate or Warrant Certificates following exercise of any or all of the Class D Warrants represented thereby or delivered to it for transfer, split up, combination or exchange. SECTION 15. Concerning the Warrant Agent. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates, or by any other act hereunder, be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Class D Warrants represented thereby or of any securities or other property delivered upon exercise of any Class D Warrant or whether any stock issued upon exercise of any Class D Warrant is fully paid and nonassessable. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists that may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered - 17 - 18 or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or willful misconduct. The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, President, or any Vice President and the Secretary, or any Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine. The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder as governed by a separate agreement to be entered into between the Warrant Agent and the Company; the Company further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and reasonable counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's negligence or willful misconduct. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or willful misconduct), after giving 30 days' prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holders of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and - 18 - 19 delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment, the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. Any entity into which the Warrant Agent or any new warrant agent may be converted or merged or any entity resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any entity succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such entity is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Class D Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. SECTION 16. Modification of Agreement. Subject to the provisions of Subsection 4(b), the parties hereto and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; (ii) to reflect an increase in the number of Class D Warrants which are to be governed by this Agreement resulting from a subsequent offering of Company securities which includes Class D Warrants having the same terms and conditions as the Class D Warrants, originally covered by or subsequently added to this Agreement under this Section 16; or (iii) that they may deem necessary or desirable and that shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders of Warrant Certificates representing more than 50% of the Class D Warrants then outstanding; and provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Class D Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Class D Warrant, other than such changes as are specifically prescribed by this Agreement (including those contemplated in Subsection 9(d)) as originally executed or are made in compliance with applicable law. SECTION 17. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed by means of first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, at 3550 General Atomics Court, San Diego, California, 92121, Attention: Chief Executive Officer, or at such other address as may have been furnished to the Warrant Agent in writing by the Company; if to the Warrant Agent, at - 19 - 20 its Corporate Office; and, if to Paramount, at Paramount Capital Inc., 787 Seventh Avenue, New York, New York 10019, Attention: Michael S. Weiss. SECTION 18. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. SECTION 19. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, Paramount, the Warrant Agent and their respective successors and assigns, and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended nor shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. SECTION 20. Termination. This Agreement shall terminate at the close of business on the Warrant Expiration Date of all the Class D Warrants or such earlier date upon which all Class D Warrants have been exercised or redeemed, except that the Warrant Agent shall account to the Company for cash held by it and the provisions of Section 15 shall survive such termination. SECTION 21. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. GENTA INCORPORATED By: ______________________________________ Authorized Officer CHASEMELLON SHAREHOLDER SERVICES, as Warrant Agent By: _____________________________________ Authorized Officer PARAMOUNT CAPITAL, INC. By: _____________________________________ Authorized Officer - 20 - 21 EXHIBIT A [FORM OF FACE OF CLASS D WARRANT CERTIFICATE] No. __ _______________ Class D Warrants VOID AFTER __________________, 2002 CLASS D WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK GENTA INCORPORATED This certifies that FOR VALUE RECEIVED _______________________________________________________________________________ ______________________________ or registered assigns (the "Registered Holder") is the owner of the number of Class D Warrants ("Class D Warrants") specified above. Each Class D Warrant represented hereby initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Warrant Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of Common Stock, par value $.001 per share ("Common Stock"), of Genta Incorporated, a Delaware corporation (the "Company"), at any time between _______________, 1997, and the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of ChaseMellon Shareholder Services, L.L.C., as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of the Purchase Price (as defined in the Warrant Agreement) in lawful money of the United States of America in cash or by official bank or certified check made payable to the Company. This Warrant Certificate and each Class D Warrant represented hereby are issued pursuant to, and are subject in all respects to, the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated as of May 20, 1997, by and among the Company, the Warrant Agent and Paramount Capital, Inc. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price or the number of shares of Common Stock subject to purchase upon the exercise of each Class D Warrant represented hereby are subject to modification or adjustment. Each Class D Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of fewer than every Class D Warrant represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Class D Warrants. The term "Expiration Date" shall mean 5:00 P.M. (New York time) on ____________, 2002, or such earlier date as the Class D Warrants shall be redeemed. If such - 21 - 22 date shall in the State of New York be a holiday or a day on which banks are authorized to close, then the Expiration Date shall mean 5:00 P.M. (New York time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. Upon notice to all Registered Holders of the Class D Warrants, the Company shall have the right to extend the Expiration Date. The Registered Holder of this Class D Warrant shall have the registration rights as provided in Section 5 of the Subscription Agreement (the "Subscription Agreement") dated as of the date hereof between the Company and such Registered Holder. The Class D Warrants represented hereby shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Class D Warrants, each of such new Warrant Certificates to represent such number of Class D Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment with any applicable transfer fee per certificate in addition to any tax or other governmental charge imposed in connection therewith, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Class D Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Class D Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. The Class D Warrants represented hereby may be redeemed at the option of the Company, at a redemption price of $.10 per share subject to such Class D Warrants (subject to adjustment under the circumstances set forth in Section 9 of the Warrant Agreement) (the "Redemption Price"). Notice of redemption shall be given not later than the sixtieth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to the Class D Warrants represented hereby except to receive the Redemption Price upon surrender of this Warrant Certificate. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Class D Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Company has agreed to pay a fee of 5% of the Purchase Price to Paramount Capital, Inc. under certain conditions as specified in the Warrant Agreement upon the exercise of the Class D Warrants represented hereby. Any costs incurred by the Placement Agent in - 22 - 23 connection with the solicitation of Class D Warrant exercises or the redemption of Class D Warrants shall be reimbursed by the Company. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile, by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. GENTA INCORPORATED Dated: _____________________ By: ______________________________ By: ______________________________ [seal] Countersigned: CHASEMELLON SHAREHOLDER SERVICES, L.L.C., as Warrant Agent By: ______________________________ Authorized Officer - 23 - 24 [FORM OF REVERSE OF WARRANT CERTIFICATE] TRANSFER FEE: $___________ PER CERTIFICATE ISSUED SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Class D Warrants The undersigned Registered Holder hereby irrevocably elects to exercise _________ Class D Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Class D Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ [please print or type name and address] and be delivered to _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ [please print or type name and address] and if such number of Class D Warrants shall not be all the Class D Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Class D Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. The undersigned represents that the exercise of the within Class D Warrant was solicited by a member of the National Association of Securities Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in the space below. Unless - 24 - 25 otherwise indicated by listing the name of another NASD member firm, it will be assumed that the exercise was solicited by Paramount Capital, Inc. ______________________________________________________________________________ (Name of NASD Member) Dated: __________________________ X _______________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Address ______________________________________________________________________________ Taxpayer Identification Number ______________________________________________________________________________ Signature Guaranteed ______________________________________________________________________________ - 25 - 26 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Class D Warrants FOR VALUE RECEIVED, _______________________________________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ [please print or type name and address] ________________________________ of the Class D Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints _________ _______________________________________________________________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: _________________________ X ________________________________________ Signature Guaranteed __________________________________________ THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM. - 26 - EX-10.67 7 WARRANT AGREEMENT (DECEMBER 23, 1999) 1 EXHIBIT 10.67 WARRANT AGREEMENT AGREEMENT, dated as of this 23 day of December, 1999, by and among GENTA INCORPORATED, a Delaware corporation (the "Company"), CHASEMELLON SHAREHOLDER SERVICES, L.L.C., a New Jersey limited liability company, as warrant agent (the "Warrant Agent"), and PARAMOUNT CAPITAL, INC., a New York corporation ("Paramount"). W I T N E S S E T H WHEREAS, the Company has commenced a private placement (the "Private Placement") of a minimum (the "Minimum Offering") of 15 Units (as defined below) and a maximum (the "Maximum Offering") of 100 Units, with an option in favor of Paramount to offer up to an additional 15 Units to cover over-allotments, each "Unit" consisting of (a) a number of shares of Common Stock determined by dividing one hundred thousand dollars ($100,000) by the lesser of (i) $3.00 and (ii) 85% of the Trading Price (as defined below) of the Common Stock on the Nasdaq SmallCap Market (the "SmallCap Market") and (b) warrants ("Warrants") to purchase, at any time prior to the fifth anniversary of the Final Closing Date (as defined below), a number of shares of Common Stock equal to 25% of the number of shares of Common Stock included in such Unit, at an initial exercise price equal to the Trading Price (subject to adjustment upon the occurrence of certain events), pursuant to a placement agency agreement dated as of November 9, 1999 (the "Placement Agency Agreement"), between the Company and Paramount; WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants, and the rights of the holders thereof; NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: SECTION 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York or the city in which the office of the Warrant Agent is located are authorized or obligated by law or executive order to close. (b) "Close of Business" on any given day shall mean 5:00 p.m. (New York City time) on such date; provided, however, if such date is not a Business Day it shall mean 5:00 p.m. (New York City time) on the next succeeding Business Day. 1 2 (c) "Closing Bid Price" for each trading day shall be the reported per share closing bid price of the Common Stock, regular way, on the Stock Market on such trading day, or, if there were no transactions on such trading day, the average of the reported closing bid and asked prices, regular way, of such security on the relevant Stock Market on such trading day. (d) "Common Stock" shall mean the common stock, par value $0.001 per share, of the Company. (e) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which, at any particular time, its principal business shall be administered, which office is located at the date hereof at Overpeck Centre, 85 Challenger Road, Ridgefield Park, New Jersey 07660, unless changed by sending notice thereof to the Company. (f) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the Warrant Certificate representing such Warrant, with the subscription form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) in the event the Registered Holder intends to exercise its Warrant other than by cashless exercise under Section 4(b) of this Agreement, payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the applicable Purchase Price. (g) "Fair Market Value" of any asset (including any security) means the fair market value thereof as mutually determined by the Company and the Registered Holders of a majority of the Warrants then outstanding. If the Company and the Registered Holders of a majority of the Warrants then outstanding are unable to reach agreement on any valuation matter, such valuation shall be submitted to and determined by a nationally recognized independent investment bank selected by the Board of Directors of the Company and the Registered Holders of a majority of the Warrants then outstanding (or, if such selection cannot be agreed upon promptly, or in any event within ten days, then such valuation shall be made by a nationally recognized independent investment banking firm selected by the American Arbitration Association in New York City in accordance with its rules), the costs of which valuation shall be paid for by the Company. (h) "Final Closing Date" shall mean the final closing date of the Private Placement. (i) "Initial Closing Date" shall mean, as to each Warrant, the date of the initial closing of the Private Placement. (j) "Initial Warrant Exercise Date" shall mean, as to each Warrant, the Final Closing Date. (k) "Interim Closing Date" shall mean, as to each Warrant, any closing date of the Private Placement other than the Initial Closing Date and the Final Closing Date. (l) "Market Price" shall mean the average Closing Bid Price for five (5) consecutive trading days ending with the trading day prior to the date as of which the Market 2 3 Price is being determined (with appropriate adjustments for subdivisions or combinations of shares effected during such period), provided that if the prices referred to in the definition of Closing Bid Price cannot be determined for such period, "Market Price" shall mean Fair Market Value. (m) "Purchase Price" shall mean, as to each Warrant, the purchase price to be paid upon exercise of such Warrant in accordance with the terms hereof, which price shall be the Trading Price, subject to adjustment from time to time pursuant to the provisions of Section 9, and subject to the Company's right to reduce the Purchase Price upon notice to all warrantholders (which may be given, without limitation, prior to the Final Closing Date). (n) "Redemption Price" shall mean the price at which the Company may, at its option in accordance with the terms hereof, redeem the Warrants, which price shall be $0.01 per share of Common Stock subject to such Warrants, as adjusted as provided in Section 9. (o) "Registered Holder" shall mean, as to any Warrant and as of any particular date, the person in whose name the certificate representing the Warrant shall be registered on that date on the books maintained by the Warrant Agent pursuant to Section 6. (p) "Stock Market" shall mean the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, shall mean the Nasdaq National Market System or the Nasdaq SmallCap Market (collectively, "Nasdaq") or, if the Common Stock is not quoted on Nasdaq, shall mean the OTC Bulletin Board or, if the Common Stock is not quoted on the OTC Bulletin Board, shall mean the over-the-counter market as furnished by any NASD member firm selected from time to time by the Company for that purpose. (q) A "trading day" shall mean a day on which the Stock Market is open for the transaction of business. (r) "Trading Price" shall mean the average Closing Bid Price (with appropriate adjustments for subdivisions or combinations of shares effected during such period) of the Common Stock for the five or 20 consecutive trading days immediately preceding (a) the Initial Closing Date, (b) any Interim Closing Date or (c) the Final Closing Date of this Offering, whichever is lowest; provided that if the prices referred to in the definition of Closing Bid Price cannot be determined for any of such periods, "Trading Price" shall mean Fair Market Value. (s) "Transfer Agent" shall mean ChaseMellon Shareholder Services, L.L.C., as the Company's transfer agent, or its authorized successor, as such. (t) "Warrant Expiration Date" shall mean, as to each Warrant, 5:00 p.m. (New York time) on the day prior to earlier of (i) the fifth anniversary of the Final Closing Date or (ii) the Redemption Date; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized or required to close, then 5:00 p.m. (New York time) on the next following day which in the State of New York is neither a holiday nor a day on which banks are authorized or required to close. Upon notice to all Registered Holders thereof, the Company shall have the right to extend the Warrant Expiration Date. 3 4 (u) Unless otherwise stated, section references used within this Warrant Agreement refer to sections of this Warrant Agreement. SECTION 2. Warrants and Issuance of Warrant Certificates. (a) A Warrant initially shall entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase one share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in Section 9. (b) The Warrants included in the offering of Units will immediately be detachable and separately transferable from the shares of Common Stock constituting part of such Units. (c) Within five Business Days after the Final Closing Date, Warrant Certificates representing the number of Warrants sold pursuant to the Private Placement shall be executed by the Company and delivered to the Warrant Agent. Within five Business Days of receipt of the Warrant Certificates by the Warrant Agent and receipt of all necessary information, the Warrant Agent shall send the Warrant Certificates to the Registered Holders. The Company shall issue a written order, signed by its Chairman of the Board of Directors, President or any Vice President and by its Secretary or an Assistant Secretary, to the Warrant Agent directing that the Warrant Certificates shall be countersigned, issued and delivered by the Warrant Agent in accordance with the preceding sentence. (d) From time to time, until the Warrant Expiration Date, the Transfer Agent, upon written instruction from the Company, shall countersign and deliver stock certificates in required whole number denominations representing the appropriate number of shares of Common Stock upon the exercise of Warrants in accordance with this Agreement. (e) From time to time, until the Warrant Expiration Date, the Warrant Agent, upon written instruction from the Company, shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued pursuant to the Private Placement, (ii) those issued on or after the Initial Warrant Exercise Date, upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7 and (v) at the option of the Company, in such form as may be approved by its Board of Directors, to reflect any adjustment to, or change in: the Purchase Price; the number of shares of Common Stock purchasable upon exercise of the Warrants; the Redemption Price of the Warrants; or the Warrant Expiration Date. 4 5 SECTION 3. Form and Execution of Warrant Certificates. (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate, which do not affect the duties and responsibilities of the Warrant Agent or the Transfer Agent, and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage or to the requirements of Section 2. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrant Certificates shall be numbered serially with the letter "W" on Warrants of all denominations. (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board of Directors, President or any Vice President and by its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be an officer of the Company or to hold the particular office referenced in the Warrant Certificate before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issuance and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be an officer of the Company or to hold such office. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder without further action by the Company, except as otherwise provided by Subsection 4(a). SECTION 4. Exercise. (a) Each Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the Close of Business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of those securities upon the exercise of the Warrant as of the Close of Business on the Exercise Date. As soon as practicable on or after the Exercise Date the Warrant Agent shall deposit the proceeds received from the exercise of a Warrant and shall notify the Company in writing of the exercise of the Warrants. Promptly following, and in any event within five Business Days after the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, a certificate or certificates for the securities deliverable upon such exercise (plus a certificate for any remaining unexercised Warrants of the Registered Holder). In the case of payment made in 5 6 the form of a check drawn on an account of Paramount or such other investment banks and brokerage houses as the Company shall approve in writing to the Warrant Agent, certificates shall immediately be issued without prior notice to the Company nor any delay. Upon the exercise of any Warrant and receipt of notice as to the clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Warrant (the "Warrant Proceeds") to the Company or as the Company may otherwise direct in writing. (b) Beginning on the 121st day following the Final Closing Date, provided that the registration statement referred to in Section 5 of the Subscription Agreement, dated as of the date hereof, between the Company and the Registered Holder is not effective, a Registered Holder may exercise all or any part of this Warrant on a "cashless" basis by providing written notice of its intention to do so and stating the maximum number (the "Maximum Number") of shares of Common Stock the Registered Holder desires to purchase in consideration of cancellation of Warrants in payment for such exercise. The number of shares of Common Stock the Registered Holder shall receive upon such exercise pursuant to this Section 4(b) shall be equal to the difference between the Maximum Number and the quotient that is obtained when the product of the Maximum Number and the Purchase Price is divided by the then Market Price per share. The Warrant Agent shall have no duty or obligation under this subsection unless and until it is notified by the Company that the Registered Holder may exercise all or part of this Warrant on a "cashless" basis. SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants shall, at the time of delivery (assuming full payment of the purchase price thereof), be duly and validly issued, fully paid, nonassessable and free from all issuance taxes, liens and charges with respect to the issue thereof including, without limitation, adverse claims whatsoever (with the exception of claims arising through the acts of the Registered Holders themselves and except as arising from applicable federal and state securities laws), that the Company shall have paid all taxes or charges, if any, in respect of the original issuance thereof and that upon issuance such shares, to the extent applicable, shall be listed on, or included in, the Stock Market. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or the approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval; provided, however, that the Company shall have no obligation to register such securities under the Securities Act of 1933, as amended, except as provided in the Subscription Agreement dated as of the date hereof between the Company and each Registered Holder. The Company will use reasonable efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws; provided, that the Company shall not be required to qualify as a foreign corporation or file a general or 6 7 limited consent to service of process in any such jurisdictions or make any changes in its capital structure or any other aspects of its business or enter into any agreements with blue sky commissions, including any agreement to escrow shares of its capital stock. With respect to any such securities, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. The Warrant Agent may conclude that no such exercise would be unlawful unless and until it has received notice otherwise from the Company. (c) The Company shall pay all documentary, stamp or similar taxes and other similar charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of taxes or charges incident thereto, if any. The Warrant Agent shall have no duty or obligation under this Section 5 unless and until it is satisfied that all such taxes or charges have been paid. (d) The Warrant Agent is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock issuable upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Warrants. SECTION 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction of the terms and provisions hereof, the Company shall execute, and the Warrant Agent shall countersign, issue and deliver in exchange therefor, the Warrant Certificate or Certificates that the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and any transfers thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his or its attorney-in-fact duly authorized in writing. 7 8 (d) A service charge may be imposed by the Warrant Agent on holders for any exchange or registration of transfer of Warrant Certificates of such holders. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or other charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise, or for exchange in case of mutilated Warrant Certificates, shall be promptly cancelled by the Warrant Agent and thereafter retained by the Warrant Agent in a manner consistent with its customary practices until termination of this Warrant Agreement or resignation as Warrant Agent, or, with the prior written consent of Paramount, disposed of or destroyed at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Warrants, which are being offered in Units with shares of Common Stock pursuant to the Placement Agency Agreement, will immediately be detachable and separately transferable from the Common Stock. SECTION 7. Loss or Mutilation. Upon receipt by the Warrant Agent of evidence satisfactory to it of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to it, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. SECTION 8. Redemption. (a) At any time after the first anniversary of the Final Closing Date, on no fewer than sixty (60) days' prior written notice to Registered Holders of the Warrants being redeemed, the Company may, at its option, redeem the Warrants at the Redemption Price, provided the Closing Bid Price exceeds 250% of the Purchase Price per share of Common Stock subject to a Warrant for at least 20 trading days in any 30 consecutive trading day period ending three days prior to the date of notice of redemption (which shall be the date of mailing of such notice). All outstanding Warrants must be redeemed if any are redeemed. The date fixed for redemption of the Warrants is referred to herein as the "Redemption Date." (b) If the conditions set forth in Section 8(a) are met, and the Company desires to exercise its right to redeem the Warrants, it shall instruct the Warrant Agent to mail, upon receipt of all necessary information, a notice of redemption to each of the Registered Holders of the Warrants to be redeemed, by first class, postage prepaid, not later than the sixtieth 8 9 Business Day before the date fixed for redemption, at his or its last address as it shall appear on the registry books of the Warrant Agent. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. (c) The notice of redemption shall specify (i) the Redemption Price, (ii) the Redemption Date, (iii) the place where the Warrant Certificates shall be delivered and the Redemption Price paid, (iv) that Paramount will assist each Registered Holder of a Warrant and be entitled to reimbursement of costs in connection with the exercise thereof and (v) that the right to exercise the Warrant shall terminate at 5:00 p.m. (New York time) on the Business Day immediately preceding the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Registered Holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New York time) on the Business Day immediately preceding the Redemption Date. On and after the Redemption Date, Registered Holders of the Warrants shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price. (e) From and after the Redemption Date, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the Redemption Price of such Warrants. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become null and void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the Redemption Price, shall cease. SECTION 9. Adjustment of Purchase Price and Number of Shares of Common Stock or Warrants. Upon each adjustment of the Purchase Price pursuant to this Section 9, the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in Subsections 9(c) and 9(d)) be such number of shares (calculated to the nearest tenth) purchasable at the Purchase Price in effect immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. (a) Except as otherwise provided herein, in the event the Company shall, at any time or from time to time after the date hereof, (i) sell or issue any shares of Common Stock for a consideration per share less than either (a) the Purchase Price in effect on the date of such sale or issuance or (b) the Market Price of the Common Stock as of the date of the sale or issuance, (ii) issue any shares of Common Stock as a stock dividend to the holders of Common 9 10 Stock, or (iii) subdivide or combine the outstanding shares of Common Stock into a greater or fewer number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Purchase Price in effect immediately prior to such Change of Shares shall be changed to a price (rounded to the nearest cent) determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding immediately prior to the sale or issuance of such additional shares or such subdivision or combination plus (B) the number of shares of Common Stock that the aggregate consideration received (determined as provided in Paragraph 9(g)(vi)) for the issuance of such additional shares would purchase at the greater of (1) the Purchase Price in effect on the date of such issuance or (2) the Market Price as of such date, and the denominator of which shall be (y) the number of shares of Common Stock outstanding immediately after the sale or issuance of such additional shares or such subdivision or combination. Such adjustment shall be made successively whenever any such issuance is made. (b) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another entity (other than a consolidation or merger in which the Company is the continuing entity and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock other than the number thereof), or in case of any sale or conveyance to another entity of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, upon the terms and conditions specified in the Warrants and in lieu of the shares of Common Stock immediately theretofore purchasable upon exercise of the Warrants, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 9. The Company shall not effect any such consolidation, merger or sale unless prior to, or simultaneously with, the consummation thereof the successor (if other than the Company) resulting from such consolidation or merger or the entity purchasing assets or other appropriate entity shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations under this Agreement. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (c) If, at any time or from time to time, the Company shall issue or distribute to the holders of shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding an issuance or distribution governed by one of the preceding subsections of this Section 9 and also excluding cash dividends 10 11 or cash distributions paid out of net profits legally available therefor in the full amount thereof (any such non-excluded event being herein called a "Special Dividend")), then in each case the Purchase Price shall be adjusted by multiplying the Purchase Price theretofore in effect by a fraction, the numerator of which shall be the Market Price in effect on the record date of such issuance or distribution less the Fair Market Value of the Special Dividend applicable to one share of Common Stock and the denominator of which shall be such Market Price. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (d) The Company may elect, upon any adjustment of the Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 9, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Section 10, the number of additional Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrant Certificates held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. (e) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Subsection 2(e), continue to express the same Purchase Price per share, number of shares purchasable thereunder and Redemption Price therefor as when the same were originally issued. (f) After each adjustment of the Purchase Price pursuant to this Section 9, the Company will promptly prepare a certificate signed by the Chairman of the Board of Directors or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants pursuant to Subsection 9(d), the number of Warrants to which the registered holder of each Warrant shall then be entitled, and the adjustment in Redemption Price resulting therefrom, and (iii) a brief statement of the facts and computations accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by ordinary first class mail to Paramount and to each Registered Holder of Warrants at his or its last address as it 11 12 shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of such adjustment. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. The Warrant Agent may rely on the information in the certificate as true and correct and has no duty or obligation to independently verify the facts, amounts or calculations set forth therein. (g) For purposes of Subsections 9(a) and 9(c), the following provisions (i) to (v) shall also be applicable: (i) The number of shares of Common Stock deemed outstanding at any given time shall include all shares of capital stock convertible into, or exchangeable for, Common Stock (on an as converted basis) as well as all shares of Common Stock issuable upon the exercise of (w) any convertible debt, (x) warrants outstanding on the date hereof, (y) options outstanding on the date hereof, and (z) all shares issuable pursuant to the rights, options and warrants referred to in Subsection 9(h)(iii). (ii) No adjustment of the Purchase Price shall be made unless such adjustment would require an increase or decrease of at least $.05 in such price; provided that any adjustments which by reason of this Paragraph (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with adjustments so carried forward, shall require an increase or decrease of at least $.01 in the Purchase Price then in effect hereunder. (iii) In case of (1) the sale by the Company (including as a component of a unit) of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or any securities convertible into or exchangeable for Common Stock (such securities convertible, exercisable or exchangeable into Common Stock being herein called "Convertible Securities"), or (2) the issuance by the Company, without the receipt by the Company of any consideration therefor, of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options, or the right to convert or exchange such Convertible Securities, are immediately exercisable, and the consideration per share for which Common Stock is issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, payable to the Company upon the exercise of such rights, warrants or options, plus the consideration received by the Company for the issuance or sale of such rights, warrants or options, plus, in the case of such Convertible Securities, the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon 12 13 the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities issuable upon the exercise of such rights, warrants or options) is less than either the Purchase Price or the Market Price of the Common Stock as of the date of the issuance or sale of such rights, warrants or options, then such total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (as of the date of the issuance or sale of such rights, warrants or options) shall be deemed to be "Common Stock" for purposes of Subsections 9(a) and 9(c) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsections 9(a) and 9(c). (iv) In case of the sale or other issuance by the Company of any Convertible Securities, whether or not the right of conversion or exchange thereunder is immediately exercisable, and the price per share for which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount of consideration received by the Company for the sale of such Convertible Securities, plus the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities) is less than either the Purchase Price or the Market Price of the Common Stock as of the date of the sale of such Convertible Securities, then such total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities (as of the date of the sale of such Convertible Securities) shall be deemed to be "Common Stock" for purposes of Subsections 9(a) and 9(c) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsections 9(a) and 9(c). (v) In case the Company shall modify the rights of conversion, exchange or exercise of any of the securities referred to in Paragraphs (iii) or (iv) of this Subsection 9(g) or any other securities of the Company convertible, exchangeable or exercisable for shares of Common Stock, for any reason other than an event that would require adjustment to prevent dilution, so that the consideration per share received by the Company after such modification is less than either the Purchase Price or the Market Price as of the date prior to such modification, then such securities, to the extent not theretofore exercised, converted or exchanged, shall be deemed to have expired or terminated immediately prior to the date of such modification and the Company shall be deemed, for purposes of calculating any adjustments pursuant to this Section 9, to have issued such new securities upon such new terms on the date of modification. Such adjustment shall become effective as of the date upon which such modification shall take effect. On the expiration or cancellation of any such right, warrant or option or the termination or cancellation of any such right to convert or exchange any such Convertible Securities, the Purchase Price then in effect hereunder shall forthwith be readjusted to such Purchase Price as would have obtained (a) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of 13 14 the issuance of only the number of shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities and (b) had adjustments been made on the basis of the Purchase Price as adjusted under clause (a) of this sentence for all transactions (which would have affected such adjusted Purchase Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities. (vi) In case of the sale of any shares of Common Stock, any Convertible Securities, any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, the consideration received by the Company therefor shall be deemed to be the gross sales price therefor without deducting therefrom any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. In the event that any securities shall be issued in connection with any other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated among the securities, then each of such securities shall be deemed to have been issued for such consideration as the Board of Directors of the Company determines in good faith; provided, however, that if holders of more than of 10% of the then outstanding Warrants disagree with such determination, the Company shall retain an independent investment banking firm for the purpose of obtaining an appraisal. (h) Notwithstanding any other provision hereof, no adjustment to the Purchase Price of the Warrants or to the number of shares of Common Stock purchasable upon the exercise of each Warrant will be made: (i) upon the issuance or exercise of any of the options outstanding on the date hereof or which may hereafter be granted under any stock option plan or any employee benefit plan of the Company, but only with respect to such options as are exercisable at prices no lower than the Closing Bid Price (or, if the price referenced in the definition of Closing Bid Price cannot be determined, the Fair Market Value) of the Common Stock as of the date of grant thereof; or (ii) upon issuance or exercise of the Placement Warrants (as defined in the Placement Agency Agreement), upon the conversion of the Company's Series A Convertible Preferred Stock or Series D Convertible Preferred Stock, upon the issuance, conversion or exercise of the Common Stock or the Warrants included in the Units of the Company issued (A) on or prior to the Final Closing Date or (B) pursuant to the exercise of the Placement Warrants; or (iii) upon the issuance or sale of Common Stock or Convertible Securities pursuant to the exercise of any rights, options or warrants to receive, subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, which securities were outstanding prior to the date of the original issuance of the Warrants by the Company, including, without limitation, rights, options or warrants issued in substitution of such existing rights, options or warrants to Dr. Kasses or holders of Class D Warrants, or which were 14 15 disclosed under the caption "Securities Outstanding/Capitalization" in the Term Sheet related to the Private Placement"; or (iv) upon the issuance or sale of Common Stock or Convertible Securities pursuant to the exercise of any rights, options or warrants to receive, subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, which were issued or sold after the date of the original issuance of the Warrants by the Company, provided that an adjustment was either made or not required to be made in accordance with Section 9(a) or 9(c) in connection with the issuance or sale of such securities or any modification of the terms thereof; or (v) upon the issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities, provided that any adjustments required to be made upon the issuance or sale of such Convertible Securities or any modification of the terms thereof were so made, and whether or not such Convertible Securities were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold. Section 9(g)(v) shall nevertheless apply to any modification of the rights of conversion, exchange or exercise of any of the securities referred to in Paragraphs (i), (ii), (iii) and (iv) of this Section 9(h). (i) As used in this Section 9, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the date of the original issuance of the Units and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Certificate of Incorporation as Common Stock on the date of the original issuance of the Units or (i), in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Subsection 9(c), the stock, securities or property provided for in such section or (ii), in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (j) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to Section 9, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. (k) Notwithstanding anything to the contrary herein, in no case shall the Purchase Price be adjusted to an amount less than $.001 per share, the current par value of the Common Stock for which the Warrants are exercisable. 15 16 (l) If and whenever the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase, or any options for the purchase of, Common Stock or securities convertible into or exchangeable for or carrying a right, warrant or option to purchase Common Stock, the Company may at its option elect concurrently therewith to grant to each Registered Holder as of the record date for such transaction of the Warrants then outstanding, the rights, warrants or options to which each Registered Holder would have been entitled if, on the record date used to determine the stockholders entitled to the rights, warrants or options being granted by the Company, the Registered Holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise of his or its Warrants. If the Company shall so elect under this Subsection 9(l), then such grant by the Company to the holders of the Warrants shall be in lieu of any adjustment which otherwise might be called for pursuant to this Section 9. SECTION 10. Fractional Warrants and Fractional Shares. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 9, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, nor to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Registered Holder an amount in cash equal to such fraction multiplied by the Market Price of one share of Common Stock as of the date of exercise. SECTION 11. Warrant Holders Not Deemed Stockholders. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. SECTION 12. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, in his or its own behalf and for his or its own benefit, enforce against the Company his or its right to exercise his or its Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificate and this Agreement. SECTION 13. Agreement of Warrant Holders. Every holder of any Warrant, by his or its acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of any Warrant that: (a) The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his or its attorney duly authorized in 16 17 writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent, in its sole discretion, together with payment of any applicable taxes or charges; and (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary. SECTION 14. Cancellation of Warrant Certificates. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same, by redemption or otherwise, shall thereupon be delivered to the Warrant Agent and canceled by it and retired. The Warrant Agent shall also cancel the Warrant Certificate or Warrant Certificates following exercise of any or all of the Warrants represented thereby or delivered to it for transfer, split up, combination or exchange. SECTION 15. Concerning the Warrant Agent. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates, or by any other act hereunder, be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. The Warrant Agent shall not at any time be under any duty, liability or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists that may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible or liable for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own gross negligence or willful misconduct, as determined by a court of competent jurisdiction. The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. 17 18 Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board President, or any Vice President and the Secretary or any Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine, or for any delay in acting while waiting for such notice, statement, instruction, request, direction, order or demand. The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder pursuant to the fee schedule attached hereto as Exhibit B; the Company further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including, but not limited to, judgments, damages, penalties, claims, demands, settlements, costs and reasonable counsel fees, for any action taken, suffered or omitted by the Warrant Agent in connection with the acceptance of this Agreement and the execution of its duties and powers hereunder, except losses, expenses and liabilities arising as a result of the Warrant Agent's gross negligence or willful misconduct, as determined by a court of competent jurisdiction. The indemnity provided herein shall survive the resignation or removal of the Warrant Agent or the termination of the Warrant Agreement and the termination and expiration of the Warrants. The costs and expenses incurred in enforcing this right of indemnification shall be paid by the Company. Anything to the contrary notwithstanding, in no event shall the Warrant Agent be liable for special, punitive, indirect, consequential or incidental loss or damage of any kind whatsoever (including, but not limited to, lost profits), even if the Warrant Agent has been advised of the likelihood of such loss or damage. Any liability of the Warrant Agent under this Agreement shall be limited to the amount of fees paid by the Company to the Warrant Agent. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's gross negligence or willful misconduct, as determined by a court of competent jurisdiction), after giving 30 days' prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holders of each Warrant Certificate at the Company's expense. Upon notice of such resignation, discharge, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be (i) an entity having capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company or (ii) an affiliate of the entity described in (i) above. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or 18 19 deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment, the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. Any entity into which the Warrant Agent or any new warrant agent may be converted or merged or any entity resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any entity succeeding to the business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such entity is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. SECTION 16. Modification of Agreement. Subject to the provisions of Subsection 4(b), the parties hereto and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; (ii) to reflect an increase in the number of Warrants which are to be governed by this Agreement resulting from a subsequent offering of Company securities which includes Warrants having the same terms and conditions as the Warrants, originally covered by or subsequently added to this Agreement under this Section 16; or (iii) that they may deem necessary or desirable and that shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders of Warrant Certificates representing more than 50% of the Warrants then outstanding; and provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement (including those contemplated in Subsection 9(d)) as originally executed or are made in compliance with applicable law. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with this Section 16, the Warrant Agent shall execute such supplement or amendment, unless the Warrant Agent determines that such supplement and amendment will increase its duties, liabilities or obligations. SECTION 17. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed 19 20 by means of first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, at 99 Hayden Avenue, Lexington, Massachusetts, 02421, Attention: Chief Financial Officer, or at such other address as may have been furnished to the Warrant Agent in writing by the Company; if to the Warrant Agent, at its Corporate Office; and, if to Paramount, at Paramount Capital, Inc., 787 Seventh Avenue, New York, New York 10019, Attention: David M. Tanen, Esq. Notwithstanding anything else contained in this agreement to the contrary, any notice to the Warrant Agent shall not be deemed to have been made or received until actually received by the Warrant Agent. SECTION 18. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. SECTION 19. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, Paramount, the Warrant Agent and their respective successors and assigns, and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended nor shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. SECTION 20. Termination. This Agreement shall terminate at the Close of Business on the Warrant Expiration Date of all the Warrants or such earlier date upon which all Warrants have been exercised or redeemed, except that the Warrant Agent shall account to the Company for cash held by it and the provisions of Section 15 shall survive such termination. SECTION 21. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. 20 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. GENTA INCORPORATED By: ___________________________________ Authorized Officer CHASEMELLON SHAREHOLDER SERVICES, L.L.C., as Warrant Agent By: ___________________________________ Authorized Officer PARAMOUNT CAPITAL, INC. By: ___________________________________ Authorized Officer 21 22 EXHIBIT A [FORM OF FACE OF WARRANT CERTIFICATE] No. W-____ _________ Warrants VOID AFTER __________________, 2004 WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK GENTA INCORPORATED This certifies that FOR VALUE RECEIVED _______________________________________________________________________________ _______________________________________________ or registered assigns (the "Registered Holder") is the owner of the number of warrants ("Warrants") specified above. Each Warrant represented hereby initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Warrant Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of common stock (or such smaller number as provided under the cashless exercise provision of the Warrant Agreement), par value $.001 per share ("Common Stock"), of Genta Incorporated, a Delaware corporation (the "Company"), at any time between _______________, 1999, and the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company, as Warrant Agent, or its successor (the "Warrant Agent"), and, other than upon a cashless exercise, the payment of the Purchase Price (as defined in the Warrant Agreement) in lawful money of the United States of America in cash or by official bank or certified check made payable to the Company. This Warrant Certificate and each Warrant represented hereby are issued pursuant to, and are subject in all respects to, the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated as of _______________, 1999, by and among the Company, the Warrant Agent and Paramount Capital, Inc. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of fewer than every Warrant represented hereby, the Company shall cancel this Warrant Certificate A-1 23 upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date" shall mean 5:00 p.m. (New York time) on _______________, 2004, or such earlier date as the Warrants shall be redeemed. If such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. Upon notice to all Registered Holders of the Warrants, the Company shall have the right to extend the Expiration Date. THE REGISTERED HOLDER OF THIS WARRANT SHALL HAVE THE REGISTRATION RIGHTS AS PROVIDED IN SECTION 5 OF THE SUBSCRIPTION AGREEMENT (THE "SUBSCRIPTION AGREEMENT") DATED AS OF THE DATE HEREOF BETWEEN THE COMPANY AND SUCH REGISTERED HOLDER. The Warrants represented hereby shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment with any applicable transfer fee per certificate in addition to any tax or other governmental charge imposed in connection therewith, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. The Warrants represented hereby may be redeemed at the option of the Company, at a redemption price of $0.01 per share subject to such Warrants (subject to adjustment under the circumstances set forth in Section 9 of the Warrant Agreement) (the "Redemption Price"). Notice of redemption shall be given not later than the sixtieth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to the Warrants represented hereby except to receive the Redemption Price upon surrender of this Warrant Certificate. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon A-2 24 made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. A-3 25 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile, by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. GENTA INCORPORATED Dated: _____________________ By: _______________________________ Authorized Officer By: _______________________________ [seal] Countersigned: CHASEMELLON SHAREHOLDER SERVICES, L.L.C., as Warrant Agent By: ________________________________ Authorized Officer A-4 26 [FORM OF REVERSE OF WARRANT CERTIFICATE] TRANSFER FEE: $___________ PER CERTIFICATE ISSUED SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrants (Check One) [ ] The undersigned Registered Holder hereby irrevocably elects to exercise _________ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of [ ] The undersigned Registered Holder, pursuant to Section 4(b) of the Warrant Agreement dated as of by and among Genta Incorporated, ChaseMellon Shareholder Services, L.L.C, and Paramount Capital, Inc. (the "Warrant Agreement"), hereby irrevocably elects to exchange ________ Warrants represented by this Warrant Certificate for such number of shares of Common Stock as are obtained by applying the provisions of Section 4(b) of the Warrant Agreement, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ [please print or type name and address] and be delivered to _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ [please print or type name and address] and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. A-5 27 The undersigned represents that the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in the space below. Unless otherwise indicated by listing the name of another NASD member firm, it will be assumed that the exercise was solicited by Paramount Capital, Inc. ____________________________________ (Name of NASD Member) Dated: __________________________ X __________________________________ ____________________________________ ____________________________________ Address ____________________________________ Taxpayer Identification Number ____________________________________ Signature Guaranteed ____________________________________ A-6 28 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, _______________________________________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ [please print or type name and address] _______________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints ________________________________ ________________________________________________________________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: _________________________ X _________________________________ Signature Guaranteed ___________________________________ THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM. A-7 EX-10.68 8 EMPLOYMENT AGREEMENT (DR. KEN KASSES) 1 EXHIBIT 10.68 December 1, 1999 Dr. Kenneth G. Kasses 41353 N. 106 Street Scottsdale Arizona 85262 Dear Ken: This letter agreement confirms the terms of the termination of your employment with Genta Incorporated ("Genta" or the "Company"). 1. As of the Termination Date (as defined below), all existing employment agreements between you and Genta whether oral or written (including but not limited to, your letter agreement entered into with Genta on September 4, 1997 (the "Agreement")), are hereby terminated. 2. Your employment as Chief Executive Officer, President and Chairman of the Board of Directors of Genta (the "Board of Directors") shall terminate effective December 1, 1999 (the "Termination Date"). You represent that you do not have any claim, action, or pending proceeding against Genta and that there is no existing basis for any claim action or proceeding against Genta. 3. Except as necessary to enforce the terms of this letter agreement, and in exchange for and in consideration of the promises, covenants and agreements set forth herein, you hereby release Genta from any and all manner of claims, demands, causes of action, obligations, damages or liabilities whatsoever of every kind and nature, at law or in equity, known or unknown, and whether or not discoverable, which you have or may have for any period prior to and including the date of the execution of this letter agreement, including, but not limited to, any claim of defamation, wrongful discharge, breach of contract, claims for unpaid wages, claims under the Agreement and claims of discrimination under the Age Discrimination in Employment Act of 1967 or any other federal, state or local laws, and any claim for attorneys' fees or costs. 4. In full consideration for your agreements set forth in this letter agreement: (a) Genta will continue to pay your base salary through November 30, 2000. Such payments shall be made in accordance with Genta's normal payroll practices, and all applicable withholdings for federal, state and local income taxes, Social Security and all other customary withholdings will be made. (b) Genta will enter into an amendment to your stock option agreement in the form attached hereto as Exhibit A. (c) Except as provided in the letter agreement entered into between you and Genta dated September 4, 1997, to the extent permitted by the applicable insurance plans and by law, Genta will continue to provide you with medical insurance, dental insurance, 2 life insurance and long-term disability insurance through December 31, 2000 in accordance with its benefit plans or programs. Genta reserves its right, in its sole discretion, to amend or terminate its benefit plans or programs at any time. To the extent Genta is unable to keep you enrolled in these insurance plans, Genta will reimburse you through December 31, 2000 for your COBRA payments for continued medical insurance and will, to the extent practicable, provide you with dental insurance, life insurance and long-term disability insurance through December 31, 2000 substantially comparable to what you would have had if you had continued in these plans. (d) Genta will continue to provide you with voicemail and electronic mail access through February 29, 2000. (e) Except as provided in this paragraph 4, you shall not be entitled to any sum of money or benefits from Genta. 5. Ownership of Proprietary Information. (a) You confirm and agree that all information that has been, either prior to the Termination Date or at any time thereafter, created, discovered or developed by the Company, or any of its subsidiaries, affiliates, licensors, licensees, successors or assigns (each, an "Affiliate" and, collectively, the "Affiliates") (including, without limitation, information relating to the Company's business created, discovered, developed or made known to the Company or an Affiliate by you during your employment with the Company and information relating to the Company's customers, clients, suppliers, vendors, consultants, licensors and licensees) or information in which proprietary rights have been assigned, licensed or otherwise conveyed to the Company or any Affiliate, has been, is and shall be the sole property of the Company or such Affiliate, as applicable, and the Company or the Affiliate, as the case may be, has been, is and shall be the sole owner of all patents, patent applications, copyrights, copyright applications and other rights in connection therewith, including but not limited to, the right to make application for statutory protection of any kind in any country. All of the aforementioned information is hereinafter called "Proprietary Information." By way of illustration, but not limitation, Proprietary Information includes trade secrets, processes, discoveries, structures, designs, ideas, works of authorship, copyrightable works, trademarks, copyrights, formulas, data, data structures, know-how, show-how, improvements, Intellectual Property (as defined in Section 7), product concepts, specifications, techniques, information or statistics contained in, or relating to, marketing plans, strategies, forecasts, blueprints, sketches, records, notes, devices, drawings, customer lists, patent applications, copyright and trademark applications of any kind and information about the Company's or any Affiliate's employees and/or consultants (including, without limitation, the compensation, job responsibility and job performance of such employees and/or consultants). (b) You further confirm and agree that at all times, both prior to the Termination Date and thereafter, you have kept and will keep in strictest confidence and trust all Proprietary Information, and you have not used or disclosed and will not use or disclose any Proprietary Information or anything directly relating to it without the prior written consent of the Company or the Affiliates, as appropriate, except as may have been necessary prior to the Termination Date in the ordinary course of performing your duties as Chief Executive Officer, President and Chairman of the Board of Directors, or as may be necessary after the Termination Date in performing your duties as a member of the Board of Directors. You acknowledge that -2- 3 the Proprietary Information constitutes a unique and valuable asset of the Company and, as applicable, each Affiliate, acquired at great time and expense, which is secret and confidential and which has been or will be communicated to you, if at all, in confidence in the course of the performance of your duties, and that any disclosure or other use of the Proprietary Information other than for the sole benefit of the Company would be wrongful and could cause irreparable harm to the Company or an Affiliate. (c) Notwithstanding the foregoing, you are free to use information which would otherwise be Proprietary Information, if such information is in the public domain not as a result of a breach of this letter agreement or the breach of any other duty owed to the Company by any third party. (d) You recognize that the Company has received and in the future will receive confidential or proprietary information from third parties subject to a duty on the Company's part to maintain the confidentiality of such information and, in some cases, to use it only for certain limited purposes. You confirm and agree that you have owed and will continue owe the Company and such third parties, both during the term of your employment and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm, partnership, joint venture, corporation or other business entity (collectively, "Person") (except in a manner that is consistent with the Company's agreement with the third party) or use it for the benefit of anyone other than the Company or such third party (consistent with the Company's agreement with the third party), unless expressly authorized to act otherwise by the Board of Directors. 6. Confidential Information. (a) You confirm and agree that, both prior to the Termination Date and thereafter, you have kept and will continue to keep in strictest confidence and trust and have not disclosed or made accessible, and will not use, disclose or make accessible, to any Person without the prior written consent of the Company, the Company's or any Affiliate's products, services and technology, promotion and marketing programs, lists, trade secrets and other confidential and proprietary business information of the Company or any Affiliate or any of its or their clients, consultants, suppliers, customers, vendors, licensors, licensees and other third parties including, without limitation, Proprietary Information (all the foregoing is referred to herein as the "Confidential Information"), except as required in connection with the performance of your duties to the Company. You confirm and agree that, both during your employment with the Company prior to the Termination Date and thereafter, (i) you have not used and will not use any such Confidential Information for yourself or any third parties; and (ii) you have not taken and will not take any material or reproductions embodying any Confidential Information from the Company's facilities (or any of the Affiliates' facilities) at any time, except as required in connection with the performance of your duties to the Company. Notwithstanding the foregoing, the parties agree that you are free to use information which would otherwise be Confidential Information, if such information is in the public domain not as a result of a breach of this letter agreement or the breach of any other duty owed to the Company by any Person. (b) You confirm and agree that, except with prior written authorization by the Company, you have not disclosed or published and will not disclose or publish any of the -3- 4 Confidential Information or any confidential, technical or business information of any other party to whom the Company or any of its Affiliates has owed or owes an obligation of confidence, at any time prior to the Termination Date and thereafter. (c) Upon written notice by the Company, if you are no longer serving on the Company's Board of Directors, you shall promptly deliver to the Company, or, if requested by the Company, promptly destroy all written Confidential Information and any other written material containing Confidential Information (whether prepared by the Company, you or a third party). You agree not to retain any copies, extracts, summaries or other reproductions in whole or in part of such written Confidential Information (and you shall, upon request of the Company, certify such delivery or destruction to the Company in a written instrument reasonably acceptable to the Company and its counsel). (d) In the event that you are requested or required (by oral questions, deposition, interrogatories, requests for information or documents, subpoena, civil investigative demand or any other process) to disclose all or any part of any Confidential Information, you will provide the Company with prompt notice of such request or requirement, as well as notice of the terms and circumstances surrounding such request or requirement, so that the Company, or, as applicable, one or more of its Affiliates, may seek an appropriate protective order or waive compliance with the provisions of this letter agreement. In such case, the parties will consult with each other on the advisability of pursuing any such order or other legal action or available steps to resist or narrow such request or requirement. If, failing the entry of a protective order or the receipt of a waiver hereunder, you are, in the opinion of counsel reasonably acceptable to the Company, legally compelled to disclose Confidential Information, you may disclose that portion of such information which counsel advises you that you are legally compelled to disclose. In any event, you will use your best efforts to obtain, and will not oppose action by the Company (or, as applicable, one or more of its Affiliates) to obtain, an appropriate protective order or other reliable assurance that confidential treatment will be accorded the disclosure of any Confidential Information. 7. Disclosure and Ownership of Intellectual Property. (a) You confirm and agree that, both prior to the Termination Date and thereafter, you have promptly disclosed and will promptly disclose to the Company, or any persons designated by the Company, all improvements, inventions (whether patentable or not), designs, ideas, works of authorship (whether copyrightable or not) copyrightable works, discoveries, trademarks, copyrights, trade secrets, formulas, processes, structures, product concepts, marketing plans, strategies, customer lists, information about employees and/or consultants (including, without limitation, job performance of such employees and/or consultants), techniques, blueprints, sketches, records, notes, devices, drawings, specifications, know-how, data, data structures, patent applications, copyright applications and other applications for statutory protection of any kind in any country relating to the current or reasonably foreseeable business of the Company, made or conceived or reduced to practice or learned by you, either alone or jointly with others, during the course of your employment prior to the Termination Date or thereafter in the performance of your duties as a director of the Company (collectively hereinafter referred to as the "Intellectual Property"). (b) You confirm and agree that all Intellectual Property above has been and shall be the sole property of the Company and to the extent permitted by law shall be -4- 5 "works made for hire" as that term is defined in the United States Copyright Act (17 USCA, Section 101). The Company has been and shall be the sole owner of all patents, copyrights, trade secret rights and other Intellectual Property and all other rights in connection therewith. You hereby assign to the Company all right, title and interest you have or acquire in all Intellectual Property. You further agree to assist the Company in every proper way (but at the Company's expense) to obtain and confirm and from time to time enforce patents, copyrights or other rights in the Intellectual Property in any and all countries, and to that end you will execute all documents necessary: (i) to apply for, obtain and vest in the name of the Company alone (unless the Company otherwise directs) letters patent, copyrights or other analogous protection in any country throughout the world and when so obtained or vested to renew and restore the same on behalf of the Company; and (ii) to defend any opposition proceedings in respect of such applications and any opposition proceedings or petitions or applications for revocation of such letters patent, copyright or other analogous protection. (c) Your obligation to assist the Company in obtaining, confirming and enforcing patents and copyrights for the Intellectual Property above in any and all countries shall continue beyond the Termination Date. The Company agrees to compensate you at a reasonable rate after the Termination Date for time actually spent by you at the Company's request on such assistance. 8. Enforcement. You agree that the remedy at law for any breach or threatened breach of any covenant contained in Sections 5, 6 or 7 of this letter agreement would be inadequate and cause irreparable damage to the Company. In the event that you breach or threaten to breach any provisions of Sections 5, 6 or 7, in addition to any other rights which the Company may have at law or in equity, the Company shall be entitled, without the posting of a bond or other security, to injunctive relief to enforce the restrictions contained in this letter agreement. In the event that an actual proceeding is brought in equity to enforce any of the provisions of Sections 5, 6 or 7, you shall not assert as a defense that there is an adequate remedy at law nor shall the Company be prevented from seeking any other remedies, including without limitation monetary damages, which may be available to it. 9. In executing this letter agreement, neither you nor Genta admits any liability or wrongdoing, and the considerations exchanged herein do not constitute an admission of any liability, error, contract violation, or violation of any federal, state, or local law or regulation. 10. This letter agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. -5- 6 11. The unenforceability or invalidity of any provision or provisions of this letter agreement shall not render any other provision or provisions hereof unenforceable or invalid. 12. This letter agreement constitutes the entire agreement between you and Genta and cannot be altered except in a writing signed by both you and Genta. You acknowledge that you entered into this letter agreement voluntarily, that you fully understand all of its provisions, and that no representations were made to induce execution of this letter agreement that are not expressly contained herein. 13. The parties agree that any disputes concerning the interpretation or application of this letter agreement shall be governed by New York law, without regard to principles of conflict of law or where the parties are located at the time a dispute arises. 14. You acknowledge that you have been afforded an opportunity to take at least (21) twenty-one days to consider this letter agreement and have been advised to consult with the attorneys of your choice prior to executing this letter agreement. You acknowledge that you have had an adequate opportunity to review this letter agreement before its execution. You further acknowledge that you will have a period of seven (7) calendar days following the execution and delivery of this letter agreement in which to revoke your consent (by delivering such written notice of revocation to Monica Lord, Esq. of Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York 10022 within such seven calendar days), and that this letter agreement will not become effective until the revocation period has expired. -6- 7 Please indicate your acceptance of the terms of this letter agreement by countersigning below and returning this letter agreement to me. Very truly yours, GENTA INCORPORATED By: ___________________________________ Mark C. Rogers, M.D. Agreed and accepted as of the date first set forth above: __________________________________ Dr. Kenneth G. Kasses -7- EX-10.69 9 1998 STOCK INCENTIVE PLAN 1 Exhibit 10.69 GENTA INCORPORATED 1998 STOCK INCENTIVE PLAN AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT (this "Amendment Agreement"), dated as of December 1, 1999, to the Stock Option Agreement, dated as of May 28, 1998 (the "Original Agreement") between GENTA INCORPORATED, a Delaware corporation (the "Company"), and Dr. Kenneth G. Kasses (the "Optionee"). Capitalized terms used here without definition shall have the meanings ascribed thereto in the Company's 1998 Stock Incentive Plan (the "Plan"). Except as specifically amended by this Amendment Agreement, the Original Agreement shall remain in full force and effect and be fully applicable with respect all options referred to herein. Pursuant to the Original Agreement, the Optionee received stock options (the "Options") to purchase 2,236,263 shares of common stock of the Company, $.001 par value per share (the "Common Stock"), at an initial exercise price of $0.94375 per share. As of November 30, 1999, 1,118,131 of the Options had not yet vested. This Amendment Agreement is being entered into pursuant to a letter agreement, dated as of the date hereof (the "Letter Agreement"), between Optionee and the Company, and pursuant to Section 3.1.3 of the Plan. Notwithstanding anything else contained in this Amendment Agreement to the contrary, the 1,118,131 options (the "Original Options") already vested as of November 30, 1999 under the Letter Agreement shall not be altered in any way. 2 In consideration of the foregoing and of the mutual undertakings set forth in this Amendment Agreement and the Letter Agreement, the Company and the Optionee agree as follows: SECTION 1. Exercisability. (a) Subject to the further terms of this Amendment Agreement, the Optionee shall immediately return to the Company 618,130 of the options not yet vested as of November 30, 1999. Such options shall be treated for all purposes as if such options had never been issued. The remaining 500,000 options (the "Remaining Options") shall be fully vested as of November 30, 2000, but shall be subject to the restrictions set forth in Section 1(b). (b) If the Optionee (i) remains a consultant to the Company, (ii) remains a member of the Board of Directors of the Company or (iii) voluntarily resigns as a Director or consultant, then the Optionee shall not sell any shares acquired upon exercise of the Original Options or the Remaining Options until March 1, 2001. SECTION 2. Termination. Section 4 of the Original Agreement is hereby amended to provide that the Original Options shall terminate and expire on the earlier of (x) May 28, 2008 and (y) the expiration of two years after the first date on which Optionee is neither a consultant to, nor member of the Board of Directors of, the Company. The Remaining Options shall also expire on the same date. -2- 3 IN WITNESS WHEREOF, the parties hereto have executed this Amendment Agreement as of the date and year first written above. GENTA INCORPORATED ---------------------------------------------- Name: Dr. Mark C. Rogers Title: Chairman OPTIONEE ---------------------------------------------- Kenneth G. Kasses, Ph.D. 41353 North 106 Street Scottsdale Arizona ---------------------------------------------- Social Security Number -3- EX-10.70 10 EMPLOYMENT AGREEMENT 1 Exhibit 10.70 GENTA INCORPORATED 99 HAYDEN AVENUE, SUITE 200 LEXINGTON, MASSACHUSETTS 02421 Dated as of October 28, 1999 Raymond P. Warrell, Jr., MD. 6 Kimble Circle Westfield, NJ 07090 Dear Dr. Warrell: We are pleased that you are interested in becoming an employee of Genta Incorporated, a Delaware corporation (the "Company"). Accordingly, I would like to offer you the following terms of engagement (the "Agreement"): 1. Employment; Duties. (a) As of October 28, 1999, the Company hereby engages and employs you, and you hereby accept engagement and employment, as an employee of the Company. Commencing on December 1, 1999, the Company will engage and employ you, and you hereby accept engagement and employment, as Chief Executive Officer and President of the Company. (b) You shall perform your duties as are customarily associated with your title, consistent with the By-laws of the Company and as required by the Board of Directors of the Company (the "Board of Directors"). You shall perform your duties hereunder at such places as shall be necessary according to the needs, business or opportunities of the Company; provided, that you acknowledge and agree that the performance of the duties hereunder may require significant domestic and international travel by you. (c) Upon commencement of your employment as President and Chief Executive Officer, you shall devote your full business time and best efforts as shall be necessary to the proper discharge of your duties and responsibilities under this Agreement. You shall not, directly or indirectly, on a full time, part time, temporary, consulting, or any other basis, work for or provide your services to any other person, firm, corporation, partnership, joint venture or any other entity, except that you may engage in up to eight hours a week of other activities, provided that such other activities are consistent in all respects with your obligations under sections 5, 6, 7 and 8 of this Agreement. However, notwithstanding anything else contained in this Agreement, you shall not engage in any other business activities, whether or not pursued for gain or profit, which will interfere with your ability to perform any of the functions, powers or duties required under this Agreement. 2 2. Term. Your employment hereunder shall be for a term of three years commencing on October 28, 1999 (the "Effective Date") and continuing through November 30, 1999 (the "Term"), unless sooner terminated as hereinafter provided. 3. Compensation and Benefits. (a) In consideration of the services you rendered as an employee of the Company for the period beginning on the Effective Date and ending upon commencement of your employment as Chief Executive Officer and President on December 1 1999, you will be paid $15,000, less all applicable federal state and local taxes, social security and worker's compensation contributions and such other amounts as may be required by law. (b) As compensation and benefits for the performance of your duties on behalf of the Company as Chief Executive Officer and President, so long as your employment has not been terminated in accordance with this Agreement, you shall be compensated and shall receive benefits upon commencement of your employment as President and Chief Executive Officer, as follows: (i) a base salary of $325,000 per annum (the "Base Salary"), payable in accordance with the Company's standard payroll practice; (ii) in consideration of your entry into this Agreement, you will receive $100,000, which is payable within 30 days from the date this Agreement is executed or later at your discretion; (iii) a guaranteed bonus of $100,000 at the end of your first twelve months of employment; (iv) a provisional bonus of at least $100,000 at the end of each subsequent twelve months of employment provided that mutually agreed upon milestones have been met. The Company shall withhold all applicable federal, state and local taxes, social security and workers' compensation contributions and such other amounts as may be required by law or agreed upon by the parties with respect to the compensation payable to you pursuant to this Section 3(a). (c) Subject to subsection 3(n), you shall be entitled to receive annual stock options for the purchase of 300,000 shares of Common Stock, adjusted for stock splits, reverse stock splits, and stock reclassifications, (at an exercise price equal to Fair Market Value, as defined in the Genta Incorporated 1998 Stock Incentive Plan, on the date of grant, or, in the event of a Trigger Event, calculated as provided below) provided that mutually agreed upon milestones have been met. All stock options granted pursuant to this subsection 3(c) (the "3(c) Options") shall be evidenced by a stock option agreement, which shall contain customary terms and shall provide for immediate vesting upon the occurrence of one of the events (each a "Trigger Event") described in Section 4.1 of the Stock Option Agreement (as defined below). In addition, if a Trigger Event occurs, whether or not your employment has been terminated pursuant to clause 4.1(ii) of the Stock Option - 2 - 3 Agreement, you shall be entitled to receive all Section 3(c) Options which you would have been entitled to receive within twelve months following such Trigger Event, provided that the relevant milestones have been met during such twelve month period. The Company shall grant such options to you as soon as practicable after you become entitled to receive them. Such options shall have an exercise price equal to the average closing price of the Company's Common Stock for the 60 consecutive calendar days prior to the occurrence of the Trigger Event and shall vest and be fully exercisable upon grant. (d) In addition, from time to time, in the discretion of the Board of Directors, you may be entitled to additional stock options pursuant to the Company's stock option plans. (e) The Company agrees to reimburse you for all reasonable and necessary travel, business entertainment and other business expenses incurred by you in connection with the performance of your duties under this Agreement. Such reimbursements shall be made by the Company on a timely basis upon submission by you of vouchers in accordance with the Company's standard procedures. (f) You shall be entitled during the Term to four weeks per annum vacation time. You may "carry over" up to four weeks of unused vacation time to the succeeding year. (g) The Company shall pay the premiums on an ordinary life insurance policy on your behalf in the principal amount of not less than $3,250,000, provided such premiums do not exceed $20,000 annually. (h) You shall be entitled to participate in any and all medical insurance, dental insurance, group health, disability insurance and other benefit plans which are made generally available by the Company to its senior executives. The Company, in its sole discretion, may at any time amend or terminate any such benefit plans or programs. (i) You shall be covered by the Company's director's and officer's insurance policy as is generally provided to the Company's directors and officers. (j) The Company shall provide you with a car or car allowance in an amount not to exceed $500 per month which shall be paid in appropriate pro rata amounts at the same time Base Salary is paid unless the Company pays all related expenses directly. (k) The Company shall pay all of your reasonable relocation expenses, provided that such expenses are incurred within 18 months from the Effective Date of this Agreement. (l) The Company shall pay attorney's fees incurred by you in connection with this Agreement in an amount not to exceed $10,000. (m) Subject to subsection 10(f) and Section 11, you must be an employee of the Company at the time that any compensation is due in order to receive such compensation. - 3 - 4 (n) No option provided for under this Section 3 shall be exercisable unless the Company's Amended and Restated Certificate of Incorporation has been amended (the "Amendment") to increase the Company's authorized capital stock by an amount sufficient to permit the issuance of Common Stock issuable upon exercise or conversion of all options, warrants, and convertible securities issued by the Company, including the shares and warrants issuable in the Company's contemplated private placement and the options provided for under this agreement. The Company shall use its best efforts, subject to applicable law, to obtain shareholder approval of the Amendment; provided, however, that nothing in this subsection 3(n) shall be interpreted so as to require the Company pay a consent fee or hire third party proxy solicitors. (o) The Company shall pay the premiums on a medical malpractice insurance policy on your behalf in the principal amount of not less than $1,000,000, provided such premiums do not exceed $20,000 annually. 4. Representations and Warranties. You hereby represent and warrant to the Company as follows: (a) Neither the execution and delivery of this Agreement nor the performance by you of your duties and other obligations hereunder violate or will violate any statute, law, determination or award, or conflict with or constitute a default under (whether immediately, upon the giving of notice or lapse of time or both) any prior employment agreement, contract, or other instrument to which you are a party or by which you are bound. (b) You have the full right, power and legal capacity to execute and deliver this Agreement and to perform your duties and other obligations hereunder. This Agreement constitutes your legal, valid and binding obligation, enforceable against you in accordance with its terms. No approvals or consents of any persons or entities are required for you to execute and deliver this Agreement or perform your duties and other obligations hereunder. 5. Non-competition and Non-solicitation. (a) You understand and recognize that your services to the Company are special and unique and agree that, upon commencement of your employment as President and Chief Executive Officer on December 1, 1999, and, except as provided below, for a period of two years following any termination of your employment, you shall not in any manner directly or indirectly on behalf of yourself or any person, firm, partnership, joint venture, corporation or other business entity (collectively, "Person"), solicit, enter into, engage in any business which is or proposes to be competitive with a technology or service of, or product manufactured or distributed by, the Company or its subsidiaries or in which the Company or any of its subsidiaries has intellectual property rights (except as provided below, "Conflicting Field"), either as an individual for your own account, or as a partner, joint venturer, executive, agent, consultant, salesperson, officer, director or shareholder of such Person ("Competitor"); provided, however, that (x) following any termination of your employment, Conflicting Field shall refer only to the field of using antisense technology as therapy for cancer as its primary business and, subject to Section 1, nothing in this agreement shall be interpreted so as to prevent you from accepting employment with any Person which is or proposes to be competitive with a Conflicting Field so long as you work solely in a division of such Person - 4 - 5 which division carries on a bona fide business that is not or does not propose to be competitive with a Conflicting Field ; and (y) nothing herein will preclude you from holding five percent (5%) or less of the stock of any publicly traded company, calculated on a fully diluted basis. (b) In further consideration of the payment by the Company to you of amounts that may hereafter be paid to you pursuant to this Agreement (including, without limitation, pursuant to Sections 3 and 11 hereof, and the Stock Option Agreement between you and the Company dated October 28, 1999 (the "Stock Option Agreement")), you agree that upon commencement of your employment as President and Chief Executive Officer, and for a period of two years thereafter or a period of two years subsequent to any termination hereunder, but subject to section 5(f), you shall not, without the prior written consent of the Company: (i) directly or indirectly take any action, or attempt to take any action, which is intended to, or could reasonably be foreseen by you to, induce a material breach of a contract or agreement known to you between the Company and any of its licensors, licensees, clients, customers, vendors, suppliers, agents, consultants, employees (whether or not such employees are "at will" employees) or other person or entity with which the Company has an agreement (each, a "Covered Party", collectively, "Covered Parties"); provided, however, that such action or attempted action could reasonably be expected to cause a material detriment to the Company; or (ii) directly or indirectly solicit or attempt to solicit any of the Covered Parties to terminate his, her or its relationship with the Company in material breach of a contract or agreement with the Company known to you; provided, however, that such action or attempted action is likely to cause a material detriment to the Company; or (iii) subject to subsection 5(f), directly or indirectly solicit or attempt to solicit any of the employees or consultants of the Company to become employees, agents, consultants, representatives or advisors of any other Person; or (iv) directly or indirectly persuade or seek to persuade any customer of or supplier to the Company to cease to do business or to reduce the amount of business which any customer or supplier has done or contemplates doing with the Company, whether or not the relationship between the Company and such Person was originally established in whole or in part through your efforts, in material breach of a contract or agreement known to you between the Company and such customer or supplier; provided, however, that such action or attempted action could reasonably be expected to cause a material detriment to the Company. (c) Upon commencement of your employment as President and Chief Executive Officer, and for a period of two years following any termination of your employment, you agree that upon the earlier of you (a) negotiating with any Competitor concerning the possible employment of you by the Competitor, (b) receiving an offer of employment from a Competitor, or (c) becoming - 5 - 6 employed by a Competitor, you will (x) immediately provide notice to the Company of such circumstances and (y) provide copies of Sections 5, 6, 7, 8 and 9 of this Agreement to the Competitor. You further agree that the Company may provide notice to a Competitor of your obligations under this Agreement, including without limitation your obligations pursuant to Sections 5, 6, 7 and 8 hereof. (d) You understand that the provisions of this Section 5 may limit your ability to earn a livelihood in a business similar to the business of the Company but nevertheless agree and hereby acknowledge that the consideration provided under this Agreement, including any compensation or benefits provided under Sections 3 and 11 hereof and the Stock Option Agreement, is sufficient to justify the restrictions contained in such provisions. In consideration thereof and in light of your education, skills and abilities, you agree that you will not assert in any forum that such provisions prevent you from earning a living or otherwise are void or unenforceable or should be held void or unenforceable. (e) Section 5(a) hereof shall not apply to any Conflicting Field that is identified on Annex I to this Agreement. Annex I to this Agreement may hereafter be amended through a writing signed by you and the Company and approved by the Company's Board of Directors. (f) Nothing in subsection 5(b)(iii) shall be interpreted so as to prohibit you from accepting offers from persons employed by the Company to be employed by you or an entity with which you become associated, provided that such offers were not solicited, directly or indirectly, or otherwise encouraged by you. 6. Ownership of Proprietary Information. (a) You confirm and agree that all information relating to the Company's, or an Affiliate's (as defined below) business that has been created by, discovered by, developed by, learned by, or made known to, the Company, or any of its subsidiaries, affiliates, licensors, licensees, successors or assigns (each, an "Affiliate" and, collectively, the "Affiliates") from the commencement of your employment and at all times thereafter (including, without limitation, information relating to the Company's business created by, discovered by, developed by, learned by, reduced to practice by or made known to the Company, an Affiliate, or you, either alone or jointly with others, during your employment and information relating to the Company's customers, clients, suppliers, vendors, consultants, licensors and licensees) or assigned, licensed or otherwise conveyed to the Company or any Affiliate, has been, is and shall be the sole property of the Company or such Affiliate, as applicable, and the Company or the Affiliate, as the case may be, has been, is and shall be the sole owner of all designs, ideas, patents, patent applications, copyrights, copyright applications and other rights in connection therewith, including but not limited to the right to make application for statutory protection of any kind in any country. All of the aforementioned information is hereinafter called "Proprietary Information" (and shall be deemed Proprietary Information regardless of whether or not the Proprietary Information is patentable or copyrightable). By way of illustration, but not limitation, Proprietary Information includes trade secrets, processes, discoveries, structures, works of authorship, copyrightable works, trademarks, copyrights, formulas, data, data structures, know-how, show-how, improvements, information relating to products (both - 6 - 7 current and under development), services and technologies, product concepts, specifications, techniques, information or statistics contained in, or relating to, promotion or marketing plans and programs, strategies, forecasts, blueprints, sketches, records, notes, devices, drawings, customer lists, continuation applications of any kind, trademark applications and information about the Company's or the Affiliate's employees and/or consultants and confidential business information of the Company or any Affiliate or any of its or their clients, consultants, suppliers, customers, vendors, licensors, licensees and other third parties (including, without limitation, the compensation, job responsibility and job performance of such employees and/or consultants). (b) You agree that all Proprietary Information shall be, the extent permitted by law, "works made for hire" as that term is defined in the United States Copyright Act (17 USA, Section 101). You hereby assign to the Company all right, title and interest you may have or acquire in all Proprietary Information; provided, that, subject to subsection 6(d) hereof, the provisions of this Section 6 only applies to information, and Proprietary Information shall only include such information which: (i) relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company except when the information more closely relates to the business, or actual or demonstrably anticipated research or development of a person or entity listed in Annex I hereto, as amended; or (ii) result from any work performed by you for the Company; or (iii) was developed on the Company's time or using the Company's equipment, supplies, facilities, or trade secret information. (c) Notwithstanding the foregoing, Proprietary Information shall not include; (i) information (x) in the public domain not as a result of the breach of this Agreement or the breach of any other duty owed to the Company or any other person (y) information lawfully in your possession prior to the date hereof and not disclosed to you by the Company or an Affiliate and (z) information disclosed to you without restriction by a third party who had the right to disclose such information to you; and (ii) information that more closely relates to the business, or actual or demonstrably anticipated research or development, of a person or entity set forth on Annex I. (d) It is understood that no patent, copyright, trademark, or other proprietary right of license is granted to you under this Agreement. Any disclosure of Proprietary Information and any materials which may accompany any such disclosure pursuant to your employment under this Agreement shall not result in the grant to you of any rights, express or implied, of any kind. 7. Confidential Information. (a) You agree at all times, including after the Term, to keep in strictest trust and confidence and will not disclose or make accessible to any other person without the prior written consent of the Company, the Company's or any Affiliate's Proprietary Information. You further - 7 - 8 agree that upon commencement of your employment and at all times thereafter (i) not to use any such Proprietary Information for yourself or others; and (ii) not to take any such material or reproductions embodying Proprietary Information from the Company's facilities (or any of the Affiliates' facilities) at any time, except as required during the Term in connection with your duties to the Company. (b) Except with prior written authorization of the Board of Directors, you agree not to disclose or publish any of the Proprietary Information, except as required in the performance of your obligations under this Agreement. You further agree not to disclose or publish information relating to your former employers, to whom you, the Company or any of its Affiliates owes an obligation of confidence, at the time of disclosure to you, at any time during or after your employment with the Company. (c) Upon written notice by the Company, you shall promptly deliver to the Company, or, if requested by the Company, promptly destroy all written Proprietary Information and any other written material containing any Proprietary Information (whether prepared by the Company, you or a third party), and will not retain any copies, extracts, summaries or other reproductions in whole or in part of such written Proprietary Information or other material. (d) You recognize that the Company has received and in the future will receive confidential or proprietary information from third parties subject to a duty on the Company's part to maintain the confidentiality of such information and, in some cases, to use it only for certain limited purposes. You agree that you owe the Company and such third parties, both during your employment and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any Person (except in a manner that is consistent with the Company's agreement with the third party) or use it for the benefit of anyone other than the Company or such third party (consistent with the Company's agreement with the third party), unless expressly authorized to act otherwise by the Board of Directors. (e) If during the term and thereafter you are requested or required (by oral questions, deposition, interrogatories, requests for information or documents, subpoena, civil investigative demand or any other process) to disclose all or any part of any Confidential Information, you will provide the Company with prompt notice of such request or requirement, as well as notice of the terms and circumstances surrounding such request or requirement, so that the Company, or, as applicable, one or more of its Affiliates, may seek an appropriate protective order or waive compliance with the provisions of this Agreement. In such case, the parties will consult with each other on the advisability of pursuing any such order or other legal action or available steps to resist or narrow such request or requirement. If, failing the entry of a protective order or the receipt of a waiver hereunder, you are, in the opinion of your counsel, legally compelled to disclose Proprietary Information, you may disclose that portion of such information which counsel advises you that you are legally compelled to disclose. In any event, you will use reasonable efforts to cooperate with the Company in obtaining and will not oppose action by the Company (or, as applicable, one or more of its Affiliates) to obtain, an appropriate protective order or other reliable assurance that confidential treatment will be accorded the disclosure of any Proprietary Information. - 8 - 9 All reasonable expenses incurred by you in compliance with this subsection 7(e) will be reimbursed by the Company. 8. Disclosure of Proprietary Information. (a) During the Term, and thereafter, you agree that you will promptly disclose to the Company, or any persons designated by the Company, all Proprietary Information developed, created, made, conceived, reduced to practice or learned by the Company, any Affiliate or you, either alone or jointly with others, during the Term and not otherwise known to the Company's officers and directors. (b) You further agree to assist the Company in every proper way (but at the Company's expense) to obtain and confirm and from time to time enforce patents, copyrights or other rights on said Proprietary Information in any and all countries, and to that end you will execute all documents necessary: (i) to apply for, obtain and vest in the name of the Company alone (unless the Company otherwise directs) letters patent, copyrights or other analogous protection in any country throughout the world and when so obtained or vested to renew and restore the same on behalf of the Company; and (ii) to defend any opposition proceedings in respect of such applications and any opposition proceedings or petitions or applications for revocation of such letters patent, copyright or other analogous protection. (c) Your obligation to assist the Company in obtaining and enforcing patents and copyrights for the Proprietary Information in any and all countries shall continue beyond the Term, but the Company agrees to compensate you at a reasonable rate after the expiration of the Term for time actually spent by you at the Company's request on such assistance. 9. Enforcement. You agree that the remedy at law for any breach or threatened breach of any covenant contained in Sections 5, 6, 7 or 8 of this Agreement would be inadequate and cause irreparable damage to the Company. In the event that you breach or threaten to breach any provisions of Sections 5, 6, 7 or 8, in addition to any other rights which the Company may have at law or in equity, the Company shall be entitled, without the posting of a bond or other security, to injunctive relief to enforce the restrictions contained in this Agreement. In the event that an actual proceeding is brought in equity to enforce any of the provisions of Sections 5, 6, 7 or 8, you shall not assert as a defense that there is an adequate remedy at law nor shall the Company be prevented from seeking any other remedies, including without limitation monetary damages, which may be available to it. 10. Termination. Your employment hereunder as President and Chief Executive Officer shall commence as provided for under subsection 1(a) and shall continue for the period set forth in Section 2 hereof unless sooner terminated upon the first to occur of the following events: (a) Death. Your death; - 9 - 10 (b) Disability. You have been unable, for a period of one hundred eighty (180) consecutive business days, to perform your duties under this Agreement, as a result of physical or mental illness or injury ("Becoming Totally Disabled") and the Company shall have communicated to you the fact of your termination by written notice, which termination shall be effective on the 30th day after receipt of such notice by you (the "Total Disability Effective Date"), unless you return to full-time performance of your duties before the Total Disability Effective Date; (c) Termination by the Company for Cause. For purposes of this Agreement, the term "Cause" shall mean any of the following; provided, however, that the Company has terminated you pursuant to this subsection 10(c) within 60 days of the Board of Directors having first obtained knowledge of a basis for termination under this subsection 10(c): (i) A breach by you of any of the provisions of Sections 4, 5, 6, 7 or 8 of this Agreement which results in a material detriment to the Company or any Affiliate thereof; (ii) Any breach by you of subsection 1(b) or (c) which is not cured by you within 30 days of written notice thereof from the Company; provided, however, your right to such 30 day cure period shall be conditioned upon your good faith attempt to cure such breach; (iii) Any action or omission by you to intentionally harm the Company which is in bad faith and likely to cause a material harm to the Company or any other act or bad faith omission having the effect of materially harming the Company, its business or reputation; (iv) The perpetration of an intentional and knowing fraud against or adversely affecting the Company or any Covered Party which causes or is likely to cause a material detriment to the Company; or (v) The conviction of you of any crime classified as a felony. (d) Termination by the Company Without Cause. The Company may terminate your employment hereunder at any time for any reason or no reason by giving you thirty (30) days prior written notice of the termination. (e) Termination By You For Good Reason. You may terminate your employment hereunder for "Good Reason" for (i) having been assigned duties by the Board of Directors which are inconsistent in any material respect with Section 1 of this Agreement or any other action by the Company that results in a material diminution in your title, position, authority, duties or responsibilities, either of which is not cured by the Company within 30 days of written notice thereof from you; or (ii) any failure by the Company to comply with Section 3 other than an isolated, insubstantial and inadvertent failure that is not taken in bad faith and is remedied by the Company promptly after receipt of notice thereof from you; (iii) your failure to be re-elected to the Company's Board of Directors, unless , at the time you are not re-elected, the Company has the right to terminate you for Cause under subsection 10(c) of this Agreement and does so within 45 days of - 10 - 11 your failure to be re-elected; or (iv) relocation of the Company's principal place of operations, provided that such relocation results in a principal place of operations more than 75 miles from New York, New York. (f) Termination by You Without Good Reason. You may terminate your employment hereunder at any time for any reason or no reason by giving thirty (30) days prior written notice of termination. If you do, you shall be entitled only to the following compensation: (i) Any accrued but unpaid Base Salary as of the date of termination for services rendered to the date of termination; (ii) Any accrued but unpaid expenses required to be reimbursed pursuant to Section 3; (iii) Any vacation accrued to the date of termination. (iv) Any accrued but unpaid bonus payments; and (v) The amounts set forth in subsection 3(b)(ii), if not already paid. 11. Compensation Following Termination Prior to the End of the Term. In the event that your employment hereunder is terminated prior to the end of the Term, you shall be entitled only to the following compensation and benefits upon such termination: (a) Termination by Reason of Death or Becoming Totally Disabled; Termination by the Company for Cause. In the event that your employment is terminated by reason of your death or your becoming Totally Disabled, or by the Company for Cause, pursuant to Sections 10(a), 10(b) or 10(c), the Company shall pay the following amounts to you (or your estate, as the case may be): (i) Any accrued but unpaid Base Salary as of the date of termination for services rendered to the date of termination; (ii) Any accrued but unpaid expenses required to be reimbursed pursuant to Section 3; (iii) Any vacation accrued to the date of termination; (iv) Any accrued but unpaid bonus payments; and (v) The amounts set forth in subsection 3(b)(ii), if not already paid. The benefits to which you may be entitled upon termination pursuant to the plans, programs and arrangements referred to in Section 3 hereof shall be determined and paid in accordance with the terms of such plans, policies and arrangements. - 11 - 12 (b) Termination by the Company Without Cause; Termination by You for Good Reason. In the event that your employment is terminated by the Company without Cause pursuant to Section 10(d) or by you for Good Reason pursuant to Section 10(e), the Company shall pay the following amounts to you: (i) Any accrued but unpaid Base Salary as of the date of termination for services rendered to the date of termination, payable within 30 days; (ii) Any accrued but unpaid expenses required to be reimbursed pursuant to Section 3, payable within 30 days; (iii) Any vacation accrued to the date of termination, payable within 30 days; and (iv) As your sole damages; (i) the Base Salary which you would have received during the twelve month period following the date on which your employment is terminated and any bonus which would have been payable to you within 12 months of the date of termination pursuant to section 3(iii) or 3(iv) had you still been employed by the Company; provided that, in the event that you have terminated your employment pursuant to subsection 10(e), and the Company has provided you notice of a basis of a breach, within 45 days of the Board of Director's of the Company having obtained first knowledge of such basis, of any covenant contained in Sections 5, 6, 7 or 8 hereof, you shall not be entitled to any payment under this clause (iv) of this Section 11(b); and (ii) all stock options received pursuant to subsection 3(c) hereof shall become fully vested. Any payments to be made pursuant to this subsection 11(b) shall be made in accordance with the Company's standard payroll practices then in effect; and (v) The amounts set forth in subsection 3(b)(ii), if not already paid. The benefits to which you may be entitled upon termination pursuant to the plans, policies and arrangements referred to in Section 3 hereof shall be determined and paid in accordance with the terms of such plans, policies and arrangements. (c) It is the intention of the parties that all cash payouts that may be due subject to this Section 11 shall be guaranteed by either Paramount Capital, the Aries Funds, or some other party that the Company and you mutually agree upon. (d) No Other Benefits or Compensation. Except as may be provided under this Agreement, under the terms of any incentive compensation, employee benefit or fringe benefit plan applicable to you at the time of the termination of your employment prior to the end of the Term, you shall have no right to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to any future period after such termination. 12. Notices. Any notice or other communication under this Agreement shall be in writing and shall be deemed to have been given: when delivered personally after receipt therefor; - 12 - 13 one (1) day after being sent by Federal Express or similar overnight delivery; or three (3) days after being mailed registered or certified mail, postage prepaid, return receipt requested, to either party at the address set forth below, or to such other address as such party shall give by notice hereunder to the other party. If to the Company: Genta Incorporated c/o Paramount Capital, Inc. 787 Seventh Avenue New York, NY 10019 (212) 554-4514 Attention: Mark C. Rogers, M.D. With a copy to: Kramer Levin Naftalis & Frankel LLP 919 Third Avenue New York, NY 10022 (212) 715-9100 Attention: Monica C. Lord, Esq. If to you: Raymond Warrell, Jr., M.D. 6 Kimball Circle Westfield, NJ 07090 (908) 301-1022 With a copy to: Morrison & Foerster LLP 755 Page Mill Road Palo Alto, CA 94304 (650) 813-5746 Attention: Joseph Lin, Esq. 13. Severability of Provisions. If any provision of this Agreement shall be declared by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced in whole or in part, the remaining conditions and provisions or portions thereof shall nevertheless remain in full force and effect and enforceable to the extent they are valid, legal and enforceable, and no provision shall be deemed dependent upon any other covenant or provision unless so expressed herein. If any provision of this Agreement, or any part thereof, is held to be invalid or unenforceable because of the scope or duration of or the area covered by such provision, the parties hereto agree that the court making such determination shall reduce the scope, duration and/or area of such - 13 - 14 provision (and shall substitute appropriate provisions for any such invalid or unenforceable provisions) in order to make such provision enforceable to the fullest extent permitted by law and/or shall delete specific words and phrases, and such modified provision shall then be enforceable and shall be enforced. The parties hereto recognize that if, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants contained in this Agreement, then that invalid or unenforceable covenant contained in this Agreement shall be deemed eliminated from these provisions to the extent necessary to permit the remaining separate covenants to be enforced. In the event that any court determines that the time period or the area, or both, are unreasonable and that any of the covenants is to that extent invalid or unenforceable, the parties hereto agree that such covenants will remain in full force and effect, first, for the greatest time period, and second, in the greatest geographical area that would not render them unenforceable. 14. Entire Agreement; Modification. This Agreement contains the entire agreement of the parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. No modification of this Agreement shall be valid unless made in writing and signed by the parties hereto. 15. Binding Effect. The rights, benefits, duties and obligations under this Agreement shall inure to, and be binding upon, the Company, its successors and assigns, and upon you and your legal representatives. This Agreement constitutes a personal service agreement, and the performance of your obligations hereunder may not be transferred or assigned by you. 16. Non-waiver. The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and said terms, conditions and provisions shall remain in full force and effect. No waiver of any term or condition of this Agreement on the part of either party shall be effective for any purpose whatsoever unless such waiver is in writing and signed by such party. 17. Governing Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York without regard to principles of conflict of laws. 18. Survivability. The provisions of this Agreement which by their terms call for performance subsequent to termination of your employment hereunder, or of this Agreement, shall so survive such termination. 19. Headings. The headings of paragraphs are inserted for convenience and shall not affect any interpretation of this Agreement. If this letter agreement meets with your approval and you desire to accept this offer of employment on the terms and conditions set forth herein, please execute the enclosed copy of this letter and return it to me as soon as possible. - 14 - 15 Sincerely, GENTA INCORPORATED By:___________________________ Mark C. Rogers, M.D. AGREED AND ACCEPTED AS OF THE DATE FIRST SET FORTH ABOVE: ____________________________________ Dr. Raymond P. Warrell, Jr. - 15 - EX-10.71 11 STOCK OPTION AGREEMENT 1 Exhibit 10.71 GENTA INCORPORATED 1998 STOCK INCENTIVE PLAN STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT (the "Agreement"), dated as of October 28, 1999, between GENTA INCORPORATED, a Delaware corporation (the "Company"), and the other party signatory hereto (the "Optionee"). Capitalized terms used here without definition shall have the meanings ascribed thereto in the Company's 1998 Stock Incentive Plan (the "Plan"). All options granted herein (the "Options") shall be appropriately adjusted pursuant to Section 1.5.3 of the Plan. The Company hereby represents and warrants to Optionee that, as of the date of this Agreement, the sum of the number of outstanding shares of Common Stock and the number of shares of Common Stock underlying all outstanding convertible or exercisable derivative securities is 63,510,163 shares. In the event that the foregoing representation is inaccurate, the number of shares underlying the Options granted under Section 1 of this Agreement shall be proportionately adjusted. The Optionee hereby represents and warrants to the Company that, upon commencing his employment with the Company on October 28, 1999, the Optionee was not violating the terms of his employment with any third person, nor did the commencement of his employment with the Company on October 28, 1999 provide the basis for a claim of such a violation. 2 In consideration of the foregoing and of the mutual undertakings set forth in this Agreement, the Company and the Optionee agree as follows: SECTION 1. Grant of Options. (a) In consideration of the commencement of his employment by the Company on October 28, 1999, the Company hereby grants to the Optionee Options (the "Initial Options") to purchase 3,175,508 shares of the Company common stock, par value $.001 (the "Common Stock"), at an initial exercise price per share of $2.67 (the "Exercise Price"). These Initial Options are exercisable immediately subject to the satisfaction of the Option Conditions (defined below); provided, however, the unvested portion of the Common Stock issuable upon exercise of the Initial Option shall be subject to the nontransferability, forfeiture and repayment provisions of Section 2, 5 and 7 hereof, respectively, until such shares vest in accordance with the following vesting schedule: 25% of the Initial Options shall vest immediately: the remaining 75% of the Initial Options and Common Stock issuable upon exercise thereof shall vest in 36 substantially equal installments on the last day of each month commencing November 30, 1999; and provided, further, that the Initial Options granted hereunder shall not be exercisable until all of the following conditions (the "Option Conditions") have been satisfied: (x) the Company's Amended and Restated Certificate of Incorporation has been amended to increase the Company's authorized capital stock by an amount sufficient to permit the issuance of Common Stock upon the exercise or conversion of all options, warrants and convertible securities issued by the Company, including all of the Options granted pursuant to this Agreement (the "Reservation Requirements"); and (y) the Company's shareholders shall have approved an amendment to the Plan authorizing an increase in the shares of Common Stock available under the Plan sufficient to satisfy the Options referred to herein. The Company shall use its best efforts, subject to -2- 3 applicable law, to obtain shareholder approval of such amendments; provided, however, that nothing in this Section 1(a) shall be interpreted so as to require the Company pay a consent fee or hire third party proxy solicitors. (b) The Company hereby grants to the Optionee Options (the "FDA Option") to purchase 793,877 shares of Common Stock at the Exercise Price; provided, however, that this FDA Option and the Common Stock issuable upon exercise thereof shall only vest when the Optionee has been employed by the Company for six years (the "Term Condition") and provided, further, that in no event shall this FDA Option be exercisable unless all Option Conditions have been satisfied. The FDA Option is immediately exercisable; provided, however, that the Common Stock issuable upon exercise of the FDA Option shall be subject to the nontransferability, forfeiture and repayment provisions of Section 2, 5 and 7 hereof, respectively. Notwithstanding the foregoing, the Term Condition shall be waived in respect of this FDA Option and the FDA Option and Common Stock issuable upon exercise thereof shall vest in their entirety when the Company has received from the Food and Drug Administration a letter providing that Company's product G3139, or its substantial equivalent, is approved for marketing in any indication. (c) The Company hereby grants to the Optionee Options (the "Market Capitalization Option") (and, together with the FDA Option, the "Performance Options") to purchase 793,877 shares of Common Stock at the Exercise Price; provided, however, that this Market Capitalization Option and the Common Stock issuable upon exercise thereof shall only vest upon the satisfaction of the Term Condition; and provided, further, that in no event shall this Market Capitalization Option be exercisable unless all Option Conditions have been satisfied. The Market Capitalization Option is immediately exercisable; provided, however, the unvested -3- 4 portion of the Common Stock issuable upon exercise of the Market Capitalization Option shall be subject to the nontransferability, forfeiture and repayment provisions of Section 2, 5 and 7 hereof, respectively. Notwithstanding the foregoing, the Term Condition shall be waived in respect of this Market Capitalization Option and the Market Capitalization Option and Common Stock issuable upon exercise thereof shall vest in its entirety when the average of the product of the Fair Market Value of the Company Common Stock (or any successor security issued as a replacement for Company Common Stock) multiplied by the number of shares of Company Common Stock outstanding and issuable upon exercise of all warrants, options and convertible securities, during any 60 consecutive calendar day period, exceeds $541,106,489. (d) All the options described above may from time to time hereinafter be referred to singularly as an "Option" and collectively as the "Options." SECTION 2. Nontransferability. (a) No Option shall be assignable or transferable, voluntarily or involuntarily, by operation of law, or otherwise, and any such assignment or transfer which may be attempted shall be null and void and of no effect; provided, however, that this Section 2 shall not prevent transfers by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Options shall be exercisable only by the Optionee. (b) Until a share of Common Stock vests in accordance with the provisions of Section 1(a), (b) or (c), as the case may be, the Optionee acknowledges that the Optionee may not, and the Optionee agrees that the Optionee shall not, transfer or assign the Optionee's rights to such share of Common Stock or to any cash payment related thereto. Until a share of Common Stock so vests, no attempt to transfer or assign such shares or the right to any cash -4- 5 payment related thereto, whether by transfer, pledge, hypothecation or otherwise and whether voluntary or involuntary, by operation of law or otherwise, shall vest the transferee or assignee with any interest or right in or with respect to such share of Common Stock or such cash payment, and the attempted transfer or assignment shall be of no force and effect. SECTION 3. Certificates; Custodianship. (a) Reasonably promptly after Optionee has exercised his right to acquire any such shares of Common Stock already vested pursuant to the provisions of Section 1 or Section 6 of this Agreement, but in no event more than ten (10) business days after such date, the Company (i) shall cause to be issued certificates evidencing such shares of Common Stock, including such legends as the Company deems necessary or appropriate to comply with federal and applicable state securities laws, and (ii) shall cause such certificates to be delivered to the Optionee (or such Optionee's legal representative, beneficiary or heir), together with any other property directly related to such vested shares of Common Stock of the Optionee. (b) Reasonably promptly after the date that the Optionee exercises his right to purchase any shares of Common Stock that have not theretofore vested or been forfeited, but in no event more than ten (10) business days after such date, provided that the Company has first received a stock power endorsed by the Optionee in blank with respect to such shares of Common Stock, the Company shall issue stock certificates, registered in the name of the Optionee, evidencing such shares of Common Stock. Each such certificate shall bear the following legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture and restrictions against transfer) contained in the Genta Incorporated 1998 Stock Incentive Plan and an -5- 6 Agreement entered into between the registered owner of such shares and Genta Incorporated. A copy of the Plan and Agreement is on file in the office of the Secretary of Genta Incorporated." Such legend shall not be removed from the certificates evidencing such exercised shares of Common Stock until such shares vest pursuant to the provisions of Section 1 and Section 6 of this Agreement. (c) Each certificate issued pursuant to Section 3(b) hereof, together with the stock powers relating to such shares of Common Stock, shall be deposited by the Company with a custodian designated by the Company (the "Certificate Custodian"). The Company may designate itself as Certificate Custodian hereunder. The Company shall cause such Certificate Custodian to issue to the Optionee a receipt evidencing the certificates held by it which are registered in the name of the Optionee. (d) Reasonably promptly after any previously unvested shares of Common Stock vest pursuant to the provisions of Section 1 or Section 6 of this Agreement, but in no event more than ten (10) business days after such date, the Company (i) shall cause to be issued certificates evidencing such shares of Common Stock, free of the legend provided in Section 3(b) hereof, but including such legends as the Company deems necessary or appropriate to comply with federal and applicable state securities laws, and (ii) shall cause such certificates to be delivered to the Optionee (or such Optionee's legal representative, beneficiary or heir), together with any other property directly related to such vested shares of Common Stock of the Optionee held by the Certificate Custodian pursuant to Section 3(e) hereof. (e) Any securities or other property (excluding cash dividends) received by the Optionee with respect to a share of Common Stock as a result of any stock dividend, stock split, -6- 7 recapitalization, merger, consolidation, combination or exchange of shares and for which the issue date of such Common Stock occurs prior to such event but which has not vested as of the date of such event will not vest until such share of Common Stock vests and shall be promptly deposited with the Certificate Custodian as though such securities and other property were part of such share. SECTION 4. Method of Exercise. (a) The Options or any part thereof may be exercised only by the giving of written notice to the Company on such form and in such manner as the Committee shall prescribe. Such written notice must be accompanied by payment of the full purchase price for the number of shares being purchased. Such payment may be made by one or a combination of the following methods: (i) by a certified or official bank check (or the equivalent thereof acceptable to the Company); (ii) by delivery of shares of Common Stock having a Fair Market Value on such date of exercise equal to part or all of the purchase price, provided such shares of Common Stock would not upon delivery of such shares for such purpose result in an accounting compensation charge with respect to the shares of Common Stock used to pay the Exercise Price; (iii) by delivery of a promissory note issued by Optionee for up to the full amount of the purchase price of the optioned shares (except that an amount equal to the par value of Common Stock shall be paid in cash), on terms acceptable to the Company, which promissory note shall be full recourse to the Optionee personally for all amounts due thereunder -7- 8 and shall be fully secured by the Common Stock purchased pursuant to the exercise of the Option; (iv) by payment through a broker-dealer sale and remittance procedure pursuant to which the Optionee (i) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Common Stock and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares of Common Stock and (ii) shall provide written directives to the Company to deliver the certificates for the purchased shares of Common Stock directly to such brokerage firm in order to complete the sale transactions; or (v) at the discretion of the Committee and to the extent permitted by law, by such other method as the Committee may authorize, including, without limitation, at the discretion of the Committee, by the withholding of shares (valued at their Fair Market Value on the exercise date of the Common Stock) underlying the Options. Pursuant to Section 3.2 of the Plan, it shall be a condition precedent to the issuance of shares upon exercise of the Options that the Optionee shall remit to the Company any amount sufficient to satisfy all applicable withholding tax requirements, which may be satisfied through the withholding of Common Stock as provided in Section 3.2.2 of the Plan. The date of the exercise of the Options shall be the date on which written notice of exercise is delivered to the Company, during normal business hours, at its address as provided in Section 10 of this Agreement, or if mailed, the date on which it is postmarked, provided such notice is actually received. -8- 9 (b) The Optionee agrees not to exercise any Options granted hereunder until the later of (i) the day the Option Conditions are satisfied or (ii) one day after the Optionee has been employed by the Company for six (6) months. Furthermore, the Optionee agrees that any disposition of any Options (and any shares of Common Stock issuable upon exercise of any options) will be carried out in a manner consistent with Section 16(b) of the Securities and Exchange Act of 1934, as amended, and any and all other applicable requirements of law. SECTION 5. Termination of Option. (a) Except as otherwise provided for under this Section 5, the unexercised portion of the Initial Option shall expire and cease to be exercisable at 12:01 a.m. on October 27, 2009; the unexercised portion of the Market Capitalization Option shall expire and cease to be exercisable on the tenth anniversary of the date such option vests in accordance with the provisions of Section 1(b) hereof; and the unexercised portion of the FDA Option shall expire and cease to be exercisable on the tenth anniversary of the date such option vests in accordance with the provisions of Section 1(c) hereof. (b) Except as provided in Section 6 of this Agreement, upon termination of the Optionee's employment with the Company or any of its subsidiaries for any reason (including death), all unvested Options immediately shall terminate and expire and all unvested shares of Common Stock exercised pursuant to any Option hereunder shall be immediately and irrevocably forfeited except as provided in Section 5(c) and (d) hereof. (c) Except as provided in Section 6 of this Agreement, if the Optionee's employment with the Company or any of its subsidiaries terminates for any reason other than death, the Options shall be exercisable but only to the extent they were exercisable and vested at -9- 10 the time of such termination and only until the earlier of the expiration date of such Options, or the expiration of one year following the date of termination. (d) If the Optionee dies while still an employee of the Company or any of its subsidiaries or following the termination of Optionee's employment with the Company and its subsidiaries, but during the period in which any Option is exercisable pursuant to Section 5(c) of this Agreement, such vested Option shall be exercisable but only to the extent they were exercisable at the time of death and only until the earlier of the expiration date of such Option or the first anniversary of the date of the Optionee's death. SECTION 6. Acceleration of Vesting. If: (i) prior to the termination of Optionee's employment with the Company, there is (A) a sale or other disposition of all or substantially all of the assets of the Company or the product G3139 or its substantial equivalent, (B) an acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the Company) unless the Company's stockholders as constituted immediately prior to such acquisition will, immediately after such acquisition (by virtue of securities issued as consideration for the Company's acquisition or otherwise) hold at least fifty percent (50%) of the voting power of the surviving or acquiring entity and unless the Company's directors as constituted immediately prior to such acquisition, constitute a majority of directors of the surviving or acquiring entity, or (C) an acquisition by any person or related group of persons (other than the Company, a Company-sponsored employee benefit plan -10- 11 or such person or entity who as of September 14, 1999, beneficially owned (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) more than fifty percent (50%) of the Company's Common Stock) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities; or (ii) Optionee's employment is terminated by the Company pursuant to Section 10(d) of the employment agreement between you and the Company dated as of October 28, 1999 (the "Employment Agreement")) or the Optionee terminates his employment for Good Reason under subsection 10(e) of the Employment Agreement; or (iii) prior to the termination of Optionee's employment with the Company, at any time Lindsay Rosenwald, or after his death or incapacity, his successor or legal representative (collectively "LR") directly or indirectly (through Paramount Capital Management Inc., Paramount Capital Inc., or any fund, trust or other entity for whom any of them, or any entity controlled by LR or any of them, serves as investment advisor and/or general partner or otherwise acts as an advisor or manager) ceases to control and direct at least 35% (thirty five percent) of the total combined voting power of the Company's outstanding securities; or (iv) prior to termination of Optionee's employment with the Company the Company, within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, -11- 12 (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, and such Custodian is not discharged within 60 days; or (v) prior to termination of Optionee's employment with the Company, a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief in any involuntary case against the Company, (B) appoints a Custodian of the Company or for all or substantially all of the property of the Company, or (C) orders the liquidation of the Company, and, in each case, the order or decree remains unstayed and in effect for 60 consecutive days; then any Initial Options previously granted and the Common Stock issuable thereof under this Agreement but not yet vested shall immediately vest. In addition, all Performance Options that would have vested during the 12-month period following the events set forth in this Section 6 (the "Section 6 Events") shall vest, if a Section 6 Event occurs within such 12-month period, immediately upon the occurrence of such Section 6 Events; provided, however, that no Options granted hereunder shall be exercisable unless the Option Conditions have been met. At the time the Section 6 Event occurs, the Options referred to in this Section 6 shall be fully exercisable. The term "Bankruptcy Law" means Title 11 of the U.S. Code or any similar federal, foreign or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, examiner or similar official under any Bankruptcy Law. SECTION 7. Right to Repayment. If in accordance with the terms of Section 5 of this Agreement, Optionee forfeits any unvested shares of Common Stock received upon exercise of an Option, Optionee acknowledges and agrees that the Certificate Custodian shall surrender to the Company as soon -12- 13 as practicable after the effective date of such forfeiture all certificates for such shares issued to Optionee by the Company pursuant to Section 3(b) of this Agreement. As soon as practicable after such surrender, but in no event later than 30 days after such surrender, Optionee shall be entitled to a payment by the Company in an amount, in cash equal to the aggregate of the Exercise Prices paid for each exercised but unvested share of Common Stock so forfeited. SECTION 8. Plan Provisions to Prevail. This Agreement is subject to all of the terms and provisions of the Plan. Without limiting the generality of the foregoing, by entering into this Agreement the Optionee agrees that no member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any award thereunder or this Agreement. In the event that there is any inconsistency between the provisions of this Agreement and of the Plan, the provisions of the Plan shall govern. Notwithstanding the foregoing, Section 2.10 of the Plan shall not apply to this Agreement. SECTION 9. Right of Discharge Preserved. Nothing in this Agreement shall confer upon the Optionee the right to continue in the employ of the Company and its subsidiaries, or to continue in the service of the Company and its subsidiaries as a consultant or director, or affect any right which the Company and its subsidiaries may have to terminate such employment or service. SECTION 10. Notices. All notices required or permitted hereunder shall be given in writing by personal delivery; by confirmed facsimile transmission (with a copy dispatched by express delivery or registered or certified mail); or by express delivery via express mail or any reputable express -13- 14 courier service. Notice shall be addressed (a) to Genta Incorporated, c/o Dr. Mark C. Rogers, Paramount Capital Inc., 787 Seventh Avenue, 48th Floor, New York, New York 10019; and (b) to the Optionee at the address set forth on the signature page hereto; or (c) as to either party, at such other address as may be designated by notice in the manner set forth herein. Notices which are delivered personally, by confirmed facsimile transmission, or by courier as aforesaid, shall be effective on the date of delivery. SECTION 11. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and the successors and assigns of the Company and, to the extent consistent with Section 5 of this Agreement and with the Plan, the heirs and personal representatives of the Optionee. SECTION 12. Entire Contract; Waiver; Amendment. This Agreement constitutes the entire contract between the parties hereto and supersedes all prior oral and written agreements between the parties with regard to the subject matter hereof. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. This Agreement may be amended as provided in Section 3.1.3 of the Plan. Headings are for convenience only, and are not themselves part of the Agreement. SECTION 14. Severability. If any provision of this Agreement (including any provision of the Plan that is incorporated herein by reference) shall hereafter be held to be invalid, unenforceable or illegal in whole or in part, in any jurisdiction under any circumstances for any reason, (a) such provision -14- 15 shall be reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal while preserving the intent of the parties as expressed in, and the benefits to the parties provided by, this Agreement and the Plan or (b) if such provision cannot be so reformed, such provision shall be severed from this Agreement and an equitable adjustment shall be made to this Agreement (including, without limitation, addition of necessary further provisions to this Agreement) so as to give effect to the intent as so expressed and the benefits so provided. Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances. Neither such holding nor such reformation or severance shall affect or impair the legality, validity or enforceability of any other provision of this Agreement or the Plan. SECTION 15. Governing Law. This Agreement shall be interpreted, construed and administered in accordance with the laws of the State of New York, without giving effect to principles of conflicts of laws, as they apply to contracts made, delivered and performed in the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the date and year first written above. GENTA INCORPORATED By: ------------------------- Name: Mark C. Rogers Title: Chairman of the Board of Directors -15- 16 OPTIONEE Dr. Raymond P. Warrell, Jr. ---------------------------- Address: ---------------------------- Social Security Number: ---------------------------- EX-10.72 12 LETTER AGREEMENT FROM SKYEPHARMA PLC 1 Exhibit 10.72 4 March 1999 Mr K Kasses Genta Incorporated 99 Hayden Avenue Lexington MA 02421 USA Dear Ken THE GENTA - JAGO JOINT VENTURE The parties have been discussing a means of resolving their involvement in Genta Jago Technologies BV (the Joint Venture) and the several agreements in being between them concerning its operation and activities. Genta is evaluating the fiscal and other consequences of acquiring SkyePharma's interest in the Joint Venture. Regardless of the outcome of such evaluation, the parties hare agreed to operate the activities of the Joint Venture in accordance with what follows notwithstanding anything contained in the several agreements referred to above. For the avoidance of doubt, SkyePharma shall mean all members of the SkyePharma Group of Companies, on whose behalf SkyePharma commits. SkyePharma is referred to as "Skye" hereafter. 1. The Parties waive, release and hold each other harmless and each of their respective partners, affiliates, shareholders, directors, officers, agents, advisors, representatives, employees, counsel and controlling persons within the meaning of the Securities Act of 1933, as amended (the "Act"), from any and all losses, liabilities, claims, damages and expenses, whether known or unknown, contingent or matured (collectively, the "Claims") whatsoever in any way related to, arising out of or in connection with (i) any and all unpaid development costs accrued as of the date hereof, (ii) the certain notes executed by the Joint Venture in favour of Genta for the funding of development and operational costs, and (iii) any and all obligations and/or responsibilities under the agreements set forth in Schedule A, including, without limitation, specifically Genta shall be released in all respects from the funding obligations under any such agreements. 2. Henceforth, and pending the outcome of Genta's evaluation (mentioned above) and/or such other agreement as may be made between the parties, Skye shall benefit from all rights and become responsible for all obligations under existing development and license agreements between the Joint Venture and independent third parties, including Apothecon (now terminated), Brightstone and Krypton. Skye shall be solely responsible for the further development, marketing, distribution, manufacturing and funding of the Joint Venture products listed in Schedule B of the Restated Geomatrix License Agreement ("JV Products"), now being Schedule B to this agreement. In order to enable these provisions to work Skye is hereby given authority to commit the Joint Venture in 2 all particulars, with third parties and without need of any further assurance from Genta or the signature of any of its officers. 3. In consideration of the foregoing, the Joint Venture shall have a vested interest in the qualified income share from the license revenues of Skye relating to JV Products (the "Qualified Income Share"), including license fees, milestones, royalties and other payments made in respect of a license granted in respect of the JV Products ("License Income"), but excluding reasonable and documented reimbursements by independent third parties for development costs and expenses of Skye. The Qualified Income Share shall be as follows: (a) For JV Products for which the Joint Venture and/or Skye have initiated development prior to the date hereof (as set forth of Schedule B), that: (i) have been, or are in the future, licensed to independent third parties, the Qualified Income Share of the Joint Venture shall be equal to one hundred percent (100%) of the License Income; and (ii) have been, or are in the future, licensed to an affiliate company within the Skye group, the Qualified Income Share of the Joint Venture shall be based on the terms for payments owed to the Joint Venture pursuant to the license agreement for Naproxen entered into on 25th October 1996 between the Joint Venture and Krypton Ltd., a wholly owned subsidiary of Skye. (b) For JV Products for which no development has occurred prior to the date hereof (as set forth in Schedule C), that are in the future licensed to independent third parties or affiliates of Skye: (i) within eighteen (18) months, then the Qualified Income Share of the Joint Venture shall be 100% of the License Income; and (ii) thereafter, the Qualified Income Share of the Joint Venture shall be sixty-six percent (66%) of the License Income; and (iii) 3.(a)(ii) above shall apply to the determination of licence income for licences to affiliate companies within the Skye Group. (c) For JV Products for which no development has occurred prior to the date hereof (as set forth in Schedule C), Skye is entitled to deduct from License Income actually received from independent third parties for each such product worked on prior to the execution of the development/license agreement with such independent third party up to an aggregate amount of CHF 500,000 per product/license to cover unreimbursed development fees that are incurred for such products. 4. Until the date that is nineteen (19) years from the date hereof, all Qualified License Income shall be paid by Skye immediately upon receipt into an escrow account in the 3 name of the JV Company, jointly controlled (for payments out) by Genta and Skye or their nominees (the "Escrow Account"). Any amounts received in the Escrow Account shall be disbursed to the Parties and Vecap Venture Capital Partners AG ("Vecap") pursuant to the Distribution List attached hereto as Schedule D. Upon full recovery of all amounts set forth for the credit of each of the Parties and Vecap, Genta and Skye shall each receive fifty percent (50%) of all additional Qualified License Income. 5. Subject to the further agreement between the parties the Joint Venture shall be maintained by an independent third party (appointed by agreement), on behalf of the parties, on a minimal basis, with only those functions performed by it or in relation to it, which are strictly necessary for purposes of this agreement, and/or to maintain the integrity of its Corporate being (audit and registration fees, etc). For avoidance of doubt such independent third party will invoice both Genta and Skye for 50% each of any necessary costs and expenses, reasonably incurred in the fulfillment of this paragraph 5. Both parties acknowledge that this agreement represents an interim solution and that it shall obtain until they are able to resolve the relationship between them to their mutual satisfaction. If the foregoing accurately reflects your understanding of what we have agreed, will you please evidence accordingly by signing and returning one copy of this agreement. Yours sincerely PETER WARBURTON COMPANY SECRETARY & INTERNATIONAL COUNSEL FOR: GENTA INCORPORATED BY: _________________________________ DATE: ____________________________ NAME: TITLE: EX-23.1 13 CONSENT OF DELOITTE AND TOUCHE LLP 1 EXHIBIT 23.1 CONSENT OF DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-72130, 33-58362,333-3846 and 333-35215 of Genta Incorporated on Form S-3 and Registration Statement Nos. 33-85887, 333-94181 and 333-94185 of Genta Incorporated on Form S-8 of our report dated February 2, 2000 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, 1999. DELOITTE & TOUCHE LLP Boston, Massachusetts March 27, 2000 EX-23.2 14 CONSENT OF DELOITTE EXPERTA LTD 1 EXHIBIT 23.2 CONSENT OF DELOITTE & TOUCHE EXPERTA LTD INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-72130, 33-58362, 333-3846 and 333-35215 of Genta Incorporated on Form S-3 and Registration Statement Nos. 33-85887, 333-94181 and 333-94185 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 indicates 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 March 27, 2000 EX-23.3 15 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.3 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, 1999. ERNST & YOUNG LLP San Diego, California March 24, 2000 EX-27.1 16 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 12-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 DEC-31-1999 1,566,288 10,100,603 892,372 0 0 1,333,739 0 0 0 0 5,937,364 11,456,429 148,245 30,357 0 0 7,551,293 12,228,190 2,308,256 2,022,114 0 0 634 401 0 0 10,426 25,456 2,947,959 10,180,219 7,551,293 12,228,190 0 0 105,087 0 0 0 6,683,123 11,333,138 0 149,027 0 0 263,675 172,137 (8,218,556) 0 0 0 (6,845,801) (8,861,510) (739,965) (189,407) 0 1,606,956 0 0 (8,218,556) (17,528,541) (1.17) (0.99) (1.17) (0.99)
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