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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 Commission File No. 0-31261 ATHEROGENICS, INC.  Georgia
    
    58-2108232(State of incorporation)
    
    (I.R.S. Employer Identification Number)
 8995 Westside Parkway, Alpharetta, Georgia 30004(Address of registrants principal executive offices, including zip code)
   (Registrants telephone number, including area code): (678) 336-2500 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
þ  No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ
No o As of May 6, 2005 there were 37,702,425 shares of the registrants common stock outstanding.




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ATHEROGENICS, INC.
FORM 10-Q
INDEX  
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Condensed Financial Statements (unaudited)Condensed Balance Sheets
March 31, 2005 and December 31, 2004
    
    
    1Condensed Statements of Operations
Three months ended March 31, 2005 and 2004
    
    
    2Condensed Statements of Cash Flows
Three months ended March 31, 2005 and 2004
    
    
    3Notes to Condensed Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    7Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4. Controls and Procedures
    
    
    13PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    13Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    13Item 6. Exhibits
    
    
    14SIGNATURES
    
    
    15EX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32 SECTION 906, CERTIFICATION OF THE CEO & CFO
  i




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PART I.  FINANCIAL INFORMATION 
 Item 1. Financial Statements ATHEROGENICS, INC. 
 CONDENSED BALANCE SHEETS
(Unaudited)
 March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    113,357,265
    
    
    $
    15,888,919Short-term investments
    
    
    128,385,184
    
    
    
    51,035,096Prepaid expenses
    
    
    1,046,858
    
    
    
    2,634,297Notes receivable and other current assets
    
    
    1,023,971
    
    
    
    566,208Total current assets
    
    
    243,813,278
    
    
    
    70,124,520Equipment and leasehold improvements, net of
accumulated depreciation and amortization
    
    
    2,187,770
    
    
    
    1,940,011Debt issuance costs and other assets
    
    
    8,530,615
    
    
    
    2,397,796Total assets
    
    $
    254,531,663
    
    
    $
    74,462,327LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    3,444,692
    
    
    $
    2,838,053Accrued research and development
    
    
    2,444,941
    
    
    
    4,083,894Accrued liabilities
    
    
    2,099,741
    
    
    
    2,159,893Accrued compensation
    
    
    453,978
    
    
    
    1,239,247Current portion of equipment loan facility
    
    
    
    
    
    
    83,622Total current liabilities
    
    
    8,443,352
    
    
    
    10,404,709Convertible notes payable
    
    
    300,000,000
    
    
    
    100,000,000Shareholders deficit:Preferred stock, no par value: Authorized  5,000,000 shares
    
    
    
    
    
    
    Common stock, no par value: Authorized  100,000,000 shares;
issued and outstanding  37,670,725 and 37,368,658 shares
at March 31, 2005 and December 31, 2004, respectively
    
    
    176,462,937
    
    
    
    175,713,265Warrants
    
    
    744,384
    
    
    
    828,804Deferred stock compensation
    
    
    (130,464
    )
    
    
    (324,607
    )Accumulated deficit
    
    
    (230,752,104
    )
    
    
    (212,120,547
    )Accumulated other comprehensive loss
    
    
    (236,442
    )
    
    
    (39,297
    )Total shareholders deficit
    
    
    (53,911,689
    )
    
    
    (35,942,382
    )Total liabilities and shareholders deficit
    
    $
    254,531,663
    
    
    $
    74,462,327
 The accompanying notes are an integral part of these condensed financial statements. 1




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ATHEROGENICS, INC. 
 CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 Three months endedMarch 31,2005
    
    
    2004Revenues
    
    $
    
    
    
    $
    Operating expenses:Research and development
    
    
    16,155,070
    
    
    
    14,010,745General and administrative
    
    
    1,820,818
    
    
    
    1,670,102Total operating expenses
    
    
    17,975,888
    
    
    
    15,680,847Operating loss
    
    
    (17,975,888
    )
    
    
    (15,680,847
    )Interest and other income
    
    
    1,447,904
    
    
    
    370,988Interest expense
    
    
    (2,103,573
    )
    
    
    (1,292,841
    )Net loss
    
    $
    (18,631,557
    )
    
    $
    (16,602,700
    )Net loss per share  basic and diluted
    
    $
    (0.50
    )
    
    $
    (0.45
    )Weighted average shares outstanding  basic and diluted
    
    
    37,532,613
    
    
    
    36,866,673
 The accompanying notes are an integral part of these condensed financial statements. 2




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ATHEROGENICS, INC. 
 CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three months endedMarch 31,2005
    
    
    2004Operating activitiesNet loss
    
    $
    (18,631,557
    )
    
    $
    (16,602,700
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    233,265
    
    
    
    345,033Amortization of debt issuance costs
    
    
    318,007
    
    
    
    163,245Changes in operating assets and liabilities:Prepaid expenses
    
    
    1,587,439
    
    
    
    (768,140
    )Notes receivable and other assets
    
    
    (475,566
    )
    
    
    (37,547
    )Accounts payable
    
    
    606,639
    
    
    
    1,986,761Accrued research and development
    
    
    (1,638,953
    )
    
    
    (779,212
    )Accrued liabilities and compensation
    
    
    (1,196,938
    )
    
    
    (1,596,890
    )Net cash used in operating activities
    
    
    (19,197,664
    )
    
    
    (17,289,450
    )Investing activitiesPurchases of short-term investments
    
    
    (80,437,505
    )
    
    
    (27,413,121
    )Sales and maturities of short-term investments
    
    
    2,890,272
    
    
    
    10,951,187Purchases of equipment and leasehold improvements
    
    
    (86,114
    )
    
    
    (76,149
    )Net cash used in investing activities
    
    
    (77,633,347
    )
    
    
    (16,538,083
    )Financing activitiesProceeds from the issuance of 1.5% convertible notes
    
    
    193,566,977
    
    
    
    Proceeds from the exercise of common stock options
    
    
    816,002
    
    
    
    1,406,856Payments on equipment loan facility
    
    
    (83,622
    )
    
    
    (116,437
    )Net cash provided by financing activities
    
    
    194,299,357
    
    
    
    1,290,419Increase (decrease) in cash and cash equivalents
    
    
    97,468,346
    
    
    
    (32,537,114
    )Cash and cash equivalents at beginning of period
    
    
    15,888,919
    
    
    
    53,058,249Cash and cash equivalents at end of period
    
    $
    113,357,265
    
    
    $
    20,521,135Supplemental disclosuresInterest paid
    
    $
    2,252,233
    
    
    $
    2,410,041
 The accompanying notes are an integral part of these condensed financial statements. 3




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ATHEROGENICS, INC. 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Organization and Nature of Operations AtheroGenics, Inc. (AtheroGenics) was incorporated on November 23, 1993 (date of inception)
in the State of Georgia to focus on the discovery, development and commercialization of novel
therapeutics for the treatment of chronic inflammatory diseases, including coronary heart disease,
organ transplant rejection, rheumatoid arthritis and asthma. 2. Basis of Presentation The accompanying unaudited condensed financial statements reflect all adjustments (consisting
solely of normal recurring adjustments) which management considers necessary for a fair
presentation of the financial position, results of operations and cash flows of AtheroGenics for
the interim periods presented. Certain footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States have been condensed or omitted from the interim financial statements as permitted by the
rules and regulations of the Securities and Exchange Commission. Interim results are not
necessarily indicative of results for the full year. The interim results should be read in conjunction with the financial statements and notes
thereto included in AtheroGenics Annual Report on Form 10-K for the year ended December 31, 2004,
as amended by Amendment No. 1 filed on April 6, 2005 and Amendment No. 2 filed on May 6, 2005 (the
Form 10-K). Shareholders are encouraged to review the Form 10-K for a broader discussion of
AtheroGenics opportunities and risks inherent in the business. Copies of the Form 10-K are
available on request. 3. Recently Issued Accounting Standards In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment(SFAS 123(R)), which
revises SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123), and supersedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees(APB
25). SFAS 123(R) requires that companies recognize compensation expense associated with stock
option grants and other equity instruments to employees in the financial statements and is
effective as of the first quarter of 2006. SFAS 123(R) applies to all grants after the effective
date and to the unvested portion of stock options outstanding as of the effective date. Under SFAS
123(R), AtheroGenics must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the transition method to be
used at the date of adoption. The permitted transition methods are either a modified prospective
method or a modified retrospective method. The modified prospective method requires that
compensation expense be recorded for all unvested options at the beginning of the first quarter of
adoption of SFAS 123(R), while the modified retrospective method requires that compensation expense
be recorded for all unvested options beginning with the first period presented. Under the modified
retrospective method, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The pro forma disclosures previously permitted under SFAS
123 will no longer be an alternative to financial statement recognition. AtheroGenics has not yet
determined the method of adoption or the effect of adopting SFAS 123(R). 4. Net Loss per Share SFAS No. 128, Earnings per Share,requires presentation of both basic and diluted earnings per
share. Basic earnings per share is computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings per share is
computed in the same manner as basic earnings per share except that diluted earnings per share
reflects the potential dilution that would occur if outstanding options, warrants and convertible
notes were exercised. Because AtheroGenics reported a net loss for all periods presented, shares
associated with stock options, warrants and convertible notes are not included because their effect
would be antidilutive. Basic and diluted net loss per share amounts are the same for the periods
presented. 4




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5. Stock-Based Compensation AtheroGenics has elected to follow APB 25, in accounting for its stock-based employee
compensation plans, rather than the alternative fair value accounting method provided for under
SFAS 123, as SFAS 123 requires the use of option valuation models that were not developed for use
in valuing employee stock options. AtheroGenics accounts for transactions in which services are
received in exchange for equity instruments based on the fair value of such services received from
non-employees, in accordance with SFAS 123 and Emerging Issues Task Force (EITF) Issue No. 96-18,
Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure(SFAS 148), an amendment to SFAS 123, requires disclosure in the
summary of significant accounting policies of the effects of the fair value of stock-based employee
compensation on reported net income and earnings per share in annual and interim financial
statements. The following table illustrates the effect on net loss and net loss per share if the fair
value based method had been applied to all outstanding and unvested options in each period, based
on the provisions of SFAS 123 and SFAS 148. Three months endedMarch 31,2005
    
    
    2004Net loss, as reported
    
    $
    (18,631,557
    )
    
    $
    (16,602,700
    )Add: Stock-based employee compensation
expense included in reported net loss
    
    
    
    
    
    
    12,035Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (2,140,725
    )
    
    
    (1,190,629
    )Pro forma net loss
    
    $
    (20,772,282
    )
    
    $
    (17,781,294
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.50
    )
    
    $
    (0.45
    )Basic and diluted, pro forma
    
    $
    (0.55
    )
    
    $
    (0.48
    )
 6. Convertible Notes Payable In August 2003, AtheroGenics issued $100.0 million in aggregate principal amount of 4.5%
convertible notes due September 1, 2008 with interest payable semi-annually in March and September.
Net proceeds to AtheroGenics were approximately $96.7 million, after deducting expenses and
underwriters discounts and commissions. The issuance costs related to the notes are recorded as
other assets and are being amortized to interest expense over the five-year life of the notes. The 4.5% convertible notes may be converted at the option of the holder into shares of
AtheroGenics common stock prior to the close of business on September 1, 2008 at a conversion rate
of 65.1890 shares per $1,000 principal amount of notes, representing a conversion price of
approximately $15.34, subject to adjustment. Under certain circumstances, AtheroGenics may be
obligated to redeem all or part of the 4.5% convertible notes prior to their maturity at a
redemption price equal to 100% of their principal amount, plus accrued and unpaid interest and
liquidated damages, if any, up to but excluding the maturity date. As of March 31, 2005, accrued
liabilities included approximately $375,000 of accrued interest related to the 4.5% convertible
notes, which is due September 1, 2005. On January 12, 2005, AtheroGenics issued $200.0 million in aggregate principal amount of 1.5%
convertible notes due February 1, 2012 with interest payable semi-annually in February and August.
Net proceeds to AtheroGenics were approximately $193.6 million, after deducting expenses and
underwriters discounts and 5




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commissions. The issuance costs related to the notes are recorded as other assets and are being
amortized to interest expense over the seven-year life of the notes. The 1.5% convertible notes are convertible into shares of common stock, at the option of the
holder, at a conversion rate of 38.5802 shares per $1,000 principal amount of notes, which
represents a conversion price of approximately $25.92, subject to adjustment. Under certain
circumstances, AtheroGenics may be obligated to redeem all or part of the 1.5% convertible notes
prior to their maturity at a redemption price equal to 100% of their principal amount, plus accrued
and unpaid interest and liquidated damages, if any, up to but excluding the maturity date. In
addition, under certain circumstances, AtheroGenics may adjust the conversion rate. As of March
31, 2005, accrued liabilities included approximately $658,000 of accrued interest related to the
1.5% convertible notes, which is due August 1, 2005. AtheroGenics has reserved a total of 14,234,953 shares of common stock for future issuance in
connection with the 4.5% convertible notes and the 1.5% convertible notes. 7. Bank Credit Agreements In March 2002, AtheroGenics entered into an equipment loan facility with Silicon Valley Bank
for up to a maximum amount of $2.5 million to be used to finance existing and new equipment
purchases. As of March 31, 2005, the equipment loan facility had been paid in full. In connection
with the equipment loan facility, AtheroGenics had granted to Silicon Valley Bank a negative pledge
on its intellectual property. This negative pledge was terminated with the full payment of the
equipment loan facility. 8. Reclassifications In order to present auction rate securities with short-term interest auction features as
short-term investments in accordance with SFAS No. 95, Statement of Cash Flowsand SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securitiesfor the quarter ended March 31,
2004, $16.1 million, was reclassed from cash and cash equivalents to short-term investments. This
reclassification was to properly state cash and cash equivalents and had no effect on previously
reported net loss or shareholders deficit. The effect of the reclassification on cash flow was to
increase cash used in investing activities by $16.1 million for the quarter ended March 31, 2004. 9. Commitments and Contingencies Except as set forth below, AtheroGenics commitments and contingencies have not changed
significantly from those previously discussed in its Form 10-K. Purported securities class action lawsuits were filed against AtheroGenics and some of its
executive officers and directors in the United States District Court for the Southern District of
New York on January 5, 2005 and February 8, 2005 (the SDNY Actions) and in the United States
District Court for the Northern District of Georgia, Atlanta division on January 7, 2005, January
10, 2005, January 11, 2005 and January 25, 2005 (the NDGA Actions). Separate motions to
consolidate these lawsuits were filed by plaintiffs in both the Southern District of New York and
the Northern District of Georgia on March 7, 2005. In addition, three class members simultaneously
moved for appointment as lead plaintiffs in both districts on March 7, 2005. On April 18, 2005, the
Honorable Richard J. Howell ordered the SDNY Actions consolidated under the caption In re
Atherogenics Securities Litigation and appointed lead plaintiff and co-lead counsel. The motion
in the NDGA Actions is still pending. The allegations in these lawsuits relate to AtheroGenics
disclosures regarding the results of the CART-2 clinical trial for AGI-1067. The results of complex
legal proceedings, such as those purported class actions, are difficult to predict. Each complaint
seeks unspecified damages and, therefore, AtheroGenics is unable to estimate the possible range of
damages that it might incur should any of these lawsuits be resolved against them. AtheroGenics
intends to defend the litigation vigorously. In March 2005, AtheroGenics committed to purchase approximately $3.5 million of commercial
manufacturing equipment for AGI-1067, to be delivered in 2006.
Progress payments related to this equipment will be made during the
construction period. 6




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following should be read with the financial statements and related footnotes and
Managements Discussion and Analysis of Financial Condition and Results of Operations included in
AtheroGenics Annual Report onForm 10-Kfor the fiscal year ended December 31, 2004, as amended by
Amendment No. 1 filed on April 6, 2005 and Amendment No. 2 filed on May 6, 2005 (the Annual Report
onForm 10-K). The results discussed below are not necessarily indicative of the results to be
expected in any future periods. The following discussion contains forward-looking statements that
are subject to risks and uncertainties which could cause actual results to differ from the
statements made. These risks are set forth in more detail in our Annual Report onForm 10-K. OVERVIEW AtheroGenics is a research-based pharmaceutical company focused on the discovery, development
and commercialization of novel drugs for the treatment of chronic inflammatory diseases, including
coronary heart disease, organ transplant rejection, rheumatoid arthritis and asthma. We have
developed a proprietary vascular protectant, or v-protectant®, technology platform to
discover drugs to treat these types of diseases. Based on our v-protectant® platform, we
have two drug development programs in clinical trials and are pursuing a number of other
preclinical programs. AGI-1067 is our v-protectant® candidate that is most advanced in clinical
development. AGI-1067 is designed to benefit patients with coronary heart disease, or CHD, which is
atherosclerosis of the blood vessels of the heart. Atherosclerosis is a common disease that results
from inflammation and the buildup of plaque in arterial blood vessel walls. In November 2004, we completed a Phase IIb clinical trial called CART-2, a 465-patient study
that examined the effect of 12 months of AGI-1067 therapy on atherosclerosis and post-angioplasty
restenosis. Two leading cardiac intravascular ultrasound laboratories independently analyzed the
final data from CART-2. The primary endpoint of the trial was a change in coronary atherosclerosis,
measured as total plaque volume after a 12-month treatment period compared to baseline values.
Combined results of the final analysis from the two laboratories, which were based on an evaluation
of intravascular ultrasounds from approximately 230 patients in the study, indicate that AGI-1067
reduced plaque volume by an average of 2.3%, which was statistically significant. Results from the
patient group receiving both placebo and standard of care indicated a plaque volume measure that
was not statistically different from baseline. While the plaque regression observed in the AGI-1067
group exceeded that observed in the standard of care group numerically, the difference did not
reach statistical significance, although a trend towards significance was seen in one laboratorys
analysis. An important secondary endpoint from the trial, change in plaque volume in the most
severely diseased subsegment, showed statistically significant regression from baseline by an
average of 4.8%. The results also demonstrated a significant reduction in myeloperoxidase, an
inflammatory biomarker that correlates with future cardiovascular events. Overall adverse event
rates were similar in the AGI-1067 and standard of care groups, and AGI-1067 was generally well
tolerated. Based on the results of an End of Phase II meeting with the U.S. Food and Drug Administration,
or FDA, we proceeded to develop a pivotal Phase III clinical trial protocol to evaluate AGI-1067
for the treatment of atherosclerosis. The Phase III protocol received a Special Protocol Assessment
from the FDA in March 2003. A Special Protocol Assessment is written confirmation from the FDA that
the protocol is adequately designed to support a New Drug Application for the drug in the specified
treatment area. In 2003, we initiated the pivotal Phase III trial, referred to as ARISE (Aggressive Reduction
of Inflammation Stops Events), which is being conducted in cardiac centers in the United States,
Canada, the United Kingdom and South Africa. ARISE will evaluate the impact of AGI-1067 on
important outcome measures such as death due to coronary disease, myocardial infarction, stroke,
coronary re-vascularization and unstable angina in patients who have CHD. The study will assess the
incremental benefits of AGI-1067 versus the current standard of care therapies in this patient
population. As such, all patients in the trial, including those on placebo, will be receiving other
appropriate heart disease medications, including statins and other cholesterol-lowering therapies,
high blood pressure medications and anti-clotting agents. 7




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We originally planned to enroll in ARISE 4,000 patients who would be followed for an average
of 18 months or until a minimum of 1,160 primary events, or outcome measures, had occurred. In
February 2005, we announced that the FDA approved our proposed amendment to the ARISE Phase III
clinical trial protocol. The changes to the ARISE protocol are intended to enhance the trial as
well as to accelerate its pace without affecting the Special Protocol Assessment with the FDA. The
changes approved by the FDA include our plan to increase the number of patients in the study to a
target of 6,000, eliminate the minimum 12 month follow-up period for patients and decrease the
minimum number of primary events to 990. With these modifications, we would expect to complete
enrollment by mid-2005 and complete the ARISE trial by the end of the first quarter of 2006. We
plan to file a New Drug Application with the FDA as soon as possible after we complete the trial
and analyze the results. Our second v-protectant® candidate, AGI-1096, is a novel antioxidant and
selective anti-inflammatory agent which is being developed to address the accelerated inflammation
of grafted blood vessels, known as transplant arteritis, common in chronic organ transplant
rejection. AGI-1096 inhibits the expression of certain inflammatory proteins, including VCAM-1, in
endothelial cells lining the inside surfaces of blood vessel walls. We have completed a Phase I
clinical trial of AGI-1096 in healthy volunteers that demonstrated AGI-1096 was well-tolerated over
the escalating single oral doses studied. Adverse events were generally mild and not considered
clinically significant. Subjects reached targeted blood levels for AGI-1096 that were equivalent to
those seen in successful preclinical models of organ transplant rejection. In 2004, we announced a
collaboration with Astellas Pharma (formerly Fujisawa Pharmaceutical Co., Ltd.) to conduct
preclinical and early-stage clinical trials, with Astellas funding all development costs during the
term of the agreement. Astellas will also receive an option to negotiate for late stage development
and commercial right to AGI-1096. In March 2005, we extended the collaboration with Astellas until
September 30, 2005 to conduct additional studies. We previously were developing AGIX-4207, a v-protectant ® candidate for
the treatment of rheumatoid arthritis. In October 2003, we initiated the enrollment in a
275-patient Phase II clinical trial called OSCAR. In October 2004, we announced the results of the
trial, which evaluated the impact of various doses of AGIX-4207 versus placebo on clinical
efficacy, biomarkers and safety in patients with rheumatoid arthritis. The results indicated that
none of the three dosing arms of AGIX-4207 showed a statistically significant improvement in ACR 20
scores, a standard measurement of response utilized to evaluate improvement, when compared to
placebo, the primary efficacy end point of the trial. Two of the pre-specified secondary endpoints,
tender joint count and morning stiffness, did show statistically significant improvement when
compared to placebo. Based on the aggregate findings of the study, however, we have discontinued
clinical development of AGIX-4207. We continue to have an active program aimed at investigating
other v-protectants ® in rheumatoid arthritis and have identified other
compounds with enhanced therapeutic potential within our rheumatoid arthritis preclinical models.
We are working to select another candidate to move into formal preclinical development. We have also identified additional potential v-protectant® candidates to treat
other chronic inflammatory diseases, including asthma. We are evaluating these
v-protectants® to determine lead drug candidates for clinical development. We plan to
develop these v-protectants® rapidly and may seek regulatory fast track status, if
available, to expedite development and commercialization. We will continue to expand upon our
v-protectant® technology platform using functional genomics to identify novel
therapeutic gene targets. Functional genomics is the process by which one uses scientific models
and techniques to discover and modify genes, measure the consequences of the modifications, and
reliably determine the function of those genes. 8




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The following table provides information regarding our research and development expenses for
our major product candidates: Three months endedMarch 31,2005
    
    
    2004Direct External Costs:AGI-1067
    
    $
    12,978,744
    
    
    $
    7,949,272AGIX-4207
    
    
    21,895
    
    
    
    2,075,329AGI-1096
    
    
    
    
    
    
    3,000Unallocated costs and other programs
    
    
    3,154,431
    
    
    
    3,983,144Total research and development
    
    $
    16,155,070
    
    
    $
    14,010,745
 From inception, we have devoted the large majority of our research and development efforts and
financial resources to support the development of the AGI-1067 product candidate. Spending for the
AGI-1096 program in both periods presented was funded by our collaborative development partner,
Astellas Pharma. The nature, timing and costs of the efforts to complete the successful development of any of
our product candidates are highly uncertain and subject to numerous risks, and therefore cannot be
accurately estimated. These risks include the rate of progress and costs of our clinical trials,
clinical trial results, cost and timing of regulatory approval and establishing commercial
manufacturing supplies. These risks and uncertainties, and their effect on our operations and
financial position, are more fully described in the risk factors
included in our Annual Report on Form 10-K for the
year ended December 31, 2004, under the headings Risks Related to Development of Our Product
Candidatesand Risks Related to Regulatory Approval of Our Product Candidates. We have not received any commercial revenues from product sales. We expect to incur
significant losses in most years prior to deriving any product revenue as we continue to increase
research and development costs. We have incurred significant losses since we began operations in
1994 and as of March 31, 2005, we had an accumulated deficit of $230.8 million. We cannot assure
you that we will become profitable. We expect that losses will fluctuate from quarter to quarter
and that these fluctuations may be substantial. Our ability to achieve profitability depends upon
a variety of factors, including our ability, alone or with others, to complete the successful
development of our product candidates, to obtain required regulatory clearances, and to manufacture
and market our future products. CRITICAL ACCOUNTING POLICIES AtheroGenics considers certain accounting policies related to use of estimates, research and
development accruals, revenue recognition and stock-based compensation to be critical policies.
There have been no material changes in the critical accounting policies from what was previously
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the
Securities and Exchange Commission on March 16, 2005. RESULTS OF OPERATIONS Comparison of the Three Month Period Ended March 31, 2005 and 2004 Revenues There were no revenues during the three months ended March 31, 2005 and 2004. Expenses Research and Development.Research and development expenses increased 15% to $16.2 million
for the three months ended March 31, 2005 from $14.0 million for the comparable period in 2004.
The increase in research and development expenses for the three months ended March 31, 2005 was
primarily due to expenditures related to 9




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ongoing patient recruitment for and operation of the AGI-1067 ARISE clinical trial, partially
offset by reduced spending in the completed CART-2 clinical trial and the discontinued AGIX-4207
program. General and Administrative.General and administrative expenses increased 9% to $1.8 million
for the three months ended March 31, 2005 from $1.7 million for the comparable period in 2004. The
increase in general and administrative expenses for the three months ended March 31, 2005 was
primarily due to higher compensation costs and other inflationary costs. Interest and Other Income Interest income was $1.4 million and $370,988 for the three months ended March 31, 2005 and
2004, respectively. The increase in interest income in the three months ended March 31, 2005 is
due to interest earned on the funds received from our $200.0 million convertible debt offering in
January 2005 and slightly higher interest rates. Interest Expense Interest expense was $2.1 million and $1.3 million for the three months ended March 31, 2005
and 2004, respectively. The increase in interest expense for the three months ended March 31, 2005
is due to our $200.0 million convertible debt offering in January 2005. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through sales of equity securities
and convertible notes. At March 31, 2005, we had cash, cash equivalents and short-term investments
of $241.7 million, compared to $66.9 million at December 31, 2004. Working capital at March 31,
2005 was $235.4 million, compared to $59.7 million at December 31, 2004. The increase in cash,
cash equivalents, short-term investments and working capital is primarily due to the issuance of
our 1.5% convertible notes in January 2005 that raised net proceeds of approximately $193.6
million, partially offset by the use of funds for operating purposes. Net cash used in operating activities was $19.2 million for the three months ended March 31,
2005, compared to $17.3 million for the comparable period in 2004. The increase in the use of cash
in operating activities is principally due to funding a net loss of $18.6 million. The increase in
cash used to fund the net loss is primarily attributable to expenditures for our AGI-1067 compound
including the ARISE clinical trial and other ongoing research and development activities. We
anticipate total net cash usage in 2005 and 2006 for ARISE to be approximately $57.0 million. We
anticipate net cash usage in 2005 for ARISE and our other ongoing clinical programs, as well as our
other operating activities, to be in a range of $85.0 million to $89.0 million. Net cash used in investing activities was $77.6 million for the three months ended March 31,
2005, compared to $16.5 million for the comparable period in 2004. The increase in net cash used
in investing activities during the three months ended March 31, 2005 is due to purchasing
short-term, available-for-sale securities using some of the funds received from the issuance of our
1.5% convertible notes. Net cash provided by financing activities was $194.3 million for the three months ended March
31, 2005, and $1.3 million for the comparable period in 2004. The increase in net cash provided by
financing activities in the three months ended March 31, 2005 consisted primarily of net proceeds
of approximately $193.6 million from the issuance of our 1.5% convertible notes. Net cash provided
by financing activities for the comparable period in 2004 consisted primarily of proceeds from the
exercise of common stock options. In March 2002, we entered into an equipment loan facility, as modified in June 2003, with
Silicon Valley Bank for up to a maximum amount of $2.5 million to be used to finance existing and
new equipment purchases. At March 31, 2005, the equipment loan facility had been paid in full. In August 2003, we issued $100 million in aggregate principal amount of 4.5% convertible notes
due 2008 through a Rule 144A private placement to qualified institutional buyers. These notes
initially are convertible into our common stock at a conversion rate of 65.1890 shares per $1,000
principal amount of notes, or approximately 10




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$15.34 per share. Net proceeds were approximately $96.7 million. As of March 31, 2005, there was
$375,000 of accrued interest related to the notes, which is due September 1, 2005. In January 2005, we issued $200 million in aggregate principal amount of 1.5% convertible
notes due 2012 through a Rule 144A private placement to qualified institutional buyers. These
notes are initially convertible into shares of our common stock at a conversion rate of 38.5802
shares per $1,000 principal amount of notes, or approximately $25.92 per share. Interest on the
1.5% convertible notes is payable semi-annually in arrears on February 1 and August 1. Net
proceeds were approximately $193.6 million. The net proceeds from the sale of the notes are being
used to fund the ongoing costs of the ARISE Phase III clinical trial for AGI-1067 and other
research and development activities, including clinical trials, process development and
manufacturing support, and for general corporate purposes, including working capital. Pending
these uses, the net proceeds have been invested in interest-bearing, investment grade securities.
As of March 31, 2005, there was $658,000 of accrued interest related to these notes, which is due
August 1, 2005. In March 2005, we committed to purchase approximately $3.5 million of commercial manufacturing
equipment for AGI-1067, to be delivered in 2006. Progress payments related to this equipment will be made during the
construction period. The following table summarizes our long-term contractual obligations as of March 31, 2005. Remainder ofTotal
    
    
    2005
    
    
    2006-2007
    
    
    2008-2009
    
    
    ThereafterContractual obligations:Operating leases, net of sublease
income
    
    $
    4,862,597
    
    
    $
    837,680
    
    
    $
    2,652,292
    
    
    $
    1,372,625
    
    
    $
    Long-term debt
    
    
    300,000,000
    
    
    
    
    
    
    
    
    
    
    
    100,000,000
    
    
    
    200,000,000Total contractual obligations
    
    $
    304,862,597
    
    
    $
    837,680
    
    
    $
    2,652,292
    
    
    $
    101,372,625
    
    
    $
    200,000,000
 Based upon the current status of our product development and commercialization plans, we
believe that our existing cash and cash equivalents and short-term investments will be adequate to
satisfy our capital needs for at least the next 12 months. However, our actual capital
requirements will depend on many factors, including:  
    the scope and results of our research, preclinical and clinical development activities;
    the timing of, and the costs involved in, obtaining regulatory approvals;
    our ability to establish and maintain collaborations and the financial terms of any collaborations;
    the cost of commercialization activities, including product marketing, sales and distribution;
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related
costs;
    the costs related to purported class action lawsuits filed against us; and
    the extent to which we acquire or invest in businesses, products and technologies. We have historically accessed the capital markets from time to time to raise adequate funds
for operating needs and cash reserves. Although we believe we have adequate cash for at least the
next 12 months, we may access capital markets when we believe market conditions or company needs
merit doing so. We cannot estimate the timing of material net cash inflows from our product
candidates, since they are dependent upon regulatory approvals and subsequent market acceptance. 11




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FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a safe harbor
for forward-looking statements made by or on behalf of AtheroGenics. AtheroGenics and its
representatives may from time to time make written or oral forward-looking statements, including
statements contained in this report and our other filings with the Securities and Exchange
Commission and in our reports to our shareholders. Generally, the words believe, expect,
intend, estimate, anticipate, will and similar expressions identify forward-looking
statements. All statements which address operating performance, events or developments that we
expect or anticipate will occur in the future, such as projections about our future results of
operations or our financial condition, research, development and commercialization of our product
candidates and anticipated trends in our business, are forward-looking statements within the
meaning of the Reform Act. The forward-looking statements are and will be based on managements
then current views and assumptions regarding future events and operating performance, and speak
only as of their dates. AtheroGenics undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. The following are some of the factors that could affect our financial performance or could
cause actual results to differ materially from those expressed or implied in our forward-looking
statements:  -
    AGI-1067 and AGI-1096 may fail in clinical trials;-
    our ability to generate positive cash flow in light of our history of operating losses;-
    our inability to obtain additional financing on satisfactory terms, which could preclude us from
developing or marketing our products;-
    our ability to successfully develop our other product candidates;-
    our ability to commercialize our product candidates if we fail to demonstrate adequately their safety
and efficacy;-
    possible delays in our clinical trials;-
    our inability to predict whether or when we will obtain regulatory approval to commercialize our
product candidates or the timing of any future revenue from these product candidates;-
    our need to comply with applicable regulatory requirements in the manufacture and distribution of
our products to avoid incurring penalties that may inhibit our ability to commercialize our products;-
    our ability to protect adequately or enforce our intellectual property rights or secure rights to third
party patents;-
    the ability of our competitors to develop and market anti-inflammatory products that are more
effective, have fewer side effects or are less expensive than our current or future product candidates;-
    third parties failure to synthesize and manufacture our product candidates, which could delay our
clinical trials or hinder our commercialization prospects;-
    our ability to create sales, marketing and distribution capabilities or enter into agreements with
third
parties to perform these functions;-
    our ability to attract, retain and motivate skilled personnel and cultivate key academic
collaborations;-
    our ability to obtain an adequate level of reimbursement or acceptable prices for our products;-
    if plaintiffs bring product liability lawsuits against us, we may incur substantial financial loss or
may
be unable to obtain future product liability insurance at reasonable prices, if at all, either of which 12




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could diminish our ability to commercialize our future products; and-
    conversion of our $100 million principal amount, 4.5% convertible notes and our $200 million
principal amount, 1.5% convertible notes will dilute the ownership interest of existing shareholders
and could adversely affect the market price of our common stock. The foregoing list of important factors is discussed in more detail in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2004 and is not an exhaustive list. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact our financial position, operating
results or cash flows due to changes in U.S. interest rates. This exposure is directly related to
our normal operating activities. Our cash, cash equivalents and short-term investments are
invested with high quality issuers and are generally of a short-term nature. Interest rates
payable on our convertible notes are fixed. As a result, we do not believe that near-term changes
in interest rates will have a material effect on our future results of operations. 
 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures.Our chief executive officer and chief
financial officer are responsible for establishing and maintaining disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for
AtheroGenics. Our chief executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
quarterly report, have concluded that our disclosure controls and procedures are effective. Changes in internal control over financial reporting.There were no changes in our internal
control over financial reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. 
 PART II - OTHER INFORMATION 
 Item 1. Legal Proceedings See Note 9. Contingencies and Commitmentsin the Notes to Condensed Financial Statements for
a full description of the pending legal proceedings, which
description is incorporated herein by reference. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On January 12, 2005, we issued $200 million in aggregate principal amount of 1.5% convertible
notes due 2012 in an exempt offering to the initial purchasers, Morgan Stanley & Co. Incorporated,
Lehman Brothers Inc., J.P. Morgan Securities Inc. and Lazard Frères & Co. LLC, pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. The initial
purchasers then resold the notes to qualified institutional buyers pursuant to Rule 144A of the
Securities Act. Net proceeds to us were approximately $193.6 million, after deducting expenses and
initial purchasers discounts and commissions of approximately $6.4 million. The notes were
issued under an indenture between us and The Bank of New York Trust Company, N.A., as trustee of
the Notes, dated January 12, 2005 The 1.5% convertible notes are convertible into shares of common stock, at the option of the
holder, at a conversion rate of 38.5802 shares per $1,000 principal amount of notes, which
represents a conversion price of approximately $25.92, subject to adjustment. Under certain
circumstances, we may be obligated to redeem all or part of the notes prior to their maturity at a
redemption price equal to 100% of their principal amount, plus accrued and unpaid interest and
liquidated damages, if any, up to but excluding the maturity date. In addition, under certain
circumstances, we may adjust the conversion rate. Interest on the 1.5% convertible notes is
payable semi-annually in arrears on February 1 and August 1. 13




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The net proceeds from the sale of the notes are being used to fund the ongoing costs of the
ARISE Phase III clinical trial for AGI-1067 and other research and development activities,
including clinical trials, process development and manufacturing support, and for general corporate
purposes, including working capital. Pending these uses, the net proceeds have been invested in
interest-bearing, investment grade securities. 
 Item 6. Exhibits Exhibits Exhibit 10.1#
    
    -
    
    Summary of non-employee directors compensation and 2005
executive officers target cash incentive (as filed under Item 1.01 of
Atherogenics' Form 8-K on April
29, 2005 and incorporated herein by reference).Exhibit 31.1
    
    -
    
    Certifications of Chief Executive Officer under Rule 13a-14(a).Exhibit 31.2
    
    -
    
    Certifications of Chief Financial Officer under Rule 13a-14(a).Exhibit 32
    
    -
    
    Certifications of Chief Executive Officer and Chief Financial
Officer under Section 1350.
    14




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ATHEROGENICS, INC.Date: May 10, 2005
    
    
    
    /s/ MARK P. COLONNESEMark P. ColonneseSenior Vice President of Finance andAdministration and Chief Financial Officer
 15