-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GCwmQBuCJybCGLDieQ5uiUY4Gbmp6pIETre07SeM/i+6WZ41lKPCQ5tZQTIgfRwj zdAp/83EUmcF6rW0Ud/diw== 0000893220-00-000381.txt : 20000331 0000893220-00-000381.hdr.sgml : 20000331 ACCESSION NUMBER: 0000893220-00-000381 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALTEON INC /DE CENTRAL INDEX KEY: 0000878903 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133304550 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19529 FILM NUMBER: 585311 BUSINESS ADDRESS: STREET 1: 170 WILLIAMS DR CITY: RAMSEY STATE: NJ ZIP: 07446 BUSINESS PHONE: 2019345000 MAIL ADDRESS: STREET 1: 170 WILLIAMS DR CITY: RAMSEY STATE: NJ ZIP: 07446 10-K 1 ALTEON, INC. FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Mark One /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 -------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ------------- -------------- Commission File No. 0-19529 ALTEON INC. ------------- (Exact name of registrant as specified in its charter) Delaware 13-3304550 - ----------------------------------------------------------------- --------------------------------------------------- (State or other jurisdiction of incorporation or organization) ( I.R.S. Employer Identification No.)
170 Williams Drive, Ramsey, New Jersey 07446 -------------------------------------------- (Address of principal executive offices) (zip code) (201) 934-5000 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ----------------------------------------------------------------- --------------------------------------------------- None None
1 2 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the equity stock held by non-affiliates of the Registrant: $86,882,085 at March 17, 2000 based on the last sales price on that date: $4.50. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of March 17, 2000:
Class Number of Shares ----- ---------------- Common Stock, $.01 par value 19,314,130
Documents incorporated by reference The Proxy Statement to be filed with respect to the Annual Meeting of Stockholders to be held on June 12, 2000 is incorporated by reference into Part III. 2 3 ITEM 1. BUSINESS. OVERVIEW Alteon is engaged in the discovery and development of new pharmaceutical products for the treatment of cardiovascular and renal diseases and other disorders of diabetes and aging. Alteon's proprietary technology focuses on Advanced Glycosylation End-products, or A.G.E.s, which are abnormal glucose/protein complexes that form as a result of circulating blood glucose reacting with proteins. A.G.E. complexes form continuously over time at a rate dependent upon glucose levels, and subsequently cross-link to other proteins and ultimately accumulate in various tissues, blood vessels, nerves and organs. As the rate of accumulation increases, A.G.E. cross-linked proteins become rigid and aggregated. It is this process which results in progressive loss of function in these sites in the body. In healthy individuals this process occurs naturally, though slowly, as the body ages. In diabetic patients, the rate of A.G.E. accumulation and the extent of protein cross-linking is accelerated. The Company believes that this is a major factor contributing to diabetic complications. The Diabetes Control and Complications Trial ("DCCT"), a multi-center investigation conducted under the auspices of the National Institutes of Health, demonstrated that elevated blood glucose levels significantly increase the rate of progression of eye, kidney, blood vessel and nerve complications from diabetes. More than 50% of people with diabetes in the United States develop diabetic complications that range from mild to severe. Studies conducted in animal models at numerous independent institutions worldwide suggest that A.G.E.s are responsible for diabetic complications including kidney disease (nephrology), eye disease (retinopathy), nerve disease (neuropathy) and hardening of the arteries (atherosclerosis). Moreover, a recent Phase II/III human clinical study conducted by Alteon confirms that inhibiting the progression of A.G.E.s in diabetic patients can have a significant impact on proteinuria, cholesterol, triglycerides and retinopathy. Alteon believes that certain complications, such as atherosclerosis, hypertension and the progressive decline in renal function that eventually occur in non-diabetics, may also be A.G.E.-related, as this pathological process is cumulative in effect over the lifetime of any individual. Pre-clinical studies have also implicated A.G.E.s in age-related disorders such as cardiovascular disease and Alzheimer's disease. Alteon's current research and drug development focused on A.G.E. technology takes three directions: the prevention or inhibition of A.G.E. formation, the breaking of A.G.E. cross-links between proteins in order to prevent or reverse damage, and the reduction of the A.G.E. burden through a novel class of anti-hyperglycemic agents. ALT-711 is Alteon's lead agent in a class of proprietary compounds known as A.G.E. Crosslink Breakers. ALT-711 offers the possibility of the first therapeutic approach to remove A.G.E. cross-links, and the potential to impact or even reverse tissue damage caused by diabetes and aging. ALT-711 initially is being developed for cardiovascular indications, but also has potential in a number of other medical conditions. Alteon has completed a series of Phase I safety testing of ALT-711, which is expected to enter Phase II trials by mid-year 2000. Additional A.G.E. Crosslink Breaker compounds for a number of other indications are under development. Alteon is exploring potential corporate partnerships for this program. While Alteon plans to fund the Phase II trials, additional funding will be required for additional trials and development of ALT-711. Alteon's lead A.G.E.-Formation Inhibitor, pimagedine, has completed a Phase II trial in dyslipidemia and a Phase II/III pivotal "ACTION" (A Clinical Trial In Overt Nephropathy) trial in Type 1 diabetic patients with overt nephropathy. In the multi-center ACTION trial, pimagedine therapy did not reach statistical significance in its primary endpoint, the time to doubling of serum creatinine, but did result in a statistically significant and clinically meaningful reduction of urinary protein excretion. Pimagedine also reduced, to a statistically significant extent, cholesterol and triglycerides as well as the progression of retinopathy. After discussion with the Food and Drug Administration ("FDA") and with scientific and clinical advisors active in nephrology research and treatment of renal disease, Alteon is actively exploring potential corporate partnerships for the continued development of pimagedine, both in the U.S. and abroad. Alteon is also utilizing its technical expertise in the field of diabetes to develop compounds focused on glucose regulation and control. These anti-hyperglycemic compounds, or glucose lowering agents ("GLA"), are in pre-clinical studies. 3 4 TECHNOLOGY The foundation for Alteon's technology is the experimental evidence that intervention and treatment along the pathway towards A.G.E. cross-link formation would be likely to provide significant benefit in slowing or reversing the development of the serious pathologies that develop in the diabetic and aging populations. ALT-711 and pimagedine are the lead compounds resulting from Alteon's research in this field. The following chart illustrates the process of A.G.E. formation and cross-linking and is qualified by the more detailed description in the text. It also highlights those areas within the A.G.E. cascade where Alteon is attempting to offer chemical agents to intervene pharmaceutically. [ NOTE: THE PRINTED COPY OF THIS FORM 10-K CONTAINS A ] [ GRAPHICAL REPRESENTATION OF THE FOLLOWING. THE "I" ] [ REPRESENT ARROWS POINTING FROM "GLUCOSE LOWERING ] [ AGENTS" TO "GLUCOSE + PROTEINS," FROM "A.G.E. FORMATION INHIBITORS" ] [ TO "A.G.E.S," AND FROM "A.G.E. CROSSLINK BREAKERS" TO ] [ "CROSS-LINKED A.G.E.S" ] ALTEON'S TECHNOLOGY PLATFORM AND PRODUCT PIPELINE Glucose + Proteins ====> A.G.E.s ====> Cross-linked A.G.E.s I I I Glucose Lowering A.G.E.-Formation A.G.E. Agents And Crosslink I Cross-link Inhibitors Breakers I I I ALT-4037 PIMAGEDINE ALT-711 -------- ---------- ------- | | I | I | | ALT-946 | ALT-1016 | | ------- | ------- Pre-Clinical Lead | | | | Type II Diabetes | | | | | Pre-Clinical | Pre-Clinical | Lead | Lead Phase II/III | Diabetic Phase II Candidate Kidney Cardiovascular Disease Disease
A.G.E. CROSSLINK BREAKERS Structural matrix proteins such as collagen and elastin play an integral role in the maintenance of cardiovascular elasticity and wall integrity. They are also prime targets for A.G.E. cross-linking. For example, collagen isolated from tissues of diabetics and aged individuals is more highly cross-linked than that isolated from non-diabetics or younger individuals. Restriction of movement arising from A.G.E. cross-linking of matrix proteins appears to impair normal functioning of contractile organs, such as blood vessels and cardiac muscle, which are dependent on flexibility and distensibility for normal function. The Company initially is developing the A.G.E. Crosslink Breaker class of compounds, specifically the lead compound, ALT-711, for cardiovascular indications. Currently available antihypertensive agents improve arterial compliance indirectly as they reduce the pressure burden on the vessel wall, which results in a greater dynamic range of elasticity from the resting state. This approach lowers peripheral resistance and/or intravascular circulating volume, leading to a reduction in mean blood pressure. A current subject of debate is whether any of the available drugs can increase arterial elasticity, beyond what would be expected from restoring the dynamic range of the vessel wall with a reduction in blood pressure alone. Pharmacologic intervention targeting the stiffness of the 4 5 cardiovascular system may decrease the incidence and severity of complications such as congestive heart failure, myocardial ischemia and cerebrovascular accidents. Through its unique mechanism of action, ALT-711 is the first compound that breaks A.G.E.-derived cross-links between proteins, both in vitro and in vivo. In the case of collagen, ALT-711 does not disrupt the natural enzymatic glycosylation sites or peptide bonds that are responsible for maintaining the normal integrity of the collagen chain. Thus, normal structure and function is preserved while abnormal cross-linking is reduced. Studies in animal models in several laboratories around the world have demonstrated rapid reversal of impaired cardiovascular functions with ALT-711. In these pre-clinical models, ALT-711 reverses the stiffening of arteries as well as stiffening of the heart that accompanies the development of diabetes and aging. The Company is also evaluating development of the breaker class for several other indications where A.G.E.s and A.G.E. cross-linking lead to abnormal function. Data from Phase I trials of ALT-711 suggest that Crosslink Breakers may have an effect on soft tissue compliance in the bladder (for treating urinary incontinence). The scientific literature also points to the possible utility of breaker compounds in ophthalmic and dermatological conditions, stiff joint disorders, and peritoneal dialysis. See "--ALT-711." A.G.E.-FORMATION INHIBITORS Alteon's most advanced therapeutic program has been in the development of drugs that inhibit A.G.E. formation. These compounds are designed to prevent the progression of major diabetic and age-related complications by blocking the formation of A.G.E.s and subsequent cross-linking of A.G.E.s to other proteins. Alteon's lead compound, pimagedine, has been shown to inhibit A.G.E. formation and subsequent cross-link formation. Pimagedine is able to have a beneficial impact on what is thought to be one of the earliest steps in the progression of nephropathy in diabetic patients. Alteon believes that because pimagedine exerts its activity by a mechanism uniquely different from currently available therapies, its benefits will be over and above current standard treatment. Data from the ACTION I trial of pimagedine suggest that other potential indications for this compound include proteinuria and retinopathy. Alteon has identified ALT-946 as a second-generation clinical lead in the A.G.E. inhibitor category. Further development of the A.G.E. inhibitor class of compounds is subject to further funding. See "--Pimagedine Intravenous" and "Pimagedine Topical." GLUCOSE LOWERING AGENTS Alteon is also utilizing its technical expertise in the field of diabetes to develop compounds focused on glucose regulation and control. These anti-hyperglycemic compounds, or GLA, are in pre-clinical studies. Removing or lessening the impact of hyperglycemia on the progression of the A.G.E Pathway also would likely enhance the impact of inhibitors and breakers. With respect to the cardiovascular arena, an agent that improves insulin responsiveness would favorably impact the cardiovascular risk from chronic elevated serum triglycerides and fatty acids. The GLA Program arose from a search of plant-derived natural products that would exhibit a beneficial profile of glucose and lipid lowering in animal models of Type II diabetes. From the inception of this program, several pre-clinical candidates have been evaluated that display these beneficial properties. A lead pre-clinical candidate, ALT-4037, lowers glucose and lipids, restores normal pancreatic sensing of glucose, stimulates greater production of insulin, and restores insulin sensitivity in skeletal muscle and fat. Further development of the GLA class of compounds is subject to further funding. 5 6 PRODUCTS UNDER DEVELOPMENT ALT-711 ORAL Several classes of novel compounds have been identified which are capable of breaking the cross-links formed as a result of A.G.E. accumulation. These compounds are currently under evaluation in various pre-clinical models to assess their potential for the treatment of a variety of diseases including cardiovascular disease states and other conditions of soft tissue compliance. A Phase I program of ALT-711, the Company's lead A.G.E. Crosslink Breaker compound, was initiated in June 1998. The Phase I program consisted of four trials, all conducted in Utrecht, The Netherlands. The first trial, a placebo-controlled, double-blind, single and ascending dose study, enrolled 88 subjects, consisting of a younger cohort, aged 18 to 50 years, and an older cohort, aged 55 to 75 years. A 14-day multiple dosing trial was then conducted in 16 older (65 to 75 years) subjects. In the third trial of 12 subjects, aged 65 to 75 years, ALT-711 was administered in ascending doses every other day. In the final Phase I study, the highest dose of ALT-711 was administered to 12 subjects, aged 65-75 years, over a consecutive 14-day period. Analyses of the clinical and safety data of each Phase I study did not show any medically relevant events. Cardiovascular Disease. The Company's early clinical program on treating cardiovascular disease is focused on ALT-711, an agent that cleaves the A.G.E. cross-link that forms between structural matrix proteins such as collagen and elastin, which play an important role in the maintenance of normal vessel elasticity. Intervention targeting the stiffness of the cardiovascular system may decrease the incidence and severity of complications such as congestive heart failure, myocardial ischemia and cerebrovascular accidents. Pre-clinical studies of ALT-711 conducted by researchers from The National Institute on Aging and Johns Hopkins Geriatric Center demonstrated the ability of the compound to significantly reduce arterial stiffness in elderly Rhesus monkeys. In this primate study, administration of ALT-711 was found to significantly reduce aortic stiffness by week 3 which persisted through week 8. Baseline weight, fasting blood glucose, creatinine and cholesterol did not change after treatment. In a recent pre-clinical study of ALT-711 in aged dogs, administration of ALT-711 for one month resulted in an approximate 40% decrease in age-related ventricular stiffness, or hardening. This decrease was accompanied by an overall improvement in cardiac function. Reductions in blood pressure that have been observed in animal models of diabetic hypertension suggest that Crosslink Breakers also may prove beneficial in the treatment of systolic hypertension in the elderly. The Company has filed an investigational new drug application ("IND") focused on vascular and ventricular compliance, and expects to initiate Phase II trials of ALT-711 in 2000. Thereafter, subsequent development will require additional funding. Other Indications. A.G.E. cross-linking has been shown to affect soft tissue compliance and interfere with the normal function of other organs of the body. Early clinical experience in Phase I human studies of ALT-711 suggest that urinary elastic dysfunction (leading to urinary incontinence) is a potential therapeutic target. Based on pre-clinical studies, the Company may decide to pursue additional therapeutic opportunities such as skin aging and dermatological conditions, stiff joint disorders and peritoneal dialysis, conditions where A.G.E. cross-linking has contributed to a loss of normal function, elasticity and flexibility. ALT-711 OPHTHALMIC Ophthalmic Conditions. The Company is pursuing investigations into the role of A.G.E. cross-linking in restricting the flow of fluid through the eye, the consequence of which causes elevated intraocular pressure, which is central to the development of glaucoma. Preliminary studies in aged primates demonstrate a persistent improvement in fluid flow following a single intraocular injection of ALT-711. In addition, pre-clinical research in diabetic models of retinopathy demonstrates a reversal in the expression of vascular endothelial-derived growth factor ("VEGF"). The elevated levels of VEGF receptors were also reduced, suggesting the possible utility of ALT-711 in proliferative retinopathy. 6 7 PIMAGEDINE ORAL Alteon has conducted the following Phase II and Phase III trials on pimagedine: Overt Nephropathy. Kidney disease is a significant cause of morbidity and mortality in patients with Type 1 and Type 2 diabetes. It is a chronic and progressive disease. One of the early signs of kidney damage is microalbuminuria (characterized by leakage of small amounts of protein into the urine) which progresses to overt nephropathy (characterized by leakage of large amounts of protein into the urine and ultimately to end-stage renal disease (advanced renal disease requiring dialysis). Approximately 34% of patients with Type 1 diabetes and approximately 10-15% of patients with Type 2 diabetes develop nephropathy. As of 1995, there were approximately 1,000,000 diabetics diagnosed with kidney disease in the United States. The Company conducted a randomized double-blind, placebo-controlled, multi-center, Phase II/III clinical trial to evaluate the safety and efficacy of pimagedine in Type 1 diabetic patients with overt nephropathy, the ACTION I trial. The trial was initiated in January 1994. The primary objective of the trial was to evaluate the safety and efficacy of pimagedine in preserving renal function in Type 1 patients. Enrollment in the trial was completed in August 1996 with 690 patients from 56 investigational sites in the United States and Canada. Patients were treated for a minimum of two years and received twice daily oral doses of pimagedine, adjusted for kidney function. Under this protocol, pimagedine treatment was in addition to the best available therapeutic regimen chosen by the treating physicians. In November 1998, the Company announced results of an analysis of data from the ACTION I trial. Although the results showed that pimagedine reduced the risk of doubling of serum creatinine, the study's primary endpoint, the data did not reach statistical significance. However, pimagedine therapy did result in a statistically significant and clinically meaningful reduction of urinary protein excretion. Pimagedine also reduced to a statistically significant extent, cholesterol and triglycerides as well as the progression of retinopathy. Additional data suggested a trend toward improvements in other measures of renal function including estimated creatinine clearance and glomerular filtration rate. The drug was generally well tolerated. After discussion with medical and clinical consultants and the FDA, Alteon is actively exploring potential corporate partnerships for the continued development of pimagedine and expects to pursue development if funding is obtained. A second Phase III trial of pimagedine, in patients with Type 2 diabetes and overt nephropathy (ACTION II), was initiated in July 1995 and used a trial design similar to the ACTION I trial. The objective of this study was to evaluate the safety and efficacy of pimagedine in preserving renal function in Type 2 patients. In March 1998, the Company discontinued this trial because of an insufficient risk/benefit ratio based upon data then available. End-Stage Renal Disease ("ESRD"). In January 1996, the Company initiated a Phase II study to evaluate the safety and efficacy of pimagedine in diabetic patients with ESRD on hemodialysis. This clinical trial enrolled approximately 120 patients who received oral doses of pimagedine three times per week in conjunction with their dialysis treatment. After the ACTION I results were unblinded in November 1998, the Company evaluated this program as part of its overall evaluation of further development of pimagedine and the trial was ended in April 1999. Data from the study was inconclusive. Dyslipidemia. In April 1997, Alteon and Gamida completed a randomized, double-blind, placebo-controlled, Phase II clinical trial to evaluate the effect of pimagedine on plasma lipid levels and A.G.E.s in patients with diabetes and elevated serum cholesterol levels. Dyslipidemia is a condition characterized by an abnormal lipid profile. The elevation of one lipid component, low-density lipoprotein, is known to be a significant risk factor in cardiovascular disease. Diabetic patients are twice as likely as non-diabetic individuals to die from coronary artery disease, and the annual incidence of cardiovascular complications is increased significantly in patients with Type 2 diabetes. This Phase II clinical trial enrolled 89 patients in Israel who were treated for a minimum of three months and who received twice daily oral doses of pimagedine, adjusted for kidney function. The primary objective of this study was to evaluate the safety and efficacy of pimagedine in reducing levels of low-density lipoproteins ("LDLs") in Type 2 diabetic patients with varying degrees of renal function and elevated LDLs. 7 8 A comprehensive statistical report of the trial after audit of the results concluded that lipid parameters between pimagedine and placebo treatment arms showed steeper decreases in the pimagedine arm in almost all parameters and in all populations. In cholesterol, triglycerides and very low-density lipoproteins ("VLDL") the decreases were significant by "last observation carried forward" analysis. In LDL, the decrease in the pimagedine group was significant at the 8th week. While not an endpoint of the Israeli trial, albumin in the urine was also reduced in patients identified as having albuminuria (excretion of more than 30 mg of albumin in 24 hours). At this time, the Company has no plans to develop pimagedine solely for this indication. PIMAGEDINE INTRAVENOUS Stroke. Every year approximately 500,000 patients in the United States suffer a stroke and approximately one-third of these individuals die, making stroke the third leading cause of death by disease. According to the American Heart Association, in 1994 the economic cost of stroke due to health care expense and loss of productivity was estimated to be nearly $30 billion. Individuals at increased risk for stroke include those with hypertension, smokers, obese individuals, diabetics and those with hyperlipidemia. Currently, several pharmaceutical and biopharmaceutical companies are conducting pre-clinical studies and clinical trials on numerous compounds for the treatment of stroke. Animal studies have demonstrated that pimagedine, when given prior to or after indication of stroke by occlusion of the middle cerebral artery, reduced the volume of tissue death by 30%. Alteon has completed acute toxicity studies in animals with an intravenous formulation of pimagedine. The Company has filed an IND with the FDA. Additional development of intravenous pimagedine will require additional funding. PIMAGEDINE TOPICAL Inflammatory Skin Disease. Nitric oxide ("NO") has been shown to play a role in the inflammatory disease process. Independent researchers have reported that treatment with pimagedine reduces inflammation in specific pre-clinical models. Pimagedine has also been shown to decrease the migration of macrophages (inflammatory cells) to the site of tissue damage and prevent the release of cytokines and consequent release of NO. Based on these findings, the Company believes that pimagedine could have a beneficial effect in certain inflammatory diseases such as contact dermatitis and eczema. Currently, topical steroids are the treatment of choice for these indications but are contraindicated for prolonged use. A topical formulation of pimagedine has been developed. The Company has filed an IND for these indications. Additional development of topical pimagedine will require additional funding. ALT-4037 ALT-4037 has been identified as the pre-clinical lead in the Glucose Lowering Agent class of compounds. ALT-4037 is a novel compound that lowers blood glucose, triglycerides and free fatty acid levels in pre-clinical animal models of Type 2 diabetes. Pre-clinical findings demonstrate an improvement in pancreatic function following chronic dosing with ALT-4037. The Company has put this research program on hold as it focuses its resources on the development of the A.G.E. breaker class. CORPORATE STRATEGIC ALLIANCES Genentech, Inc. In December 1997, Alteon and Genentech entered into a stock purchase agreement and a development collaboration and license agreement providing for the development and marketing of pimagedine and second-generation A.G.E.-Formation Inhibitors. Pursuant to the stock purchase agreement Genentech purchased $5,610,000 of Common Stock and $31,934,000 of Series G Preferred Stock and Series H Preferred Stock for an aggregate purchase price of $37,544,000. Genentech's obligations to purchase shares of Alteon's stock terminated 8 9 December 31, 1998. Pursuant to a letter agreement dated February 11, 1999, between Alteon and Genentech, the development collaboration and license agreement terminated effective June 30, 1999. Yamanouchi Pharmaceutical Co., Ltd. In July 1989, Alteon and Yamanouchi entered into a series of agreements pursuant to which the parties formed a strategic alliance to develop and commercialize Alteon's A.G.E.-related technology in Japan, South Korea, Taiwan and The People's Republic of China (the "Yamanouchi Territory"). Under this arrangement, the parties agreed to collaborate on further research and development, Yamanouchi purchased shares of Alteon stock and Alteon granted to Yamanouchi an exclusive license to commercialize Alteon's technology in the Yamanouchi Territory in exchange for royalty payments on net sales, if any. Yamanouchi has the right to terminate the agreement upon 90 days' prior written notice to Alteon. This license expires as to each product in each licensed country upon the later of 15 years from the date of the agreement, the expiration of the last patent applicable to the product or five years after the first commercial sale of the product in the country. Pursuant to the license agreement, Alteon granted Yamanouchi the right to manufacture pimagedine bulk material for sale in the Yamanouchi Territory. With respect to certain second-generation A.G.E.-Formation Inhibitors, Alteon has the option to supply all of Yamanouchi's reasonable requirements of active ingredient bulk materials for sale within the Yamanouchi Territory. Alteon and Yamanouchi also entered into a research and development collaboration agreement to provide for joint collaboration on further research and development, specifically Alteon's A.G.E.-formation and protein cross-linking technology. Yamanouchi also agreed to fund pre-clinical studies, including most toxicology studies on pimagedine and any other products that the parties jointly agree to develop including a second-generation A.G.E.-Formation Inhibitor and a macrophage stimulator. The collaboration agreement provides that any joint development program is terminable by either party upon 60 days' prior written notice. The agreement terminated in June 1999. Since then the parties have been in discussions regarding the continuation of their collaboration on pimagedine. Pursuant to the research and development collaboration agreement, Yamanouchi provided financial support for most of the pre-clinical toxicity studies and completed Phase I clinical trials on pimagedine in Japan. Yamanouchi has not conducted Phase II clinical trials in Japan. Roche Diagnostics In December 1994, the Company entered into an exclusive licensing arrangement with Roche for Alteon's technology for diagnostic applications. Under this alliance, Alteon will be entitled to receive royalties based on net sales of research and commercial assays developed by Roche and based on Alteon's A.G.E. technology. Roche will receive exclusive worldwide rights to the technology for diagnostic applications outside the Yamanouchi Territory. Under the agreement, Roche has agreed to develop immunoassays to detect A.G.E.-hemoglobin, ApoB-A.G.E. and A.G.E.-serum protein/peptides. Development of reagents and formats for the A.G.E. competitive ELISA and a procedure for measuring hemoglobin-A.G.E. was completed in 1998. Continuation of the program to adapt these reagents to automated clinical assays is contingent upon FDA approval of pimagedine and will advance along with any product launch of pimagedine. The agreement gives Roche discretion over commercial development. Roche may terminate the license agreement upon 90 days' prior written notice. Gamida In November 1995, the Company entered into clinical testing and distribution agreements with Gamida. Under these agreements, Gamida conducted, at its own expense, a Phase II multi-site clinical trial in Israel, in accordance with the protocol developed by Alteon, to evaluate pimagedine in patients with diabetes and elevated serum cholesterol levels. Gamida will receive the exclusive right to distribute pimagedine, if successfully developed and approved for marketing, in Israel, Bulgaria, Cyprus, Jordan and South Africa. The distribution agreement is for a term ending 10 years after the date of regulatory approval for the sale of pimagedine in Israel; thereafter, it will be 9 10 automatically renewed for successive three-year periods unless terminated by either party on the last day of the initial or renewal term. IDEXX In June 1997, Alteon entered into a license and supply agreement with IDEXX pursuant to which Alteon licensed to IDEXX pimagedine as a potential therapeutic in companion animals (dogs, cats and horses) and its A.G.E. diagnostics technology for companion animal use. IDEXX will be responsible for the development, licensing and marketing of pimagedine and A.G.E. diagnostics for such use on a worldwide basis. Alteon will be entitled to receive milestone payments and royalties on sales of the licensed products. ACADEMIC RESEARCH AND LICENSE AGREEMENTS Washington University, St. Louis In June 1995, the Company obtained an exclusive, worldwide, royalty-bearing license from Washington University for patents covering the use of pimagedine as an inhibitor of inducible nitric oxide synthase ("iNOS"). The agreement requires the Company to pay certain licensing fees upon the attainment of development milestones as well as a royalty on net sales or a share of sub-licensing profits on products covered by the patents. The license also covers patents developed through any subsequent research collaboration between the parties which Alteon agrees to fund. Cerami Consulting Corporation and Warren Laboratories Effective May 17, 1999, the Company terminated its consulting agreement with Cerami Consulting Corporation and its research agreement with Kenneth S. Warren Laboratories, Inc. The company retained the rights to results and inventions resulting from these agreements. The Rockefeller University Pursuant to an agreement with Rockefeller University, Alteon has exclusive, worldwide and perpetual rights to the technology and inventions relating to A.G.E.s and other protein cross-linking, including those relating to the complications of diabetes and aging. See "--Patents, Trade Secrets and Licenses." The Picower Institute for Medical Research Pursuant to an agreement with The Picower Institute, a not-for-profit biomedical science institution, the Company has received an exclusive worldwide, royalty-bearing license for certain commercial health care applications of A.G.E.-related inventions. See "--Patents, Trade Secrets and Licenses." MANUFACTURING The Company has no manufacturing facilities for either production of bulk chemicals or the manufacturing of pharmaceutical dosage forms. The Company relies on third party contract manufacturers to produce the raw materials and chemicals used as the active drug ingredients in its pharmaceutical products and to perform the tasks necessary to process, package and distribute these products in finished form. Such third party contractors will be inspected by the Company and its consultants to confirm compliance with current Good Manufacturing Practice ("cGMP") required for pharmaceutical products. The Company believes it will be able to obtain sufficient quantities of bulk chemical at reasonable prices to satisfy anticipated needs. There can be no assurance, however, that the Company can continue to meet its needs for supply of bulk chemicals or that manufacturing limitations will not delay clinical trials or possible commercialization. See "--Corporate Strategic Alliances." 10 11 MARKETING AND SALES Alteon plans to market and sell its products, if successfully developed and approved, directly or through co-promotion or other licensing arrangements with third parties. Such arrangements may be exclusive or nonexclusive and may provide for marketing rights worldwide or in a specific market. For certain of its products Alteon has licensed exclusive marketing rights, formed joint marketing arrangements or granted distribution rights within specified territories with its corporate partners, Yamanouchi, Roche, Gamida, and IDEXX. See "--Corporate Strategic Alliances." PATENTS, TRADE SECRETS AND LICENSES Proprietary protection for the Company's product candidates, processes and know-how is important to its business. Alteon aggressively files and prosecutes patents covering its proprietary technology, and, if warranted, will defend its patents and proprietary technology. As appropriate, the Company seeks patent protection for its proprietary technology and products in the United States and Canada and in key commercial European and Asia/Pacific countries. The Company also relies upon trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain its competitive position. Pimagedine is not a novel compound and is not protected by a composition-of-matter patent. In 1992, a United States patent on the use of pimagedine was issued to Rockefeller University and subsequently exclusively licensed to Alteon with claims relating to the inhibition of A.G.E. formation. The patent claims the new use of a known agent for the treatment of the complications of diabetes and aging. In 1994, corresponding patents were granted in France, Germany, Italy, the United Kingdom and other European countries. A corresponding patent was issued in Japan in 1995. The Company continues to pursue and patent chemical analogs of known A.G.E.-Formation Inhibitors, as well as novel compounds having potential inhibitory properties. Alteon has obtained several patents covering certain novel compounds in the A.G.E. Crosslink Breaker category. These patents and additional patent applications contain compound, composition and method of treatment claims for several chemical classes of Crosslink Breaker compounds. The novel compounds have the ability to break what were previously believed to be permanent, A.G.E.-mediated bonds between proteins. The use of these compounds offers the possibility of the first therapeutic approach to the removal of A.G.E. cross-links. The Company believes that its licensed and owned patents provide a substantial proprietary base that will allow Alteon and its collaborative partners to commercialize products in this field. There can be no assurance, however, that pending or future applications will issue, that the claims of any patents which do issue will provide any significant appreciation of the Company's technology, or that the Company's directed discovery research will yield compounds and products of therapeutic and commercial value. In 1987, the Company acquired an exclusive, royalty-free, worldwide license (including the right to sub-license to others) to issued patents, patent applications and trade secrets from Rockefeller University relating to the A.G.E.-formation and cross-linking technology currently under development at Alteon. The inventors of the patented technology include Drs. Michael A. Brownlee, Anthony Cerami, Helen Vlassara and Peter C. Ulrich. Additional patent applications have since been filed on discoveries made in support of the technology from research conducted at Rockefeller University, The Picower Institute and the Company's laboratories. Pursuant to the Company's agreement with The Picower Institute, certain patentable inventions and discoveries relating to A.G.E. technology have been licensed exclusively to the Company. In consultation with the Company, The Picower Institute is responsible for the worldwide filing and prosecution of patent applications and maintenance of patents for such inventions. Alteon will contribute 50% of the cost of such activities. As of December 31, 1999, the Company's patent estate of owned and/or licensed patent rights consisted of 100 issued patents or allowed United States patent applications, none of which expire prior to 2005, and 23 pending patent applications in the United States, the majority of which are A.G.E.-related. Included in Alteon's patent estate are two issued United States patents on the use of pimagedine for inhibition of iNOS, licensed from Washington 11 12 University. Alteon also owns or has exclusive rights to over 25 issued or granted non-United States patents and has over 70 patent applications pending in Europe, Japan, Australia and Canada. The Company intends to continue to focus its research and development efforts on the synthesis of novel compounds and on the search for additional therapeutic applications to expand and broaden the Company's rights within its technological and patent base. The Company is also prepared to in-license additional technology that may be useful in building its proprietary position. Where appropriate, the Company utilizes trade secrets and unpatentable improvements to enhance its technology base and improve its competitive position. Alteon requires all employees, scientific consultants and contractors to execute confidentiality agreements as a condition of engagement by the Company. There can be no assurance, however, that the Company can limit unauthorized or wrongful disclosures of unpatented trade secret information. The Company believes that its estate of licensed and owned issued patents, if upheld, and pending applications, if granted and upheld, will be a substantial factor in the Company's success. The patent positions of pharmaceutical firms, including Alteon, are generally uncertain and involve complex legal and factual questions. Consequently, even though Alteon is currently prosecuting such patent applications in the United States and foreign patent offices, the Company does not know whether any of such applications will result in the issuance of any additional patents or, if any additional patents are issued, whether the claims thereof will provide significant proprietary protection or will be circumvented or invalidated. Competitors or potential competitors have filed for or have received United States and foreign patents and may obtain additional patents and proprietary rights relating to compounds or processes competitive with those of the Company. Accordingly, there can be no assurance that the Company's patent applications will result in patents being issued or that, if issued, the claims of the patents will afford protection against competitors with similar technology; nor can there be any assurance that others will not obtain patents that the Company would need to license or circumvent. See "--Competition." The Company's success will depend, in part, on its ability to obtain patent protection for its products, preserve its trade secrets and operate without infringing on the proprietary rights of third parties. There can be no assurance that the Company's current patent estate will enable the Company to prevent infringement by third parties or that competitors will not develop competitive products outside the protection that may be afforded by the claims of such patents. To the extent the Company relies on trade secrets and unpatented know-how to maintain its competitive technological position, there can be no assurance that others may not develop independently the same or similar technologies. Failure to maintain its current patent estate or to obtain requisite patent and trade secret protection, which may become material or necessary for product development, could delay or preclude the Company or its licensees or marketing partners from marketing their products and could thereby have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION The Company and its products are subject to comprehensive regulation by the FDA in the United States and by comparable authorities in other countries. These national agencies and other federal, state and local entities regulate, among other things, the pre-clinical and clinical testing, safety, effectiveness, approval, manufacturing, labeling, marketing, export, storage, record keeping, advertising and promotion of the Company's products. The process required by the FDA before the Company's products may be approved for marketing in the United States generally involves (i) pre-clinical new drug laboratory and animal tests, (ii) submission to the FDA of an IND, which must become effective before clinical trials may begin, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for its intended indication, (iv) submission to the FDA of an NDA, and (v) FDA review of the NDA in order to determine, among other things, whether the drug is safe and effective for its intended uses. There is no assurance that the FDA review process will result in product approval on a timely basis, if at all. 12 13 Pre-clinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Certain pre-clinical tests are subject to FDA regulations regarding current Good Laboratory Practices. The results of the pre-clinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of clinical trials or during the conduct of the clinical trials, as appropriate. Clinical trials are conducted under protocols that detail such matters as the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each protocol must be reviewed and approved by an institutional review board. Clinical trials are typically conducted in three sequential phases, which may overlap. During Phase I, when the drug is initially given to human subjects, the product is tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase II involves studies in a limited patient population to (i) evaluate preliminarily the efficacy of the product for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage, and (iii) identify possible adverse effects and safety risks. Phase III trials are undertaken in order to further evaluate clinical efficacy and to further test for safety within an expanded patient population. The FDA may suspend clinical trials at any point in this process if it concludes that clinical subjects are being exposed to an unacceptable health risk. FDA approval of the Company's products, including a review of the manufacturing processes and facilities used to produce such products, will be required before such products may be marketed in the United States. The process of obtaining approvals from the FDA can be costly, time consuming and subject to unanticipated delays. There can be no assurance that approvals of the Company's proposed products, processes, or facilities will be granted on a timely basis, if at all. Any delay or failure to obtain such approvals would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, even if regulatory approval is granted, such approval may include significant limitations on indicated uses for which a product could be marketed. Among the conditions for NDA approval is the requirement that the prospective manufacturer's manufacturing procedures conform to cGMP requirements, which must be followed at all times. In complying with those requirements, manufacturers (including a drug sponsor's third party contract manufacturers) must continue to expend time, money and effort in the area of production and quality control to ensure compliance. Domestic manufacturing establishments are subject to periodic inspections by the FDA in order to assess, among other things, cGMP compliance. To supply a product for use in the United States, foreign manufacturing establishments must comply with cGMP and are subject to periodic inspection by the FDA or by regulatory authorities in certain of such countries under reciprocal agreements with the FDA. Both before and after approval is obtained, a product, its manufacturer, and the holder of the NDA for the product are subject to comprehensive regulatory oversight. Violations of regulatory requirements at any stage, including the pre-clinical and clinical testing process, the approval process, or thereafter (including after approval) may result in various adverse consequences, including the FDA's delay in approving or refusal to approve a product, withdrawal of an approved product from the market, and/or the imposition of criminal penalties against the manufacturer and/or NDA holder. In addition, later discovery of previously unknown problems may result in restrictions on such product, manufacturer, or NDA holder, including withdrawal of the product from the market. Also, new government requirements may be established that could delay or prevent regulatory approval of the Company's products under development. The FDA has implemented accelerated approval procedures for certain pharmaceutical agents that treat serious or life-threatening diseases and conditions, especially where no satisfactory alternative therapy exists. The Company cannot predict the ultimate impact, however, of the FDA's accelerated approval of procedures on the timing or likelihood of approval of any of its potential products or those of any competitor. In addition, the approval of a product under the accelerated approval procedures may be subject to various conditions, including the requirement to verify clinical benefit in post-marketing studies, and the authority on the part of the FDA to withdraw approval under streamlined procedures if such studies do not verify clinical benefit. 13 14 For marketing outside the United States, the Company will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and diagnostic products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. The Company does not currently have any facilities or personnel outside of the United States. In addition to regulations enforced by the FDA, the Company also is subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. The Company's research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. COMPETITION A number of companies are pursuing the research and development of pharmaceutical agents to treat cardiovascular and renal disease and other disorders of diabetes and aging. The Company is not aware of any other pharmaceutical company developing an A.G.E.-Formation Inhibitors that has reached the clinical development stage of demonstrating efficacy with a relevant physiological endpoint. The Company has no knowledge of any company pursuing a product to break cross-linked A.G.E. proteins. Conversely, Alteon is aware of many companies which are pursuing research and development of compounds for the lowering of glucose levels, for cardiovascular and renal diseases, and the selective inhibition if iNOS. Many of the Company's potential competitors have substantially greater financial, technical and human resources than the Company and may be better equipped to develop, manufacture and market products. In addition, many of these companies have extensive experience in pre-clinical testing and human clinical trials. These companies may develop and introduce products and processes competitive with or superior to those of the Company. The Company's competition will be determined in part by the potential indications for which the Company's compounds are developed and ultimately approved by regulatory authorities. For certain of the Company's potential products, an important factor in competition may be the timing of market introduction of its or its competitors' products. Accordingly, the relative speed with which Alteon can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market are important competitive factors. The Company expects that competition among products approved for sale will be based on, among other things, product efficacy, safety, reliability, availability, price and patent position. Competitive drugs based on other therapeutic mechanisms may be efficacious in treating diabetic complications. The development by others of non-A.G.E.-related treatment modalities for these diabetic and/or other age-related complications could render pimagedine and other Alteon products in the diabetic field non-competitive or obsolete. Therapeutic approaches being pursued include curing diabetes via gene therapy or islet cell transplantation, as well as pharmaceutical intervention with agents such as the aldose reductase inhibitors. Results of the DCCT showed that tight glucose control reduced the incidence of diabetic complications. Numerous companies are pursuing other methods to manage glucose control and to reduce the incidence of diabetic complications. In addition, several companies have initiated research with drugs that inhibit vascularization as a potential treatment of diabetic retinopathy. In the event one or more of these initiatives are successful, the market for some of the Company's products may be reduced or eliminated. The treatment of diabetic complications with use of existing agents such as lipid lowering agents or A.C.E. inhibitors also appears beneficial. The A.C.E. inhibitor, captopril, has been approved by the FDA for patients with diabetic nephropathy. Alteon's clinical trials were designed assuming patients' baseline therapy would include A.C.E. inhibitor treatment. The patent covering captopril expired in March 1996. Other pharmaceutical companies have chosen to market and sell this drug, which has led to a significant decrease in its price. Sales of captopril may reduce or eliminate the market for any product developed by the Company for this indication. 14 15 In addition, a broad range of cardiovascular drugs is under development, which could reduce or eliminate the market for any cardiovascular product developed by the Company. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain protection or otherwise develop proprietary products or processes and secure sufficient capital resources. MEDICAL AND CLINICAL ADVISORS The Company's Medical and Clinical Advisors consist of individuals with recognized expertise in the medial and pharmaceutical science and related fields who advise the Company about present and long-term scientific planning, research and development. These advisors consult and meet with Company management informally on a frequent basis. All advisors are employed by employers other than the Company and may have commitments to, or consulting or advisory agreements with, other entities that may limit their availability to the Company. These companies may also be competitors of Alteon. The advisors have agreed, however, not to provide any services to any other entities that might conflict with the activities that they provide. Each member also has executed a confidentiality agreement for the benefit of the Company. The following persons are Medical and Clinical Advisors: Michael A. Brownlee, M.D., Anita and Jack Saltz Professor of Diabetes Research, Departments of Medicine and Pathology, Albert Einstein College of Medicine. Jay N. Cohn, M.D., Professor of Medicine, University of Minnesota Medical School; immediate Past-President of the International Society of Hypertension. Richard J. Glassock, M.D., MACP, Professor Emeritus, UCLA School of Medicine; Past-President, National Kidney Foundation; Past-President, American Society of Nephrology. Jan Lessem, M.D., Ph.D., FACC, Chief Medical Officer and Vice President, Clinical Research and Development, OraPharma, Inc.; former Vice President and Corporate Officer, Drug Strategy and Medical Director, Takeda America, Inc.; Director of Clinical Investigations, SmithKline Beecham Pharmaceuticals. Seth A. Rudnick, M.D., Venture Partner, Caanan Partners; former Chairman, President and CEO, CytoTherapeutics, Inc.. Mark E. Williams, M.D., Director of Dialysis, Joslin Diabetes Center; Chairman, National Scientific Council on Diabetic Kidney Disease, National Kidney Foundation. EMPLOYEES As of March 15, 2000, Alteon employed 20 persons (6 of whom held a Ph.D., M.D. or other advanced degree), of whom 7 were engaged in research and development and 13 were engaged in administration and management. Alteon believes that it has been successful in attracting skilled and experienced personnel. None of the Company's employees are covered by collective bargaining agreements and all employees are covered by confidentiality agreements. The Company believes that its relationship with its employees is good. FORWARD-LOOKING STATEMENTS Statements in this Form 10-K that are not statements or descriptions of historical facts are "forward-looking" statements under Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 and are subject to numerous risks and uncertainties. These forward-looking statements and other forward-looking statements made by the Company or its representatives are based on a number of assumptions. The words "believes," "expects," "anticipates," "intends," "estimates" or other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking 15 16 statements as they involve risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in this section and elsewhere in, or incorporated by reference into, this Form 10-K. These factors include, but are not limited to, the risks set forth below. The forward-looking statements represent the Company's judgment and expectations as of the date of this Report. The Company assumes no obligation to update any such forward-looking statements. Alteon may not be able to obtain sufficient additional funding to meet its needs or to allow it to continue the research, product development, pre-clinical testing and clinical trials of its product candidates. Alteon anticipates that its existing available cash and cash equivalents and short-term investments will be adequate to satisfy its working capital requirements for its current and planned operations into 2001. Alteon will require substantial new funding in order to continue the research, product development, pre-clinical testing and clinical trials of its product candidates, including ALT-711 and pimagedine. The Company will also require additional funding for operating expenses, the pursuit of regulatory approvals for its product candidates and the establishment of marketing and sales capabilities. The Company's future capital requirements will depend on many factors, including continued scientific progress in its research and development programs, the size and complexity of these programs, progress with pre-clinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the establishment of additional collaborative arrangements, the cost of manufacturing arrangements, commercialization activities, and the cost of product in-licensing and strategic acquisitions, if any. There can be no assurance that the Company's cash reserves and other liquid assets, including funding that may be received from the Company's corporate partners and equity sales and interest income earned thereon, will be adequate to satisfy its capital and operating requirements. Alteon intends to seek funding initially through arrangements with corporate collaborators. It may in the future seek funding through public or private sales of the Company's securities, including equity securities, when and if conditions permit. In addition, the Company may pursue opportunities to obtain debt financing, including capital leases, in the future. There can be no assurance, however, that additional funding will be available on reasonable terms, if at all. Any additional equity financing would be dilutive to the Company's stockholders. If adequate funds are not available, Alteon may be required to curtail significantly or eliminate one or more of its research and development programs. If Alteon obtains funds through arrangements with collaborative partners or others, it may be required to relinquish rights to certain of its technologies or product candidates. Alteon may not successfully develop or derive revenues from any products. All of the Company's product candidates are in the research or development stage, and all revenues to date have been generated from collaborative research agreements and financing activities, or interest income earned on these funds. No revenues have been generated from product sales. There can be no assurance that product revenues can be realized on a timely basis, if at all. Alteon has not yet requested or received regulatory approval for any product from the FDA or any other regulatory body. Before obtaining regulatory approvals for the commercial sale of any of its products under development, the Company must demonstrate through pre-clinical studies and clinical trials that the product is safe and effective for use in each target indication. The results from pre-clinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that any clinical trials undertaken by the Company will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or will result in marketable products. There can be no assurance that Alteon will succeed in the development and marketing of any therapeutic or diagnostic product. To achieve profitable operations, the Company must, alone or with others, successfully identify, develop, introduce and market proprietary products. Such products will require significant additional investment, development and pre-clinical and clinical testing prior to potential regulatory approval and commercialization. The development of new pharmaceutical products is highly uncertain and subject to a number of significant risks. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. Potential products may be found ineffective or cause harmful side effects during pre-clinical 16 17 testing or clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to achieve market acceptance or be precluded from commercialization by proprietary rights of third parties. There can be no assurance that the Company will undertake additional clinical trials or that the Company's product development efforts will be successfully completed, that required regulatory approvals can be obtained or that any products, if introduced, will be successfully marketed or achieve customer acceptance. Commercial availability of any Alteon products, including ALT-711 and pimagedine, is not expected for a number of years, if at all. Alteon may never generate profits. At December 31, 1999, the Company had an accumulated deficit of $121,496,049. The Company anticipates that it will incur substantial, potentially greater losses in the future. There can be no assurance that the Company's products under development will be successfully developed or that its products, if successfully developed, will generate revenues sufficient to enable the Company to earn a profit. Alteon expects to incur substantial additional operating expenses over the next several years as its research, development and clinical trial activities increase. Alteon does not expect to generate revenues from the sale of products, if any, for a number of years. The Company's ability to achieve profitability depends in part on its ability to enter into agreements for product development, obtain regulatory approval for its products and develop the capacity, or enter into agreements, for the manufacture, marketing and sale of any products. There can be no assurance that Alteon will obtain required regulatory approvals, or successfully develop, manufacture, commercialize and market product candidates or that the Company will ever achieve product revenues or profitability. The Company may not be able to form and maintain collaborative relationships which its business strategy requires. The Company's strategy for development and commercialization of certain of its products is dependent upon entering into various arrangements with research collaborators, corporate partners and others and upon the subsequent success of these third parties in performing their obligations. Alteon has established collaborative arrangements with Yamanouchi, Roche, IDEXX and Gamida with respect to the development of drug therapies and diagnostics utilizing the Company's scientific platforms. Alteon is seeking to establish new collaborative relationships to provide the funding necessary for continuation of its product development but there can be no assurance that such effort will be successful. The Company will, in some cases, be dependent upon these outside partners to conduct pre-clinical testing and clinical trials and to provide adequate funding for the Company's development programs. Under certain of these arrangements, the Company's corporate partners may have all or a significant portion of the development and regulatory approval responsibilities. Failure of the corporate partners to develop marketable products or to gain the appropriate regulatory approvals on a timely basis, if at all, would have a material adverse effect on the Company's business, financial condition and results of operations. In most cases, the Company cannot control the amount and timing of resources that its corporate partners devote to the Company's programs or potential products. If any of the Company's corporate partners breach or terminate their agreements with the Company or otherwise fail to conduct their collaborative activities in a timely manner, the pre-clinical or clinical development or commercialization of product candidates or research programs will be delayed, and the Company will be required to devote additional resources to product development and commercialization or terminate certain development programs. The termination of collaborative arrangements would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that disputes will not arise in the future with respect to the ownership of rights to any technology developed with third-parties. These and other possible disagreements between collaborators and the Company could lead to delays in the collaborative research, development or commercialization of certain product candidates or could require or result in litigation or arbitration, which would be time-consuming and expensive and would have a material adverse effect on the Company's business, financial condition and results of operations. Alteon's corporate partners may develop, either alone or with others, products that compete with the development and marketing of the Company's products. Competing products, either developed by the corporate partners or to which the corporate partners have rights, may result in their withdrawal of support with respect to all 17 18 or a portion of the Company's technology, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company may not be able to protect the proprietary rights that are critical to its success. The Company's success will depend on its ability to obtain patent protection for its products, preserve its trade secrets, prevent third parties from infringing upon its proprietary rights and operate without infringing upon the proprietary rights of others, both in the United States and abroad. The degree of patent protection afforded to pharmaceutical inventions is uncertain and the Company's potential products are subject to this uncertainty. Pimagedine is not a novel compound and is not covered by a composition-of-matter patent. The patents covering pimagedine are use patents containing claims covering therapeutic indications and the use of specific compounds and classes of compounds to inhibit A.G.E. formation. Use patents may afford a lesser degree of protection in certain foreign countries due to their patent laws. Competitors may develop and commercialize pimagedine or pimagedine-like products for indications outside of the protection provided by the claims of the Company's use patents. Physicians, pharmacies and wholesalers could then substitute for the Company's pimagedine products. Substitution for the Company's pimagedine products would have a material adverse effect on the Company's business, financial condition and results of operations. ALT-711 is a novel compound protected by a composition-of-matter patent, and the Company has several patent applications pending to protect proprietary technology and potential products. There can be no assurance, however, that these patents will provide any significant protection of the Company's technology or products, or that the Company will enjoy any patent protection beyond the expiration dates of its currently issued patents. There can be no assurance that competitors will not develop competitive products to pimagedine and/or ALT-711 outside the protection that may be afforded by the claims of the Company's patents. The Company is aware that other parties have been issued patents and have filed patent applications in the United States and foreign countries with respect to other agents which impact A.G.E. or A.G.E. cross-link formation. The Company also relies upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to maintain, develop and expand its competitive position, which it seeks to protect, in part, by confidentiality agreements with its corporate partners, collaborators, employees and consultants. The Company also has invention or patent assignment agreements with its employees and certain, but not all, corporate partners and consultants. There can be no assurance that relevant inventions will not be developed by a person not bound by an invention assignment agreement. There can be no assurance that binding agreements will not be breached, that the Company would have adequate remedies for such breach, or that the Company's trade secrets will not otherwise become known to or be independently discovered by competitors. The Company cannot be certain that regulatory approvals will be obtained for its products. Alteon's research, pre-clinical testing and clinical trials of its product candidates are, and the manufacturing and marketing of its products will be, subject to extensive and rigorous regulation by numerous governmental authorities in the United States and in other countries where the Company intends to test and market its product candidates. Prior to marketing, any product developed by the Company must undergo an extensive regulatory approval process. This regulatory process, which includes pre-clinical testing and clinical trials, and may include post-marketing surveillance, of each compound to establish its safety and efficacy, can take many years and can require the expenditure of substantial resources. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, delays or rejections may be encountered based upon changes in FDA policy for drug approval during the period of product development and FDA regulatory review of each submitted NDA. Similar delays may also be encountered in foreign countries. There can be no assurance that regulatory approval will be obtained for any drugs developed by the Company. Moreover, regulatory approval may entail limitations on the indicated uses of the drug. Further, even if regulatory approval is obtained, a marketed drug and its manufacturer are subject to continuing review and discovery of previously unknown problems with a product or manufacturer which may have adverse effects on the 18 19 Company's business, financial condition and results of operations, including withdrawal of the product from the market. Violations of regulatory requirements at any stage, including pre-clinical testing and clinical trials, the approval process or post-approval, may result in various adverse consequences including the FDA's delay in approving, or its refusal to approve, a product withdrawal of an approved product from the market and the imposition of criminal penalties against the manufacturer and NDA holder. None of the Company's products have been approved for commercialization in the United States or elsewhere. No assurance can be given that the Company will be able to obtain FDA approval for any products. Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested will delay or preclude the Company or its licensees or marketing partners from marketing the Company's products or limit the commercial use of such products and will have a material adverse effect on the Company's business, financial condition and results of operations. There is intense competition for cures and therapies for diabetes, cardiovascular diseases and the other conditions for which the Company seeks to develop products. The Company is engaged in pharmaceutical fields characterized by extensive research efforts and rapid technological progress. Many established pharmaceutical and biotechnology companies with resources greater than those of the Company are attempting to develop products that would be competitive with the Company's products. Other companies may succeed in developing products that are safer, more efficacious or less costly than any that may be developed by Alteon and may also be more successful than Alteon in production and marketing. Rapid technological development by others may result in the Company's products becoming obsolete before the Company recovers a significant portion of the research, development or commercialization expenses incurred with respect to those products. Certain technologies under development by other pharmaceutical companies could result in a cure for diabetes or the reduction of the incidence of diabetes and its complications. For example, a number of companies are investigating islet cell transplantation as a possible cure for Type I diabetes. Results of a study conducted by the National Institutes of Health, known as the DCCT, published in 1993, showed that tight glucose control reduced the incidence of diabetic complications. Numerous companies are pursuing methods to control glucose levels. In addition, several large companies have initiated or expanded research, development and licensing efforts to build a diabetic pharmaceutical franchise focusing on diabetic nephropathy, neuropathy, retinopathy and related conditions. An example of this is research seeking anti-angiogenesis drugs for the potential treatment of diabetic retinopathy. Furthermore, the Company is aware of several pharmaceutical companies that are developing and marketing thiazolidinedione derivatives ("glitazones") for the treatment of Type II diabetes. It is possible that one or more of these initiatives may reduce or eliminate the market for some of the Company's products. In addition, a broad range of cardiovascular drugs is under development by many pharmaceutical and biotechnology companies. It is possible that one or more of these initiatives may reduce or eliminate the market for some of the Company's products. Efforts to reduce healthcare costs may affect our operations. The Company's business, financial condition and results of operations may be materially adversely affected by the continuing efforts of government and third-party payors to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing and/or profitability of prescription pharmaceuticals are subject to government control. In the United States, the Company expects that there will continue to be federal and state initiatives to control and/or reduce pharmaceutical expenditures. In addition, increasing emphasis on managed care in the United States will continue to put pressure on pharmaceutical pricing. Cost control initiatives could decrease the price that the Company receives for any products it may develop and sell in the future and have a material adverse effect on the Company's business, financial condition and results of operations. Further, to the extent that cost control initiatives have a material adverse effect on the Company's corporate partners, the Company's ability to commercialize its products may be adversely affected. The Company's ability to commercialize pharmaceutical products may depend in part on the extent to which reimbursement for the products will be available from government health administration authorities, private health insurers and other third-party payors. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third-party payors, including Medicare, are increasingly challenging the prices 19 20 charged for medical products and services. There can be no assurance that any third-party insurance coverage will be available to patients for any products developed by the Company. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing in some cases to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. If adequate coverage and reimbursement levels are not provided by government and other third-party payors for the Company's products, the market acceptance of these products would be adversely affected. Alteon has no experience in marketing or sales and may have to rely on others to market and sell any products the Company may development. For certain of its products, the Company has licensed exclusive marketing rights to its corporate partners or formed collaborative marketing arrangements within specified territories in return for royalties to be received on sales, a share of profits or beneficial transfer pricing. These agreements are terminable at the discretion of the Company's partners upon as little as 90 days' prior written notice. If the licensee or marketing partner terminates an agreement or fails to market a product successfully, the Company's business, financial condition and results of operations may be adversely affected. Alteon currently has no experience in marketing or selling pharmaceutical products. In order to achieve commercial success for any approved product, Alteon must either develop a marketing and sales force or, where appropriate or permissible, enter into arrangements with third parties to market and sell its products. There can be no assurance that Alteon will develop successfully marketing and sales experience or that it will be able to enter into marketing and sales agreements with others on acceptable terms, if at all, or that any such arrangements, if entered into, will not be terminated. If the Company develops its own marketing and sales capability, it will compete with other companies that currently have experienced, well funded and larger marketing and sales operations. To the extent that the Company enters into co-promotion or other sales and marketing arrangements with other companies, any revenues to be received by Alteon will be dependent on the efforts of others, and there can be no assurance that their efforts will be successful. Alteon has no experience in manufacturing products and may have to rely on others to manufacture any products the Company may develop. The Company has no experience in manufacturing products for commercial purposes and does not have manufacturing facilities. Consequently, the Company is dependent on contract manufacturers for the production of products for development and commercial purposes. The manufacture of the Company's products for clinical trials and commercial purposes is subject to cGMP regulations promulgated by the FDA. The Company has contracted or will be contracting with third parties for the manufacture and distribution of ALT-711 and pimagedine. However, in the event that the Company is unable to obtain or retain third-party manufacturing for its products, it will not be able to proceed with clinical trials or commercialize such products as planned. There can be no assurance that the Company will be able to enter into agreements for the manufacture of future products with manufacturers whose facilities and procedures comply with cGMP and other regulatory requirements. The Company's current dependence upon others for the manufacture of its products may adversely affect its profit margin, if any, on the sale of future products and the Company's ability to develop and deliver such products on a timely and competitive basis. Use of any products the Company develops may result in liability claims. The use of any of the Company's potential products in clinical trials and the sale of any approved products, including the testing and commercialization of pimagedine or ALT-711, may expose the Company to liability claims resulting from the use of products or product candidates. These claims might be made directly by consumers, pharmaceutical companies or others. The Company maintains product liability insurance coverage for claims arising from the use of its products in clinical trials. However no assurance can be given that the Company will be able to maintain insurance or, if maintained, that insurance can be acquired at a reasonable cost or in sufficient amounts to protect the Company against losses due to liability that could have a material adverse effect on the Company's business, financial conditions and results of operations. There can be no assurance that the Company will be able to obtain commercially reasonable product liability insurance for any product approved for marketing in 20 21 the future or that insurance coverage and the resources of the Company would be sufficient to satisfy any liability resulting from product liability claims. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on its business, financial condition and results of operations. Alteon may be unable to attract and retain the key personnel on whom its success depends. The Company is highly dependent on the principal members of its management and scientific staff. The loss of services of any of these personnel could impede the achievement of the Company's development objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future will also be critical to the Company's success. There can be no assurance that the Company will be able to attract and retain personnel on acceptable terms given the competition between pharmaceutical and health care companies, universities and non-profit research institutions for experienced scientists. In addition, the Company relies on consultants to assist the Company in formulating its research and development strategy. All of Alteon's consultants are employed outside the Company and may have commitments to or consulting or advisory contracts with other entities that may limit their availability to the Company. Alteon's operations involve a risk of injury or damage from hazardous materials. The Company's research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, the Company could be held liable for any damages or fines that result. Such liability could have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 2. PROPERTIES. The Company leases a 37,000 square foot building in Ramsey, New Jersey, which contains its executive and administrative offices and research laboratory space. The lease, which commenced on November 1, 1993, has a 10-year term. In addition, the lease has two five-year renewal options. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock - was traded on the Nasdaq Market until December 10, 1999, under the symbol "ALTN." Since December 13, 1999, the Company's Common Stock has been traded on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol ALTN. The following table sets forth, for the calendar periods indicated, the range of high and low sale prices for the Common Stock of the Company on the Nasdaq Market or the OTCBB, as applicable:
High Low ---- --- 1998 ---- First Quarter $13.125 $4.563 Second Quarter 5.500 3.250 Third Quarter 5.000 2.188 Fourth Quarter 5.500 0.531
21 22
High Low ---- --- 1999 ---- First Quarter $1.6875 $0.6875 Second Quarter 1.0625 0.6250 Third Quarter 1.4375 0.5625 Fourth Quarter 1.3438 0.5000
As of March 17, 2000, there were 340 holders of the Common Stock, with beneficial stockholders in excess of 400. On March 17, 2000, the last sale price reported on the OTCBB for the Common Stock was $4.50 per share. Effective with the close of business on December 10, 1999, the Company's Common Stock was delisted from the Nasdaq Stock Market because it did not satisfy the $1.00 per share minimum bid price required for listing on the Nasdaq Stock Market. Effective December 13, 1999, the Common Stock has been traded on the OTCBB. The delisting from the Nasdaq Stock Market could have a material adverse effect on the Company's ability to raise capital on favorable terms or at all. The Company has neither paid nor declared dividends on its Common Stock since its inception and does not plan to pay dividends in the foreseeable future. Any earnings that the Company may realize will be returned to finance the growth of the Company. The market prices for securities of biotechnology and pharmaceutical companies, including Alteon, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new therapeutic products by the Company or others, clinical trial results, developments concerning agreements with collaborators, governmental regulation, developments in patent or other proprietary rights, public concern as to safety of drugs developed by the Company or others, future sales of substantial amounts of Common Stock by existing stockholders and general market conditions can have an adverse effect on the market price of the Common Stock. 22 23 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth below should be read in conjunction with the audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected financial data for the five years ended December 31, 1999, has been derived from the audited financial statements of the Company.
YEARS ENDED DECEMBER 31, 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues: Investment income ................... $ 1,888 $ 2,295 $ 1,510 $ 1,321 $ 835 Other income ........................ -- -- -- -- 600 -------- -------- -------- -------- -------- Total revenues .................... 1,888 2,295 1,510 1,321 1,435 Expenses: Research and development ............... 10,004 17,494 23,264 24,592 10,598 Elimination of previously accrued loss contingency .................. -- -- -- (1,771) -- General and administrative .......... 3,699 3,517 3,633 4,842 4,357 Interest ............................ 68 47 25 4 -- -------- -------- -------- -------- -------- Total expenses .................... 13,771 21,058 26,922 27,667 14,955 -------- -------- -------- -------- -------- Net loss before benefit for income taxes (11,883) (18,763) (25,412) (26,346) (13,520) Income tax benefit ..................... -- -- -- -- 2,588 -------- -------- -------- -------- -------- Net loss ............................... (11,883) (18,763) (25,412) (26,346) (10,932) Preferred stock dividends and discount amortization ........... -- -- 1,091 2,207 2,707 -------- -------- -------- -------- -------- Net loss applicable to common stockholders ........................ $(11,883) $(18,763) $(26,503) $(28,553) $(13,639) ======== ======== ======== ======== ======== Basic loss per share to common stockholders ........................ $ (0.90) $ (1.20) $ (1.60) $ (1.57) $ (0.72) ======== ======== ======== ======== ======== Diluted loss per share to common stockholders ........................ $ (0.90) $ (1.20) $ (1.60) $ (1.57) $ (0.72) ======== ======== ======== ======== ======== Weighted average common shares used in computing basic and diluted loss per share ........................... 13,170 15,640 16,566 18,211 19,055 ======== ======== ======== ======== ========
DECEMBER 31, 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (in thousands) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments ......... $ 45,197 $ 34,500 $ 28,974 $ 24,132 $ 12,370 Working capital ................... 44,433 26,542 22,390 20,093 10,425 Total assets ...................... 52,216 40,139 33,508 27,652 15,021 Long-term capital lease obligations 467 162 -- -- -- Accumulated deficit ............... (34,037) (52,800) (79,303) (107,857) (121,496) Stockholders' equity .............. 49,716 31,371 26,455 23,338 12,827
23 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Since its inception in October 1986, Alteon has devoted substantially all of its resources to its research, drug discovery and development programs. To date, Alteon has not generated any revenues from the sale of products and does not expect to generate any such revenues for a number of years, if at all. Alteon has incurred an accumulated deficit of $121,496,049 as of December 31, 1999, and expects to incur operating losses, potentially greater than losses in prior years, for a number of years. Alteon has financed its operations through proceeds from an initial public offering of Common Stock in 1991, a follow-on offering of Common Stock completed in 1995, and private placements of common and preferred equity securities, revenue from present and former collaborative relationships, reimbursement of certain of Alteon's research and development expenses by its collaborative partners, investment income earned on cash balances and short-term investments and the sale of its New Jersey State Net Operating Losses ("NOLs") carryforwards. In December 1997, Alteon and Genentech entered into a stock purchase agreement and a development collaboration and license agreement providing for the development and marketing of pimagedine and second-generation A.G.E.-Formation Inhibitors. Pursuant to the stock purchase agreement Genentech purchased Common Stock, Series G Preferred Stock and Series H Preferred Stock for an aggregate purchase price of $37,544,000. Genentech's obligations to purchase shares of Alteon's stock terminated December 31, 1998. Pursuant to a letter agreement dated February 11, 1999, between Alteon and Genentech, the development collaboration and license agreement terminated effective June 30, 1999. Although the Company anticipates increased expenditures in research and development expenses as it develops products and conducts its clinical trials, a portion of such development expenses are expected to be reimbursed by Alteon's collaborative partners. Yamanouchi funded pre-clinical studies, including most toxicology studies, on pimagedine. Gamida conducted, at its own expense, a Phase II clinical trial in Israel to evaluate pimagedine in patients with diabetes and elevated serum cholesterol levels, which was completed in April 1997. Yamanouchi and Gamida do not fund Alteon's research or early product development expenses. In August 1999, Alteon and Taisho Pharmaceutical Co., Ltd. ("Taisho") entered into an agreement under which Taisho was granted an exclusive option through December 31, 1999, to acquire a license to Alteon's lead A.G.E. Crosslink Breaker, ALT-711, for Japan, South Korea, Taiwan and China for a non-refundable option fee of $600,000. This amount is reflected in "Other income" in the statement of operations. The option expired on December 31, 1999. In December 1999, Alteon sold $27.7 million of its gross state net operating loss carryforwards and $645,000 of its state research and development tax credit carryforwards under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the "Program"). The Program allowed qualified technology and biotechnology businesses in New Jersey to sell unused amounts of net operating loss carryforwards and defined research and development tax credits for cash. The total tax value sold was $3,137,000 and the total proceeds received by the Company were $2,588,000, which was recorded as a tax benefit in the statement of operations. The Company's business is subject to significant risks including, but not limited to, (i) its ability to obtain funding, (ii) the risks inherent in its research and development efforts, including clinical trials, (iii) uncertainties associated both with obtaining and enforcing its patents and with the patent rights of others, (iv) the lengthy, expensive and uncertain process of seeking regulatory approvals, (v) uncertainties regarding government reforms and product pricing and reimbursement levels, (vi) technological change and competition, (vii) manufacturing uncertainties, and (viii) dependence on collaborative partners and other third parties. Even if the Company's product candidates appear promising at an early stage of development, they may not reach the market for numerous reasons. Such reasons include the possibilities that the products will prove ineffective or unsafe during clinical trials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties. 24 25 RESULTS OF OPERATIONS Years Ended December 1999, 1998, 1997 Revenues Total revenues for 1999, 1998 and 1997 were $1,435,000, $1,321,000 and $1,510,000, respectively. Revenues in 1999, 1998 and 1997 were derived from interest earned on cash and cash equivalents and short-term investments and other income. The increase in revenues in 1999 over 1998 was attributed to other income from the option agreement with a potential corporate partner, offset by the decrease in investment income due to a decrease in cash and cash equivalents and short-term investment balances during most of 1999. Operating Expenses The Company's total expenses decreased to $14,955,000 in 1999, from $27,667,000 in 1998 and $26,922,000 in 1997 and consisted primarily of research and development expenses Research and development expenses, net of reimbursements from its collaborative partners, were $10,598,000 in 1999, $24,592,000 in 1998, and $23,264,000 in 1997. Research and development expenses decreased in 1999 from 1998 by $13,994,000, or 56.9%. This decrease was primarily due to decreased expenses related to the closure of the ACTION I and ESRD trials. Research and development expenses increased in 1998 from 1997 by $1,328,000, or 5.7%, due to the increased expenses related to the A.G.E. Crosslink Breaker program including Phase I clinical trial costs and the expansion of the ESRD trial offset by a decrease in the ACTION trial costs due to the termination of the ACTION II trial. General and administrative expenses were $4,357,000 in 1999 as compared to $4,842,000 in 1998 and $3,633,000 in 1997. The decrease in 1999 over 1998 was due to decreased personnel related and investor relations costs and patent fees offset by increased consulting expenditures. Interest expense was $0 in 1999, $4,000 in 1998 and $25,000 in 1997. The decrease in interest expense was primarily due to the Company's exercise of its purchase option in June 1998 on its capital lease arrangement, which commenced in June 1994 for leasehold improvements on the Company's headquarters and research facility. Net Loss At December 31, 1999, the Company had available Federal net operating tax loss carryforwards ("NOLs"), which expire in various amounts from the years 2006 through 2014, of approximately $111.8 million for income tax purposes and State net operating loss carryforwards, which expire in the years 2000 through 2007, of approximately $81 million. In addition, the Company had Federal research and development credit carryforwards of approximately $4.5 million and State research and development tax credit carryforwards of approximately $2.5 million. The Company had net losses of $10,932,000 in 1999, $26,346,000 in 1998 and $25,412,000 in 1997. The Company does not believe that inflation has had a material impact on the results of its operations. LIQUIDITY AND CAPITAL RESOURCES Alteon had cash and cash equivalents and short-term investments at December 31, 1999, of $12,370,000 compared to $24,132,000 at December 31, 1998. This is a decrease in cash and cash equivalents and short-term investments for the twelve months ended December 31, 1999, of $11,762,000. This consisted of $11,770,000 of cash used in operations consisting primarily of research and development expenses, personnel and related costs and facility expenses. Also included in the cash used in operations was $2,588,000 from the sale of the Company's NOLs and $600,000 of other income from the option agreement with Taisho. Capital expenditures consisted of $158,000. This was offset by $166,000 of financing activities primarily related to the sale of Common Stock. As of December 31, 1999, Alteon had invested $7,520,000 in capital equipment and leasehold improvements. In December 1999, Alteon sold $2,588,210 of its NOLs under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the "Program"). The Program allowed qualified technology and 25 26 biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits for cash. In August 1999, Alteon and Taisho entered into an agreement under which Taisho was granted an exclusive option through December 31, 1999, to acquire a license to Alteon's lead A.G.E. Crosslink Breaker, ALT-711, for Japan, South Korea, Taiwan and China for a non-refundable option fee of $600,000. This amount is reflected in "Other income" in the Statement of Operations. The option expired on December 31, 1999. The Company's research and development expenses, to date, have been funded primarily by research and development collaborative arrangements and sales of equity securities. In programs that are subject to joint development agreements, the Company expects to incur substantial additional research and development costs, including costs related to drug discovery, pre-clinical research and clinical trials. The Company anticipates that it will be able to offset a portion of its research and development expenses and its clinical development expenses with funding from its collaborative partners. Alteon anticipates that its existing available cash and cash equivalents and short-term investments will be adequate to satisfy its working capital requirements for its current and planned operations into 2001. In December 1997, Alteon and Genentech entered into a stock purchase agreement and a development collaboration and license agreement providing for the development and marketing of pimagedine and second-generation A.G.E.-Formation Inhibitors. Pursuant to the stock purchase agreement Genentech purchased Common Stock, Series G Preferred Stock and Series H Preferred Stock for an aggregate purchase price of $37,544,000. Genentech's obligations to purchase shares of Alteon's stock terminated December 31, 1998. Pursuant to a letter agreement dated February 11, 1999, between Alteon and Genentech, the development collaboration and license agreement terminated effective June 30, 1999. The amount of the Company's future capital requirements will depend on numerous factors, including the progress of the Company's research and development programs, the conduct of pre-clinical tests and clinical trials, the development of regulatory submissions, the costs associated with protecting patents and other proprietary rights, the development of marketing and sales capabilities and the availability of third party funding. Because of the Company's long-term capital requirements, it may seek access to the public or private equity markets whenever conditions are favorable. The Company may also seek additional funding through corporate collaborations and other financing vehicles, potentially including off-balance sheet financing through limited partnerships or corporations. There can be no assurance that such funding will be available at all or on terms acceptable to the Company. If adequate funds are not available, the Company may be required to curtail significantly one or more of its research or development programs. If the Company obtains funds through arrangements with collaborative partners or others it may be required to relinquish rights to certain of its technologies or product candidates. Alteon's corporate partners may develop, either alone or with others, products that compete with the development and marketing of the Company's products. Competing products, either developed by the corporate partners or to which the corporate partners have rights, may result in their withdrawal of support with respect to all or a portion of the Company's technology, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's current priorities are the development of ALT-711, its lead A.G.E. Crosslink Breaker candidate, and the continued development of pimagedine. The Company is focusing its resources on the development of ALT-711, and is actively seeking one or more corporate partners to help fund further development. After consultation with the FDA, the Company also has decided to continue the development of pimagedine and is actively seeking one or more corporate partners to provide necessary funding. The Company believes that additional development of these compounds and other product candidates will require the Company to find sources of funding. Effective with the close of business on December 10, 1999, the Company's Common Stock was delisted from the Nasdaq Stock Market because it did not satisfy the $1.00 per share minimum bid price required for listing 26 27 on the Nasdaq Stock Market. Effective December 13, 1999, the Common Stock has been traded on the OTCBB. The delisting from the Nasdaq Stock Market could have a material adverse effect on the Company's ability to raise capital on favorable terms. The Company initiated a program to assess the risks of year 2000 compliance, remediate all non-compliant systems and to assess the readiness of key third parties. The critical aspects of the year 2000 readiness program were completed in the third quarter of 1999. The Company has not experienced any significant business disruptions related to the transition to the year 2000. Total costs to address the year 2000 issue were not material to the Company's financial position, results of operations or cash flows. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment in marketable securities. The Company does not use derivative financial instruments in its investments. The Company's investments consist primarily of debt instruments of the U.S. government, government agencies, financial institutions and corporations with strong credit ratings. The table below presents principal amounts and related weighted average interest rates expected by maturity date for the Company's investment portfolio.
2000 2001 2002 2003 2004 Thereafter ---- ---- ---- ---- ---- ---------- Assets ------- Cash equivalents: Fixed rate $5,335,529 --- --- --- --- --- Average interest rate 5.02% --- --- --- --- --- Short-term investments: Fixed rate $7,034,258 --- --- --- --- --- Average interest rate 5.82% --- --- --- --- --- Total investment securities: $12,369,787 --- --- --- --- --- Average interest rate 5.42% --- --- --- --- ---
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list of the financial statements filed herewith is found at "Index to Financial Statements and Schedules" on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. For information concerning this item, see the information under "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement to be filed with respect to the Annual Meeting of Stockholders to be held on June 12, 2000, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. For information concerning this item, see the information under "Executive Compensation" in the Company's Proxy Statement to be filed with respect to the Annual Meeting of Stockholders to be held on June 12, 2000, which information is incorporated herein by reference. 27 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. For information concerning this item, see the information under "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement to be filed with respect to the Annual Meeting of Stockholders to be held on June 12, 2000, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For information concerning this item, see the information under "Certain Relationships and Related Transactions" in the Company's Proxy Statement to be filed with respect to the Annual Meeting of Stockholders to be held on June 12, 2000, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements. The Company's audited financial statements, financial statement schedules and the Report of Independent Public Accountants are appended to this Annual Report on Form 10-K. Reference is made to the Index to Financial Statements and Schedules on page F-1. (b) Reports on Form 8-K. On January 7, 2000, the Company filed a current report on Form 8-K, dated January 5, 2000, regarding the Company's sale of net operating loss carryforwards under the State of New Jersey's Technology Business Tax Certificate Transfer Program. On January 7, 2000 the Company filed a current report on Form 8-K, dated December 13, 1999, announcing that it has been notified that the its common stock had been delisted from trading on the Nasdaq SmallCap Market. On November 23, 1999, the Company filed a current report on Form 8-K, dated November 23, 1999, announcing that it had been approved to sell net operating loss carryforwards under the State of New Jersey's Technology Business Tax Certificate Transfer Program. On November 16, 1999, the Company filed a current report on Form 8-K, dated November 11, 1999, announcing the financial results for the third quarter ended September 30, 1999. On November 16, 1999, the Company filed a current report on Form 8-K, dated November 8, 1999, announcing that the first data on the Phase III ACTION I trial of pimagedine in Type 1 diabetic patients with overt nephropathy has been published and presented at the American Society of Nephrology ("ASN") 32nd Annual Meeting and Scientific Exposition in Miami Beach, Florida. October 15, 1999, the Company filed a current report on Form 8-K, dated September 27, 1999, announcing that it ha been notified by the Nasdaq Listing Qualifications Panel that the Company had been granted a temporary exception from the $1.00 per share minimum bid requirement and will continue to be listed with Nasdaq on the Nasdaq SmallCap Market. (c) Exhibits. The exhibits required to be filed are listed on the Index to Exhibits attached hereto, which is incorporated herein by reference. 28 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 29th day of March 2000. ALTEON INC. By:/s/ Kenneth I. Moch ---------------------- Kenneth I. Moch President and Chief Executive Officer 29 30 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Mark Novitch Chairman of the Board March 29, 2000 - ---------------- -------------- Mark Novitch /s/ Kenneth I. Moch President and Chief Executive Officer March 29, 2000 - ------------------- (principal executive officer) -------------- Kenneth I. Moch /s/ Elizabeth O'Dell Vice President, Finance and Administration, March 29, 2000 - -------------------- Secretary and Treasurer (principal finance and -------------- Elizabeth O'Dell accounting officer) /s/ Edwin Bransome, Jr. M.D. Director March 29, 2000 - ---------------------------- -------------- Edwin Bransome, Jr. M.D. /s/ Marilyn G. Breslow Director March 29, 2000 - ---------------------- -------------- Marilyn G. Breslow /s/ Alan J. Dalby Director March 29, 2000 - ----------------- -------------- Alan J. Dalby /s/ David McCurdy Director March 29, 2000 - ----------------- -------------- David McCurdy /s/ George M. Naimark, Ph.D. Director March 29, 2000 - ---------------------------- -------------- George M. Naimark, Ph.D.
30 31 EXHIBIT INDEX Exhibit No. Description of Exhibit --- ---------------------- 3.1 Restated Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-Q filed on November 10, 1999). 3.2 Certificate of the Voting Powers, Designations, Preference and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations or Restrictions of Series F Preferred Stock of the Company. (Incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on August 4, 1995). 3.3 Certificate of Retirement of Alteon Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-Q filed on November 10, 1999). 3.4 Certificate of Designations of Series G Preferred Stock of Alteon Inc. (Incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.5 Certificate of Amendment of Certificate of Designations of Series G Preferred Stock of Alteon Inc. (Incorporated by reference to Exhibit 3.4 to the Company's Report on Form 10-Q filed on August 14, 1998). 3.6 Certificate of Designations of Series H Preferred Stock of Alteon Inc. (Incorporated by reference to Exhibit 3.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.7 Amended Certificate of Designations of Series H Preferred Stock of Alteon Inc. (Incorporated by reference to Exhibit 3.6 to the Company's Report on Form 10-Q filed on August 14, 1998). 3.8 By-laws, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on April 22, 1996). 4.1 Stockholders' Rights Agreement dated as of July 27, 1995 between Alteon Inc. and Registrar and Transfer Company, as Rights Agent. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on August 4, 1995). 4.2 Amendment to Stockholders' Rights Agreement dated as of April 24, 1997 between Alteon Inc. and Registrar and Transfer Company, as Rights Agent. (Incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K filed on May 9, 1997). 4.3 Registration Rights Agreement dated as of April 24, 1997 between Alteon Inc. and the investors named on the signature page thereof. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on May 9, 1997). 4.4 Form of Common Stock Purchase Warrant. (Incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on May 9, 1997). 4.5 Amendment to Stockholders' Rights Agreement dated as of December 1, 1997 between Alteon Inc. and Registrar and Transfer Company, as Rights Agent. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on December 10, 1997). 10.1+ Amended and Restated 1987 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.2+ Amended 1995 Stock Option Plan. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q filed May 12, 1999). E-1 32 10.3 Form of Employee's or Consultant's Invention Assignment, Confidential Information and Non-Competition Agreement executed by all key employees and consultants as employed or retained from time to time. (Incorporated by Reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File Number 33-42574) which became effective on November 1, 1991). 10.4 Amendment and Assignment of Research and Option Agreement dated as of September 25, 1987 among Telos Development Corporation ("Telos"), The Rockefeller University ("The Rockefeller"), the Company and Anthony Cerami. (Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File Number 33-42574) which became effective on November 1, 1991). 10.5 License Agreement dated as of September 25, 1987 among Telos, Applied Immune Sciences, Inc., the Company and The Rockefeller as amended by letter agreement dated September 25, 1987 and letter agreement dated August 15, 1991. (Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File Number 33-42574) which became effective on November 1, 1991). 10.6* License Agreement dated as of June 16, 1989 between the Company and Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"). (Incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File Number 33-42574) which became effective on November 1, 1991). 10.7* Research and Development Collaboration Agreement dated as of June 16, 1989 between the Company and Yamanouchi. (Incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File Number 33-42574) which became effective on November 1, 1991). 10.8* Research and License Agreement dated as of September 5, 1991 between the Company and The Picower Institute for Medical Research. (Incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-1 (File Number 33-42574) which became effective on November 1, 1991). 10.9 Amendment dated as of September 17, 1992 to the Research and Development Collaboration Agreement dated as of June 16, 1989, between the Company and Yamanouchi. (Incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 10.10 Lease Agreement dated January 11, 1993 between Ramsey Associates and the Company. (Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 10.11* License Agreement dated as of December 30, 1994 between the Company and Corange International Limited. (Incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.12+ Employment Agreement dated as of March 27, 1995 between the Company and Kenneth Cartwright. (Incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13* Research Collaboration and License Agreement dated as of June 2, 1995 between Washington University and the Company. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 11, 1995). 10.14 Distribution Agreement dated September 25, 1995 between the Company and Eryphile BV. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 24, 1995). 10.15+ Employment Agreement dated as of October 21, 1995 between the Company and Elizabeth O'Dell. (Incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). E-2 33 10.16+ Alteon Inc. Change in Control Severance Benefits Plan. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 13, 1996). 10.17+ Letter Agreement dated January 29, 1997 between the Company and Kenneth Cartwright amending Employment Agreement dated March 27, 1995. (Incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.18+ Letter Agreement dated January 29, 1997 between the Company and Elizabeth A. O'Dell amending Employment Agreement dated October 21, 1995. (Incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.19+ Letter Agreement dated March 27, 1997 between the Company and Kenneth Cartwright amending Employment Agreement dated March 27, 1995, as amended. (Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.20 Preferred Stock Investment Agreement dated as of April 24, 1997 between Alteon Inc. and the investors named on the signature page thereof. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 9, 1997). 10.21* License and Supply Agreement dated June 17, 1997 between IDEXX Laboratories, Inc. and Alteon Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q filed on August 13, 1997). 10.22+ Letter Agreement dated October 21, 1997 between the Company and Elizabeth A. O'Dell amending Employment Agreement dated October 21, 1995, as amended. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q filed on November 12, 1997). 10.23 Stock Purchase Agreement dated as of December 1, 1997 between Alteon Inc. and Genentech, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 10, 1997). 10.24* Development Collaboration and License Agreement dated as of December 1, 1997 between Alteon Inc. and Genentech, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on December 10, 1997). 10.25* Letter Agreement dated as of April 1, 1998 between Alteon Inc. and Cerami Consulting Corporation. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q filed on August 14, 1998). 10.26* Letter Agreement dated as of April 1, 1998 between Alteon Inc. and Kenneth S. Warren Laboratories, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q filed on August 14, 1998). 10.27 Amendment to Stock Purchase Agreement and Development Collaboration and License Agreement dated as of April 29, 1998 between the Company and Genentech, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 6, 1998). 10.28+ Amended and Restated Employment Agreement dated as of December 15, 1998 between the Company and Kenneth I. Moch. 10.29 Letter Agreement dated February 11, 1999 between the Company and Genentech, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 19, 1999). 10.30+ Employment Agreement dated as of June 2, 1999 between the Company and F. Kenneth Andrews (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 10-Q filed on November 10, 1999). E-3 34 23.1 Consent of Independent Public Accountants. 27 Financial Data Schedule. - --------------- * Confidentiality has been granted for a portion of this exhibit. + Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) to this Form 10-K. E-4 35 Form 10-K - Item 14(a) (1) Alteon Inc. List of Financial Statements
Page ---- The following financial statements of Alteon Inc. are included in Item 8: Report of independent public accountants - Arthur Andersen LLP .............................. F-2 Financial statements:........................................................................ F-3 Balance sheets as of December 31, 1998 and 1999..................................... F-3 Statements of operations for the years ended December 31, 1997, 1998 and 1999....... F-4 Statements of stockholders' equity for the years ended December 31, 1997, 1998 and 1999 ........................................................................... F-5 Statements of cash flows for the years ended December 31, 1997, 1998 and 1999....... F-6 Notes to financial statements ...................................................... F-7 -- F-14
F-1 36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Alteon Inc.: We have audited the accompanying balance sheets of Alteon Inc. (a Delaware corporation) as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alteon Inc. as of December 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Roseland, New Jersey March 2, 2000 F-2 37 ALTEON INC. BALANCE SHEETS
DECEMBER 31, ----------------------------------- 1998 1999 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................... $ 10,839,586 $ 5,335,529 Short-term investments .................................................. 13,292,666 7,034,258 Other current assets .................................................... 274,145 248,983 ------------- ------------- Total current assets ................................................. 24,406,397 12,618,770 Property and equipment, net ............................................... 2,985,156 2,399,305 Deposits and other assets ................................................. 260,080 2,815 ------------- ------------- Total assets ........................................................... $ 27,651,633 $ 15,020,890 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ........................................................ $ 1,035,417 $ 431,000 Accrued expenses ........................................................ 3,277,858 1,763,202 ------------- ------------- Total liabilities .................................................... 4,313,275 2,194,202 ------------- ------------- CONTINGENCIES AND COMMITMENTS (NOTES 3 AND 6) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 1,993,329 shares authorized and 771 and 839 of Series G, 2,315 and 2,518 of Series H shares issued and outstanding as of December 31, 1998 and 1999, respectively ........ 31 34 Common stock, $.01 par value; 40,000,000 shares authorized and 18,814,740 and 19,189,701 shares issued and outstanding as of December 31, 1998 and 1999, respectively ............ 188,147 191,897 Additional paid-in capital .............................................. 131,005,033 134,129,513 Accumulated deficit ..................................................... (107,856,621) (121,496,049) Accumulated other comprehensive income .................................. 1,768 1,293 ------------- ------------- Total stockholders' equity ........................................... 23,338,358 12,826,688 ------------- ------------- Total liabilities and stockholders' equity ................................ $ 27,651,633 $ 15,020,890 ============= =============
See accompanying notes to financial statements F-3 38 ALTEON INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ Revenues: Investment income ................................ $ 1,510,673 $ 1,320,538 $ 834,661 Other income ..................................... -- -- 600,000 ------------ ------------ ------------ 1,510,673 1,320,538 1,434,661 ------------ ------------ ------------ Expenses: Research and development ......................... 23,264,385 24,591,769 10,598,008 Elimination of previously accrued loss contingency -- (1,770,975) -- General and administrative ....................... 3,632,917 4,842,176 4,356,447 Interest ......................................... 25,061 3,610 -- ------------ ------------ ------------ Total expenses ................................ 26,922,363 27,666,580 14,954,455 ------------ ------------ ------------ Net loss before benefit for income taxes ........... (25,411,690) (26,346,042) (13,519,794) Income tax benefit ................................. -- -- 2,588,210 ------------ ------------ ------------ Net loss ........................................... (25,411,690) (26,346,042) (10,931,584) Preferred stock dividends and discount amortization 1,091,401 2,207,205 2,707,844 ------------ ------------ ------------ Net loss applicable to common stockholders ......... $(26,503,091) $(28,553,247) $(13,639,428) ============ ============ ============ Basic loss per share to common stockholders ........ $ (1.60) $ (1.57) $ (0.72) ============ ============ ============ Diluted loss per share to common stockholders ...... $ (1.60) $ (1.57) $ (0.72) ============ ============ ============ Weighted average common shares used in computing basic and diluted loss per share ..... 16,566,290 18,210,902 19,054,750 ============ ============ ============
See accompanying notes to financial statements F-4 39 ALTEON INC. STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------- --------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ------ ------ ------ ------ ------------- ------------- Balance, December 31, 1996 ......................... -- -- 15,702,825 $ 157,028 $ 84,018,146 $ (52,800,283) Net loss ....................................... -- -- -- -- -- (25,411,690) Change in unrealized losses .................... -- -- -- -- -- -- Comprehensive loss ............................. -- -- -- -- -- -- Issuance of 6%, cumulative preferred stock valued at $1,000 per share, net of transaction costs ................... 5,000 50 -- -- 4,812,277 -- Conversion of all 6%, cumulative preferred stock to common stock ............ (5,000) (50) 1,203,099 12,031 (12,014) -- Preferred stock discount amortization .......... -- -- -- -- 1,065,161 (1,065,161) Issuance of Series G preferred stock valued at $10,000 per share to Genentech, Inc., net of transaction costs ...................................... 939 9 -- -- 9,266,313 -- Issuance of Series G preferred stock dividends .................................. 3 -- -- -- 26,240 (26,240) Issuance of common stock to Genentech, Inc ..... -- -- 837,314 8,373 5,601,627 -- Exercise of employee stock options ............. -- -- 179,081 1,791 119,165 -- Deferred compensation expense in connection with the issuance of non-qualified stock options and options granted to non-employees -- -- -- -- 688,104 -- ------ ------- ----------- --------- ------------ ------------- Balance, December 31, 1997 ......................... 942 9 17,922,319 179,223 105,585,019 (79,303,374) Net loss ....................................... -- -- -- -- -- (26,346,042) Change in unrealized losses .................... -- -- -- -- -- -- Comprehensive loss ............................. -- -- -- -- -- -- Issuance of Series H preferred stock valued at $10,000 per share to Genentech, Inc., net of transaction costs ................... 2,254 23 -- -- 22,543,706 -- Issuance of Series G and H preferred stock dividends .................................. 133 1 -- -- 1,327,768 (1,327,768) Conversion of Series G preferred stock to common stock ............................ (243) (2) 822,204 8,222 (8,220) -- Preferred stock discount amortization .......... -- -- -- -- 879,437 (879,437) Exercise of employee stock options ............. -- -- 70,217 702 195,451 -- Deferred compensation expense in connection with the issuance of non-qualified stock options and options granted to non-employees -- -- -- -- 481,872 -- ------ ------- ----------- --------- ------------ ------------- Balance, December 31, 1998 ......................... 3,086 31 18,814,740 188,147 131,005,033 (107,856,621) Net loss ....................................... -- -- -- -- -- (10,931,584) Change in unrealized losses .................... -- -- -- -- -- -- Comprehensive loss ............................. -- -- -- -- -- -- Issuance of Series G and H preferred stock dividends .................................. 272 3 -- -- 2,707,841 (2,707,844) Exercise of employee stock options ............. -- -- 374,961 3,750 162,691 -- Deferred compensation expense in connection with the issuance of non-qualified stock options and options granted to non-employees -- -- -- -- 253,948 -- ------ ------- ---------- --------- ------------ ------------- Balance, December 31, 1999 ......................... 3,358 $ 34 19,189,701 $ 191,897 $134,129,513 $(121,496,049) ====== ======= ========== ========= ============ =============
ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCKHOLDERS' INCOME/(LOSS) EQUITY ------------- ------------- Balance, December 31, 1996 ......................... $ (3,717) $ 31,371,174 Net loss ....................................... -- (25,411,690) Change in unrealized losses .................... (2,224) (2,224) ------------- Comprehensive loss ............................. -- (25,413,914) ------------- Issuance of 6%, cumulative preferred stock valued at $1,000 per share, net of transaction costs ................... -- 4,812,327 Conversion of all 6%, cumulative preferred stock to common stock ............ -- (33) Preferred stock discount amortization .......... -- -- Issuance of Series G preferred stock valued at $10,000 per share to Genentech, Inc., net of transaction costs ...................................... -- 9,266,322 Issuance of Series G preferred stock dividends .................................. -- -- Issuance of common stock to Genentech, Inc ..... -- 5,610,000 Exercise of employee stock options ............. -- 120,956 Deferred compensation expense in connection with the issuance of non-qualified stock options and options granted to non-employees -- 688,104 ------------- ------------- Balance, December 31, 1997 ......................... (5,941) 26,454,936 Net loss ....................................... -- (26,346,042) Change in unrealized losses .................... 7,709 7,709 ------------- Comprehensive loss ............................. -- (26,338,333) ------------- Issuance of Series H preferred stock valued at $10,000 per share to Genentech, Inc., net of transaction costs ................... -- 22,543,729 Issuance of Series G and H preferred stock dividends .................................. -- 1 Conversion of Series G preferred stock to common stock ............................ -- -- Preferred stock discount amortization .......... -- -- Exercise of employee stock options ............. -- 196,153 Deferred compensation expense in connection with the issuance of non-qualified stock options and options granted to non-employees -- 481,872 ------------- ------------- Balance, December 31, 1998 ......................... 1,768 23,338,358 Net loss ....................................... -- (10,931,584) Change in unrealized losses .................... (475) (475) ------------- Comprehensive loss ............................. -- (10,932,059) ------------- Issuance of Series G and H preferred stock dividends .................................. -- -- Exercise of employee stock options ............. -- 166,441 Deferred compensation expense in connection with the issuance of non-qualified stock options and options granted to non-employees -- 253,948 ------------- ------------- Balance, December 31, 1999 ......................... $ 1,293 $ 12,826,688 ============= =============
See accompanying notes to financial statements F-5 40 ALTEON INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1997 1998 1999 ------------- ------------- ------------- Cash Flows from Operating Activities: Net loss ................................................... $ (25,411,690) $ (26,346,042) $ (10,931,584) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................ 711,839 678,773 743,820 Amortization of deferred compensation ................ 688,104 481,872 253,948 Changes in operating assets and liabilities: Other current assets .............................. 180,489 194,535 25,162 Other assets ...................................... 5,613 1,278 257,265 Accounts payable and accrued expenses ............. (1,409,900) (2,577,746) (2,119,073) ------------- ------------- ------------- Net cash used in operating activities ............. (25,235,545) (27,567,330) (11,770,462) ------------- ------------- ------------- Cash Flows from Investing Activities: Capital expenditures ....................................... (21,187) (480,566) (157,969) Purchases of marketable securities ......................... (105,272,696) (115,976,783) (54,461,475) Sales and maturities of marketable securities .............. 112,934,079 111,241,889 60,719,408 Restricted cash ............................................ 103,400 620,400 -- ------------- ------------- ------------- Net cash provided by (used in) investing activities 7,743,596 (4,595,060) 6,099,964 ------------- ------------- ------------- Cash Flows from Financing Activities: Proceeds from issuance of common stock ..................... 5,730,956 196,153 166,441 Proceeds from issuance of preferred stock .................. 14,078,616 22,543,729 -- Payments under capital lease obligations ................... (305,317) (161,581) -- Proceeds from sales-leaseback financing .................... 125,516 -- -- ------------- ------------- ------------- Net cash provided by financing activities ......... 19,629,771 22,578,301 166,441 ------------- ------------- ------------- Net (decrease)/increase in cash and cash equivalents ......... 2,137,822 (9,584,089) (5,504,057) Cash and cash equivalents, beginning of period ............... 18,285,853 20,423,675 10,839,586 ------------- ------------- ------------- Cash and cash equivalents, end of period ..................... $ 20,423,675 $ 10,839,586 $ 5,335,529 ============= ============= ============= Supplemental disclosures of cash flow information: Cash paid for interest ............................ $ 25,061 $ 3,610 $ -- ============= ============= =============
See accompanying notes to financial statements F-6 41 NOTES TO FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Alteon Inc. (the "Company") is engaged in the discovery and development of new pharmaceutical products for the treatment of cardiovascular and renal disease and other disorders of diabetes and aging. The Company conducts its business in one operating segment. Alteon's proprietary technology focuses on Advanced Glycosylation End-products, or A.G.E.s, formed as a result of circulating blood glucose reacting with proteins. All of the Company's products are in research or development, and no revenues have been generated from product sales. The Company's lead A.G.E. Crosslink Breaker compound, ALT-711, has completed a series of Phase I human clinical trials and is expected to enter Phase II trials in 2000. The Company is seeking a corporate partner to help fund the continued development of its lead A.G.E.-Formation Inhibitor, pimagedine, based on the results of a Phase III trial of pimagedine in Type 1 diabetic patients with overt nephropathy. Alteon is also pursuing the development of a novel series of glucose lowering agent compounds. The Company's business is subject to significant risks including, but not limited to, (i) its ability to obtain funding, (ii) its uncertainty of future profitability, (iii) the risks inherent in its research and development efforts, including clinical trials, (iv) uncertainties associated both with obtaining and enforcing its patents and with the patent rights of others, (v) the lengthy, expensive and uncertain process of seeking regulatory approvals, (vi) uncertainties regarding government reforms and product pricing and reimbursement levels, (vii) technological change and competition, (viii) manufacturing uncertainties, and (ix) dependence on collaborative partners and other third parties. Even if the Company's product candidates appear promising at an early stage of development, they may not reach the market for numerous reasons. Such reasons include the possibilities that the products will prove ineffective or unsafe during clinical trials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties. Alteon will require substantial new funding in order to continue the research, product development, pre-clinical testing and clinical trials of its product candidates. If adequate funding is not available, the Company may be required to curtail significantly one or more of its research or development programs and other Company activities. Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents and Short-Term Investments Cash and cash equivalents include cash and highly liquid investments, which have a maturity of less than three months at the time of purchase. Short-term investments are recorded at fair market value. As of December 31, 1999, short-term investments were invested in debt instruments of the U.S. government, government agencies, financial institutions and corporations with strong credit ratings. They consist of the following:
DECEMBER 31, ----------------------------- 1998 1999 ----------- ----------- U.S. Government Agency Funds ............... $ 8,107,933 $ -- Corporate Obligations ...................... 5,184,733 7,034,258 ----------- ----------- $13,292,666 $ 7,034,258 =========== ===========
These amounts represent market value of the short-term investments at December 31, 1998 and December 31, 1999. The amortized cost of these short-term investments was $13,291,910 and $7,033,844 at December 31, 1998 and December 31, 1999, respectively. F-7 42 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the useful lives of owned assets, which range from three to five years. Leasehold improvements and equipment under capital leases are amortized using the straight-line method over the shorter of the lease term or the useful life of the assets. Research and Development Expenditures for research and development are charged to operations as incurred. Net Loss Per Share Basic loss per share is based on the average numbers of shares outstanding during the year. Diluted loss per share is the same as basic loss per share, as the inclusion of common stock equivalents would be antidilutive. Recently Issued Accounting Standards In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). The bulletin draws on existing accounting rules and provides specific guidance on how those accounting rules should be applied, and specifically addresses revenue recognition for non-refundable technology access fees in the biotechnology industry. SAB 101 is effective for fiscal years beginning after December 15, 1999. The Company is evaluating SAB 101 and the effect it may have on our financial statements. At this time, the Company believes that SAB 101 will not have a material impact on our financial position or results of operations. In June 1998, Statement of Financial Accounting Standards No. 133 - "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) was issued. SFAS No. 133 requires all derivatives to be measured at fair value and recognized as assets or liabilities on the balance sheet. Changes in the fair value of derivatives should be recognized in either net income or other comprehensive income, depending on the designated purpose of the derivative. In June 1999, the Financial Accounting Standards Board delayed the required adoption of SFAS No. 133, for companies with fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial position or results of operations. Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. NOTE 2 -- PROPERTY AND EQUIPMENT
DECEMBER 31, -------------------------- 1998 1999 ----------- ----------- Laboratory equipment ............................. $ 1,324,828 $ 1,261,640 Furniture and equipment .......................... 681,362 682,124 Computer equipment ............................... 598,920 360,713 Leasehold improvements ........................... 5,215,069 5,215,069 ----------- ----------- 7,820,179 7,519,546 Less: Accumulated depreciation & amortization ... (4,835,023) (5,120,241) ----------- ----------- $ 2,985,156 $ 2,399,305 =========== ===========
F-8 43 NOTE 3 -- COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT Genentech, Inc. ("Genentech") In December 1997, Alteon and Genentech entered into a stock purchase agreement and a development collaboration and license agreement providing for the development and marketing of pimagedine and second-generation A.G.E.-Formation Inhibitor. Pursuant to the stock purchase agreement Genentech purchased Common Stock, Series G Preferred Stock and Series H Preferred Stock for an aggregate purchase price of $37,544,000. Genentech's obligations to purchase shares of Alteon's stock terminated December 31, 1998. Pursuant to a letter agreement dated February 11, 1999 between Alteon and Genentech, the development collaboration and license agreement terminated effective June 30, 1999. NOTE 4 -- OTHER DEVELOPMENT AGREEMENTS In 1989, the Company and Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi") formed a strategic alliance to develop and commercialize the Company's A.G.E. technology. Under this arrangement, the parties agreed to collaborate on further research and development, and the Company granted to Yamanouchi an exclusive license to commercialize the Company's technology in Japan, South Korea, Taiwan and The People's Republic of China. In December 1994, the Company entered into an exclusive licensing arrangement for Alteon's diagnostic technology with Roche Diagnostic GmbH, formerly Corange International Limited, acting through its subsidiary Boehringer Mannheim Diagnostics ("Roche"). Under the agreement, Roche received exclusive worldwide rights to Alteon's technology for diagnostics application, subject to an option held by Yamanouchi for Japan, South Korea, Taiwan and The People's Republic of China. Yamanouchi is Alteon's exclusive licensee for its A.G.E. technology in the aforementioned countries. Pursuant to the agreement, Alteon received an initial payment in January 1995, and will be entitled to receive ongoing royalties based on net sales of research test kits and commercial assays developed by Roche, which are based on Alteon's A.G.E. technology. In June 1995, the Company obtained an exclusive, worldwide, royalty-bearing license from Washington University for patents covering the use of pimagedine as an inhibitor of inducible nitric oxide synthase. The agreement requires the Company to pay certain licensing fees upon the attainment of development milestones as well as a royalty on net sales or a share of sub-licensing profits of products covered by the patents. The license also covers patents developed through any subsequent research collaboration between the parties, which Alteon agrees to fund. In November 1995, the Company entered into clinical testing and distribution agreements with Gamida for Life ("Gamida"), formerly Eryphile BV. Under these agreements, Gamida conducted, at its own expense, a Phase II multi-site clinical trial in Israel, in accordance with the protocol developed by Alteon, evaluating pimagedine in patients with diabetes and elevated serum cholesterol levels. Gamida will receive the exclusive right to distribute pimagedine, if successfully developed and approved for marketing, in Israel, Bulgaria, Cyprus, Jordan and South Africa. The distribution agreement is for a term ending 10 years after the date of regulatory approval for the sale of pimagedine in Israel; thereafter, it will be automatically renewed for successive three-year periods unless terminated by either party on the last day of the initial or a renewal term. In June 1997, Alteon entered into a license and supply agreement with IDEXX Laboratories, Inc. ("IDEXX") pursuant to which Alteon licensed to IDEXX pimagedine as a potential therapeutic in companion animals (dogs, cats and horses) and its A.G.E. diagnostics technology for companion animal use. IDEXX will be responsible for the development, licensing and marketing of pimagedine and A.G.E. diagnostics for such use on a worldwide basis. Alteon will be entitled to receive milestone payments and royalties on sales of the licensed products. F-9 44 NOTE 4 -- OTHER DEVELOPMENT AGREEMENTS (CONTINUED) In August 1999, Alteon and Taisho Pharmaceutical Co., Ltd. ("Taisho") entered into an agreement under which Taisho was granted an exclusive option through December 31, 1999 to acquire a license to Alteon's lead A.G.E. Crosslink Breaker, ALT-711, for Japan, South Korea, Taiwan and China for a non-refundable option fee of $600,000. This amount is reflected in other income in the statement of operations. The option expired on December 31, 1999. Alteon's commercial partners may develop, either alone or with others, products that compete with the development and marketing of the Company's products. Competing products, either developed by the commercial partners or to which the commercial partners have rights, may result in their withdrawal of support with respect to all or a portion of the Company's technology, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has also entered into various arrangements with independent research laboratories to conduct studies in conjunction with the development of the Company's technology. The Company receives certain rights to inventions or discoveries that may arise from this research. (See Note 9.) NOTE 5 -- ACCRUED EXPENSES
DECEMBER 31, -------------------------- 1998 1999 ---------- ---------- Accrued clinical trial expense ................. $1,958,457 $ 923,756 Accrued payroll and related expenses ........... 670,946 402,288 Accrued consultants/contracts .................. 16,767 -- Accrued rent ................................... 265,410 210,498 Accrued professional ........................... 197,161 145,769 Accrued patent ................................. 48,215 20,000 Other .......................................... 120,902 60,891 ---------- ---------- $3,277,858 $1,763,202 ========== ==========
The Company's headquarters and research facility rent is being expensed on a straight-line basis over the ten-year lease period. (See Note 6.) NOTE 6 -- CONTINGENCIES AND COMMITMENTS Contingencies In December 1990, the Company and Marion Merrell Dow, Inc., which was subsequently acquired by an affiliate of Hoechst AG and renamed Hoechst Marion Roussel, Inc. ("HMRI"), formed a strategic alliance to develop and commercialize the Company's A.G.E. technology for therapeutics in the areas of diabetic and aging complications. In 1996, HMRI ended the collaboration as a result of HMRI's continuing prioritization of its new product pipeline, and the Company regained all rights granted to HMRI covering the Company's technology. In June 1998, the Company and HMRI resolved various open issues arising from the termination of their collaboration. As a result, the previously established accrual in the amount of $1.8 million has been eliminated and credited to the statement of operations. F-10 45 NOTE 6 -- CONTINGENCIES AND COMMITMENTS (CONTINUED) Commitments The Company leases its headquarters and research facility and related equipment and furniture under non-cancelable operating leases. As of December 31, 1999, future minimum rentals under operating leases that have initial or remaining non-cancelable terms in excess of one year are as follows:
OPERATING LEASES ---------- 2000................................................ 578,191 2001................................................ 536,500 2002................................................ 536,500 2003................................................ 447,083 2004................................................ -- Thereafter.......................................... -- ---------- $2,098,274 ==========
Rent expense for each of the years in the three-year period ended December 31, 1999, was $573,962, $584,510 and $590,943, respectively. NOTE 7 -- STOCKHOLDERS' EQUITY Common/Preferred Stock Issuances On November 1, 1991, the Company completed an initial public offering of Common Stock with net proceeds to the Company of $47,406,581. In conjunction with the offering, all of the then outstanding shares of Preferred Stock were converted into 6,725,627 shares of Common Stock. In October and November 1995, the Company completed a follow-on offering of Common Stock, which included the sale of 2,000,000 shares and 300,000 shares, respectively, at a price of $9.00 per share which provided net proceeds to the Company of $19,035,000. On April 24, 1997, the Company raised $4.8 million net of offering costs, through the issuance of 5,000 shares of its $0.01 par value, 6% Cumulative Convertible Preferred Stock ("Preferred Stock"). This stock was convertible at a discount to market. In connection with this issuance, the Company issued to the purchasers, warrants to purchase 60,000 shares of its Common Stock at an exercise price of $4.025 per share. As of December 1997, all the Preferred Stock has been converted and approximately $1,065,000 of Preferred Stockholder Dividends were recorded which included the amortization of the conversion discount and warrants, and the 6% preferred dividends. In December 1997, the Company and Genentech entered into a stock purchase agreement pursuant to which Genentech agreed to buy shares of Common Stock, Series G Preferred Stock and Series H Preferred Stock. (See Note 3.) In December 1997, Genentech purchased Common Stock and Series G Preferred Stock for an aggregate purchase price of $15,000,000. On July 27, 1998 and October 1, 1998, Genentech purchased $8,000,000 and $14,544,000 respectively, of Series H Preferred Stock. As of December 31, 1998 and 1999, respectively, approximately $2,207,000 and $2,708,000 of Preferred Stockholder Dividends and amortization of Preferred Stock conversion discount were recorded. Series G Preferred Stock and Series H Preferred Stock Dividends are payable quarterly in shares at a rate of 8.5%. Each share of Series G Preferred Stock and Series H Preferred Stock is convertible at any time into a number of shares of Common Stock determined by dividing $10,000 by the average of the closing sales price of the Common Stock, as reported on the Over-the-Counter Bulletin Board ("OTCBB") for the twenty business days immediately preceding the date of conversion (the "Conversion Price"). F-11 46 NOTE 7 -- STOCKHOLDERS' EQUITY (CONTINUED) Effective with the close of business on December 10, 1999 the Company's Common Stock was delisted from the Nasdaq Stock Market because it did not satisfy the $1.00 per share minimum bid price required for listing on the Nasdaq Stock Market. Effective December 13, 1999, the Common Stock has been traded on the OTCBB. The delisting from the Nasdaq Stock Market could have a material adverse effect on the Company's ability to raise capital on favorable terms or at all. Stock Option Plan The Company has established two stock option plans for its employees, officers, directors, consultants and independent contractors. Options to purchase up to 4,192,000 shares of Common Stock may be granted under the first plan and options to purchase up to 4,000,000 million shares of common stock may be granted under the second plan. The plans are administered by a committee of the Board of Directors, which may grant either non-qualified or incentive stock options. The committee determines the exercise price and vesting schedule at the time the option is granted. Options vest over various periods and may expire no later than 10 years from date of grant. Each option entitles the holder to purchase one share of Common Stock at the indicated exercise price. The plans also provide for certain antidilution and change in control rights, as defined. The following table summarizes the activity in the Company's stock options:
WEIGHTED AVERAGE EXERCISE PRICE EXERCISE PRICE OPTIONS PER SHARE PER SHARE ---------- -------------- ---------------- Balance, December 31, 1996 .......... 3,160,795 $ 6.44 Granted ............................. 852,110 $3.88 - 6.56 5.60 Exercised ........................... (179,081) 0.30 - 6.56 .68 Canceled ............................ (174,384) 0.89 - 14.13 6.75 ---------- -------- Balance, December 31, 1997 .......... 3,659,440 $ 6.51 Granted ............................. 1,232,950 0.88 - 8.50 1.98 Exercised ........................... (70,217) 0.30 - 8.63 2.79 Canceled ............................ (22,913) 3.88 - 15.00 8.72 ---------- -------- Balance, December 31, 1998 .......... 4,799,260 $ 5.39 Granted ............................. 1,928,701 0.78 - 1.125 0.99 Exercised ........................... (374,961) 0.30 - 0.60 0.44 Canceled ............................ (1,277,804) 0.81 - 15.00 3.88 ---------- -------- Balance, December 31, 1999 .......... 5,075,196 $ 3.40 ==========
At December 31, 1999, 2,594,760 options were exercisable at a weighted average price of $5.60 per share. The weighted average fair value of the options granted was $2.89, $1.71 and $0.53 during 1997, 1998 and 1999, respectively. The outstanding stock options at December 31, 1999 have a weighted average remaining contractual life of 7.0 years. Included in options at December 31, 1999, are 380,000 options granted to certain executives with option prices ranging from $0.813 per share to $1.063 per share. Such options vest upon the earlier of 5 years after grant or upon achievement of certain Company milestones. The Company accounts for its stock option plans under APB Opinion No. 25, under which no compensation cost (excluding those options granted below fair market value) has been recognized. Had compensation costs for these plans been determined consistent with FASB Statement No. 123, the Company's pro forma net loss and loss per share applicable to common stockholders for 1997, 1998 and 1999 would have been $28.0 million, $30.5 million and $13.5 million and, $1.74, $1.67 and $0.71, respectively. The 1999 pro forma net loss and loss per share applicable to common stockholders reflects a benefit for the reversal of previously recognized pro forma compensation costs on options forfeited in 1999. Consistent with FASB Statement No. 123, the Company elected not to estimate these forfeitures in the prior period pro forma compensation cost calculation. Because FASB Statement No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. F-12 47 NOTE 7 -- STOCKHOLDERS' EQUITY (CONTINUED) Under FASB Statement No. 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1997, 1998 and 1999, respectively: risk free interest rates ranging 5.73% to 6.78%, 4.32% to 5.63% and 4.73% to 6.07%, respectively; expected life of 2.02 years over the vesting periods; and expected volatility of 70%. In February 1999, the Board of Directors approved the repricing of 1,063,000 stock options outstanding as of February 2, 1999. NOTE 8 -- SAVINGS AND RETIREMENT PLAN The Company maintains a savings and retirement plan under Section 401(k) of the Internal Revenue Code which allows eligible employees to annually contribute a portion of their annual salary to the plan. In 1998, the Company began making discretionary contributions at a rate of 25% of an employee's contribution up to a maximum of 5% of their base salary. The Company made contributions of $57,000 as of December 31, 1998 and $49,000 as of December 31, 1999. NOTE 9 -- RELATED PARTY TRANSACTIONS Since the Company's inception, the Company has entered into certain collaborative agreements with organizations with which Dr. Anthony Cerami, a former member of the Company's Board of Directors, was affiliated. These organizations included The Picower Institute for Medical Research ("The Picower Institute"), The Rockefeller University, Cerami Consulting Corporation and the Kenneth S. Warren Laboratories, Inc. The Company paid to the organizations $284,000, $731,000 and $243,000 in 1997, 1998, and 1999, respectively. In addition, the Company paid patent maintenance fees for technology related to the organizations of $168,000, $207,000 and $73,000 in 1997, 1998 and 1999, respectively. Although the Company has terminated its collaborative relationship with The Picower Institute, the Company has a royalty obligation on all net sales and other revenues associated with certain technologies developed. Effective May 17, 1999, the Company terminated its consulting agreement with Cerami Consulting Corporation and its research agreement with Kenneth S. Warren Laboratories, Inc. In addition, Dr. Cerami resigned from the Company's Board of Directors on April 19, 1999. The Chairman of the Company's Scientific Advisory Board and two other Scientific Advisory Board members provide consulting services to the Company. Consulting fees paid to these members totaled $136,000, $89,000 and $55,000 in 1997, 1998 and 1999, respectively. In 1993, a former Company officer (see Note 11) received a loan, which bore interest at a rate equal to the prime rate as published in the Wall Street Journal, adjusted quarterly, for the purpose of purchasing a home. The loan was secured by a second mortgage on the premises purchased by the officer. On November 3, 1999, the Company received a payment of $268,073 representing the total amount of principal and interest due. NOTE 10 -- INCOME TAXES At December 31, 1999, the Company had available Federal net operating loss carryforwards ("NOLs"), which expire in the years 2006 through 2014, of approximately $111.8 million for income tax purposes and State net operating loss carryforwards, which expire in the years 2000 through 2007, of approximately $81 million. In addition, the Company has Federal research and development tax credit carryforwards of approximately $4.5 million and State research and development tax credit carryforwards of approximately $2.5 million. The amount of Federal net operating loss and research and development tax credit carryforwards which can be utilized in any one period may become limited by Federal income tax regulations if a cumulative change in ownership of more than 50% occurs within a three year period. F-13 48 NOTE 10 -- INCOME TAXES (CONTINUED) The components of the deferred tax assets and the valuation allowance are as follows:
DECEMBER 31, ------------------------------- 1998 1999 ------------ ------------ NOL carryforwards ........................ $ 40,700,000 $ 42,900,000 Research and development credit .......... 6,700,000 7,000,000 Other temporary differences .............. 4,200,000 4,700,000 ------------ ------------ Gross deferred tax assets ................ 51,600,000 54,600,000 Valuation allowance ...................... (51,600,000) (54,600,000) ------------ ------------ Net-deferred tax assets .................. $ -- $ -- ============ ============
A valuation allowance was established since the realization of the deferred tax assets is uncertain. In December 1999, Alteon sold $27.6 million of its gross State net operating loss carryforwards and $645,000 of its State research and development tax credit carryforwards under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the "Program"). The Program allowed qualified technology and biotechnology businesses in New Jersey to sell unused amounts of net operating loss carryforwards and defined research and development tax credits for cash. The total tax value sold was $3,137,000 and the total proceeds received by the Company were $2,588,000, which was recorded as a tax benefit on the statement of operations. NOTE 11 -- KEY EMPLOYEES The Chairman and Chief Executive Officer resigned from the Company effective December 31, 1998 and the President and Chief Operating Officer retired from the Company effective January 31, 1999. In December 1998, the Senior Vice President, Finance and Business Development and Chief Financial Officer was elected to the Board of Directors and to the office of President and Chief Executive Officer. A member of the Board of Directors was elected to the position of Chairman. F-14 EX-10.28 2 AMENDED & RESTATED EMPLOYMENT AGREEMENT, 12/15/98 1 EXHIBIT 10.28 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is dated as of December 15, 1998 by and between Alteon Inc., a Delaware corporation (the "Company"), and Kenneth I. Moch (the "Employee"). WHEREAS, the Company wishes to employ the Employee as Chief Executive Officer and President of the Company; and WHEREAS, the Employee wishes to enter into the employ of the Company as its Chief Executive Officer and President; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereby agree as follows; 1. Term of Employment. Subject to the terms and conditions hereof, the Company will employ the Employee, and the Employee will serve the Company, as Chief Executive Officer and President for a period beginning on the date hereof and terminating December 31, 2001, subject to extension by mutual agreement of the Company and the Employee (such term, as it may be shortened by termination of the Employee's employment hereunder pursuant to the provisions hereof or extended, is hereinafter referred to as the "Term of Employment"). 2. Duties. (a) During the Term of Employment, the Employee will serve as Chief Executive Officer and President, subject to the terms of this Agreement, the direction and control of the Board of Directors of the Company, and past practice with regard to authority, responsibility, and discretion in the exercise of managerial prerogative. The primary location of the Employee's employment hereunder shall be the headquarters of the Company. The Employee will, during the Term of Employment, serve the Company faithfully, diligently and competently and to the best of his ability, and will, consistent with the dignity of Chief Executive Officer and President of the Company, hold, in addition to the offices of Chief Executive Officer and President of the Company, such other offices in the Company to which he may be appointed or assigned from time to time by the Board of Directors of the Company and will discharge such duties in connection therewith. The Employee shall devote all of his business time to the performance of his duties hereunder, provided, that the Employee shall not be precluded from serving as a member of up to two boards of directors or advisory boards of companies or organizations so long as such service does not violate the provisions of Section 9 of this Agreement or interfere with the performance of the Employee's duties hereunder. (b) During the Term of Employment, the Company will use its best efforts to obtain the nomination of, and so long as the Employee is the Chief Executive Officer of the Company, the election of the Employee as a director of the Company. In the event that the -1- 2 Employee is elected as a director of the Company, the Employee shall perform all duties incident to such directorship faithfully, diligently and competently. 3. Compensation. The Company will, during the Term of Employment, pay to the Employee as compensation for the performance of his duties and obligations hereunder an initial base salary at the rate of $300,000 per annum ("Salary"), payable in equal semi-monthly installments. Such Salary shall be reviewed annually by the Board of Directors of the Company in accordance with the Company's compensation program solely for the purpose of determining increases. In each of the Company's fiscal years during the Term of Employment, the Employee shall be eligible to receive a bonus, to be awarded at the sole discretion of the Board of Directors of the Company, in an amount of up to $150,000. The Board shall use as a basis for determining the extent of such bonus awards the attainment of stated goals and objectives for the Employee to be set by the Compensation Committee of the Board after consultation with the Employee. The Board of Directors shall advise the Employee in writing of the goals and objectives for each fiscal year. 4. Other Benefits. (a) The Company shall grant to the Employee an incentive stock option (or to the extent that such option does not qualify as an incentive stock option, a non-qualified stock option), pursuant to the Company's 1987 or 1995 Stock Option Plan, to purchase 600,000 shares of Common Stock of the Company ("Common Stock") with an exercise price equal to the closing price of the Company's Common Stock on the date of the grant of the option, which shall be March 16, 1999. Such option shall be in the form of, and on such terms and conditions as provided in, the Company's standard form of Stock Option Grant Agreement in effect as of the date of this Agreement. Such Stock Option Grant Agreement for such option shall provide, on condition that the Employee is employed by the Company on the relevant vesting dates, that such options shall vest as follows: (1) 20,000 shares shall vest on the date of grant of the option and 340,000 shares shall vest over a thirty-four month period at the rate of 10,000 shares on the first day of each calendar month commencing on March 1, 1999; and (2) except as provided in subsection 4(d) of this Agreement, 240,000 shares shall vest upon the accomplishment by the Employee of four of eight milestones which shall be established by the Compensation Committee of the Board after consultation with the Employee and set forth in the Stock Option Grant Agreement. Such shares shall vest at the rate of 60,000 shares upon the accomplishment by the Employee of each of such four milestones. (b) The Stock Option Grant Agreement shall contain provisions to the effect that the options described in subsection 4(a)(2)of this Agreement shall vest on the earlier of the time set forth in such subsection or the tenth anniversary of the date of this Agreement, provided the Employee is then employed by the Company. -2- 3 (c) As of the date of this Agreement and prior to the grant of the stock options referred to in subsection 4(a) of this Agreement, the Employee has stock options as set forth in Exhibit A. Pursuant to your Stock Option Grant Agreement dated January 28, 1998, you have unvested options to purchase 40,000 shares of Common Stock, which options will vest upon the achievement of certain milestones. That Stock Option Grant Agreement is hereby amended to provide that, in lieu of the milestones provided therein, one-half (1/2) of such options shall vest upon the achievement of the first of the milestones described in subsection 4(a)(2) of this Agreement and the balance shall vest upon the achievement of the second such milestone. (d) The Stock Option Grant Agreement shall contain provisions to the following effect: (1) The options shall be transferable to the extent afforded in the Company's 1987 or 1995 Stock Option Plan, as the case may be, and as may be permissible under the applicable registration statement filed by the Company under the Securities Act of 1933. The Company represents that it has available or shall cause to be available sufficient shares under the Plan to cover stock to be issued pursuant to such Plan upon the Employee's exercise of the options. (2) All unvested options will become exercisable immediately upon a merger, consolidation, acquisition of property or stock, reorganization (other than a mere reincorporation or the creation of a holding company) or liquidation of the Company, as a result of which the shareholders of the Company receive cash, stock or other property in exchange for or in connection with their shares of the Company's Common Stock. In addition, such options shall vest and become exercisable immediately in the event of a change in control of the Company. A change in control of the Company shall be deemed to occur if (a) the Company is merged with or into or consolidated with another corporation or other entity under circumstances where the shareholders of the Company immediately prior to such merger or consolidation do not own after such merger or consolidation shares representing at least fifty percent of the voting power of the Company or the surviving or resulting corporation or other entity, as the case may be, or (b) if the Company is liquidated or sells or otherwise disposes of substantially all of its assets to another corporation or entity, or (c) if any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) shall become the beneficial owner (within the meaning of Rule 13d-3 under such Act) of forty percent (40%) or more of the Common Stock other than pursuant to a plan or arrangement entered into by such person and the Company or otherwise approved by the Board of Directors, or (d) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the entire Board of Directors shall cease for any reason to constitute a majority of the Board unless the election or nomination for election by the Company's shareholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. -3- 4 (3) In the event that the accelerated vesting caused by Section 4(c)(2) of this Agreement (i) constitutes a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code, and (ii) but for this Section 4(c)(3), would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the portion of the option which would have become immediately vested and exercisable under Section 4(c)(2) may be reduced to the portion which the Employee, in his sole discretion, determines would result in no portion, or a lesser portion, of the option being subject to the Excise Tax. The determination by the Employee of any reduction shall be conclusive and binding upon the Company. The Company shall reduce the portion of the option which is vested and exercisable only upon written notice by the Employee indicating the amount of such reduction. (e) The Employee shall be entitled during the Term of Employment to participate in employee benefit plans and programs of the Company to the extent that his position, tenure, salary, age, health and other qualifications make him eligible to participate. The Company does not guarantee the adoption or continuance of any particular employee benefit plan or program during the Term of Employment, and the Employee's participation in any such plan or program shall be subject to the provisions, rules, regulations and laws applicable thereto; provided, however, that during the Term of Employment the Employee shall be entitled to health, hospital, life and dental insurance benefits consistent with the past practices of the Company in effect with respect to Company personnel generally. (f) During the Term of Employment, the Employee shall be entitled to four (4) weeks vacation per year while employed hereunder. Such vacation may be taken by the Employee at such times as do not unreasonably interfere with the business of the Company. The accumulation of annual vacation time earned but not taken will be in accordance with the Company policy guidelines. Additional vacation will be earned in accordance with Company policy. 5. Expenses. During the Term of Employment, all travel and other reasonable business expenses incident to the rendering of services by the Employee under this Agreement will be paid or reimbursed by the Company subject to the submission of appropriate vouchers and receipts in accordance with the Company's policy from time to time in effect. 6. Death or Disability. (a) Employee's employment under this Agreement shall be terminated by the death of the Employee. In addition, Employee's employment under this Agreement may be terminated by the Board of Directors of the Company if the Employee shall be rendered incapable by illness or any other disability from complying with the terms, conditions and provisions on his part to be kept, observed and performed for a period such that the Employee qualifies for long-term disability benefits under any long-term disability policy the company maintains which covers the Employee ("Disability"). If Employee's employment under this Agreement is terminated by reason of Disability of the Employee, -4- 5 the Company shall give written notice to that effect to the Employee in the manner provided herein. In the event that the Employee receives disability insurance benefits paid for by the Company during any period prior to termination of Employee's employment under this Agreement pursuant to this Section 6(a), the Employee's Salary shall be reduced by an amount equal to such disability insurance benefits during such period. (b) In addition to and not in substitution for any other benefits which may be payable by the Company in respect of the death or Disability of the Employee, in the event of such death or Disability, the Salary payable hereunder shall continue to be paid at the then current rate for three (3) months after the termination of employment, and any bonus to which the Employee would have been entitled for the year in which his death or Disability occurs shall be pro rated to the date of his death or termination of employment on account of Disability and paid not later than three (3) months after the termination of employment. In the event of the death of the Employee during the Term of this Agreement, the sums payable hereunder shall be paid to his personal representative or executor. 7. Disclosure of Information, Inventions and Discoveries. The Employee shall promptly disclose to the Company all processes, trademarks, inventions, improvements discoveries and other information related to the business of the Company (collectively, "Developments") conceived, developed or acquired by him alone or with others during the Term of Employment or during any earlier period of employment by the Company or any predecessor of the Company, whether or not during regular working hours or through the use of materials or facilities of the Company. All such Developments shall be the sole and exclusive property of the Company, and, upon request, the Employee shall promptly deliver to the Company all drawings, sketches, models and other data and records relating to such Developments. In the event any such Development shall be deemed by the Company to be patentable, the Employee shall, at the expense of the Company, assist the Company in obtaining a patent or patents thereon and execute all documents and do all such other acts and things necessary or proper to obtain letters of patents and to invest in the Company full right, title and interest in and to such Developments. 8. Non-Disclosure. The Employee shall not, at any time during or after the Term of Employment or any earlier period of employment by the Company or any predecessor of the Company, divulge, furnish or make accessible to anyone (otherwise than in the regular course of business of the Company) or use for his own account or for the account of any person any knowledge or information with respect to confidential or secret processes, inventions, discoveries, improvements, formulae, plans, materials, devices or ideas or other know-how, whether patentable or not, with respect to any confidential or secret development or research work or with respect to any other confidential or secret aspects of the Company's business (including, without limitation, customer lists, supplier lists and pricing arrangements with customers or suppliers). This Section 8 shall not apply to any information which (i) is or becomes generally available to the public other than as a result of a disclosure directly or indirectly by the Employee or (ii) is or becomes available to the Employee on a non-confidential basis from a person other than the Company or its officers, directors or agents who to the Employee's knowledge after due inquiry is not and -5- 6 was not bound by a confidentiality agreement with the Company and was not otherwise prohibited from transmitting the information to the Employee. 9. Non-Competition. The Company and the Employee agree that the services rendered by the Employee hereunder are unique and irreplaceable. The Employee hereby agrees that, during the Term of Employment and for a period of one (1) year thereafter (the "Restricted Period"), the Employee shall not (i) in any geographical area in the United States or in those foreign countries where the Company, during the Term of Employment, conducts or proposes to conduct business or initiates activities, engage or participate in, directly or indirectly (whether as an officer, director, employee, partner, consultant, holder of an equity or debt investment, lender or in any other manner or capacity), or lend his name (or any part or variant thereof) to any business which is, or as a result of the Employee's engagement or participation would become, competitive with any aspect of the business of the Company, such business being the commercialization of the measurement, prevention therapy or reversal of glucose-mediated non-enzymatic cross-linking of macro-molecules, and such other specific technologies in which the Company has, during the Term of Employment or any earlier period of employment by the Company or any predecessor of the Company, initiated significant plans to develop products, (ii) deal, directly or indirectly, in a competitive manner with any customers doing business with the Company during the Term of Employment or any earlier period of employment by the Company or any predecessor of the Company (except in connection with the performance of the duties and obligations of the Employee during the Term of Employment), (iii) solicit any officer, director, employee, consultant or agent of the Company to become an officer, director, employee, consultant or agent of the Employee, his respective affiliates or anyone else if such participation would be competitive with any aspect of the Company's business; and (iv) engage in or participate in, directly or indirectly, any business conducted under any name that shall be the same as or similar to the name of the Company or any trade name used by it. Ownership, in the aggregate, of less than 1% of the outstanding shares of capital stock of any corporation with one or more classes of its capital stock listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a violation of the foregoing provision. 10. Remedies. The Employee acknowledges that irreparable damage would result to the Company if the provisions of Section 7, 8, 9 or 14 were not specifically enforced, and agrees that the Company shall be entitled to any appropriate legal, equitable or other remedy, including injunctive relief, in respect to any failure to comply with the provisions of Section 7, 8, 9 or 14. 11. Termination for Cause. In addition to any other remedy available to the Company, either at law or in equity, the Employee's employment with the Company may be terminated by the Board of Directors for cause, which shall include (i) the Employee's conviction from which no further appeal may be taken for, or plea of nolo contendere to, a felony or a crime involving moral turpitude, (ii) the Employee's commission of a breach of fiduciary duty involving personal profit in connection with the Employee's employment by the Company, (iii) the Employee's commission of an act which the Board of Directors shall -6- 7 reasonably have found to have involved willful misconduct or gross negligence on the part of the Employee, in the conduct of his duties under this Agreement, (iv) habitual absenteeism, or (v) the Employee's material breach of any material provision of this Agreement which remains uncured for a period of thirty (30) days following notice by the Company. With respect to the matters set forth in subsections (iii), (iv) and (v) hereof, the Company may not terminate the Employee's employment unless the Employee has first been given notice of the conduct forming the cause for such termination and an opportunity to explain such conduct to the Board of Directors or a committee thereof. In the event of termination under this Section 11, the Company's obligations under this Agreement shall cease and the Employee shall forfeit all rights to receive any future compensation under this Agreement. Notwithstanding any termination of this Agreement pursuant to this Section 11, the Employee, in consideration of his employment hereunder to the date of such termination, shall remain bound by the provisions of Section 7, 8, 9 and 14 hereof. 12. Termination Without Cause. Each of the Company and Employee may terminate Employee's employment under this Agreement at any time for any reasons whatsoever, without any further liability or obligation of the Company to the Employee or of the Employee to the Company from and after the date of such termination (other than liabilities or obligations accrued but unsatisfied on, or surviving, the date of such termination), by sending thirty (30) days prior written notice to the other party. Such notice shall state the effective date of termination of Employee's employment under this Agreement. In the event (a) the Company elects to terminate Employee's employment under this Agreement or (b) the Company gives Employee notice of its election not to extend the Term of Employment beyond the expiration of the then current Term of Employment, or (c) by the date which is four (4) months prior to the end of the then current Term of Employment, the Company has not offered to extend the then current Term of Employment on terms and conditions at least as favorable to Employee as those in effect during the then current Term of Employment or (d) the Employee terminates his employment under this Agreement following a Detrimental Change (as defined below), then (a) the Company shall pay to the Employee an amount equal to his then current annual Salary (exclusive of bonuses) in equal installments over a twelve month period commencing on the effective date of the termination of the Employee's employment under this agreement in accordance with the Company's normal payroll practices. (b) the Company will enter into a consulting agreement with the Employee pursuant to which it will retain the Employee to provide such consulting services as the Company shall request for a period of twelve (12) months following the expiration of the Term of Employment for an annual consulting fee equal to one-half of the Employee's annual salary (exclusive of bonuses) at the time of termination of his employment under this Agreement; -7- 8 (c) for a period of eighteen (18) months following the effective date of termination of the Employee's employment under this Agreement, so long as reasonably comparable coverage is not provided to him by another person or entity with which he has commenced employment, the Company will provide him with all health, dental and hospital insurance benefits to which he is entitled under the federal law popularly known as COBRA without cost; and (d) the Company will amend the terms of all stock option grant agreements then in effect between the Employee and the Company to provide that all options which are vested on the effective date of the termination of the Employee's employment under this Agreement shall be exercisable until the earlier of (i) the expiration date set forth in the stock option grant agreement (without regard to the effect of the termination of the Employee's employment on the term of the option) or (ii) the second anniversary of the effective date of the termination of the Employee's employment under this Agreement. The Employee acknowledges that under applicable law any vested options exercised more than three (3) months after he ceases to be employed by the Company shall not be eligible for federal income tax treatment as incentive stock options and shall be non-qualified stock options. In the event the Employee elects to terminate prior to the end of the Term of Employment (other than as a result of a Detrimental Change), the Company's obligation to pay Salary shall cease as of the effective date of termination. Notwithstanding any termination of this Agreement pursuant to this Section 12, the Employee, in consideration of his employment hereunder to the date of such termination, shall remain bound by the provisions of Section 7, 8, 9 and 14 hereof. Any termination of this Agreement by the Company as provided in this Section 12 shall be in addition to, and not in substitution for, any rights with respect to termination of the Employee which the Company may have pursuant to Section 11. As used in this Agreement, Detrimental Change shall mean the failure of the Company to comply with the terms of this Agreement, a material reduction in the Employee's duties or responsibilities hereunder or the relocation of the Employee's primary office of employment to a location more than thirty-five (35) miles from the location of such office prior to the relocation or substantially increased travel requirements. 13. Resignation. In the event that the Employee's services under this Agreement are terminated under any of the provisions of this Agreement (except by death), the Employee agrees that he will deliver his written resignation from all positions held with the Company to the Board of Directors, such resignation to become effective immediately; provided, however, that nothing herein shall be deemed to affect the provisions of Section 7, 8, 9, 12, 14 and 15 hereof relating to the survival thereof following termination of the Employee's services hereunder, and provided, further, that except as expressly provided in this Agreement, the Employee shall be entitled to no further compensation hereunder. 14. Data. Upon termination of the Term of Employment or termination pursuant to Sections 6, 11 or 12 hereof, the Employee or his personal representative shall promptly -8- 9 deliver to the Company all books, memoranda, plans, records and written data of every kind relating to the business and affairs of the Company which are then in his possession. 15. Insurance. The Company shall have the right, at its own cost and expense to apply for and to secure in its own name, or otherwise, life, health or accident insurance or any or all of them covering the Employee, and the Employee agrees to submit to usual and customary medical examinations and otherwise to cooperate with the Company in connection with the procurement of any such insurance, and any claims thereunder. The Company will use its best reasonable efforts to maintain directors' and officers' liability insurance with coverage comparable to that in place on the date of this Agreement during the term of your service as an officer or director of the Company and thereafter for as long as you may have any liability which would be covered by such insurance. The requirements of the preceding sentence shall survive termination of your employment under this Agreement. 16. Waiver of Breach. Any waiver of any breach of this Agreement shall not be construed to be a continuing waiver or consent to any subsequent breach on the part either of the Employee or of the Company. 17. Assignment. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company upon any sale of all or substantially all of the Company's assets, or upon any merger or consolidation of the Company with or into any other entity, all as though such successors and assigns of the Company and their respective successors and assigns were the Company. Insofar as the Employee is concerned, this Agreement, being personal, may not be assigned. 18. Severability. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted therefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Agreement be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which may be validly and enforceable covered. 19. Notices. All notices, requests and other communications pursuant to this Agreement shall be in writing and shall be deemed to have been duly given, if delivered in person or by courier, telegraphed, telexed or by facsimile transmission or five business days after being sent by registered or certified mail, return receipt requested, postage paid, addressed as follows: If to the Employee: Kenneth I. Moch 68 Willow Avenue -9- 10 Larchmont, NY 10538 with a copy to: Herbert Eisenberg, Esq. Davis & Eisenberg 377 Broadway New York, NY 10013 If to the Company: Alteon Inc. 170 Williams Drive Ramsey, NJ 07446 with a copy to: Richard J. Pinto, Esq. Smith, Stratton, Wise, Heher & Brennan 600 College Road East Princeton, NJ 08540 Any party may, by written notice to the other in accordance with this Section 19, change the address to which notices to such party are to be delivered or mailed. 20. General. Except as otherwise provided herein, the terms and provisions of this Agreement, all stock options grant agreements currently in effect between the Employee and the Company as set forth on Exhibit A and the Stock Option Grant Agreement to be entered into between the Company and the Employee as provided above shall constitute the entire agreement by the Company and the Employee with respect to the subject matter hereof, and shall supersede any and all prior agreements or understandings between the Employee and the Company, whether written or oral. This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey. This Agreement may be amended or modified only by a written instrument executed by the Employee and the Company. This Agreement may be executed in any number of counterparts, all of which, when executed, shall be deemed to be an original, and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. Alteon Inc. /s/ Mark Novitch ----------------------------------- By: -10- 11 Title: Chairman /s/ Kenneth I. Moch ----------------------------------- Kenneth I. Moch -11- EX-23.1 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated March 2, 2000 included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 333-91437, 333-39429, 333-04496, 3389134 and 3360576) and Form S-3 (File No. 333-44453). Arthur Andersen LLP Roseland, New Jersey March 28, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Balance Sheets, Statements of Operations, Cash Flow Statements and the Statement of Stockholders' Equity filed as part of Alteon Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999 and is qualified in its entirety by reference to such Annual Report on Form 10-K. 1 US DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 5,335,529 7,034,258 0 0 0 12,618,770 2,399,305 0 15,020,890 2,194,202 0 0 34 191,897 12,634,757 15,020,890 0 1,434,661 0 0 14,954,455 0 0 (13,519,794) (2,588,210) (10,931,584) 0 2,707,844 0 (13,639,428) (0.72) (0.72)
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