** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

** **
| **(Mark  One)**                          |
|------------------------------------------|
|                                     |
| **ý**                               | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                     |
| **For the Quarter Ended March 31, 2003** |
|                                     |
| **or**                                   |
|                                     |
| **o**                                    | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                     |
| **Commission file number 333-12570**     |

 

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** **

**STRESSGEN BIOTECHNOLOGIESCORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Yukon Territory, Canada**                                                                                                                                     |   | **N/A**                            |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
| (State  of incorporation)                                                                                                                                       |   | (IRS  Employer Identification No.) |
|                                                                                                                                                            |   |                               |
| **350-4243 Glanford Avenue  Victoria, British Columbia V8Z 4B9  Parent of Stressgen Biotechnologies, Inc.10241 Wateridge Circle, Suite C200****San  Diego, CA** |   | **92121**                          |
| (Address  of principal executive offices)                                                                                                                       |   | (zip  code)                        |
|                                                                                                                                                            |   |                               |
| **(250) 744-2811  (858) 202-4900**                                                                                                                              |
| (Registrant’s  telephone number, including area code)                                                                                                      |

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  Noo

 

As of May 5,2003, the registrant had approximately 61,658,000 shares of Common Stock, nopar value, outstanding. 

 

 

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**Stressgen Biotechnologies Corporation and Subsidiaries**

 

**INDEX**

 
| **Part I —  Financial Information** |
|------------------------------------------|
|                                     |   |   |
|                                     | Item 1. | Financial Statements |
|                                     |   |   |
|                                     |   | Consolidated Balance Sheet  March 31, 2003 (Unaudited) and December 31, 2002 |
|                                     |   | Consolidated  Statement of Operations and Accumulated Deficit  Three Months Ended March 31, 2003 and 2002 (Unaudited) |
|                                     |   | Consolidated  Statement of Cash FlowsThree Months Ended March 31, 2003 and 2002 (Unaudited) |
|                                     |   | Notes to  Consolidated Financial Statements (Unaudited) |
|                                     |   |
|                                     | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                     |   | Factors That Could Affect Future  Performance |
|                                     |   |
|                                     | Item  3. | Quantitative  and Qualitative Disclosures About Market Risk |
|                                     |   |
|                                     | Item 4. | Controls and  Procedures |
|                                     |
| **Part II — Other Information**     |
|                                     |
| Items 1 through 6                        |
|                                     |
| SIGNATURES AND CERTIFICATIONS            |
|                                          |  |  |  |

 

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**CONSOLIDATEDBALANCE SHEET**

* *

*Stressgen Biotechnologies Corporation and Subsidiaries*

*(Canadian dollars in thousands)*

* *
|                                                                                                                                                                                             |   | **March 31,  2003** |   | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                                                                                                                                                                             |   | **(Unaudited)**     |   |                   |   |
| **Assets**                                                                                                                                                                                       |   |                |   |                   |   |
| Current assets:                                                                                                                                                                                  |   |                |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                        |   | $                   | 2,966  |                   | $      | 31,202 |   |
| Short-term investments                                                                                                                                                                           |   | 36,428              |   | 14,811                 |   |
| Accounts receivable, net                                                                                                                                                                         |   | 5,556               |   | 4,279                  |   |
| Inventories                                                                                                                                                                                      |   | 842                 |   | 838                    |   |
| Other current assets                                                                                                                                                                             |   | 575                 |   | 518                    |   |
|                                                                                                                                                                                             |   |                |   |                   |   |
| Total current assets                                                                                                                                                                             |   | 46,367              |   | 51,648                 |   |
|                                                                                                                                                                                             |   |                |   |                   |   |
| Capital assets                                                                                                                                                                                   |   | 2,585               |   | 2,746                  |   |
| Deferred expenses, net of current portion                                                                                                                                                        |   | 359                 |   | 421                    |   |
|                                                                                                                                                                                             |   | $                   | 49,311 |                   | $      | 54,815 |   |
|                                                                                                                                                                                             |   |                |   |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                    |   |                |   |                   |   |
| Current liabilities:                                                                                                                                                                             |   |                |   |                   |   |
| Accounts payable and accrued liabilities                                                                                                                                                         |   | $                   | 6,324  |                   | $      | 8,833 |   |
| Current portion of deferred revenue                                                                                                                                                              |   | 1,037               |   | 1,115                  |   |
| Current portion of capital lease  obligations                                                                                                                                                    |   | 319                 |   | 318                    |   |
|                                                                                                                                                                                             |   |                |   |                   |   |
| Total current liabilities                                                                                                                                                                        |   | 7,680               |   | 10,266                 |   |
|                                                                                                                                                                                             |   |                |   |                   |   |
| Long-term liabilities:                                                                                                                                                                           |   |                |   |                   |   |
| Deferred revenue, net of current portion                                                                                                                                                         |   | 2,850               |   | 3,344                  |   |
| Capital lease obligations, net of current  portion                                                                                                                                               |   | 181                 |   | 262                    |   |
|                                                                                                                                                                                             |   |                |   |                   |   |
| Total long-term liabilities                                                                                                                                                                      |   | 3,031               |   | 3,606                  |   |
|                                                                                                                                                                                             |   |                |   |                   |   |
| Total liabilities                                                                                                                                                                                |   | 10,711              |   | 13,872                 |   |
|                                                                                                                                                                                             |   |                |   |                   |   |
| Stockholders’ equity:                                                                                                                                                                       |   |                |   |                   |   |
| Common shares and other equity – no par  value; unlimited shares authorized, 60,243,989 and 60,209,989 shares issued  and outstanding at March 31, 2003 and December 31, 2002, respectively |   | 175,447             |   | 175,384                |   |
| Deferred stock compensation                                                                                                                                                                      |   | (341                | )      | (392                   | )      |
| Accumulated deficit                                                                                                                                                                              |   | (136,506            | )      | (134,049               | )      |
| Total stockholders’ equity                                                                                                                                                                  |   | 38,600              |   | 40,943                 |   |
|                                                                                                                                                                                             |   | $                   | 49,311 |                   | $      | 54,815 |   |

 

*See accompanying notes to consolidated financial statements.*

 

1

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**CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT**

**(Unaudited)**

 

*Stressgen Biotechnologies Corporation and Subsidiaries*

*(Canadian dollars in thousands, except per share amounts)*

 
|                                                                                                  |   | **Three months ended  March 31,** |     |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------------|----------|
|                                                                                                  |   | **2003**                          |     | **2002** |   |
|                                                                                                  |   |                              |     |   |   |
| Revenue:                                                                                              |   |                              |     |   |   |
| Collaborative R&D revenue                                                                         |   | $                                 | 5,221    |   | $ | — |   |
| Bioreagent sales                                                                                      |   | 1,419                             |     | 1,405 |   |
| Total revenue                                                                                         |   | 6,640                             |     | 1,405 |   |
|                                                                                                  |   |                              |     |   |   |
| Operating expenses:                                                                                   |   |                              |     |   |   |
| Research and development                                                                              |   | 6,493                             |     | 9,283 |   |
| Selling, general and administrative                                                                   |   | 2,290                             |     | 2,295 |   |
| Cost of bioreagent sales                                                                              |   | 365                               |     | 396 |   |
|                                                                                                  |   | 9,148                             |     | 11,974 |   |
|                                                                                                  |   |                              |     |   |   |
| Operating loss                                                                                        |   | (2,508                            | )        | (10,569 | ) |
|                                                                                                  |   |                              |     |   |   |
| Other income  (expenses):                                                                             |   |                              |     |   |   |
| Interest and  other income, net                                                                       |   | 62                                |     | 110 |   |
| Interest expense                                                                                      |   | (11                               | )        | (21 | ) |
|                                                                                                  |   | 51                                |     | 89 |   |
|                                                                                                  |   |                              |     |   |   |
| Net loss                                                                                              |   | (2,457                            | )        | (10,480 | ) |
|                                                                                                  |   |                              |     |   |   |
| Accumulated deficit, beginning of period                                                              |   | (134,049                          | )        | (105,247 | ) |
| Accumulated deficit, end of period                                                                    |   | $                                 | (136,506 | ) | $ | (115,727 | ) |
|                                                                                                  |   |                              |     |   |   |
| Basic and  diluted loss per common share                                                              |   | $                                 | (0.04    | ) | $ | (0.18 | ) |
|                                                                                                  |   |                              |     |   |   |
| Weighted  average shares used to compute basic and diluted loss per common share  (in thousands) |   | 60,238                            |     | 57,634 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

2

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**CONSOLIDATED STATEMENT OF CASH FLOWS**

**(Unaudited)**

 

*Stressgen Biotechnologies Corporation and Subsidiaries*

*(Canadian dollars in thousands)*

* *
|                                                                         |   | **Three months ended  March 31,** |       |
|------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                         |   | **2003**                          |       | **2002** |   |
|                                                                         |   |                              | ** ** |   | ** ** |
| Cash flows from operating activities:                                        |   |                              |       |   |   |
| Net loss                                                                     |   | $                                 | (2,457     | ) | $ | (10,480 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                              |       |   |   |
| Depreciation and amortization of capital  assets                             |   | 173                               |       | 190 |   |
| Amortization of deferred stock compensation                                  |   | 55                                |       | 55 |   |
| Unrealized foreign exchange loss                                             |   | 330                               |       | 36 |   |
| Loss on market value of investments                                          |   | 37                                |       | 385 |   |
| Changes in operating assets and liabilities                                  |   | (4,357                            | )          | 2,194 |   |
| Net cash used in operating activities                                        |   | (6,219                            | )          | (7,620 | ) |
|                                                                         |   |                              |       |   |   |
| Cash flows from investing activities:                                        |   |                              |       |   |   |
| Purchase of short-term investments                                           |   | (22,424                           | )          | (40,025 | ) |
| Sales and maturities of short-term  investments                              |   | 598                               |       | 29,862 |   |
| Purchase of capital assets                                                   |   | (12                               | )          | (124 | ) |
| Net cash used in investing activities                                        |   | (21,838                           | )          | (10,287 | ) |
|                                                                         |   |                              |       |   |   |
| Cash flows from financing activities:                                        |   |                              |       |   |   |
| Proceeds on issue of common shares                                           |   | 59                                |       | 394 |   |
| Repayment of borrowings                                                      |   | (80                               | )          | (125 | ) |
| Net cash (used in) provided by financing  activities                         |   | (21                               | )          | 269 |   |
|                                                                         |   |                              |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                |   | (158                              | )          | 15 |   |
|                                                                         |   |                              |       |   |   |
| Decrease in cash and cash equivalents                                        |   | (28,236                           | )          | (17,623 | ) |
| Cash and cash equivalents, beginning of  period                              |   | 31,202                            |       | 33,338 |   |
| Cash and cash equivalents, end of period                                     |   | $                                 | 2,966      |   | $ | 15,715 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

3

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***Stressgen Biotechnologies Corporation***

**Notes to Consolidated Financial Statements**

***(Canadian dollars)***

 

### ***1.***                                  THE COMPANY AND ITS SIGNIFICANTACCOUNTING POLICIES

* *

*The Company*

 

Stressgen BiotechnologiesCorporation (with its subsidiaries, “Stressgen” or the “Company”) is abiopharmaceutical company focused on the development and commercialization ofinnovative stress protein-based immunotherapeutics. The Company is developing abroad range of products for the treatment of viral infections and relatedcancers. Its lead product is HspE7, which targets a broad spectrum of humanpapillomavirus (“HPV”) related diseases. The Company has also initiated research studies to evaluate stressprotein (also known as heat shock protein) fusions, made through itsproprietary CoValTM technology, for the treatment of hepatitis B,hepatitis C and herpes simplex. Further, Stressgen has an internationally recognized research productsupply business with sales to scientists worldwide for the study of cellularstress, apoptosis, oxidative stress and neurobiology.

 

*Basis of presentation*

 

Theconsolidated financial statements include the assets, liabilities and operatingresults of the Company and its wholly-owned subsidiaries.  Intercompany accounts and transactions havebeen eliminated in consolidation.

* *

*Financial statements and estimates*

 

The information at March 31, 2003 and for the three month periods endedMarch 31, 2003 and 2002 has been prepared by the Company and has not beenaudited.  The financial statements, inthe opinion of management, include all adjustments necessary for their fairpresentation in conformity with Canadian generally accepted accountingprinciples (“Canadian GAAP”), and conform in all material respects with accountingprinciples generally accepted in the United States of America (“U.S. GAAP”),except as discussed in Note 5.  Thesefinancial statements should be read in conjunction with the financialstatements and notes thereto in the Company’s December 31, 2002 Annual Reporton Form 10-K.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with Canadian and U.S. GAAP have been condensed or omitted pursuantto the applicable Canadian regulatory and U.S. Securities and ExchangeCommission rules and regulations. Interim results are not necessarily indicative of results for the fullyear.

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenueand expenses and related disclosures as of the date of the financialstatements.  Significant estimates areused for, but not limited to, reporting revenue recognition, clinical trialcosts, stock based compensation, and the allocation of indirect costs.  Actual results could differ from suchestimates.

* *

*Foreign currencytranslation*

 

The Company uses the Canadian dollar as its consolidated functionalcurrency.  Monetary assets andliabilities that are denominated in U.S. dollars are translated into Canadiandollars at the rate of exchange prevailing at the balance sheet date.  Non-monetary assets and liabilities aretranslated at historical exchange rates. Revenue and expenses are translated at the average rate of exchange forthe period of such transactions. Foreign exchange losses of $141,000 and gains of $119,000 are includedin other income for the three month periods ended March 31, 2003 and2002, respectively.

 

4

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*Revenue recognition*

 

Revenue from product sales is recognized upondelivery to customers when persuasive evidence of an arrangement exists, theprice is fixed or determinable and collection is reasonably assured.  Revenue also includes amounts charged forshipping and handling costs.

 

Revenue from collaborative research anddevelopment (“R&D”) arrangements may include multiple elements within asingle contract.  The Company’saccounting policy complies with the revenue determination requirements setforth in EITF 00-21, *Accounting for Revenue Arrangements with MultipleDeliverables*, relating tothe separation of multiple deliverables into individual accounting units withdeterminable fair values.  Paymentsreceived under collaborative arrangements may include the following:  non-refundable fees at inception of contractfor technology rights; funding for services performed; milestone payments forspecific achievements; and payments based upon resulting sales of products.

 

The Company recognizes collaborative research and development revenuesas services are performed consistent with the performance requirements of thecontract.  Revenue from non-refundablecontract fees where the Company has continuing involvement through research anddevelopment collaborations or other contractual obligations, less the fairmarket value of any related warrants, is recognized ratably over thedevelopment period or the period for which Stressgen continues to have a performanceobligation.  The period of developmentis evaluated on a regular basis. Revenue from performance milestones is recognized upon the achievementof the milestones as specified in the agreement, provided payment isproportionate to the effort expended.  Payments received in advance of performance or delivery arerecorded as deferred revenue.

* *

*Clinical trial accruals*

 

The Company recognizes expenses related to its ongoing clinical trialsusing a methodology designed to accrue estimated costs in the appropriateaccounting periods.  The Companyrecognizes clinical trial costs in three distinct phases:  the start-up phase, the patient accrualphase, and the close-out phase.  Thetotal estimated trial cost is divided into these three phases based on thetasks involved in conducting the trial. Upon start of the trial, the start-up portion of the trial contract isaccrued.  As patients enter the trial,the patient accrual cost is ratably recognized.  Once the study is complete and analysis of the patient data hasbeen initiated, the close-out portion of the trial is recognized.

* *

*Stock-based compensation plan*

 

The Companyhas adopted the recommendations of the CICA Handbook section 3870, *Stock-Based Compensation and Other Stock-BasedPayments*, effective January 1, 2002.  This section establishes standards for the recognition,measurement and disclosure of stock-based compensation and other stock-basedpayments made in exchange for goods and services. The standard requires thatall stock-based awards made to non-employees be measured and recognized using afair value based method.  The standardencourages the use of a fair value based method for all awards granted toemployees, but only requires the use of a fair value based method for directawards of stock, stock appreciation rights, and awards that call for settlementin cash or other assets.  Awards that acompany has the ability to settle in stock are recorded as equity, whereasawards that the entity is required to or has a practice of settling in cash arerecorded as liabilities.

 

5

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The Company’s accounting methods forstock-based compensation plans also materially follow the guidance under therecognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,*and related interpretations.  TheCompany has two stock-based compensation plans, which are described in Note3.  New option grants are made with anexercise price equal to the fair market value of the underlying common stock.  No compensation expense is recognized foroptions granted at fair market value under the plan when stock options areissued to directors and employees. Deferred stock compensation charges arise where stock options aregranted at exercise prices less than the fair value of the underlying stock andare amortized to expense over the vesting period of the option.  Any consideration paid by directors,employees and others on exercise of stock options is credited to share capital.

 

The following table summarizes the effect onnet income and earnings per share if the company had applied the fair valuerecognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation,*to stock-basedemployee compensation.

 
|                                                                           |   | **For the three months ended  March 31,** |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
| **(in  thousands, except per share amounts)**                                  |   | **2003**                                  |   | **2002** |   |
|                                                                           |   | **(unaudited)**                           |   |
| Net loss  under Canadian GAAP                                                  |   | $                                         | (2,457 | ) | $ | (10,480 | ) |
|                                                                           |   |                                      |   |   |   |
| Net loss  under U.S. GAAP (See Note 5 for reconciliation to Canadian GAAP)     |   | $                                         | (2,248 | ) | $ | (10,044 | ) |
|                                                                           |   |                                      |   |   |   |
| Employee  stock compensation included in net loss under Canadian and U.S. GAAP |   | 55                                        |   | 55 |   |
|                                                                           |   |                                      |   |   |   |
| Stock-based  employee compensation expense under the fair value method         |   | (557                                      | )      | (930 | ) |
|                                                                           |   |                                      |   |   |   |
| Pro forma  net loss under Canadian GAAP                                        |   | $                                         | (2,959 | ) | $ | (11,355 | ) |
|                                                                           |   |                                      |   |   |   |
| Pro forma  net loss under U.S. GAAP                                            |   | $                                         | (2,750 | ) | $ | (10,919 | ) |
|                                                                           |   |                                      |   |   |   |
| Pro forma  basic loss per common share under Canadian GAAP                     |   | $                                         | (0.05  | ) | $ | (0.20 | ) |
|                                                                           |   |                                      |   |   |   |
| Pro forma  basic loss per common share under U.S. GAAP                         |   | $                                         | (0.05  | ) | $ | (0.19 | ) |

 

The weighted-averageper-share fair values of the individual options granted during the three-monthperiods ended March 31, 2003 and 2002 were $0.93 and $2.50, respectively.  The fair values of the options weredetermined using a Black-Scholes option-pricing model with the followingassumptions:

 
|                    |   | **For the three months ended  March 31,** |   |
|-------------------------|--------|-------------------------------------------|--------|
|                    |   | **2003**                                  |   | **2002** |   |
|                    |   | **(unaudited)**                           |   |
| Dividend yield          |   | 0                                         | %      | 0 | % |
| Volatility              |   | 74                                        | %      | 60 | % |
| Risk-free interest rate |   | 2.5                                       | %      | 5.5 | % |
| Expected life           |   | 4 years                                   |   | 4 years |   |

 

6

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##  

### ***2.***                                  COLLABORATIVE AGREEMENT

 

In June 2002, the Company entered into a collaboration agreement forthe co-development and global commercialization of the Company’s innovativeproprietary CoValTM fusion product candidate, HspE7, with F. Hoffmann-La Rocheand Hoffmann-La Roche Inc. (collectively, “Roche”).  Under the terms of the agreement, Roche has the worldwideexclusive right to manufacture, market and sell the HspE7 product and the Companyhas the right to co-promote the product in the U.S. to certain physicianspecialties. The terms of the collaboration agreement provide for an initialequity investment, issuance of two warrants (see Note 3), and an upfrontpayment aggregating approximately $13,700,000. Under the terms of the collaboration agreement, Roche could pay theCompany up to an aggregate of $300,000,000 comprised of upfront license fees,development and commercial milestones, and equity investments. For the three months ended March 31, 2003,the Company recognized collaborative R&D revenue of $5,221,000, includingapproximately $2,200,000 related to a development milestone earned as of March31, 2003. Further, in April 2003, Roche made a $4,600,000 equityinvestment (see Note 3) in the Company upon exercising the first of twowarrants previously issued.

** **

### ***3.***                                      BALANCE SHEET DETAILS

 

Upon receivingthe upfront payment from Roche in 2002, the Company recorded a $634,320 payabledue to MIT/Whitehead and a related deferred expense.  The Company recognizes the expense over the developmentperiod.  At March 31, 2003 and December31, 2002, the Company had a total of $489,767 and $561,778 of deferred expenserelated to this payment.

 

The followingtables provide details of selected balance sheet items:

 
| **(In thousands)**                           |   | **March 31,  2003** |   | **December 31,  2002** |   |
|----------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                         |   | **(unaudited)**     |   |                   |   |
| Accounts receivable:                         |   |                |   |                   |   |
| Collaborative receivable                     |   | $                   | 4,947  |                   | $      | 3,790 |   |
| Trade accounts receivable                    |   | 647                 |   | 527                    |   |
| Less:   allowance for doubtful accounts |   | (38                 | )      | (38                    | )      |
|                                         |   | $                   | 5,556  |                   | $      | 4,279 |   |
|                                         |   |                |   |                   |   |
| Inventories:                                 |   |                |   |                   |   |
| Raw materials and work in progress, net      |   | $                   | 478    |                   | $      | 563 |   |
| Finished goods, net                          |   | 364                 |   | 275                    |   |
|                                         |   | $                   | 842    |                   | $      | 838 |   |
|                                         |   |                |   |                   |   |
| Accounts payable and accrued liabilities:    |   |                |   |                   |   |
| Trade accounts payable                       |   | $                   | 2,673  |                   | $      | 3,607 |   |
| Clinical trial accruals                      |   | 2,607               |   | 3,133                  |   |
| Accrued compensation and benefits            |   | 675                 |   | 1,274                  |   |
| Royalty payable                              |   | 220                 |   | 634                    |   |
| Other accrued liabilities                    |   | 149                 |   | 185                    |   |
|                                         |   | $                   | 6,324  |                   | $      | 8,833 |   |

 

7

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|                          |   | **March 31, 2003****(unaudited)** |   | **December 31, 2003**         |   |
|-------------------------------|--------|-----------------------------------|--------|-------------------------------|--------|
|                          |   | **Cost**                          |   | **Accumulated  Depreciation** |   | **Net Book  Value** |   | **Net Book  Value** |   |
| Capital Assets:               |   |                              |   |                          |   |   |   |   |   |
| Laboratory equipment          |   | $                                 | 2,315  |                          | $      | 1,185 |   | $ | 1,130 |   | $ | 1,188 |   |
| Equipment under capital lease |   | 2,672                             |   | 1,828                         |   | 844 |   | 903 |   |
| Computer equipment            |   | 804                               |   | 471                           |   | 333 |   | 355 |   |
| Furniture and fixtures        |   | 313                               |   | 171                           |   | 142 |   | 149 |   |
| Leasehold improvements        |   | 554                               |   | 418                           |   | 136 |   | 151 |   |
|                          |   | $                                 | 6,658  |                          | $      | 4,073 |   | $ | 2,585 |   | $ | 2,746 |   |

 

*Stockholders’ equity*

 

In June2002, the Company issued 2,036,436 common shares for $7,657,000 pursuant to thecollaboration agreement with Roche (see Note 2).  The equity was issued at a per share price determined by theweighted average price of common shares of the Company during the ten businessdays prior to the Roche transaction.  The Company also issued two warrants to exercise between 2,036,435 and2,356,000 additional common shares.  TheCompany allocated $1,264,000 as the fair value of the warrants, as determinedby an independent valuation expert.  Inthe event the holder is obligated to exercise a warrant and the current pershare price of common shares of the Company is less than initial per shareexercise price of $3.76, then the per share exercise price will be amended toequal the greater of $3.25 or the then-current per share market price, and thenumber of common shares issuable pursuant to the terms of the warrant will beequal to the initial aggregate exercise price of such warrant divided by theamended per share exercise price.

 

Uponcompletion of certain milestones established in the agreement, the Company hasthe option to require Roche to exercise the warrants.  In April 2003, the Company provided notice for Roche to exerciseone of the warrants and Roche subsequently purchased 1,413,600 common shares at$3.25, resulting in net proceeds of approximately $4,600,000 to the Company. Anexercise of the second warrant would result in the future issuance of between814,574 and 942,400 additional common shares, at an exercise price ranging from$3.76 to $3.25 per share, respectively. Roche may exercise the second warrant until June 28, 2007.

 

In 1998, theCompany issued Class B Warrants to purchase 4,000,000 common shares for $3.30per share on or before June 11, 2003. At the option of the holder, the Class B Warrants may be exercisedthrough cashless exercise, which permits the warrant holder to deduct thestrike price of the warrant from the market price of the common shares at thetime of exercise, and to receive the difference in common shares valued at themarket price at the time of exercise. There were 3,231,145 Class B Warrants outstanding at March 31, 2003.

 

Stockholders’equity at March 31, 2003 and December 31, 2002 includes $2,179,000 ofcontributed surplus.  At March 31, 2003and December 31, 2002 there were 70,677,743 and 69,973,871 fully diluted commonshares, respectively.

 

*Employee share option plan*

 

In 2001, theCompany issued out-of-plan stock options prior to stockholder approval of the2001 Equity Incentive Plan (the “2001 Plan”). Between the date of grant and stockholder approval, the market price ofthe Company’s common stock increased resulting in deferred compensation of$807,000 associated with these options. The deferred compensation is being amortized to expense over the vestingperiod of the granted options, which have been applied to the 2001Plan.  The stockholders subsequentlyapproved adoption of the 2001 Plan reserving an additional 3,500,000 new commonshares for issuance pursuant to the grant of stock options.  Once the 2001 Plan was approved, the grantsceased to be considered out-of-plan.  Atthat time, the Company stopped granting options under its pre-existing 1996Share Incentive

 

8

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Plan.  At March 31, 2003, there were 588,485options available for future grant under the 2001 Plan.

 

The followingtable summarizes information related to all stock options outstanding andexercisable, as of March 31, 2003.

 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                                       |   |
|-------------------------------|--------|--------------------------|--------|----------------------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining  Contractual Life  (in years)** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise Price** |   |
|                          |   |                     |   |                                                           |   |   |   |   |   |   |   |
| $ 1.22 - $1.97                |   | 1,462,320                |   | 7.67                                                           |   | $ | 1.69 |   | 672,388 |   | $ | 1.74 |   |
| $ 2.30 - $2.85                |   | 53,500                   |   | 8.61                                                           |   | $ | 2.60 |   | 20,000 |   | $ | 2.68 |   |
| $ 3.01 - $3.65                |   | 406,500                  |   | 6.73                                                           |   | $ | 2.68 |   | 197,831 |   | $ | 3.57 |   |
| $ 4.10 - $5.85                |   | 1,507,515                |   | 8.18                                                           |   | $ | 4.87 |   | 830,213 |   | $ | 4.86 |   |
| $ 6.00 - $8.00                |   | 1,544,600                |   | 7.19                                                           |   | $ | 6.19 |   | 1,272,138 |   | $ | 6.19 |   |
|                          |   | 4,974,435                |   |                                                           |   |   |   | 2,992,570 |   |   |   |

 

At May ­5,2003 there were 4,976,935 options outstanding.

 

9

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### ***4.***                                      SEGMENT INFORMATION

 

The Companymanages its operations in two reportable segments, Biotechnology andBioreagents.  Revenues are allocated tocountries based on customer locations.

 
|                                |   | **Three months ended  March 31,** |   |
|-------------------------------------|--------|-----------------------------------|--------|
| **(In thousands)**                  |   | **2003**                          |   | **2002** |   |
|                                |   | **(unaudited**)                   |   |
| **Bioreagents**                     |   |                              |   |   |   |
| Revenue:                            |   |                              |   |   |   |
| U.S.                                |   | $                                 | 908    |   | $ | 887 |   |
| Canada                              |   | 57                                |   | 79 |   |
| Other                               |   | 454                               |   | 439 |   |
|                                |   | 1,419                             |   | 1,405 |   |
| Expenses:                           |   |                              |   |   |   |
| Research and development            |   | 319                               |   | 238 |   |
| Selling, general and administrative |   | 488                               |   | 346 |   |
| Cost of bioreagent sales            |   | 365                               |   | 396 |   |
|                                |   | 1,172                             |   | 980 |   |
| Operating income                    |   | $                                 | 247    |   | $ | 425 |   |
|                                |   |                              |   |   |   |
| **Biotechnology**                   |   |                              |   |   |   |
| Collaborative R&D revenue       |   | $                                 | 5,221  |   | $ | — |   |
|                                |   |                              |   |   |   |
| Expenses:                           |   |                              |   |   |   |
| Research and development            |   | 6,174                             |   | 9,045 |   |
| Selling, general and administrative |   | 1,802                             |   | 1,949 |   |
|                                |   | 7,976                             |   | 10,994 |   |
| Operating loss                      |   | $                                 | (2,755 | ) | $ | (10,994 | ) |
|                                |   |                              |   |   |   |
| **Totals**                          |   |                              |   |   |   |
| Revenue:                            |   |                              |   |   |   |
| Collaborative R&D revenue       |   | $                                 | 5,221  |   | $ | — |   |
| Bioreagent sales                    |   | 1,419                             |   | 1,405 |   |
| Total revenue                       |   | 6,640                             |   | 1,405 |   |
|                                |   |                              |   |   |   |
| Expenses:                           |   |                              |   |   |   |
| Research and development            |   | 6,493                             |   | 9,283 |   |
| Selling, general and administrative |   | 2,290                             |   | 2,295 |   |
| Cost of bioreagent sales            |   | 365                               |   | 396 |   |
|                                |   | 9,148                             |   | 11,974 |   |
|                                |   |                              |   |   |   |
| Operating loss                      |   | $                                 | (2,508 | ) | $ | (10,569 | ) |

 

The Companydoes not allocate interest and other income or interest on capital leaseobligations to each segment.

 

10

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### ***5.***                                      THE EFFECT OF APPLYING ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THEU.S.

 

Thesefinancial statements have been prepared in accordance with Canadian GAAP which,except as set out below, conform in all material respects to U.S. GAAP.

 

Effect on theconsolidated financial statements:

* *

*Balance Sheet*

 

For allperiods presented, there are no significant balance sheet differences underCanadian and U.S. GAAP.

* *

*Statement of Operations*

* *
|                                                                               |   | **Three months ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **(In thousands, except per share amounts)**                                       |   | **2003**                          |   | **2002** |   |
|                                                                               |   | **(unaudited )**                  |   |
| Net loss under Canadian GAAP                                                       |   | $                                 | (2,457 | ) | $ | (10,480 | ) |
|                                                                               |   |                              |   |   |   |
| Reversal of unrealized foreign exchange  loss on available-for-sale  securities(a) |   | 172                               |   | 51 |   |
| Reversal of write-down of short term  investments(a)                               |   | 37                                |   | 385 |   |
|                                                                               |   | 209                               |   | 436 |   |
|                                                                               |   |                              |   |   |   |
| Net loss under U.S. GAAP                                                           |   | $                                 | (2,248 | ) | $ | (10,044 | ) |
|                                                                               |   |                              |   |   |   |
| Basic loss per common share under Canadian  GAAP                                   |   | $                                 | (0.04  | ) | $ | (0.18 | ) |
|                                                                               |   |                              |   |   |   |
| Basic loss per common share under U.S. GAAP                                        |   | $                                 | (0.04  | ) | $ | (0.17 | ) |
|                                                                               |   |                              |   |   |   |
| Common shares used to compute basic loss  per share under Canadian and U.S. GAAP   |   | 60,238                            |   | 57,634 |   |

 

*Statement of Cash Flows*

 

For allperiods presented, there are no significant differences under Canadian and U.S.GAAP in net cash (used in) provided by operating, investing and financingactivities.

* *

*Differences*

 

As disclosed in Note 11 to the financial statements in the Company’sDecember 31, 2002 Annual Report on Form 10-K, differences exist for the Companybetween Canadian and U.S. GAAP.

 

The following outlines the differences that affect the Company for thethree month periods ended March 31, 2003 and 2002.

 

----

(a)                                  UnderU.S. GAAP, Statement of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*, the Company has classified certain of its short-termsecurities as available-for-sale and, accordingly, has included the changes innet unrealized holding gains or losses on these securities in othercomprehensive loss rather than in operations.

 

11

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SFAS No. 130, *Reporting Comprehensive Income,* establishesstandards for the reporting and display of comprehensive income and itscomponents (revenue, expenses, gains and losses) in a full set ofgeneral-purpose financial statements. Comprehensive income is as follows:

 
|                                                                                                   |   | **Three months ended  March 31,** |   |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **(In thousands, except per share amounts)**                                                           |   | **2003**                          |   | **2002** |   |
|                                                                                                   |   | **(unaudited )**                  |   |
| Net loss under U.S. GAAP:                                                                              |   | $                                 | (2,248 | ) | $ | (10,044 | ) |
| Other comprehensive income                                                                             |   |                              |   |   |   |
| Adjustment to unrealized foreign exchange  and market gains (losses) on available-for-sale investments |   | (209                              | )      | (436 | ) |
| Comprehensive net loss under U.S. GAAP                                                                 |   | $                                 | (2,457 | ) | $ | (10,480 | ) |
|                                                                                                   |   |                              |   |   |   |
| Comprehensive loss per share under U.S.  GAAP                                                          |   | $                                 | (0.04  | ) | $ | (0.18 | ) |

 

### ***6.***                                      SUPPLEMENTAL CASH FLOW INFORMATION

 

The changes in operating assets and liabilities are as follows:

 
|                                      |   | **Three months ended****March 31,** |   |
|-------------------------------------------|--------|-------------------------------------|--------|
| **(In thousands)**                        |   | **2003**                            |   | **2002** |   |
|                                      |   | **(unaudited)**                     |   |
| Collaborative receivable                  |   | $                                   | (1,157 | ) | $ | — |   |
| Trade receivables                         |   | (120                                | )      | (107 | ) |
| Inventories                               |   | (4                                  | )      | (60 | ) |
| Other current assets                      |   | (57                                 | )      | 98 |   |
| Deferred expenses, net of current portion |   | 62                                  |   | — |   |
| Accounts payable and accrued liabilities  |   | (2,509                              | )      | 2,263 |   |
| Deferred revenue                          |   | (572                                | )      | — |   |
|                                      |   | $                                   | (4,357 | ) | $ | 2,194 |   |
| Supplemental disclosures of cash flows:   |   |                                |   |   |   |
| Interest paid                             |   | $                                   | 11     |   | $ | 21 |   |

 

12

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** **

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

TheManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking statements that involve risks and uncertainties.  The predictions described in thesestatements may not materialize if management’s current expectations regardingour future performance prove incorrect. Our results could also be affected byfactors including, but not limited to, our reliance on collaborative partnersand other risks described below under “Factors That Could Affect FuturePerformance.”  The forward-lookingstatements are based on currently available information; we disclaim anyobligation to update them.

 

The followinginformation should be read in conjunction with our March 31, 2003 consolidatedfinancial statements and related notes therein, which are prepared inaccordance with Canadian generally accepted accounting principles or CanadianGAAP.  These principles differ in certainrespects from accounting principles generally accepted in the United States orU.S. GAAP.  The differences, as theyaffect our consolidated financial statements, are described in Note 5 to ourMarch 31, 2003 consolidated financial statements.  All amounts following are expressed in Canadian dollars unlessotherwise indicated.

## ** **

## **Overview**

 

Our activitiesare focused primarily on the research and development of a unique class ofproteins, called stress proteins or heat shock proteins, to regulate the body’sown immune response to combat infectious diseases and cancer.  We believe that the use of stress proteins,genetically combined with various antigens derived from disease-causingorganisms or cancer cells, can yield novel therapeutic products.

 

In June 2002,we entered into a strategic collaboration with F. Hoffmann-La Roche andHoffmann-La Roche Inc. (collectively, “Roche”) for the development ofHspE7.  Under terms of the agreement, wecould receive up to an aggregate of $300,000,000 comprised of upfront licensefees, development and commercial milestones, and equity investments.  In addition, we will receive sales-basedpayments at increasing rates upon commercialization of HspE7. We may furtherreduce product development risk in the future by seeking partners foradditional product candidates.  Suchcollaborations could enable us to develop additional product candidates andexploit new applications for our technology, resulting in additional productopportunities.

 

We haveincurred significant losses since our inception and expect to incur substantiallosses for the foreseeable future as we invest in our research and productdevelopment programs, including manufacturing, pre-clinical studies andclinical trials, and regulatory activities. At March 31, 2003, our accumulated deficit was $136,506,000.  Historically we have depended principally onequity financings to fund our business activities.  We intend to pursue additional equity financings to fund ourbusiness activities, markets permitting.

## ** **

## **Liquidity andCapital Resources**

 

Since inception we haverelied principally on equity financings to fund our research and developmentprograms, operations and capital expenditures, coupled with cash flowsgenerated from our bioreagent business.  Through May 5, 2003, we haveraised net equity proceeds of $180,047,000, principally through our publicissuances of stock, the exercise of warrants and stock options issued since1996 and, more recently, the issuance of stock and warrants to Roche inconnection with the collaboration agreement.  We employ a financialperformance measurement system designed to ensure our revenues and expenses areconsistent with management’s operational objectives and budgetaryconstraints.  The variability of anticipated cash utilization is dependentupon several factors, including the timing and extent of clinical developmentof HspE7 to treat recurrent respiratory papillomatosis, or RRP.  We believe that our current capitalresources, coupled with substantial funding from our partner Roche for thedevelopment of HspE7, is sufficient to fund our operations for the next twoyears.  Achievement of event-drivenHspE7

 

13

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development milestones would further extendour calendar to fund operations.  Thisbelief is based on current research and clinical development plans, the currentregulatory environment, historical industry experience in the development oftherapeutics and general economic conditions.

 

At March 31,2003, we had cash, cash equivalents and short-term investments of $39,394,000,a decrease of $6,619,000 from December 31, 2002.  Approximately 19% of cash, cash equivalents and short-terminvestments were held in U.S. dollars as of March 31, 2003.

 

In April 2003,we received two milestones from Roche: an equity investment of approximately$4,600,000 and a time-based development payment of approximately$2,200,000.  The $4,600,000 equityinvestment by Roche, consisting of 1,413,600 common shares at $3.25 per share,is from the exercise of the first of two warrants issued as part of the June2002 collaboration agreement.  Anexercise of the second warrant would result in an equity investment ofapproximately $3,000,000 resulting in the future issuance of between 814,574and 942,400 additional common shares, at an exercise price ranging from $3.76to 3.25 per share, respectively.  Thesecond warrant may be exercised until June 2007.

 

During thethree months ended March 31, 2003, capital expenditures totaled $12,000compared with $124,000 for the same period in 2002.  Capital purchases in 2003 are consistent with management’sinvestment policy of limiting purchases to those required to preserve ourcurrent level of manufacturing and research capabilities.

 

We have acredit facility for $2,000,000 with a Canadian chartered bank.  At March 31, 2003 and December 31, 2002,$472,000 and $541,000, respectively were used and outstanding under thisfacility in the form of fixed rate capital leases.

 

We willrequire additional capital to fund future research and product developmentactivities.  We expect to seekadditional funds from various sources, including research and developmentcollaborations with corporate partners, and public and private equityfinancing.  We cannot assure you thatadditional financing will be available when needed or on satisfactoryterms.  If we raise additional funds byissuing equity securities, substantial dilution to our existing shareholdersmay result.  If adequate funds are notavailable, we may be required to delay, reduce the scope of, or eliminate oneor more of our research or development programs. We may need to obtain fundsthrough collaborative arrangements with others that are on unfavorableterms.  We may also have to relinquishrights to certain of our technologies, product candidates or products that wewould otherwise seek to develop ourselves.

## ** **

## **Results of Operations**

 

For the threemonths ended March 31, 2003, our net loss was $2,457,000 or $0.04 per commonshare.  This compares with a net loss of$10,480,000 or $0.18 for the same period in 2002.  The 75% improvement during the current quarter is due principallyto collaborative R&D revenue totaling $5,221,000.

*** ***

***CollaborativeR&D revenue***

 

CollaborativeR&D revenue was $5,221,000 for the three months ended March 31, 2003.  Collaborative R&D revenue includes$2,755,000 for development activities in support of Roche, a time-baseddevelopment payment of approximately $2,200,000, and $266,000 from theamortization of up-front license fees in accordance with SAB No. 101, *Revenue Recognition in Financial Statements.*  Collaborative R&D revenue and associatedexpenses are expected to decrease substantially by the middle of 2003.

 

14

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### ***Bioreagentsales***

 

The productionand sale of bioreagents supports our business strategy by building our marketpresence in stress proteins and strengthening our strategic relationships withcompanies, academic institutions and stress response researchers. Our productsare sold directly to end-users and through third party distributors.  With an overall economic slowdown in NorthAmerica, which has caused industry-wide demand for bioreagents to slow, ourbioreagent sales have remained consistent at $1,419,000 and $1,405,000 for thethree months ending March 31, 2003 and 2002, respectively.

*** ***

***Research and development***

 

Research anddevelopment, or R&D, includes costs associated with clinical studies,product development, and ongoing exploratory research.  In order to optimize our financialflexibility, we employ clinical research organizations to conduct our clinicaltrials and engage contract manufacturers to assist us with our productdevelopment and manufacturing.

 

R&Dspending decreased by approximately 30% to $6,493,000 for the three monthsended March 31, 2003 compared with $9,283,000 for the same period in2002.  The 2003 decrease reflects the cost shift of HspE7 manufacturingscale-up costs and other product development efforts to Roche.  Approximately 66% of our R&D spendingrelated to efforts developing HspE7 during the quarter, while the remainingspending related to exploratory research, including our follow-on CoValTM fusionproduct candidates.

*** ***

***Selling, general and administrative expenses***

 

Selling,general and administrative expense, or SG&A, includes executive management,business development, investor relations, legal support and generaladministrative activities.

*** ***

***Cost of bioreagent sales***

 

The aggregatecost of bioreagent sales as a percentage of bioreagent sales was approximately26% for the three months ended March 31, 2003, resulting in gross margins of74% compared with 72% for the same period in 2002.

*** ***

***Interestand other income, net***

 

Interest andother income, net decreased by 44% to $62,000 for the three months ended March31, 2003 compared to the same period in the prior year.  The change is due principally to reducedinterest income earned on investments resulting from reduced market interestrates and a lower investment portfolio balance.

# *** ***

# ***Basic and diluted loss per share***

 

The 75% improvementin net loss to $2,457,000, compared to $10,480,000 in 2002, was diluted by a 5%increase in the weighted average number of common shares outstanding, resultingin a basic and diluted loss per share of $0.04 and $0.18, for the three monthperiods ended March 31, 2003 and 2002, respectively.

 

15

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### ***Differencesbetween Canadian and U.S. generally accepted accounting principles***

 

Ourconsolidated financial statements include adjustments necessary for their fairpresentation in accordance with Canadian GAAP. Certain adjustments would be required if these statements were to beprepared in all material respects in accordance with U.S. GAAP.

 

To conform toU.S. GAAP, our net loss would decrease by $209,000 for the three months endedMarch 31, 2003.  The principaldifferences under U.S. GAAP as opposed to Canadian GAAP for the current quarterwere the reversal of a write-down of short-term investments of $37,000, coupledwith a $172,000 reversal of unrealized foreign exchange loss onavailable-for-sale securities.

 

Basic net lossper common share under U.S. GAAP would have been $0.04 in the three monthsended March 31, 2003, compared to $0.17 during the same period in theprior year.  Our current assets andstockholders’ equity under U.S. GAAP would have been the same as the$46,367,000 and $38,600,000 reported under Canadian GAAP atMarch 31, 2003.

## ** **

## **CriticalAccounting Policies**

 

Oursignificant accounting policies are disclosed in Note 1 to our consolidatedfinancial statements.  Certain of ourpolicies require the application of management judgment in making estimates andassumptions that affect the amounts reported in the consolidated financialstatements and disclosures made in the accompanying notes.  Those estimates and assumptions are based onhistorical experience and various other factors deemed applicable andreasonable under the circumstances.  Theuse of judgment in determining such estimates and assumptions is, by nature,subject to a degree of uncertainty. Accordingly, actual results could differ from the estimates made.  Our significant accounting policies include:

*** ***

***Revenue recognition***

 

Revenue fromcollaborative R&D arrangements may include multiple elements within asingle contract.  Our accounting policycomplies with the revenue determination requirements set forth in EITF 00-21“Accounting for Revenue Arrangements with Multiple Deliverables,” relating tothe separation of multiple deliverables into individual accounting units withdeterminable fair values.  Under theguidance of EITF-0021, we have estimated the fair value of deliverables in theRoche agreement using standard industry techniques.  Changes in the determination of fair values or performanceperiods relating to certain deliverables, and associated milestones, couldimpact the timing of future revenue streams.

*** ***

***Clinical trial accruals***

 

The Companyrecognizes expenses related to its ongoing clinical trials using a methodologydesigned to accrue estimated costs in the appropriate accounting periods.  The Company recognizes clinical trial costsin three distinct phases:  start-upphase, patient accrual phase, and close-out phase.  Our expenses related to clinical trials vary based on patientavailability, additional statistical analysis requirements, and decisions toextend the patient evaluation period.

 

16

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***Stock-basedcompensation***

 

The Companyhas adopted the recommendations of the CICA Handbook section 3870, *Stock-Based Compensation and Other Stock-BasedPayments*, effective January 1, 2002, and has elected to recognizestock compensation expense in accordance with the provisions of AccountingPrinciples Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees*. Refer to Note 1 of the accompanying financial statements for our proforma financial results using the fair value method of accounting for stockbased compensation.

** **

**FACTORSTHAT COULD AFFECT FUTURE PERFORMANCE**

** **

**Beforeinvesting in our common stock you should carefully consider the following riskfactors, the other information included herein and the information included inour other reports and filings.  Ourbusiness, financial condition, and the trading price of our common stock could beadversely affected by these and other risks.**

** **

**WeAre At an Early Stage of Development**

 

Ourbiotechnology business is still at an early stage of development.  Significant additional research anddevelopment and clinical trials must be completed before our technology can becommercialized.  We have not completedthe development of any therapeutic products and, therefore, have not begun tomarket or generate revenues from the commercialization of any therapeuticproducts.  We have undertaken onlylimited human clinical trials for some of our product candidates and we cannotassure you that the results obtained from laboratory or research studies willbe replicated in human studies or that such human studies will not identifyundesirable side effects.  We cannotassure you that any of our products will meet applicable health regulatorystandards, obtain required regulatory approvals or clearances, be produced incommercial quantities at reasonable costs, be successfully marketed or beprofitable enough that we will recoup the investment made in such productcandidates.  None of our therapeuticproduct candidates are expected to be commercially available for severalyears.  There is no precedent for thesuccessful commercialization of products based on our CoValTM fusiontechnology.  It is possible that we willnot successfully develop any therapeutic products.

 

**WeHave a History of Operating Losses and We May Never Become Profitable**

 

We have notrecorded any revenues from the sale of therapeutic products and haveaccumulated substantial net losses.  Weexpect to incur continued losses for at least the next several years as wecontinue research and development, and clinical trials.  To become profitable, we, either alone orwith one or more partners, must develop, manufacture and successfully marketour product candidates.

 

**WeMust Obtain Additional Financing To Execute Our Business Plan**

 

Our revenuesfrom the production and sale of bioreagents, and the projected revenues andexpense reimbursements from our HspE7 collaboration are not adequate to supportall of the therapeutic product development programs in our business plan.  We will need substantial additional funds topursue further research and development; carry out clinical trials; obtainregulatory approvals; file, prosecute, defend and enforce our intellectualproperty rights and market our products. We will seek additional funds through public or private equity or debtfinancing, strategic transactions and/or from other sources.  We could enter into collaborativearrangements for the development of particular products that would lead to ourrelinquishing some or all of our rights to the related technology or products.

 

17

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Although weexpect to seek additional funding when there are market opportunities, futurefunding may not be available on favorable terms or at all.   If additional funding were not obtained, wewould reduce, defer or cancel development programs, planned initiatives oroverhead expenditures, to the extent necessary.  The failure to fund our capital requirements would have amaterial adverse effect on its business, financial condition and results ofoperations.

 

**OurSuccess Depends On Collaborative Partners, Licensees and Other Third PartiesOver Whom We Have Limited Control**

 

Due to thecomplexity of the process of developing therapeutics, our core business dependson our arrangements with pharmaceutical companies, corporate and academiccollaborators, licensors, licensees and others for the research, development,clinical testing, manufacturing, marketing and commercialization of ourproducts. We are transitioning a number of functions to Roche as a result ofour June 2002 collaboration for the development and commercialization ofHspE7.  In addition, we have variousresearch collaborations and outsource many other business functions such asclinical trials and manufacturing.  Wemay not be able to establish or maintain collaborations that are important toour business on favorable terms, if at all, and such collaborations may not besuccessful.

 

There are anumber of risks associated with our dependence on collaborative agreements withthird parties.  Our product developmentand commercialization efforts could be adversely affected if any collaborativepartner terminates its agreement with us, causes delays, fails to timelydevelop or manufacture in adequate quantities a substance we need in order toconduct clinical trials, fails to adequately perform clinical trials,determines not to develop, manufacture or commercialize an end product to whichit has or we have rights, or otherwise fails to meet its contractualobligations.  Our collaborative partnerscould pursue other technologies or develop alternative products that couldcompete with our future products.

 

In both ourtherapeutic and our bioreagent businesses, we hold licenses from third partiesfor technologies and materials.  We planto acquire additional licenses from other companies and academic institutions.  Pursuant to the terms of our licenseagreements, we could be obligated to diligently bring potential products tomarket, make milestone payments that, in some instances, could be substantial,and incur the costs of filing and prosecuting patent applications.  We cannot assure you that these licenseswill not terminate or that they will be renewed.  In addition, we cannot assure you that these licenses will remainin good standing.   Our licensors mayattempt to terminate our licenses for their own business reasons.

 

**TheProfitability of Our Products Will Depend On Our Ability to Protect OurProprietary Rights and Operate Without Infringing The Proprietary Rights ofOthers**

 

Theprofitability of our products will depend in part on our ability to obtain andmaintain patents and licenses, and preserve trade secrets, and the period ourintellectual property remains exclusive. We must also operate without infringing the proprietary rights of thirdparties and without third parties circumventing our rights. We have receivedU.S. and European patents and have filed and are actively pursuing applicationsfor additional U.S. and other patents. The patent positions of pharmaceutical and biotechnology enterprises,including ours, are uncertain and involve complex legal and factual questionsfor which important legal principles are largely unresolved.  For example, no consistent policy hasemerged regarding the breadth of biotechnology patent claims that are grantedby the U.S. Patent and Trademark Office or enforced by the U.S. federal courts.  In addition, the scope of the originally claimedsubject matter in a patent application can be significantly reduced before apatent is issued.  The biotechnologypatent situation outside the U.S. is even more uncertain, is currentlyundergoing review and revision in many countries, and may not protect ourintellectual property rights to the same extent as the laws of the U.S.  Because patent applications are maintainedin secrecy in some cases, we cannot be certain that we or our licensors are thefirst creators of inventions described in our pending patent applications orpatents or the first to file patent applications for such inventions.

 

18

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Othercompanies may independently develop similar products and design around anypatented products we develop.  We cannotassure you that any of our patent applications will result in the issuance ofpatents, that we will develop additional patentable products, that the patentswe have been issued will provide us with any competitive advantages, that thepatents of others will not impede our ability to do business or that thirdparties will not be able to circumvent our patents.  On October 22, 2002 Antigenics Inc. announced that it had filedan opposition in the European Patent Office to a European patent and requestsfor re-examination in the U.S. Patent Office of two U.S. patents we havelicensed.  Until we receive finalresults from the opposition and re-examination processes, we will not be ableto assure you of the success of our planned vigorous defense of these patents.

 

A number ofpharmaceutical, biotechnology, research and academic companies and institutionshave developed technologies, filed patent applications or received patents ontechnologies that may relate to our business. If these technologies, applications or patents conflict with ours, thescope of our current or future patents could be limited or our patentapplications could be denied.  Ourbusiness may be adversely affected if competitors independently developcompeting technologies, especially if we do not obtain, or only obtain narrow,patent protection.  If patents thatcover our activities are issued to other companies, we may not be able toobtain licenses at a reasonable cost, or at all, or develop alternativetechnology.  If we are blocked fromusing our current technologies we may not be able to introduce, manufacture orsell our planned products.

 

Patentlitigation is becoming widespread in the biotechnology industry.  Such litigation may affect our efforts toform collaborations, to conduct research or development, to conduct clinicaltesting or to manufacture or market any products under development.  We cannot assure you that our patents wouldbe held valid or enforceable by a court or that competitor’s technology orproduct would be found to infringe our patents.  Our business could be materially affected by an adverse outcometo such litigation.  Similarly, we mayparticipate in interference proceedings declared by the U.S. Patent andTrademark Office or equivalent international authorities to determine priorityof invention.  We could incursubstantial costs and devote significant management resources to defend ourpatent position or seek a declaration that the patents of others are invalid.

 

Much of ourknow-how and technology may not be patentable, though it may constitute tradesecrets. We cannot assure you that we will be able to meaningfully protect ourtrade secrets.  We cannot assure youthat any of the existing confidentiality agreements with our employees,consultants, advisors or collaborators will provide meaningful protection forour trade secrets, know-how or other proprietary information in the event ofany unauthorized use or disclosure. Collaborators, advisors or consultants may dispute the ownership ofproprietary rights to our technology, for example by asserting that theydeveloped it independently.

 

**WeCould Need to Conduct More Clinical Trials or Take More Time to Complete OurClinical Trials Than We Originally Plan**

 

Clinicaltrials vary in design by factors including their dosage, end points, length,controls, and numbers and types of patients enrolled.  We may need to conduct a series of trials to demonstrate thesafety and efficacy of our products.  Inaddition, we may be required to determine whether our products delay or preventdisease recurrence.  Clinical trials toshow that a disease does not recur take longer to complete than clinical trialsthat end when patients stop having specific symptoms.  The actual schedules for our clinical trials could vary dramaticallyfrom the forecasted schedules due to factors including conflicts with theschedules of participating clinicians and clinical institutions, delayedpatient accrual and changes affecting supplies for clinical trials.

 

We havelimited experience in conducting clinical trials.  We rely on corporate collaborators including Roche, academicinstitutions and clinical research organizations to conduct, supervise, monitorand design some or all aspects of clinical trials involving our products.  In addition, the NCI is sponsoring someHspE7 clinical trials.  Since thesetrials depend on governmental participation and funding, we have less controlover their timing and design.  Delays inor failure to commence or complete any planned

 

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clinical trials could delay theultimate timelines for product release. In addition, such delays could reduce investors’ confidence in ourability to develop products, likely causing our stock price to decrease.

 

**WeMay Not Be Able to Obtain the Regulatory Approvals or Clearances That AreNecessary to Commercialize Our Products**

 

The U.S.,Canada and other countries impose significant statutory and regulatoryobligations upon the manufacture and sale of human therapeutic products.  In order for our products to obtainmarketing approval and clearance for each indication, our preclinical andclinical data and manufacturing facilities will need to meet complex criteriaestablishing the safety and efficacy of the ultimate products.

 

Our productcandidates, some of which are currently in the early stages of development,will require significant additional development and pre-clinical and clinicaltesting prior to their commercialization. These steps and the process ofobtaining required approvals and clearances can be costly andtime-consuming.  If our potentialproducts are not successfully developed, do not prove to be safe and effectivein clinical trials, or do not receive applicable regulatory approvals andclearances, or if there are delays in the process:

 

•                  the successfulcommercialization of our products could be adversely affected;

 

•                  our competitiveadvantages could be diminished; and

 

•                  revenues orcollaborative milestones from our products could be reduced or delayed.

 

Governmentaland regulatory authorities may approve a product candidate for fewerindications or narrower circumstances than we request or may condition approvalon the performance of post-marketing studies for a product candidate.  Even if we receive regulatory approval andclearance, our product candidates may later exhibit adverse side effects thatlimit or prevent their widespread use or that force us to withdraw thoseproduct candidates from the market.  Inaddition, any marketed product and its manufacturer will continue to be subjectto strict regulation after approval. Any unforeseen problems with an approved product or any violation ofregulations could result in restrictions on the product, including its withdrawalfrom the market.

 

If we, Rocheor our contract manufacturers fail to comply with applicable regulatoryrequirements at any stage during the regulatory process, we may be subject tosanctions, including fines, product recalls or seizures, injunctions, refusalof regulatory agencies to review pending market approval applications orsupplements to approval applications, total or partial suspension ofproduction, civil penalties, withdrawals of previously approved marketingapplications and criminal prosecution.

 

Themanufacturers of our products will be required to comply with applicable goodmanufacturing practices regulations, which include requirements relating toquality control and quality assurance as well as the corresponding maintenancerecords and documentation.  If themanufacturers cannot comply with regulatory requirements including applicablegood manufacturing practice requirements, we may not be allowed to develop ormarket product candidates.

 

**CompetitorsMay Develop and Market Drugs That Are Less Expensive, More Effective or Safer,Making Our Products Obsolete or Uncompetitive**

 

Many of ourcompetitors and potential competitors have substantially greater productdevelopment capabilities and financial, scientific, marketing and humanresources than ours.  Technologicalcompetition from pharmaceutical companies and biotechnology companies isintense and is expected to increase. Other companies have developed technologies that could be the basis forcompetitive products.  Some of theseproducts have an entirely different approach or means of accomplishing thedesired therapeutic effect than products being developed by us and may be moreeffective and less costly than the products developed by us.  Competitors may succeed in developingproducts earlier than us, obtaining approvals and clearances

 

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for such products more rapidlythan us, or developing products that are more effective than ours.  In addition, other forms of medicaltreatment may be competitive with our products. Our technology or products maybecome obsolete or uncompetitive.

 

**OurProducts May Not Gain Market Acceptance**

 

Our productsmay not gain market acceptance among physicians, patients, healthcare payorsand the medical community.  The degreeof market acceptance of any product that we may develop will depend on a numberof factors, including establishment and demonstration of clinical efficacy andsafety, cost effectiveness of the products, their potential advantage overalternative products and marketing and distribution support for the products.

 

Our salesexperience is limited to the sale of our bioreagents.  To directly market and distribute any pharmaceutical products wemay develop, we or our collaborators, will need a substantial marketing andsales force with appropriate technical expertise and supporting distributioncapabilities.  We may not be able toestablish sales, marketing and distribution capabilities of our own or enterinto arrangements with third parties on terms that are acceptable to us.  If marketing and sales through partneringarrangements is not successful and we do not successfully develop internalmarketing and sales expertise, our ability to generate revenue from productsales will be limited.

 

**WeMay Encounter Difficulties in Developing Manufacturing Capabilities andFacilities or Entering into Contracts for Manufacturing with Third Parties**

 

Ourmanufacturing experience in bioreagents is not directly applicable to themanufacture of therapeutic products.  Wehave not yet introduced any therapeutic products and have no manufacturingexperience for immunotherapies.  Beforeour products can be profitable, they need to be produced in commercialquantities in a cost-effective manufacturing process that complies withregulatory requirements.  We do not havefacilities for the production of the products we are developing so depend onthe manufacturing capabilities of collaborators.  Currently, we anticipate that Roche will manufacture our HspE7product.  If this situation changes andwe cannot contract for large-scale manufacturing capabilities on acceptableterms, or if there are delays or difficulties in manufacturing, we may notobtain regulatory approval or there may be shortages of our products.

 

Production ofour products could require raw materials which are scarce or which can beobtained from a limited number of sources. If our manufacturers were unable to obtain adequate supplies of such rawmaterials, the development, regulatory approval and marketing of our productscould be delayed.

 

**OurOperations Involve Risks Which Could Subject Us to Damages Resulting fromAccidental Contamination or Injury**

 

We conducthuman clinical trials, including trials in children, which may have unforeseenlong-term health implications.  We haveonly limited amounts of product liability insurance for our clinicaltrials.  We may not correctly anticipateor be able to maintain on acceptable terms the level of insurance coverage thatwould adequately cover potential liabilities from proposed clinicaltrials.  This type of insurance isexpensive, difficult to obtain and may not be available in the future.  If we cannot obtain sufficient insurancecoverage or other protection against potential product liability claims, we maynot be able to commercialize potential products.  If any liabilities from a claim exceed the limit of our insurancecoverage, we may not have the resources to pay them.

 

Our researchand development processes involve the controlled use of hazardous andradioactive materials.  We are subjectto federal, provincial and local laws and regulations governing the use,manufacture, storage, handling and disposal of such materials and certain wasteproducts.  The risk of accidentalcontamination or injury from handling and disposing of such materials cannot becompletely eliminated. In the event of or an accident involving hazardous orradioactive materials, we could be held liable for any damages that result. Weare not insured with respect to this liability. Such liability could

 

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exceed our resources.  In the future we may be required to incursignificant costs to comply with environmental laws and regulations.

 

**OurSuccess Depends On Our Ability To Attract and Retain Qualified Personnel**

 

We depend on acore management and scientific team. The loss of any of these individuals may prevent us from achieving ourbusiness objective of commercializing our product candidates.  Our future success will also depend in largepart on our continued ability to attract and retain other highly qualifiedscientific, technical and management personnel, as well as personnel withexpertise in clinical testing and government regulation.  We face competition for personnel from othercompanies, universities, public and private research institutions, governmententities and other organizations.  If weare unsuccessful in our recruitment and retention efforts, our businessoperations will suffer.

 

**WeWill Depend Upon the Availability of Reimbursement From Third-Party Payors WhoAre Increasingly Challenging the Price and Examining the Cost Effectiveness ofMedical Products and Services**

 

Sales of ourproducts will depend in part upon the availability of reimbursement fromthird-party payors, including government health administration authorities,managed care providers, private health insurers and other organizations.  These third-party payors increasinglyattempt to contain costs by challenging the price of products and services andlimiting the coverage and level of reimbursement for pharmaceuticalproducts.  Third-party reimbursement forour products may be inadequate to enable us to maintain prices that provide areturn on our product development investment. Governments continue to propose and pass legislation designed to reducehealthcare costs.  This legislationcould further limit reimbursement.  Ifgovernment and third-party payors do not adequately reimburse patients for ourproducts, there may not be a market for the products.

 

**OurShare Price Has Been and Is Likely to Continue to Be Highly Volatile**

 

As is typical for biotechnology companies without a Food and DrugAdministration approved product on the market, our share price has been highlyvolatile in the past and is likely to continue to be volatile. The price of ourshares could be materially affected by factors including the announcement oftechnological innovations, the release of publications, the announcement ofclinical trials results by us or our competitors, the development of newcommercial products, changes affecting patents or exclusive licenses, changesin regulations, the release of financial results, public concerns over risksrelating to biotechnology, future issuances of shares by us, sales of shares byour shareholders and changes in analyst recommendations.

 

The volatility of our stock may be heightened while it is tradedprimarily on the Toronto Stock Exchange, which attracts primarily Canadianshareholders.  Because someinstitutional investors invest in Toronto Stock Exchange companies inproportion to their weight on that index, changes within the S&P/TSXComposite Index may also increase volatility in our share price.  We continue to explore a cross-listing onthe Nasdaq or a U.S. exchange, but can provide no assurances regarding thetiming or ultimate results of such a transaction.

 

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**Item3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We are exposedto foreign currency fluctuations through our operations in the U.S. since asubstantial amount of our contract research and development spending istransacted in U.S. dollars. However, since approximately 95% of our bioreagentproduct sales are in U.S. dollars, there is partial matching of U.S. currencyexpenses and revenues.  We use the Canadiandollar as our measurement and functional currency.  As a result, we translate monetary assets and liabilities intoCanadian dollars at the rate of exchange prevailing at our balance sheet dateand include resulting exchange gains and losses in the other income lineitem.  We do not currently engage inhedging or other activities to reduce foreign currency risk, beyond matchinginvestments proportionately with anticipated spending, but may do so in thefuture under certain conditions. A substantial amount of our receivables andpayables are denominated in U.S. dollars. We record resulting exchange gainsand losses in our statement of operations.

 

Our sales andcontract research and development expenses are denominated in U.S. dollars andproduce a price risk from exposure to fluctuations in the U.S. exchangerate.  We do not believe this will havea material impact on our results of operations in the foreseeable future.  We maintain cash equivalent and short-terminvestment portfolio holdings of various issuers, types, and maturity dateswith large banks and investment banking institutions.  Typically, 75% of our investments are in government bonds ratedAAA. We occasionally hold short-term investments beyond 120 days, and themarket value of these investments during the investment term varies as a resultof market interest rate fluctuations.

 

We maintain anon-trading investment portfolio.  Ourmarket risk exposure is limited to interest rate risk and foreign exchange raterisk.  We computed a hypothetical changein interest rates by applying a 10% change to our average rate of return,resulting in a $81,000 impact.  Ifinterest rates were to increase by 10%, our net loss would decrease by $81,000.  Further, if interest rates were to decreaseby 10%, our net loss would increase by $81,000.  In addition, we computed a hypothetical change in foreignexchange rates by applying a 10% change to our year-end foreign exchange rateand then applied that rate to our average level of U.S. investments during theyear, resulting in a $420,000 impact. If the value of the Canadian dollar relative to the U.S. dollar were toincrease by 10%, our net loss would decrease by $420,000.  Further, if the value of the Canadian dollarrelative to the U.S. dollar were to decrease by 10%, our net loss wouldincrease by $420,000. We have not used derivative financial instruments in ourinvestment portfolio.  We classify ourinvestments as available-for-sale or held-to-maturity at the time of purchaseand re-evaluate this designation as of each balance sheet date. We had$39,394,000 in cash, cash equivalents and short-term investments as of March31, 2003.

 

**Item4.  CONTROLS AND PROCEDURES**

 

(a) Basedon their evaluation conducted within 90 days of filing this report on Form10-Q, our chief financial officer and chief executive officer have concludedthat our disclosure controls and procedures (as defined in Rules 13a-14(c) and15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended)are effective and designed to alert them to material information relating toStressgen and its consolidated subsidiaries.

 

(b) There were no significant changes in the Company’s internalcontrols or in other factors that could significantly affect those controlssubsequent to the date of our most recent evaluation.

 

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####  

#### **PART II —OTHER INFORMATION**

 

Exhibits

 
| **Exhibit  No.** |   | **Description**                                                              |
|------------------|--------|------------------------------------------------------------------------------|
| 99.1             |   | Form of  Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |

 

## **SIGNATURES AND CERTIFICATIONS**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized. 

 
|              | Stressgen Biotechnologies  Corporation                                                                          |
|-------------------|-----------------------------------------------------------------------------------------------------------------|
|              |                                                                                                            |
| Date: May 5, 2003 | /s/ DONALD D. TARTRE                                                                                            |   |
|              | Donald D. Tartre                                                                                                |
|              | Vice President and Chief  Financial Officer                                                                     |
|              | (Principal Financial and  Accounting  Officer duly authorized to sign  this report on behalf of the registrant) |

 

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I, Donald D. Tartre, certifythat:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Stressgen BiotechnologiesCorporation (the “registrant”);

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a.               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b.              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c.               presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  May 5, 2003

 
|   | /s/ Donald  D. Tartre                       |   |
|--------|---------------------------------------------|--------|
|   | Donald D.  Tartre                           |
|   | Vice  President and Chief Financial Officer |

 

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I, Daniel L. Korpolinski,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Stressgen BiotechnologiesCorporation (the “registrant”);

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a.               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b.              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c.               presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  May 5, 2003

 
|   | /s/ Daniel  L. Korpolinski             |   |
|--------|----------------------------------------|--------|
|   | Daniel L.  Korpolinski                 |
|   | President  and Chief Executive Officer |

 

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