##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM
10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period endedSeptember 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period fromto
 Commission
file number 001-16043
 ALTEON INC.
  Delaware(State or other jurisdiction of
incorporation or organization)
    
    13-3304550(I.R.S. Employer Identification No.)
 6 Campus Drive, Parsippany, New Jersey 07054
    (Registrants
telephone number, including area code)
 (Former
name, former address and former fiscal year,
 þ o
 þ o
 o þ




---



ALTEON INC.
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Condensed Financial Statements (Unaudited)Condensed Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    3Condensed Statements of Operations for the three and nine months ended September 30, 2005 and 2004
    
    
    4Condensed Statement of Changes in Stockholders Equity for the nine months ended September 30, 2005
    
    
    5Condensed Statements of Cash Flows for the nine months ended September 30, 2005 and 2004
    
    
    6Notes to Condensed Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Qualitative and Quantitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 6. Exhibits
    
    
    27SIGNATURES
    
    
    28INDEX TO EXHIBITS
    
    
    29Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM l. Condensed Financial Statements (Unaudited)
 ALTEON INC.
 
 CONDENSED BALANCE SHEETS
 (Unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    8,183,766
    
    
    $
    11,175,762Other current assets
    
    
    456,864
    
    
    
    159,364Total current assets
    
    
    8,640,630
    
    
    
    11,335,126Property and equipment, net
    
    
    70,880
    
    
    
    107,269Restricted cash
    
    
    200,000
    
    
    
    200,000Total assets
    
    $
    8,911,510
    
    
    $
    11,642,395LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    333,956
    
    
    $
    593,094Accrued expenses
    
    
    944,811
    
    
    
    2,002,381Total liabilities
    
    
    1,278,767
    
    
    
    2,595,475Stockholders Equity:Preferred Stock, $0.01 par value,
1,993,329 shares authorized, and 1,360 and 1,277 shares
of Series G and 4,085 and 3,836 shares of Series H
issued and outstanding, as of September 30, 2005 and
December 31, 2004, respectively. The liquidation value at
September 30, 2005, was $54,447,388
    
    
    54
    
    
    
    51Common Stock, $0.01 par value,
300,000,000 shares and 175,000,000 shares authorized, as of
September 30, 2005 and December 31, 2004, respectively,
and 57,996,711 and 48,472,898 shares issued and outstanding,
as of September 30, 2005 and December 31, 2004, respectively
    
    
    579,967
    
    
    
    484,729Additional paid-in capital
    
    
    227,059,931
    
    
    
    214,274,790Accumulated deficit
    
    
    (220,007,209
    )
    
    
    (205,712,650
    )Total stockholders equity
    
    
    7,632,743
    
    
    
    9,046,920Total liabilities and stockholders equity
    
    $
    8,911,510
    
    
    $
    11,642,395
  3




---



##### Table of Contents



ALTEON INC.
 
 CONDENSED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Income:Investment income
    
    $
    87,235
    
    
    $
    55,198
    
    
    $
    286,789
    
    
    $
    121,614Other income
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    151,822Total income
    
    $
    87,235
    
    
    $
    55,198
    
    
    $
    386,789
    
    
    $
    273,436Expenses:Research and development
    
    
    1,981,136
    
    
    
    2,131,879
    
    
    
    8,115,615
    
    
    
    7,261,576General and administrative
    
    
    1,062,503
    
    
    
    933,414
    
    
    
    3,245,946
    
    
    
    3,258,749Total expenses
    
    
    3,043,639
    
    
    
    3,065,293
    
    
    
    11,361,561
    
    
    
    10,520,325Net loss
    
    
    (2,956,404
    )
    
    
    (3,010,095
    )
    
    
    (10,974,772
    )
    
    
    (10,246,889
    )Preferred stock dividends
    
    
    1,142,016
    
    
    
    1,049,920
    
    
    
    3,319,787
    
    
    
    3,062,731Net loss applicable to common stockholders
    
    $
    (4,098,420
    )
    
    $
    (4,060,015
    )
    
    $
    (14,294,559
    )
    
    $
    (13,309,620
    )Basic/diluted net loss per share
applicable to common stockholders
    
    $
    (0.07
    )
    
    $
    (0.08
    )
    
    $
    (0.25
    )
    
    $
    (0.31
    )Weighted average common shares used
in computing basic/diluted net loss per share
    
    
    57,996,711
    
    
    
    48,298,985
    
    
    
    57,518,794
    
    
    
    43,100,121
  4




---



##### Table of Contents



ALTEON INC.
 
 CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
 (Unaudited)
 Additional
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance, December 31, 2004
    
    
    5,113
    
    
    $
    51
    
    
    
    48,472,898
    
    
    $
    484,729
    
    
    $
    214,274,790
    
    
    $
    (205,712,650
    )
    
    $
    9,046,920Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,974,772
    )
    
    
    (10,974,772
    )Issuance of Series G and H
preferred stock dividends
    
    
    332
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3,319,784
    
    
    
    (3,319,787
    )
    
    
    Public offerings of common stock
    
    
    
    
    
    
    
    
    
    
    9,523,813
    
    
    
    95,238
    
    
    
    9,437,057
    
    
    
    
    
    
    
    9,532,295Deferred compensation expense
in connection with the issuance
of non-qualified stock options
granted to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,300
    
    
    
    
    
    
    
    28,300Balance, September 30, 2005
    
    
    5,445
    
    
    $
    54
    
    
    
    57,996,711
    
    
    $
    579,967
    
    
    $
    227,059,931
    
    
    $
    (220,007,209
    )
    
    $
    7,632,743
  5




---



##### Table of Contents



ALTEON INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine MonthsEnded September 30,2005
    
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (10,974,772
    )
    
    $
    (10,246,889
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    49,497
    
    
    
    56,548Stock Compensation Expense
    
    
    28,300
    
    
    
    15,138Changes in operating assets and liabilities:Other assets
    
    
    (297,500
    )
    
    
    (207,953
    )Accounts payable and accrued expenses
    
    
    (1,316,708
    )
    
    
    323,485Net cash used in operating activities
    
    
    (12,511,183
    )
    
    
    (10,059,671
    )Cash Flows from Investing Activities:Capital expenditures
    
    
    (13,108
    )
    
    
    (80,646
    )Net cash used in investing activities
    
    
    (13,108
    )
    
    
    (80,646
    )Cash Flows from Financing Activities:Net proceeds from issuance of common stock
    
    
    9,532,295
    
    
    
    7,581,318Net proceeds from exercise of employee stock options
    
    
    
    
    
    
    5,085Net cash provided by financing activities
    
    
    9,532,295
    
    
    
    7,586,403Net decrease in cash and cash equivalents
    
    
    (2,991,996
    )
    
    
    (2,553,914
    )Cash and cash equivalents, beginning of period
    
    
    11,175,762
    
    
    
    16,678,582Cash and cash equivalents, end of period
    
    $
    8,183,766
    
    
    $
    14,124,668
  6




---



##### Table of Contents



ALTEON INC.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1  Basis of Presentation
  Note 2  Liquidity
       7




---



##### Table of Contents



Note 3  Stock-Based Compensation
    8




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (2,956,404
    )
    
    $
    (3,010,095
    )
    
    $
    (10,974,772
    )
    
    $
    (10,246,889
    )Less: Total stock-based
employee and director
compensation expense
determined under fair
value method
    
    
    (231,914
    )
    
    
    125,580
    
    
    
    (943,493
    )
    
    
    (604,087
    )Pro forma net loss
    
    
    (3,188,318
    )
    
    
    (2,884,515
    )
    
    
    (11,918,265
    )
    
    
    (10,850,976
    )Preferred stock dividends
    
    
    1,142,016
    
    
    
    1,049,920
    
    
    
    3,319,787
    
    
    
    3,062,731Pro forma net loss
applicable to common
stockholders
    
    $
    (4,330,334
    )
    
    $
    (3,934,435
    )
    
    $
    (15,238,052
    )
    
    $
    (13,913,707
    )Earnings per share
applicable to common
stockholders:Basic/diluted, as reported
    
    $
    (0.07
    )
    
    $
    (0.08
    )
    
    $
    (0.25
    )
    
    $
    (0.31
    )Basic/diluted, pro forma
    
    $
    (0.07
    )
    
    $
    (0.08
    )
    
    $
    (0.26
    )
    
    $
    (0.32
    )
  Note 4  Net Loss Per Share Applicable to Common Stockholders
  Note 5  Stockholders Equity
   9




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  P E D E S T Al E m Er al D S P E c Tr A
      10




---



##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
   Results of Operations
 Three Months ended September 30, 2005 and 2004
     Nine Months Ended September 30, 2005 and 2004
  11




---



##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
     Liquidity and Capital Resources
     12




---



##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
      Critical Accounting Policies
   13




---



##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
   14




---



##### Table of Contents



Forward-Looking Statements and Cautionary Statements
 Form 10-Q.
 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, and cease operations.
  P E D E S T Al E m Er al D S P E c Tr A
   15




---



##### Table of Contents



If we are unable to renegotiate our preferred stock agreement with Genentech, we may not be
able to secure future equity financing or merge with a third party.
   16




---



##### Table of Contents



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.
  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.
  Clinical studies required for our product candidates are time-consuming, and their outcome is
uncertain.
   17




---



##### Table of Contents




    
    slower than expected patient enrollment due to the nature of the protocol,
the proximity of subjects to clinical sites, the eligibility criteria for the study,
competition with clinical trials for other drug candidates or other factors;
    
    adverse results in pre-clinical safety or toxicity studies;
    
    lower than expected retention rates of subjects in a clinical trial;
    
    inadequately trained or insufficient personnel at the study site to assist
in overseeing and monitoring clinical trials;
    
    delays in approvals from a study sites review board, or other required
approvals;
    
    longer treatment time required to demonstrate effectiveness or determine
the appropriate product dose;
    
    lack of sufficient supplies of the product candidate;
    
    adverse medical events or side effects in treated subjects;
    
    lack of effectiveness of the product candidate being tested; and
    
    regulatory changes.
    
    
    ongoing pre-clinical or clinical study results may indicate that the
product candidate is not safe or effective;
    
    the FDA may interpret our pre-clinical or clinical study results to
indicate that the product candidate is not safe or effective, even if we interpret the
results differently; or
 18




---



##### Table of Contents




    
    the FDA may deem the processes and facilities that our collaborative
partners, our third-party manufacturers or we propose to use in connection with the
manufacture of the product candidate to be unacceptable.
 If we do not successfully develop any products, or are unable to derive revenues from product
sales, we will never be profitable.
   S P E c Tr A
  
 Failure to remediate the material weaknesses in our internal controls and to achieve and
maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of
2002 could have a material adverse effect on our business and stock price.
  19




---



##### Table of Contents



If we are able to form collaborative relationships, but are unable to maintain them, our
product development may be delayed and disputes over rights to technology may result.
   
    
    collaborators may fail to adequately perform the scientific and
pre-clinical studies called for under our agreements with them;
    
    collaborators have significant discretion in determining the efforts and
resources that they will apply to these collaborations;
    
    collaborators may not pursue further development and commercialization of
our product candidates or may elect not to continue or renew research and development
programs based on pre-clinical or clinical study results, changes in their strategic
focus or available funding or external factors, such as an acquisition that diverts
resources or creates competing priorities;
    
    collaborators may delay clinical trials, provide insufficient funding for a
clinical program, stop a clinical study or abandon a product candidate, repeat or
conduct new clinical trials or require a new formulation of a product candidate for
clinical testing;
    
    collaborators could independently develop, or develop with third parties,
products that compete directly or indirectly with our products or product candidates if
the collaborators believe that competitive products are more likely to be successfully
developed or can be commercialized under terms that are more economically attractive;
collaborators with marketing and distribution rights to one or more products may not
commit enough resources to their marketing and distribution;
    
    collaborators may not properly maintain or defend our intellectual property
rights or may use our proprietary information in such a way as to invite litigation
that could jeopardize or invalidate our proprietary information or expose us to
potential litigation;
    
    disputes may arise between us and the collaborators that result in the
delay or termination of the research, development or commercialization of our product
candidates or that result in costly litigation or arbitration that diverts management
attention and resources; and
 20




---



##### Table of Contents




    
    collaborations may be terminated and, if terminated, may result in a need
for additional capital to pursue further development of the applicable product
candidates.
  Our product candidates will remain subject to ongoing regulatory review even if they receive
marketing approval. If we fail to comply with continuing regulations, we could lose these
approvals and the sale of our products could be suspended.
   
    
    restrictions on the products, manufacturers or manufacturing processes;
    
    warning letters;
    
    civil or criminal penalties;
    
    fines;
    
    injunctions;
    
    product seizures or detentions;
    
    import bans;
    
    voluntary or mandatory product recalls and publicity requirements;
    
    suspension or withdrawal of regulatory approvals;
    
    total or partial suspension of production; and
    
    refusal to approve pending applications for marketing approval of new drugs
or supplements to approved applications.
 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 to
the market may be impaired.
  21




---



##### Table of Contents



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.
  
    
    could encounter difficulties in achieving volume production, quality
control and quality assurance and suffer shortages of qualified personnel, which could
result in their inability to manufacture sufficient quantities of drugs to meet our
clinical schedules or to commercialize our product candidates;
    
    could terminate or choose not to renew the manufacturing agreement, based on their
own business priorities, at a time that is costly or inconvenient for us;
    
    could fail to establish and follow FDA-mandated cGMPs, as required for FDA approval
of our product candidates, or fail to document their adherence to cGMPs, either of
which could lead to significant delays in the availability of material for clinical
study and delay or prevent filing or approval of marketing applications for our product
candidates; and
    
    could breach, or fail to perform as agreed, under the manufacturing agreement.
   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.
   22




---



##### Table of Contents



The effect of accounting rules relating to our equity compensation arrangements may have an
adverse effect on our stock price and financial condition.
   If we are not able to compete successfully with other companies in the development and
marketing of cures and therapies for cardiovascular diseases, diabetes, erectile dysfunction and
the other conditions for which we seek to develop products, we may not be able to continue our
operations.
   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.
  23




---



##### Table of Contents



If the users of the products that we are developing 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 condition and results of operations.
  24




---



##### Table of Contents



ITEM 3. Qualitative and Quantitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
        25




---



##### Table of Contents



26




---



##### Table of Contents



PART
II  OTHER INFORMATION
 
 ITEM
6. Exhibits
   27




---



##### Table of Contents



SIGNATURES
   ALTEON INC.By: /s/ Kenneth I. MochKenneth I. MochPresident and Chief Executive Officer
(principal executive officer) By:  /s/ Mary T. PhelanMary T. PhelanDirector of Finance and Financial Reporting
(principal accounting officer) 28




---



##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNo.
    
    Description of Exhibit31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 29