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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 ___________________ Form 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004 OR o
    
    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 0-31261 AtheroGenics, Inc.  Georgia
    
    58-2108232(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)8995 Westside Parkway,
    
    (678) 336-2500Alpharetta, Georgia 30004
    
    (Registrants telephone number, including area code)(Address of principal executive offices, including zip code)
 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, No Par Value
Common Stock Purchase Rights ___________________ 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 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. 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 The aggregate market value of shares of voting stock held by nonaffiliates of the registrant,
computed by reference to the closing price of $19.03 as reported on the Nasdaq National Market as
of the last business day of AtheroGenics most recently completed second fiscal quarter (June 30,
2004), was approximately $422,239,543. AtheroGenics has no nonvoting common equity. The number of shares outstanding of the registrants common stock, as of March 8, 2005:
37,668,445. Documents Incorporated by Reference: Portions of the proxy statement filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934 with respect to the 2005 Annual Meeting of Shareholders are incorporated herein by
reference in Part III.




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ATHEROGENICS, INC
FORM 10-K INDEX PagePART IItem 1.
    
    Business
    
    
    
    
    
    
    1Item 2.
    
    Properties
    
    
    
    
    
    
    24Item 3.
    
    Legal Proceedings
    
    
    
    
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    
    
    
    
    24PART IIItem 5.
    
    Market for Registrants Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
    
    
    
    
    
    
    25Item 6.
    
    Selected Financial Data
    
    
    
    
    
    
    26Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    
    
    
    
    27Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    
    
    
    
    32Item 8.
    
    Financial Statements and Supplementary Data
    
    
    
    
    
    
    33Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    
    
    
    
    49Item 9A.
    
    Controls and Procedures
    
    
    
    
    
    
    49Item 9B.
    
    Other Information
    
    
    
    
    
    
    50PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    
    
    
    
    50Item 11.
    
    Executive Compensation
    
    
    
    
    
    
    50Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    
    
    
    
    51Item 13.
    
    Certain Relationships and Related Transactions
    
    
    
    
    
    
    51Item 14.
    
    Principal Accountant Fees and Services
    
    
    
    
    
    
    51PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    
    
    
    
    51Signatures
    
    
    
    
    
    
    
    
    54EX-10.33 EQUITY OWNERSHIP AGREEMENTEX-23.01 CONSENT OF ERNST & YOUNG LLPEX-24.01 POWERS OF ATTORNEYEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO




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PART I Item 1.Business Overview AtheroGenics is a research-based pharmaceutical company incorporated in the State of Georgia
in 1993. We are 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.
Nearly 13 million
people in the United States currently have diagnosed CHD. There are no medications available for
physicians to treat directly the underlying chronic inflammation associated with CHD. Instead,
physicians treat risk factors, such as high cholesterol and high blood pressure, to slow the
progression of the disease. The anti-inflammatory mechanism of AGI-1067 represents a novel, direct
therapeutic approach that may be suitable as a chronic treatment for all patients with CHD,
including those without traditional risk factors. 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. 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
then plan to file a New Drug Application with the FDA as soon as possible after we complete the
trial and analyze the results. 1




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We previously were developing AGIX-4207, a v-protectant® candidate for the
treatment of rheumatoid arthritis. Based on our findings, however, we have discontinued clinical
development of AGIX-4207 and the intravenous dosage form of AGIX-4207 for rheumatoid arthritis. 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 compounds 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. Business Strategy Our objective is to become a leading pharmaceutical company focused on discovering, developing
and commercializing novel drugs for the treatment of chronic inflammatory diseases. The key
elements of our strategy include the following:  
    Continue aggressive development program for AGI-1067.We intend to rapidly develop
AGI-1067 for the treatment and prevention of atherosclerosis in patients with coronary heart
disease. We are continuing to enroll patients in the ARISE Phase III clinical trial for the
treatment of atherosclerosis in patients with coronary heart disease.
    Extend our v-protectant®technology platform into additional therapeutic areas
that address unmet medical needs.We believe that our v-protectants® have the
potential for treating a wide variety of other chronic inflammatory diseases. These
indications include chronic organ transplant rejection, rheumatoid arthritis, asthma and
other diseases. We completed a Phase I clinical trial with positive results for AGI-1096, a
v-protectant® developed for the prevention of chronic organ transplant rejection.
    Expand our clinical product candidate portfolio.In addition to our existing discovery
programs, we intend to acquire rights to other product candidates and technologies that
complement our existing product candidate lines or that enable us to capitalize on our
scientific and clinical development expertise. We plan to expand our product candidate
portfolio by in-licensing or acquiring product candidates, technologies or companies.
    Commercialize our products.We plan to collaborate with large pharmaceutical companies
to commercialize products that we develop to target patient or physician populations in
broad markets, such as AGI-1067 for atherosclerosis. In contrast, we plan to develop a sales
force to commercialize those of our products that we develop to target appropriate patient
or physician populations in narrow markets. Inflammation and Disease Inflammation is a normal response of the body to protect tissues from infection, injury or
disease. The inflammatory response begins with the production and release of chemical agents by
cells in the infected, injured or diseased tissue. These agents cause redness, swelling, pain,
heat and loss of function. Inflamed tissues generate additional signals that recruit white blood
cells to the site of inflammation. White blood cells destroy any infective or injurious agent, and
remove cellular debris from damaged tissue. This inflammatory response usually promotes healing
but, if uncontrolled, may become harmful. The inflammatory response can be either acute or chronic. Acute inflammation lasts at most
only a few days. The treatment of acute inflammation, where therapy includes the administration of
aspirin and other non-steroidal anti-inflammatory agents, provides relief of pain and fever for
patients. In contrast, chronic inflammation lasts weeks, months or even indefinitely and causes
tissue damage. In chronic inflammation, the inflammation becomes the problem rather than the
solution to infection, injury or disease. Chronically inflamed tissues continue to generate
signals that attract white blood cells from the bloodstream. When white blood cells migrate from
the bloodstream into the tissue they amplify the inflammatory response. This chronic inflammatory
response can break down healthy tissue in a misdirected attempt at repair and healing. Diseases
characterized by chronic inflammation include, among others: 2




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
    atherosclerosis, including coronary heart disease;
    organ transplant rejection;
    rheumatoid arthritis; and
    asthma. Atherosclerosis is a common cardiovascular disease that results from inflammation and the
buildup of plaque in arterial blood vessel walls. Plaque consists of inflammatory cells,
cholesterol and cellular debris. Atherosclerosis, depending on the location of the artery it
affects, may result in a heart attack or stroke. Atherosclerosis of the blood vessels of the heart is called coronary artery disease or heart
disease. It is the leading cause of death in the United States, claiming more lives each year than
all forms of cancer combined. Recent estimates suggest that over 13 million Americans are
diagnosed with some form of atherosclerosis. When atherosclerosis becomes severe enough to cause
complications, physicians must treat the complications themselves, including angina, heart attack,
abnormal heart rhythms, heart failure, kidney failure, stroke, or obstructed peripheral arteries.
Many of the patients with established atherosclerosis are treated aggressively for their associated
risk factors, as with statins, which have been repeatedly shown to slow the progression of
atherosclerosis and prevent future adverse events such as heart attack, stroke, and death. Other
risk factors associated with atherosclerosis include elevated triglyceride levels, high blood
pressure, smoking, diabetes, obesity and physical inactivity. Many atherosclerosis patients also
experience symptoms of angina and/or a history of acute coronary syndromes, such as myocardial
infarctions and unstable angina. In addition, most of these patients have high-cholesterol, and as
a result, the current treatment focuses primarily on cholesterol reduction. Additionally, these
patients are routinely treated with anti-hypertensives and anti-platelet drugs to help prevent the
formation of blood clots. There are currently no medications available for physicians to treat
directly the underlying chronic inflammation of atherosclerosis. Organ transplantation takes place when an organ from a donor is surgically removed and placed
in a recipient patient whose own organ has failed because of disease or infection. Except for
transplants between identical twins, all transplant donors and recipients are immunologically
incompatible. This biological incompatibility is a barrier that causes the recipients immune
system to try to destroy or reject the new organ. A patients white blood cells produce special
proteins called antibodies that are created specifically to latch onto the transplanted organ.
While attached to the organ, the antibodies alert the rest of the immune system to attack the organ
slowly and continuously. The current treatment for prevention of organ transplant rejection
focuses on the use of powerful immunosuppressive drugs such as cyclosporin A, tacrolimus and
rapamycin (sirolimus). These drugs, which are initiated during the acute rejection phase, need to
be taken continuously after the transplant procedure, often cause side effects, and may fail to
prevent long-term rejection of the transplant. Immunosuppressants may also impair the recipients
immune system in order to reduce the immune response against the transplant. The Scientific
Registry of Transplant Recipients reports that even with the use of immunosuppressants, patients
run the risk of losing a donated organ during the first three years following transplantation, and
roughly 50 percent of patients have functioning organ transplants after approximately ten years. Rheumatoid arthritis is a common form of arthritis that is characterized by inflammation of
the membrane lining the joint, which causes pain, stiffness, warmth, redness and swelling. The
inflamed joint lining, the synovium, can invade and damage bone and cartilage. Inflammatory cells
release enzymes that may digest bone and cartilage. The involved joint can lose its shape and
alignment, resulting in pain and loss of movement. When the immune system works properly, it is
the bodys defense against bacteria, viruses and other foreign cells. In an immune disorder like
rheumatoid arthritis, the immune system works improperly and attacks the bodys own joints and
other organs. In rheumatoid arthritis, white blood cells move from the bloodstream into the joint
tissues. Fluid containing inflamed cells accumulates in the joint. The white cells in the joint
tissue and fluid produce many substances, including enzymes, antibodies and other molecules that
attack the joint and can cause damage. In the United States, approximately one percent of the
population, or 2.1 million people, have rheumatoid arthritis. The cause of rheumatoid arthritis is
not yet known, and the disease differs from person to person. Anyone can get rheumatoid arthritis,
including children and the elderly. However, the disease usually begins in the young- to
middle-adult years. Among people with rheumatoid arthritis, women outnumber men three-to-one. The
disease occurs in all ethnic groups and in all parts of the world. Current treatment methods for rheumatoid arthritis focus on relieving pain, reducing
inflammation, stopping or slowing joint damage, and improving patient function and well-being, and
include non-steroidal anti-inflammatory drugs, corticosteroids, and drugs designed to slow the
progression of disease, termed disease modifying anti-rheumatic drugs, or DMARDs. DMARDs can cause 3




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serious side effects, and include drugs that were originally designed to treat cancer, such as
methotrexate. Modern treatments with DMARDs developed by other companies, Enbrel® (etanercept) and
Remicade® (infliximab), have substantially improved the quality of life for people with rheumatoid
arthritis. These drugs prove that blocking the activity of tumor necrosis factor, a molecule that
stimulates a broad range of cellular activities implicated in the inflammation process, improves
rheumatoid arthritis. However, both of these drugs must be injected and both increase the risk of
severe infection. Asthma is a common chronic inflammatory disease of the bronchial tubes, which are the airways
in the lungs. Asthma is marked by episodic airway attacks that are caused by many stresses,
including allergy, cold air, ozone or exercise. Asthma therapy has concentrated on the use of
inhaled corticosteroids to reduce chronic inflammation and bronchodilators to provide symptomatic
relief. Asthmatic patients, however, continue to experience flare-ups, or exacerbations, that are
not prevented nor effectively treated by these medicines. Many physicians are only now becoming aware of the key role of chronic inflammation in diverse
diseases such as atherosclerosis and asthma for which existing anti-inflammatory treatments are
incomplete and limited in use. As more physicians recognize that a wide range of chronic diseases
are inflammatory in nature, we believe that these physicians will require safer and more effective
anti-inflammatory treatments. We believe that one of these therapeutic approaches will be the
administration of drugs designed to block the migration of white blood cells through blood vessel
walls into inflamed tissues, unless the inflammation is due to infection. V-Protectant® Technology We have developed a proprietary v-protectant® technology platform for the treatment
of chronic inflammatory diseases. This platform is based on the work of our scientific co-founders
R. Wayne Alexander, M.D., Ph.D. and Russell M. Medford, M.D., Ph.D. In 1993, Drs. Alexander and
Medford discovered a novel mechanism within arterial blood vessel walls that could control the
excessive accumulation of white blood cells without affecting the bodys ability to fight
infection. V-protectant® technology exploits the observation that the endothelial cells
that line the interior wall of the blood vessel play an active role in recruiting white blood cells
from the blood to the site of chronic inflammation. V-protectants® are drugs that block
harmful effects of oxygen and other similar molecules, collectively called oxidants. Scientists
have known for some time that some oxidants can damage cells, but have more recently determined
that these same oxidants may also act as signals to modify gene activity inside cells. This change
in gene activity leads to the production of proteins that initiate or maintain inflammation. The
protein products of these cells, including VCAM-1, attract white blood cells to the site of chronic
inflammation. We believe that an excess number of VCAM-1 molecules on the surface of cells is a
disease state. We also believe that AGI-1067 and other v-protectants® can act as
antioxidants and can block the specific type of inflammation caused by oxidants acting as signals.
We believe that v-protectants® will provide this anti-inflammatory benefit without
undermining the bodys ability to protect itself against infection. Products The table below summarizes our therapeutic programs, their target indication or disease and
their development status. Therapeutic Program
    
    Disease/Indication
    
    Development StatusV-PROTECTANTS®AGI-1067
    
    Atherosclerosis
    
    Phase III clinical trialAGI-1096
    
    Transplant rejection
    
    Phase I clinical trialAGI Series
    
    Chronic asthma
    
    Pre-INDAGI Series
    
    Rheumatoid arthritis
    
    Pre-INDFUNCTIONAL GENOMICS PROGRAM
    
    Inflammatory diseases
    
    ResearchMEKK TECHNOLOGY PLATFORM
    
    Inflammatory diseases
    
    Research
 We have established therapeutic programs for product development using lead candidates we
select from among our compound libraries. These programs seek to exploit the value of the products
early and to expand their use broadly. We continue to test compounds to identify back-up and
second-generation product candidates. We are also pursuing novel discovery targets in chronic
inflammation. 4




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AGI-1067 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. Nearly 13 million
people in the United States currently have diagnosed CHD. There are no medications available for
physicians to treat directly the underlying chronic inflammation associated with CHD. Instead,
physicians treat risk factors, such as high cholesterol and high blood pressure, to slow the
progression of the disease. The anti-inflammatory mechanism of AGI-1067 represents a novel, direct
therapeutic approach that may be suitable as a chronic treatment for all patients with CHD,
including those without traditional risk factors. We completed a 305-patient Phase II clinical trial of AGI-1067 called CART-1 (Canadian
Antioxidant Restenosis Trial) in May 2001. Results from the trial showed that the study met its
primary endpoint, which was improvement in the size of the luminal area, or coronary artery
opening, as measured by intravascular ultrasound six months after angioplasty, with statistical
significance. CART-1 data also showed that after only six weeks of therapy, there was an apparent
anti-atherosclerotic effect in blood vessels adjacent to the angioplasty site, but not involved in
the angioplasty. In the trial, AGI-1067 was well tolerated, with no increase in serious adverse
events versus placebo. In January 2004, we performed an analysis of CART-1 data that provided
additional information on the impact of AGI-1067 on plaque burden, a measure of disease in coronary
vessels. In the treatment groups in CART-1 receiving the two highest doses of AGI-1067, plaque
burden decreased by 1.6% and 1.9%, a therapeutic effect that we believe is consistent with
reversing coronary artery disease. 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. 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
then plan to file a New Drug Application with the FDA as soon as possible after we complete the
trial and analyze the results. 5




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AGI-1096 Organ transplant rejection is caused when patients immune systems recognize transplanted
organs as foreign and, therefore, reject them. Acute rejection occurs soon after transplantation,
while chronic rejection may take years. Recent industry sources report there are approximately
200,000 organ transplant recipients in the United States who are at risk of chronic organ
transplant rejection. Chronic rejection is a major factor contributing to organ shortage. Physicians treat these patients with powerful immunosuppressants to block all immune and
inflammatory reactions that could cause organ transplant rejection. These immunosuppressive
therapies, however, may place patients at increased risk for infection. The vascular protection
provided by our drug candidate may protect organs from rejection beyond the first year without
increasing the risk of infection. 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 January 2004, we announced
a collaboration with Fujisawa Pharmaceutical Co., Ltd. to conduct preclinical and early-stage
clinical trials, with Fujisawa funding all development costs during the term of the agreement.
Fujisawa will also receive an option to negotiate for late stage development and commercial right
to AGI-1096. Other V-Protectant®Candidates Rheumatoid arthritis is a chronic, progressively debilitating inflammatory disease that
affects articular, or rotating, joints resulting in significant pain, stiffness and swelling and
leads to degradation of the joint tissue. According to the Arthritis Foundation, there are 2.1
million people with rheumatoid arthritis in the United States. Approximately 70 percent of
patients with rheumatoid arthritis are young and middle-aged women. Physicians treat rheumatoid arthritis in a stepwise fashion, starting with the occasional to
regular use of anti-inflammatory agents such as aspirin or ibuprofen, and proceeding to treatment
with DMARDs, which can potentially be toxic. The newer DMARDs target the modulation of tumor
necrosis factor (TNF), tissue repair and proliferation. The recent successful introduction of new
drugs for rheumatoid arthritis has highlighted both the market potential and the size and scope of
the unmet medical need of these patients. These drugs are partially effective and may cause
serious side effects. 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 Phase II
clinical trial called OSCAR, a multi-center, randomized, double-blind, placebo-controlled trial of
approximately 275 patients. The patients were randomized into four groups and treated with
one of three doses of AGI-4207 or placebo, administered orally, once a day, for 12 weeks. In
October 2004, we announced the results of the OSCAR clinical
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 and the
intravenous dosage form 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. According to the American Lung Association,
approximately 20 million adults and children in the United States currently suffer from asthma.
Current therapies that target the underlying disease include corticosteroids and several classes of
drugs that relieve symptoms but are not effective for chronic inflammation. We believe that
v-protectants® may reduce the inflammation associated with chronic asthma. 6




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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. Discovery Research Program We have built a robust Discovery Research Program using our demonstrated expertise in
functional genomics, molecular biology, cell biology, physiology, pharmacology, biochemistry and
medicinal chemistry. Our Discovery Research Program has four main objectives:  
    To discover and develop v-protectants®with enhanced potency and improved
therapeutic properties.We are synthesizing novel compounds and testing them in a
variety of biochemical and cell-based assays to discover and develop new, small molecule
v-protectants®. We believe that these v-protectants® will have
improved therapeutic properties and applicability across a wide range of chronic
inflammatory diseases. We have identified several novel series of highly potent
v-protectants®.
    To identify novel anti-inflammatory therapeutic targets utilizing functional genomics.
One part of our drug discovery platform is a set of techniques that connects our
knowledge of genes, which code for proteins, to agents that modify gene activity. This
collection of methods, called functional genomics, enables us to select targets
efficiently. Our targets for therapy may be the gene, the protein, another substance in
the body that links to the protein, or the agent that induces the change. For example,
oxidants are agents that induce changes in gene activity. We believe our functional
genomics program will enable us to identify novel genes and their protein products that
are critical to the chronic inflammatory disease process. We plan to progress these
genes and proteins into targets for novel classes of drugs.
    To develop new classes of v-protectant®drugs based on the new therapeutic
targets identified by our functional genomics program.We are identifying enzymes and
other molecular targets that either control or are controlled by oxidant signals. We
believe these discoveries will enable our chemists to synthesize the next generation of
v-protectants®. We intend to use these enzymes and other molecular targets
for both internal efforts and as strategic collaboration assets.
    To develop a second broad platform for the discovery and development of a new class of
anti-inflammatory drug candidates.As a result of entering into the license agreement
with National Jewish Medical and Research Center in June 2001, we have expanded our
research program to include the discovery and development of new drug candidates through
the exploitation of the licensed technology. Patents and Intellectual Property We have established a patent portfolio of owned and in-licensed patents that cover our lead
compounds and their use. It is our goal to pursue both broad and specific patent protection in the
key areas of our research and development both in the United States and internationally, and to
identify value-added exclusive in-licensing opportunities. V-Protectant®Technology We have license agreements with Emory University and The Regents of the University of
California covering aspects of our v-protectant® technology. These agreements obligate
us to make milestone payments upon attainment of agreed-upon goals and royalty payments on the sale
of licensed products and technology. The licenses with Emory University and The Regents of the
University of California also require us to be diligent in commercializing the licensed
technologies within certain time periods. Under our license agreement with Emory University, Emory University granted to us an exclusive
license to make, use and sell methods and products covered by certain patents and patent
applications owned by Emory University relating generally to the treatment and diagnosis of VCAM-1
related diseases. The license agreement requires us to make royalty payments to Emory University
based on certain percentages of net revenue we derive from sales of products covered by the
licensed patents or patent applications, and from sublicensing of the licensed patents or patent
applications. The license agreement also requires us to make 7




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milestone payments to Emory University upon the occurrence of certain product development
events. Milestone payments for AGI-1067 could total $250,000 if all milestone objectives are met.
We must indemnify Emory University for all claims and/or losses caused or contributed to by
AtheroGenics arising out of our use of the license. We have procured commercial general liability
insurance in specified amounts customary in the industry naming Emory University as an insured. The Emory license agreement will terminate when all patent rights licensed under the agreement
expire. Emory University may terminate the agreement if, after Emory gives notice to us, we fail
to make a payment, we fail to render progress reports, we incur specified financial problems, we
decide to no longer develop licensed products under the agreement, or we breach a material term of
the agreement. We may terminate the agreement upon advance notice to Emory, or if Emory University
violates certain material terms of the agreement. Under our license agreement with The Regents of the University of California, we received a
license to make, use and sell diagnostic and therapeutic methods and products using monoclonal
antibodies in atherosclerosis and other diseases, which are claimed in applicable patent
applications owned by The Regents of the University of California in the U.S. and Canada. We must
make milestone payments to The Regents of the University of California upon occurrence of various
product development events of up to $45,000 for each therapeutic application and $35,000 for each
diagnostic application. In addition, we must pay to The Regents of the University of California a
percentage of the net revenue we receive from the sale of products covered by the patents and
patent applications and from our sublicensing the licensed patents and patent applications. The
Regents of the University of California may terminate the agreement upon proper notice for
violation of material terms of the agreement. The agreement expires in 2018, when the last patent
covered by the license expires. We may terminate the agreement at any time upon prior notice to
The Regents of the University of California. We must indemnify The Regents of the University of
California for all losses and claims arising out of our use of the license. In addition, we have
procured commercial liability insurance in specified amounts customary in the industry naming the
University of California as an insured. As part of our v-protectant® technology patent portfolio, we also purchased U.S.
Patent No. 5,262,439 under an agreement with Dr. Sampath Parthasarathy. We believe the cost of
this agreement to us is immaterial. AGI-1067 Patent Portfolio Our patent coverage on AGI-1067 is based on patent filings that we own and patent filings
exclusively licensed from Emory University. We own one issued patent, U.S. Patent No. 5,262,439,
which expires in 2012, and related filings in Japan, Canada and Europe that generically cover the
compound AGI-1067 as a member of a class of related compounds. We own another patent, U.S. Patent
No. 6,147,250, that protects through 2018 the specific compound AGI-1067 and its use to treat
VCAM-1 mediated diseases including, among others, atherosclerosis, post-angioplasty restenosis and
coronary artery disease. We also own U.S. Patent No. 6,121,319, which covers the use of a class of
compounds including AGI-1067 to treat VCAM-1 mediated diseases. Applications corresponding to U.S.
Patent No. 6,147,250 and U.S. Patent No. 6,121,319 have also been filed in foreign patent offices.
The patents that we have exclusively licensed from Emory University include the use of a substance
that inhibits a class of oxidant signals to treat diseases mediated by VCAM-1. AGI-1096 Patent Portfolio Our patent coverage on AGI-1096 is based on patent filings that we own and patent filings
exclusively licensed from Emory University. We own U.S. Patent No. 6,617,352 and associated
non-U.S. patent filings which describe AGI-1096 and its use to treat disorders mediated by VCAM-1.
We also own U.S. Patent No. 6,670,398 which claims method of using AGI-1096 for treating transplant
organ rejection. These patents and any associated non-U.S. counterparts will expire in 2018. AGIX-4207 Patent Portfolio Our patent coverage on AGIX-4207 is based on patent filings that we own and patent filings
exclusively licensed from Emory University. We own U.S. Patent No. 6,548,699, and associated
non-U.S. patent filings which describe AGIX-4207 and its use to treat rheumatoid arthritis, other
inflammatory conditions and other disorders mediated by VCAM-1. This patent and its associated
non-U.S. counterparts will expire in 2018. 8




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Other V-Protectant®Compounds Certain patent applications in the United States and non-U.S. countries cover the use of a
number of compounds identified in our research program to act as v-protectants®, and
specifically for use in treating cardiovascular and inflammatory disease. In addition we have
exclusively licensed patents from Emory University that cover the use of a class of compounds which
act as v-protectants®. MEKK Technology In June 2001, we entered into a worldwide exclusive license agreement with National Jewish
Medical and Research Center. Under the agreement, National Jewish granted us an exclusive license
under several of its U.S. and foreign patents and patent applications and related technical
information to make, use and sell diagnostics and therapeutics for the treatment of human diseases,
including inflammation and asthma. Under the terms of the agreement with National Jewish, we may
grant sublicenses of our rights to others. Under the agreement with National Jewish, we have assumed responsibility for all future costs
associated with research and development of products developed from the licensed technology. We
have also assumed responsibility for the costs of filing, prosecuting and maintaining the licensed
patent rights. We granted National Jewish a warrant to purchase up to 40,000 shares of our common
stock at an exercise price of $6.00 per share, subject to a vesting period. Under the agreement,
we made an upfront payment in connection with the execution of the agreement and will pay milestone
payments to National Jewish upon the achievement of certain clinical and regulatory milestones.
Upfront and milestone payments could aggregate up to approximately $800,000. If we fail to meet
various performance milestones by certain dates, some or all of the licensed technology will revert
to National Jewish. We must also pay a royalty to National Jewish on net sales of licensed
products. If we sublicense the licensed technology, we must pay to National Jewish a percentage of
the amounts paid to us by the sublicensee. We may terminate the license agreement with National Jewish at any time upon at least 90 days
prior written notice. If we terminate the agreement in this manner, all licensed patent rights and
related technology revert to National Jewish. Either party to the agreement may also terminate it
upon a material, uncured breach by the other, or upon the bankruptcy or insolvency of the other.
We must indemnify National Jewish for all losses and claims arising out of our use of the license.
We will procure commercial liability insurance in amounts customary in the industry as required by
the agreement. Our patent position, like that of many pharmaceutical companies, is uncertain and involves
complex legal and factual questions for which important legal principles are unresolved or unclear.
We may not develop or obtain rights to products or processes that are patentable. Even if we do
obtain patents, they may not adequately protect the technology we own or in-license. In addition,
others may challenge, seek to invalidate, infringe or circumvent any patents we own or in-license,
and rights we receive under those patents may not provide competitive advantages to us. Our commercial success will depend in part on our ability to manufacture, use, sell and offer
to sell our product candidates and proposed product candidates without infringing patents or other
proprietary rights of others. We may not be aware of all patents or patent applications that may
impact our ability to make, use or sell any of our product candidates or proposed product
candidates. For example, U.S. patent applications do not publish until 18 months from their
effective filing date. Further, we may not be aware of published or granted conflicting patent
rights. Any conflicts resulting from patent applications and patents of others could significantly
reduce the coverage of our patents and limit our ability to obtain meaningful patent protection.
If others obtain patents with conflicting claims, we may be required to obtain licenses to these
patents or to develop or obtain alternative technology. We may not be able to obtain any licenses
or other rights to patents, technology or know-how necessary to conduct our business as described
in this report. Any failure to obtain such licenses or other rights could delay or prevent us from
developing or commercializing our product candidates and proposed product candidates, which could
materially affect our business. Litigation or patent interference proceedings may be necessary to enforce any of our patents
or other proprietary rights, or to determine the scope and validity or enforceability of the
proprietary rights of others. The defense and prosecution of patent and intellectual property
claims are both costly and time consuming, even if the outcome is favorable to us. Any adverse
outcome could subject us to significant liabilities, require us to license disputed rights from
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Trademarks The U.S. Patent and Trademark Office issued a Certificate of Registration for the trademark
OXYKINE on April 10, 2001. The Patent and Trademark Office issued a Certificate of Registration
for the trademark AATHEROGENICS and design on November 7, 2000 and issued one for the trademark AGI
on September 19, 2000. On February 3, 2003, we applied for the trademark V-PROTECTANT. On January 30, 2002, Applied Genetics Incorporated Dermatics filed with the United States
Patent and Trademark Office a petition to cancel the trademark AGI. Applied Genetics has not
requested any monetary damages. We filed an answer to the petition on March 11, 2002. On July 12,
2002, the United States Patent and Trademark Office issued a suspension of the cancellation
proceeding to allow the parties to negotiate a settlement. A settlement agreement has been reached
between both parties and is pending approval with the Patent Office. Manufacturing We have entered into arrangements with third party manufacturers for the supply of AGI-1067
bulk drug substance and for the formulated drug product for use in our ongoing and currently
planned clinical trials. The suppliers of the bulk drug substance for AGI-1067 operate under
current Good Manufacturing Practice guidelines using cost-effective and readily available materials
and reliable processes. The starting material used in the manufacturing process of AGI-1067 is
Probucol USP, a material that is available from a number of suppliers worldwide. We have
sufficient quantities to support development activities for the foreseeable future. Another third
party supplier formulates AGI-1067 into the drug product under current Good Manufacturing Practice
guidelines. We anticipate that these suppliers will be able to provide sufficient formulated drug
product to complete our ongoing and currently planned clinical trials. We plan to establish manufacturing agreements with third parties that comply with Good
Manufacturing Practice guidelines for bulk drug substance and oral or intravenous formulations of
our v-protectant® product candidates to support both ongoing and planned clinical trials
as well as commercial marketing of the products following regulatory approval. Sales and Marketing We plan to collaborate with large pharmaceutical companies to commercialize product candidates
that are for patient or physician populations in broad markets. We believe that collaborating with
large companies that have significant marketing and sales capabilities provides for optimal
penetration into broad markets, particularly those areas that are highly competitive. In contrast,
we plan to develop a sales force to commercialize the products targeted at appropriate patient and
physician populations in narrow markets. By using our own sales and marketing organization, we
believe we can retain a higher percentage of the profits generated from the sale of our products. Competition Developments by others may render our product candidates obsolete or noncompetitive. We face
intense competition from other companies for collaborative arrangements with pharmaceutical,
biotechnology and medical device companies for establishing relationships with academic and
research institutes and for licenses to proprietary technology. These competitors, either alone or
in collaboration, may succeed in developing technologies or products that are more effective than
ours. We believe pharmaceutical, biotechnology and medical device companies, as well as academic and
research institutions and government agencies, have drug discovery and development programs related
to our named therapeutic areas of interest. Many of these companies and institutions, including,
but not limited to, Pfizer Inc., GlaxoSmithKline, Johnson & Johnson and Novartis AG, have targeted
indications that overlap significantly with our targets and have substantially greater resources
than we do. They may, therefore, succeed in commercializing products before we do that compete
with us on the basis of efficacy, safety and price. Our ability to compete is predicated on three related factors:  
    First, our scientists and their collaborators have pioneered the basic
discoveries and research methodologies linking oxidant signals to vascular cell
inflammation. These discoveries and research methodologies form the foundation for our
proprietary drug discovery programs relating to chronic inflammation. 10




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
    Second, our scientific expertise, coupled with our expertise in clinical drug
development, has enabled us to be the first company to conduct clinical trials of an
orally-administered, small molecule v-protectant®.
    Third, we believe our scientific, development and licensing expertise strongly
positions us to acquire promising technologies and products discovered outside
AtheroGenics. Governmental Regulation We plan to develop prescription-only drugs for the foreseeable future. The U.S. Food and Drug
Administration is the regulatory agency that is charged with the protection of people in the United
States who take prescription medicines. Every country has a regulatory body with a similar
mandate. In addition, the European Union has vested centralized authority in the European
Medicines Evaluation Agency and Committee on Proprietary Medicinal Products to standardize review
and approval across member nations. Regulatory agencies have established guidelines and regulations for the drug development
process. This process involves several steps. First, the drug company must generate sufficient
preclinical data to support initial human testing. In the United States, the drug company must
submit an Investigational New Drug application prior to human testing. The Investigational New
Drug application contains adequate data on product candidate chemistry, toxicology and metabolism
and, where appropriate, animal research testing to support initial safety evaluation in humans. In
addition, the drug company provides to the FDA a clinical plan, including proposed use and testing
in subjects comprising healthy volunteers and patients. Clinical trials for a new product candidate usually proceed through four phases:  
    Phase I clinical trials explore safety, blood levels, metabolism and the
potential for interaction with other drugs. Phase I typically proceeds from healthy
volunteers into patients with the target disease and comprises up to approximately 200
total subjects.
    Phase II clinical trials establish a dose for future testing and marketing in an
adequate number of patients with the target disease. The clinical trials may include
hundreds of patients who have the target disease and who are receiving a range of
background medications. In addition, Phase II clinical trials verify the mechanisms of
action proposed preclinically.
    Phase III clinical trials usually include two adequate and well controlled
studies in the target population. For most chronic diseases, drug companies study a few
thousand patients to assure a broadly applicable assessment of safety and efficacy.At the successful conclusion of Phase III, drug companies may submit a product license
application, called a New Drug Application in the United States. Upon accepting the
submission, the FDA or non-U.S. regulatory authorities review the file for completeness,
accuracy and adherence to regulations. These authorities may use internal and external
consultants and may convene an expert committee to advise on the safety, effectiveness
and usefulness of the proposed new product candidate prior to final regulatory judgment.
The final step to registration is approval of the package insert or label that defines
what the drug company may promote to physicians who may use the new drug.
    Phase IV clinical trials provide additional information to support marketing of
the drug for its approved indication. Phase IV clinical trials may generate data to
support promotion of the new drug in comparison with other approved drugs and to support
healthcare economics claims. In addition, every pharmaceutical company is responsible
for post-marketing surveillance for safety in the marketplace. We must meet regulatory standards prior to exposing subjects to any drug candidate. We remain
responsible for any of these development activities whether we perform them internally or contract
them to a third party. The FDA may audit us or our third party contractors at any time to
ascertain compliance with standards. The FDA may halt all ongoing work if it determines that we or
our contractors have deviated significantly from these standards. These standards include:  
    Good Manufacturing Practices, which govern process chemistry, formulation,
labeling and handling of a drug throughout its life cycle; 11




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
    Good Laboratory Practices, which govern the use of a drug in animal studies to
support establishment of safety or the disposition and metabolism of the administered
drug, and handling of human or other biological samples for drug assays; and
    Good Clinical Practices, which govern the exposure of human subjects under our
protocols. Good Clinical Practices set standards for the constitution and activities of
institutional review boards that are charged with assuring that the appropriate person
gives informed consent prior to study participation and protecting patients whether they
receive an experimental drug, an approved drug, or an inactive look-alike called a
placebo. In
addition, our research and development processes and manufacturing
activities involve the controlled use of hazardous materials,
chemicals and radioactive materials and produce waste products. We
are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposing of
hazardous materials and waste products. Advertising is subject to FDA approval in the United States and national review elsewhere. In
addition, state and local governments and other federal agencies may control marketing if the drug
substance, formulation, package, intended use or disposal is subject to local regulation. The FDA has expanded its expedited review process in recognition that certain severe or
life-threatening diseases and disorders have only limited treatment options. Fast track
designation expedites the development process but places greater responsibility on a drug company
during Phase IV clinical trials. The drug company may request fast track designation for one or
more indications at any time during the Investigational New Drug application process, and the FDA
must respond within 60 days. Fast track designation allows the drug company to develop product
candidates faster based on the ability to request an accelerated approval of the New Drug
Application (NDA). For accelerated approval the clinical effectiveness is based on a surrogate
endpoint in a smaller number of patients. In addition, the drug company may request priority
review at the time of the NDA submission. If the FDA accepts the NDA submission as a priority
review, the time for review is reduced from one year to six months. We plan to request fast track
designation and/or priority review, as appropriate, for internal drug development programs. Research and Development Our research and development expenses in 2004, 2003 and 2002
were $59.2 million, $46.7 million
and $23.7 million, respectively. We plan to increase significantly our research and development
expenses as we continue to invest in our clinical programs. Employees We currently have 106 full-time employees, including 85 in research and development. The
employee group includes 29 employees with Ph.D.s, six with M.D.s and 23 with Masters degrees. We
believe that our employee relations are good. Available Information Our internet website is located at www.atherogenics.com. Copies of our reports filed
under Section 13(a) or 15(d) of the Exchange Act, including annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, may be
accessed from our website, free of charge, as soon as reasonably practicable after these reports
are electronically filed with or furnished to the Securities and Exchange Commission. The
reference to our website address does not constitute incorporation by reference of the information
contained on the website, which should not be considered part of this document. 12




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Scientific Advisory Board We have established a scientific advisory board to provide guidance and counsel on aspects of
our business. The board convenes once a year and individual members are contacted as required.
Members of the board provide input on product research and development strategy, education and
publication plans. The names and members of the board are as follows: R. Wayne Alexander, M.D.,
Ph.D., Chairman
    
    Chairman, Department of Medicine, Emory University School of MedicineWilliam W. Busse, M.D.
    
    Professor of Medicine, Director, Allergy and Clinical Immunology Department, University of Wisconsin
Medical SchoolVictor J. Dzau, M.D.
    
    Chancellor, Health Affairs, Duke University Medical CenterErwin W. Gelfand, M.D.
    
    Chairman, Department of Pediatrics, National Jewish Medical and Research CenterDavid G. Harrison, M.D.
    
    Professor of Medicine, Director, Division of Cardiology, Emory University School of MedicineGary L. Johnson, Ph.D.
    
    Professor and Chairman, Department of Pharmacology, University of North Carolina School of MedicinePeter Libby, M.D.
    
    Mallinckrodt Professor of Medicine, Harvard Medical School, Chief, Cardiovascular Division
Department of Medicine, Brigham and Womens HospitalDavid M. Stern, M.D.
    
    Dean, School of Medicine, Chief Clinical Officer, Cardiovascular Division Department of Medicine,
Brigham and Womens Hospital
 Forward-Looking Statements and Risks Related to Our Company and Business The Private Securities Litigation Reform Act of 1995 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, including projections of our future results of
operations or of 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 our then
current views and assumptions regarding future events and operating performance, and speak only as
of their dates. We undertake 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: Risks Related to Our Financial Results and Need for Additional Financing We have a history of operating losses, and we may not generate revenue or achieve profitability in the future. Our ability to generate revenue and achieve profitability depends on our
ability, alone or with collaborators, to complete successfully the development of our product
candidates, conduct preclinical tests in animals and clinical trials in human beings, obtain the
necessary regulatory approvals and manufacture and market the resulting drugs. We have had no
significant revenue to date. We have experienced operating losses since we began operations in
1994. As of December 31, 2004, we had an accumulated deficit of approximately $212.1 million. We
expect to incur additional operating losses and expect cumulative losses to increase substantially
as 13




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our research and development, preclinical, clinical, manufacturing and marketing efforts expand. If
we are unable to achieve and then maintain profitability, the market value of our common stock and
our outstanding notes will decline. If we need additional financing and cannot obtain it, we may not be able to develop or market
our products. We expect our research and development expenses to increase in connection with
our ongoing activities, particularly in connection with the ARISE trial that we initiated in June
2003. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to enable us to fund
our operating expenses, obligations under our financing arrangements and capital expenditure
requirements for at least the next 12 months. Our future 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, as described under Item 3. Legal Proceedings; and
    the extent to which we acquire or invest in businesses, products and technologies. If our future capital requirements exceed our available funds, we will need to
seek additional financing. We may be unable to raise capital when needed or on attractive terms. If
additional funds are not available, we may need to delay clinical studies, curtail operations or
obtain funds through collaborative arrangements that may require us to relinquish rights to some of
our products or potential markets. Risks Related to Development of Product Candidates We depend heavily on the success of our most advanced internal product candidate, AGI-1067
for atherosclerosis, which is in clinical development. If we are unable to commercialize this
product candidate, or experience significant delays in doing so, our business will be materially
harmed. AGI-1067 is our lead compound. Our ability to generate product revenues will
depend heavily on the successful development and commercialization of this compound. The commercial
success of AGI-1067 will depend on several factors, including the following:  
    successful completion of clinical trials;
    receipt of marketing approvals from the FDA and similar foreign regulatory authorities;
    establishing commercial manufacturing arrangements with third party manufacturers;
    launching commercial sales of the product, either alone or in collaboration with others; and
    acceptance of the product in the medical community and with third party payors. AGI-1067 could fail in clinical trials if we are unable to show it is effective or if it causes
unacceptable side effects in the patients we treated. While the plaque regression observed in the
group treated with AGI-1067 in the CART-2 trial exceeded that observed in the standard of care
group numerically, the difference was not statistically significant. Moreover, the results of our
Phase II clinical trials of AGI-1067 are not necessarily indicative of the results we will obtain
in our Phase III clinical trial of AGI-1067, particularly because 14




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the primary clinical endpoints of these trials are not the same. Failure in clinical trials of
AGI-1067 would have a material adverse effect on our ability to generate revenue or become
profitable. If we are not successful in commercializing AGI-1067, or are significantly delayed in
doing so, our business will be materially harmed. If we do not successfully develop our other product candidates, we will have limited ability to
generate revenue. Other than AGI-1067, all of our other product candidates are in early stages
of development, and only one other product candidate has undergone Phase I clinical trials. Our
product candidates are subject to the risks of failure inherent in developing drug products based
on new technologies. We do not expect any of our potential product candidates, including AGI-1067,
to be commercially available until at least 2007. Our drug discovery efforts may not produce any
other proprietary product candidates. Our failure to develop product candidates will limit our
ability to generate additional revenue. If we fail to demonstrate adequately the safety and efficacy of a product candidate, we will not
be able to commercialize that product candidate. Product candidates we develop, alone or with others, may not prove safe and
effective in clinical trials and may not meet all of the applicable regulatory requirements needed
to receive regulatory approval. If we fail to adequately demonstrate safety and efficacy for any
product candidate, we will not be able to commercialize that product candidate. Our failure to
commercialize a product candidate will materially adversely affect our revenue opportunities. We
will need to conduct significant research, preclinical testing and clinical trials before we can
file product approval applications with the FDA and similar regulatory authorities in other
countries. Preclinical testing and clinical trials are long, expensive and uncertain processes. We
may spend several years completing our testing for any particular product candidate. Failure can
occur at any stage. For example, we recently discontinued clinical development of AGI-4207 in
rheumatoid arthritis following announcement of unsuccessful results of a Phase II clinical trial of
that product candidate. The FDA or we may suspend our clinical trials at any time if either of us believes that we are
exposing the subjects participating in these trials to unacceptable health risks. The FDA or
institutional review boards at the medical institutions and healthcare facilities where we sponsor
clinical trials may suspend any trial indefinitely if they find deficiencies in the conduct of
these trials. The FDA and these institutional review boards have authority to oversee our clinical
trials, and the FDA may require large numbers of test subjects. In addition, we must manufacture
the product candidates that we use in our clinical trials under the FDAs Good Manufacturing
Practices. Even if we achieve positive results in early clinical trials, these results do
not necessarily predict final results. A number of companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials, even after achieving positive results in
earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial
could cause the FDA or us to terminate a clinical trial or require that we repeat it. In addition, even if we receive approval for commercial sale of any of our
product candidates, after use in an increasing number of patients, our products could show side
effect profiles that limit their usefulness or require their withdrawal although the drugs did not
show the side effect profile in Phase I through Phase III clinical trials. Risks Related to Our Dependence on Third Parties for Manufacturing, Research and Development and
Marketing and Distribution Activities We may not be successful in establishing collaborations for AGI-1067 and any other product
candidate we may seek to commercialize, which could adversely affect our ability to discover,
develop and commercialize products. A key element of our business strategy is to collaborate with third parties,
particularly leading pharmaceutical companies, to develop and commercialize some of our product
candidates, including AGI-1067. We are currently seeking a collaborator for development and
commercialization of AGI-1067. We also expect to seek collaborations for the development and
commercialization of other product candidates in the future. The timing and terms of any
collaboration for AGI-1067 will depend on the evaluation by prospective collaborators of the
clinical trial results of AGI-1067 and other aspects of the drugs safety and efficacy profile. We
are currently reviewing the results of our CART-2 trial of AGI-1067 with potential collaborators
and cannot now predict the timing and terms of such a collaboration. If we are unable to reach
agreements with suitable collaborators for AGI-1067 or any other product 15




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candidate, we would be forced to fund the entire development and commercialization of such product
candidates, and we may not have the resources to do so. If resource constraints require us to enter
into a collaboration early in the development of a product candidate, we may be forced to accept a
more limited share of any revenues such products may eventually generate. We face significant
competition in seeking appropriate collaborators. Moreover, these collaboration arrangements are
complex and time-consuming to negotiate and document. We may not be successful in our efforts to
establish collaborations or other alternative arrangements for AGI-1067 or any other product
candidate. We expect to depend significantly on collaborations with third parties to develop and
commercialize some of our product candidates. If a potential collaborator were to change its
strategy or the focus of its development and commercialization efforts with respect to our
relationship, the success of our product candidates and our operations could be adversely
affected. Our collaboration with Fujisawa Pharmaceutical to develop AGI-1096 in
preclinical testing and early-stage clinical trials and any other collaboration that we may
establish may not be successful. The success of any collaboration arrangement will depend heavily
on the efforts and activities of our collaborators. Collaborators will likely have significant
discretion in determining the efforts and resources that they will apply to these collaborations.
The risks that we anticipate being subject to in collaborations include:  
    a collaborator may develop and commercialize, either alone or with others, products and services that are similar to or
competitive with the products that are the subject of the collaboration with us;
    a collaborator may change the focus of its development and commercialization efforts. Pharmaceutical and biotechnology
companies historically have re-evaluated their priorities from time to time, including following mergers and
consolidations, which have been common in recent years in these industries;
    the ability of our product candidates and products to reach their potential could be limited if our collaborators decrease
or fail to increase spending relating to such products;
    a collaborator may terminate a collaboration in the event of a material breach by us; and
    a collaborator may fail to maintain or defend our intellectual property rights. The termination of any collaboration that we may establish might adversely
affect the development of the related product candidates and our ability to derive revenue from
them. Collaborations with pharmaceutical companies and other third parties often are terminated or
allowed to expire by the other party or by us. For example, in 2001, Schering-Plough and we
terminated a collaboration that we had established for AGI-1067, and our existing collaboration
with Fujisawa Pharmaceutical for the development of AGI-1096 is scheduled to expire in March 2005.
Any future terminations or expirations would adversely affect us financially and could harm our
business reputation. In such event, we might be required to devote additional resources to the
product or product candidate, seek a new collaborator or abandon the product or product candidate,
any of which could have an adverse effect on our business. Third parties failure to synthesize and manufacture our product candidates to our
specifications could delay our clinical trials or hinder our commercialization prospects. We currently have no manufacturing facilities to synthesize or manufacture our
product candidates, nor do we intend to develop these capabilities in the near future. Our reliance
on third parties for these services exposes us to various risks that could delay our clinical
trials or hinder our commercialization prospects. These risks include the following:  
    A finding that a third party did not comply with applicable governmental regulations.
Manufacturers of pharmaceutical products are subject to continual review and periodic
inspections by regulatory agencies. Our present or future manufacturers may not be able to
comply with the FDAs current Good Manufacturing Practices regulations and other FDA
regulatory requirements or similar regulatory requirements outside the United States.
Failure of one of our third party manufacturers to comply with applicable regulatory
requirements, whether or not related to our product candidates, could result in sanctions
being imposed on us, including fines, injunctions, civil penalties, failure of regulatory
authorities to grant marketing approval of our product candidates, delays, suspension or
withdrawal of approvals, license revocation, seizures or recalls of product 16




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candidates or products, operating restrictions and criminal prosecutions, any of which could
significantly and adversely affect supplies of our product candidates and products.  
    A failure to synthesize and manufacture our product candidates in
accordance with our product specifications.We need to maintain a very
low maximal amount of one of the starting materials used in the
manufacture of AGI-1067. The starting material, probucol, was
prescribed by physicians as a cholesterol-lowering agent until its
manufacturer withdrew the drug from the market for efficacy reasons. A
failure by our third party manufacturers to maintain an acceptable
level of probucol in the manufacture of AGI-1067 may result in chronic
dosing of probucol, which is associated with the occurrence of a rare
side effect.
    A failure to deliver product candidates in sufficient quantities or in
a timely manner.Any failure by our third party manufacturers to
supply our requirements for clinical trial materials or commercial
product, or to supply these materials in a timely manner, could
jeopardize the initiation or completion of clinical trials or could
have a material adverse effect on our ability to commercialize any
approved products and thereby generate revenue.
    Inability to control costs.We may be subject to costs outside of our
control, which could adversely affect our future profitability and our
ability to commercialize products on a timely and competitive basis.
    Termination or nonrenewal of an agreement by the third party, based on
its own business priorities, at a time that is costly or inconvenient
to us.Our product candidates and any products that we successfully
develop may compete with product candidates and products of others for
access to the third partys manufacturing facilities. Risks Related to Our Intellectual Property Our failure to protect adequately or enforce our intellectual property rights or secure
rights to third party patents could materially adversely affect our proprietary position in the
marketplace or prevent the commercialization of our products. Our success will depend in large part on our ability to obtain and maintain
protection in the United States and other countries for the intellectual property covering or
incorporated into our technologies and products. The patents and patent applications in our patent
portfolio are either owned by us or licensed to us. Our ability to protect our product candidates
from unauthorized or infringing use by third parties depends substantially on our ability to obtain
and maintain valid and enforceable patents. Due to evolving legal standards relating to the
patentability, validity and enforceability of patents covering pharmaceutical inventions and the
scope of claims made under these patents, our ability to obtain and enforce patents is uncertain
and involves complex legal and factual questions for which important legal principles are
unresolved. We may not be able to obtain patent rights on products, treatment methods or
manufacturing processes that we may develop or to which we may obtain license or other rights. Even
if we do obtain patents, rights under any issued patents may not provide us with sufficient
protection for our product candidates or provide sufficient protection to afford us a commercial
advantage against our competitors or their competitive products or processes. It is possible that
no patents will be issued from any pending or future patent applications owned by us or licensed to
us. Others may challenge, seek to invalidate, infringe or circumvent any patents we own or license.
Alternatively, we may in the future be required to initiate litigation against third parties to
enforce our intellectual property rights. The cost of this litigation could be substantial and it
is possible that our efforts could be unsuccessful. Changes in either patent laws or in
interpretations of patent laws in the United States and other countries may diminish the value of
our intellectual property or narrow the scope of our patent protection. Our patents also may not afford us protection against competitors with similar
technology. We may not have identified all patents, published applications or published literature
that affect our business either by blocking our ability to commercialize our product candidates, by
preventing the patentability of our drugs to us or our licensors or by covering the same or similar
technologies that may affect our ability to market our product candidates. For example, patent
applications in the United States are maintained in confidence for up to 18 months after their
filing. In some cases, however, patent applications remain confidential in the United States Patent
and Trademark Office for the entire time prior to issuance as a United States patent. Patent
applications filed in countries outside the United States are not typically published until at
least 18 months from their first filing date. Similarly, publication of discoveries in the
scientific or patent literature often lags behind actual discoveries. Therefore, we or our
licensors might not have been the first to invent, or the first to file, patent applications on our
drug candidates or for their use. The laws of some foreign jurisdictions do not 17




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protect intellectual property rights to the same extent as in the United States and many companies
have encountered significant difficulties in protecting and defending such rights in foreign
jurisdictions. If we encounter such difficulties in protecting or are otherwise precluded from
effectively protecting our intellectual property rights in foreign jurisdictions, our business
prospects could be substantially harmed. If we infringe or are alleged to infringe intellectual property rights of third parties, it will
adversely affect our business. Our research, development and commercialization activities, as well as any
product candidates or products resulting from these activities, may infringe or be claimed to
infringe patents or patent applications under which we do not hold licenses or other rights. Third
parties may own or control these patents and patent applications in the United States and abroad.
These third parties could bring claims against us or our collaborators that would cause us to incur
substantial expenses and, if successful against us, could cause us to pay substantial damages.
Further, if a patent infringement suit were brought against us or our collaborators, we or they
could be forced to stop or delay research, development, manufacturing or sales of the product or
product candidate that is the subject of the suit. As a result of patent infringement claims, or in order to avoid potential
claims, we or our collaborators may choose or be required to seek a license from the third party
and be required to pay license fees or royalties or both. These licenses may not be available on
acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the
rights may be nonexclusive, which could result in our competitors gaining access to the same
intellectual property. Ultimately, we could be prevented from commercializing a product, or be
forced to cease some aspect of our business operations, if, as a result of actual or threatened
patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable
terms. This could harm our business significantly. There has been substantial litigation and other proceedings regarding patent
and other intellectual property rights in the pharmaceutical and biotechnology industries. In
addition to infringement claims against us, we may become a party to other patent litigation and
other proceedings, including interference proceedings declared by the United States Patent and
Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual
property rights with respect to our products and technology. The cost to us of any patent
litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our
competitors may be able to sustain the costs of such litigation or proceedings more effectively
than we can because of their substantially greater financial resources. Uncertainties resulting
from the initiation and continuation of patent litigation or other proceedings could have a
material adverse effect on our ability to compete in the marketplace. Patent litigation and other
proceedings may also absorb significant management time. If we fail to comply with our obligations in our intellectual property licenses with third
parties, we could lose license rights that are important to our business. Our commercial success will also depend on our ability to develop,
manufacture, use, sell and offer to sell our product candidates and proposed product candidates
without breaching our agreements with our patent licensors. We are a party to a number of license
agreements, including exclusive licenses to technologies from Emory University, covering aspects of
our v-protectant® technology, and the National Jewish Medical and Research Center, covering aspects
of our MEKK technology platform. We expect to enter into additional licenses in the future. Our
exclusive license with Emory University requires us to take steps to commercialize the licensed
technology in a timely manner. If we fail to meet these obligations, Emory University can convert
our exclusive license to a non-exclusive license, can grant others non-exclusive rights in the
licensed technology or can require us to sublicense aspects of the licensed technology. Our license
agreement with National Jewish requires us to develop the licensed technology in a timely manner.
If we fail to meet these obligations, some or all of the licensed technology may revert to National
Jewish. Our existing licenses impose, and we expect future licenses will impose, various diligence,
milestone payments, royalty, insurance and other obligations on us. If we fail to comply with these
obligations, the licensor may have the right to terminate the license, in which event we might not
be able to market any product that is covered by the licensed patents. If we are unable to protect the confidentiality of our proprietary information and know-how, the
value of our technology and products could be adversely affected. In addition to patented technology, we rely on trade secrets, proprietary
know-how and technological advances, which we seek to protect through agreements with our
collaborators, employees and consultants. These persons and entities could breach our agreements,
for which we may not have adequate remedies. In addition, others could become aware of our trade
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know-how through independent discovery or otherwise. If we are unable to protect the
confidentiality of our proprietary information and know-how, competitors may be able to use this
information to develop products that compete with our products, which could adversely impact our
business. Risks Related to Regulatory Approval of Our Product Candidates Because we cannot predict whether or when we will obtain regulatory approval to
commercialize our product candidates, we cannot predict the timing of any future revenue from
these product candidates. We cannot commercialize any of our product candidates, including AGI-1067 and
AGI-1096, until the appropriate regulatory authorities have reviewed and approved the applications
for the product candidates. The regulatory agencies may not complete their review processes in a
timely manner and we may not obtain regulatory approval for any product candidate we or our
collaborators develop. Satisfaction of regulatory requirements typically takes many years, if
approval is obtained at all, is dependent upon the type, complexity and novelty of the product and
requires the expenditure of substantial resources. Regulatory approval processes outside the United
States include all of the risks associated with the FDA approval process. In addition, we may
experience delays or rejections based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. The FDA has substantial discretion in the approval
process and may refuse to accept any application or may decide that our data is insufficient for
approval and require additional preclinical, clinical or other studies. In addition, varying
interpretations of the data obtained from preclinical and clinical testing could delay, limit or
prevent regulatory approval of a product candidate. We may experience delays in our clinical trials that could adversely affect our financial
results and our commercial prospects. We do not know whether planned clinical trials will begin on time or whether
we will complete any of our clinical trials on schedule or at all. We recently announced approval
by the FDA to modify the protocol for our ARISE trial, in part to mitigate any delay in completing
the trial. Product development costs to us and our collaborators will increase if we have delays in
testing or approvals or if we need to perform more or larger clinical trials than planned.
Significant delays may adversely affect our financial results and the commercial prospects for our
products, and delay our ability to become profitable. We rely heavily on independent clinical investigators, contract research
organizations and other third party service providers for successful execution of our clinical
trials, but do not control many aspects of their activities. We are responsible for ensuring that
each of our clinical trials is conducted in accordance with the general investigational plan and
protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred
to as Good Clinical Practices, for conducting and recording and reporting the results of clinical
trials to assure that data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are protected. Our reliance on third parties
that we do not control does not relieve us of these responsibilities and requirements. Third
parties may not complete activities on schedule, or may not conduct our clinical trials in
accordance with regulatory requirements or our stated protocols. The failure of these third parties
to carry out their obligations could delay or prevent the development, approval and
commercialization of our product candidates. Failure to obtain regulatory approval in international jurisdictions would prevent us from
marketing our products abroad. We intend to have our products marketed outside the United States. In order to
market our products in the European Union and many other foreign jurisdictions, we must obtain
separate regulatory approvals and comply with numerous and varying regulatory requirements. We
expect that a collaborator may have responsibility to obtain regulatory approvals outside the
United States with respect to some of our product candidates, and we will depend on such
collaborators to obtain these approvals. The approval procedure varies among countries and can
involve additional testing. The time required to obtain approval may differ from that required to
obtain FDA approval. The foreign regulatory approval process may include all of the risks
associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely
basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other
countries or jurisdictions, and approval by one foreign regulatory authority does not ensure
approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We
and any future collaborators may not be able to file for regulatory approvals and may not receive
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If we do not comply with applicable regulatory requirements in the manufacture and distribution
of our products, we may incur penalties that may inhibit our ability to commercialize our
products and adversely affect our revenue. Our failure to comply with applicable FDA or other regulatory requirements,
including manufacturing, quality control, labeling, safety surveillance, promoting and reporting,
may result in criminal prosecution, civil penalties, recall or seizure of our products, total or
partial suspension of production or an injunction, as well as other regulatory action against our
potential products or us. Discovery of previously unknown problems with a product, supplier,
manufacturer or facility may result in restrictions on the sale of our products, including a
withdrawal of such products from the market. Risks Related to Commercialization The commercial success of any products that we may develop will depend on the degree of
market acceptance by physicians, patients, healthcare payors and others in the medical
community. Any products that we bring to the market may not gain market acceptance by
physicians, patients, healthcare payors and others in the medical community. If these products do
not achieve an adequate level of acceptance, we may not generate material product revenues and we
may not become profitable. The degree of market acceptance of our product candidates, if approved
for commercial sale, will depend on a number of factors, including:  
    the prevalence and severity of any side effects;
    the efficacy and potential advantages over alternative treatments;
    the ability to offer our product candidates for sale at competitive prices;
    relative convenience and ease of administration;
    the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
    the strength of marketing and distribution support; and
    sufficient third party coverage or reimbursement. If our competitors develop and market products that are more effective, have fewer side effects
or are less expensive than our current or future product candidates, we may have limited
commercial opportunities. The development and commercialization of new drugs is highly competitive. Our competitors
include large pharmaceutical and more established biotechnology companies. Moreover, there are
approved products on the market for many of the diseases for which we are developing drugs. In many
cases, these products have well known brand names, are distributed by large pharmaceutical
companies and have achieved widespread acceptance among physicians and patients. Our competitors
have significant resources and expertise in research and development, manufacturing, testing,
obtaining regulatory approvals and marketing. Potential competitors also include academic
institutions, government agencies, and other public and private research organizations that conduct
research, seek patent protection and establish collaborative arrangements for research,
development, manufacturing and commercialization. It is possible that any of these competitors
could develop technologies or products that would render our technologies or product candidates
obsolete or non-competitive, which could adversely affect our revenue potential. These third
parties also compete with us in recruiting and retaining qualified scientific and management
personnel, establishing clinical trial sites and patient registration for clinical trials, as well
as in acquiring technologies complementary to or necessary for our programs or advantageous to our
business. If we are unable to create sales, marketing and distribution capabilities or enter into
agreements with third parties to perform these functions, we will not be able to commercialize
our product candidates. We currently have no sales, marketing or distribution capabilities. In order
to commercialize our product candidates, we must either develop our own sales, marketing and
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have no experience in developing, training or managing a sales force and will incur substantial
additional expenses in doing so. The cost of establishing and maintaining a sales force may exceed
its cost effectiveness. In addition, we will compete with many companies that currently have
extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be
unable to compete successfully against these companies. If we are unable to obtain adequate reimbursement from third party payors for any products that
we may develop or acceptable prices for those products, our revenues and prospects for
profitability will suffer. Most patients will rely on Medicare and Medicaid, private health insurers and
other third party payors to pay for their medical needs, including any drugs we or any
collaborators may market. If third party payors do not provide adequate coverage or reimbursement
for any products that we may develop, our revenues and prospects for profitability will suffer. In
December 2003, the Congress enacted a limited prescription drug benefit for Medicare recipients in
the Medicare Prescription Drug and Modernization Act of 2003. While the program established by this
statute may increase demand for our products, if we participate in this program, our prices will be
negotiated with drug procurement organizations for Medicare beneficiaries and are likely to be
lower than we might otherwise obtain. Non-Medicare third party drug procurement organizations may
also base the price they are willing to pay on the rate paid by drug procurement organizations for
Medicare beneficiaries. A primary trend in the United States healthcare industry is toward cost
containment. In addition, in some foreign countries, particularly the countries of the European
Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities can take six to 12 months or longer
after the receipt of regulatory marketing approval for a product. To obtain reimbursement or
pricing approval in some countries, we may be required to conduct a clinical trial that compares
the cost effectiveness of our product candidates or products to other available therapies. The
conduct of such a clinical trial could be expensive and result in delays in commercialization of
our products. Third party payors are challenging the prices charged for medical products and
services, and many third party payors limit reimbursement for newly-approved healthcare products.
In particular, third party payors may limit the indications for which they will reimburse patients
who use any products that we may develop. Cost control initiatives could decrease the price we
might establish for products that we may develop, which would result in lower product revenues to
us. 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 could diminish our ability to commercialize our future products. The testing and marketing of medicinal products entail an inherent risk of
product liability. Clinical trial subjects, consumers, healthcare providers, or pharmaceutical
companies or others selling our future products could bring product liability claims against us. If
we cannot successfully defend ourselves against claims that our product candidates or products
caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome,
liability claims may result in:  
    decreased demand for any product candidates or products that we may develop;
    injury to our reputation;
    withdrawal of clinical trial participants;
    costs to defend the related litigation;
    substantial monetary awards to trial participants or patients;
    loss of revenue; and
    the inability to commercialize any products that we may develop. We may not be able to acquire or maintain insurance coverage at a reasonable cost or in sufficient
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Risks Related to Our Operations Our failure to attract, retain and motivate skilled personnel and cultivate key academic
collaborations could materially adversely affect our research and development efforts. We
are a small company with approximately 100 full-time employees. If we are unable to
continue to attract, retain and motivate highly qualified management and scientific personnel and
to develop and maintain important relationships with leading academic institutions and scientists,
we may not be able to achieve our research and development objectives. Competition for personnel
and academic collaborations is intense. We have entered into employment agreements with each of our
executive officers. These employment agreements are terminable by the employee on short notice.
Loss of the services of any of these officers or of our key scientific personnel could adversely
affect progress of our research and development programs. All of our other employees are at will
employees. We do not carry key person insurance on any employee. The outcome of informal inquiries by the SEC and NASD regarding our announcement of interim
results from the CART-2 clinical trial for AGI-1067 and related trading in our common stock is
uncertain. We have been contacted by the staff of the Securities and Exchange Commission
and the NASD regarding informal inquiries they are conducting related to our September 27, 2004
announcement of interim results from the CART-2 clinical trial for AGI-1067 and trading in our
common stock surrounding that announcement. The SEC staffs notice states that its inquiry should
not be construed as an expression of opinion on the part of the SEC or its staff that any
violations of law have occurred. The SEC and NASD staff have requested that we voluntarily provide
them with documents and other information relating to that announcement. We are cooperating fully
with these requests. Based on our review of the facts as to the September 27, 2004 announcement and
trading in our common stock surrounding that announcement, we do not believe that we or any of our
officers or directors have violated any laws related to these inquiries. However, we cannot predict
the outcome of these inquiries, whether the SEC or NASD will undertake any formal investigation or
proceeding relating to us or our officers or directors or when these matters might be resolved. Risks Related to our Common Stock and Indebtedness Our stock price has been and may continue to be volatile. The market price of our common stock, and the market prices for securities of pharmaceutical
and biotechnology companies in general, have been highly volatile and may continue to be highly
volatile in the future. During the period from January 1, 2004 to March 8, 2005, the closing sale
price of our common stock on the NASDAQ National Market ranged from a low of $13.50 per share to a
high of $38.00 per share. The following factors, in addition to other risk factors described
herein, may have a significant impact on the market price of our common stock:  
    results of clinical trials of our product candidates, particularly AGI-1067, and those of our competitors;
    whether we enter into collaboration agreements and the timing and accounting treatment of payments, if any, to us under
those agreements;
    developments concerning any research and development, manufacturing, and marketing collaborations, including whether and
when we achieve milestones;
    announcements of technological innovations or new commercial products by our competitors or us;
    developments concerning proprietary rights, including patents;
    the addition or termination of research programs or funding support;
    publicity regarding actual or potential results relating to medicinal products under
development by our competitors or us;
    manufacturing and commercialization costs for any product that receives approval for commercial sale; 22




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
    regulatory developments in the United States and other countries;
    litigation;
    economic and other external factors, including disasters or crises; and
    period-to-period fluctuations in financial results. In the past, following periods of volatility in the market price of a companys securities,
securities class action litigation has often been instituted. Purported securities class action
lawsuits were filed against us and some of our 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
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 allegations in these
lawsuits relate to our 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, we are unable to estimate the
possible range of damages that we might incur should any of these lawsuits be resolved against us.
An unfavorable outcome or settlement of these lawsuits could harm our financial position. In
addition, similar class action lawsuits may be filed against us and our executive officers and
directors in the future. Litigation can be costly, time consuming and disruptive to normal business
operations. The defense of these lawsuits could also result in diversion of our managements time
and attention away from business operations, which could harm our business. We have incurred significant additional indebtedness as a result of the sale of our 1.5%
convertible notes due 2012 on January 12, 2005 and we may incur additional indebtedness in the
future. Our
existing indebtedness and any future indebtedness we incur exposes us to risks that could
adversely affect our business, operating results and financial condition. As of December 31, 2004, we had $100.0 million of total indebtedness outstanding. We incurred
$200 million of additional indebtedness when we sold our 1.5% convertible notes due 2012 on January
12, 2005. We may also incur additional long-term indebtedness or obtain additional working capital
lines of credit to meet future financing needs. Our indebtedness could have significant negative
consequences for our business, operating results and financial condition, including:  
    increasing our vulnerability to adverse economic and industry conditions;
    limiting our ability to obtain additional financing;
    requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby
reducing the amount of our cash flow available for other purposes;
    limiting our flexibility in planning for, or reacting to, changes in our business; and
    placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better
access to capital resources. If we do not achieve a significant increase in revenues, we could have difficulty making
required payments on our outstanding convertible notes, our other existing indebtedness and any
indebtedness that we may incur in the future. During each of the last five years, we had no
earnings to cover our fixed charges. If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if we fail to comply with the various
requirements of our convertible notes, our other existing indebtedness or any indebtedness which we
may incur in the future, we would be in default, which would permit the holders of the notes and
such other indebtedness to accelerate the maturity of the notes and such other indebtedness and
could cause defaults under the notes and such other indebtedness. Any default under our convertible
notes, our other existing indebtedness or any indebtedness which we may incur in the future could
have a material adverse effect on our business, operating results and financial condition. Conversion of our convertible notes will dilute the ownership interest of existing shareholders
and could adversely affect the market price of our common stock. The conversion of some or all of the 1.5% convertible notes due 2012 or the 4.5% convertible
notes due 2008 will dilute the ownership interests of existing shareholders. Any sales in the
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adversely affect prevailing market prices of our common stock. In addition, the existence of the
notes may encourage short selling by market participants because the conversion of the notes could
depress the price of our common stock. Our shareholder rights plan and anti-takeover provisions in our charter documents may make an
acquisition of us, which may benefit our shareholders, more difficult. Our shareholder rights plan and provisions of our articles of incorporation and bylaws could
make it more difficult for a third party to acquire us. These documents include provisions that:  
    allow our shareholders the right to acquire common stock from us at discounted prices in the event a person acquires 15% or
more of our common stock or announces an attempt to do so without our board of directors prior consent;
    authorize the issuance of blank check preferred stock by our board of directors without shareholder approval, which would
increase the number of outstanding shares and could thwart a takeover attempt;
    limit who may call a special meeting of shareholders;
    require shareholder action without a meeting by unanimous written consent;
    establish advance notice requirements for nominations for election to the board of directors or for proposing matters that
can be acted upon at shareholder meetings;
    establish a staggered board of directors whose members can only be dismissed for cause;
    adopt the fair price requirements and rules regarding business combinations with interested shareholders set forth in
Article 11, Parts 2 and 3 of the Georgia Business Corporation Code; and
    require approval by the holders of at least 75% of the outstanding common stock to amend any
of the foregoing provisions. 
 Item 2.Properties Our scientific and administration facility encompasses approximately 27,000 square feet in
Alpharetta, Georgia. We lease our facility pursuant to a long-term lease agreement that expires in
2009, and our remaining aggregate commitment under this long-term, non-cancelable lease is
approximately $4.9 million. This lease may be extended at our option to 2019. In November 2001, we leased a facility in Norcross, Georgia encompassing approximately 5,800
square feet. We lease this laboratory facility pursuant to a long-term lease agreement that, as
amended, expires in 2007, and our remaining aggregate commitment under this long-term,
non-cancelable lease is approximately $374,000. We have the option to renew this lease under
mutually agreeable terms. 
 Item 3.Legal Proceedings Purported securities class action lawsuits were filed against us and some of our 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 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. 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, two plaintiffs simultaneously moved for appointment as lead
plaintiffs in both districts on March 7, 2005. The allegations in these lawsuits relate to our 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, we are unable to estimate the possible range of damages that we might incur should any
of these lawsuits be resolved against us. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 24




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##### Table of Contents



PART II Item 5.Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities Common Stock Information Our common stock is traded on the Nasdaq National Market under the symbol AGIX. The
following table sets forth the range of high and low reported last sale price per share of our
common stock as quoted on the Nasdaq National Market for each period indicated. Common StockHigh
    
    
    LowYear ended December 31, 2004First quarter
    
    $
    23.00
    
    
    $
    14.60Second quarter
    
    
    25.91
    
    
    
    18.41Third quarter
    
    
    38.00
    
    
    
    13.50Fourth quarter
    
    
    36.73
    
    
    
    23.24Year ended December 31, 2003First quarter
    
    $
    9.84
    
    
    $
    6.41Second quarter
    
    
    15.11
    
    
    
    8.79Third quarter
    
    
    18.65
    
    
    
    12.12Fourth quarter
    
    
    18.43
    
    
    
    13.15
 As of March 1, 2005, there were approximately 6,500 holders of our common stock. This number
includes beneficial owners of our common stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers and other fiduciaries. Dividend Policy We have never declared or paid any dividends on our capital stock. We currently intend to
retain all of our future earnings, if any, to finance our operations and do not anticipate paying
any cash dividends on our capital stock in the foreseeable future. 25




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##### Table of Contents



Item 6.Selected Financial Data The selected financial data set forth below should be read in conjunction with our financial
statements and the related notes and Managements Discussion and Analysis of Financial Condition
and Results of Operations, included in this annual report. The historical results are not
necessarily indicative of the operating results to be expected in the future. Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Statement of Operations Data:Revenues:License fees
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,111,111
    
    
    $
    3,333,333Research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,398,429
    
    
    
    4,826,370Total revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,509,540
    
    
    
    8,159,703Operating expenses:Research and development
    
    
    59,235,833
    
    
    
    46,660,960
    
    
    
    23,746,127
    
    
    
    17,824,080
    
    
    
    14,672,720General and administrative
    
    
    6,607,506
    
    
    
    5,930,675
    
    
    
    5,139,000
    
    
    
    5,691,791
    
    
    
    9,151,355Total operating expenses
    
    
    65,843,339
    
    
    
    52,591,635
    
    
    
    28,885,127
    
    
    
    23,515,871
    
    
    
    23,824,075Operating loss
    
    
    (65,843,339
    )
    
    
    (52,591,635
    )
    
    
    (28,885,127
    )
    
    
    (20,006,331
    )
    
    
    (15,664,372
    )Interest and other income
    
    
    1,447,001
    
    
    
    1,258,216
    
    
    
    962,040
    
    
    
    2,366,748
    
    
    
    1,714,850Interest expense
    
    
    (5,192,894
    )
    
    
    (1,954,402
    )
    
    
    (42,420
    )
    
    
    
    
    
    
    Net loss
    
    $
    (69,589,232
    )
    
    $
    (53,287,821
    )
    
    $
    (27,965,507
    )
    
    $
    (17,639,583
    )
    
    $
    (13,949,522
    )Basic and diluted net loss per share
    
    $
    (1.88
    )
    
    $
    (1.49
    )
    
    $
    (1.00
    )
    
    $
    (0.68
    )
    
    $
    (1.30
    )Shares used in computing basic and
diluted net loss per share
    
    
    37,070,235
    
    
    
    35,770,994
    
    
    
    27,978,705
    
    
    
    26,010,347
    
    
    
    10,747,773
 The following table contains a summary of our balance sheet data as of December 31: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance Sheet Data:Cash, cash equivalents and
short-term investments
    
    $
    66,924,015
    
    
    $
    131,583,928
    
    
    $
    34,671,131
    
    
    $
    58,439,995
    
    
    $
    53,981,239Working capital
    
    
    59,719,811
    
    
    
    124,848,687
    
    
    
    30,009,013
    
    
    
    55,056,263
    
    
    
    52,422,951Total assets
    
    
    74,462,327
    
    
    
    138,836,746
    
    
    
    37,952,044
    
    
    
    62,255,278
    
    
    
    57,598,951Long-term obligations
    
    
    100,000,000
    
    
    
    100,083,622
    
    
    
    572,492
    
    
    
    
    
    
    
    84,907Accumulated deficit
    
    
    (212,120,547
    )
    
    
    (142,531,315
    )
    
    
    (89,243,494
    )
    
    
    (61,277,987
    )
    
    
    (43,638,404
    )Total shareholders (deficit) equity
    
    
    (35,942,382
    )
    
    
    30,377,006
    
    
    
    32,493,713
    
    
    
    58,294,812
    
    
    
    54,271,686
 26




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##### Table of Contents



Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our financial statements and
related notes included in this annual report. In this report, AtheroGenics, we, us and our
refer to AtheroGenics, Inc. This annual report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject
to certain factors, risks and uncertainties that may cause actual results, events and performances
to differ materially from those referred to in such statements. These risks include 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 financial condition,
research, development and commercialization of our product candidates, anticipated trends in our
business, and other risks that could cause actual results to differ materially. You should
carefully consider these risks, which are discussed in this annual report, including, without
limitation, in this section entitled Managements Discussion and Analysis of Financial Condition
and Results of Operations, and in AtheroGenics Securities and Exchange Commission filings. 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® 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. We are currently evaluating AGI-1067 in the
Phase III clinical trial called ARISE (Aggressive Reduction of Inflammation Stops Events) as an
oral therapy for the treatment of atherosclerosis. AGI-1096, our second candidate, 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. We are working with Fujisawa
Pharmaceutical Co., Ltd. to further develop AGI-1096 in preclinical and early-stage clinical
trials. We previously were developing AGIX-4207, a v-protectant® candidate for the
treatment of rheumatoid arthritis. Based on our findings, however, we have discontinued clinical
development of AGIX-4207 and the intravenous dosage form of AGIX-4207 for rheumatoid arthritis. 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 compounds 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. To date, we have devoted substantially all of our resources to research and development. We
have not derived any commercial revenues from product sales and, excluding the effect of certain
license fees of a non-recurring nature, expect to incur significant losses in most years prior to
deriving any such product revenue. We have funded our operations primarily through sales of equity
and debt securities. We have incurred significant losses since we began operations and, as of December 31, 2004,
had an accumulated deficit of $212.1 million. We cannot assure you whether or when we will become
profitable. We expect to continue to incur substantial operating losses over the next several
years as we continue to incur increasing research and development costs. We expect that losses
will fluctuate from quarter to quarter and that these fluctuations may be substantial. Our ability
to achieve profitability depends upon 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. 27




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##### Table of Contents



Critical Accounting Policies We have identified the following policies as critical to our business operations and the
understanding of our results of operations. The impact and any associated risks related to these
policies on our business operations are discussed throughout Managements Discussion and Analysis
of Financial Condition and Results of Operations. Use of Estimates The
preparation of the financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from those
estimates. Research and Development Accrual As part of the process of preparing our financial statements, we are required to estimate
expenses that we believe we have incurred, but have not yet been billed for. This process involves
identifying services and activities that have been performed by third-party vendors on our behalf
and estimating the level to which they have been performed and the associated cost incurred for
such service as of each balance sheet date in our financial statements. Examples of expenses for
which we accrue include fees for professional services, such as those provided by certain clinical
research organizations and investigators in conjunction with clinical trials, and fees owed to
contract manufacturers in conjunction with the manufacture of clinical trial materials. We make
these estimates based upon progress of activities related to contractual obligations and also
information received from vendors. Revenue Recognition License fees, which are nonrefundable, are recognized when the related license agreements
specify that no further efforts or obligations are required of us. We had committed to perform
certain research and development activities as part of a license agreement, which has been
terminated; accordingly, the upfront license payment was amortized over the anticipated time period
to conduct these activities. Revenues under research and development arrangements were recognized
as the research and development activities were performed pursuant to the terms of the related
agreements. These revenues were billed quarterly and the related payments were not refundable. Stock-Based Compensation We have elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees(APB 25), in accounting for our stock-based employee compensation
plans, rather than the alternative fair value accounting method provided for under Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation(SFAS
123), as SFAS 123 requires the use of option valuation models that were not developed for use in
valuing employee stock options. We account 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 an entitys accounting policy with
respect to stock-based employee compensation on reported net income and earnings per share in
annual and interim financial statements. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment(SFAS 123(R)), which
revises SFAS 123 and supersedes 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 reporting period that begins after June 15,
2005. 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), we 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 28




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##### Table of Contents



statement recognition. We have not yet determined the
method of adoption or the effect of adopting
SFAS 123(R). Results of Operations Comparison of Years Ended December 31, 2004 and 2003 Revenues There were no revenues during 2004 or 2003. We may receive revenues in the future related to
potential licensing agreements with pharmaceutical companies for our compounds or programs. Expenses Research and Development.Research and development expenses were $59.2 million in 2004,
compared to $46.7 million in 2003. The increase of $12.6 million, or 27%, is primarily due to
increased expenditures for the AGI-1067 ARISE Phase III clinical trial, including manufacturing
activities for clinical drug supply, study monitoring, payments to clinical investigators, and
salary and personnel related expenses. We expect that research and development expenses will continue to increase in 2005. This
increase will be primarily related to activities surrounding the AGI-1067 ARISE Phase III clinical
trial and precommercialization development activities. General and Administrative.General and administrative expenses were $6.6 million in 2004,
compared to $5.9 million in 2003. The increase of $676,831, or 11%, is primarily due to a full
years impact of the increase in directors and officers insurance premiums in 2004 compared to a
partial years impact of the increase in premiums in 2003, an increase in professional fees in
connection with compliance with the Sarbanes-Oxley Act of 2002 and consulting fees. Also
contributing to the increase were business development expenses related to partnering activities,
along with salary and personnel expenses. Interest and Other Income Interest and other income is primarily comprised of interest income earned on our cash and
short-term investments. Interest and other income was $1.4 million in 2004, compared to $1.3
million in 2003. The slight increase is due to the increase in the weighted average cash and
short-term investment balances along with an increase in interest rates. Interest Expense Interest expense was
$5.2 million in 2004 compared to $2.0 million in 2003. The increase in
interest expense is due to a full year of interest expense resulting from our $100 million
long-term convertible debt, issued in August 2003, compared to a partial year in 2003. We
anticipate that interest expense will increase in 2005 due to our
recent issuance of $200 million in aggregate principal amount of 1.5% convertible notes. Income Taxes As of December 31, 2004, we
had net operating loss carryforwards and research and development
credit carryforwards of $205.9 million and $6.4 million, respectively, available to offset future
taxable income. The net operating loss carryforwards and the research and
development credit carryforwards will expire between 2010 and 2025. Because of our lack of
earnings history, the resulting deferred tax assets have been fully offset by a valuation
allowance. The utilization of the carryforwards is dependent upon the timing and extent of our
future profitability. The annual limitations combined with the expiration dates of the
carryforwards may prevent the utilization of all of the net operating loss and research and
development credit carryforwards if we do not attain sufficient profitability by the expiration
dates of the carryforwards. 29




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Comparison of Years Ended December 31, 2003 and 2002 Revenues There were no revenues during 2003 or 2002. Expenses Research and Development.Research and development expenses were $46.7 million in 2003,
compared to $23.7 million in 2002. The increase of $22.9 million, or 96%, was primarily due to
increased expenditures for the AGI-1067 ARISE Phase III clinical trial and the AGIX-4207 OSCAR
Phase II clinical trial, such as manufacturing activities for clinical drug supply, study
monitoring and payments to clinical investigators. Also contributing to the increase were the
ongoing patient related costs for the AGI-1067 CART-2 Phase IIb clinical trial. General and Administrative.General and administrative expenses were $5.9 million in 2003,
compared to $5.1 million in 2002. The increase of $791,675, or 15%, was primarily due to an
increase in directors and officers insurance premiums, consulting fees and business development
expenses related to partnering activities, partially offset by a lower amount of deferred stock
compensation expense. Interest and Other Income Interest and other income is primarily comprised of interest income earned on our cash and
short-term investments. Interest and other income was $1.3 million in 2003, compared to $962,040
in 2002. The increase is due to the increased amount of invested funds received from our follow-on
offering in February 2003 and our convertible debt offering in August 2003. Interest Expense Interest expense was $2.0 million in 2003 compared to $42,420 in 2002. The increase in
interest expense is primarily comprised of interest expense resulting from our $100 million
long-term convertible debt, issued in August 2003. Income Taxes As of December 31, 2003, we had net operating loss carryforwards and research and development
credit carryforwards of $129.4 million and $4.0 million, respectively, available to offset future
taxable income. Liquidity and Capital Resources Since inception, we have financed our operations primarily through sales of equity securities
and convertible notes. At December 31, 2004, we had cash, cash equivalents and short-term
investments of $66.9 million, compared with $131.6 million and $34.7 million at December 31, 2003
and 2002, respectively. Working capital at December 31, 2004 was $59.7 million, compared to $124.8
million and $30.0 million at December 31, 2003 and 2002, respectively. The decrease in cash, cash
equivalents, short-term investments and working capital for the year ended December 31, 2004 is
primarily due to the use of funds for operating purposes. The increase in cash, cash equivalents,
short-term investments and working capital for the year ended December 31, 2003 is primarily due to
funds received from our follow-on stock offering in February 2003 of approximately $48.4 million
and our convertible debt offering in August 2003 of approximately $96.7 million. Net cash used in operating activities was $66.6 million in 2004 compared to $48.6 million in
2003 and $24.2 million in 2002. The increase in the use of cash in operating activities in 2004 is
principally due to funding a net loss of $69.6 million. The increase in cash needed to fund the
net loss is primarily attributable to expenditures for our ARISE Phase III clinical trial for
AGI-1067, our CART-2 Phase IIb clinical trial for AGI-1067, and our OSCAR Phase II clinical trial
for AGIX-4207, as well as other ongoing product development activities. For 2005 and 2006,
expenditures for the ARISE clinical trial are estimated to be approximately $57 million while
expenditures for CART-2 and OSCAR are essentially completed. We anticipate net cash usage in 2005
for ARISE and our other on going preclinical and clinical programs, as well as our other operating
activities, to be in a range of $85.0 million to $89.0 million. 30




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Net cash provided by investing activities was $27.1 million in 2004 compared to net cash used
in investing activities of $68.1 million in 2003 and $18.1 million provided by investing activities
in 2002. Net cash provided by investing activities consisted primarily of net sales of
available-for-sale securities, with the proceeds reinvested in interest-bearing cash equivalents.
Net cash used in investing activities consisted primarily of net purchases of available-for-sale
securities. Net cash provided by financing activities was $2.3 million in 2004 compared to $146.1 million
in 2003 and $1.2 million in 2002. Net cash provided by financing activities in 2004 consisted
primarily of the proceeds received upon exercise of common stock options. Net cash provided by
financing activities in 2003 consisted primarily of $48.4 million received from our follow-on stock
offering in February 2003 and $96.7 million received from our convertible debt offering in August
2003. Net cash provided by financing activities in 2002 consisted primarily of proceeds from an
equipment loan facility and 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. The borrowing period under the equipment loan facility, as modified,
expired on September 30, 2003. At December 31, 2004, there was an outstanding balance of
approximately $83,622 on the equipment loan facility and the weighted average interest rate was
7.5% per year. 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 $15.34 per share. Net proceeds were approximately
$96.7 million. As of December 31, 2004, we have recorded $1.5 million of accrued interest expense
related to the notes, which is due March 1, 2005. On January 12, 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 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 $193.5 million. We are using the net proceeds from the sale of the notes 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. The following table summarizes our long-term contractual obligations as of December 31, 2004: Payments Due by PeriodContractual
Obligations
    
    Total
    
    
    2005
    
    
    2006-2007
    
    
    2008-2009
    
    
    ThereafterOperating leases, net of sublease income
    
    $
    5,140,305
    
    
    $
    1,115,388
    
    
    $
    2,652,292
    
    
    $
    1,372,625
    
    
    $
    Long-term debt
    
    
    100,083,622
    
    
    
    83,622
    
    
    
    
    
    
    
    100,000,000
    
    
    
    Total contractual obligations
    
    $
    105,223,927
    
    
    $
    1,199,010
    
    
    $
    2,652,292
    
    
    $
    101,372,625
    
    
    $
    
 Based upon the current status of our product development and commercialization plans, we
believe that our existing cash and cash equivalents, along with the funds received from the 1.5%
convertible notes issued in January 2005, 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 31




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##### Table of Contents




    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. 
 Item 7A.Quantitative and Qualitative Disclosures about Market Risk The primary objective of our investment activities is to preserve principal while at the same
time maximizing the income we receive from our investments without significantly increasing risk.
Some of the securities that we invest in may have market risk. This means that a change in
prevailing interest rates may cause the fair value of the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the fair value of the principal
amount of our investment will probably decline. To minimize this risk in the future, we intend to
continue to maintain our portfolio of cash equivalents and short-term investments in a variety of
securities, including commercial paper, all of which have a minimum investment rating of A1/P1,
money market funds, and government and non-government debt securities. The average duration of all
of our investments has generally been less than one year. Due to the short-term nature of these
investments, we believe we have no material exposure to interest rate risk arising from our
investments. The following table summarizes the maturity of the debt and projected annual average interest
rates on our equipment loan facility and convertible notes as of December 31, 2004. Value as ofDecember 31,2005
    
    
    2006-2007
    
    
    2008-2009
    
    
    Total
    
    
    2004Long-term debt-fixed rateMaturity
    
    $
    83,622
    
    
    $
    
    
    
    $
    100,000,000
    
    
    $
    100,083,622
    
    
    $
    177,083,622Average interest rate
    
    
    7.5
    %
    
    
    
    
    
    
    4.5
    %
 32




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##### Table of Contents



Item 8.Financial Statements and Supplementary Data ATHEROGENICS, INC.
INDEX TO FINANCIAL STATEMENTS Contents Managements Annual Report on the Internal Control Over Financial Reporting
    
    
    34Report of Independent Registered Public Accounting Firm on Internal Control
    
    
    35Report of
Independent Registered Public Accounting Firm on Financial Statements
    
    
    36Balance Sheets
    
    
    37Statements of Operations
    
    
    38Statements of Shareholders (Deficit) Equity
    
    
    39Statements of Cash Flows
    
    
    40Notes to Financial Statements
    
    
    41
 33




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##### Table of Contents



MANAGEMENTS ANNUAL REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING Management of AtheroGenics, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended. AtheroGenics internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. AtheroGenics internal control over financial reporting
includes those policies and procedures that:  
    pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of AtheroGenics;
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of AtheroGenics are being made only in
accordance with authorizations of management and directors of AtheroGenics; and
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of AtheroGenics assets that could have a material
effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of AtheroGenics internal control over financial
reporting as of December 31, 2004. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment and those criteria, management believes that AtheroGenics maintained
effective internal control over financial reporting as of December 31, 2004. AtheroGenics independent registered public accounting firm has issued an attestation report
on managements assessment of AtheroGenics internal control over financial reporting which is
included herein. 34




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL The Board of Directors and Shareholders of AtheroGenics, Inc. We have audited managements
assessment, included in the accompanying Managements Annual
Report on Internal Control Over Financial Reporting, that AtheroGenics, Inc. maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). AtheroGenics, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal
control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that AtheroGenics, Inc. maintained effective internal
control over financial reporting as of December 31, 2004 is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, AtheroGenics, Inc. maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2004
based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of AtheroGenics, Inc. as of December 31, 2004
and 2003, and the related statements of operations, shareholders (deficit) equity and cash flows
for each of the three years in the period ended December 31, 2004 and our report dated March 16,
2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Atlanta, Georgia
March 16, 2005 35




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS The Board of Directors and Shareholders
AtheroGenics, Inc. We have audited the accompanying balance sheets of AtheroGenics, Inc. as of December 31, 2004
and 2003, and the related statements of operations, shareholders (deficit) equity and cash flows
for each of the three years in the period ended December 31, 2004. 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 of the Public Company Accounting
Oversight Board (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 AtheroGenics, Inc. at December 31, 2004 and 2003, and the
results of its operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of AtheroGenics, Inc.s internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 16, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Atlanta, Georgia
March 16, 2005 36




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ATHEROGENICS, INC.
BALANCE SHEETS December 31,2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,888,919
    
    
    $
    53,058,249Short-term investments
    
    
    51,035,096
    
    
    
    78,525,679Prepaid expenses
    
    
    2,634,297
    
    
    
    1,144,006Notes receivable and other current assets
    
    
    566,208
    
    
    
    496,871Total current assets
    
    
    70,124,520
    
    
    
    133,224,805Equipment and leasehold improvements, net of accumulated depreciation
and amortization
    
    
    1,940,011
    
    
    
    2,520,790Other assets
    
    
    2,397,796
    
    
    
    3,091,151Total assets
    
    $
    74,462,327
    
    
    $
    138,836,746Liabilities and Shareholders (Deficit) EquityCurrent liabilities:Accounts payable
    
    $
    2,838,053
    
    
    $
    1,778,187Accrued research and development
    
    
    4,083,894
    
    
    
    2,961,085Accrued liabilities
    
    
    2,159,893
    
    
    
    2,118,500Accrued compensation
    
    
    1,239,247
    
    
    
    1,038,907Current portion of equipment loan facility
    
    
    83,622
    
    
    
    479,439Total current liabilities
    
    
    10,404,709
    
    
    
    8,376,118Convertible notes payable
    
    
    100,000,000
    
    
    
    100,000,000Equipment loan facility, net of current portion
    
    
    
    
    
    
    83,622Shareholders (deficit) equity
Preferred stock, no par value: Authorized5,000,000 shares
    
    
    
    
    
    
    Common stock, no par value:Authorized100,000,000 shares; issued and outstanding 
37,368,658 and 36,763,407 shares at December 31, 2004
and 2003, respectively
    
    
    175,713,265
    
    
    
    172,452,536Warrants
    
    
    828,804
    
    
    
    950,588Deferred stock compensation
    
    
    (324,607
    )
    
    
    (505,708
    )Accumulated deficit
    
    
    (212,120,547
    )
    
    
    (142,531,315
    )Accumulated other comprehensive (loss) income
    
    
    (39,297
    )
    
    
    10,905Total shareholders (deficit) equity
    
    
    (35,942,382
    )
    
    
    30,377,006Total liabilities and shareholders (deficit) equity
    
    $
    74,462,327
    
    
    $
    138,836,746
 The accompanying notes are an integral part of these financial statements. 37




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##### Table of Contents



ATHEROGENICS, INC.
STATEMENTS OF OPERATIONS Year Ended December 31,2004
    
    
    2003
    
    
    2002Revenues
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses:Research and development
    
    
    59,235,833
    
    
    
    46,660,960
    
    
    
    23,746,127General and administrative
    
    
    6,607,506
    
    
    
    5,930,675
    
    
    
    5,139,000Total operating expenses
    
    
    65,843,339
    
    
    
    52,591,635
    
    
    
    28,885,127Operating loss
    
    
    (65,843,339
    )
    
    
    (52,591,635
    )
    
    
    (28,885,127
    )Interest and other income
    
    
    1,447,001
    
    
    
    1,258,216
    
    
    
    962,040Interest expense
    
    
    (5,192,894
    )
    
    
    (1,954,402
    )
    
    
    (42,420
    )Net loss
    
    $
    (69,589,232
    )
    
    $
    (53,287,821
    )
    
    $
    (27,965,507
    )Net loss per sharebasic and diluted
    
    $
    (1.88
    )
    
    $
    (1.49
    )
    
    $
    (1.00
    )Weighted average shares outstandingbasic and diluted
    
    
    37,070,235
    
    
    
    35,770,994
    
    
    
    27,978,705
 The accompanying notes are an integral part of these financial statements. 38




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##### Table of Contents



ATHEROGENICS, INC.
STATEMENTS OF SHAREHOLDERS (DEFICT) EQUITY AccumulatedDeferred
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    
    
    
    
    Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Warrants
    
    
    Compensation
    
    
    Deficit
    
    
    (Loss) Income
    
    
    (Deficit) EquityBalance at January 1, 2002
    
    
    27,834,773
    
    
    $
    121,723,102
    
    
    $
    771,713
    
    
    $
    (2,975,314
    )
    
    $
    (61,277,987
    )
    
    $
    53,298
    
    
    $
    58,294,812Issuance of common stock for exercise of stock options
at $.30 to $5.00 per share
    
    
    262,654
    
    
    
    240,524
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    240,524Issuance of common stock for exercise of warrants
    
    
    36,133
    
    
    
    78,637
    
    
    
    (78,637
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock compensation for re-measurement of
stock options related to a consulting agreement
    
    
    
    
    
    
    235,956
    
    
    
    
    
    
    
    (235,956
    )
    
    
    
    
    
    
    
    
    
    
    Adjustments to market value for variable stock options
and warrants issued to non-employees
    
    
    
    
    
    
    16,229
    
    
    
    105,000
    
    
    
    (121,229
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock compensation
    
    
    
    
    
    
    (111,841
    )
    
    
    
    
    
    
    2,088,713
    
    
    
    
    
    
    
    
    
    
    
    1,976,872Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,965,507
    )
    
    
    
    
    
    
    (27,965,507
    )Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,988
    )
    
    
    (52,988
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,018,495
    )Balance at December 31, 2002
    
    
    28,133,560
    
    
    
    122,182,607
    
    
    
    798,076
    
    
    
    (1,243,786
    )
    
    
    (89,243,494
    )
    
    
    310
    
    
    
    32,493,713Issuance of common stock for exercise of stock options
at $.30 to $8.25 per share
    
    
    340,395
    
    
    
    1,382,972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,382,972Issuance of common stock for exercise of warrants
    
    
    9,452
    
    
    
    150,400
    
    
    
    (150,400
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock, net of issuance
cost of $3,264,905
    
    
    8,280,000
    
    
    
    48,411,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,411,649Adjustments to market value for variable stock options
and warrants issued to non-employees
    
    
    
    
    
    
    324,908
    
    
    
    302,912
    
    
    
    (627,820
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,365,898
    
    
    
    
    
    
    
    
    
    
    
    1,365,898Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,287,821
    )
    
    
    
    
    
    
    (53,287,821
    )Unrealized gain on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,595
    
    
    
    10,595Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,277,226
    )Balance at December 31, 2003
    
    
    36,763,407
    
    
    
    172,452,536
    
    
    
    950,588
    
    
    
    (505,708
    )
    
    
    (142,531,315
    )
    
    
    10,905
    
    
    
    30,377,006Issuance of common stock for exercise of stock options
at $.30 to $16.52 per share
    
    
    495,265
    
    
    
    2,783,894
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,783,894Issuance of common stock for exercise of warrants
    
    
    109,986
    
    
    
    289,540
    
    
    
    (289,540
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustments to market value for variable stock options
and warrants issued to non-employees
    
    
    
    
    
    
    145,663
    
    
    
    167,756
    
    
    
    (313,419
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock compensation
    
    
    
    
    
    
    41,632
    
    
    
    
    
    
    
    494,520
    
    
    
    
    
    
    
    
    
    
    
    536,152Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,589,232
    )
    
    
    
    
    
    
    (69,589,232
    )Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,202
    )
    
    
    (50,202
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,639,434
    )Balance at December 31, 2004
    
    
    37,368,658
    
    
    $
    175,713,265
    
    
    $
    828,804
    
    
    $
    (324,607
    )
    
    $
    (212,120,547
    )
    
    $
    (39,297
    )
    
    $
    (35,942,382
    )
 The accompanying notes are an integral part of these financial statements. 39




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##### Table of Contents



ATHEROGENICS, INC.
STATEMENTS OF CASH FLOWS Year Ended December 31,2004
    
    
    2003
    
    
    2002Operating activitiesNet loss
    
    $
    (69,589,232
    )
    
    $
    (53,287,821
    )
    
    $
    (27,965,507
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    883,312
    
    
    
    839,503
    
    
    
    746,949Amortization of debt issuance costs
    
    
    652,981
    
    
    
    217,660
    
    
    
    Amortization of deferred stock compensation
    
    
    536,152
    
    
    
    1,365,898
    
    
    
    1,976,872Changes in operating assets and liabilities:Prepaid expenses
    
    
    (1,490,291
    )
    
    
    (977,011
    )
    
    
    23,679Notes receivable and other assets
    
    
    (28,963
    )
    
    
    (252,126
    )
    
    
    420,446Accounts payable
    
    
    1,059,866
    
    
    
    (181,108
    )
    
    
    837,745Accrued research and development
    
    
    1,122,809
    
    
    
    2,015,579
    
    
    
    (361,929
    )Accrued liabilities and compensation
    
    
    241,733
    
    
    
    1,611,006
    
    
    
    102,021Net cash used in operating activities
    
    
    (66,611,633
    )
    
    
    (48,648,420
    )
    
    
    (24,219,724
    )Investing activitiesSales and maturities of short-term investments
    
    
    103,984,437
    
    
    
    61,337,482
    
    
    
    37,336,165Purchases of short-term investments
    
    
    (76,544,056
    )
    
    
    (128,913,764
    )
    
    
    (18,570,010
    )Purchases of equipment and leasehold improvements
    
    
    (302,533
    )
    
    
    (535,026
    )
    
    
    (656,704
    )Net cash provided by (used in) investing activities
    
    
    27,137,848
    
    
    
    (68,111,308
    )
    
    
    18,109,451Financing activitiesProceeds from the exercise of common stock options
    
    
    2,783,894
    
    
    
    1,382,972
    
    
    
    240,524Proceeds from the convertible notes
    
    
    
    
    
    
    96,735,095
    
    
    
    Proceeds from the issuance of common stock
    
    
    
    
    
    
    48,411,649
    
    
    
    Proceeds from equipment loan facility
    
    
    
    
    
    
    
    
    
    
    1,258,473Payments on equipment loan facility and capital lease obligation
    
    
    (479,439
    )
    
    
    (444,068
    )
    
    
    (338,445
    )Net cash provided by financing activities
    
    
    2,304,455
    
    
    
    146,085,648
    
    
    
    1,160,552(Decrease) increase in cash and cash equivalents
    
    
    (37,169,330
    )
    
    
    29,325,920
    
    
    
    (4,949,721Cash and cash equivalents at beginning of year
    
    
    53,085,249
    
    
    
    23,732,329
    
    
    
    28,682,050Cash and cash equivalents at end of year
    
    $
    15,888,919
    
    
    $
    53,058,249
    
    
    $
    23,732,329Supplemental disclosures of cash flow informationInterest paid
    
    $
    4,676,472
    
    
    $
    61,844
    
    
    $
    50,689Re-measurement adjustment for variable options and warrants issued
for technology license agreements and consulting agreements
    
    $
    313,419
    
    
    $
    627,820
    
    
    $
    357,185
 The accompanying notes are an integral part of these financial statements. 40




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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 1. Description of Business and Significant Accounting Policies Description of Business 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, such as heart disease
(atherosclerosis), rheumatoid arthritis and asthma. Use of Estimates The
preparation of the financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from those
estimates. Reclassifications In order to present auction rate securities with short-term interest auction features as
short-term investments in accordance with Statement of Financial Accounting Standards (SFAS) No.
95, Statement of Cash Flowsand SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities(SFAS 115) for the fiscal year ended December 31, 2003 and 2002, $10,600,000 and
$8,400,000, respectively, was reclassified 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) equity. The effect of
the reclassification on cash flow was to decrease cash provided by
investing activities by $10,600,000 and $8,400,000 for the years ended
December 31, 2003 and 2002, respectively. Cash and Cash Equivalents AtheroGenics considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. AtheroGenics cash equivalents consist primarily of money
market accounts, commercial paper, government agency notes and corporate notes on deposit with
several financial institutions and the carrying amounts reported in the balance sheets approximate
their fair value. Short-Term Investments Short-term investments consist of government agency notes, corporate notes, commercial paper,
auction rate securities and certificates of deposit with original maturities when purchased greater
than three months. Management determines the appropriate classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date. These investments are
accounted for in accordance with SFAS 115. AtheroGenics has classified all investments as
available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of shareholders (deficit) equity.
Realized gains and losses are included in investment income and are determined on a specific
identification basis. Fair Value of Financial Instruments and Concentration of Credit Risk Financial instruments that subject AtheroGenics to concentration of credit risk consist
primarily of cash, cash equivalents and short-term investments. These assets are maintained by
reputable third-party financial institution custodians. The carrying values reported in the
balance sheets for cash, cash equivalents and short-term investments approximate fair values. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation of computer and lab
equipment is computed using the straight-line method over the estimated useful lives of three and
five years, respectively. Amortization of leasehold improvements is recorded over the shorter of:
(a) the estimated useful lives of the related assets; or (b) the lease term. 41




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Research and Development Accrual As part of the process of preparing its financial statements, AtheroGenics is required to
estimate expenses that it believes it has incurred, but has not yet been billed for. This
process involves identifying services and activities that have been performed by third-party
vendors on its behalf and estimating the level to which they have been performed and the associated
cost incurred for such service as of each balance sheet date in its financial statements. Examples
of expenses for which AtheroGenics accrues include fees for professional services, such as those
provided by certain clinical research organizations and investigators in conjunction with clinical
trials, and fees owed to contract manufacturers in conjunction with the manufacture of clinical
trial materials. AtheroGenics makes these estimates based upon progress of activities related to
contractual obligations and also information received from vendors. Research and Development and Patent Costs Research and development costs, including all related salaries, clinical trial expenses,
facility costs and expenditures related to obtaining patents, are charged to expense when incurred. Stock-Based Compensation AtheroGenics has elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees(APB 25), in accounting for its stock-based employee compensation
plans, rather than the alternative fair value accounting method provided for under SFAS No. 123,
Accounting for Stock-Based Compensation(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 an entitys accounting policy with respect to 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. 2004
    
    
    2003
    
    
    2002Net loss, as reported
    
    $
    (69,589,232
    )
    
    $
    (53,287,821
    )
    
    $
    (27,965,507
    )Add: Stock-based employee compensation expense included
in reported net loss
    
    
    57,511
    
    
    
    553,309
    
    
    
    1,495,249Deduct: Total stock-based employee compensation expense
determined under fair value based method for
all awards
    
    
    (6,125,770
    )
    
    
    (3,375,253
    )
    
    
    (3,441,554
    )Pro forma net loss
    
    $
    (75,657,491
    )
    
    $
    (56,109,765
    )
    
    $
    (29,911,812
    )Net loss per share:Basic and diluted, as reported
    
    $
    (1.88
    )
    
    $
    (1.49
    )
    
    $
    (1.00
    )Basic and diluted, pro forma
    
    $
    (2.04
    )
    
    $
    (1.57
    )
    
    $
    (1.07
    )
 42




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##### Table of Contents



The fair value for these options (which are granted with an exercise price equal to fair
market value on the grant date) was estimated using the Black-Scholes option valuation model with
the following assumptions: 2004
    
    
    2003
    
    
    2002Expected life
    
    5 years
    
    5 years
    
    5 yearsRisk free interest rate
    
    
    4.24
    %
    
    
    4.27
    %
    
    
    3.37
    %Volatility
    
    
    78.77
    %
    
    
    80.18
    %
    
    
    87.63
    %Weighted average fair value of grants
    
    $
    15.27
    
    
    $
    9.64
    
    
    $
    5.13
 Income Taxes The liability method is used in accounting for income taxes. Deferred income tax assets and
liabilities are determined based on differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are anticipated to reverse. Comprehensive Income AtheroGenics computes comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income(SFAS 130). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. Comprehensive income, as
defined, includes all changes in equity during a period from non-owner sources, such as unrealized
gains and losses on available-for-sale securities. Comprehensive loss was $69,639,434, $53,277,226
and $28,018,495 for the years ended December 31, 2004, 2003 and 2002, respectively. Recently Issued Accounting Standards In
December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment(SFAS 123(R)), which
revises SFAS 123 and supersedes 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 reporting period that begins after June 15,
2005. 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). 2. Short-Term Investments Short-term investments consist
of debt securities classified as available-for-sale and have
maturities greater than 90 days from the date of acquisition. AtheroGenics
has invested primarily in corporate notes and commercial paper, all of which have a minimum
investment rating of A1/P1, and government agency notes. AtheroGenics had no realized gains or
losses from the sale of investments for the years ended December 31, 2004 and 2003. The cumulative
unrealized (loss) gains were $(39,297) and $10,905 at December 31, 2004 and 2003, respectively.
The following table summarizes the estimated fair value of AtheroGenics short-term investments: December 31,2004
    
    
    2003Government agency notes
    
    $
    19,803,045
    
    
    $
    36,415,792Corporate notes
    
    
    10,751,955
    
    
    
    17,824,579Commercial paper
    
    
    9,939,363
    
    
    
    2,194,575Auction rate securities
    
    
    10,500,000
    
    
    
    22,050,000Certificate of deposit
    
    
    40,733
    
    
    
    40,733Total
    
    $
    51,035,096
    
    
    $
    78,525,679
 All available-for-sale securities held at December 31, 2004 will mature during 2005. 43




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3. Equipment and Leasehold Improvements Equipment and leasehold improvements consist of the following: December 31,2004
    
    
    2003Laboratory equipment
    
    $
    2,538,760
    
    
    $
    2,664,192Leasehold improvements
    
    
    1,563,084
    
    
    
    1,563,084Computer and office equipment
    
    
    1,479,392
    
    
    
    1,474,5995,581,236
    
    
    
    5,701,875Accumulated depreciation and amortization
    
    
    (3,641,225
    )
    
    
    (3,181,085
    )$
    1,940,011
    
    
    $
    2,520,790
 4. Convertible Notes Payable In August 2003, AtheroGenics issued $100,000,000 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 $96,700,000, after deducting expenses and
underwriters discounts and commissions. AtheroGenics recorded issuance costs related to the notes
of approximately $3,300,000. These costs are recorded as other assets and are being amortized to
interest expense over the five-year life of the notes. The 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 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. On January 12, 2005, AtheroGenics issued $200,000,000 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 $193,500,000, after deducting expenses and
underwriters discounts and commissions. 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. 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. In addition, as of
December 31, 2004, accrued liabilities included approximately $1,500,000 of accrued interest
related to the 4.5% convertible notes, which is due March 1, 2005. 5. Bank Credit Agreements In March 2002, AtheroGenics entered into an equipment loan facility with Silicon Valley Bank
for up to a maximum amount of $2,500,000 to be used to finance existing and new equipment
purchases. Amounts borrowed under the equipment loan facility are repaid in 33 equal installments
of principal and interest beginning on the first business day of the month following an advance.
As of December 31, 2004, there was an outstanding balance of $83,622 under the equipment loan
facility and the weighted average interest rate was 7.5% per year. The borrowing period for the
equipment loan facility expired in September 2003. In
connection with the equipment loan facility, AtheroGenics had granted to Silicon Valley
Bank a negative pledge on its intellectual property and a security
interest on deposits with Silicon Valley Bank and
its affiliates. In December 2003, AtheroGenics and Silicon Valley Bank terminated all security
interests other than the negative pledge in connection with the equipment loan facility. 44




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##### Table of Contents



Maturities of long-term debt as of December 31, 2004 are as follows: 2005
    
    $
    83,6222008
    
    
    100,000,000$
    100,083,622
 6. 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 payable were exercised. During all periods presented, AtheroGenics had securities outstanding which could potentially
dilute basic earnings per share in the future, but were excluded from the computation of diluted
net loss per share, as their effect would have been antidilutive. These outstanding securities
consist of the following at the dates indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002Shares underlying convertible notes
    
    
    6,518,904
    
    
    
    6,518,904
    
    
    
    Options
    
    
    4,955,801
    
    
    
    4,403,179
    
    
    
    3,895,420Warrants
    
    
    142,310
    
    
    
    267,622
    
    
    
    283,622Total
    
    
    11,617,015
    
    
    
    11,189,705
    
    
    
    4,179,042Conversion price of shares underlying convertible notes
    
    $
    15.34
    
    
    $
    15.34
    
    
    $
    Weighted average exercise price of options
    
    $
    10.20
    
    
    $
    6.27
    
    
    $
    4.06Weighted average exercise price of warrants
    
    $
    4.78
    
    
    $
    4.32
    
    
    $
    4.41
 Because AtheroGenics reported a net loss for all periods presented, shares associated with
stock options, warrants and the convertible notes are not included because they are antidilutive.
Basic and diluted net loss per share amounts are the same for the periods presented. 7. Common Stock In November 2001, AtheroGenics Board of Directors adopted a Shareholder Rights Plan declaring
a dividend distribution of one common stock purchase right on each outstanding share of its common
stock. Until the rights become exercisable, the rights will trade automatically with the common
stock of AtheroGenics and separate rights certificates will not be issued. Under the rights plan,
each right consists of an initial right and subsequent rights. Initial rights will be exercisable
only if a person or group acquires 15% or more of AtheroGenics common stock, whether through open
market or private purchases or consummation of a tender or exchange offer. Any shareholders who
owned, as of November 9, 2001, in excess of 17% of AtheroGenics common stock will be permitted to
acquire up to an aggregate of 20% of AtheroGenics outstanding common stock without triggering the
rights plan. If, following the exercise of initial rights, a person or group again acquires 15% or
more of AtheroGenics common stock, or a person or group who had previously acquired 15% or more of
AtheroGenics common stock acquires an additional 10% or more of the common stock, the subsequent
rights become exercisable. Each right will initially entitle shareholders to buy eight shares of
common stock at an exercise price equal to 20% of the then current market value of the common
stock, calculated and adjusted according to the terms of the rights plan. The number of shares
that can be purchased upon exercise will increase as the number of shares held by the bidder
increases. If AtheroGenics is acquired in a merger or other business combination, each right will entitle
its holder to purchase, at the rights then-current exercise price, a number of the acquiring
companys shares equal in value to those obtainable if the rights were exercisable in AtheroGenics
common stock. The rights are intended to enable all shareholders to realize the long-term value of their
investment in AtheroGenics. They will not prevent a takeover, but should encourage anyone seeking
to acquire AtheroGenics to negotiate with the Board of Directors prior to attempting a takeover.
The Board of Directors may redeem any non-exercisable rights at any time at its option at a
redemption price of $.0001 per right. The rights plan expires at the close of business on November
8, 2011. 45




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##### Table of Contents



In February 2003, AtheroGenics completed a public offering of 8,280,000 shares of common stock
(including the exercise of the underwriters over-allotment option) that raised net proceeds of
approximately $48,400,000. 8. Stock Options and Warrants During 1995, AtheroGenics established a stock option plan (the 1995 Plan) which, as amended,
provides that options to purchase AtheroGenics common stock may be granted to employees,
directors, consultants or contractors with exercise prices not less than 75% of the fair values of
the shares on the dates of grant. The 1995 Plan, as amended, authorizes the grant of options for up to 1,264,084 shares of
AtheroGenics common stock, and as of December 31, 2004, AtheroGenics had reserved 227,800 shares
of common stock for future issuance under the 1995 Plan. Options granted under the 1995 Plan vest
over periods ranging from the date of grant to five years from that date. During 1997, AtheroGenics established an equity ownership plan (the 1997 Plan) whereby
options to purchase AtheroGenics common stock may be granted to employees, directors, consultants
or contractors with exercise prices not less than the fair value of the shares on the dates of
grant. The 1997 Plan, as amended, authorizes the grant of options for up to 3,724,416 shares of
AtheroGenics common stock. As of December 31, 2004, AtheroGenics had reserved 1,897,433 shares of
common stock for issuance under the 1997 Plan. The 1997 Plan allows for grants of non-qualified
options, incentive stock options and shares of restricted stock. Non-qualified options granted
under the 1997 Plan may vest immediately for non-employees, but vest over a four-year period for
employees. Incentive stock options generally vest over four years. The majority of the stock
options granted under the 1997 Plan are incentive stock options. During 2001, AtheroGenics established an equity ownership plan (the 2001 Plan) whereby
options to purchase AtheroGenics common stock may be granted to employees, directors, consultants
or contractors with exercise prices not less than the fair value of the shares on the dates of
grant. The 2001 Plan authorizes the grant of options for up to 2,000,000 shares of AtheroGenics
common stock. As of December 31, 2004, AtheroGenics had reserved 1,874,585 shares of common stock
for issuance under the 2001 Plan. The terms of the 2001 Plan are substantially similar to the
terms of the 1997 Plan. Effective April 28, 2004, AtheroGenics established an equity ownership plan (the 2004 Plan)
whereby options to purchase AtheroGenics common stock may be granted to employees, directors,
consultants or contractors with exercise prices not less than the fair value of the shares on the
dates of grant. The 2004 Plan authorizes the grant of options for up to 4,500,000 shares of
AtheroGenics common stock. As of December 31, 2004, AtheroGenics had reserved 4,500,000 shares of
common stock for issuance under the 2004 Plan. The terms of the 2004 Plan are substantially
similar to the terms of the 2001 Plan and the 1997 Plan. A summary of stock option activity under the 1995 Plan, the 1997 Plan, the 2001 Plan and the
2004 Plan follows: WeightedNumber of
    
    
    
    
    
    
    AverageShares
    
    
    Price Range
    
    
    PriceOutstanding at January 1, 2002
    
    
    3,360,660
    
    
    $
    .10-$9.88
    
    
    $
    2.99Granted
    
    
    1,048,380
    
    
    
    6.10 - 7.85
    
    
    
    7.18Exercised
    
    
    (262,654
    )
    
    
    .30 - 5.30
    
    
    
    .92Canceled
    
    
    (250,966
    )
    
    
    .31 - 9.88
    
    
    
    5.97Outstanding at December 31, 2002
    
    
    3,895,420
    
    
    
    .10 - 9.88
    
    
    
    4.06Granted
    
    
    986,983
    
    
    
    7.55 - 16.65
    
    
    
    14.40Exercised
    
    
    (340,395
    )
    
    
    .30 - 8.25
    
    
    
    4.06Canceled
    
    
    (138,829
    )
    
    
    .31 - 14.51
    
    
    
    7.68Outstanding at December 31, 2003
    
    
    4,403,179
    
    
    
    .10 - 16.65
    
    
    
    6.27Granted
    
    
    1,166,125
    
    
    
    14.38 - 32.95
    
    
    
    23.16Exercised
    
    
    (496,908
    )
    
    
    .30 - 16.52
    
    
    
    5.72Canceled
    
    
    (116,595
    )
    
    
    4.53 - 14.93
    
    
    
    10.23Outstanding at December 31, 2004
    
    
    4,955,801
    
    
    $
    .10-$32.95
    
    
    $
    10.20
 The following table summarizes information concerning currently outstanding and exercisable
options granted under the 1995 Plan, the 1997 Plan, the 2001 Plan and the 2004 Plan as of December
31, 2004. 46




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##### Table of Contents



Options Outstanding
    
    Options ExercisableNumber
    
    Weighted Average
    
    Weighted Average
    
    Number
    
    Weighted AverageExercise Price
    
    Outstanding
    
    Remaining Years
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$.10-.38
    
    
    1,353,015
    
    
    
    4.11
    
    
    $
    .31
    
    
    
    1,353,015
    
    
    $
    .314.37-7.41
    
    
    1,425,865
    
    
    
    7.23
    
    
    
    6.51
    
    
    
    924,087
    
    
    
    6.307.55-14.93
    
    
    1,008,796
    
    
    
    8.62
    
    
    
    13.66
    
    
    
    358,563
    
    
    
    12.1816.52-23.56
    
    
    1,034,125
    
    
    
    9.85
    
    
    
    22.83
    
    
    
    4,795
    
    
    
    16.5725.30-32.95
    
    
    134,000
    
    
    
    9.37
    
    
    
    25.86
    
    
    
    80,000
    
    
    
    25.30.10-32.95
    
    
    4,955,801
    
    
    
    7.27
    
    
    
    10.20
    
    
    
    2,720,460
    
    
    
    4.67
 In 1999 and 2000, in connection with the grant of certain options to employees, AtheroGenics
recorded non-cash deferred stock compensation of $13,989,088, representing the difference between
the exercise price and the deemed fair value of AtheroGenics common stock on the dates these stock
options were granted. Deferred stock compensation is included as a reduction of shareholders
(deficit) equity and is being amortized to expense using the graded vesting method. The graded
vesting method provides for vesting of each portion of the overall award over its respective
vesting period, and results in higher vesting in earlier years than straight-line vesting. During
2004, 2003 and 2002, AtheroGenics recorded amortization of deferred stock compensation for these
options of $57,511, $553,309 and $1,495,249, respectively. In June 2001, in connection with the grant of certain warrants as part of a licensing
agreement with National Jewish Medical and Research Center and options granted for the addition of
new members to the Scientific Advisory Board, AtheroGenics recorded non-cash deferred stock
compensation of $1,092,200. In August 2002, in connection with the modification of certain options
held by an employee who changed his status to become a consultant, AtheroGenics recorded non-cash
deferred stock compensation of $235,956. In December 2004, in connection with the modification of
certain options held by an employee who changed his status to become a consultant, AtheroGenics
recorded non-cash deferred stock compensation of $18,685. The fair value of the warrants and
options for purposes of these calculations was determined by using the Black-Scholes model. These
amounts are included as a reduction of shareholders (deficit) equity and are being amortized over
the vesting periods of the individual warrants and options. The amortization period is five years,
using the graded vesting method, for National Jewish and one year, using the straight-line method,
for the consultants. During 2004, 2003 and 2002, an additional $313,419, $627,820 and $357,185,
respectively, of non-cash deferred stock compensation was recorded due to re-measurement of the
fair value of the options and warrants at each measurement date. During 2004, 2003 and 2002,
AtheroGenics recorded a total of $478,641, $812,589 and $481,623, respectively, of amortization of
deferred stock compensation for these options and warrants. At December 31, 2004, 68,000 shares of
common stock were reserved for issuance upon the exercise of these outstanding warrants. At December 31, 2004, AtheroGenics had a total of $324,607 remaining to be amortized over the
vesting periods of all of the option and warrant grants discussed above. This amortization will
approximate $252,000 in 2005 and $73,000 in 2006. During 2002, 13,200 shares were forfeited and
deferred stock compensation was decreased by $111,841. 9. Employee Benefit Plan AtheroGenics has a defined contribution plan covering eligible employees, which is qualified
under Section 401(k) of the Internal Revenue Code (IRC). Under the provisions of the plan,
eligible participating employees may elect to contribute up to the maximum amount of tax deferred
contribution allowed by the IRC. AtheroGenics may make a discretionary contribution. During 2004,
AtheroGenics matched 50% of employees contributions, up to a maximum of 6% of the employees
annual base compensation. AtheroGenics contribution to the plan for 2004, 2003 and 2002 aggregated
$204,094, $161,576 and $129,503, respectively. AtheroGenics stock is not an eligible investment
under this plan. 47




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##### Table of Contents



10. Income Taxes At December 31, 2004, AtheroGenics had net operating loss carryforwards and research and
development credit carryforwards of $205,886,593 and $6,366,269, respectively, for income tax
purposes, which both begin to expire in 2010. The significant components of the deferred tax assets
are: December 31,2004
    
    
    2003Net operating loss carryforwards
    
    $
    78,154,551
    
    
    $
    49,198,787Deferred stock compensation
    
    
    3,075,991
    
    
    
    4,374,216Research credits
    
    
    6,366,269
    
    
    
    4,010,990Other
    
    
    194,803
    
    
    
    240,266Total deferred tax assets
    
    
    87,791,614
    
    
    
    57,824,259Valuation allowance
    
    
    (87,791,614
    )
    
    
    (57,824,259
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 Because of AtheroGenics lack of earnings history, the deferred tax assets have been fully
offset by a valuation allowance. The valuation allowance increased $29,967,355 and $22,372,603 in
2004 and 2003, respectively, due to the change in net cumulative tax differences and the excess tax
benefit from disqualifying dispositions of incentive stock options. AtheroGenics net operating loss carryforwards and research and development credit
carryforwards may be subject to certain IRC Section 382 and Section 383 limitations on annual
utilization in the event of changes in ownership. These limitations could significantly reduce the
amount of the net operating loss carryforwards available in the future. The utilization of the
carryforwards is dependent upon the timing and extent of our future profitability. The annual
limitations combined with the expiration dates of the carryforwards may prevent the utilization of
all of the net operating loss and research and development credit carryforwards if we do not attain
sufficient profitability by the expiration dates of the carryforwards. 11. Commitments and Contingencies On June 19, 1998, AtheroGenics entered into a 10-year operating lease for office and
laboratory space through March 1, 2009. Monthly lease payments of approximately $89,400 began March
2, 1999, the date occupancy commenced. These payments are subject to increases during each
successive 12-month period based on changes in the Consumer Price Index (CPI). Future increases
in monthly lease payments due to increases in the CPI are considered to be contingent rentals, and,
therefore, will be charged to expense over the lease term as they become payable. AtheroGenics may
extend the lease term for two successive five-year periods. AtheroGenics other operating lease
obligations are not significant. At December 31, 2004, AtheroGenics minimum aggregate commitments (net of sublease income)
under long-term, non-cancelable operating leases are as follows: SubleaseGross
    
    
    Income
    
    
    Net2005
    
    $
    1,315,874
    
    
    $
    200,486
    
    
    $
    1,115,3882006
    
    
    1,334,435
    
    
    
    
    
    
    
    1,334,4352007
    
    
    1,317,857
    
    
    
    
    
    
    
    1,317,8572008
    
    
    1,176,536
    
    
    
    
    
    
    
    1,176,5362009
    
    
    196,089
    
    
    
    
    
    
    
    196,089Thereafter
    
    
    
    
    
    
    
    
    
    
    $
    5,340,791
    
    
    $
    200,486
    
    
    $
    5,140,305
 Net rent expense under operating leases amounted to $1,050,333, $1,026,495 and $984,043 in
2004, 2003 and 2002, respectively. 48




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##### Table of Contents



In July 2004, AtheroGenics signed a term sheet with a contract manufacturer under which it
purchased a portion of its clinical supply requirements. The term sheet includes contingent future
payments and royalties. The potential financial obligations are not considered to be material. 12. Related Party Transactions AtheroGenics has a sublease agreement for a portion of its office and laboratory space with
Inhibitex, Inc. The monthly lease payments are approximately $16,700. The lease term ends on
December 31, 2005. The President and Chief Executive Officer of AtheroGenics and the Chairman of
AtheroGenics Board of Directors are both members of the Inhibitex, Inc. Board of Directors. AtheroGenics had a sublease agreement for a portion of its office space with ATV Management
Corp. Monthly lease payments were approximately $3,500. The lease term ended in December 2004.
The Chairman of the Board of Directors of AtheroGenics is the President and sole shareholder of ATV
Management Corp. 13.  Subsequent
Events 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 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. 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, two plaintiffs simultaneously moved for appointment as lead
plaintiffs in both districts on March 7, 2005. 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. 14.  Quarterly Results of Operations (Unaudited) The following is a summary of the unaudited quarterly results of operations: Year Ended December 31, 20041stQuarter
    
    
    2ndQuarter
    
    
    3rdQuarter
    
    
    4thQuarterNet revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating loss
    
    
    (15,680,847
    )
    
    
    (15,597,955
    )
    
    
    (18,046,883
    )
    
    
    (16,517,654
    )Net loss
    
    
    (16,602,700
    )
    
    
    (16,525,159
    )
    
    
    (19,003,116
    )
    
    
    (17,458,257
    )Net loss per share data:Basic and diluted
    
    
    (0.45
    )
    
    
    (0.45
    )
    
    
    (0.51
    )
    
    
    (0.47
    )
 Year Ended December 31, 20031stQuarter
    
    
    2ndQuarter
    
    
    3rdQuarter
    
    
    4thQuarterNet revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating loss
    
    
    (11,672,363
    )
    
    
    (12,542,414
    )
    
    
    (13,461,425
    )
    
    
    (14,915,433
    )Net loss
    
    
    (11,494,701
    )
    
    
    (12,335,978
    )
    
    
    (13,636,617
    )
    
    
    (15,820,525
    )Net loss per share data:Basic and diluted
    
    
    (0.35
    )
    
    
    (0.34
    )
    
    
    (0.37
    )
    
    
    (0.43
    )
 Because of the method used in calculating per share data, the quarterly per share data will
not necessarily add to the per share data as computed for the year. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A.Controls and Procedures Managements annual report on internal control over financial reporting.Section 404 of the
Sarbanes-Oxley Act of 2002 requires management to include in this Annual Report on Form 10-K a
report on managements assessment of the effectiveness of our internal control over financial
reporting, as well as an attestation report from our independent registered public accounting firm
on managements assessment of the effectiveness of our internal control over financial reporting.
Managements annual report on internal control over financial reporting and the related attestation
report from our independent registered public accounting firm are located herein and are
incorporated herein by reference. 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 49




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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 adequate and effective in timely
alerting them to material information relating to us required to be included in our periodic SEC
filings. Changes in internal control over financial reporting.There were no material 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. 
 Item 9B.Other Information On
December 22, 2005, AtheroGenics board of directors, based on the
recommendation of the
compensation committee, granted our executive officers options to acquire
shares of our common
stock under the AtheroGenics, Inc. 2004 Equity Ownership Plan. The option
grants are effective as
of December 31, 2004 and have an exercise price equal to the fair
market value on that date of $23.56 per share. The options vest
at a rate of 25 percent on the anniversary of the date of grant, and following that date, the
remaining options vest at a rate of approximately two percent per month over the next 36 months.
The option grants expire December 31, 2014. The following is a summary of the option grants: Name
    
    Title
    
    Number of SharesRussell M. Medford, M.D., Ph.D.
    
    Chief Executive Officer and President
    
    
    140,000Mark P. Colonnese
    
    Senor Vice President of Finance and Administration
and Chief Financial Officer
    
    
    60,000Robert A. D. Scott, M.D.
    
    Senior Vice President of Clinical Development and
Regulatory Affairs and Chief Medical Officer
    
    
    60,000Martin A. Wasserman, Ph.D.
    
    Senior Vice President of Discovery Research
and Chief Scientific Officer
    
    
    54,000W. Charles Montgomery, Ph.D.
    
    Vice President of Business Development
    
    
    50,000
 The
form of option agreement for these grants is attached as Exhibit
10.33 to this report. 
 PART III Item 10.Directors and Executive Officers of the Registrant We have set forth information relating to the directors and executive officers and compliance
with Section 16(a) of the Securities Exchange Act of 1934 under the captions Nominees, Executive
Officers and Directors, Board Meetings and Committees and Section 16(a) Beneficial Ownership
Reporting Compliance, respectively, in our proxy statement for our 2005 annual meeting of
shareholders to be held on April 27, 2005. We are incorporating this information by reference in
this Form 10-K. Our definitive proxy statement will be filed with the Securities and Exchange
Commission no later than 120 days after December 31, 2004. Code of Ethics We have adopted a code of business conduct and ethics for directors, officers and employees,
including our principal executive officer and principal financial officer, known as the
AtheroGenics, Inc. Code of Business Conduct and Ethics. Shareholders may request a free copy from:  AtheroGenics, Inc.
Attention: Investor Relations
8995 Westside Parkway
Alpharetta, Georgia 30004
(678) 336-2500
http://www.investor@atherogenics.com 
 Item 11.Executive Compensation We have set forth information relating to executive compensation under the captions Director
Compensation, Executive Compensation, Employment Agreements and Compensation Committee
Interlocks and Insider Participation in the proxy statement referred to in Item 10 above. We are
incorporating this information by reference in this Form 10-K. 50




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Item 12.Security Ownership of Certain Beneficial Owners and Management We have set forth information relating to ownership of our common stock by certain persons and
to our equity compensation plans under the captions Security Ownership of Certain Beneficial
Owners and Management and Equity Compensation Plan Information, respectively, in the proxy
statement referred to in Item 10 above. We are incorporating this information by reference in this
Form 10-K. 
 Item 13.Certain Relationships and Related Transactions We have set forth information relating to existing or proposed relationships or transactions
between us and certain of our affiliates under the caption Certain Relationships and Related
Transactions in the proxy statement referred to in Item 10 above. We are incorporating this
information by reference in this Form 10-K. 
 Item 14.Principal Accountant Fees and Services We have set forth information relating to our principal accountant fees and services under the
caption Principal Accountant Fees and Services in the proxy statement referred to in Item 10
above. We are incorporating this information by reference in this Form 10-K. 
 PART IV Item 15.Exhibits and Financial Statement Schedules  (1)
    Financial Statements, filed as part of this report  Report of Independent Registered Public Accounting FirmBalance Sheets as of December 31, 2004 and 2003Statements of Operations for the years ended December 31, 2004, 2003 and 2002Statements Shareholders (Deficit) Equity for the years ended December 31, 2004, 2003 and 2002Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002Notes to Financial Statements  (2)
    Financial Statement Schedules  No financial statement schedules are provided, because the information called for
is not required or is shown either in the financial statements or the notes
thereto.  (3)
    Listing of Exhibits Exhibit No.
    
    
    
    Description3.01**
    
    
    
    Form of Fourth Amended and Restated Articles of Incorporation of AtheroGenics, Inc.3.02**
    
    
    
    Form of Third Amended and Restated Bylaws of AtheroGenics, Inc., as amended.4.01**
    
    
    
    Form of Common Stock Certificate.4.02**
    
    
    
    Amended and Restated Master Rights Agreement dated October 31, 1995, as amended by First
Amendment dated November 1, 1995; Second Amendment dated July 30, 1996; Third Amendment
dated April 13, 1999; Fourth Amendment dated May 11, 1999; and Fifth Amendment dated
August 30, 1999.4.03**
    
    
    
    Applicable provisions of Fourth Amended and Restated Articles of Incorporation and Third
Amended and Restated Bylaws of AtheroGenics, Inc. (incorporated by reference to Exhibits
3.01 and 3.02).
 51




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##### Table of Contents



Exhibit No.
    
    
    
    Description4.04
    
    
    
    Rights Agreement dated as of November 9, 2001 between AtheroGenics, Inc. and American
Stock Transfer & Trust Company, as Rights Agent (filed as an exhibit of the same number
with AtheroGenics Form 8-K on October 9, 2001 and incorporated herein by reference).10.02**+
    
    
    
    Exclusive License Agreement dated July 17, 1998 between The Regents of the University of
California and AtheroGenics, Inc.10.03**+
    
    
    
    License Agreement dated January 11, 1995 between Emory University and AtheroGenics, Inc.10.04**+
    
    
    
    Patent Purchase Agreement dated April 26, 1995 between AtheroGenics, Inc. and Sampath
Parthasarathy, together with Services Agreement dated April 26, 1995 between AtheroGenics,
Inc. and Sampath Parthasarathy.10.05**+
    
    
    
    Sponsored Research Agreement dated October 14, 1996 between Emory University and
AtheroGenics, Inc.10.07**#
    
    
    
    AtheroGenics, Inc. 1995 Stock Option Plan, together with form of nonqualified stock option
agreement.10.08**#
    
    
    
    AtheroGenics, Inc. 1997 Equity Ownership Plan, as amended by Amendment No. 1 and Amendment
No. 2.10.09**
    
    
    
    Preferred Shares Purchase Warrant dated August 24, 1998 between AtheroGenics, Inc. and
certain Lenders named therein.10.10**
    
    
    
    Series C Convertible Preferred Stock Purchase Warrants of AtheroGenics, Inc.10.11**
    
    
    
    Promissory Note dated April 1, 1999 between Inhibitex, Inc. and AtheroGenics, Inc.10.12**++
    
    
    
    Lease Agreement dated June 19, 1998 between Cousins Properties, Inc. and AtheroGenics, Inc.10.14#
    
    
    
    Employment Agreement dated March 1, 2001 between AtheroGenics, Inc. and Russell M. Medford
(filed as an exhibit of the same number with AtheroGenics Annual Report on Form 10-K for
the year ended December 31, 2000, and incorporated herein by reference).10.15
    
    
    
    Amendment dated January 1, 2001 to Promissory Note dated April 1, 1999 between Inhibitex,
Inc. and AtheroGenics, Inc. (filed as an exhibit of the same number with AtheroGenics
Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein
by reference).10.16
    
    
    
    Form of Common Stock Purchase Agreement dated as of June 19, 2001 between AtheroGenics,
Inc. and the Purchasers named therein (filed as an exhibit of the same number with
AtheroGenics Registration Statement on Form S-1, Registration No. 333-64228, on July 23,
2001 and incorporated herein by reference).10.17+
    
    
    
    Exclusive License Agreement dated as of June 29, 2001 between AtheroGenics, Inc. and
National Jewish Medical and Research Center (filed as an exhibit with the same number with
Amendment No. 1 to AtheroGenics Registration Statement on Form S-1, Registration No.
333-64228, on June 29, 2001 and incorporated herein by reference).10.18#
    
    
    
    AtheroGenics, Inc. 2001 Equity Ownership Plan (filed as Appendix B to the proxy statement
for AtheroGenics 2001 Annual Shareholders Meeting as filed on March 22, 2001 and
incorporated herein by reference).10.20(a)
    
    
    
    Revolving Promissory Note dated March 6, 2002 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as an exhibit of the same number to AtheroGenics Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference).10.20(b)
    
    
    
    Equipment Term Note dated March 6, 2002 between AtheroGenics, Inc. and Silicon Valley Bank
(filed as an exhibit of the same number to AtheroGenics Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 and incorporated herein by reference).10.20(c)
    
    
    
    Loan and Security Agreement dated March 6, 2002 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as an exhibit of the same number to AtheroGenics Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference).10.20(d)
    
    
    
    Negative Pledge Agreement dated March 6, 2002 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as an exhibit of the same number to AtheroGenics Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference).10.21#
    
    
    
    Promissory Note and Stock Pledge Agreement dated as of April 15, 2002 between
AtheroGenics, Inc. and Mark P. Colonnese (filed as Exhibit 10.21 to AtheroGenics
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein
by reference).
 52




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Exhibit No.
    
    
    
    Description10.22#
    
    
    
    Separation and Consulting Agreement and General Release dated as of October 3, 2002
between AtheroGenics, Inc. and Mitchell Glass, M.D. (filed as Exhibit 10.22 to
AtheroGenics Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference).10.23
    
    
    
    First Loan Modification dated June 20, 2003 between AtheroGenics, Inc. and Silicon Valley
Bank.
(filed as an exhibit of the same number to AtheroGenics Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003 and incorporated herein by reference).10.24
    
    
    
    Purchase Agreement dated August 19, 2003 between AtheroGenics, Inc. and the Initial
Purchasers named therein (filed as an exhibit of the same number to AtheroGenics
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated
herein by reference).10.25
    
    
    
    Second Loan Modification dated August 13, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank.10.26
    
    
    
    Third Loan Modification dated December 29, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank.10.27
    
    
    
    Negative Pledge Agreement dated December 29, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank.10.28#
    
    
    
    Employment Agreement dated December 22, 2004 between AtheroGenics, Inc. and Mark P.
Colonnese.10.29#
    
    
    
    Employment Agreement dated December 22, 2004 between AtheroGenics, Inc. and Martin A.
Wasserman.10.30#
    
    
    
    Employment Agreement dated December 22, 2004 between AtheroGenics, Inc. and Robert A. D.
Scott.10.31#
    
    
    
    Employment Agreement dated December 22, 2004 between AtheroGenics, Inc. and W. Charles
Montgomery.10.32#
    
    
    
    AtheroGenics, Inc. 2004 Equity Ownership Plan (filed as Appendix B to the proxy statement
for AtheroGenics 2004 Annual Shareholders Meeting as filed on March 26, 2004 and
incorporated herein by reference).10.33*#
    
    
    
    AtheroGenics, Inc. 2004 Equity Ownership Plan form of incentive equity ownership
agreement and form of directors
nonqualified equity ownership agreement.23.01*
    
    
    
    Consent of Ernst & Young LLP.24.01*
    
    
    
    Powers of Attorney.31.1*
    
    
    
    Certifications of Chief Executive Officer under Rule 13a-14(a).31.2*
    
    
    
    Certifications of Chief Financial Officer under Rule 13a-14(a).32*
    
    
    
    Certifications of Chief Executive Officer and Chief Financial Officer under Section 1350.
   *
    
    Filed herewith.**
    
    Filed as the exhibit of the same number with AtheroGenics registration statement on Form
S-1, Registration No. 333-31140, declared effective by the SEC on August 8, 2000, and
incorporated herein by reference.+
    
    Certain confidential information contained in this document has been
omitted and filed separately with the Commission pursuant to a request
for confidential treatment under Rule 406 of the Securities Act of
1933, as amended.++
    
    We agree to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to this agreement upon request by the
Commission.#
    
    Management contract or compensatory plan or arrangement. 53




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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, on March 16, 2005. ATHEROGENICS, INC.By:
    /s/ RUSSELL M. MEDFORDRussell M. Medford, M.D., Ph.D.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. Name
    
    Title
    
    DatePrincipal Executive Officer:/s/ RUSSELL M. MEDFORD
Russell M. Medford
    
    President and Chief Executive
Officer, Director
    
    March 16, 2005Principal Financial and PrincipalAccounting Officer:/s/ MARK P. COLONNESE
Mark P. Colonnese
    
    Senior Vice President of Finance
and Administration and Chief
Financial Officer
    
    March 16, 2005Additional Directors:*
Michael A. Henos
    
    Director
    
    March 16, 2005*
R. Wayne Alexander
    
    Director
    
    March 16, 2005*
David Bearman
    
    Director
    
    March 16, 2005*
Vaughn D. Bryson
    
    Director
    
    March 16, 2005*
T. Forcht Dagi
    
    Director
    
    March 16, 2005*
Arthur M. Pappas
    
    Director
    
    March 16, 2005*
William A. Scott
    
    Director
    
    March 16, 2005*
Stephen G. Sudovar
    
    Director
    
    March 16, 2005*By: /s/ MARK P. COLONNESE
Mark P. Colonnese
Attorney-in-fact
 54