================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-19635 GENTA INCORPORATED (Exact name of Registrant as specified in its certificate of incorporation) Delaware 33-0326866 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Two Connell Drive Berkeley Heights, NJ 07922 (Address of principal executive offices) (Zip Code) (908) 286-9800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |_| No |X| As of July 31, 2003, the registrant had 74,954,128 shares of common stock outstanding. ================================================================================ Genta Incorporated INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements: Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 CERTIFICATIONS 22 2 Genta Incorporated CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, (In thousands, except par value data) 2003 2002 --------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents .......................................... $ 38,915 $ 32,700 Short-term investments (Note 2) .................................... 58,274 81,016 Accounts receivable (Note 3) ....................................... 19,585 14,574 Notes receivable ................................................... 275 200 Other current assets ............................................... 2,123 1,458 --------- --------- Total current assets .................................................. 119,172 129,948 Property and equipment, net ........................................... 3,565 3,256 Notes receivable ...................................................... 1,465 -- Intangibles, net ...................................................... 1,151 1,440 Other assets .......................................................... 1,716 1,775 --------- --------- Total assets .......................................................... $ 127,069 $ 136,419 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................... $ 5,093 $ 27,683 Note payable ....................................................... -- 490 Accrued expenses ................................................... 7,372 4,740 Deferred revenues, current portion ................................. 5,237 5,237 Other current liabilities .......................................... 212 212 --------- --------- Total current liabilities ............................................. 17,914 38,362 Deferred revenues (Note 5) ......................................... 38,736 41,354 Convertible debt (Note 6) .......................................... 10,000 10,000 Line of credit (Note 7) ............................................ 25,000 -- --------- --------- Total liabilities ..................................................... 91,650 89,716 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, Series A convertible preferred stock, $.001 par value; 5,000 shares authorized, 261 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively; liquidation value of $13,025 ....................... -- -- Common stock, $.001 par value; 120,000 shares authorized, 74,853 and 74,168 shares issued and 74,409 and 73,775 outstanding at June 30, 2003 and December 31, 2002, respectively ............ 75 74 Additional paid-in capital ......................................... 324,792 322,997 Accumulated deficit ................................................ (286,211) (273,190) Deferred compensation .............................................. (409) (697) Accumulated other comprehensive (loss) income ...................... (19) 25 --------- --------- Total stockholders' equity ............................................ 38,228 49,209 Cost of treasury stock: 444 and 393 shares at June 30, 2003 and December 31, 2002, respectively ............................. (2,809) (2,506) --------- --------- Total stockholders' equity ............................................ 35,419 46,703 --------- --------- Total liabilities and stockholders' equity ............................ $ 127,069 $ 136,419 ========= ========= See accompanying notes to condensed consolidated financial statements. 3 Genta Incorporated CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands, except per share data) 2003 2002 2003 2002 -------- -------- -------- -------- Revenues: License fees and royalties (Note 5) ........... $ 276 $ 214 $ 542 $ 219 Development funding (Note 5) .................. 1,044 696 2,087 696 -------- -------- -------- -------- 1,320 910 2,629 915 Costs and expenses: Research and development (Note 4) ............. (1,322) 9,693 4,978 19,530 General and administrative (Note 4) ........... 6,131 8,247 10,911 11,049 Compensation expense related to stock options . 144 238 288 477 -------- -------- -------- -------- 4,953 18,178 16,177 31,056 -------- -------- -------- -------- Loss from operations ............................. (3,633) (17,268) (13,548) (30,141) Other income (expense): Other income, principally net interest income . 435 299 887 545 Interest expense ............................. (220) (100) (360) (100) -------- -------- -------- -------- 215 199 527 445 -------- -------- -------- -------- Net loss applicable to common shares ............. $ (3,418) $(17,069) $(13,021) $(29,696) ======== ======== ======== ======== Net loss per common share ........................ $ (0.05) $ (0.25) $ (0.18) $ (0.44) ======== ======== ======== ======== Shares used in computing net loss per common share 74,442 69,184 74,338 67,862 ======== ======== ======== ======== See accompanying notes to condensed consolidated financial statements. 4 Genta Incorporated CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (In thousands) 2003 2002 --------- --------- Operating activities Net loss .......................................................... $ (13,021) $ (29,696) Items reflected in net loss not requiring cash: Depreciation and amortization .................................. 1,040 768 Loss on disposition of patents and equipment ................... -- 10 Compensation expense related to stock options .................. 288 477 Changes in operating assets and liabilities: Accounts and notes receivable (Note 3) ......................... (6,551) (7,126) Prepaids and other assets ...................................... (606) (5,579) Accounts payable, accrued expenses and other current liabilities (23,066) 48,985 --------- --------- Net cash (used in) provided by operating activities .............. (41,916) 7,839 --------- --------- Investing activities Purchase of available-for-sale short-term investments ........... (38,000) -- Maturities and sales of available-for-sale short-term investments 60,698 15,566 Purchase of property and equipment .............................. (1,060) (1,179) --------- --------- Net cash provided by investing activities ......................... 21,638 14,387 --------- --------- Financing activities Issuance of common stock from private placement, net ............ -- 71,035 Issuance of convertible debt .................................... -- 10,000 Proceeds from line of credit (Note 7) ........................... 25,000 -- Purchase of treasury stock (Note 8) ............................. (303) (74) Proceeds from exercise of warrants and options .................. 1,796 1,758 --------- --------- Net cash provided by financing activities ......................... 26,493 82,719 --------- --------- Increase in cash and cash equivalents ............................. 6,215 104,945 Cash and cash equivalents at beginning of period .................. 32,700 38,098 --------- --------- Cash and cash equivalents at end of period ........................ $ 38,915 $ 143,043 ========= ========= See accompanying notes to condensed consolidated financial statements. 5 Genta Incorporated NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003 (Unaudited) (1) Basis of Presentation The unaudited condensed consolidated financial statements of Genta Incorporated, a Delaware corporation ("Genta" or the "Company"), presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and note disclosures required to be presented for complete financial statements. The accompanying financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. Results for the interim periods are not necessarily indicative of results for the full years. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations will continue. Revenue Recognition In April 2002, the Company entered into a development and commercialization agreement (the "Collaborative Agreement") with Aventis Pharmaceuticals Inc. ("Aventis"). Under the terms of the Collaborative Agreement, the Company and Aventis will jointly develop and commercialize Genasense(TM) in the U.S. ("the Alliance"), and Aventis will have exclusive development and marketing rights to Genasense(TM) in all countries outside of the U.S. Under the Collaborative Agreement, Aventis will pay 75% of U.S. New Drug Application ("NDA")-directed development costs incurred by either Genta or Aventis, subsequent to the execution of the Collaborative Agreement, and 100% of all other development, marketing, and sales costs incurred within the U.S. and elsewhere. Reimbursements are to be made pursuant to a single net payment from one party to the other. Such payments are due and payable 60 days following the end of the quarter in which such expenses are incurred. Initial and future funding of ongoing development received from Aventis after the achievement of certain research and development milestones (Notes 4 and 5) are being recognized over the estimated useful life of the first-to-expire related patent of 115 months. Research and Development Research and development costs are expensed as incurred, including raw material costs required to manufacture products for clinical trials. Reimbursements for applicable Genasense(TM)-related costs, under the Collaborative Agreement (Note 4), have been recorded as a reduction to expenses in the condensed consolidated statements of operations. Intangible Assets Intangible assets, consisting primarily of licensed technology and capitalized patent costs, are amortized using the straight-line method over their estimated useful lives of five years. 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 assets, such impairment would be recognized by a write-down of the applicable assets. The Company evaluates the continuing value of patents and patent applications in each financial reporting period. Through this evaluation, the Company may elect to continue to maintain these patents, seek to out-license them, or abandon them. 6 Future amortization expense related to intangibles at June 30, 2003 follows ($ thousands): Amortization Expense ------------ 2003.................................. $ 288 2004.................................. 577 2005.................................. 286 2006.................................. -- 2007.................................. -- Thereafter............................ -- ------- Total........................ $ 1,151 ======= Stock Options The Company accounts for stock-based compensation arrangements in accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company's stock and the exercise price. The Company accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123, and Emerging Issues Task Force Consensus on 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." The Company is amortizing deferred stock compensation using the graded vesting method, in accordance with Financial Accounting Standards Board Interpretation No. 28, over the vesting period of each respective option, which is generally four years. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - Amendment of FASB Statement No. 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation: ($ thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net loss applicable to common shares, as reported ................................. $ (3,418) $(17,069) $(13,021) $(29,696) Equity related employee compensation expense included in reported net income, net of related tax effects ...................... 144 238 288 477 Total stock-based employee compensation expense determined under fair values based method for all awards, net of related tax effects .................................. (1,907) (1,909) (3,455) (3,576) -------- -------- -------- -------- Pro forma net loss applicable to common shares ................................... $ (5,181) $(18,740) $(16,188) $(32,795) ======== ======== ======== ======== Net loss per common share: As reported: Basic and diluted .............. $ (0.05) $ (0.25) $ (0.18) $ (0.44) Pro forma: Basic and diluted ................ $ (0.07) $ (0.27) $ (0.22) $ (0.48) 7 Pro Forma Disclosure The fair value of options for the three months ended June 30, 2003 and 2002, has been estimated at the date of grant using the minimum value option pricing model with the following assumptions: Three Months Ended June 30, --------------------------- 2003 2002 ------ ------ Risk-free interest rate .................... 2.5% 2.8% Dividend yield ............................. -- -- Expected life (years) ...................... 4.0 5.0 Volatility ................................. 65.0% 65.0% All of the options issued during the three-month periods ended June 30, 2003 and 2002, were issued with an exercise price equal to market value on the date of grant. The weighted-average estimated fair value of stock options granted was $9.86 per share and $10.32 per share for the three-month periods ended June 30, 2003 and 2002, respectively. Net Loss Per Common Share Basic and diluted loss per common share are identical for the three months ended June 30, 2003 and 2002 as potentially dilutive securities, including options, warrants and convertible preferred stock have been excluded in the calculation of the net loss per common share due to their anti-dilutive effect. Recent Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Liabilities, Equity, or Both. This limited scope statement prescribes changes to the classification of preferred securities of subsidiary trusts and the accounting for forward purchase contracts issued by a company in its own stock. SFAS No. 150 does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety and requires all preferred securities of subsidiary trusts to be classified as debt on the consolidated balance sheet and the related dividends as interest expense. As the Company did not have any financial instruments within the scope of SFAS No. 150, its adoption did not have any impact on the Company's results of operations, financial position or cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In particular, SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (4) amends certain other existing pronouncements. SFAS No. 149 is to be applied prospectively to contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. Management believes that adopting this statement will not have a material impact on the Company's results of operations, financial position or cash flows. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company adopted SFAS No. 143 effective January 1, 2003. The adoption did not have any material impact on the Company's results of operations, financial position or cash flows. 8 (2) Short-Term Investments The carrying amounts of short-term investments approximate fair value due to the short-term nature of these instruments. The fair value of available-for-sale marketable securities at June 30, 2003 is as follows ($ thousands): Amortized costs ....................................... $ 58,293 Gross unrealized gains ................................ 32 Gross unrealized losses ............................... (51) -------- Estimated fair value .................................. $ 58,274 ======== The estimated fair value of each marketable security has been compared to its cost, and therefore, an unrealized loss of approximately $0.019 million has been recognized in accumulated other comprehensive (loss) income at June 30, 2003. (3) Accounts Receivable Included in accounts receivable and netted against operating expenses in the condensed consolidated statement of operations for the three months ended June 30, 2003, is $19.433 million in net expense reimbursements due from Aventis for various third-party costs, internal costs of scientific and technical personnel ("Full-time Equivalents" or "FTE's") and Genasense(TM) drug supply costs. Information with respect to the cost reimbursement for the three months ended June 30, 2003 is presented below ($ thousands): Reimbursement to Genta: Third-party costs ................................... $ 8,822 Drug supply costs ................................... 9,192 FTE's ............................................... 1,793 -------- Amount due to Genta ................................. 19,807 Reimbursement to Aventis: FTE's ............................................... (374) -------- Net amount due to Genta ............................... $ 19,433 ======== (4) Collaborative Agreement In April 2002, the Company entered into a Collaborative Agreement with Aventis. Under the terms of the Collaborative Agreement, the Alliance will jointly develop and commercialize Genasense(TM) in the U.S., and Aventis will have exclusive development and marketing rights to Genasense(TM) in all countries outside of the U.S. Under the Collaborative Agreement, Aventis will pay 75% of U.S. NDA-directed development costs incurred by either Genta or Aventis, subsequent to the execution of the Collaborative Agreement, and 100% of all other development, marketing, and sales costs incurred within the U.S. and elsewhere. An analysis of expenses reimbursable under the Collaborative Agreement (Note 1) follows: 9 ($ thousands) Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Research and development expenses, gross $ 18,111 $ 16,442 $ 33,568 $ 26,279 Less net expense reimbursement ......... (19,433) (6,749) (28,590) (6,749) -------- -------- -------- -------- Research and development expenses, net . $ (1,322) $ 9,693 $ 4,978 $ 19,530 ======== ======== ======== ======== General and administrative, gross ...... $ 6,131 $ 8,670 $ 10,911 $ 11,472 Less expense reimbursement ............. -- (423) -- (423) -------- -------- -------- -------- General and administrative, net ........ $ 6,131 $ 8,247 $ 10,911 $ 11,049 ======== ======== ======== ======== As of June 30, 2003, the Company has received a total of $194.4 million in initial and near-term funding, which included a $10.0 million licensing fee and $40.0 million in development funding (Note 5), $10.0 million in convertible debt proceeds (Note 6), $71.9 million pursuant to an at-market equity investment in the Company's common stock, $37.5 million in paid expense reimbursements and $25.0 million in line of credit proceeds (Note 7). A further $19.6 million in accrued expense reimbursement is due for payment during the third quarter of 2003 (Note 3), which includes $0.1 million due from December 31, 2002. The remaining amounts that could be received under the Collaborative Agreement, $280.0 million in cash and $65.0 million in convertible note proceeds, are contingent upon the achievement of certain research and development milestones. (5) Deferred Revenues As of June 30, 2003, the Company had recorded $44.0 million in deferred revenues relating to the initial $10.0 million licensing fee and $40.0 million development funding received under the Collaborative Agreement (Note 4), of which $5.2 million is included in current liabilities and $38.8 million is classified as long-term deferred revenues, which are being recognized over the estimated useful life of the first-to-expire related patent of 115 months. Any subsequent milestone payments that may be received from Aventis will also be recognized over the then, remaining estimated useful life of the first-to-expire related patent. Separately, as of June 30, 2003, the Company had recorded $0.01 million in royalties. (6) Convertible Debt At June 30, 2003, the Company had $10.0 million in convertible debt that was issued in connection with the Collaborative Agreement (Note 4). The Company received $10.0 million in debt proceeds from Aventis, and issued a $10.0 million convertible promissory note to Aventis ("Aventis Note"). Interest accrues at the rate of 5.63% per annum until April 26, 2009 (the "Maturity Date") and compounds annually on each anniversary date of the Aventis Note through the Maturity Date. The Company may redeem the Aventis Note for cash in whole or in part (together with any accrued and unpaid interest with respect to such principal amount) in amounts of not less than $0.5 million (and in $0.1 million increments thereafter). In addition, the Company may convert the Aventis Note on or prior to the Maturity Date in whole or in part (together with any accrued and unpaid interest with respect to such principal amount) in amounts of not less than $5.0 million (and in $1.0 million increments thereafter), into fully paid and non-assessable shares of common stock (calculated as to the nearest 1/1000 of a share). As of any date, the number of shares of common stock into which the Aventis Note may be converted shall be determined by a formula based on the then market value of the common stock (the "Conversion Price"), subject to a minimum Conversion Price of $8.00 per share. (7) Aventis Line of Credit At June 30, 2003, the Company had $25.0 million outstanding on a line of credit that was issued in connection with an amendment, dated March 14, 2003, to the Collaborative Agreement (Note 4) that established a $40.0 million line of credit related to the development, manufacturing and commercialization of Genasense(TM) ("Aventis Credit Line"). The amendment provides Genta the immediate availability of up to $40.0 million in cash. This revolving debt will be considered an advance against both past and future costs and will be secured by reimbursable development expenses from Aventis, as well as drug inventory. At the time of Genasense(TM) NDA approval in the U.S., any outstanding balance will be offset against the first milestone payment that is due to Genta from Aventis. The terms of the Aventis Credit Line provide for a favorable interest rate, which is set two days prior to the first day of each calendar quarter. The Aventis Credit Line terminates upon the earlier of (1) the receipt of Genasense(TM) NDA approval in the U.S., (2) notice given by either Genta or Aventis of the termination of the Collaborative Agreement, (3) notice given by Genta of the termination of the Aventis Credit Line, (4) various default provisions or (5) December 31, 2004. Depending upon the circumstances, repayment is due immediately or up to six months after the termination of the Aventis Credit Line. 10 (8) Treasury Stock In June 2002 the Company commenced a stock repurchase program, whereby up to 5.0 million shares of its common stock may be repurchased by the Company at prices deemed desirable by the Company. As of June 30, 2003, the Company had repurchased 444,200 shares of common stock in open-market transactions as follows: Shares Average price Repurchased per share ----------- ------------- At December 31, 2002 ....................... 392,700 $6.3807 Six Months Ended June 30, 2003 ............. 51,500 5.8927 ------- ------- 444,200 $6.3242 ======= ======= (9) Comprehensive Loss An analysis of comprehensive loss is presented below: Three Months Six Months ($ thousands) Ended June 30, Ended June 30, ----------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net loss ...................... $ (3,418) $(17,069) $(13,021) $(29,696) Change in market value on available-for-sale short-term investments ................. (28) 116 (44) 60 -------- -------- -------- -------- Total comprehensive loss ...... $ (3,446) $(16,953) $(13,065) $(29,636) ======== ======== ======== ======== (10) Supplemental Disclosure of Cash Flows Information and Non-cash Investing and Financing Activities No interest was paid for the six months ended June 30, 2003 and 2002. (11) Commitments and Contingencies Litigation and Potential Claims JBL The sale of JBL Scientific, Inc. ("JBL"), the Company's manufacturing subsidiary, was completed on May 10, 1999. JBL was notified on October 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. In December 2001, Genta received a revised settlement proposal from the EPA in the amount of $0.033 million, the terms of the settlement with the EPA containing standard contribution protection and release language. In January 2002, the Company accepted the proposal and paid the $0.033 million as an offer to settle this matter. There can be no assurance, however, that the EPA will not reject our settlement offer if there is not a sufficient number of PRPs settling with the EPA. 11 Genta Europe During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a wholly-owned subsidiary of Genta, received funding in the form of a loan from ANVAR, a French government agency, of which the proceeds were intended to fund research and development activities. In October 1996, in connection with a restructuring of Genta's operations, Genta terminated all scientific personnel of Genta Europe. In 1998, ANVAR asserted that Genta Europe was not in compliance with the ANVAR Agreement, notified Genta Europe of its demand for accelerated repayment of the loan and notified Genta that it was liable as a guarantor on the note. Based on the advice of French counsel, Genta does not believe that ANVAR is entitled to payment under the terms of the ANVAR Agreement and also believes it to be unlikely that Genta will incur any liability in this matter, although there can be no assurance thereof. At June 30, 2003, the Company has accrued a net liability of $0.212 million related to this matter, which management believes is adequate to provide for this contingency. University of Pennsylvania In October 2002, a licensing officer from the University of Pennsylvania ("UPenn") asserted a claim to a portion of the initial $40.0 million development funding (Note 5) the Company received from Aventis pursuant to the Collaborative Agreement. The Company has disputed this claim and has filed a petition for binding arbitration for this matter, as provided in the original licensing agreement between the Company and UPenn. The Company and UPenn are currently discussing the possibility of entering into a settlement with respect to this matter. Under the terms of the proposed settlement, in exchange for an agreement by UPenn to forego any and all claims in the future to any portion of any milestone and other payments (other than royalty payments) made to Genta pursuant to the Collaborative Agreement, Genta would make the following payments to UPenn: (i) $750,000 on October 1, 2003, (ii) $250,000 on February 2, 2004, (iii) $1.5 million upon the first NDA or foreign equivalent approval of Genasense(TM) (the "first Genasense(TM) approval"), and (iv) provided that the first Genasense(TM) approval has been received by Genta, $750,000 on the earlier of (a) the second NDA or foreign equivalent approval of Genasense(TM) or (b) December 30, 2004. The proposed settlement, including the aforementioned monetary terms, is still subject to the parties reaching agreement on certain other matters, and no assurance can be given that the parties will reach any such agreement and that the proposed settlement will be entered into on these monetary terms, if at all. At the current time the Company cannot reasonably estimate the outcome of this claim; however, the Company does not believe that this claim will have a material adverse impact on the Company's financial results and liquidity. As of June 30, 2003, the Company has not reserved any amount for royalty payments that could be due to UPenn as a result of binding arbitration. Purchase Commitments Per an agreement entered into with Avecia Biotechnology, Inc. ("Avecia") in December 2002 (the "Supply Agreement") the Company is obligated for up to $27.5 million in drug substance purchases during 2003. Pursuant to the Collaborative Agreement with Aventis (Note 4), the Company anticipates that it will be reimbursed for at least 75% of these purchase commitments after the drug is shipped to the clinical sites. No drug substance purchases were made in the first half of 2003, primarily due to the significant amount of drug substance purchased in the fourth quarter of 2002. In addition, the Company has committed up to $5.0 million of advance financing to Avecia for facility expansion, which would be recovered with interest through future payments determined as a function of drug substance purchases to be made by the Company in the future. As of July 15, 2003, the Company had paid $1.448 million in advance financing. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain Factors Affecting Forward-Looking Statements - Safe Harbor Statement The statements contained in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 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 actual results to differ materially from any future results expressed or implied by such forward-looking statements. Forward-looking statements include, without limitation, statements about: o the Company's ability to develop, manufacture and sell its products; o the potential efficacy of the Company's products; o the commencement and completion of pre-clinical and clinical trials; o the Company's ability to obtain necessary regulatory approvals; o the Company's contractual collaborative arrangements; o the adequacy of the Company's capital resources; o the ability to obtain sufficient financing to maintain the Company's planned operations; o the possibility and effect of patent infringement claims; o the impact of competitive products and market conditions; and o other risks described under Certain Risks and Uncertainties Related to the Company's Business in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The Company does not undertake to update any forward-looking statements. Although the Company believes that the forward-looking statements contained herein are reasonable, it can give no assurances that the Company's expectations are correct. Overview Since its inception in February 1988, the Company has devoted its principal efforts toward drug discovery and research and development. The Company has been unprofitable to date and expects to incur substantial operating losses for the next several years due to continued requirements for ongoing research and development activities, preclinical and clinical testing activities, regulatory activities, possible establishment of manufacturing activities and a sales and marketing organization. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in revenues, expenses and losses will continue. A full description of the Company's business, R&D programs and products is set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 13 Results of Operations for the Three Months Ended June 30, 2003 and 2002 Summary Operating Results ($ thousands) For the Three Months Ended June 30, Increase (Decrease) ---------------------- 2003 $ % 2002 -------- -------- -------- -------- Revenues: Licensing fees and royalties ..... $ 276 $ 62 29% $ 214 Development funding .............. 1,044 348 50% 696 -------- -------- -------- -------- 1,320 410 45% 910 Costs and expenses: Research and development ......... 18,111 1,669 10% 16,442 General and administrative ....... 6,131 (2,539) (29)% 8,670 Compensation expense related to stock options ................... 144 (94) (39)% 238 Less: Expense reimbursement ...... 19,433 12,261 171% 7,172 -------- -------- -------- -------- 4,953 (13,225) (73)% 18,178 -------- -------- -------- -------- Loss from operations ................. (3,633) (13,635) (79)% (17,268) Other income, principally net interest income ............................ 435 136 45% 299 Less: Interest expense ............... 220 120 120% 100 -------- -------- -------- -------- Net loss applicable to common shares . $ (3,418) $(13,651) (80)% $(17,069) ======== ======== ======== ======== Revenues. Licensing fees, development funding and royalties for the three months ended June 30, 2003 increased $0.410 million over the comparable period in 2002. This increase reflects the amortization, for three months in 2003 compared to two months in 2002, of the up-front licensing fee and development funding received from Aventis (Note 5), which are being recognized over the estimated useful life of the first-to-expire related patent of 115 months. Royalties were $0.010 million and $0.036 million for the three months ended June 30, 2003 and 2002, respectively. Research and development expenses. Research and development expenses before reimbursement for the three months ended June 30, 2003 increased $1.669 million or 10% over the comparable period in 2002. The increase in research and development expenses is primarily attributable to the costs of the Genasense(TM) Phase 3 clinical trials and NDA preparation activities, offset by no drug substance purchases in the quarter. Of the $18.111 million in research and development expenses for the three months ended June 30, 2003, $14.523 million and $0.774 million were reimbursable at 75% and 100%, respectively, pursuant to the Collaborative Agreement (Note 4), of which a net amount of $11.666 million is expected to be reimbursed in the third quarter. An additional $8.141 million is expected to be reimbursed in the third quarter for drug substance and drug product shipped to Aventis in the second quarter in connection with drug substance purchases the Company expensed in 2002. General and administrative expenses. General and administrative expenses for the three months ended June 30, 2003 decreased $2.539 million or 29% over the comparable period in 2002. In 2002, higher expenses were a result of financial advisory services, royalty payments and legal fees relating to the Collaborative Agreement (Note 4). This was partially offset in 2003 by increased costs associated with Ganite(TM) pre-launch activities and general corporate expenses driven by business growth. There were no sales and marketing related expenses reimbursable at 100% pursuant to the Collaborative Agreement for the three months ended June 30, 2003, as sales and marketing related expenses related to Genasense(TM) are mainly being billed to and paid for directly by Aventis. Expense reimbursement. Expense reimbursement for the three months ended June 30, 2003 relate to various third-party, FTE and drug supply costs that Aventis is required to reimburse under the Collaborative Agreement (Note 4), as follows ($ thousands): 14 Reimbursement to Genta: Third-party costs ..................................... $ 8,822 Drug supply costs ..................................... 9,192 FTE's ................................................. 1,793 -------- Amount due to Genta ................................... 19,807 Reimbursement to Aventis: FTE's ................................................. (374) -------- Net amount due to Genta ................................. $ 19,433 ======== Other income less interest expense. Net other income for the three months ended June 30, 2003 increased $0.016 million or 8% over the comparable period in 2002, principally as a result of higher investment balances on investments, offset by interest expense on the $10.0 million Aventis Note (Note 6) and the $25.0 million Aventis Credit Line (Note 7). Net Loss. Genta incurred a net loss of $3.418 million, or $0.05 per share, for the three months ended June 30, 2003, compared with a net loss of $17.069 million, or $0.25 per share, for the three months ended June 30, 2002. The decrease in net loss, and per share net loss to common shareholders, was primarily due to the expense reimbursement pursuant to the Collaborative Agreement (Note 4) of $19.433 million or $0.26 per share, offset by increased expenses primarily related to third-party costs for current Genasense(TM) on-going clinical studies, expenses attributable to the NDA preparation, general corporate legal fees, personnel costs and Ganite(TM) marketing-related spending. Results of Operations for the Six Months Ended June 30, 2003 and 2002 Summary Operating Results ($ thousands) For the Six Months Ended June 30, Increase (Decrease) ---------------------- 2003 $ % 2002 -------- -------- -------- -------- Revenues: Licensing fees and royalties ..... $ 542 $ 323 147% $ 219 Development funding .............. 2,087 1,391 200% 696 -------- -------- -------- -------- 2,629 1,714 187% 915 Costs and expenses: Research and development ......... 33,568 7,289 28% 26,279 General and administrative ....... 10,911 (561) (5)% 11,472 Compensation expense related to stock options ................... 288 (189) (40)% 477 Less: Aventis reimbursement ...... 28,590 21,418 299% 7,172 -------- -------- -------- -------- 16,177 (14,879) (48)% 31,056 -------- -------- -------- -------- Loss from operations ................. (13,548) (16,593) (55)% (30,141) Other income, principally net interest income ............................ 887 342 63% 545 Less: Interest expense ............... 360 260 260% 100 -------- -------- -------- -------- Net loss applicable to common shares . $(13,021) $(16,675) (56)% $(29,696) ======== ======== ======== ======== Revenues. Licensing fees, development funding and royalties for the six months ended June 30, 2003 increased $1.714 million over the comparable period in 2002. This increase reflects the amortization, for six months in 2003 compared to two months in 2002, of the up-front licensing fee and development funding received from Aventis (Note 5), which are being recognized over the estimated useful life of the first-to-expire related patent of 115 months. Royalties were $0.010 million and $0.036 million for the six months ended June 30, 2003 and 2002, respectively. 15 Research and development expenses. Research and development expenses before reimbursement for the six months ended June 30, 2003 increased $7.289 million or 28% over the comparable period in 2002. The increase in research and development expenses is primarily attributable to the costs of the Genasense(TM) Phase 3 clinical trials and NDA preparation activities, offset by no drug substance purchases in the six months. Of the $33.568 million in research and development expenses for the six months ended June 30, 2003, $25.584 million and $2.114 million were reimbursable at 75% and 100%, respectively, pursuant to the Collaborative Agreement (Note 4), of which the net amount of $21.302 million is expected to be reimbursed. An additional $8.141 million is expected to be reimbursed for drug substance and product shipped to Aventis in the second quarter in connection with drug substance purchases expensed in 2002. General and administrative expenses. General and administrative expenses for the six months ended June 30, 2003 decreased $0.561 million or 5% over the comparable period in 2002. The decrease is primarily related to financial advisory services, royalty payments and legal fees relating to the Collaborative Agreement (Note 4) incurred in 2002 offset by increased costs associated with Ganite(TM) pre-launch activities and general corporate expenses driven by business growth. There were no sales and marketing related expenses reimbursable at 100% pursuant to the Collaborative Agreement for the six months ended June 30, 2003, as sales and marketing related expenses related to Genasense(TM) are mainly being billed to and paid for directly by Aventis. Expense reimbursement. Expense reimbursement for the six months ended June 30, 2003 relate to various third-party, FTE and drug supply costs that Aventis is required to reimburse under the Collaborative Agreement (Note 4), as follows ($ thousands): Reimbursement to Genta: Third-party costs ..................................... $ 14,870 Drug supply costs ..................................... 11,240 FTE's ................................................. 3,333 -------- Reimbursement to Genta ................................ 29,443 Reimbursement to Aventis: FTE's ................................................. (853) -------- Net reimbursement to Genta .............................. $ 28,590 ======== Other income less interest expense. Net other income for the six months ended June 30, 2003 increased $0.082 million or 18% over the comparable period in 2002, principally as a result of higher investment balances on investments, offset by interest expense on the $10.0 million Aventis Note (Note 6) and the $25.0 million Aventis Credit Line (Note 7). Net Loss. Genta incurred a net loss of $13.021 million, or $0.18 per share, for the six months ended June 30, 2003, compared with a net loss of $29.696 million, or $0.44 per share, for the six months ended June 30, 2002. The decrease in net loss, and per share net loss to common shareholders, was primarily due to the expense reimbursement pursuant to the Collaborative Agreement (Note 4) of $28.590 million or $0.38 per share, offset by increased expenses primarily related to third-party costs for current Genasense(TM) on-going clinical studies, expenses attributable to the NDA preparation, general corporate legal fees, personnel costs and Ganite(TM) marketing-related spending. Liquidity and Capital Resources At June 30, 2003, the Company had cash, cash equivalents and short-term investments totaling $97.2 million compared to $113.7 million at December 31, 2002. As reflected in Note 4 to the condensed consolidated financial statements, in April 2002, Genta entered into a Collaborative Agreement with Aventis. Under the terms of the Collaborative Agreement, the Alliance will jointly develop and commercialize Genasense(TM) in the U.S., and Aventis will have exclusive development and marketing rights to Genasense(TM) in all countries outside of the U.S. The Company will retain responsibility for global manufacturing and for regulatory filings within the U.S., while Aventis will assume all regulatory responsibilities outside the U.S. Joint management teams, including representatives from both Genta and Aventis, will oversee the Alliance. Collectively, this Collaborative Agreement could provide up to $476.9 million in cash, equity and convertible debt proceeds to the Company. In addition, under the Collaborative Agreement, the Company is entitled to royalties on worldwide sales of Genasense(TM) from which the Company is required to pay third-party pass-through royalties to UPenn and The National Institutes of Health ("NIH") based on net worldwide sales of Genasense(TM). Furthermore, under the 16 Collaborative Agreement, Aventis will pay 75% of U.S. NDA-directed development costs incurred by either Genta or Aventis subsequent to the execution of the Collaborative Agreement, and 100% of all other development, marketing, and sales costs incurred within the U.S. and elsewhere. Genta has received a total of $194.4 million in initial and near-term funding, which included a $10.0 million licensing fee and $40.0 million in development funding (Note 5), $10.0 million in convertible debt proceeds (Note 6), $71.9 million pursuant to an at-market equity investment in the Company's common stock, $37.5 million in paid expense reimbursements and $25.0 million in line of credit proceeds (Note 7). A further $19.6 million in accrued expense reimbursement is due for payment during the third quarter of 2003 (Note 3), which includes $0.1 million due from December 31, 2002. Contingent upon the achievement of certain research and development milestones, and included in the Collaborative Agreement's collective amount of $476.9 million, the Company could still receive up to an additional $280.0 million in cash and up to $65.0 million in convertible note proceeds. As of July 2003, up to $15.0 million is available under the Aventis Credit Line (Note 7). The Company's principal expenditures relate to its research and development activities, which include the Company's on-going and future clinical trials. The Company expects these expenditures to continue. The Company expects increased total expenditures, prior to expense reimbursement, for clinical trials and drug supply related to Genasense(TM) as a result of the Collaboration Agreement with Aventis. In addition, expenditures associated with other products under development by the Company may increase as research and development activities become more focused and as other clinical trials are initiated. The Company anticipates seeking additional product development opportunities from external sources. Any 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 pre-clinical 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. If the Company successfully secures sufficient levels of collaborative revenues and other sources of financing, it expects to use such revenues and the proceeds of any such financings to continue and expand its ongoing research and development activities, preclinical and clinical testing activities, manufacturing and/or market introduction of potential products and expansion of its administrative activities. Recent Accounting Pronouncements See Note 1 to the condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments, which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates, which would impact interest income earned on such instruments. 17 Item 4. Controls and Procedures As required by Rules 13a-15(b) or 15d-15(b), Genta's Chief Executive Officer and Chief Financial Officer conducted an evaluation as of the end of the period covered by this report of the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rules 13a-15(d) or 15d-15(d), Genta's Chief Executive Officer and Chief Financial Officer also conducted an evaluation of the Company's internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings JBL The sale of JBL, the Company's manufacturing subsidiary, was completed on May 10, 1999. JBL was notified on October 1998 from Region IX of the EPA that it had been identified as a 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. In December 2001, Genta received a revised settlement proposal from the EPA in the amount of $0.033 million, the terms of the settlement with the EPA containing standard contribution protection and release language. In January 2002, the Company accepted the proposal and paid the $0.033 million as an offer to settle this matter. There can be no assurance, however, that the EPA will not reject our settlement offer if there is not a sufficient number of PRPs settling with the EPA. Genta Europe During 1995, Genta Europe, a wholly-owned subsidiary of Genta, received funding in the form of a loan from ANVAR, a French government agency, of which the proceeds were intended to fund research and development activities. In October 1996, in connection with a restructuring of Genta's operations, Genta terminated all scientific personnel of Genta Europe. In 1998, ANVAR asserted that Genta Europe was not in compliance with the ANVAR Agreement, notified Genta Europe of its demand for accelerated repayment of the loan and notified Genta that it was liable as a guarantor on the note. Based on the advice of French counsel, Genta does not believe that ANVAR is entitled to payment under the terms of the ANVAR Agreement and also believes it to be unlikely that Genta will incur any liability in this matter, although there can be no assurance thereof. At June 30, 2003, the Company has accrued a net liability of $0.212 million related to this matter, which management believes is adequate to provide for this contingency. University of Pennsylvania In October 2002, a licensing officer from UPenn asserted a claim to a portion of the initial $40.0 million development funding (Note 5) the Company received from Aventis pursuant to the Collaborative Agreement. The Company has disputed this claim and has filed a petition for binding arbitration for this matter, as provided in the original licensing agreement between the Company and UPenn. The Company and UPenn are currently discussing the possibility of entering into a settlement with respect to this matter. Under the terms of the proposed settlement, in exchange for an agreement by UPenn to forego any and all claims in the future to any portion of any milestone and other payments (other than royalty payments) made to Genta pursuant to the Collaborative Agreement, Genta would make the following payments to UPenn: (i) $750,000 on October 1, 2003, (ii) $250,000 on February 2, 2004, (iii) $1.5 million upon the first NDA or foreign equivalent approval of Genasense(TM) (the "first Genasense(TM) approval"), and (iv) provided that the first Genasense(TM) approval has been received by Genta, $750,000 on the earlier of (a) the second NDA or foreign equivalent approval of Genasense(TM) or (b) December 30, 2004. The proposed settlement, including the aforementioned monetary terms, is still subject to the parties reaching agreement on certain other matters, and no assurance can be given that the parties will reach any such agreement and that the proposed settlement will be entered into on these monetary terms, if at all. At the current time the Company cannot reasonably estimate the outcome of this claim; however, the Company does not believe that this claim will have a material adverse impact on the Company's financial results and liquidity. As of June 30, 2003, the Company has not reserved any amount for royalty payments that could be due to UPenn as a result of binding arbitration. Item 4. Submission of Matters to a Vote of Security Holders (a) The Company held its Annual Meeting of Stockholders (the "Annual Meeting") on June 25, 2003. (b) Proxies for the meeting were solicited pursuant to Regulation 14A of the Exchange Act. There was no solicitation in opposition to the Board of Directors' nominees for directors listed in the definitive proxy statement of the Company dated as of May 27, 2003. All of the Board of Directors' nominees were elected. 19 (c) Briefly described below is each matter voted upon at the Annual Meeting. (i) Election of eight directors. Total combined voting power of the shares of Common Stock voted and withheld for the election of each director was as follows: Directors Votes For Withheld --------- --------- -------- Raymond P. Warrell, Jr., M.D. 66,314,039 267,578 Jerome E. Groopman, M.D. 66,349,289 232,328 Betsy McCaughey, Ph.D. 66,331,816 249,801 Daniel D. Von Hoff, M.D. 66,319,543 262,074 Harlan J. Wakoff 66,342,270 239,347 Douglas G. Watson 66,298,881 282,736 Michael S. Weiss 66,293,627 287,990 Patrick J. Zenner 66,317,411 264,206 (ii) Approval of an amendment to the Company's 1998 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder, the result of the voting was as follows: For: 62,509,222 votes Against: 3,939,906 votes Abstain: 132,489 votes Broker non-vote: 0 votes (iii) Ratification of the selection of Deloitte & Touche LLP as the Company's independent auditors, the result of voting was as follows: For: 66,429,769 votes Against: 96,784 votes Abstain: 55,064 votes Broker non-vote: 0 votes Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 10.1 Employment Agreement, dated as of August 5, 2003, between the Company and Loretta M. Itri, M.D. 31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. None. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENTA INCORPORATED (Registrant) By: /s/ RAYMOND P. WARRELL, JR., M.D. -------------------------------------------- Name: Raymond P. Warrell, Jr., M.D. Title: Chairman, President, Chief Executive Officer and Principal Executive Officer By: /s/ WILLIAM P. KEANE -------------------------------------------- Name: William P. Keane Title: Vice President, Chief Financial Officer and Principal Accounting Officer Date: August 14, 2003 21