-----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, REEIi7p4Yz8QQZ/sVIfEq0MkOr0QE2/iGofb+abZLvaVx1gs8K9+yh6qLms+nlvQ C8kciVLekvNqS7rkFsHoSQ== 0000893220-03-000272.txt : 20030310 0000893220-03-000272.hdr.sgml : 20030310 20030310170954 ACCESSION NUMBER: 0000893220-03-000272 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030310 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: 1934 Act SEC FILE NUMBER: 001-16043 FILM NUMBER: 03598443 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 w84290e10vk.txt FORM 10-K FOR ALTEON INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM__________ TO__________ Commission file number 001-16043 ALTEON INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-3304550 - ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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: Name of Each Exchange Title of Each Class On Which Registered - -------------------------------------- ------------------------ Common Stock, Par Value $.01 per share American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the American Stock Exchange closing price of the common stock ($2.06 per share), as of June 28, 2002, was $65,516,106. At February 28, 2003, 33,600,841 shares of the registrant's common stock, par value $.01 per share, were outstanding. Documents Incorporated By Reference Document Where Incorporated - -------- ------------------ Proxy Statement for 2003 Part III Annual Meeting of Stockholders PART 1 ITEM 1. BUSINESS. OVERVIEW We are a product-based biopharmaceutical company primarily engaged in the discovery and development of oral drugs to reverse or slow down diseases of aging and complications of diabetes. Our product candidates represent novel approaches to some of the largest pharmaceutical markets. Our lead compound is in Phase 2b clinical development; several others are in earlier development stages. These pharmaceutical candidates were developed as a result of our research on the Advanced Glycation End-Products ("A.G.E.") pathway, a fundamental pathological process and inevitable consequence of aging that causes or contributes to many medical disorders, including cardiovascular, kidney and eye diseases. A.G.E.s are glucose/protein complexes that form as a result of circulating blood glucose reacting with proteins. These A.G.E. complexes subsequently interact and bond (crosslink) with other proteins, resulting in "hardened" (stiffened) arteries, toughened tissues and impaired flexibility and function of many body organs. In healthy individuals, this pathological A.G.E.-formation process occurs slowly as the body ages. In diabetic patients, the rate of A.G.E. accumulation and the extent of protein crosslinking are accelerated because of high glucose levels. Our current research and drug development activities targeting the A.G.E. pathway take three directions: the breaking of A.G.E. crosslinks between proteins in order to reverse damage ("A.G.E. Crosslink Breakers"); the prevention or inhibition of A.G.E. formation ("A.G.E.-Formation Inhibitors") and the reduction of the A.G.E. burden through a novel class of anti-hyperglycemic agents, Glucose Lowering Agents ("GLA"). We believe that we were the first company to focus on the development of compounds to treat diseases caused by A.G.E. formation and crosslinking. Since our inception, we have created an extensive library of novel compounds targeting the A.G.E. pathway, and have actively pursued patent protection for these discoveries. We have 99 issued United States patents and over 80 issued foreign patents focused primarily on A.G.E. technology. ALT-711 is an A.G.E. Crosslink Breaker and our lead product candidate. ALT-711 offers the possibility of the first therapeutic approach to "breaking" A.G.E. crosslinks, the benefit of which may be to reverse tissue damage caused by aging and diabetes, thereby restoring flexibility and function to blood vessels and organs of the body. We are initially developing ALT-711 for the treatment of cardiovascular diseases, and have completed two Phase 2a safety, efficacy and pharmacology studies. Preliminary results from the first 17 patients in the recently conducted Phase 2a DIAMOND (Distensibility Improvement And REMODELING in Diastolic Heart Failure) clinical trial evaluating the activity of ALT-711 in diastolic heart failure ("DHF") patients demonstrated that patients who received ALT-711 for 16 weeks experienced a statistically significant reduction in left ventricular mass, a marked improvement in left ventricular diastolic filling and a positive effect on patients' quality of life. In 2001, we conducted a Phase 2a clinical trial, in which 93 patients received ALT-711 or placebo tablets once daily for eight weeks. Study results showed that ALT-711 patients experienced a statistically significant and clinically meaningful reduction in pulse pressure (p<0.02), defined as the difference between systolic and diastolic blood pressures. Results also showed a statistically significant increase in large artery compliance (p<0.03), an indicator of greater vascular flexibility and volume capacity. Additionally, the drug was well tolerated. This Phase 2a data was published as "breakthrough information" in the September 26, 2001 issue of the peer-reviewed journal, Circulation: Journal of the American Heart Association. The positive results from the Phase 2a trials suggest that ALT-711 may be a novel therapy for a number of cardiovascular conditions, including systolic hypertension and diastolic heart failure, two diseases that occur as a result of vascular stiffening due to age or diabetes. We have initiated two companion Phase 2b clinical trials, the SAPPHIRE (Systolic And Pulse Pressure Hemodynamic Improvement by Restoring Elasticity) trial focused on patients with systolic hypertension and the SILVER (Systolic Hypertension Interaction with Left Ventricular Remodeling) trial in patients with systolic hypertension and left ventricular hypertrophy ("LVH"). Data from these trials is expected to be reported concurrently about mid-year 2003. We are also considering further clinical development of ALT-711 for DHF and other related conditions. 2 A topical formulation of an A.G.E. Crosslink Breaker, ALT-744, is being clinically evaluated in skin aging for cosmetic applications. We continue to evaluate potential clinical trials in other cardiovascular and therapeutic indications where A.G.E. Crosslink Breaker compounds may address significant unmet needs. We are also actively evaluating product development opportunities from other classes of compounds in our patent estate, including A.G.E.-Formation Inhibitors which target the A.G.E. pathway by inhibiting the formation and crosslinking of A.G.E.s. In addition, we are utilizing our technical expertise in the field of diabetes to develop compounds focused on glucose regulation and control, our GLA compounds. We are evaluating our lead compounds in these classes to determine the optimal strategy for pre-clinical development. We were incorporated in Delaware in October 1986 under the name Geritech Inc. Our name was changed to Alteon Inc. in August 1991. We are headquartered at 170 Williams Drive, Ramsey, New Jersey 07446. Our web address is www.alteon.com, and our telephone number is (201) 934-5000. OUR BUSINESS STRATEGY Our strategy is to develop drug candidates from our proprietary portfolio of new chemical entities. Because of their novel mechanism of action, these compounds address large medical needs that are unmet by existing therapies. We will seek, as appropriate, to selectively out-license our drug candidates to corporate partners. As we continue clinical development of ALT-711, we will determine if it is appropriate to retain development and marketing rights for one or several indications in North America, while at the same time continuing to evaluate potential corporate partnerships for the further development and ultimate marketing of the compound. In addition to ALT-711, we have identified compounds in multiple chemical classes that warrant further evaluation and potential development. MARKETS OF OPPORTUNITY Our research and development efforts have led us to an initial focus on cardiovascular diseases, including systolic hypertension and diastolic heart failure, as well as complications of diabetes. Targeting the A.G.E. pathway may have an impact on a number of medical disorders related to aging and diabetes, thus potentially broadening our markets of opportunity. The pre-clinical and clinical data generated to date on our A.G.E. Crosslink Breakers and A.G.E.-Formation Inhibitors demonstrates clear and consistent findings across several species, including rats, dogs, non-human primates and man. Cardiovascular Disease According to the American Heart Association, nearly 62 million Americans have one or more types of cardiovascular disease. Cardiovascular disease has been the number one killer of Americans since the early 1900's. The latest World Health Organization - International Society of Hypertension guidelines for the management of hypertension emphasize the importance of pulse pressure (the difference between systolic and diastolic pressures) and arterial stiffness as predictors of general cardiovascular risk. Currently available anti-hypertensive agents reduce pressure on the vessel wall in such a manner as to lower both systolic and diastolic blood pressures without significantly affecting pulse pressure. Our approach rapidly increases large artery elasticity, thereby reducing pulse pressure 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 cardiovascular system may decrease the incidence and severity of complications such as LVH, a thickening and stiffening of the heart tissue, and congestive heart failure. Published studies have shown that a 10mm Hg reduction in pulse pressure correlates with approximately a 35% reduction in cardiovascular mortality. Systolic Hypertension Systolic hypertension, defined as elevated systolic blood pressure greater than 140mm Hg, is the most common form of hypertension in those over the age of 50, with an estimated prevalence of nearly 25 million Americans. It is associated with a significantly increased risk of overall mortality, cardiovascular mortality and congestive heart failure. According to the American Heart Association, it is the type of hypertension least likely to be well treated. The ability of ALT-711 to decrease pulse pressure and increase large artery compliance offers an 3 opportunity to provide a treatment option specifically for systolic hypertension. See "--A.G.E. Crosslink Breakers - ALT-711." Although currently marketed anti-hypertensive agents are being used to treat the disease, it is not adequately treated by these therapies. ALT-711 is the first drug to show direct activity by targeting the stiff vessels that cause systolic hypertension. We believe that ALT-711 will provide additional benefit because it exerts its activity by a mechanism unique from currently marketed anti-hypertension drugs. Diastolic Heart Failure Diastolic heart failure is caused by an impaired ability of the heart to relax after a contraction and fill properly, in part due to the stiffening of the heart tissue. When the ventricles (the heart's lower pumping chambers) do not relax normally, increased pressure and fluid in the blood vessels of the lungs may be a result (pulmonary congestion). DHF can also cause increased pressure and fluid in the blood vessels coming back to the heart (systemic congestion). DHF is a poorly treated medical condition that is estimated to account for 30-50% of all heart failure cases, which total nearly five million cases in the United States alone. ALT-711 offers promise as a novel therapy for DHF because currently available therapies do not specifically target the stiffening heart and vessel walls. Left Ventricular Hypertrophy Left ventricular hypertrophy refers to the thickening of the left ventricle that can occur with hypertension. LVH can lead to decreased cardiac output, the inability to meet the circulatory needs of the body and to heart failure itself. LVH is a component of many cardiovascular diseases, including systolic hypertension and DHF. In the DIAMOND trial, a statistically significant reduction of left ventricular mass was noted in DHF patients treated with ALT-711. Additionally, in several pre-clinical studies, ALT-711 has been shown to reduce the thickening of the left ventricle and remodel the heart. Complications of Diabetes The Diabetes Control and Complications Trial ("DCCT"), a multi-center clinical trial conducted by 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. 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 ("ESRD"). Approximately 34% of patients with Type 1 diabetes and approximately 10-15% of patients with Type 2 diabetes develop nephropathy. In the Phase 2/3 ACTION (A Clinical Trial In Overt Nephropathy) trial in diabetic patients with overt nephropathy, therapy with our first A.G.E.-Formation Inhibitor, pimagedine, showed a statistically significant reduction in urinary protein excretion, although it did not reach statistical significance in its primary endpoint, the time to doubling of serum creatinine. Though pimagedine is no longer in active clinical development, the ACTION trial serves as a proof-of-concept study, demonstrating the potential of compounds that target the A.G.E. pathway in the treatment of diabetic kidney disease and other complications of diabetes. See "--Retinopathy." ALT-946, another A.G.E.-Formation Inhibitor, has demonstrated the ability to slow the progression of overt nephropathy in a pre-clinical study. Cardiovascular Complications A significant portion of diabetic individuals develops cardiovascular diseases and complications due to the high levels of blood glucose and A.G.E.s within the body. According to the American Diabetes Association, heart disease is the leading cause of diabetes-related deaths. Heart disease death rates are two to four times higher in adults with diabetes than that of adults without diabetes. The risk of stroke is also two to four times higher in those with diabetes. 4 ESRD As a component of our clinical strategy in developing ALT-711 for cardiovascular diseases and diabetic complications, we are currently conducting Phase 1 safety studies of ALT-711 in the critically ill ESRD patient population undergoing peritoneal dialysis. ESRD is a condition in which the kidneys no longer function. Peritoneal dialysis is a method of dialysis that uses the patient's peritoneum (a membrane in the abdomen) to filter out waste products. Latest statistics show that almost 25,000 of the 400,000 Americans living with ESRD are undergoing peritoneal dialysis. The ESRD patient population has a limited five-year survival (less than 30%) and significant cardiovascular complications, including LVH. Retinopathy Approximately nine out of 10 people with diabetes eventually develop retinopathy, a complication that affects the blood vessels inside the eye and can lead to blindness. Each year, approximately 12,000 to 24,000 people lose their sight because of diabetes. The incidence and severity of retinopathy increases with the duration of diabetes. Though not a primary endpoint in the Phase 2/3 ACTION trial, pimagedine therapy did result in a statistically significant reduction in the progression of retinopathy. Pre-clinical evidence suggests that ALT-711 and other compounds from the A.G.E. Crosslink Breaker class also may have a positive impact on retinopathy. Skin Aging Pre-clinical data has demonstrated the potential of A.G.E. Crosslink Breaker compounds to increase skin hydration and elasticity. A topical formulation of ALT-744, an A.G.E. Crosslink Breaker, is being clinically evaluated in skin aging for cosmetic applications. Other Diseases A.G.E.s have been shown to cause or contribute to many disorders beyond cardiovascular diseases and complications of diabetes, such as arthritis/inflammation, ophthalmic diseases, respiratory diseases and urological diseases, among others. We continue to evaluate potential indications for our compounds. OUR TECHNOLOGY: THE A.G.E. PATHWAY IN AGING AND DIABETES The harmful consequences of A.G.E. formation in man was proposed in 1986 by our scientific founders as an outgrowth of a research effort focused on diabetes. The foundation for our technology is the experimental evidence that intervention along the A.G.E. pathway provides significant benefit in slowing or reversing the development of serious diseases in the diabetic and aging populations. We are the pioneer in A.G.E. technology, and we have built an extensive patent estate covering our discoveries and compounds. A.G.E.s are permanent structures that form when simple sugars such as glucose bind to the surface of proteins. As the body ages, A.G.E. complexes form on proteins continuously and naturally, though slowly throughout life, at a rate dependent upon glucose levels and on the body's natural ability to clear these pathological structures. A.G.E. complexes subsequently crosslink to other proteins, causing a progressive loss of flexibility and function in various tissues, blood vessels and organs. The formation and crosslinking of A.G.E.s is a well-known process in food chemistry, where it is called the Maillard Reaction. The browning and toughening of food during the cooking process occurs, in part, as a result of the formation of A.G.E. complexes between sugars and the amino acids of proteins. The A.G.E. crosslink has been found to be unique in biology and is prevalent in animal models of aging and diabetes. Scientific literature suggests that the formation and subsequent crosslinking of A.G.E.s is an inevitable part of the aging process and diabetes that leads to a loss of flexibility and function in body tissues, organs and vessels. The A.G.E. pathway may provide the scientific explanation for how and why many of the medical complications of the aging process occur with higher frequency and earlier in life in diabetic patients. Diabetic individuals form excessive amounts of A.G.E.s earlier in life than do non-diabetic individuals, due primarily to higher levels of blood sugar. For this reason, diabetes may be viewed as an accelerated form of aging. 5 A.G.E.s and A.G.E. crosslinks are considered to be likely causative factors in the development of many age-related and diabetic disorders, including those associated with the cardiovascular and renal systems. For example, proteins in the body, such as collagen and elastin, which play an important role in maintaining the elasticity of the cardiovascular system, are prime targets for A.G.E. crosslinking. This stiffening process can impair the normal function of contractile organs, such as blood vessels, which depend on flexibility for normal function. Loss of flexibility of the vasculature may lead to a number of cardiovascular disorders, including systolic hypertension, diastolic dysfunction and LVH, and ultimately may lead to heart failure. Studies conducted in animal models of diabetes and aging at numerous independent institutions worldwide demonstrate that A.G.E.s are a major factor contributing to many of the disorders of aging and diabetes, including cardiovascular, kidney and eye diseases, as well as atherosclerosis. Recent human clinical studies we performed confirm that impacting the A.G.E. pathway can have beneficial effects on these diseases. The following chart illustrates the process of A.G.E. formation and crosslinking and is qualified by the more detailed description in the text. It also highlights those areas within the A.G.E. pathway where we are developing pharmaceutical agents to intervene therapeutically. OUR TECHNOLOGY PLATFORM AND PRODUCT PIPELINE Glucose + Proteins --------> A.G.E.s --------> Crosslinked A.G.E.s I I I Glucose Lowering A.G.E. Formation A.G.E. Crosslink Agents and Crosslink Breakers Inhibitors - - New Chemical Class - 9 New Chemical Classes - 17 New Chemical Classes (51 Compounds) (852 Compounds) (658 Compounds) - - New Mechanism - New Mechanism - New Mechanism - Improves pancreas function - Blocks A.G.E. cascade - Breaks A.G.E. crosslinks - Increases insulin production - Improves renal function - Restores vascular function - Restores insulin sensitivity - Effects additive to - Restores heart function conventional therapies - Activity unlike any known drug - Effects additive to conventional therapies Key Products in Development: Lead Identification Pimagedine ALT-711 ------------------- ---------- ------- - - Ongoing Phase 2/3 Phase 2 - - Type 2 Diabetes - Diabetic Kidney Disease (inactive) - Systolic Hypertension Veterinary Health - DHF - Diabetic Neuropathy Phase 1 - ESRD ALT-744 ------- Clinical Evaluation - Skin Aging
We incurred research and development expenditures of approximately $14,992,000, $8,461,000 and $6,375,000 for the years ended December 31, 2002, 2001 and 2000, respectively. 6 A.G.E. Crosslink Breakers By "breaking" A.G.E. crosslinks, these novel classes of compounds may have an impact on a number of medical disorders where loss of flexibility or elasticity leads to a loss in function. Our lead clinical candidate, ALT-711, has demonstrated the ability to reverse tissue damage and restore function to the cardiovascular system in two Phase 2a clinical trials, in cardiovascular compliance and diastolic heart failure. Additionally, we are evaluating the development of several compounds in the breaker class for other indications where A.G.E. crosslinking leads to abnormal function. Early clinical experience in human studies of ALT-711 suggests that urinary elastic dysfunction (leading to urinary incontinence) is a potential therapeutic target. The scientific literature also points to the possible utility of breaker compounds in ophthalmic and dermatological conditions, stiff joint disorders and treatment of complications in patients undergoing peritoneal dialysis. We have identified 17 distinct chemical classes of A.G.E. Crosslink Breakers, and have a library of more than 650 compounds. ALT-711 Through its unique mechanism of action, ALT-711 is the first compound that breaks A.G.E. crosslinks between proteins, both in vitro and in vivo. ALT-711 is an orally bioavailable compound dosed in tablet form. The compound is under Phase 2 clinical evaluation in cardiovascular diseases, as well as in Phase 1 evaluation in ESRD patients undergoing peritoneal dialysis. ALT-711 is being evaluated in various pre-clinical models to assess its potential in a number of other disease states. In January 2003, we announced positive results from a preliminary analysis of the first 17 patients in the Phase 2a DIAMOND clinical trial evaluating ALT-711 in DHF patients. The trial was conducted at Wake Forest University Baptist Medical Center and the Medical University of South Carolina in patients at least 60 years of age with isolated DHF. In the DIAMOND trial, 23 patients received 210 mg of ALT-711 twice daily on an open-label outpatient basis for 16 weeks in addition to their current medications. Primary endpoints included changes in exercise tolerance and aortic stiffness; effects on LVH, diastolic filling and quality of life were also assessed. Patients who received ALT-711 for 16 weeks experienced a statistically significant reduction in left ventricular mass, as well as a marked improvement in left ventricular diastolic filling. Additionally, the drug had a positive effect on patients' quality of life. Measurements of exercise tolerance and aortic distensibility proved to be more variable than anticipated for a study of this size and were not reportable. In January 2001, we announced successful results from a Phase 2a clinical trial of ALT-711 evaluating the effects of the compound on the cardiovascular system. This trial, conducted at nine United States clinical sites, was a double-blind, placebo-controlled study evaluating the safety, efficacy and pharmacology of ALT-711. The trial enrolled 93 patients over the age of 50 with measurably stiffened large vessels, including systolic blood pressure of at least 140mm Hg and pulse pressure of at least 60mm Hg. Patients were randomized to receive oral doses of either 210mg of ALT-711 or placebo once daily for eight weeks. Patients were evaluated for cardiovascular elasticity and function as measured by pulse pressure, cardiovascular compliance, pulse wave velocity and cardiac output. Under this protocol, ALT-711 treatment was in addition to the best available therapeutic regimen chosen by the treating physicians. Study results showed that patients who received ALT-711 experienced a statistically significant (p<0.02) and clinically meaningful reduction in the arterial pulse pressure, defined as the difference between systolic and diastolic blood pressure. Results also showed a statistically significant increase in large artery compliance (p<0.03), an indicator of greater vascular flexibility and volume capacity, using a traditional measurement of the ratio of stroke volume to pulse pressure. Additionally, the drug was well tolerated. This Phase 2a data was presented at the Special Sessions Presentation of "Late Breaking Clinical Trials" at the American College of Cardiology Annual Scientific Session in March 2001, and published as "breakthrough information" in the September 26, 2001 issue of the peer-reviewed journal, Circulation: Journal of the American Heart Association. Based on the positive results of this trial, we initiated two Phase 2b efficacy trials of ALT-711 in systolic hypertension, the SAPPHIRE and SILVER trials. These trials further evaluate ALT-711's ability to lower systolic blood pressure and pulse pressure in aging and diabetic patients and extend the range of doses and the dosing period of ALT-711 used in the Phase 2a trial. 7 In the SAPPHIRE trial, ALT-711 is being tested in 479 patients at more than 60 sites throughout the United States. Recruited patients receive ALT-711 tablets once a day for six months, in addition to their existing medications. The study consists of five treatment arms, comprised of four different dose levels of ALT-711 plus placebo. Patients enrolled in the trial are older than 50 years of age and have systolic blood pressure of greater than 150mm Hg and diastolic blood pressure of less than 90mm Hg. The trial includes male and female, non-diabetic and diabetic patients. The SILVER trial is designed as a companion trial to the SAPPHIRE trial, and is being conducted at the same clinical sites. Entry criteria are identical to that in the SAPPHIRE trial, except that patients have LVH in addition to systolic hypertension. The trial will evaluate the blood pressure lowering effects of ALT-711 in approximately 282 patients who are randomized to one of two treatment arms, ALT-711 or placebo. The primary endpoint of both studies will be the change in systolic blood pressure. In addition, secondary endpoints will include additional blood pressure measurements and change in certain urological characteristics. During 2001, we also initiated a Phase 1 trial assessing the safety of ALT-711 and the way the drug is metabolized in ESRD patients undergoing peritoneal dialysis. This patient population has a limited five-year survival (less than 30%) and significant cardiovascular complications, which are the primary cause of death. The ongoing Phase 1 program is an important component of our clinical strategy in developing ALT-711 for cardiovascular disease. ALT-711 data is consistent across species. 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 the stiffening of the heart, that accompanies the development of aging and diabetes. 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 a 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 of the heart, with an overall improvement in cardiac function. Reductions in blood pressure that have been observed in animal models of diabetic hypertension suggest that ALT-711 may prove beneficial in the treatment of systolic hypertension in the elderly or in the diabetic. Additionally, in several pre-clinical studies, ALT-711 has been shown to normalize the thickening of the left ventricle and remodel the heart. ALT-711 is a small, easily synthesized compound with a rapid mode of action. It is well absorbed from an oral tablet formulation. In addition to the Phase 2a human trials, a series of Phase 1 safety and dose escalation studies were conducted. These trials have shown the drug to be well tolerated. Additional A.G.E. Crosslink Breakers ALT-744 is another A.G.E. Crosslink Breaker in a topical formulation. It is being clinically evaluated in skin aging for cosmetic applications. We continue to evaluate other A.G.E. Crosslink Breakers from our library of compounds. A.G.E.-Formation Inhibitors A.G.E.-Formation Inhibitors are designed to prevent glucose/protein formation and crosslinking. This class of compounds may have broad applications in slowing down the key complications of diabetes. We have identified nine distinct chemical classes of A.G.E.-Formation Inhibitors, encompassing a library in excess of 850 compounds. Pimagedine Pimagedine has been the lead compound in the A.G.E.-Formation Inhibitor class. In November 1998, we announced results of an analysis of data from the ACTION 1 trial of pimagedine in diabetic patients with overt nephropathy. 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 8 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 kidney function, including estimated creatinine clearance and glomerular filtration rate. The drug was generally well tolerated. Though pimagedine is no longer in active clinical development, the ACTION trial serves as a proof-of-concept study demonstrating the potential of compounds that target the A.G.E. pathway in the treatment of diabetic kidney disease and other complications of diabetes. ALT-946, another A.G.E.-Formation Inhibitor, has demonstrated the ability to slow the progression of overt nephropathy in a pre-clinical study. We are continuing to evaluate the A.G.E. Inhibitors in our patent portfolio in order to identify pre-clinical leads for further development. Glucose Lowering Agents High glucose levels (hyperglycemia of diabetes) accelerate the rate of A.G.E. formation and crosslinking. Controlling glucose levels has been shown to slow the rate of progression of diabetic complications. The GLA program arose from a search of plant-derived natural products that would exhibit a beneficial profile of glucose and lipid lowering of Type 2 diabetes. Several pre-clinical candidates that display these beneficial properties have been evaluated. They have demonstrated the ability to lower glucose and lipids, restore insulin sensitivity and stimulate increased insulin production. We have identified one chemical class of GLA, which includes more than 50 compounds. COLLABORATIVE ARRANGEMENTS AND LICENSE AGREEMENTS We have entered into a number of licensing and collaboration agreements relating to the development and distribution of our A.G.E-related technology. Pursuant to an agreement with Rockefeller University, we have exclusive, royalty-free, worldwide and perpetual rights to the technology and inventions relating to A.G.E.s and other protein crosslinking, including those relating to the complications of aging and diabetes. See "--Patents, Trade Secrets and Licenses." We have also entered into an exclusive licensing arrangement with Roche Diagnostics GmbH ("Roche") for our technology for diagnostic applications, and we have also entered into clinical testing and distribution agreements with Gamida for Life which grant Gamida the exclusive right to distribute pimagedine, if successfully developed and approved for marketing, in Israel, Bulgaria, Cyprus, Jordan and South Africa. We have a license and supply agreement with IDEXX Laboratories, Inc., pursuant to which we licensed pimagedine to IDEXX as a potential therapeutic in companion animals (dogs, cats and horses) and our A.G.E. diagnostics technology for companion animal use. All of these agreements will entitle us to receive royalties on sales if any products covered by the agreements are developed and sold. On November 6, 2002, we entered into a new agreement, effective as of April 15, 2002, with The Picower Institute for Medical Research ("The Picower Institute"), which terminated their license agreement dated as of September 5, 1991. Pursuant to this termination agreement, Picower assigned to us all of its patents, patent applications and other technology related to A.G.E.'s, and we agreed to prosecute and maintain the patents and patent applications. We will pay The Picower Institute royalties on any sales of products falling within the claims of these patents and patent applications until they expire or are allowed to lapse. See "--Patents, Trade Secrets and Licenses." Effective as of August 5, 2002, we entered into a letter agreement with Yamanouchi Pharmaceutical Co, Ltd. ("Yamanouchi"), which terminated their License Agreement dated as of June 16, 1989. Pursuant to the letter agreement, for a period of fifteen years, (i) we will pay Yamanouchi royalties on any sales of pimagedine or pimagedine products in the territory covered by the License Agreement and (ii) we will have the option to purchase from Yamanouchi all or any part of our common stock owned by Yamanouchi. In October 2000, we entered into an agreement with HemoMax, LLC ("HemoMax") for the development of a novel technology designed to increase the delivery of oxygen to tissues in the body through enhanced blood circulation. On February 9, 2002, HemoMax advised us that because of uncertainties regarding its ability to receive patents adequate to support commercialization of the technology, it has decided to cease operations and liquidate. 9 MANUFACTURING We have no manufacturing facilities for either production of bulk chemicals or the manufacturing of pharmaceutical dosage forms. We rely on third-party contract manufacturers to produce the raw materials and chemicals used as the active drug ingredients in our products used in clinical trials, and we expect to rely on third parties to perform the tasks necessary to process, package and distribute these products in finished form. We will inspect third-party contract manufacturers and their consultants to confirm compliance with current Good Manufacturing Practice ("cGMP") required for pharmaceutical products. We believe we will obtain sufficient quantities of bulk chemicals at reasonable prices to satisfy anticipated needs. There can be no assurance, however, that we can continue to meet our needs for supply of bulk chemicals or that manufacturing limitations will not delay clinical trials or possible commercialization. See "--Collaborative Arrangements and License Agreements." MARKETING AND SALES We retain worldwide marketing rights to our A.G.E. Crosslink Breaker compounds. We plan to market and sell our products, if successfully developed and approved, directly or through co-promotion or other licensing arrangements with third parties. We believe that ALT-711 may address the cardiovascular, diabetes and primary care physician markets. Such arrangements may be exclusive or nonexclusive and may provide for marketing rights worldwide or in a specific market. For certain of our products, we have licensed exclusive marketing rights, formed joint marketing arrangements or granted distribution rights within specified territories with our corporate partner, Roche. See "--Collaborative Arrangements and License Agreements." PATENTS, TRADE SECRETS AND LICENSES Proprietary protection for our product candidates, processes and know-how is important to our business. We aggressively file and prosecute patents covering our proprietary technology, and, if warranted, will defend our patents and proprietary technology. As appropriate, we seek patent protection for our proprietary technology and products in the United States and Canada and in key commercial European and Asia/Pacific countries. We also rely upon trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain our competitive position. As of December 31, 2002, our patent estate of owned and/or licensed patent rights consisted of 99 issued United States patents, 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. We also own or have exclusive rights to over 80 issued patents in Europe, Japan, Australia and Canada. We have seven issued United States patents and five issued foreign patents, including one from the European Patent Office, as well as 19 pending patent applications in the United States, 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, including ALT-711. Pimagedine is not protected by a composition-of-matter patent but is protected by a series of use patents. In 1992, a United States patent on the use of pimagedine was issued to Rockefeller University and subsequently exclusively licensed to us 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 aging and diabetes. 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. We continue to pursue and patent chemical analogs of known A.G.E.-Formation Inhibitors, as well as novel compounds having potential inhibitory properties. We believe that our licensed and owned patents provide a substantial proprietary base that will allow us and our 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 protection of our technology or that our directed discovery research will yield compounds and products of therapeutic and commercial value. 10 In 1987, we 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 crosslinking technology currently under development by us. 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 our laboratories. Pursuant to our agreement with The Picower Institute, certain patentable inventions and discoveries relating to A.G.E. technology have been licensed exclusively to us. On December 31, 2001, The Picower Institute ceased operations. On November 6, 2002, we entered into an agreement, effective as of April 15, 2002, with The Picower Institute, which terminated their license agreement dated as of September 5, 1991. Pursuant to this termination agreement, The Picower Institute assigned to us all of its patents, patent applications and other technology related to A.G.E.'s and we agreed to prosecute and maintain the patents and patent applications. We will pay The Picower Institute royalties on any sales of products falling within the claims of these patents and patent applications until they expire or are allowed to lapse. We intend to continue to focus our research and development efforts on the synthesis of novel compounds and on the search for additional therapeutic applications to expand and broaden our rights within our technological and patent base. We are also prepared to in-license additional technology that may be useful in building our proprietary position. Where appropriate, we utilize trade secrets and unpatentable improvements to enhance our technology base and improve our competitive position. We require all employees, scientific consultants and contractors to execute confidentiality agreements as a condition of engagement. There can be no assurance, however, that we can limit unauthorized or wrongful disclosures of unpatented trade secret information. We believe that our estate of licensed and owned issued patents, if upheld, and pending applications, if granted and upheld, will be a substantial factor in our success. The patent positions of pharmaceutical firms, including ours, are generally uncertain and involve complex legal and factual questions. Consequently, even though we are currently prosecuting such patent applications in the United States and foreign patent offices, we do 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 ours. Accordingly, there can be no assurance that our 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 we would need to license or circumvent. See "--Competition." Our success will depend, in part, on our ability to obtain patent protection for our products, preserve our trade secrets and operate without infringing on the proprietary rights of third parties. There can be no assurance that our current patent estate will enable us 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 we rely on trade secrets and unpatented know-how to maintain our competitive technological position, there can be no assurance that others may not develop independently the same or similar technologies. Failure to maintain our 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 us or our licensees or marketing partners from marketing their products and could thereby have a material adverse effect on our business, financial condition and results of operations. GOVERNMENT REGULATION We and our products are subject to comprehensive regulations by the United States Food and Drug Administration ("FDA") 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 our products. 11 The process required by the FDA before our 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 investigational new drug application ("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 a new drug application ("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. 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 1, when the drug is initially given to human subjects, the product is tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase 2 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 3 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. We will need FDA approval of our products, including a review of the manufacturing processes and facilities used to produce such products 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 the FDA will grant approvals of our proposed products, processes or facilities on a timely basis, if at all. Any delay or failure to obtain such approvals would have a material adverse effect on our 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 operating 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 our 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. We cannot predict the ultimate impact, however, of the FDA's accelerated approval of procedures on the timing or likelihood of approval of any of our 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 12 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. For marketing outside the United States, we will have to satisfy 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. We do not currently have any facilities or personnel outside of the United States. In addition to regulations enforced by the FDA, we are also subject to regulations 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. Our research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our 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, we could be held liable for any damages that result and any such liability could exceed our resources. COMPETITION A.G.E.s have been shown to contribute to many of the disorders of aging and diabetes, including cardiovascular, kidney and eye diseases. We are aware of several companies that have research and development activities in the A.G.E. field. Many companies are pursuing research and development of compounds for cardiovascular and kidney diseases and the lowering of glucose levels. Many of our potential competitors have substantially greater financial, technical and human resources than ours 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 ours. Our competition will be determined, in part, by the potential indications for which our compounds are developed and ultimately approved by regulatory authorities. For certain of our potential products, an important factor in competition may be the timing of market introduction of our or our competitors' products. Accordingly, the relative speed with which we can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market are important competitive factors. We expect that competition among products approved for sale will be based on, among other things, product efficacy, safety, reliability, availability, price and patent position. Our competitive position also depends upon our ability to attract and retain qualified personnel, obtain protection or otherwise develop proprietary products or processes and secure sufficient capital resources. We are competing in an industry in which technologies can become obsolete over time, thereby reducing or eliminating the market for any pharmaceutical product. For example, competitive drugs based on other therapeutic mechanisms may be efficacious in treating cardiovascular disease or diabetic complications. The development by others of non-A.G.E.-related treatment modalities could render our products non-competitive. Therapeutic approaches being pursued by others include curing cardiovascular disease or diabetic complications via gene therapy or cell transplantation, as well as pharmaceutical intervention with agents such as the aldose reductase inhibitors. Angiotensin converting enzyme inhibitors, angiotensin receptor blockers, calcium channel blockers, beta-blockers and diuretics are effective treatments for essential hypertension, a disease characterized by increased peripheral vascular resistance (essential hypertension closely related to diastolic blood pressure). Systolic hypertension, characterized by increased stiffness of the large arteries, is not usually associated with increased peripheral vascular resistance. In the absence of any marketed products that address the underlying pathology of systolic hypertension patients, treatments approved for essential hypertension are currently being prescribed to treat hypertension in these patients. 13 MEDICAL AND CLINICAL ADVISORS Our Medical and Clinical Advisors consist of individuals with recognized expertise in the medical and pharmaceutical science and related fields who advise us about present and long-term scientific planning, research and development. These advisors consult and meet with our management informally on a frequent basis. All advisors are employed by employers other than us and may have commitments to, or consulting or advisory agreements with, other entities that may limit their availability to us. These companies may also be competitors of ours. The advisors have agreed, however, not to provide any services to any other entities that might conflict with the activities that they provide us. Each member also has executed a confidentiality agreement for our benefit. The following persons are Medical and Clinical Advisors: George L. Bakris, M.D., F.A.C.P., F.C.P., Professor of Preventive and Internal Medicine, Vice Chairman, Department of Preventive Medicine and Director, Hypertension/Clinical Research Center, Rush-Presbyterian/St. Luke's Medical Center; immediate Past-President, American College of Clinical Pharmacology. Leslie Z. Benet, Ph.D., Professor, University of California San Francisco, School of Pharmacy, Department of Biopharmaceutical Sciences; Chairman of the Board, AvMax, Inc.; former Chairman, Department of Biopharmaceutical Sciences of the University of California San Francisco. Edward D. Frohlich, M.D., Alton Ochsner Distinguished Scientist of the Ochsner Clinic Foundation; Professor of Medicine and Physiology at Louisiana State University; Clinical Professor of Medicine and Adjunct Professor of Pharmacology at Tulane University; President, Society of Geriatric Cardiology; Past-President, American Society for Clinical Pharmacology and Therapeutics; Past-Chairman, Council for High Blood Pressure Research (American Heart Association); immediate Past-Editor-in-Chief of Hypertension journal. Richard J. Glassock, M.D., M.A.C.P., Professor Emeritus, The David Geffen School of Medicine at the University of California Los Angeles, Past-President, National Kidney Foundation; Past-President, American Society of Nephrology. Norman K. Hollenberg, M.D., Ph.D., Assistant, Associate and Full Professor, Peter Bent Brigham Hospital, Boston, Massachusetts; served as an Editor of the New England Journal of Medicine. EMPLOYEES As of February 28, 2003, we employed 43 persons, 31 were engaged in research and development and 12 were engaged in administration and management. Seven of those employed held a Ph.D., M.D. or other advanced degree. We believe that we have been successful in attracting skilled and experienced personnel. Our employees are not covered by collective bargaining agreements, but all employees are covered by confidentiality agreements. We believe that our relationship with our employees is good. FORWARD-LOOKING STATEMENTS AND CAUTIONARY 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 us or our representatives are based on a number of assumptions. The words "believe," "expect," "anticipate," "intend," "estimate" 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 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 this Form 10-K. These factors include, but are not limited to, the risks set forth below. 14 The forward-looking statements represent our judgment and expectations as of the date of this Report. We assume no obligation to update any such forward-looking statements. IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES. As of December 31, 2002, we had working capital of approximately $13,786,000, including approximately $17,439,000 of cash, cash equivalents and short-term investments. During 2002, we sold 6,164,285 shares of common stock, raising net proceeds of approximately $21,575,000. Our cash used in operations for the year ended December 31, 2002, 2001 and 2000 was approximately $14,931,000, $9,032,000 and $8,986,000, respectively. We expect to utilize cash to fund our operations at levels similar to those used in 2002 through the expected completion date of the SAPPHIRE and SILVER trials in mid-2003, and believe we have adequate cash and cash equivalents and short-term investments to fund such trials. However, we do not believe we will have adequate cash at these spending levels to complete the fiscal year. As a result, throughout 2003, we will monitor our liquidity position and the status of our clinical trials. Depending upon the results of any attempts made by us to raise additional funds through the sale of additional equity securities, we may be required to significantly reduce or curtail our research and product development activities and other operations if our level of cash and cash equivalents fall below pre-determined levels. We have the intent and ability to quickly and significantly reduce the cash burn rate, if necessary, as we have limited fixed commitments. We believe that such actions will enable us to fund our operations through the first quarter of 2004. We will require, over the long-term, substantial new funding to pursue development and commercialization of ALT-711 and our other product candidates and continue our operations. We believe that satisfying these capital requirements over the long-term will require successful commercialization of our product candidates. However, it is uncertain whether or not any products will be approved or will be commercially successful. The amount of our future capital requirements will depend on numerous factors, including the progress of our 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 our short-term and long-term capital requirements, we, as stated above, may seek access to the public or private equity markets. This may have the effect of materially diluting the current holders of our outstanding stock. We 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 us. If we obtain funds through arrangements with collaborative partners or others, we may be required to relinquish rights to certain of our technologies or product candidates. IF WE DO NOT SUCCESSFULLY DEVELOP ANY PRODUCTS, WE MAY NOT DERIVE ANY REVENUES. We have not yet requested or received regulatory approval for any product from the FDA or any other regulatory body. All of our product candidates are still in research or clinical development. We may not succeed in the development and marketing of any therapeutic or diagnostic product. To achieve profitable operations, we 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 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. We may not be able to undertake additional clinical trials. In addition, our product development efforts may not be successfully completed, we may not obtain regulatory approvals, and our products, if introduced, may not be successfully marketed or achieve customer acceptance. We do not expect any of our products, including ALT-711, to be commercially available for a number of years, if at all. 15 CLINICAL TRIALS REQUIRED FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND TIME-CONSUMING, AND THEIR OUTCOME IS UNCERTAIN. Before obtaining regulatory approvals for the commercial sale of any of our products under development, we must demonstrate through pre-clinical studies and clinical trials that the product is safe and effective for use in each target indication. The length of time necessary to complete clinical trials varies significantly and may be difficult to predict. Factors which can cause delay or termination of our clinical trials include: (i) slower than expected patient enrollment due to the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the study, competition with clinical trials for other drug candidates or other factors; (ii) lower than expected retention rates of patients in a clinical trial; (iii) inadequately trained or insufficient personnel at the study site to assist in overseeing and monitoring clinical trials; (iv) delays in approvals from a study site's review board; (v) longer treatment time required to demonstrate effectiveness or determine the appropriate product dose; (vi) lack of sufficient supplies of the product candidate; (vii) adverse medical events or side effects in treated patients; (viii) lack of effectiveness of the product candidate being tested and (ix) regulatory changes. Even if we obtain positive results from pre-clinical or clinical trials for a particular product, we may not achieve the same success in future trials of that product. In addition, some or all of the clinical trials we undertake may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals, which could prevent the creation of marketable products. Our product development costs will increase if we have delays in testing or approvals, if we need to perform more or larger clinical trials than planned or if our trials are not successful. Delays in our clinical trials may harm our financial results and the commercial prospects for our products. IF WE ARE UNABLE TO DERIVE REVENUES FROM PRODUCT SALES, WE MAY NEVER BE PROFITABLE. All of our revenues to date have been generated from collaborative research agreements and financing activities, or interest income earned on these funds. We have not received any revenues from product sales. We may not realize product revenues on a timely basis, if at all. At December 31, 2002, we had an accumulated deficit of approximately $169,376,000. We anticipate that we will incur substantial, potentially greater, losses in the future. Our products under development may not be successfully developed and our products, if successfully developed, may not generate revenues sufficient to enable us to earn a profit. We expect to incur substantial additional operating expenses over the next several years as our research, development and clinical trial activities increase. We do not expect to generate revenues from the sale of products, if any, for a number of years. Our ability to achieve profitability depends, in part, on our ability to enter into agreements for product development, obtain regulatory approval for our products and develop the capacity, or enter into agreements, for the manufacture, marketing and sale of any products. We may not obtain required regulatory approvals, or successfully develop, manufacture, commercialize and market product candidates, and we may never achieve product revenues or profitability. PRIOR STOCK OPTION REPRICING MAY HAVE AN ADVERSE EFFECT ON OUR FUTURE FINANCIAL PERFORMANCE. Based on the performance of our stock, we repriced certain employee stock options on February 2, 1999, in order to bolster employee retention. As a result of this repricing, options to purchase 1.06 million shares of stock were repriced and certain vesting periods related to these options were modified or extended. This repricing may have a material adverse impact on future financial performance based on the Financial Accounting Standards Board ("FASB") Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, An Interpretation of APB Opinion No. 25." This interpretation requires us to record compensation expense or benefit, which is adjusted every quarter, for increases or decreases in the fair value of the repriced options based on changes in our stock price from the value at July 1, 2000, until the repriced options are exercised, forfeited or expire. The options expire at various dates through January 2008. IF WE ARE UNABLE TO FORM THE COLLABORATIVE RELATIONSHIPS THAT OUR BUSINESS STRATEGY REQUIRES, THEN OUR PROGRAMS WILL SUFFER AND WE MAY NOT BE ABLE TO DEVELOP PRODUCTS. Our strategy for developing and deriving revenues from our products depends, in large part, upon entering into arrangements with research collaborators, corporate partners and others. We are seeking to establish these relationships to provide the funding necessary for continuation of our product development, but if such efforts may not be successful, our programs may suffer and we may be unable to develop products. 16 IF WE ARE ABLE TO FORM OUR COLLABORATIVE RELATIONSHIPS, BUT ARE UNABLE TO MAINTAIN THEM, OUR PRODUCT DEVELOPMENT MAY BE DELAYED AND DISPUTES OVER RIGHTS TO TECHNOLOGY MAY RESULT. We may form collaborative relationships that will, in some cases, make us dependent upon outside partners to conduct pre-clinical testing and clinical trials and to provide adequate funding for our development programs. Such corporate partners, if any, 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 our business, financial condition and results of operations. In most cases, we will not be able to control the amount and timing of resources that our corporate partners devote to our programs or potential products. If any of our corporate partners breached or terminated its agreement with us or otherwise failed to conduct its collaborative activities in a timely manner, the pre-clinical or clinical development or commercialization of product candidates or research programs could be delayed, and we would be required to devote additional resources to product development and commercialization or terminate certain development programs. Disputes may arise in the future with respect to the ownership of rights to any technology we develop with third parties. These and other possible disagreements between us and collaborators could lead to delays in the collaborative research, development or commercialization of 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 our business, financial condition, results of operations and liquidity. Any corporate partners we have may develop, either alone or with others, products that compete with the development and marketing of our 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 our technology, which would have a material adverse effect on our business, financial condition, results of operations and liquidity. IF WE CANNOT SUCCESSFULLY DEVELOP A MARKETING AND SALES FORCE OR MAINTAIN SUITABLE ARRANGEMENTS WITH THIRD PARTIES TO MARKET AND SELL OUR PRODUCTS, OUR ABILITY TO DELIVER PRODUCTS MAY BE IMPAIRED. We currently have no experience in marketing or selling pharmaceutical products. In order to achieve commercial success for any approved product, we must either develop a marketing and sales force or, where appropriate or permissible, enter into arrangements with third parties to market and sell our products. We might not be successful in developing marketing and sales capabilities. Further, we may not be able to enter into marketing and sales agreements with others on acceptable terms, and any such arrangements, if entered into, may be terminated. If we develop our 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 we enter into co-promotion or other sales and marketing arrangements with other companies, revenues will depend on the efforts of others, which may not be successful. IF WE CANNOT SUCCESSFULLY FORM AND MAINTAIN SUITABLE ARRANGEMENTS WITH THIRD PARTIES FOR THE MANUFACTURING OF THE PRODUCTS WE MAY DEVELOP, OUR ABILITY TO DEVELOP OR DELIVER PRODUCTS MAY BE IMPAIRED. We have no experience in manufacturing products for commercial purposes and do not have manufacturing facilities. Consequently, we are dependent on contract manufacturers for the production of products for development and commercial purposes. The manufacture of our products for clinical trials and commercial purposes is subject to cGMP regulations promulgated by the FDA. In the event that we are unable to obtain or retain third-party manufacturing for our products, we will not be able to commercialize such products as planned. We may not 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. Our current dependence upon others for the manufacture of our products may adversely affect our profit margin, if any, on the sale of future products and our ability to develop and deliver such products on a timely and competitive basis. 17 IF WE ARE NOT ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR SUCCESS, THE DEVELOPMENT AND ANY POSSIBLE SALES OF OUR PRODUCT CANDIDATES COULD SUFFER AND COMPETITORS COULD FORCE OUR PRODUCTS COMPLETELY OUT OF THE MARKET. Our success will depend on our ability to obtain patent protection for our products, preserve our trade secrets, prevent third parties from infringing upon our 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 our potential products are subject to this uncertainty. Competitors may develop competitive products outside the protection that may be afforded by the claims of our patents. We are 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 that have an effect on A.G.E.s. or the formation of A.G.E. crosslinks. In addition, although we have several patent applications pending to protect proprietary technology and potential products, these patents may not be issued, and the claims of any patents, which do issue, may not provide significant protection of our technology or products. In addition, we may not enjoy any patent protection beyond the expiration dates of our currently issued patents. We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to maintain, develop and expand our competitive position, which we seek to protect, in part, by confidentiality agreements with our corporate partners, collaborators, employees and consultants. We also have invention or patent assignment agreements with our employees and certain, but not all, corporate partners and consultants. Relevant inventions may be developed by a person not bound by an invention assignment agreement. Binding agreements may be breached, and we may not have adequate remedies for such breach. In addition, our trade secrets may become known to or be independently discovered by competitors. IF WE FAIL TO OBTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, THE COMMERCIAL USE OF OUR PRODUCTS WILL BE LIMITED. Our research, pre-clinical testing and clinical trials of our product candidates are, and the manufacturing and marketing of our products will be, subject to extensive and rigorous regulation by numerous governmental authorities in the United States and in other countries where we intend to test and market our product candidates. Prior to marketing, any product we develop 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 is susceptible to varying interpretations that could delay, limit or prevent regulatory approval. In addition, we may encounter delays or rejections based upon changes in FDA policy for drug approval during the period of product development and FDA regulatory review of each submitted NDA. We may encounter similar delays in foreign countries. We may not obtain regulatory approval for the drugs we develop. Moreover, regulatory approval may entail limitations on the indicated uses of the drug. Further, even if we obtain regulatory approval, 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 our 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, 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 our products has been approved for commercialization in the United States or elsewhere. We may not 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 our licensees or marketing partners from marketing our products or limit the commercial use of such products and will have a material adverse effect on our business, financial condition, results of operations and liquidity. IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE DEVELOPMENT AND MARKETING OF CURES AND THERAPIES FOR CARDIOVASCULAR DISEASES, DIABETES AND THE OTHER CONDITIONS FOR WHICH WE SEEK TO DEVELOP PRODUCTS, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS. We are engaged in pharmaceutical fields characterized by extensive research efforts and rapid technological progress. Many established pharmaceutical and biotechnology companies with resources greater than ours are attempting to develop products that would be competitive with our products. Other companies may succeed 18 in developing products that are safer, more efficacious or less costly than any we may develop and may also be more successful than us in production and marketing. Rapid technological development by others may result in our products becoming obsolete before we recover 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 better treatments for cardiovascular disease, or diabetes and its related complications. Several large companies have initiated or expanded research, development and licensing efforts to build pharmaceutical franchises focusing on these medical conditions. It is possible that one or more of these initiatives may reduce or eliminate the market for some of our products. In addition, other companies have initiated research in the inhibition or crosslink breaking of A.G.E.s. IF GOVERNMENTS AND THIRD-PARTY PAYERS CONTINUE THEIR EFFORTS TO CONTAIN OR DECREASE THE COSTS OF HEALTHCARE, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS SUCCESSFULLY. In certain foreign markets, pricing and/or profitability of prescription pharmaceuticals are subject to government control. In the United States, we expect 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 we receive for any products we may develop and sell in the future and have a material adverse effect on our business, financial condition and results of operations. Further, to the extent that cost control initiatives have a material adverse effect on our corporate partners, our ability to commercialize our products may be adversely affected. Our 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 payers. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, and third-party payers, including Medicare, are increasingly challenging the prices charged for medical products and services. Third-party insurance coverage may not be available to patients for any products developed by us. Government and other third-party payers are attempting to contain healthcare 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 payers for our products, the market acceptance of these products would be adversely affected. IF THE USERS OF THE PRODUCTS WE DEVELOP CLAIM THAT OUR PRODUCTS HAVE HARMED THEM, WE MAY BE SUBJECT TO COSTLY AND DAMAGING PRODUCT LIABILITY LITIGATION, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. The use of any of our potential products in clinical trials and the sale of any approved products, including the testing and commercialization of ALT-711 or other compounds, exposes us to liability claims resulting from the use of products or product candidates. A claim, which was subsequently settled, was made by a participant in one of our clinical trials, and additional claims might be made directly by other such participants, consumers, pharmaceutical companies or others. We maintain product liability insurance coverage for claims arising from the use of our products in clinical trials. However, coverage is becoming increasingly expensive, and we may not be able to maintain or acquire insurance at a reasonable cost or in sufficient amounts to protect us against losses due to liability that could have a material adverse effect on our business, financial conditions and results of operations. We may not be able to obtain commercially reasonable product liability insurance for any product approved for marketing in the future and insurance coverage and our resources may not be sufficient to satisfy any liability resulting from product liability claims. A successful product liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition, results of operations and liquidity. IF WE ARE UNABLE TO ATTRACT AND RETAIN THE KEY PERSONNEL ON WHOM OUR SUCCESS DEPENDS, OUR PRODUCT DEVELOPMENT, MARKETING AND COMMERCIALIZATION PLANS COULD SUFFER. We are highly dependent on the principal members of our management and scientific staff. The loss of services of any of these personnel could impede the achievement of our development objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future will also be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the 19 competition between pharmaceutical and healthcare companies, universities and non-profit research institutions for experienced scientists. In addition, we rely on consultants to assist us in formulating our research and development strategy. All of our consultants are employed outside of us and may have commitments to or consulting or advisory contracts with other entities that may limit their availability to us. OUR OPERATIONS INVOLVE A RISK OF INJURY OR DAMAGE FROM HAZARDOUS MATERIALS, AND IF AN ACCIDENT WERE TO OCCUR, WE COULD BE SUBJECT TO COSTLY AND DAMAGING LIABILITY CLAIMS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our research and development activities involve the controlled use of hazardous materials and chemicals. Although we believe that our 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, we could be held liable for any damages or fines that result. Such liability could have a material adverse effect on our business, financial condition, results of operations and liquidity. ITEM 2. PROPERTIES. We lease a 37,000 square foot building in Ramsey, New Jersey, which contains our 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. On August 5, 2002, Lisa Weller, a former employee of ours, filed suit against us in the Superior Court of New Jersey asserting claims for alleged pregnancy, sex and handicap discrimination, wrongful termination and intentional infliction of emotional distress, all arising from our termination of her employment as an executive assistant. We removed the case to the United States District Court for the District of New Jersey. In December 2002, we agreed to a settlement with Ms. Weller under which we deny all liability in exchange for a dismissal and release by Ms. Weller of any and all claims against us. The settlement is currently being executed by both parties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock has traded on the American Stock Exchange ("Amex") since August 7, 2000, under the symbol "ALT."
2002 High Low ---- ---- ---- First Quarter.................... $ 5.90 $ 3.40 Second Quarter................... 3.84 1.77 Third Quarter.................... 2.25 1.38 Fourth Quarter................... 2.45 1.00
2001 High Low ---- ---- ---- First Quarter.................... $ 6.50 $ 3.15 Second Quarter................... 4.71 2.70 Third Quarter.................... 3.49 2.25 Fourth Quarter................... 4.93 2.33
As of February 28, 2003, there were 325 holders of the common stock. On February 28, 2003, the last sale price reported on the Amex for the common stock was $3.74 per share. 20 We have neither paid nor declared dividends on our common stock since our inception and do not plan to pay dividends in the foreseeable future. Any earnings that we may realize will be returned to finance our growth. The market prices for securities of biotechnology and pharmaceutical companies, including ours, 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 our operating results, announcements of technological innovations or new therapeutic products by us or others, clinical trial results, developments concerning agreements with collaborators, governmental regulation, developments in patent or other proprietary rights, public concern as to the safety of drugs developed by us 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. The information called for by Item 201(d) of Regulation S-K is provided in response to Item 12 of this Annual Report on Form 10-K, which is incorporated herein by reference. 21 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, 2002, has been derived from our audited financial statements.
Year Ended December 31, -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ (in thousands, except per share data) STATEMENTS OF OPERATIONS DATA: Revenues: Investment income .......................... $ 410 $ 452 $ 570 $ 835 $ 1,321 Other income ............................... -- -- -- 600 -- ------------ ------------ ------------ ------------ ------------ Total revenues ........................... 410 452 570 1,435 1,321 Expenses: Research and development (which includes non-cash variable stock compensation (benefit)/expense in 2002, 2001 and 2000 of $(94), $165 and $353, respectively) ............................. 14,992 8,461 6,375 10,598 24,592 Elimination of previously accrued loss contingency .......................... -- -- -- -- (1,771) General and administrative (which includes non-cash variable stock compensation (benefit)/expense in 2002, 2001 and 2000 of $(1,316), $657 and $891, respectively) ....................... 2,946 4,761 5,313 4,357 4,842 Interest ................................... -- -- -- -- 4 ------------ ------------ ------------ ------------ ------------ Total expenses ............................ 17,938 13,222 11,688 14,955 27,667 ------------ ------------ ------------ ------------ ------------ Loss before income tax benefit ................ (17,528) (12,770) (11,118) (13,520) (26,346) Income tax benefit ............................ 647 1,187 1,548 2,588 -- Total expenses .......................... ------------ ------------ ------------ ------------ ------------ Net loss ...................................... (16,881) (11,583) (9,570) (10,932) (26,346) -- Preferred stock dividends ..................... 3,485 3,204 2,945 2,707 2,207 Common stock warrant deemed dividends ......... -- 210 -- -- -- ------------ ------------ ------------ ------------ ------------ Net loss applicable to common stockholders ................................ $ (20,366) $ (14,997) $ (12,515) $ (13,639) $ (28,553) ============ ============ ============ ============ ============ Basic/diluted net loss per share applicable to common stockholders ......................... $ (0.64) $ (0.61) $ (0.63) $ (0.72) $ (1.57) ============ ============ ============ ============ ============ Weighted average common shares used in computing basic/diluted net loss per share... 31,793 24,556 19,861 19,055 18,211 ============ ============ ============ ============ ============ BALANCE SHEET DATA: Cash, cash equivalents and short-term investments ...................... $ 17,439 $ 10,726 $ 9,955 $ 12,370 $ 24,132 Working capital ............................... 13,786 9,758 9,754 10,425 20,093 Total assets .................................. 18,099 13,233 13,389 15,021 27,652 Accumulated deficit ........................... (169,376) (149,009) (134,011) (121,496) (107,857) Total stockholders' equity .................... 14,303 10,871 11,453 12,827 23,338
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW We are a product-based biopharmaceutical company primarily engaged in the discovery and development of oral drugs to reverse or slow down diseases of aging and complications of diabetes. Our product candidates represent novel approaches to some of the largest pharmaceutical markets. Our lead compound is in Phase 2b clinical development; several others are in earlier development stages. These pharmaceutical candidates were developed as a result of our research on the A.G.E. pathway, a fundamental pathological process and inevitable consequence of aging that causes or contributes to many medical disorders, including cardiovascular, kidney and eye diseases. 22 Our lead compound, ALT-711, is being developed initially for cardiovascular indications, and two Phase 2a clinical trials in cardiovascular compliance and in DHF have been successfully completed. Based on the positive results of the trial in cardiovascular compliance, we have initiated two Phase 2b efficacy trials of ALT-711, the SAPPHIRE and SILVER trials in systolic hypertension, for which data is expected to be reported concurrently about mid-year 2003. We are also considering further clinical development in DHF and related conditions. As we continue clinical development of ALT-711, we will determine if it is appropriate to retain development and marketing rights for one or several indications in North America, while at the same time continuing to evaluate potential corporate partnerships for the further development and ultimate marketing of the compound in other territories throughout the world. We believe that ALT-711 may address the cardiovascular, diabetes and primary care physician markets. A topical formulation of an A.G.E. Crosslink Breaker, ALT-744, is being clinically evaluated in skin aging for cosmetic applications. We continue to evaluate product development opportunities from among our A.G.E. Crosslink Breaker compounds and other classes of compounds in our patent estate. Since our inception in October 1986, we have devoted substantially all of our resources to research, drug discovery and development programs. To date, we have not generated any revenues from the sale of products and do not expect to generate any such revenues for a number of years, if at all. We have incurred an accumulated deficit of approximately $169,376,000 as of December 31, 2002, and expect to incur operating losses, potentially greater than losses in prior years, for a number of years. We have financed our operations through proceeds from an initial public offering of common stock in 1991, public offerings of common stock, private placements of common and preferred equity securities, revenue from former collaborative relationships, reimbursement of certain of our research and development expenses by our collaborative partners, investment income earned on cash balances and short-term investments and the sale of a portion of our New Jersey State net operating loss carryforwards. In December 2002, we completed a public offering of 1,714,285 shares of common stock at $1.75 per share, which provided net proceeds of approximately $2,965,000. In connection with this offering, certain previously issued warrants were repriced pursuant to antidilution provisions connected to the warrants. In January 2002, we completed a public offering of 4,450,000 shares of common stock, which provided net proceeds of approximately $18,611,000. In July 2001, we completed a public offering of 4,500,000 shares of common stock, which provided net proceeds of approximately $9,410,000. In connection with this offering, certain previously issued warrants were repriced pursuant to antidilution provisions connected to the warrants. In March 2000, the FASB released Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, An Interpretation of APB Opinion No. 25." The interpretation became effective on July 1, 2000, but in some circumstances applies to transactions that occur prior to the effective date. Under the interpretation, stock options that are repriced must be accounted for as variable-plan arrangements until the options are exercised, forfeited or expire. This requirement applies to any options repriced after December 15, 1998. On February 2, 1999, we repriced certain stock options. The total compensation (benefit)/expense resulting from the repricing and included in net loss for the years ended December 31, 2002, 2001 and 2000, was approximately $(1,409,000), $822,000 and $1,244,000, respectively. As of December 31, 2002, there were approximately 590,000 repriced options outstanding, which expire at various dates through 2008. In 2002, 2001 and 2000, we sold $1,839,000, $6,243,000 and $14,129,000, respectively, of our gross State net operating loss carryforwards and $578,000, $802,000 and $590,000, respectively, of our State research and development tax credit carryforwards under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the "Program"). The Program allows 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 proceeds from the sale in 2002, 2001 and 2000 were approximately $647,000, $1,187,000 and $1,548,000, respectively, and such amounts were recorded as a tax benefit in the statements of operations. 23 Our business is subject to significant risks including, but not limited to, (i) the ability to obtain funding, (ii) the risks inherent in our research and development efforts, including clinical trials, (iii) uncertainties associated with obtaining and enforcing our patents and with the patent rights of others, (iv) the lengthy, expensive and uncertain process of seeking regulatory approvals, (v) uncertainties regarding government healthcare 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 our 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. These risks and others are discussed under the heading "Forward-Looking Statements and Cautionary Statements." RESULTS OF OPERATIONS Years Ended December 2002, 2001, 2000 Revenues Total revenues for 2002, 2001 and 2000 were $410,000, $452,000 and $570,000, respectively. Revenues were derived from interest earned on cash and cash equivalents and short-term investments. The decrease in revenues in 2002 over 2001 and 2000 was attributed to decreased interest rates, partially offset by larger investment balances. Operating Expenses Total expenses increased to $17,938,000 in 2002 from $13,222,000 in 2001, and from $11,688,000 in 2000, and in each year consisted primarily of research and development expenses. Research and development expenses were $14,992,000 in 2002, $8,461,000 in 2001 and $6,375,000 in 2000, and included non-cash variable stock compensation (benefit)/expense of $(94,000), $165,000 and $353,000, respectively. Research and development expenses consisted primarily of third-party expenses associated with pre-clinical and clinical studies, manufacturing costs, including the development and preparation of clinical supplies, personnel and personnel-related expenses and an allocation of facility expense. Research and development expenses increased in 2002 from 2001 by $6,531,000, or 77.2%. This increase was primarily related to increased clinical trial costs associated with the crosslink breaker program. In 2002, approximately $6,631,000 of total research and development expenditures were related to the Phase 2b SAPPHIRE and SILVER trials and the Phase 2a DIAMOND trial. The 2002 results also included approximately $3,250,000 in personnel and personnel-related costs, $683,000 in pre-clinical expenses and approximately $1,872,000 of manufacturing costs. These manufacturing costs included finalizing the development of manufacturing processes for the production of Phase 3 clinical trial supplies and potential commercialization of ALT-711, drug stability studies and drug packaging. The Phase 2b SAPPHIRE and SILVER trials completed enrollment in November 2002. The release of the data from these trials is expected to be reported concurrently about mid-year 2003. The development and successful commercialization of ALT-711 are subject to substantial risks, which are described in this Report. For example, See "--Forward-Look Statements and Cautionary Statements -- If we do not successfully develop any products, we may not derive any revenues." Research and development expenses increased in 2001 from 2000 by $2,086,000, or 32.7%. This increase was primarily related to additional manufacturing costs and expenditures for the crosslink breaker program. Manufacturing costs were approximately $1,916,000 in 2001, which included the production of supplies for the ongoing clinical programs (tableting and packaging), drug stability studies and the development of manufacturing processes for the production of Phase 3 clinical trial supplies. In 2001, approximately $1,730,000 was spent on various pre-clinical and clinical programs and the initiation of the Phase 2b SAPPHIRE and SILVER trials. The 2001 results also included personnel and personnel-related costs of $2,554,000. In 2000, approximately $1,769,000 was related to pre-clinical and clinical programs including the Phase 2a trial, $1,859,000 was related to personnel costs and $345,000 to manufacturing expense. The Phase 2a trial was completed in 2000, and the data was released in 2001. General and administrative expenses were $2,946,000 in 2002, decreased from $4,761,000 in 2001 and from $5,313,000 in 2000. The changes in general and administrative expenses consisted primarily of non-cash variable stock compensation (benefit)/expense of $(1,316,000), $657,000 and $891,000 in 2002, 2001 and 2000, 24 respectively. Excluding the non-cash variable stock compensation, general and administrative expenses were $4,262,000, $4,104,000 and $4,422,000 in 2002, 2001 and 2000, respectively. The increase in 2002 over 2001 is primarily related to increased personnel costs. At December 31, 2002, we had available federal net operating loss carryforwards, which expire in various amounts from the years 2006 through 2022, of approximately $152,365,000 and State net operating loss carryforwards, which expire in the years 2004 through 2009, of approximately $106,771,000. In addition, we had federal research and development credit carryforwards of approximately $7,048,000 and State research and development tax credit carryforwards of approximately $811,000. We had net losses of $16,882,000 in 2002, $11,584,000 in 2001 and $9,570,000 in 2000. Net Loss Included in our net loss in 2002, 2001 and 2000 was the sale of approximately $1,839,000, $6,243,000 and $14,129,000, respectively, of our gross State net operating loss carryforwards and approximately $578,000, $802,000 and $590,000, respectively, of our State research and development tax credit carryforwards. The proceeds from the sale in 2002, 2001 and 2000 were approximately $647,000, $1,187,000 and $1,548,000, respectively. Included in the net loss applicable to common stockholders for 2002, 2001 and 2000 were preferred stock dividends of approximately $3,485,000, $3,204,000 and $2,945,000, respectively, and common stock deemed dividends of $210,000 in 2001. LIQUIDITY AND CAPITAL RESOURCES We had cash, cash equivalents and short-term investments at December 31, 2002, of $17,439,000 compared to $10,726,000 at December 31, 2001. This is an increase in cash, cash equivalents and short-term investments of $6,713,000 for the year ended December 31, 2002. This consisted of $21,697,000 of financing activities related to public offerings of common stock and proceeds from stock option exercises. In December 2002, we completed a public offering of 1,714,285 shares of common stock at $1.75 per share, which provided net proceeds of approximately $2,964,500. In connection with this offering, certain previously issued warrants were repriced pursuant to antidilution provisions connected to the warrants. In January 2002, we completed a public offering of 4,450,000 shares of common stock, which provided net proceeds of approximately $18,611,000. This was offset by $14,931,000 of cash used in operations, net of $1,833,000 of cash received for the sales of our New Jersey State net operating loss carryforwards, and consisted primarily of research and development expenses, personnel and related costs, facility expenses and approximately $45,000 of capital expenditures. In 2002, 2001 and 2000, we sold $1,839,000, $6,243,000 and $14,129,000, respectively, of our gross State net operating loss carryforwards and $578,000, $802,000 and $590,000, respectively, of our State research and development tax credit carryforwards under the State Program. The proceeds from the sale in 2002, 2001 and 2000 were $647,000, $1,187,000 and $1,548,000, respectively, and such amounts were recorded as a tax benefit in the statements of operations. The proceeds from the sale of the net operating loss carryforwards and the research and development tax credit carryforwards sold in 2001 were received in January 2002, and the proceeds from the carryforwards sold in 2002 were received in December 2002. As of December 31, 2002, we had State net loss carryforwards and State research and development tax credit carryforwards available for sale of approximately $107,582,000 and $85,100,000, respectively. The State renews the Program annually and limits the aggregate proceeds to $10,000,000. We cannot be certain if we will be able to sell any or all of these carryforwards under the Program. We expect to utilize our cash, cash equivalents and short-term investments to fund our operations at levels similar to those used in 2002 through the expected completion date of the SAPPHIRE and SILVER trials in mid-2003, and believe we have adequate cash and cash equivalents and short-term investments to fund such trials. However, we do not believe we will have adequate cash at these spending levels to complete the fiscal year. As a result, throughout 2003, we will monitor our liquidity position and the status of our clinical trials. Depending upon the results of any attempts made by us to raise additional funds through the sale of additional equity securities, we may be required to significantly reduce or curtail our research and product development activities and other operations if our level of cash and cash equivalents fall below pre-determined levels. We have the intent and ability to quickly and significantly reduce the cash burn rate, if necessary, as we have limited fixed commitments. We believe that such actions will enable us to fund our operations through the first quarter of 2004. 25 We will require, over the long-term, substantial new funding to pursue development and commercialization of ALT-711 and our other product candidates and continue our operations. We believe that satisfying these capital requirements over the long-term will require successful commercialization of our product candidates. However, it is uncertain whether any products will be approved or will be commercially successful. The amount of our future capital requirements will depend on numerous factors, including the progress of our 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 our short-term and long-term capital requirements, we, as stated above, may seek access to the public or private equity markets. This may have the effect of materially diluting the current holders of our outstanding stock. We 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 us. If we obtain funds through arrangements with collaborative partners or others, we may be required to relinquish rights to certain of our technologies or product candidates. Our current priorities and the focus of our resources are the evaluation and continued development of ALT-711 and determining the optimal course for the development of other compounds in our patent estate. As we continue clinical development of ALT-711, we will determine if it is appropriate to retain development and marketing rights for one or several indications in North America, while at the same time, continuing to evaluate potential corporate partnerships for the further development and ultimate marketing of the compound throughout the world. As described above, we believe that additional development of this compound and other product candidates will require us to find additional sources of funding. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. RELATED PARTY TRANSACTIONS Since our inception, we have entered into certain collaborative agreements with organizations with which Dr. Anthony Cerami, a former member of our Board of Directors, was affiliated. These organizations included The Picower Institute and The Rockefeller University. We paid patent maintenance fees for technology licensed from these organizations of $1,450, $17,000 and $120,000 in 2002, 2001 and 2000, respectively. Although we have terminated our collaborative relationship with The Picower Institute, we have a royalty obligation on all net sales and other revenues associated with certain technologies developed, payable to The Picower Institute's successor. CRITICAL ACCOUNTING POLICIES In December 2001, the United States Securities and Exchange Commission issued a statement concerning certain views of the Commission regarding the appropriate amount of disclosure by publicly held companies with respect to their critical accounting policies. In particular, the Commission expressed its view that in order to enhance investor understanding of financial statements, companies should explain the effects of critical accounting policies as they are applied, the judgments made in the application of these policies and the likelihood of materially different reported results if different assumptions or conditions were to prevail. We have since carefully reviewed the disclosures included in our filings with the Commission, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2002, and accompanying audited financial statements and related notes thereto, as well as our definitive Proxy Statement for the 2003 Annual Meeting. We believe the effect of the following accounting policy is significant to our results of operations and financial condition. We account for options granted to employees and directors in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense is recorded on fixed stock grants only if the current fair value of the underlying stock exceeds the exercise price of the option at the date of grant and it is recognized on a straight-line basis over the vesting 26 period. Based on the performance of our stock, we repriced certain employee stock options on February 2, 1999. As a result of this repricing, options to purchase 1.06 million shares of stock were repriced and certain vesting periods related to these options were modified or extended. FIN 44 requires us to record compensation expense or benefit, which is adjusted every quarter, for increases or decreases in the fair value of the repriced options based on changes in our stock price from the value at July 1, 2000, until the repriced options are exercised, forfeited or expire. As a result, net income applicable to common stockholders and net loss per share to common stockholders may be subject to volatility. Had we accounted for repricing of stock option grants in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the expense related to the vested options would have been recorded at the repricing date, and the expense related to non-vested options would have been recorded over the vesting period. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities. We do not use derivative financial instruments in our investments. Our investments consist primarily of debt instruments of the United States government, government agencies, financial institutions and corporations with strong credit ratings. The table below presents principal amounts and related weighted average interest rates as of December 31, 2002 for our investment portfolio. There are no maturities after 2003, and our exposure is limited based on the short-term nature of these investments.
Assets 2002 - ------ ----------- Cash equivalents: Fixed rate......................... $14,452,413 Average interest rate.............. 1.32% Short-term investments: Fixed rate......................... $ 2,986,200 Average interest rate.............. 1.30% Total investment securities.......... $17,438,613 Average interest rate.............. 1.31%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (a) 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 33. (b) The unaudited quarterly financial data for the two-year period ended December 31, 2002 is as follows:
Net Loss Loss Before Applicable to Income Tax Common Basic/Diluted Revenues Expenses Benefit Stockholders Loss Per Share -------- -------- ----------- -------------- --------------- (in thousands, except per share amounts) 2002 - ---- First Quarter............. $ 136 $ 3,878 $ (3,742) $ (4,574) $ (0.15) Second Quarter............ 117 4,961 (4,844) (5,703) (0.18) Third Quarter............. 93 5,307 (5,214) (6,101) (0.19) Fourth Quarter............ 64 3,792 (3,728) (3,988) (0.12) ------- -------- ---------- -------------- ------------ Total Year............. $ 410 $ 17,938 $ (17,528) $ (20,366) $ (0.64) 2001 - ---- First Quarter............. $ 153 $ 4,181 $ (4,028) $ (4,793) $ (0.21) Second Quarter............ 101 2,407 (2,306) (3,096) (0.14) Third Quarter............. 107 2,321 (2,214) (3,239) (0.13) Fourth Quarter............ 91 4,313 (4,222) (3,869) (0.13) ------- -------- ---------- -------------- ------------ Total Year............. $ 452 $ 13,222 $ (12,770) $ (14,997) $ (0.61)
27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On May 30, 2002, we dismissed Arthur Andersen LLP ("Andersen") as our principal independent accountants and engaged KPMG LLP ("KPMG") to serve as our principal independent accountants for the fiscal year ending December 31, 2002. Andersen's reports on our financial statements, as of and for the years ended December 31, 2001 and 2000, did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2001 and 2000 and the period from December 31, 2001 to the date of dismissal of Andersen, (i) there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Andersen's satisfaction, would have caused Andersen to make reference to the subject matter of the disagreement(s) in connection with its report and (ii) there were no "reportable events," as such term is defined in Item 304(a)(1)(v) of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The information called for by Item 10 is incorporated by reference from the information under the caption "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement for our 2003 Annual Meeting of Stockholders to be held on June 4, 2003. ITEM 11. EXECUTIVE COMPENSATION. The information called for by Item 11 is incorporated by reference from the information under the caption "Executive Compensation" in our Proxy Statement for our 2003 Annual Meeting of Stockholders to be held on June 4, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table sets forth information concerning the number of outstanding options, the weighted average exercise price of those securities and the number of securities remaining to be granted under existing equity plans, whether approved or not approved by security holders, as of December 31, 2002:
Number of Securities Weighted Average Number of Securities To Be Issued Upon Exercise Price of Remaining Available Exercise of Outstanding For Future Issuance Outstanding Options, Options, Warrants Under Existing Equity Plan Category Warrants and Rights and Rights Compensation Plans - ----------------------------------------- -------------------- ----------------- -------------------- Equity compensation plans approved by security holders................... 5,436,279 $3.08 2,773,097 Equity compensation plans not approved by security holders.......... N/A N/A N/A --------- ----- --------- Total........................... 5,436,279 $3.08 2,773,097 ========= ===== =========
The additional information called for by Item 12 is incorporated by reference from the information under the caption "Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement for our 2003 Annual Meeting of Stockholders to be held on June 4, 2003. 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by Item 13 is incorporated by reference from the information under the caption "Certain Relationships and Related Transactions" in our Proxy Statement for our 2003 Annual Meeting of Stockholders to be held on June 4, 2003. ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Within the 90 days prior to the filing date of this Annual Report on Form 10-K, our Chief Executive Officer and our Vice President, Finance, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and the Vice President, Finance, have concluded that our current disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and reported on a timely basis. (b) Changes in Internal Controls. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation by the Chief Executive Officer and the Vice President, Finance. PART IV ITEM 15. FINANCIAL STATEMENTS, REPORTS ON FORM 8-K AND EXHIBITS. (a) Financial Statements. Our audited financial statements and the Independent Auditors' Report are appended to this Annual Report on Form 10-K. Reference is made to the "Index to Financial Statements" on page 33. (b) Reports on Form 8-K. On December 24, 2002, we filed a current report on Form 8-K, dated December 20, 2002, announcing that we entered into a Stock Purchase Agreement to sell 1,714,285 shares of common stock. (c) Exhibits. The exhibits required to be filed are listed on the "Exhibit Index" attached hereto, which is incorporated herein by reference. 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 10th day of March 2003. ALTEON INC. By: /s/ Kenneth I. Moch ------------------------------------ Kenneth I. Moch President and Chief Executive Officer 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/ Kenneth I. Moch Chairman of the Board, March 10, 2003 - ------------------------------ President and Chief Executive Officer Kenneth I. Moch (principal executive officer) /s/ Elizabeth O'Dell Vice President, Finance, Secretary and Treasurer March 10, 2003 - ------------------------------ (principal accounting officer) Elizabeth O'Dell /s/ Edwin Bransome, Jr., M.D. Director March 10, 2003 - ----------------------------- Edwin Bransome, Jr., M.D. /s/ Marilyn G. Breslow Director March 10, 2003 - ------------------------------ Marilyn G. Breslow /s/ Alan J. Dalby Director March 10, 2003 - ------------------------------ Alan J. Dalby /s/ David McCurdy Director March 10, 2003 - ------------------------------ David McCurdy /s/ Thomas A. Moore Director March 10, 2003 - ------------------------------ Thomas A. Moore /s/ George M. Naimark, Ph.D. Director March 10, 2003 - ---------------------------- George M. Naimark, Ph.D. /s/ Mark Novitch, M.D. Director March 10, 2003 - ------------------------------ Mark Novitch, M.D.
30 CERTIFICATIONS I, Kenneth I. Moch, certify that: 1. I have reviewed this annual report on Form 10-K of Alteon Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 10, 2003 /s/ Kenneth I. Moch ------------------------------------ Kenneth I. Moch President and Chief Executive Officer 31 CERTIFICATIONS I, Elizabeth O'Dell, certify that: 1. I have reviewed this annual report on Form 10-K of Alteon Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 10, 2003 /s/ Elizabeth A. O'Dell ------------------------------------ Elizabeth A. O'Dell Vice President, Finance Secretary and Treasurer 32 Form 10-K - Item 14(a)(1) Alteon Inc. Index to Financial Statements
Page ---- Independent Auditors' Report - KPMG LLP............................................. 34 Report of Independent Public Accountants - Arthur Andersen LLP...................... 35 Financial Statements: Balance Sheets at December 31, 2002 and 2001............................... 36 Statements of Operations for the years ended December 31, 2002, 2001 and 2000........................................ 37 Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000........................................ 38 Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000........................................ 39 Notes to Financial Statements.............................................. 40
33 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Alteon Inc.: We have audited the accompanying balance sheet of Alteon Inc. as of December 31, 2002, and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The balance sheets of Alteon Inc., as of December 31, 2001 and 2000 and related statements of operations, stockholders' equity and cash flows for the years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 22, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alteon Inc. as of December 31, 2002, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Short Hills, New Jersey January 27, 2003 34 INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS' REPORT THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR ANDERSEN LLP ("ANDERSEN"). THE REPORT HAS NOT BEEN REISSUED BY ANDERSEN NOR HAS ANDERSEN CONSENTED TO ITS INCLUSION IN THIS ANNUAL REPORT ON FORM 10-K. THE ANDERSEN REPORT REFERS TO THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999, WHICH ARE NO LONGER INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Alteon Inc.: We have audited the accompanying balance sheets of Alteon Inc. (a Delaware corporation) as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States ARTHUR ANDERSEN LLP Roseland, New Jersey January 22, 2002 35 ALTEON INC. BALANCE SHEETS ASSETS
December 31, December 31, 2002 2001 -------------- -------------- Current Assets: Cash and cash equivalents.................................... $ 14,452,413 $ 4,249,439 Short-term investments....................................... 2,986,200 6,476,384 Other current assets......................................... 143,124 1,394,765 -------------- -------------- Total current assets....................................... 17,581,737 12,120,588 Property and equipment, net.................................. 517,623 1,109,676 Deposits and other assets.................................... -- 2,815 -------------- -------------- Total assets............................................... $ 18,099,360 $ 13,233,079 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................. $ 537,394 $ 307,153 Accrued expenses............................................. 3,258,729 2,054,980 -------------- -------------- Total current liabilities.................................. 3,796,123 2,362,133 -------------- -------------- Stockholders' Equity: Preferred stock, $0.01 par value, 1,993,329 shares authorized, and 1,079 and 992 shares of Series G and 3,241 and 2,980 shares of Series H issued and outstanding, as of December 31, 2002 and December 31, 2001, respectively............................ 43 40 Common stock, $0.01 par value, 80,000,000 shares authorized, and 33,600,841 and 27,314,846 shares issued and outstanding, as of December 31, 2002 and December 31, 2001, respectively...... 336,008 273,148 Additional paid-in capital .................................. 183,341,416 159,596,934 Accumulated deficit.......................................... (169,375,594) (149,008,641) Accumulated other comprehensive income....................... 1,364 9,465 -------------- -------------- Total stockholders' equity................................. 14,303,237 10,870,946 -------------- -------------- Total liabilities and stockholders' equity...................... $ 18,099,360 $ 13,233,079 ============== ==============
The accompanying notes are an integral part of these balance sheets. 36 ALTEON INC. STATEMENTS OF OPERATIONS
Year ended December 31, -------------------------------------------------------- 2002 2001 2000 ------------- ------------- ------------- Revenues: Investment income................................... $ 409,853 $ 451,518 $ 570,444 ------------- ------------- ------------- Expenses: Research and development (which includes non-cash variable stock compensation (benefit)/expense in 2002, 2001 and 2000 of $(93,516), $164,988 and $353,065, respectively)....................... 14,992,418 8,461,476 6,375,380 General and administrative (which includes non-cash variable stock compensation (benefit)/expense in 2002, 2001 and 2000 of $(1,315,635), $657,295 and $890,604, respectively).............. 2,945,846 4,760,747 5,312,750 ------------- ------------- ------------- Total expenses................................. 17,938,264 13,222,223 11,688,130 ------------- ------------- ------------- Loss before income tax benefit......................... (17,528,411) (12,770,705) (11,117,686) Income tax benefit.................................. 646,500 1,186,921 1,547,763 ------------- ------------- ------------- Net loss............................................... (16,881,911) (11,583,784) (9,569,923) Preferred stock dividends........................... 3,485,042 3,203,906 2,945,451 Common stock warrant deemed dividends............... --- 209,528 --- ------------- ------------- ------------- Net loss applicable to common stockholders............. $ (20,366,953) $ (14,997,218) $ (12,515,374) ============= ============= ============= Basic/diluted net loss per share applicable to common stockholders ............................. $ (0.64) $ (0.61) $ (0.63) ============= ============= ============= Weighted average common shares used in computing basic/diluted net loss per share.................... 31,793,466 24,555,885 19,860,847 ============= ============= =============
The accompanying notes are an integral part of these statements. 37 ALTEON INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock -------------------- --------------------------- Shares Amount Shares Amount ------ ------ ---------- -------- Balances at DECEMBER 31, 1999................. 3,357 $ 34 19,189,701 $191,897 Net loss........................ --- --- --- --- Change in unrealized gains/(losses)................. --- --- --- --- Comprehensive loss.............. Issuance of Series G and H preferred stock dividends...... 294 3 --- --- Exercise of employee stock options........................ --- --- 375,871 3,759 Private placement of common stock and warrants............. --- --- 2,834,088 28,341 Compensation expense related to variable plan employee stock options.................. --- --- --- --- Compensation expense in connection with the issuance of non-qualified stock options, stock option modifications and options granted to non-employees.................. --- --- --- --- ----- ---- ---------- -------- DECEMBER 31, 2000................. 3,651 37 22,399,660 223,997 Net loss........................ --- --- --- --- Change in unrealized gains/(losses)................. --- --- --- --- Comprehensive loss.............. Issuance of Series G and H preferred stock dividends...... 321 3 --- --- Exercise of employee stock options........................ --- --- 415,186 4,151 Public offering of common stock......................... --- --- 4,500,000 45,000 Compensation expense related to variable plan employee stock options................ --- --- --- --- Common stock warrant deemed dividends...................... --- --- --- --- Compensation expense in connection with the issuance of non-qualified stock options, stock option modifications and options granted to non-employees.................. --- --- --- --- ----- ---- ---------- -------- DECEMBER 31, 2001................. 3,972 40 27,314,846 273,148 Net loss........................ --- --- --- --- Change in unrealized gains/(losses)................. --- --- --- --- Comprehensive loss.............. Issuance of Series G and H preferred stock dividends...... 348 3 --- --- Exercise of employee stock options........................ --- --- 121,710 1,217 Public offerings of common stock.......................... --- --- 6,164,285 61,643 Compensation benefit related to variable plan employee stock options........................ --- --- --- --- Compensation expense in connection with the issuance of non-qualified stock options to non-employees............... --- --- --- --- ----- ---- ---------- -------- DECEMBER 31, 2002 4,320 $ 43 33,600,841 $336,008 ===== ==== ========== ========
Accumulated Additional Other Total Paid-in Accumulated Comprehensive Stockholders Capital Deficit Income/(Loss) Equity ------------ ------------- ------------- -------------- Balances at DECEMBER 31, 1999................. $134,129,513 $(121,496,049) $ 1,293 $ 12,826,688 ------------ Net loss........................ --- (9,569,923) --- (9,569,923) Change in unrealized gains/(losses)................. --- --- (2,163) (2,163) ------------ Comprehensive loss.............. (9,572,086) ------------ Issuance of Series G and H preferred stock dividends...... 2,945,448 (2,945,451) --- --- Exercise of employee stock options........................ 500,786 --- --- 504,545 Private placement of common stock and warrants............. 6,103,151 --- --- 6,131,492 Compensation expense related to variable plan employee stock options.................. 1,243,669 --- --- 1,243,669 Compensation expense in connection with the issuance of non-qualified stock options stock option modifications and options granted to non-employees.................. 318,698 --- --- 318,698 ------------ ------------- ------------ ------------ DECEMBER 31, 2000................. 145,241,265 (134,011,423) (870) 11,453,006 ------------ Net loss........................ --- (11,583,784) --- (11,583,784) Change in unrealized gains/(losses)................. --- --- 10,335 10,335 ------------ Comprehensive loss.............. (11,573,449) ------------ Issuance of Series G and H preferred stock dividends...... 3,203,903 (3,203,906) --- --- Exercise of employee stock options........................ 428,698 --- --- 432,849 Public offering of common stock......................... 9,365,080 --- --- 9,410,080 Compensation expense related to variable plan employee stock options................ 822,283 --- --- 822,283 Common stock warrant deemed dividends...................... 209,528 (209,528) --- --- Compensation expense in connection with the issuance of non-qualified stock options, stock option modifications and options granted to non-employees.................. 326,177 --- --- 326,177 ------------ ------------- ------------ ------------ DECEMBER 31, 2001................. 159,596,934 (149,008,641) 9,465 10,870,946 ------------ Net loss........................ --- (16,881,911) --- (16,881,911) Change in unrealized gains/(losses)................. --- --- (8,101) (8,101) ------------ Comprehensive loss.............. (16,890,012) ------------ Issuance of Series G and H preferred stock dividends...... 3,485,039 (3,485,042) --- --- Exercise of employee stock options........................ 120,797 --- --- 122,014 Public offerings of common stock.......................... 21,513,373 --- --- 21,575,016 Compensation benefit related to variable plan employee stock options........................ (1,409,151) --- --- (1,409,151) Compensation expense in connection with the issuance of non-qualified stock options to non-employees............... 34,424 --- --- 34,424 ------------ ------------- ------------ ------------ DECEMBER 31, 2002 $183,341,416 $(169,375,594) $ 1,364 $ 14,303,237 ============ ============= ============ ============
The accompanying notes are an integral part of these statements. 38 ALTEON INC. STATEMENTS OF CASH FLOWS
Year ended December 31, ---------------------------------------------------- 2002 2001 2000 -------------- -------------- ------------- Cash flows from operating activities: Net loss.............................................. $ (16,881,911) $ (11,583,784) $ (9,569,923) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization......................... 637,162 636,565 765,601 Stock compensation expense............................ 34,424 326,177 318,698 Non-cash compensation expense related to variable plan employee stock options............... (1,409,151) 822,283 1,243,669 Changes in operating assets and liabilities: Other assets.......................................... 1,254,456 340,895 (1,486,677) Accounts payable and accrued expenses................. 1,433,990 425,775 (257,844) -------------- -------------- ------------- Net cash used in operating activities.............. (14,931,030) (9,032,089) (8,986,476) -------------- -------------- ------------- Cash flows from investing activities: Capital expenditures.................................. (45,109) (50,159) (62,377) Purchases of marketable securities.................... (18,020,917) (16,743,570) (11,550,202) Maturities of marketable securities................... 21,503,000 16,632,000 12,227,817 -------------- -------------- ------------- Net cash provided by/(used in) investing activities 3,436,974 (161,729) 615,238 -------------- -------------- ------------- Cash flows from financing activities: Net proceeds from issuance of common stock............ 21,575,016 9,410,080 6,131,492 Net proceeds from exercise of employee stock options............................................ 122,014 432,849 504,545 -------------- -------------- ------------- Net cash provided by financing activities......... 21,697,030 9,842,929 6,636,037 -------------- -------------- ------------- Net increase/(decrease) in cash and cash equivalents....... 10,202,974 649,111 (1,735,201) Cash and cash equivalents, beginning of period............. 4,249,439 3,600,328 5,335,529 -------------- -------------- ------------- Cash and cash equivalents, end of period................... $ 14,452,413 $ 4,249,439 $ 3,600,328 ============== ============== =============
The accompanying notes are an integral part of these statements. 39 ALTEON INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Alteon Inc. ("Alteon" or the "Company") is a product-based biopharmaceutical company engaged in the discovery and development of oral drugs to reverse or inhibit cardiovascular aging and diabetic complications. The Company's product candidates represent novel approaches to some of the largest pharmaceutical markets, such as cardiovascular and kidney diseases. The Company conducts its business in one operating segment. Alteon's proprietary technology focuses on Advanced Glycation End-products ("A.G.E.s"). A.G.E.s ultimately form crosslinks with adjacent proteins, leading to a loss of flexibility and function in body tissues, vessels and organs. All of the Company's products are in research or development, and no revenues have been generated from product sales. The Company's lead compound, ALT-711, is being developed initially for cardiovascular indications, and two Phase 2a clinical trials in cardiovascular compliance and in diastolic heart failure ("DHF") have been successfully completed. Based on the positive results of the trial in cardiovascular compliance, Alteon has initiated two Phase 2b efficacy trials of ALT-711 in systolic hypertension, the SAPPHIRE (Systolic And Pulse Pressure Hemodynamic Improvement by Restoring Elasticity) trial and the SILVER (Systolic Hypertension Interaction with Left VEntricular Remodeling) and SILVER trial, for which data is expected to be reported concurrently in mid-2003. The Company is also considering further clinical development in DHF and related conditions. A topical formulation of an A.G.E. Crosslink Breaker, ALT-744, is being clinically evaluated in skin aging for cosmetic applications. The Company continues to evaluate product development opportunities from its A.G.E. Crosslink Breaker compounds and other classes of compounds in its patent estate. The Company's business is subject to significant risks including, but not limited to, (i) the ability to obtain funding, (ii) the risks inherent in its research and development efforts, including clinical trials, (iii) uncertainties associated 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 healthcare 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. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Estimates are used for, but not limited to: accrued expenses, income tax valuation allowances and assumptions utilized within the Black Scholes options pricing model and the model itself. Accounting estimates require the use of judgment regarding uncertain future events and their related effects and, accordingly, may change as additional information is obtained. 40 ALTEON INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 considered available-for-sale and are recorded at fair value, as determined by quoted market prices, with changes in fair value recorded as a component of accumulated other comprehensive income/(loss). As of December 31, 2002 and 2001, short-term investments were invested in debt instruments of the United States government, government agencies, financial institutions and corporations with strong credit ratings. They consisted of the following:
December 31, --------------------------------- 2002 2001 ------------ ------------ United States government agency funds.............. $ 2,986,200 $ 5,479,434 Corporate obligations.............................. --- 996,950 ------------ ------------ $ 2,986,200 $ 6,476,384 ============ ============
The cost of short-term investments was $2,984,836 and $6,466,919 at December 31, 2002 and December 31, 2001, respectively. 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. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets and would be charged to operations. Alteon adopted Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" on January 1, 2002. The adoption of SFAS No. 144 had no impact on the Company's policy regarding impairment of long-lived assets or its results of operations, cash flows or financial position. Research and Development Expenditures for research and development are charged to operations, as incurred. Stock-Based Compensation The Company accounts for employee stock-based compensation and awards issued to non-employee directors under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, under which no compensation cost (excluding those options granted below fair market value) has been recognized. Stock option awards issued to consultants and contractors are accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." In March 2000, the Financial Accounting Standards Board ("FASB") released Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, An Interpretation of APB Opinion No. 25." The interpretation became effective on July 1, 2000, but in some circumstances applies to transactions that occurred prior to the effective date. Under the interpretation, stock options that are repriced must be accounted for as variable-plan arrangements until the options are exercised, forfeited or expire. This requirement applies to any options repriced after December 15, 1998. (See Note 8.) 41 ALTEON INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) If the Company had applied the fair value recognition provisions of SFAS No. 123 to all of its option grants, the Company's pro forma net loss and net loss per share applicable to common stockholders for 2002, 2001 and 2000 would be as follows:
Year Ended December 31, -------------------------------------------------- 2002 2001 2000 -------------- ------------- ------------- Net loss applicable to common stockholders, as reported.... $ (20,366,953) $ (14,997,218) $ (12,515,374) Add: Variable non-cash stock compensation (benefit)/expense.................................. (1,409,151) 822,283 1,243,669 Less: Total stock-based employee compensation expense determined under fair value method......... (1,892,584) (2,029,445) (1,517,400) -------------- ------------- ------------- Pro forma net loss applicable to common stockholders....... $ (23,668,688) $ (16,204,380) $ (12,789,105) Net loss per share applicable to common stockholders: Basic/diluted as reported.......................... $ (0.64) $ (0.61) $ (0.63) Basic/diluted pro forma............................ $ (0.73) $ (0.64) $ (0.63)
The fair value of each stock option grant, for recognition or disclosure purposes, is calculated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 2002, 2001 and 2000, respectively: risk free interest rates ranging from 1.29% to 5.15%, 2.79% to 5.02% and 5.24% to 6.64%, respectively; expected life of 5.75 years for employee grants and the contractual life for grants to consultants and contractors; expected dividend yield of 0%; and expected volatility of 108.98%, 110.39% and 109.53%, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and tax credit carryforwards. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Deferred tax assets are recorded when they are more likely than not to be realized. Net Loss Per Share Applicable to Common Stockholders Basic net loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares outstanding during the year. Diluted net loss per share is the same as basic net loss per share applicable to common stockholders, since the assumed exercise of stock options and warrants and the conversion of preferred stock would be antidilutive. The amount of common stock equivalents excluded from the calculation as of December 31, 2002, 2001 and 2000, was 28,872,120, 15,135,350 and 15,148,365 shares, respectively. Recently Issued Accounting Standards In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. SFAS No. 146 will affect the types and timing of costs included in restructuring programs, if any, but is not expected to have a material impact on the Company's results of operations, cash flows or financial position. 42 ALTEON INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- LIQUIDITY The Company has devoted substantially all of its resources to research, drug discovery and development programs. To date, it 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. As a result, Alteon has incurred operating losses since inception, has an accumulated deficit of $169,375,594 at December 31, 2002, and expects to incur operating losses, potentially greater than losses in prior years, for a number of years. The Company has financed its operations through proceeds from the sale of common and preferred equity securities, revenue from collaborative relationships, reimbursement of certain of our research and development expenses by collaborative partners, investment income earned on cash and cash equivalent balances and short-term investments and the sale of a portion of the Company's New Jersey state net operating loss carryforwards. As of December 31, 2002, the Company had working capital of $13,785,614, including $17,438,613 of cash, cash equivalents and short-term investments. During 2002, the Company sold 6,164,285 shares of common stock, raising net proceeds of $21,575,016. (See Note 8.) The Company's cash used in operations for the year ended December 31, 2002, 2001 and 2000 was $14,931,030, $9,032,089 and $8,986,476, respectively. The Company expects to utilize cash to fund its operations at levels similar to those used in 2002 through the expected completion date of the SAPPHIRE and SILVER trials in mid-2003, and believes it has adequate cash and cash equivalents and short-term investments to fund such trials. However, it does not believe it will have adequate cash at these spending levels to complete the fiscal year. As a result, throughout 2003, the Company will monitor its liquidity position and the status of its clinical trials. Depending upon the results of any attempts made by the Company to raise additional funds through the sale of additional equity securities, Alteon may be required to significantly reduce or curtail its research and product development activities and other operations if its level of cash and cash equivalents fall below pre-determined levels. The Company has the intent and ability to quickly and significantly reduce the cash burn rate, if necessary, as it has limited fixed commitments. The Company believes that such actions will enable Alteon to fund its operations through the first quarter of 2004. The Company will require, over the long-term, substantial new funding to pursue development and commercialization of ALT-711 and its other product candidates and continue its operations. The Company believes that satisfying these capital requirements over the long-term will require successful commercialization of its product candidates. However, it is uncertain whether any products will be approved or will be commercially successful. The amount of the Company's future capital requirements will depend on numerous factors, including the progress of its 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 Alteon's short-term and long-term capital requirements, the Company, as stated above, may seek access to the public or private equity markets. This may have the effect of materially diluting the current holders of the Company's outstanding stock. 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 Alteon. If Alteon obtains funds through arrangements with collaborative partners or others, the Company may be required to relinquish rights to certain of its technologies or product candidates. 43 ALTEON INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- PROPERTY AND EQUIPMENT
December 31, ---------------------------- 2002 2001 ----------- ----------- Laboratory equipment................................ $ 1,183,034 $ 1,183,034 Furniture and equipment............................. 699,020 686,560 Computer equipment.................................. 442,145 409,496 Leasehold improvements.............................. 5,215,069 5,215,069 ----------- ----------- 7,539,268 7,494,159 Less: Accumulated depreciation & amortization...... (7,021,645) (6,384,483) ----------- ----------- $ 517,623 $ 1,109,676 =========== ===========
Depreciation and amortization expense was $637,162, $636,565 and $765,601 for the years ended December 31, 2002, 2001 and 2000, respectively. NOTE 4 -- COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS On November 6, 2002, Alteon entered into a new agreement, effective as of April 15, 2002, with The Picower Institute for Medical Research ("Picower"), which terminated their license agreement dated as of September 5, 1991. Pursuant to this termination agreement, Picower assigned to Alteon all of its patents, patent applications and other technology related to A.G.E.'s and Alteon agreed to prosecute and maintain the patents and patent applications. Alteon will pay Picower royalties on any sales of products falling within the claims of these patents and patent applications until they expire or are allowed to lapse. Effective as of August 5, 2002, Alteon entered into a letter agreement with Yamanouchi Pharmaceutical Co, Ltd. ("Yamanouchi"), which terminated their License Agreement dated as of June 16, 1989. Pursuant to the letter agreement, for a period of fifteen years, (i) Alteon will pay Yamanouchi royalties on any sales of pimagedine or pimagedine products in the territory covered by the License Agreement and (ii) Alteon will have the option to purchase from Yamanouchi all or any part of its common stock owned by Yamanouchi. NOTE 5 -- OTHER DEVELOPMENT AGREEMENTS Alteon has entered into a number of licensing and collaboration agreements relating to the development and distribution of its A.G.E.-related technology. Pursuant to an agreement with Rockefeller University, the Company has exclusive, royalty-free, worldwide and perpetual rights to the technology and inventions relating to A.G.E.s and other protein crosslinking, including those relating to the complications of aging and diabetes. Alteon has also entered into an exclusive licensing arrangement with Roche Diagnostics GmbH for Alteon's technology for diagnostic applications, and the Company has also entered into clinical testing and distribution agreements with Gamida for Life which grant Gamida the exclusive right to distribute pimagedine, if successfully developed and approved for marketing, in Israel, Bulgaria, Cyprus, Jordan and South Africa. Alteon has a license and supply agreement with IDEXX Laboratories, Inc. ("IDEXX") pursuant to which the Company licensed pimagedine to IDEXX as a potential therapeutic in companion animals (dogs, cats and horses) and Alteon's A.G.E. diagnostics technology for companion animal use. All of these agreements will entitle Alteon to receive royalties on sales if any products covered by the agreements are developed and sold. In October 2000, Alteon entered into an agreement with HemoMax, LLC ("HemoMax") for the development of a novel technology designed to increase the delivery of oxygen to tissues in the body through enhanced blood circulation. On February 9, 2002, HemoMax advised Alteon that because of uncertainties regarding its ability to receive patents adequate to support commercialization of the technology, it has decided to cease operations and liquidate. 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 44 ALTEON INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. NOTE 6 -- ACCRUED EXPENSES Accrued expenses consisted of the following:
December 31, ----------------------------- 2002 2001 ----------- ----------- Clinical trial expense.............................. $ 2,706,678 $ 1,379,693 Professional fees................................... 204,723 191,000 Payroll and related expenses........................ 106,629 224,287 Rent expense........................................ 45,761 100,673 Patent fees......................................... 107,187 85,571 Other............................................... 87,751 73,756 ----------- ----------- $ 3,258,729 $ 2,054,980 =========== ===========
NOTE 7 - COMMITMENTS AND CONTINGENCIES Commitments The Company leases its headquarters and research facility under non-cancelable operating leases. As of December 31, 2002, Alteon has no future minimum rentals under operating leases in excess of one year as the current facility lease term ends October 2003. This facility lease includes two, five-year renewal options which are presently under negotiation. Rent expense for each of the years in the three-year period ended December 31, 2002, was $604,690, $599,655 and $586,294, respectively. NOTE 8 -- STOCKHOLDERS' EQUITY Common/Preferred Stock Issuances In December 2002, Alteon completed a public offering of 1,714,285 shares of common stock at $1.75 per share, which provided net proceeds of approximately $2,964,495. In connection with this offering, certain previously issued warrants were repriced from $2.25 to $1.75 per share pursuant to antidilution provisions connected to the warrants. In January 2002, Alteon completed a public offering of 4,450,000 shares of common stock at $4.25 per share, which provided net proceeds of $18,610,521. In July 2001, Alteon completed a public offering of 4,500,000 shares of common stock, which provided net proceeds of $9,410,080. In connection with this offering, certain previously issued warrants were repriced from $3.40 to $2.25 per share pursuant to antidilution provisions connected to the warrants. In September 2000, Alteon entered into an agreement with several investors pursuant to which Alteon sold, in a private placement, an aggregate of 2,834,088 shares of common stock and warrants to purchase 1,133,636 shares of common stock (the "Warrants") for net proceeds of $6,131,492. The adjusted exercise price of the Warrants, as of December 31, 2002, is $1.75 per share, while the term is seven years. 45 ALTEON INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) In December 1997, the Company and Genentech, Inc. ("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. 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, 2002, 2001 and 2000, respectively, $3,485,042, $3,203,906 and $2,945,451 of Preferred Stockholder dividends were recorded. Series G Preferred Stock and Series H Preferred Stock dividends are payable quarterly in shares of preferred stock at a rate of 8.5%. Each share of Series G Preferred Stock and Series H Preferred Stock is convertible, upon 70 days' prior written notice, into the 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 American Stock Exchange, for the 20 business days immediately preceding the date of conversion. In connection with an April 1997 convertible preferred stock offering, warrants to purchase 60,000 shares of common stock at an exercise price of $4.025 per share were issued and all are still outstanding. 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 the Company's common stock may be granted under the first plan, and options to purchase up to 7,000,000 shares of the Company's 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 Weighted Average Average Grant Date Grant Date Options Exercise Price Fair Value ----------- -------------- ---------- Balance, December 31, 1999 .......... 5,075,196 $ 3.40 Granted at market price ............. 1,105,820 4.57 $ 2.54 Exercised ........................... (375,871) 1.34 Canceled (550,326) 1.12 --------- ------ Balance, December 31, 2000 .......... 5,254,819 $ 4.02 Granted at market price ............. 873,942 3.13 $ 1.78 Exercised ........................... (415,186) 1.04 Canceled ............................ (1,008,269) 8.53 --------- ------ Balance, December 31, 2001 .......... 4,705,306 $ 3.15 Granted at market price ............. 676,400 2.94 $ 1.62 Granted above market price .......... 250,000 1.95 1.06 Granted below market price .......... 10,000 0.01 4.37 Exercised ........................... (121,710) 1.02 Canceled ............................ (83,717) 4.25 --------- ------ Balance, December 31, 2002 5,436,279 $ 3.08 ==========
Stock options exercisable at December 31, 2002, 2001 and 2000 were 3,836,930, 3,336,159 and 3,637,496, respectively, at weighted average grant date exercise prices of $3.08, $2.95 and $4.35, respectively. 46 ALTEON INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information regarding stock options outstanding at December 31, 2002:
Options Outstanding at Options Exercisable at December 31, 2002 December 31, 2002 ----------------------------------------------------- --------------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Number Remaining Exercise Number Exercise Prices Outstanding Contractual Life (Years) Price Exercisable Price - --------------------- ----------- ------------------------ --------- ----------- -------- $ 0.7810 - $ 1.0630 1,464,138 5.15 $ 0.9491 1,464,138 $ 0.9491 1.1250 - 2.6000 1,645,457 8.60 1.9369 695,943 1.5661 2.8750 - 4.6250 1,423,080 7.50 3.8314 867,078 3.7897 5.0000 - 15.0000 903,604 4.31 7.4294 807,771 7.4927 - --------------------- --------- ---- --------- ----------- -------- $ 0.7810 - $ 15.0000 5,436,279 6.67 $ 3.0797 3,834,930 $ 3.0817
Included in options at December 31, 2002 are 1,406,667 options granted to certain executives with option exercise prices ranging from $0.875 per share to $4.380 per share, the fair value of the Company's common stock on the date of grant. Such options vest upon the earlier of five years after grant or upon achievement of certain Company milestones. Expenses recorded for options granted to consultants totaled $34,424, $66,567 and $62,255 in 2002, 2001 and 2000, respectively. On February 2, 1999, the Company repriced certain stock options. In accordance with FIN 44, the Company recognized a total non-cash stock compensation (benefit)/expense resulting from the repricing for the years ended December 31, 2002, 2001 and 2000 of $(1,409,151), $822,283 and $1,243,669, respectively, which included research and development charges of $(93,516), $164,988 and $353,065 and general and administrative charges of $(1,315,635), $657,295 and $890,604, respectively. As of December 31, 2002, there were approximately 589,899 repriced options outstanding, which expire on various dates through January 2008. NOTE 9 -- 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 the employee's base salary, as defined. The Company made contributions of $54,024, $38,669 and $30,530 for the years ended December 31, 2002, 2001 and 2000, respectively. NOTE 10 -- 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 and The Rockefeller University. The Company paid patent maintenance fees for technology licensed from these organizations of $1,449, $16,799 and $120,001 in 2002, 2001 and 2000, 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, payable to The Picower Institute's successor. NOTE 11 -- INCOME TAXES At December 31, 2002, the Company had available federal net operating loss carryforwards, which expire in the years 2006 through 2022, of approximately $152,365,000 for income tax purposes and State net operating loss carryforwards, which expire in the years 2004 through 2009, of approximately $106,771,000. In addition, the Company has federal research and development tax credit carryforwards of approximately $7,048,000 and State research and development tax credit carryforwards of approximately $811,000. 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. 47 ALTEON INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The components of the deferred tax assets and the valuation allowance are as follows:
December 31, ----------------------------------- 2002 2001 ------------ ------------ Net operating loss carryforwards................ $ 59,800,000 $ 51,300,000 Research and development credit................. 7,800,000 6,700,000 Other temporary differences..................... 1,200,000 4,100,000 ------------ ------------ Gross deferred tax assets....................... 68,800,000 62,100,000 Valuation allowance............................. (68,800,000) (62,100,000) ------------ ------------ Net deferred tax assets......................... $ --- $ --- ============ ============
Given the Company's past history of incurring operating losses, management believes that it is unlikely that any of the deferred tax assets will be recoverable. As a result, a valuation allowance equal to the gross deferred tax assets was established. In 2002, 2001 and 2000, the Company sold $1,839,000, $6,243,000 and $14,129,000, respectively, of its gross State net operating loss carryforwards and $578,000, $802,000 and $590,000, respectively, 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 allows qualified technology and biotechnology business in New Jersey to sell unused amounts of net operating loss carryforwards and defined research and development tax credits for cash. The proceeds from the sale of the Company's carryforwards and credits in 2002, 2001 and 2000 were approximately $647,000, $1,187,000 and $1,548,000, respectively, and such amounts were recorded as a tax benefit in the statements of operations. The State of New Jersey renews the Program annually and limits the aggregate proceeds to $10,000,000. Due to the uncertainty at any time as to the Company's ability to effectuate the sale of Alteon's available New Jersey net operating losses, and since the Company has no control or influence over the Program, the benefits are recorded once the agreement with the counterpart is signed and the sale is approved by the State. 48 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, S.E.C. File Number 000-19529.) 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 Alteon Inc. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, S.E.C. File Number 001-16043.) 3.3 Certificate of Retirement dated September 10, 2000, of Alteon Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-Q filed on November 10, 1999, S.E.C. File Number 000-19529.) 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, S.E.C. File Number 000-19529.) 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, S.E.C. File Number 000-19529.) 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, S.E.C. File Number 000-19529.) 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, S.E.C. File Number 000-19529.) 3.8 Certificate of Retirement dated November 20, 2000, of Alteon Inc. (Incorporated by reference to Exhibit 3.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, S.E.C. File Number 001-16043.) 3.9 Certificate of Amendment to Restated Certificate of Incorporation of Alteon Inc., dated June 7, 2001 (Incorporated by reference to Exhibit 3.8 to the Company's Report on Form 10-Q filed on August 14, 2001, S.E.C. File Number 001-16043.) 3.10 By-laws, as amended. 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 Annual Report on Form 10-K for the year ended December 31, 2000, S.E.C. File Number 001-16043.) 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, S.E.C. File Number 000-19529.) 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, S.E.C. File Number 000-19529.) 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, S.E.C. File Number 000-19529.) 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, S.E.C. File Number 000-19529.)
4.6 Registration Rights Agreement dated September 29, 2000. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on October 5, 2000, S.E.C. File Number 001-16043.) 4.7 Form of Series 1 Common Stock Purchase Warrant. (Incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on October 5, 2000, S.E.C. File Number 001-16043.) 4.8 Form of Series 2 Common Stock Purchase Warrant. (Incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed on October 5, 2000, S.E.C. File Number 001-16043.) 4.9 Notice of Appointment, dated August 29, 2002, of The American Stock Transfer & Trust Company as successor Rights Agent, pursuant to Stockholders' Rights Agreement dated as of July 27, 1995. (Incorporated by reference to Exhibit 4.4 of the Company's Report on Form 10-Q filed on November 13, 2002, S.E.C. File Number 001-16043.) 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, S.E.C. File Number 000-19529.) 10.2+ Amended 1995 Stock Option Plan. (Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, S.E.C. File Number 001-16043.) 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, S.E.C. File Number 33-42574, which became effective on November 1, 1991.) 10.4 Lease Agreement dated January 11, 1993, between Ramsey Associates and Alteon Inc. (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, S.E.C. File No. 001-16043.) 10.5+ Employment Agreement dated as of October 21, 2000, between the Alteon Inc. and Elizabeth O'Dell. (Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, S.E.C. File Number 001-16043.) 10.6+ Alteon Inc. Change in Control Severance Benefits Plan. (Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, S.E.C. File Number 001-16043.) 10.7 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, S.E.C. File Number 000-19529.) 10.8* 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, S.E.C. File Number 000-19529.) 10.9+ Amended and Restated Employment Agreement dated as of December 15, 1998, between Alteon Inc. and Kenneth I. Moch (Incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, S.E.C. File Number 000-19529.) 10.10+ Employment Agreement dated as of March 14, 2000, between Alteon Inc. and Robert deGroof, Ph.D. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q filed on May 12, 2000, S.E.C. File Number 001-16043.) 10.11 Common Stock and Warrants Purchase Agreement dated as of September 29, 2000, among Alteon Inc. and EGM Medical Technology Fund, L.P., EGM Technology Offshore Fund, Narragansett I, L.P., Narragansett Offshore, Ltd., S.A.C. Capital Associates, LLC, SDS Merchant Fund, LP and Herriot Tabuteau. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 5, 2000, S.E.C. File Number 001-16043.)
10.12+ Letter Agreement dated December 3, 2001, between Alteon Inc. and Kenneth I. Moch amending Amended and Restated Employment Agreement dated as of December 15, 1998. (Incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, S.E.C. File Number 001-16043.) 10.13 Stock Purchase Agreement dated January 4, 2002, between Alteon Inc. and the Purchasers named therein. (Incorporated by reference to the Company's Current Report on Form 8-K filed on January 7, 2002, S.E.C. File Number 001-16043.) 10.14+ Employment agreement dated as of February 11, 2002, between Alteon Inc. and Judith S. Hedstrom. Incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q filed on May 14, 2002, S.E.C. File Number 001-16043.) 10.15 Stock Purchase Agreement dated December 20, 2002, between Alteon Inc. and the Purchasers named therein. (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on December 24, 2002, S.E.C. File Number 001-16043.) 23.1 Consent of KPMG LLP. 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------------- * 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. EX-3.10 3 w84290exv3w10.txt BY-LAWS, AS AMENDED Exhibit 3.10 AMENDED AND RESTATED BY-LAWS OF ALTEON INC. ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the Corporation within the State of Delaware shall be located at the Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, State of Delaware 19801, and the name of the registered agent in charge thereof is The Corporation Trust Company. SECTION 2. OTHER OFFICES. The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE. All meetings of the stockholders shall be held at such place, either within or without the State of Delaware, as shall be designated by the Board of Directors, or in the case of special meetings, at the place specified in the notice of the meeting. SECTION 2. ANNUAL MEETING. The annual meeting of stockholders for the election of directors and for such other business as may properly come before the meeting shall be held at such date and time as may be designated by the Board of Directors. SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, may be called only by the Chairman of the Board, President or Secretary, or by resolution of the Board of Directors. SECTION 4. NOTICE. Written notice of the place, date and hour of any annual or special meeting of the stockholders shall be given by the Secretary or any Assistant Secretary not less than ten (10) nor more than sixty (60) days prior to the meeting, to each stockholder of record entitled to vote thereat at his/her post office address as the same appears on the books of the Corporation at the time of such mailing. The notice of any special meeting shall state, in addition, the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders need not be given to any stockholder who shall sign a waiver of such notice in writing, whether before or after the time of such meeting, or to any stockholder who shall attend such meeting in person or by proxy. Notice of any adjourned meeting of the stockholders of the Corporation need not be given, except as otherwise required by statute. SECTION 5. RECORD DATE. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action affecting the interests of stockholders, the Board of Directors may fix, in advance, a record date. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting, nor more than sixty (60) days prior to any other action. In each such case, except as otherwise provided by law, only such persons as shall be stockholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to express such consent or dissent, or to receive payment of such dividend, or such allotment of rights, or otherwise to be recognized as stockholders for the related purpose, notwithstanding any registration or transfer of stock on the books of the Corporation after any such record date so fixed. SECTION 6. QUORUM. Except as otherwise provided by statute or the Certificate of Incorporation of the Corporation, the presence, in person or by proxy, of stockholders holding a majority of the shares of the stock of the Corporation generally entitled to vote shall constitute a quorum at all meetings of the stockholders for the transaction of business. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any stockholders. In the absence of a quorum at any meeting or any adjournment thereof, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have the power to adjourn the meeting from time to time, without any notice other than announcement at the meeting of the time and place of the adjourned meeting, until the requisite amount of shares entitled to vote thereat shall be present. At any such adjourned meeting at which the requisite amount of shares entitled to vote thereat shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 7. VOTING. Unless otherwise provided by any provision of the laws of the State of Delaware or of the Certificate of Incorporation or these By-Laws, each stockholder entitled to vote shall be entitled to one vote, in person or by proxy, for each share of stock held by such stockholder. All elections for directors shall be decided by plurality vote, and all other questions shall be decided by majority vote, except as otherwise provided by the laws of the State of Delaware or the Certificate of Incorporation or these By-Laws. SECTION 8. PROXIES. Every proxy must be executed in writing by the stockholder or by his/her attorney-in-fact. No proxy shall be valid after the expiration of three (3) years from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where an irrevocable proxy is permitted by law. SECTION 9. ACTION WITHOUT MEETING. To the fullest extent permitted by law, whenever a vote of stockholders at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provision of the laws of the State of Delaware or of the Certificate of Incorporation or these By-Laws, the meeting, prior notice thereof and the vote of stockholders may be dispensed with if the holders of shares of stock of the Corporation having not less than the minimum number of votes that would have been necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted shall consent in writing to the taking of such action. Where corporate action is taken in such manner by less than unanimous written consent, prompt written notice of the taking of such action shall be given to all stockholders who have not consented in writing thereto. SECTION 10. ADVANCE NOTICE OF STOCKHOLDER NOMINEES FOR DIRECTOR AND OTHER STOCKHOLDER PROPOSALS. The matters to be considered and brought before any annual or special meeting of stockholders of the Corporation shall be limited to only such matters, including the nomination and election of directors, as shall be brought properly before such meeting in compliance with the procedures set forth in this Section 10. For any matter to be properly brought before any annual meeting of stockholders, the matter must be (i) specified in the notice of annual meeting given by or at the direction of the Board of Directors, (ii) otherwise brought before the annual meeting by or at the direction of the Board of Directors or (iii) brought before the annual meeting in the manner specified in this Section 10 by a stockholder that holds of record stock of the Corporation entitled to vote at the annual meeting on such matter (including any election of a director) or (y) by a person (a "Nominee Holder") that holds such stock through a nominee or "street name" holder of record of such stock and can demonstrate to the Corporation such indirect ownership of, and such Nominee Holder's entitlement to vote, such stock on such matter. In addition to any other requirements under applicable law, the certificate of incorporation and these By-Laws, persons nominated by stockholders for election as directors of the Corporation and any other proposals by stockholders shall be properly brought before an annual meeting of stockholders only if notice of any such matter to be presented by a stockholder at such meeting (a "Stockholder Notice") shall be delivered to the Secretary at the principal executive office of the Corporation not less than ninety nor more than one hundred and twenty days prior to the first anniversary date of the annual meeting for the preceding year; provided, however, that if and only if the annual meeting is not scheduled to be held within a period that commences thirty days before and ends thirty days after such anniversary date (an annual meeting date outside such period being referred to herein as an "Other Meeting Date"), such Stockholder Notice shall be given in the manner provided herein by the later of (i) the close of business on the date ninety days prior to such Other Meeting Date or (ii) the close of business on the tenth day following the date on which such Other Meeting Date is first publicly announced or disclosed. Any stockholder desiring to nominate any person or persons (as the case may be) for election as a director or directors of the Corporation at an annual meeting of stockholders shall deliver, as part of such Stockholder Notice, a statement in writing setting forth the name of the person or persons to be nominated, the number and class of all shares of each class of stock of the Corporation owned of record and beneficially by each such person, as reported to such stockholder by such person, the information regarding each such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission, each such person's signed consent to serve as a director of the Corporation if elected, such stockholder's name and address, the number and class of all shares of each class of stock of the Corporation owned of record and beneficially by such stockholder and, in the case of a Nominee Holder, evidence establishing such Nominee Holder's indirect ownership of stock and entitlement to vote such stock for the election of directors at the annual meeting. Any stockholder who gives a Stockholder Notice of any matter (other than a nomination for director) proposed to be brought before an annual meeting of stockholders shall deliver, as part of such Stockholder Notice, the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder's name and address, the number and class of all shares of each class of stock of the Corporation owned of record and beneficially by such stockholder, any material interest of such stockholder in the matter proposed (other than as a stockholder), if applicable, and, in the case of a Nominee Holder, evidence establishing such Nominee Holder's indirect ownership of stock and entitlement to vote such stock on the matter proposed at the annual meeting. As used in these by-laws, shares "beneficially owned" shall mean all shares which such person is deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 (the "Exchange Act"). If a stockholder is entitled to vote only for a specific class or category of directors at a meeting (annual or special), such stockholder's right to nominate one or more individuals for election as a director at the meeting shall be limited to such class or category of directors. Except as provided in the immediately following sentence, no matter shall be properly brought before a special meeting of stockholders unless such matter shall have been brought before the meeting pursuant to the Corporation's notice of such meeting. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any stockholder entitled to vote for the election of such director(s) at such meeting may nominate a person or persons (as the case may be) for election to such position(s) as are specified in the Corporation's notice of such meeting, but only if the Stockholder Notice required by this Section 10 shall be delivered to the Secretary at the principal executive office of the Corporation not later than the close of business on the tenth day following the first day on which the date of the special meeting and either the names of all nominees proposed by the Board of Directors to be elected at such meeting or the number of directors to be elected shall have been publicly announced or disclosed. In no event shall the adjournment of an annual meeting or a special meeting, or any announcement thereof, commence a new period for the giving of notice as provided in this Section 10. This Section 10 shall not apply to (i) any stockholder proposal made pursuant to Rule 14a-8 under the Exchange Act or (ii) any nomination of a director in an election in which only the holders of one or more series of Preferred Stock of the Corporation issued pursuant to the certificate of incorporation are entitled to vote (unless otherwise provided in the terms of such stock). The chairman of any meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall have the power and duty to determine whether notice of nominees and other matters proposed to be brought before a meeting has been duly given in the manner provided in this Section 10 and, if not so given, shall direct and declare at the meeting that such nominees and other matters shall not be considered. ARTICLE III DIRECTORS SECTION 1. NUMBER AND TERM. The number of directors that shall constitute the whole Board of Directors shall be no less than four (4) and no more than ten (10). The number of directors may be increased within the range of four (4) to ten (10) by a vote of the Board without stockholder approval. The Board of Directors shall be divided into three (3) classes, which are designated Class A, Class B and Class C, respectively. The directors in each class shall be as equal in number as possible. At each annual meeting of stockholders, directors to replace those whose terms expired at such meeting shall be elected to hold office until the third succeeding annual meeting and until their successors have been elected and shall have qualified. SECTION 2. RESIGNATIONS. Any director or member of a committee of the Board of Directors may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by any officer of the Corporation. The acceptance of a resignation shall not be necessary to make it effective. SECTION 3. VACANCIES. If any vacancy shall occur on the Board of Directors or on a committee of the Board of Directors, for any reason, the remaining directors in office, though less than a quorum, by a majority vote may appoint any qualified person to fill such vacancy. Such person shall hold office for the unexpired term and until his/her successor shall be elected and qualified. SECTION 4. INCREASE OF NUMBER OF DIRECTORS. Newly created directorships resulting from any increase in the authorized number of directors may be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. SECTION 5. POWERS. The property, affairs and business of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. ARTICLE IV MEETINGS OF THE BOARD SECTION 1. PLACE. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. SECTION 2. PARTICIPATION IN MEETINGS BY TELEPHONE. Members of the Board of Directors, or any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other. Such participation shall constitute presence in person at such meeting. SECTION 3. ANNUAL MEETING. The annual meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders, and no notice of such meeting shall be necessary in order to constitute the meeting, provided a quorum shall be present. In the event such annual meeting is not held at such time and place, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a duly executed waiver of notice thereof. SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, if any, or by the President not less than one (1) day before the meeting; special meetings shall be called by the Chairman of the Board, President or Secretary on like notice on the written request of two (2) directors. SECTION 6. QUORUM; ACT OF THE BOARD OF DIRECTORS. At all meetings of the Board of Directors, a majority of the total number of directors shall be necessary to be and constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time until a quorum shall be present. Notice of any such adjournment shall be given to any directors who were not present and, unless announced at the meeting, to the other directors. For purposes of the foregoing, any director who participates in any meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other shall be deemed to be present in person at such meeting. SECTION 7. COMPENSATION. Directors, as such, shall not receive any stated salary for their services. By resolution of the Board of Directors, however, a fixed fee together with expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors or of any committee of the Board of Directors, provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Further, by resolution of the Board of Directors, the Chairman of the Board may receive a stipend in connection with his or her services rendered as Chairman. SECTION 8. ACTION WITHOUT MEETING. Whenever any action is required or permitted to be taken at a meeting of the Board of Directors, such action may be taken without a meeting if, prior or subsequent to the taking of such action, all members of the Board of Directors consent thereto in writing and such written consent or consents are filed with the minutes of the proceedings of the Board; and such written consent or consents shall have the same effect as a unanimous vote at a meeting of the Board of Directors at which all members thereof were present and voting. SECTION 9. COMMITTEES. The Board of Directors, by resolution adopted by a majority of the whole Board, may from time to time designate from among its members an executive committee, an audit committee, a compensation committee and such other committees, and alternate members thereof, as they may deem desirable, each such committee consisting of one or more members, with such power and authority (to the extent permitted by law) as may be provided in such resolution. Each such committee shall serve at the pleasure of the Board. ARTICLE V NOTICES SECTION 1. FORM; DELIVERY. Notices to directors and stockholders shall be in writing and may be delivered personally or by mail or telegram. Notice by mail shall be deemed to be given at the time when deposited in any post office or letter box, in a post-paid sealed wrapper, and addressed to directors or stockholders at their addresses appearing on the records of the Corporation, unless any such director or stockholder shall have filed with the Secretary of the Corporation a written request that notices intended for him/her be mailed or delivered to some other address, in which case the notice shall be mailed to or delivered at the address designated in such request. Notice to directors may also be given by leaving the notice at the residence or usual place of business of a director. SECTION 2. WAIVER. Whenever a notice is required to be given by any statute or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to such notice. Attendance of a person at a meeting of stockholders, directors or any committee of directors, as the case may be, shall constitute a waiver of notice of such meeting, except when the person is attending for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of stockholders, directors or committee of directors need be specified in any written waiver of notice. ARTICLE VI OFFICERS SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of the Board, a President, a Treasurer, and a Secretary, all of whom shall be elected by the Board of Directors and who shall hold office until their successors are elected and qualified or until their earlier resignation or removal. In addition, the Board of Directors may elect a Chief Operating Officer, one or more Vice Presidents, and such Assistant Secretaries and Assistant Treasurers as the Board of Directors may deem proper. None of the officers of the Corporation need be directors. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting of stockholders. Any officer elected by the Board of Directors may be removed with or without cause at any time by the Board of Directors. Any number of offices may be held by the same person. SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may elect such other officers and agents as it may deem advisable, who shall hold their offices for such terms, shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 3. COMPENSATION. Except as otherwise provided in any employment agreement to which the Corporation is a party, the compensation of all officers of the Corporation shall be fixed by the Board of Directors, and the compensation of agents shall either be so fixed or shall be fixed by officers thereunto duly authorized. SECTION 4. VACANCIES. If an office becomes vacant for any reason, the Board of Directors may fill such vacancy. Any officer so elected by the Board of Directors shall serve only until such time as the unexpired term of his/her predecessor shall have expired, unless reelected by the Board of Directors or unless he/she shall resign or be removed in accordance with these By-Laws. SECTION 5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors. He/she shall see that all orders and resolutions of the Board are carried into effect, subject, however, to the right of the directors to delegate any specific powers to any other officer or officers of the Corporation. He/she shall have the authority to execute bonds, mortgages and other contracts under the seal of the Corporation except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. He/she shall perform such other duties as may from time to time be requested by the Board of Directors. SECTION 6. PRESIDENT. The President shall be the Chief Executive Officer of the Corporation. He/she shall have general and active management of the business of the Corporation, shall see that all orders and resolutions of the Board are carried into effect, subject, however, to the right of the Chairman of the Board and the directors to delegate any specific powers, except such as may be by statute exclusively conferred on the Chief Executive Officer, to any other officer or officers of the Corporation. He/she shall have the authority to execute bonds, mortgages and other contracts under the seal of the Corporation except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. He/she shall have the general powers and duties of supervision and management usually vested in the Chief Executive Officer of a corporation. He/she shall present a report of the condition of the business of the Corporation at each annual meeting of the stockholders and the Board of Directors. In the absence of the Chairman of the Board, he/she shall preside at all meetings of the stockholders and of the Board of Directors. He/she shall perform such other duties as may from time to time be requested by the Board of Directors. SECTION 7. CHIEF OPERATING OFFICER. A Chief Operating Officer, if one has been appointed, shall be vested with all the powers, and shall be required to perform all the duties, as may be properly assigned by the Board of Directors, the Chairman of the Board or the President. SECTION 8. VICE PRESIDENT(S). The Vice President or Vice Presidents, acting under the direction of the President, shall manage the business and affairs of the Corporation and shall have such other powers and duties as may from time to time be assigned by the Board of Directors, the Chairman of the Board or the President. Subject to any limitations imposed by the Board of Directors, the Vice President or Vice Presidents in the order of their election shall have all the powers and duties of the President in the event of the President's absence or inability to act. SECTION 9. SECRETARY AND ASSISTANT SECRETARY(IES). The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the stockholders and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees if required. He/she shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board or the President, under whose supervision he/she shall be. He/she shall have custody of the seal of the Corporation and he/she or an Assistant Secretary shall have authority to affix the same to any instrument requiring it, and, when so affixed, it may be attested by his/her signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his/her signature. He/she shall keep in safe custody the certificate books and stockholder records and such other books and records as the Board of Directors may direct and shall perform all other duties incident to the office of Secretary. The Assistant Secretary or, if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of his/her inability to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. SECTION 10. TREASURER AND ASSISTANT TREASURER(S). The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He/she shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors, the Chairman of the Board and the President at its regular meetings, or when the Board of Directors so requires, an account of all of his/her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he/she shall give the Corporation a bond (which shall be renewed from time to time) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his/her office and for the restoration to the Corporation, in case of his/her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his/her possession or under his/her control belonging to the Corporation. The Assistant Treasurer or, if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Treasurer or in the event of his/her inability to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. SECTION 11. RESIGNATIONS. Any officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein or, if no time shall be specified, at the time of its receipt by any officer of the Corporation. The acceptance of a resignation shall not be necessary to make it effective. ARTICLE VII STOCK CERTIFICATES SECTION 1. FORM; SIGNATURE. The certificates for shares of stock of the Corporation shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each certificate shall exhibit the registered holder's name, the number and class of shares and the date of issuance thereof and shall be signed by, or in the name of, the Corporation by (i) the Chairman of the Board of Directors, the President or any Vice President and (ii) the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation. In case any officer who has signed a certificate shall cease to be an officer before such certificate is issued, it may be issued with the same effect as if he/she were such officer at the date of issue. Each certificate exchanged or returned to the Corporation shall be marked "Canceled," with the date of cancellation. SECTION 2. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his/her legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed or the issuance of such new certificate or certificates. SECTION 3. REGISTRATION OR TRANSFER. Upon surrender to the Corporation or any transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or such transfer agent to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 4. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII GENERAL PROVISIONS SECTION 1. DIVIDENDS. Dividends upon the shares of the Corporation may be declared by the Board of Directors, from time to time, at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of stock, subject to the provisions of the Certificate of Incorporation and the provisions of the Delaware General Corporation Law or any successor statute. SECTION 2. RESERVES. The directors may set apart out of any funds of the Corporation legally available for dividends such sum or sums as the Board of Directors, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall determine to be in the best interests of the Corporation, and the directors may modify or abolish any such reserve. SECTION 3. ANNUAL STATEMENT. The Board of Directors shall present at each annual meeting of stockholders a full and clear statement of the business and condition of the Corporation. SECTION 4. CHECKS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 5. FISCAL YEAR. The fiscal year of the Corporation shall commence on January 1 and end on December 31. SECTION 6. SEAL. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile to be impressed or affixed or reproduced or otherwise. ARTICLE IX INDEMNIFICATION AND INSURANCE SECTION 1. INDEMNIFICATION AND INSURANCE. Every person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he/she or a person of whom he/she is the legal representative is or was a director or officer of the Corporation or is or was serving at the request of the Corporation or for its benefit as a director or officer of another corporation, or as its representative in another enterprise, shall be indemnified and held harmless to the fullest extent legally permissible under and pursuant to any procedure specified in the General Corporation Law of the State of Delaware, as amended from time to time, against all expenses, liabilities and losses (including attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him/her in connection therewith. Such right of indemnification shall be a contract right that may be enforced in any manner desired by such person. Such right of indemnification shall not be exclusive of any other right which such directors, officers or representatives may have or hereafter acquire and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any agreement, vote of stockholders, provision of law or otherwise, as well as their rights under this Article. The Board of Directors may cause the Corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of such status, whether or not the Corporation would have the power to indemnify such person. ARTICLE X AMENDMENTS SECTION 1. AMENDMENT BY STOCKHOLDERS. These By-Laws may be amended by the stockholders, not inconsistent with the Corporation's Articles of Incorporation or the laws of the State of Delaware, at any annual or special meeting of the stockholders, by a two-thirds vote of all outstanding shares of the Corporation. SECTION 2. AMENDMENT BY BOARD OF DIRECTORS. The Board of Directors by a majority vote of the whole Board at any meeting may amend these By-Laws, including By-Laws adopted by the stockholders, provided the stockholders may from time to time specify particular provisions of these By-Laws that may not be amended by the Board of Directors. As amended through February 12, 2003. EX-23.1 4 w84290exv23w1.txt CONSENT OF KPMG LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Alteon Inc.: We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 33-60576, 33-89134, 333-91437, 333-39429, 333-04496, 333-69304) and in the registration statements on Form S-3 (Nos. 333-44453, 333-48964, 333-28309, 333-56512) of Alteon Inc. of our report dated January 27, 2003, with respect to the balance sheet of Alteon Inc. as of December 31, 2002, and the related statements of operations, stockholders' equity, and cash flows, for the year then ended, which report appears in the December 31, 2002 Annual Report on Form 10-K of Alteon Inc. /s/ KPMG LLP Short Hills, New Jersey March 7, 2003 EX-99.1 5 w84290exv99w1.txt CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of the registrant certifies, to the best of his or her knowledge, that the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (the "Form 10-K") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-K, fairly presents, in all material respects, the financial condition and results of operations of the registrant. Dated: March 10, 2003 /s/ Kenneth I. Moch ------------------------------------- Kenneth I. Moch President and Chief Executive Officer Dated: March 10, 2003 /s/ Elizabeth A. O'Dell ------------------------------------- Elizabeth A. O'Dell Vice President, Finance Secretary and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----