<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 2000
REGISTRATION NO. 333-31140
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
ATHEROGENICS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
GEORGIA 2834 58-2108232
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
8995 WESTSIDE PARKWAY
ALPHARETTA, GEORGIA 30004
(678) 336-2500
(Address, including zip code, and telephone number,including area code,
of Registrant's principal executive offices)
---------------------------
RUSSELL M. MEDFORD, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ATHEROGENICS, INC.
8995 WESTSIDE PARKWAY
ALPHARETTA, GEORGIA 30004
(678) 336-2500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------
Copies to:
<TABLE>
<S> <C>
LEONARD A. SILVERSTEIN, ESQ. ALAN L. JAKIMO, ESQ.
LONG ALDRIDGE & NORMAN LLP BROWN & WOOD LLP
SUNTRUST PLAZA, SUITE 5300 ONE WORLD TRADE CENTER, 58TH FLOOR
303 PEACHTREE STREET NEW YORK, NEW YORK 10048
ATLANTA, GEORGIA 30308-3201 (212) 839-5300
(404) 527-4000
</TABLE>
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 14, 2000
PROSPECTUS
6,000,000 SHARES
(ATHEROGENICS LOGO)
COMMON STOCK
This is an initial public offering of common stock by AtheroGenics, Inc.
AtheroGenics is selling 6,000,000 shares of common stock. The estimated initial
public offering price will be between $11.00 and $13.00 per share.
------------------------
Prior to this offering, there has been no public market for our common
stock. We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol AGIX.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- -----------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to AtheroGenics, before expenses................... $ $
</TABLE>
AtheroGenics has granted the underwriters the right to purchase up to
900,000 additional shares of common stock to cover over-allotments.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
ROBERTSON STEPHENS
ADAMS, HARKNESS & HILL, INC.
A.G. EDWARDS & SONS, INC.
, 2000
<PAGE> 3
Inside Cover Illustration:
This four-color image/copy will appear on the inside front cover of the
prospectus. The image/copy will depict the inflammatory diseases which
AtheroGenics' v-protectant technology targets in the context of the organs of
the body affected by these diseases. The image will include a full human body
with the following organ (disease) call-outs:
- Lungs (Asthma)
- Kidneys (Solid organ transplant rejection)
- Heart (Restenosis)
- Carotid artery (Atherosclerosis)
- Knee joints (Rheumatoid Arthritis)
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 26
Management.................................................. 42
Certain Transactions........................................ 50
Principal Shareholders...................................... 52
Description of Capital Stock................................ 55
Shares Eligible for Future Sale............................. 58
Underwriting................................................ 60
Legal Matters............................................... 61
Experts..................................................... 62
Where You Can Find Additional Information................... 62
Financial Statements........................................ F-1
</TABLE>
2
<PAGE> 5
PROSPECTUS SUMMARY
The following is only a summary. You should carefully read the more
detailed information contained in this prospectus, including our financial
statements and related notes included in this prospectus. Our business involves
significant risks. You should carefully consider the information under the
heading "Risk Factors" beginning on page 8. Unless otherwise indicated, all
information in this prospectus assumes (1) the conversion of all outstanding
shares of our preferred stock into 13,859,102 shares of common stock immediately
prior to the closing of this offering and (2) no exercise by the underwriters of
the over-allotment option.
ATHEROGENICS
AtheroGenics is an emerging pharmaceutical company focused on the
discovery, development and commercialization of novel drugs for the treatment of
chronic inflammatory diseases, such as atherosclerosis, asthma and arthritis. We
designed our lead product candidate, AGI-1067, as an oral drug to benefit
patients with coronary artery disease, which is atherosclerosis of the blood
vessels of the heart. Atherosclerosis is a common disease that results from
inflammation and the buildup of plaque in arterial blood vessel walls. In
October 1999 we entered into a worldwide exclusive license agreement with
Schering-Plough Corporation to develop and commercialize AGI-1067. We are
currently testing AGI-1067 in a Phase II clinical trial for the prevention and
treatment of restenosis, the reoccurrence of narrowing of the coronary arteries
following angioplasty in patients with coronary artery disease. Schering-Plough
has extensive experience in developing, manufacturing and commercializing
pharmaceutical products. Schering-Plough's total licensing and development and
sales milestone payments to us for this initial indication, excluding royalties
and development costs, could reach $189 million.
We have combined our basic research in the role of blood vessels in
inflammation with applied research techniques into an integrated process to
discover new drugs for treating diseases of chronic inflammation. We call this
technology our vascular protectant or v-protectant platform. Our first
v-protectant drug candidates from this platform technology block the production
of VCAM-1, a protein that binds to white blood cells that accumulate along the
walls of blood vessels and prolong inflammation. Inflammation normally protects
the body from infection, injury and disease, but chronic inflammation often
causes damage in a misdirected attempt at repair and healing. Diseases of
chronic inflammation that we are targeting with our v-protectants include:
- atherosclerosis, including coronary artery disease, which affects
more than 12 million people in the United States and is the leading
cause of death in the United States; physicians perform more than
one million angioplasties annually worldwide;
- asthma, which affects more than 17 million people in the United
States; its prevalence and economic impact are both increasing;
- cystic fibrosis, which affects 36,000 children and adults in the
United States, of whom 25% are hospitalized at least once annually;
- rheumatoid arthritis, which affects 2.1 million people in the United
States and is more common in women than men; the economic cost of
rheumatoid arthritis and related diseases exceeds $65 billion
annually in the United States; and
- solid organ transplant rejection, which affects more than 200,000
people in the United States and is a major factor contributing to
organ shortage.
Our v-protectants are drugs that block a class of signals inside of cells
called oxidant signals. Oxidant signals inside of the cells that line blood
vessels lead to the production of selected proteins including VCAM-1. These
proteins attract white blood cells to the site of chronic inflammation. White
blood cells destroy infective agents and promote healing but can also amplify
chronic inflammation. Diseases marked by chronic inflammation are the
therapeutic targets of several classes of currently available drugs. Some drugs
are directed toward reduction of risk factors for the underlying disease, such
as high blood
3
<PAGE> 6
cholesterol in atherosclerosis. Other drugs provide symptomatic relief. Among
these agents are anti-inflammatory drugs and drugs that decrease the body's
natural defenses. These drugs, called immunosuppressants, decrease chronic
inflammation, but increase the risk of infection. None of these drugs treats the
underlying cause of chronic inflammation. In contrast, we believe that our
v-protectants can suppress chronic inflammation by blocking production of VCAM-1
without undermining the body's ability to protect itself against infection.
AGI-1067 is our v-protectant candidate that is most advanced in clinical
development. We are currently managing a Phase II clinical trial, CART-1, to
assess in approximately 300 patients the safety and effectiveness of AGI-1067
for the treatment of post-angioplasty restenosis. We recruited our first CART-1
patient in September 1999 and we expect to complete this clinical trial in the
first half of 2001. Our Phase II clinical trial program follows our successful
completion of seven Phase I clinical trials comprising more than 150 men and
women.
We have identified other potential v-protectant product candidates to treat
asthma, cystic fibrosis, rheumatoid arthritis and solid organ transplant
rejection. We are evaluating these v-protectant product candidates to choose
lead candidates for clinical development into commercial products. We plan to
develop these v-protectant lead product candidates rapidly and may seek
regulatory fast track status to expedite development and commercialization. We
will continue to expand our v-protectant technology platform with other
scientific programs in inflammation 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.
We base our competitive strategy on our ability to integrate the following
strengths:
- we have pioneered basic discoveries in vascular cell biology that
form the foundation of our v-protectant technology platform;
- our scientific expertise coupled with our clinical and regulatory
expertise has enabled us to be the first company to conduct Phase I
and II clinical trials of an orally-administered, small molecule
v-protectant;
- we expect that our exclusive license agreement with Schering-Plough
will allow us to sustain and extend our competitive advantage; and
- we believe that our scientific, development and licensing expertise
strongly positions us to acquire promising technologies and products
discovered outside AtheroGenics.
We believe that these competitive advantages are important to the success
of our business strategy, which is to:
- develop AGI-1067 for commercialization in collaboration with
Schering-Plough;
- extend our v-protectant technology platform into additional
therapeutic areas that address unmet medical needs;
- create value rapidly through innovative drug discovery coupled with
innovative development to produce useful drugs;
- expand our product candidate portfolio by acquiring complementary
product candidates and technologies; and
- commercialize our products based upon the size and other relevant
characteristics of the patient and physician populations.
---------------------
We were incorporated in the State of Georgia in November 1993. Our
executive offices are located at 8995 Westside Parkway, Alpharetta, Georgia
30004. Our telephone number at that location is (678) 336-2500 and our Internet
address is www.atherogenics.com. We do not intend for information contained on
AtheroGenics' website to constitute part of this prospectus.
4
<PAGE> 7
THE OFFERING
Common stock AtheroGenics is offering... 6,000,000 shares
Common stock to be outstanding after
this offering........................... 22,820,585 shares
Underwriters' over-allotment option..... 900,000 shares
Use of proceeds......................... We intend to use the net proceeds
for research and development
activities, including clinical
trials, process development and
manufacturing support, potential
licensing and acquisition
opportunities and for general
corporate purposes, including
working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol.................................. AGIX
The number of shares of our common stock to be outstanding immediately
after this offering is based on the number of shares outstanding at June 27,
2000. This number does not take into account:
- 2,580,725 shares of our common stock issuable upon exercise of options
outstanding under our stock option plans at June 27, 2000 with a weighted
average exercise price of $0.50 per share;
- 1,051,238 shares of our common stock available for future grant or
issuance under our benefit plans; and
- 250,290 shares of our common stock issuable upon exercise of outstanding
warrants at June 27, 2000 with an average exercise price of $3.40 per
share.
5
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table contains a summary of our statement of operations data.
The pro forma net loss per share data below gives effect to (1) the conversion
of each outstanding share of preferred stock into one share of common stock
immediately prior to the closing of this offering and (2) the pro forma basis of
presentation described in "Selected Financial Data" on page 20. See Note 12 to
Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees................ $ -- $ -- $ -- $ -- $ 555,556 $ -- $ 833,333
Research and development.... -- -- -- -- 791,653 -- 1,257,947
----------- ----------- ----------- ------------ ------------ ----------- -----------
Total revenues........ -- -- -- -- 1,347,209 -- 2,091,280
Operating expenses:
Research and development,
exclusive of $23,649 and
$360,751 for the year
ended December 31, 1999
and the three months ended
March 31, 2000,
respectively, reported
below as amortization of
deferred stock
compensation.............. 780,159 1,776,891 4,656,478 8,954,904 9,041,345 2,200,960 2,885,640
General and administrative,
exclusive of $61,831 and
$1,207,732 for the year
ended December 31, 1999
and the three months ended
March 31, 2000,
respectively, reported
below as amortization of
deferred stock
compensation.............. 348,107 548,766 988,230 1,573,807 2,593,017 427,132 786,362
Amortization of deferred
stock compensation........ -- -- -- -- 85,480 -- 1,568,483
----------- ----------- ----------- ------------ ------------ ----------- -----------
Total operating
expenses............ 1,128,266 2,325,657 5,644,708 10,528,711 11,719,842 2,628,092 5,240,485
----------- ----------- ----------- ------------ ------------ ----------- -----------
Operating loss................ (1,128,266) (2,325,657) (5,644,708) (10,528,711) (10,372,633) (2,628,092) (3,149,205)
Net interest income
(expense)................... 21,547 277,563 485,392 (205,130) (60,617) (122,243) 157,767
----------- ----------- ----------- ------------ ------------ ----------- -----------
Net loss...................... $(1,106,719) $(2,048,094) $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438)
=========== =========== =========== ============ ============ =========== ===========
Basic and diluted net loss per
share....................... $ (0.72) $ (1.10) $ (2.25) $ (4.45) $ (4.27) $ (1.14) $ (1.13)
Shares used in computing basic
and diluted net loss per
share....................... 1,543,064 1,869,246 2,292,966 2,409,948 2,443,237 2,412,125 2,635,816
Pro forma basic and diluted
net loss per share.......... $ (0.82) $ (0.18)
Shares used in computing pro
forma basic and diluted net
loss per share.............. 12,712,029 16,332,556
</TABLE>
6
<PAGE> 9
The following table contains a summary of our balance sheet at March 31,
2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of preferred stock into 13,859,102 shares of common stock effective
immediately prior to the closing of this offering; and
- on a pro forma as adjusted basis to reflect the conversion of all
outstanding shares of preferred stock into 13,859,102 shares of common
stock effective immediately prior to the closing of this offering and the
sale of 6,000,000 shares of common stock offered hereby at an assumed
initial public offering price per share of $12.00.
<TABLE>
<CAPTION>
MARCH 31, 2000
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 10,010,491 $ 10,010,491 $ 75,010,491
Working capital...................................... 7,804,078 7,804,078 72,804,078
Total assets......................................... 14,416,698 14,416,698 79,416,698
Long-term obligations, less current portion.......... 164,811 164,811 164,811
Redeemable convertible preferred stock............... 39,604,288 -- --
Common stock......................................... 11,237,117 50,841,405 115,841,405
Deferred compensation................................ (9,186,237) (9,186,237) (9,186,237)
Accumulated deficit.................................. (32,680,320) (32,680,320) (32,680,320)
Total common shareholders' (deficit) equity.......... (30,629,440) 9,200,561 74,200,561
</TABLE>
7
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. You should also refer to the other information in this
prospectus, including our financial statements and the related notes. The risks
and uncertainties we describe below are those that we currently believe may
materially affect our company. Additional risks and uncertainties that we are
unaware of or that we currently deem immaterial also may become important
factors that affect our company.
RISKS RELATED TO OUR COMPANY AND BUSINESS
IF AGI-1067 FAILS IN CLINICAL TRIALS, WE MAY NOT BE ABLE TO GENERATE FUTURE
REVENUES OR BECOME PROFITABLE.
AGI-1067 is our lead compound and the subject of an exclusive licensing
agreement with Schering-Plough. This compound would fail in clinical trials if
we show it is ineffective or causes unacceptable side effects in the patients we
treated.
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 pre-clinical tests in animals and clinical
trials in human beings, obtain the necessary regulatory approvals, and
manufacture and market the resulting drugs. We have experienced operating losses
since we began operations in 1994. As of March 31, 2000, we had an accumulated
deficit of approximately $32.7 million. We expect to incur additional operating
losses over the next several years and expect cumulative losses to increase
substantially as our research and development, pre-clinical, clinical,
manufacturing and marketing efforts expand. Except for an initial licensing fee
and research and development revenue that Schering-Plough paid to us, we have
had no significant revenue to date.
IF WE DO NOT SUCCESSFULLY DEVELOP OUR OTHER PRODUCT CANDIDATES, WE WILL HAVE
LIMITED ABILITY TO GENERATE REVENUE.
All of our other programs are in early stages of development, and we face
the risks of failure inherent in developing drug products based on new
technologies. We do not expect any of our potential product candidates to be
commercially available until at least 2004. In addition, our drug discovery
efforts may not produce any other proprietary product candidates.
WE WILL NOT BE ABLE TO COMMERCIALIZE OUR PRODUCT CANDIDATES IF WE FAIL TO
DEMONSTRATE ADEQUATELY THEIR SAFETY AND EFFICACY.
We cannot assure you that any product candidate we develop, alone or with
others, will prove safe and effective in clinical trials and will meet all of
the applicable regulatory requirements needed to receive regulatory approval. We
will need to conduct significant research, pre-clinical testing and clinical
trials before we can file product approval applications with the U.S. Food and
Drug Administration and similar regulatory authorities in other countries.
Pre-clinical testing and clinical trials are long, expensive and uncertain
processes. It may take us several years to complete our testing, and failure can
occur at any stage.
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. We must conduct clinical trials in accordance with the FDA's Good
Clinical Practices. 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 which we use
in our clinical trials under the FDA's Good Manufacturing Practices.
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<PAGE> 11
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.
Even if the FDA approves a New Drug Application for any of our product
candidates, the resulting product may not be accepted in the marketplace.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products. In addition,
after approval and use in an increasing number of patients, our product 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.
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.
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 typically rely on third party clinical investigators at
medical institutions and healthcare facilities to conduct our clinical trials
and, as a result, we may face additional delaying factors outside our control.
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 assure you that for any product candidate we or our collaborators
develop, including AGI-1067, the regulatory agencies will complete their review
processes in a timely manner or that we will obtain regulatory approval.
Pharmaceutical companies cannot market a drug in the United States or most other
countries until they have completed a rigorous and extensive regulatory approval
process for the drug. Satisfaction of regulatory requirements typically takes
many years, 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.
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.
We intend to seek fast track status for some of our product candidates. If
we obtain this status for any of our product candidates, the time required for
the FDA to review the Investigational New Drug Application that we submit for
that product candidate would be shorter than would otherwise be the case. We
cannot assure you that the FDA will grant fast track status to any
Investigational New Drug Applications that we may submit or that, if granted,
such status will result in faster New Drug Application approval or any approval
at all.
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<PAGE> 12
IF SCHERING-PLOUGH DECIDES TO TERMINATE OUR EXCLUSIVE LICENSE AGREEMENT, WE
WOULD LOSE ACCESS TO THEIR SUBSTANTIAL DEVELOPMENT, COMMERCIAL AND FINANCIAL
RESOURCES, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND
COMMERCIALIZE AGI-1067 AND OUR ABILITY TO GENERATE REVENUE.
Schering-Plough may terminate our exclusive license agreement for any
reason upon 60 days notice. Under our agreement, Schering-Plough will pay all
costs related to the worldwide development and commercialization of AGI-1067.
Schering-Plough also will pay us significant milestone fees upon attaining
development, regulatory and sales objectives. In addition, the agreement
provides us with access to their substantial product development, manufacturing
and commercialization expertise. If, however, Schering-Plough terminates the
agreement, we may not receive a substantial portion of our potential aggregate
licensing and milestone payments from Schering-Plough or have access to their
resources and expertise.
THE RECEIPT AND TIMING OF MILESTONE PAYMENTS FROM SCHERING-PLOUGH IS UNCERTAIN,
WHICH COULD MATERIALLY ADVERSELY AFFECT OUR REVENUE AND PROFITABILITY.
We have to date received a $5.0 million nonrefundable license fee from
Schering-Plough for entering into our license agreement with them. The receipt
and timing of the balance of the development and sales milestone payments to us
under this agreement is subject to factors relating to the clinical and
regulatory development and commercialization of AGI-1067, which generally are
the responsibility of Schering-Plough and many of which are beyond our control
and the achievement of which we cannot assure.
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 patent position, like that of many pharmaceutical companies, is
uncertain and involves complex legal and factual questions for which important
legal principles are unresolved. 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 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 drug
candidates. For example, U.S. patent applications are confidential while pending
in the Patent and Trademark Office, and patent offices in non-U.S. countries
often publish patent applications for the first time six months or more after
filing. 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 need to obtain licenses to these patents or to develop or obtain
alternative technology. We may not be able to obtain any such license on
acceptable terms or at all. Any failure to obtain such licenses could delay or
prevent us from developing or commercializing our drug candidates, which would
adversely 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 others, or require us to cease selling our future products.
Our commercial success will also depend on our ability to manufacture, use,
sell and offer to sell our product candidates without breaching our agreements
with our patent licensees. We have obtained exclusive licenses to technologies
from Emory University, covering aspects of our v-protectant technology, and The
Regents of the University of California, covering aspects of our diagnostic
technology. Our
10
<PAGE> 13
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 The Regents of the University of California also
includes a requirement that we develop the licensed technology within certain
time limits. If we fail to meet these time limits, they can terminate our
license. Further, The Regents of University of California are primarily
responsible for patent prosecution of the technology we license from them, and
we are required to reimburse them for the costs they incur in performing these
activities. As a result, we do not have the ability to control these activities.
We also rely upon 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 secrets or proprietary know-how through
independent discovery or otherwise.
IF OUR COMPETITORS DEVELOP AND MARKET ANTI-INFLAMMATORY PRODUCTS THAT ARE MORE
EFFECTIVE, HAVE FEWER SIDE EFFECTS OR ARE LESS EXPENSIVE THAN OUR CURRENT OR
FUTURE PRODUCT CANDIDATES, WE MAY HAVE LIMITED COMMERCIAL OPPORTUNITIES.
Our competitors include large pharmaceutical companies and more established
biotechnology companies. These 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.
THIRD PARTIES' FAILURE TO SYNTHESIZE AND MANUFACTURE OUR PRODUCT CANDIDATES
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
several 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. 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 against
our potential products, including recall or seizure, total or
partial suspension of production or injunction.
- A failure to synthesize and manufacture our product candidates in
accordance with our product specifications. For example, a starting
material used in the manufacturing process of AGI-1067 is probucol,
which physicians previously prescribed as a cholesterol-lowering
agent but which its manufacturer withdrew from the market for
efficacy reasons. The occurrence of a rare side effect with chronic
dosing of probucol requires that we maintain a very low maximal
amount of probucol in the manufacture of AGI-1067.
- 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 supply these
materials in a timely manner could jeopardize the scheduled
initiation or completion of these clinical trials and could have a
material adverse effect on our ability to generate revenue.
11
<PAGE> 14
In addition, our continued dependence on third parties for the synthesis
and manufacture of our future products may subject us 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.
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 FUTURE PRODUCT CANDIDATES.
We currently have no sales, marketing or distribution capabilities.
Therefore, in order to commercialize our product candidates, we must either
develop our own sales, marketing and distribution capabilities or collaborate
with a third party to perform these functions. We 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.
To the extent we seek sales, marketing and distribution alliances for our
future products, we face risks including the following:
- we may not be able to find collaborators, enter into alliances on
favorable terms or enter into alliances that will be commercially
successful;
- any collaborator might, at its discretion, limit the amount of
resources and time it devotes to marketing our products; and
- any collaborator may terminate its agreement with us and abandon our
products at any time for any reason, regardless of the terms of the
agreement.
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 55 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. Loss of the services of any of our key scientific
personnel and, in particular, Dr. Russell M. Medford, our President and Chief
Executive Officer, could adversely affect progress of our research and
development programs. We do not have employment agreements with any of our
employees.
IF WE NEED ADDITIONAL FINANCING AND CANNOT OBTAIN IT, WE MAY NOT BE ABLE TO
DEVELOP OR MARKET OUR PRODUCTS.
We may encounter increased costs due to unanticipated changes in our
product development or commercialization plans. If these costs exceed our
available funds, we will need to seek additional financing. 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 certain of our products or potential markets.
12
<PAGE> 15
OUR FAILURE TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT OR ACCEPTABLE PRICES
FOR OUR PRODUCTS COULD DIMINISH OUR REVENUES.
Our ability to commercialize our future products successfully, alone or
with collaborators, will depend in part on the extent to which reimbursement for
the products will be available from:
- government and health administration authorities;
- private health insurers; and
- other third party payors.
Government and other third party payors increasingly are attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new drugs. Third party private health insurance coverage may
not be available to patients for any of our future products.
The continuing efforts of government and other third party payors to
contain or reduce the costs of healthcare through various means may limit our
commercial opportunity. For example, in some countries other than the United
States, pricing and profitability of prescription pharmaceuticals are subject to
government control. In the United States, we expect proposals to implement
similar government control to continue. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on the pricing
of pharmaceutical products. Cost control initiatives could decrease the price
that we or any potential collaborators could receive for any of our future
products and could adversely affect our profitability.
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. We cannot assure you that we will be able
to acquire or maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect us.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE CAUSING VOLATILITY IN OUR STOCK
PRICE.
Our product candidates are now in research and various stages of
development or clinical trials. Accordingly, we do not receive any revenues from
sales of these product candidates. Our results of operations historically have
fluctuated on a quarterly basis and can be expected to continue to be subject to
quarterly fluctuations. Our results of operations at any given time will be
based primarily on the following factors:
- the status of development of our various product candidates;
- whether we enter into collaboration agreements and the timing and
accounting treatment of payments, if any, to us under those agreements;
- whether and when we achieve specified development or commercialization
milestones; and
- the addition or termination of research programs or funding support.
We believe that quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. These fluctuations may cause the price of our stock to fluctuate,
perhaps substantially.
13
<PAGE> 16
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE, AND YOUR INVESTMENT IN OUR STOCK COULD DECLINE
IN VALUE.
Prior to this offering, there has been no public market for our common
stock and an active public market for our common stock may not develop or be
sustained after the offering. The initial public offering price will be
determined by negotiations between the representatives of the underwriters and
us and may not be indicative of future market prices. Factors to be considered
in determining the initial public offering price of the common stock, in
addition to prevailing market conditions, include:
- estimates of our business potential and earnings prospects;
- an assessment of our management; and
- the consideration of the above factors in relation to market valuations
of companies in related businesses.
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. The following factors, in addition to other risk factors
described in this section, may have a significant impact on the market price of
our common stock:
- announcements of technological innovations or new commercial products by
our competitors or us;
- developments concerning proprietary rights, including patents;
- developments concerning any research and development, manufacturing, and
marketing collaborations;
- publicity regarding actual or potential results relating to medicinal
products under development by our competitors or us;
- regulatory developments in the United States and other countries;
- litigation;
- economic and other external factors, including disasters or crises; or
- period-to-period fluctuations in financial results.
BECAUSE A SMALL NUMBER OF EXISTING SHAREHOLDERS OWN A LARGE PERCENTAGE OF OUR
VOTING STOCK, YOU WILL HAVE MINIMAL INFLUENCE ON SHAREHOLDER DECISIONS.
Upon completion of this offering, we anticipate that our executive
officers, directors and greater than five percent shareholders, along with their
affiliates, will, in the aggregate, own approximately 42.8% of our outstanding
common stock. As a result, such persons, acting together, will have the ability
to influence substantially all matters submitted to the shareholders for
approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets. These persons
will also have the ability to control our management and business affairs. This
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control, impeding a merger, consolidation, takeover or
other business combination involving us, or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control of our
business, even if such a transaction would benefit other shareholders.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
The market price for our common stock could fall substantially if our
shareholders sell large amounts of our common stock in the public market
following this offering. These sales, or the possibility that these sales may
occur, could also make it more difficult for us to sell equity or equity related
securities if we need to do so in the future to address then-existing financing
needs. Restrictions under federal securities
14
<PAGE> 17
law requiring the registration or exemption from registration in connection with
the sale of securities limit the number of shares of common stock available for
sale in the public market. In addition, we, our directors and officers and
substantially all of our existing shareholders have entered into lock-up
agreements with the underwriters. The lock-up agreements restrict us, our
directors and officers and substantially all of our existing shareholders from
selling or otherwise disposing of any shares of our common stock for a period of
180 days after the date of this prospectus without the prior written consent of
Chase Securities Inc. Chase Securities Inc. may, however, in its sole discretion
and without notice, release all or any portion of the shares from the
restrictions in the lock-up agreements.
After this offering, we will have 22,820,585 outstanding shares of common
stock. These shares will become eligible for sale in the public market as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES DATE ELIGIBLE FOR PUBLIC RESALE
---------------- -------------------------------
<C> <S>
6,002,054 After the date of this prospectus, freely tradable shares
sold in this offering, and shares freely saleable under Rule
144(k) that are not subject to the 180-day lock-up.
33,118 After 90 days from the date of the prospectus, shares
saleable under Rule 144 and not subject to the 180-day
lock-up.
114,096 After 120 days from the date of this prospectus, shares
saleable under Rule 144, subject in some cases to volume
limitations or Rule 144(k).
15,283,911 After 180 days from the date of this prospectus, shares
saleable under Rule 144, subject in some cases to volume
limitations or Rule 144(k).
1,387,406 At various times after 180 days from the date of this
prospectus, restricted shares that will become saleable
under Rule 144 upon being held for one year.
</TABLE>
We intend to file one or more registration statements to register shares of
common stock subject to outstanding stock options and common stock reserved for
issuance under our stock option plans not before 30 days after the date of this
prospectus. We expect these additional registration statements to become
effective immediately upon filing. In addition, upon completion of this offering
and the conversion of our outstanding preferred stock into common stock, which
will happen immediately prior to the completion of this offering, the holders of
14,724,342 shares of our common stock will have the right to require us to
register their shares for sale to the public and holders of warrants exercisable
into 200,290 shares of our common stock would have the right to participate in
any such registration. Substantially all of these shares are subject to the
180-day lock-up agreements with the underwriters. If these holders register and
sell a large number of shares in the public market, our stock price could fall.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS MAY MAKE AN ACQUISITION OF US,
WHICH MAY BENEFIT OUR SHAREHOLDERS, MORE DIFFICULT.
Provisions of our amended and restated articles of incorporation and
amended and restated bylaws that could make it more difficult for a third party
to acquire us include provisions that:
- 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 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;
15
<PAGE> 18
- adopt the fair price requirements and business combinations with
interested shareholders rules set forth in Article II, 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.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING.
The initial public offering price is substantially higher than the net
tangible book value per share of our outstanding common stock immediately after
this offering. Accordingly, at the assumed initial public offering price of
$12.00 per share, if you purchase common stock in this offering, you will incur
immediate and substantial dilution of approximately $8.73 in the net tangible
book value per share of our common stock from the price you pay for our common
stock. In addition, we have issued options to acquire common stock at prices
significantly below the initial public offering price. To the extent the holders
of these outstanding options ultimately exercise them, there will be further
dilution to you in this offering.
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," and elsewhere in this
prospectus that are forward-looking statements that involve substantial risks
and uncertainty. You can identify these statements by forward-looking words such
as "may," "will," "expect, "intend," "anticipate," "believe," "estimate, "plan,"
"could," "should" and "continue" or similar words. These forward-looking
statements may also use different phrases. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements, which are subject to risks, uncertainties, and
assumptions about us, may include, among other things, projections of our future
results of operations or of our financial condition, our anticipated product
commercialization strategies, and anticipated trends in our business.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or which we do not fully control that could cause actual
results to differ materially from those expressed or implied in our
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements, including the following:
- competitive factors;
- general economic conditions;
- the ability to develop safe and effective drugs;
- ability to enter into future collaborative agreements;
- variability of royalty, license and other revenue;
- failure to achieve positive results in clinical trials;
- failure to receive regulatory approval to market our product
candidates;
- uncertainty regarding our owned and our licensed patents and patent
rights, including the risk that we may be forced to engage in costly
litigation to protect such patent rights and the material harm to us
if there were an unfavorable outcome of any such litigation;
- governmental regulation and suspension;
- technological change;
- changes in industry practices; and
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<PAGE> 19
- one-time events.
You should also consider carefully the statements under "Risk Factors" and
other sections of this prospectus, which address additional factors that could
cause our results to differ from those set forth in the forward-looking
statements. The Private Securities Litigation Reform Act of 1995 does not apply
to the statements in this prospectus.
---------------------
AtheroGenics and associated design, AGI and Oxykine are trademarks of
AtheroGenics, Inc. This prospectus also refers to trade names and trademarks of
other organizations.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 6,000,000 shares of
common stock offered by us at an assumed initial public offering price of $12.00
per share will be approximately $65 million, after deducting the underwriting
discounts and estimated offering expenses. If the underwriters exercise in full
their option to purchase an additional 900,000 shares of common stock, we
estimate that such net proceeds will be approximately $10 million. We expect to
use the net proceeds from this offering for research and development activities,
including clinical trials, process development and manufacturing support and for
general corporate purposes, including working capital. We may use a portion of
the proceeds to acquire or invest in complementary businesses, products or
technologies, although we are not currently in negotiations concerning any such
acquisitions or investments. Based upon the current status of our product
development and commercialization plans, we believe that the net proceeds of
this offering, together with our cash, cash equivalents and investments, will be
adequate to satisfy our capital needs for at least the next 12 months. Pending
such uses, we intend to invest the net proceeds of this offering in interest
bearing, investment grade securities.
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.
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<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization at March 31, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding
shares of preferred stock into 13,859,102 shares of common stock;
and
- on a pro forma as adjusted basis to reflect the conversion of all
outstanding shares of preferred stock into 13,859,102 shares of
common stock, and the sale of 6,000,000 shares of common stock
offered hereby at an assumed initial offering price of $12.00, per
share, and our receipt of the estimated net proceeds after deducting
underwriting discounts and commissions and estimated offering
expenses.
You should read the following table in conjunction with our financial
statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------- -------------
<S> <C> <C> <C>
Redeemable convertible preferred stock:
Series A, $1.00 par and liquidation value:
Authorized -- 1,000,000 shares; issued and
outstanding -- 1,000,000 shares (none pro
forma and pro forma as adjusted).............. $ 1,000,000 $ -- $ --
Series B, $3.00 par and liquidation value:
Authorized -- 4,804,382 shares; issued and
outstanding -- 4,695,974 shares (none pro
forma and pro forma as adjusted).............. 14,164,057 -- --
Series C, $3.00 par and liquidation value:
Authorized -- 8,500,000 shares; issued and
outstanding -- 8,163,128 shares (none pro
forma and pro forma as adjusted).............. 24,440,231 -- --
Series B-1, $5.00 par and liquidation value:
Authorized 50,000 shares (none outstanding)...... -- -- --
Preferred stock warrants......................... 225,713 -- --
Common shareholders' equity (deficit):
Common stock, no par value:
Authorized -- 21,100,000 shares; issued and
outstanding -- 2,805,308 shares (16,664,410
shares pro forma; 22,664,410 shares pro forma
as adjusted).................................. 11,237,117 50,841,405 115,841,405
Warrants......................................... -- 225,713 225,713
Deferred stock compensation...................... (9,186,237) (9,186,237) (9,186,237)
Accumulated deficit.............................. (32,680,320) (32,680,320) (32,680,320)
------------ ------------- -------------
Total common shareholders' equity
(deficit).............................. (30,629,440) $ 9,200,561 $ 74,200,561
------------ ============= =============
Total redeemable convertible preferred
stock and common shareholders'
equity................................. $ 9,200,561
============
</TABLE>
The information in the table above does not include:
- shares of our common stock issuable upon exercise of options outstanding
under our benefit plans, of which 2,580,725 were outstanding at June 27,
2000, with a weighted average exercise price of $0.50 per share;
- shares of our common stock available for future grant or issuance under
our benefit plans, of which 1,051,238 were available at June 27, 2000;
and
18
<PAGE> 21
- shares of our common stock issuable upon conversion of preferred stock
issuable upon exercise of outstanding warrants, of which 250,290 were
outstanding at June 27, 2000, with a weighted average exercise price of
$3.40 per share.
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was
approximately $9.2 million, or $0.55 per share of common stock. Our pro forma
net tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the shares of common stock outstanding as of
March 31, 2000, assuming the conversion of all outstanding shares of preferred
stock.
After giving effect to the sale of 6,000,000 shares of common stock we are
offering hereby at an assumed initial public offering price of $12.00 per share
and after deducting estimated underwriting discounts and commissions and
offering expenses, our pro forma net tangible book value as of March 31, 2000
would have been approximately $74.2 million, or $3.27 per share. This represents
an immediate increase in pro forma net tangible book value of $2.72 per share to
existing shareholders and an immediate and substantial dilution of $8.73 per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share at March 31,
2000...................................................... $0.55
Increase per share attributable to this offering............ 2.72
-----
Pro forma net tangible book value per share after
offering.................................................. 3.27
------
Dilution per share to new investors......................... $ 8.73
======
</TABLE>
The following table summarizes, as of March 31, 2000, on the pro forma
basis described above, the number of shares of common stock purchased in this
offering, the aggregate cash consideration paid and the average price per share
paid by existing shareholders for common stock and by new investors purchasing
shares of common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders.................... 16,664,410 74% $ 40,229,726 36% $ 2.41
New Investors............................ 6,000,000 26 72,000,000 64 12.00
----------- --- ------------ ---
Total.......................... 22,664,410 100% $112,229,726 100% $ 4.95
=========== === ============ ===
</TABLE>
This discussion and tables above assume no exercise of options outstanding
under our benefit plans. As of June 27, 2000, there were options outstanding to
purchase a total of 2,580,725 shares of common stock at a weighted average
exercise price of $0.50 per share and 1,051,238 shares available for future
grant or issuance under our benefit plans. The discussion and tables above also
assume no exercise of any outstanding warrants. As of June 27, 2000, there were
outstanding warrants to purchase 250,290 shares of our common stock, with a
weighted average exercise price of $3.40 per share. To the extent that any of
these options or warrants are exercised, there will be further dilution to new
investors.
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<PAGE> 22
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
prospectus. The statement of operations data for the years ended December 31,
1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999,
are derived from, and qualified by reference to, our audited financial
statements included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1995 and 1996, and the balance sheet data
as of December 31, 1995, 1996 and 1997 are derived from our audited financial
statements that do not appear in this prospectus. The historical results are not
necessarily indicative of the operating results to be expected in the future.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding preferred stock into
common stock, as if the shares had converted immediately upon their issuance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees.............. $ -- $ -- $ -- $ -- $ 555,556 $ -- $ 833,333
Research and
development............. -- -- -- -- 791,653 -- 1,257,947
----------- ----------- ----------- ------------ ------------ ----------- -----------
Total revenues...... -- -- -- -- 1,347,209 -- 2,091,280
Operating expenses:
Research and development
exclusive of $23,649 and
$360,751 for the year
ended December 31, 1999
and the three months
ended March 31, 2000,
respectively, reported
below as amortization of
deferred stock
compensation............ 780,159 1,776,891 4,656,478 8,954,904 9,041,345 2,200,960 2,885,640
General and administrative
exclusive of $61,831 and
$1,207,732 for the year
ended December 31, 1999
and the three months
ended March 31, 2000,
respectively, reported
below as amortization of
deferred stock
compensation............ 348,107 548,766 988,230 1,573,807 2,593,017 427,132 786,362
Amortization of deferred
stock compensation...... -- -- -- -- 85,480 -- 1,568,483
----------- ----------- ----------- ------------ ------------ ----------- -----------
Total operating
expenses.......... 1,128,266 2,325,657 5,644,708 10,528,711 11,719,842 2,628,092 5,240,485
----------- ----------- ----------- ------------ ------------ ----------- -----------
Operating loss.............. (1,128,266) (2,325,657) (5,644,708) (10,528,711) (10,372,633) (2,628,092) (3,149,205)
----------- ----------- ----------- ------------ ------------ ----------- -----------
Net interest income
(expense)................. 21,547 277,563 485,392 (205,130) (60,617) (122,243) 157,767
----------- ----------- ----------- ------------ ------------ ----------- -----------
Net loss.................... $(1,106,719) $(2,048,094) $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438)
=========== =========== =========== ============ ============ =========== ===========
Basic and diluted net loss
per share................. $ (0.72) $ (1.10) $ (2.25) $ (4.45) $ (4.27) $ (1.14) $ (1.13)
Shares used in computing
basic and diluted net loss
per share................. 1,543,064 1,869,246 2,292,966 2,409,948 2,443,237 2,412,125 2,635,816
Pro forma basic and diluted
net loss per share........ $ (0.82) $ (0.18)
Shares used in computing pro
forma basic and diluted
net loss per share........ 12,712,029 16,332,556
</TABLE>
20
<PAGE> 23
The following table contains a summary of our balance sheet on an actual
basis at December 31, 1995, 1996, 1997, 1998 and 1999; and at March 31, 2000.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
----------- ----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 1,491,400 $11,404,142 $ 6,925,364 $ 3,683,423 $ 13,409,450 $ 10,010,491
Working capital (deficiency)..... 1,584,187 11,330,250 6,108,938 (4,259,366) 9,651,239 7,804,078
Total assets..................... 2,266,384 11,965,284 7,612,796 5,341,816 15,717,214 14,416,698
Long-term obligations, less
current portion................ -- 270,950 281,636 163,262 61,854 164,811
Redeemable convertible preferred
stock and warrants............. 3,524,236 14,654,604 14,654,626 14,950,624 39,193,366 39,830,001
Deferred compensation............ -- -- -- -- (1,809,680) (9,186,237)
Accumulated deficit.............. (1,314,381) (3,362,475) (8,521,791) (19,255,632) (29,688,882) (32,680,320)
Total common shareholders'
deficit........................ (1,260,359) (3,177,653) (8,240,444) (18,973,881) (29,288,600) (30,629,440)
</TABLE>
21
<PAGE> 24
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 prospectus.
OVERVIEW
Since our operations began in 1994, we have been engaged in the discovery
and development of novel therapeutics for the treatment of acute and chronic
inflammatory diseases. Our lead product candidate, AGI-1067, is currently in
Phase II clinical trials for the treatment and prevention of post-angioplasty
restenosis.
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 received
in connection with entering into an exclusive license agreement, expect to incur
significant losses in most years prior to deriving any such product revenue. We
have incurred significant losses since we began operations in 1994 and, as of
March 31, 2000, had an accumulated deficit of $32.7 million. There can be no
assurance if or when we will become profitable. We expect to continue to incur
significant 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 such 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. In October 1999 we entered into an exclusive licensing agreement with
Schering-Plough covering our lead compound, AGI-1067. Under terms of the
agreement, Schering-Plough obtained exclusive worldwide rights to AGI-1067 and
related compounds. Schering-Plough is responsible for all costs of development
and commercialization. Schering-Plough paid us an initial licensing fee and will
pay milestone fees upon achievement of development, regulatory and commercial
milestones.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues
Total revenues were $2.1 million for the three months ended March 31, 2000,
compared to none in 1999. Revenues of $833,333 in 2000 were attributable to
licensing fees from the exclusive license agreement signed in October 1999 with
Schering-Plough. This amount represents the earned portion of the $5.0 million
initial license fee which is being amortized over 18 months. Research and
development revenues related to such license agreement were $1.3 million in
2000.
Expenses
Research and Development. Research and development expenses were $2.9
million for the three months ended March 31, 2000, compared to $2.2 million for
the three months ended March 31, 1999. The increase of $684,680, or 31%,
reflects the continued expansion of our internal research and development
capabilities as well as higher costs associated with the AGI-1067 clinical
trials.
General and Administrative. General and administrative expenses were
$786,362 for the three months ended March 31, 2000, compared to $427,132 for the
three months ended March 31, 1999. The increase of $359,230, or 84%, was
primarily due to increases in facility costs, personnel costs in administration
departments and professional fees.
Amortization of Deferred Stock Compensation. In January 2000, we recorded
non-cash deferred stock compensation of approximately $8.9 million for options
granted with exercise prices below the deemed fair value for financial reporting
purposes of our common stock on their respective grant dates. This deferred
stock compensation is being amortized using the graded vesting method.
Amortization of
22
<PAGE> 25
deferred stock compensation was $1.6 million for the three months ended March
31, 2000 of which $360,751 was attributable to research and development expenses
and $1.2 million was attributable to general and administrative expenses. There
was no amortization of deferred stock compensation for the three months ended
March 31, 1999.
Net Interest (Expense) Income
Net interest income was $157,767 for the three months ended March 31, 2000
as compared to net interest expense of $122,243 for the three months ended March
31, 1999. The increase in net interest income was due to an increased level of
invested funds, as well as the elimination of interest expense related to the
bridge loan, which was converted to preferred stock in April 1999.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues
Total revenues were $1.3 million in 1999, compared to none in 1998 and
1997. Revenues of $555,556 in 1999 were attributable to licensing fees from the
exclusive license agreement signed in October 1999 with Schering-Plough. This
amount represents the earned portion of the $5.0 million initial license fee
which is being amortized over 18 months. Research and development revenues
related to the exclusive license agreement signed with Schering-Plough were
$791,653 in 1999.
Expenses
Research and Development. Research and development expenses were $9.0
million for the year ended December 31, 1999, $9.0 million for the year ended
December 31, 1998 and $4.7 million for the year ended December 31, 1997.
Research and development expenses in 1999 were higher than 1998 by $86,441, or
1%, reflecting higher costs associated with the AGI-1067 clinical trials. The
$4.3 million, or 92%, increase in research and development expenses from 1997 to
1998 was due primarily to expansion of the number of clinical trials and
pre-clinical testing for our lead compound AGI-1067. These increased costs
principally involved payments to third party contractors.
General and Administrative. General and administrative expenses for the
years ended December 31, 1999, 1998 and 1997 were $2.6 million, $1.6 million and
$988,230, respectively. The $1.0 million, or 63%, increase in 1999 compared to
1998 was due primarily to an increase in administrative personnel to support our
expanded research and development and licensing programs, and to the costs of
relocating to a larger scientific and administration facility. General and
administrative expenses increased $585,577, or 62%, for 1998 compared to 1997.
The increase in 1998 expense was primarily related to administrative activities
to support our expanded research and development efforts.
Amortization of Deferred Stock Compensation. In 1999 we recorded non-cash
deferred stock compensation of approximately $1.9 million for options granted
with exercise prices below the deemed fair value for financial reporting
purposes of our common stock on their respective grant dates. Amortization of
deferred stock compensation was $85,480 in 1999. Of such amount, $23,649 was
attributable to research and development expenses and $61,831 was attributable
to general and administrative expenses. There was no amortization of deferred
stock compensation in 1998 and 1997.
Net Interest (Expense) Income
Net interest expense was $60,617 and $205,130 for the years ended December
31, 1999 and 1998, respectively. The $144,513, or 70%, decrease in expense in
1999 as compared to 1998 was attributable to an increase in the amount of cash
available for investing from the sale of Series C convertible preferred stock
and conversion of the bridge loan in preferred stock in April 1999. Net interest
income was $485,392 for the year ended December 31, 1997. The $690,522 decrease
in net interest income in 1998 as compared to 1997 was due primarily to a lower
level of invested funds, as well as interest expense related to the bridge loan
entered into in 1998.
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<PAGE> 26
Income Taxes
As of December 31, 1999, we had net operating loss carryforwards and
research and development credit carryforwards of $24.9 million and $1.1 million,
respectively, available to offset future regular and alternative taxable income.
The net operating loss carryforwards will expire between 2009 and 2019. The
research and development credit carryforwards will expire between 2009 and 2014.
The maximum annual use of the net operating loss carryforwards is limited in
situations where changes occur in our stock ownership. Because of our lack of
earnings history, the resulting deferred tax assets have been fully offset by a
valuation allowance. The utilization of the loss and credit carryforwards to
reduce future income taxes will depend on our ability to generate sufficient
taxable income prior to the expiration of the net operating loss carryforwards
and research and development credit carryforwards. We have not yet completed
full analysis of IRC Section 382 limitations on the cumulative net operating
loss carryforward. However, the annual limitations are not expected to prevent
utilization of the net operating loss carryforward due to significant increases
in value indicated by the successive issues of preferred stock. If a change in
ownership has occurred, there will be an annual limitation; however, this
limitation is not expected to result in a loss of the deferred tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
placements of preferred stock, which have resulted in net proceeds to us of
$39.2 million through March 31, 2000. We had cash and cash equivalents of $10.0
million at March 31, 2000, compared with $13.4 million at December 31, 1999,
$3.7 million at December 31, 1998 and $6.9 million at December 31, 1997. Working
capital at March 31, 2000 was $7.8 million, compared to $9.7 million at December
31, 1999, a deficit of $4.3 million at December 31, 1998, and $6.1 million at
December 31, 1997. Long-term debt was $164,811 at March 31, 2000 compared to
$61,854, $163,262 and $281,636 for the years ending December 31, 1999, 1998 and
1997, respectively. Long-term debt consists primarily of capital equipment lease
obligations.
Net cash used in operating activities was $3.7 million for the three months
ended March 31, 2000, and $6.7 million, $9.1 million and $4.3 million for the
years ended December 31, 1999, 1998 and 1997, respectively. The decrease in net
cash used in 1999 compared to 1998 was due to receipt of a $5.0 million initial
license fee from Schering-Plough. The increase in net cash used in 1998 compared
to 1997 resulted from an increase in net loss from operations.
Net cash used in investing activities was $513,054 for the three months
ended March 31, 2000, and $1.1 million, $62,586 and $295,284 for the years ended
December 31, 1999, 1998 and 1997, respectively. Net cash used in investing
activities consisted primarily of equipment purchases and leasehold
improvements.
Net cash provided by financing activities was $858,677 for the three months
ended March 31, 2000, and $17.5 million, $5.9 million and $76,461 for the years
ended December 31, 1999, 1998 and 1997, respectively. Net cash provided by
financing activities in 2000 consisted primarily of proceeds from the exercise
of preferred stock warrants and common stock options. The preceding periods
consisted primarily of proceeds from the sale of preferred stock and, in 1998,
proceeds from the bridge loan.
Based upon the current status of our product development and
commercialization plans, we believe that the net proceeds of this offering,
together with our existing cash and cash equivalents, 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 status of product development;
- the time and cost involved in conducting clinical trials and
obtaining regulatory approvals;
- filing, prosecuting and enforcing patent claims;
- competing technological and market developments; and
24
<PAGE> 27
- our ability to market and distribute our future products and
establish new licensing agreements.
IMPACT OF YEAR 2000
In late 1999 we completed remediation and testing of our computer systems
at a nominal cost. As a result of those planning and implementation efforts, we
have experienced no significant disruptions in our information technology and
non-information technology systems to date and we believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues. We will continue to monitor
our mission critical computer systems and the appropriate systems of our
suppliers and vendors throughout 2000 to ensure that any latent Year 2000
matters which may arise are addressed promptly. To date, we are not aware of any
Year 2000 disruptions in the computer systems of our significant vendors or
service providers.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ON 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 maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, 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.
25
<PAGE> 28
BUSINESS
OVERVIEW
AtheroGenics is an emerging pharmaceutical company focused on the
discovery, development and commercialization of novel drugs for the treatment of
chronic inflammatory diseases, such as atherosclerosis, asthma and arthritis. We
designed our lead product candidate, AGI-1067, to benefit patients with coronary
artery disease, which is atherosclerosis of the blood vessels of the heart. In
October 1999 we entered into a worldwide exclusive license agreement with
Schering-Plough to develop and commercialize AGI-1067. We are currently testing
AGI-1067 in a Phase II clinical trial for the prevention and treatment of
restenosis, the reoccurrence of narrowing of the coronary arteries following
angioplasty in patients with coronary artery disease. Schering-Plough has
extensive experience in developing, manufacturing and commercializing
pharmaceutical products.
We have developed a proprietary v-protectant technology platform to
discover drugs for the treatment of chronic inflammation. Our first
v-protectants are drugs that block the production of proteins that are necessary
to initiate and maintain inflammation. For example, one of these proteins,
VCAM-1, binds to white blood cells that accumulate at the site of inflammation
and directs these cells in their migration from the bloodstream into the tissue.
We believe that an excess number of VCAM-1 molecules on the surface of cells is
a disease state. We also believe that v-protectants can suppress chronic
inflammation by blocking production of VCAM-1 without undermining the body's
ability to protect itself against infection.
AGI-1067 is our v-protectant candidate that is most advanced in clinical
development. We are currently managing a Phase II clinical trial, CART-1, to
assess in approximately 300 patients the safety and effectiveness of AGI-1067
for the treatment of post-angioplasty restenosis. We recruited our first CART-1
patient in September 1999 and we expect to complete this clinical trial in the
first half of 2001. Our Phase II clinical trial program follows our successful
completion of seven Phase I clinical trials comprising more than 150 men and
women.
We have identified other potential v-protectant product candidates to treat
asthma, cystic fibrosis, rheumatoid arthritis and solid organ transplant
rejection. We are evaluating these v-protectant product candidates to choose
lead product candidates for clinical development. We plan to develop these
v-protectants rapidly and may seek regulatory fast track status to expedite
development and commercialization. We will continue to expand our v-protectant
technology platform using functional genomics to identify novel therapeutic gene
targets.
INFLAMMATION DISEASES
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
26
<PAGE> 29
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:
- atherosclerosis, including coronary artery disease;
- asthma;
- cystic fibrosis;
- rheumatoid arthritis; and
- solid organ transplant rejection.
Atherosclerosis is a common 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 heart attack or stroke.
There are no medications available for physicians to treat directly the
underlying chronic inflammation of atherosclerosis.
Atherosclerosis of the blood vessels of the heart is called coronary artery
disease. Treatment for coronary artery disease often progresses to therapeutic
procedures including angioplasty or bypass surgery to re-establish an effective
blood supply to the heart. Angioplasty corrects the blockage by the inflation of
a balloon delivered by catheter, with or without the placement of a stent, a
small cylindrical mesh device, at the site of the obstructing plaque. After
angioplasty, the artery opened by the procedure often re-narrows. Inflammation
plays an important role in this re-narrowing called restenosis. There is no
medical treatment for restenosis.
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 or treated by these medicines.
Cystic fibrosis is an inherited disease that first appears in childhood
with blocked glands of various organs, including the lungs, intestines and
pancreas. This chronic blockage leads to chronic inflammation and recurrent lung
infections. Patients with cystic fibrosis develop chronic lung inflammation that
may suddenly flare with severe consequences. Current treatment only attempts to
control infection, primarily with antibiotics.
There is a wide variety of other chronic inflammatory diseases, including
rheumatoid arthritis and solid organ transplant rejection. Physicians regularly
use anti-inflammatory agents, such as aspirin, other non-steroidal
anti-inflammatory drugs and corticosteroids, alone or in combination with
immuno-suppressants, to treat these diseases. However, these diseases may
suddenly flare due to either the tissue inflammation that underlies them or
bacteria that take advantage of the suppressed immune response induced by
present therapies. Treatments for the underlying disease have major side effects
and are not completely effective for these inflammatory exacerbations. For
example, systemic corticosteroids cause major side effects including high blood
pressure, adult-onset diabetes, cataracts, brittle bones and increased risk of
infection.
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.
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<PAGE> 30
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 which 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 two 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 recently described 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 anti-oxidants
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.
V-PROTECTANTS BLOCK ACTIVATION OF VCAM-1
IN CELLS THAT LINE BLOOD VESSELS
<TABLE>
<S> <C>
ACTIVATION OF VCAM-1 INHIBITION OF VCAM-1
</TABLE>
(V-Protectants Block Chart)
1 INFLAMMATORY AGENT ATTACHES TO CELL SURFACE RECEPTOR
2 RECEPTOR CHANGES GENERATE OXIDANT SIGNALS INSIDE CELL
3 OXIDANT SIGNALS STIMULATE GENE TO PRODUCE VCAM-1
4 CELL PRODUCES VCAM-1 PROTEINS
5 VCAM-1 MIGRATES TO CELL SURFACE
6 WHITE BLOOD CELLS ATTACH TO VCAM-1 ON CELL SURFACE
BUSINESS STRATEGY
Our objective is to become a leading pharmaceutical company focused on
discovering, developing and commercializing novel therapeutics for the treatment
of chronic inflammatory diseases. The key elements of our strategy include the
following:
- Develop AGI-1067 for commercialization in collaboration with
Schering-Plough. We have entered into an exclusive license agreement
with Schering-Plough to develop and commercialize our lead
28
<PAGE> 31
product candidate, AGI-1067, for the treatment of atherosclerosis. The
collaboration will seek initially to develop AGI-1067 for the treatment
and prevention of restenosis in patients with coronary artery disease who
undergo angioplasty.
- 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
inflammatory diseases and clinical conditions. These indications include
asthma, cystic fibrosis, rheumatoid arthritis, solid organ transplant
rejection and other diseases.
- Create value rapidly through innovative drug discovery coupled with
innovative drug development. We intend to use our capabilities to
identify scientific breakthroughs in inflammation and move these rapidly
through pre-clinical testing to clinical trials. We intend to use our
development expertise to minimize the time required to commercialize our
discoveries in functional genomics, which links genetics to drug
research, and medicinal and combinatorial chemistry, which are techniques
to identify novel drug candidates with pre-defined activities.
- Expand our 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. In contrast, we
plan to develop a sales force to commercialize those of our products that
we develop to target patient or physician populations in narrow markets.
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<PAGE> 32
PRODUCTS
The table below summarizes our therapeutic programs, their target
indication or disease, development status and commercial strategy.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
THERAPEUTIC PROGRAM DISEASE/INDICATION DEVELOPMENT STATUS(1) COMMERCIAL STRATEGY
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LEAD V-PROTECTANT
AGI-1067 Restenosis Phase II clinical trial Exclusive license
to
Schering-Plough
--------------------------------------------------------------------------------------------------
OTHER V-PROTECTANTS
AGI-series, Exacerbations of asthma Compound selection Internal
intravenous and cystic fibrosis
AGI-series, oral Rheumatoid arthritis Compound selection Collaboration
AGI-series, oral Solid organ transplant Compound selection Internal
rejection
Oral product Chronic asthma Research Collaboration
candidate
--------------------------------------------------------------------------------------------------
OTHER PROGRAMS
Functional genomics Inflammatory diseases Research Collaborations
--------------------------------------------------------------------------------------------------
DIAGNOSTICS
Oxykine diagnostic Atherosclerosis Clinical testing Collaboration
--------------------------------------------------------------------------------------------------
</TABLE>
---------------
(1) References to compound selection means the process by which we are selecting
a lead product candidate for clinical development.
We have established therapeutic programs for product development using
product 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 are developing our lead compound, AGI-1067 and related compounds in
collaboration with Schering-Plough. We are selecting product candidates from
among our AGI-1000 series, AGI-1100 series, AGI-1200 series and AGI-1300 series
for internal development. We are also pursuing novel discovery targets in
chronic inflammation.
AGI-1067
AGI-1067, our lead v-protectant product candidate, is a small molecule that
patients take orally once per day. In pre-clinical testing, AGI-1067 has shown
the following three biological properties that we believe will benefit patients
with atherosclerosis:
- AGI-1067 blocks production of VCAM-1. We believe that decreased VCAM-1
production will diminish atherosclerosis and restenosis.
- AGI-1067 is a potent anti-oxidant. AGI-1067 protects LDL cholesterol
from converting into a harmful inflammatory agent.
- AGI-1067 lowers LDL cholesterol. LDL cholesterol lowering reduces the
risk of developing atherosclerosis.
30
<PAGE> 33
According to the American Heart Association, more than 12 million people in
the United States have coronary artery disease, including approximately 1.1
million who have heart attacks every year. In order to make a definitive
diagnosis in patients with suspected coronary artery disease, a specially
trained cardiologist or radiologist performs a diagnostic procedure called
angiography in which the cardiologist injects dye through an intravenous
catheter to image the coronary arteries. Angiography can reveal coronary artery
disease that may require an invasive procedure. Physicians perform this invasive
procedure, called angioplasty, more than one million times annually worldwide.
This procedure consists of placing a balloon-tipped catheter into the coronary
artery and mechanically re-opening the blood vessel by expanding the balloon
under very high pressure. In addition, cardiologists may opt to treat some of
these coronary artery blockages by inserting a stent to keep the blood vessel
open after the cardiologist removes the catheter.
Angioplasty does not cure coronary artery disease, nor does it treat the
underlying chronic inflammation. In fact, angioplasty induces an inflammatory
response that contributes to its failure in approximately 30% of patients who
undergo the procedure. This process of re-narrowing, or post-angioplasty
restenosis, is a major clinical problem that limits the effectiveness of the
procedure. Restenosis following balloon angioplasty occurs due to local damage
to the coronary artery. The development of stents and the ongoing research and
development activities with respect to catheter improvement have not eradicated
the problem of restenosis, but have introduced the new problem of in-stent
restenosis which is particularly difficult to treat. In-stent restenosis occurs
when the cells that surround the stent proliferate and fill the opening of the
vessel.
Our initial development target is post-angioplasty restenosis. More
significantly, we believe that AGI-1067 may treat all areas of the coronary
artery susceptible to atherosclerosis in a way that cannot be achieved with any
existing therapy.
We have completed pre-clinical testing in multiple species to establish the
therapeutic properties of AGI-1067. Dosed orally, AGI-1067 blocked VCAM-1
production, blocked damage from oxidants and prevented atherosclerosis. In
addition, AGI-1067 reduced LDL cholesterol comparably to and in combination with
statins, which are widely used cholesterol lowering drugs.
Based upon our successful completion of pre-clinical testing, we studied
AGI-1067 in seven Phase I clinical trials in more than 150 men and women,
including healthy volunteers and patients up to the age of 85 to assess
tolerability and potential for interaction with other drugs. In the course of
these seven studies we have given AGI-1067 in combination with other drug
classes commonly used in patients with atherosclerosis. In these seven clinical
trials, six of which we conducted under the Investigational New Drug Application
for cholesterol lowering, some subjects reported mild nausea during the first
few doses of AGI-1067, but the nausea abated while they continued to take the
drug. Overall, subjects tolerated AGI-1067 well, with no dose or use-limiting
side effects. These clinical trial results, which showed that patients tolerated
AGI-1067 well alone and in combination with other drugs, supported our progress
to Phase II clinical trials.
We are presently conducting a Phase II clinical trial in Canada to assess
the tolerability and efficacy of AGI-1067 as an agent to prevent
post-angioplasty restenosis. We opened our Canadian Investigational New Drug
Application in April 1999 for AGI-1067 as an agent to prevent post-angioplasty
restenosis. The Canadian Antioxidant Restenosis Trial, called CART-1, is a
multi-center, randomized, double-blind, safety and efficacy dose-ranging study,
comparing AGI-1067 with placebo and an active control in patients with
established coronary artery disease who undergo elective angioplasty. We plan to
dose approximately 300 patients for six weeks and follow them for a total of six
months. During angiography performed six months after angioplasty, we will
assess the efficacy of AGI-1067 by measuring directly the diameter of the
opening of the treated coronary artery. We enrolled the first patient in CART-1
in September 1999 and the trial is ongoing at four Canadian centers of
excellence in interventional cardiology. An independent data and safety
monitoring board reviews patient data periodically to ensure the continued
safety of enrolled patients.
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We have formed a joint management committee with Schering-Plough to oversee
all aspects of development and commercialization of AGI-1067. The committee
consists of equal numbers of AtheroGenics and Schering-Plough representatives.
Under direction of the joint management committee, we expect to manage further
clinical, pre-clinical and chemical development work for AGI-1067.
AGI-Series for Respiratory Diseases
We are developing an intravenously-dosed, v-protectant drug to treat
exacerbations of cystic fibrosis. If we achieve positive clinical trial results,
we will evaluate our v-protectant for the treatment of patients hospitalized
with exacerbations of asthma. For patients with chronic respiratory diseases,
including cystic fibrosis and asthma, an exacerbation is a sudden worsening of
the patient's breathing that usually requires hospitalization and intensive
therapy.
According to the American Lung Association, asthma afflicts more than 17
million adults and children in the United States. From 1980 to 1994, the
prevalence of this disease increased by over 75%. Asthma morbidity and mortality
continue to rise in spite of massive public health efforts. According to the
American Lung Association, in 1998 the combined direct and indirect costs of
asthma in the United States is approximately $11.3 billion annually. Current
therapies that target the underlying disease include corticosteroids and several
classes of drugs that relieve symptoms but are not effective for chronic
inflammation. None of these drugs, including inhaled corticosteroids, is
particularly effective for treating exacerbation of asthma which remains a major
unmet medical problem. We believe that v-protectants may reduce the inflammation
associated with chronic asthma and with the acute exacerbation of asthma and may
be useful in the treatment of up to 1.8 million patients annually who develop
acute exacerbations of asthma and seek emergency room treatment in the United
States.
Cystic fibrosis is a common hereditary disease among Caucasians. According
to the Cystic Fibrosis Foundation, there are 36,000 children and adults with
cystic fibrosis in the United States. Approximately 25% of patients with cystic
fibrosis are hospitalized at least once per year. Physicians treat exacerbations
of cystic fibrosis with antibiotics that treat the associated chronic bacterial
infection of the lungs. These antibiotics, however, do not address the chronic
inflammation that underlies cystic fibrosis. Physicians no longer use
corticosteroids routinely to treat exacerbations because they compromise the
patient's immune response to bacterial infection. We believe that v-protectants
can treat this chronic inflammation without compromising the necessary immune
response to bacteria.
We have identified v-protectant drug candidates from among four AGI-series
of compounds for intravenous administration to hospitalized patients with
respiratory diseases. We are evaluating these small molecules based on
development criteria such as potency, stability and ease of formulation. We will
use these criteria to choose a lead product candidate for clinical development
that targets one or more respiratory disease indications. We plan to apply to
the FDA for fast track status for this lead product candidate as a treatment for
exacerbations of cystic fibrosis. We have observed a decrease in lung
inflammation in a pre-clinical model of asthma using a compound we discovered in
this effort.
AGI-Series for Rheumatoid Arthritis
We are developing an orally-dosed, v-protectant drug to treat patients with
chronic rheumatoid arthritis who have not responded to maximum current therapy.
For patients with rheumatoid arthritis, chronic therapy progresses from pain
relievers to increasingly toxic immunosuppressants, called disease modifiers. If
we achieve positive clinical trial results, we will evaluate our v-protectant
for the treatment of patients who are receiving moderate disease modifying
therapy.
Rheumatoid arthritis is a common auto-immune disease which affects joints
and arterial blood vessels. According to the Arthritis Foundation, there are 2.1
million people with rheumatoid arthritis in the United States. Rheumatoid
arthritis and related diseases cost the U.S. economy more than $65 billion
annually in direct and indirect costs. Approximately 70% of patients with
rheumatoid arthritis are young and middle-aged women. Physicians treat
rheumatoid arthritis with pain relievers including aspirin and other non-
steroidal anti-inflammatory drugs, and proceed in resistant patients to
treatment with low doses of
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corticosteroids and immunosuppressants. The recent successful introduction of
new drugs, including Celebrex, Enbrel and Vioxx, has highlighted both the market
potential and the size and scope of the unmet medical need of these patients.
These drugs are partially effective but either increase the risk of infection or
do not address the chronic vascular inflammation that marks rheumatoid
arthritis. We believe that v-protectants can treat the chronic inflammation of
rheumatoid arthritis including the direct inflammation of the arteries, without
increasing the patient's risk for infection.
We have identified v-protectant product candidates from among four
AGI-series of compounds for oral administration to rheumatoid arthritis patients
who have not responded to therapy. We are evaluating these small molecules based
on development criteria such as potency, stability and ease of formulation.
AGI-Series for Post-Transplant Chronic Solid Organ Rejection
We are developing an orally-dosed, v-protectant drug to treat chronic solid
organ transplant rejection. Patients' immune systems recognize transplanted
organs as foreign and therefore reject them. This chronic inflammatory process
is called chronic solid organ transplant rejection. Physicians treat these
patients with powerful immunosuppressants to block all immune and inflammatory
reactions that could cause solid organ rejection. These therapies place patients
at risk for life threatening infection. The vascular protection provided by our
product candidates may protect solid organs from rejection beyond the first year
without increasing the risk of infection. We are not aware of any other solid
organ anti-rejection drug in development that has this profile.
Recent industry sources report there are approximately 200,000 organ
transplant recipients in the United States who are at risk of chronic transplant
rejection. Chronic rejection is a major factor contributing to organ shortage.
We have identified v-protectant product candidates from among four
AGI-series of compounds for oral administration to patients who have received
transplants. We are evaluating these small molecules based on development
criteria such as potency, stability and ease of formulation. We will use these
criteria to choose a lead product candidate for clinical development that
targets chronic solid organ transplant rejection. We plan to apply to the FDA
for fast track status for this product candidate as an adjunct to current
transplant therapy, which includes immunosuppressant and anti-inflammatory
drugs.
Diagnostic Assay Program
Based on our v-protectant technology platform, we have designed a simple
and proprietary blood test that measures a circulating blood marker for
atherosclerosis. We plan to conduct tests on human blood samples to establish
whether this new marker, called Oxykine, is an accurate and useful diagnostic
tool. We believe Oxykine will allow physicians to determine whether a patient
has active and progressive atherosclerosis and whether the disease is responding
to medical therapy. There are currently no diagnostic tools that meet this
critical need in atherosclerosis disease management.
RESEARCH PROGRAM
We have built a robust research program using our demonstrated expertise in
functional genomics, molecular biology, cell biology, physiology, pharmacology,
medicine, biochemistry, analytical and synthetic chemistry and bioengineering.
Our research program has three 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.
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- 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 target
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 process.
- To develop new classes of v-protectant drugs based on the novel
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. 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.
PATENTS AND INTELLECTUAL PROPERTY
We have established a patent portfolio of owned and in-licensed patents
that cover our lead v-protectant compounds and their use, as well as methods for
regulating the fundamental biological pathway involved in the production of the
inflammatory protein, VCAM-1. 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.
The patent approval process in the United States progresses through several
steps from filing an application, through review of the application by the U.S.
Patent and Trademark Office, and, if the application is allowed, to an issued
patent. There is a similar regulatory process in most non-U.S. countries. We
currently own one U.S. patent, two allowed U.S. patent applications, eight
pending U.S. applications, and 50 associated non-U.S. patent filings, which, if
issued, will expire from 2012 to 2020. We co-own with Emory University one
pending U.S. patent application and 17 associated non-U.S. patent filings which,
if issued, will expire on or before 2018. In addition, we hold exclusive
licenses from Emory University to 11 U.S. patents, one U.S. patent application,
and 59 associated non-U.S. patent filings, expiring on or before 2012. We
purchased the U.S. patent that we own in an agreement with Sampath
Parthasarathy. We believe the cost of this agreement to us is immaterial.
We have license agreements with Emory University and The Regents of
University of California covering aspects of our technology. These agreements
obligate us to make milestone payments upon attainment of agreed-upon goals and
royalty payments on 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. In addition, we have a collaborative research agreement with Emory
University.
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 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
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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.
Under our sponsored research agreement with Emory University, Emory
University has agreed to provide facilities for and to perform research in
collaboration with us. The initial term of the agreement was one year. Following
the initial term, the agreement is renewable and has been renewed on an annual
basis. The renewable term of the agreement will end in 2001. We believe our
costs under the agreement are immaterial. Rights to patents, inventions and
copyrightable works arising from the research may be held by Emory University
independently or jointly between Emory University and us depending upon the
circumstances under which the right arises. We have the option to exclusively
license patent rights that Emory acquires from the sponsored research, under the
terms of our license agreement with Emory. The agreement may be terminated upon
mutual agreement, if a party is in material breach, or upon proper notice by
either party if the principal investigator at Emory University is terminated and
a suitable replacement is not identified.
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 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. The U.S. Patent and Trademark Office has
recently allowed one of our patent applications that covers 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. The U.S. Patent and Trademark Office has allowed
another of our patent applications that covers the use of a class of compounds
closely related to AGI-1067 to treat VCAM-1 mediated diseases. These key
applications have also been filed in 20 non-U.S. 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.
Other V-Protectant Compounds
We have filed patent applications in the United States and non-U.S.
countries that 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. Some of these compounds are novel and
some represent new uses for known compounds. In addition we have exclusively
licensed patents from Emory University that cover the use of a class of
compounds which act as v-protectants.
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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. 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 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 drug
candidates. For example, U.S. patent applications are confidential while pending
in the Patent and Trademark Office, and patent applications filed in non-U.S.
countries are often first published six months or more after filing. 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 such license on
acceptable terms or at all. Any failure to obtain such licenses could delay or
prevent us from developing or commercializing our drug candidates, which would
adversely 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 others, or require us to cease selling our future products.
Trademarks
We have applications to register the trademarks AtheroGenics and associated
design, AGI and Oxykine pending with the U.S. Patent and Trademark Office. We
cannot assure you that our applications to register these trademarks will be
successful. We have no knowledge of any infringement or any prior claims of
ownership of trademarks that would materially adversely affect our current
operations.
EXCLUSIVE LICENSE AGREEMENT WITH SCHERING-PLOUGH
On October 22, 1999 we entered into a worldwide exclusive license agreement
with Schering-Plough. This agreement consists of contracts with two
Schering-Plough affiliates. Under the agreement we granted to Schering-Plough an
exclusive license under our patents and know-how to make, use and sell AGI-1067
and other specified compounds for the treatment of restenosis, coronary artery
disease and atherosclerosis. During the term of the agreement with
Schering-Plough, we will not develop or commercialize outside the agreement any
compound for the treatment or prevention of restenosis, coronary artery disease
or atherosclerosis.
Schering-Plough paid us an initial nonrefundable licensing fee of
$5,000,000 upon signing the agreement and has assumed responsibility for all
costs going forward associated with the development, manufacturing and
commercialization of products containing AGI-1067 and any other licensed
compound. Further, Schering-Plough will make certain payments to us upon
achievement of clinical and regulatory milestones. Schering-Plough will also pay
us a royalty on all net sales of licensed products and will pay us fees
associated with the achievement of certain annual sales levels.
Schering-Plough's total direct payments to us for the initial indication of
restenosis, excluding royalties and development costs, could reach $189 million
during the term of the agreement. The amount and timing of any milestone and
royalty payments, however, are subject to events many of which are beyond our
control and the achievement of which we cannot assure.
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The agreement will terminate when the last patent right which is the
subject of the agreement expires. Schering-Plough may terminate the agreement at
any time upon 60 days prior written notice to us. We may terminate the agreement
upon the failure of Schering-Plough to meet certain development milestones.
Either party may terminate the agreement upon proper notice of certain uncured
material violations of the agreement. In addition, either party may terminate
the agreement on a product-by-product basis if Schering-Plough ceases
commercialization of a licensed product. Finally, either party may terminate the
agreement if the other party incurs specified financial problems. Upon certain
material breaches of the agreement by AtheroGenics, Schering-Plough may either
terminate the agreement, continue the agreement with future milestone payments
materially reduced by a specified percentage, or continue the agreement with
future royalty payments reduced by a specified percentage. Should either party
terminate the agreement, AtheroGenics will have the right to purchase
Schering-Plough's remaining inventory of licensed products at a specified
amount.
MANUFACTURING
We have entered into an arrangement with a third party manufacturer for the
supply of AGI-1067 bulk drug substance and another third party manufacturer for
the formulated drug product. We believe that we could obtain bulk drug and
formulated drug product from other manufacturers and formulators at competitive
prices, if necessary. The present agreements enable us to focus on our research
and development strengths, minimize fixed costs and capital expenditures, and
gain access to advanced manufacturing process capabilities and expertise. Our
exclusive license agreement with Schering-Plough grants them the right to
manufacture AGI-1067 for late-stage clinical trials and commercialization.
Schering-Plough has extensive experience in manufacturing pharmaceutical
products.
Our supplier of the bulk drug substance for AGI-1067 operates 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, which was once widely used in
North America as a cholesterol-lowering agent, but has since been withdrawn from
the North American market due to lack of efficacy. Under the terms of our
contract, our bulk drug supplier is committed to manufacture sufficient
quantities to support development activities for the foreseeable future. This
supplier is currently manufacturing AGI-1067 in development-scale batches.
After manufacture, a third party supplier formulates AGI-1067 into the drug
product under current Good Manufacturing Practice guidelines. We anticipate that
this supplier 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 other v-protectant product candidates.
SALES AND MARKETING
Under our exclusive license agreement for AGI-1067, Schering-Plough will
handle exclusively, or sublicense, on a worldwide basis, sales, marketing and
distribution of AGI-1067 for any therapeutic indication. Schering-Plough has
extensive experience in marketing pharmaceutical products.
We plan to collaborate with large pharmaceutical companies to commercialize
product candidates other than AGI-1067 which 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 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. We
believe that this sales and marketing strategy will enable us to achieve our
financial goals while maintaining our focus on innovative drug discovery coupled
with innovative drug development.
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COMPETITION
We believe pharmaceutical companies and research institutions will increase
their efforts to define and exploit emerging concepts about vascular cell
biology and oxidant signals for drug discovery programs relating to chronic
inflammation. Many of these companies and institutions 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 four 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.
- 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.
We believe that our current Phase II clinical trials demonstrate that we
are maintaining this important first-to-clinic competitive advantage.
- Third, we expect that our exclusive license agreement with
Schering-Plough will allow us to sustain and extend our competitive
advantage.
- Fourth, we believe our scientific, development and licensing expertise
strongly positions us to acquire promising technologies and products
discovered outside AtheroGenics.
Our initial target for drug development is restenosis. We are aware of two
orally-dosed drugs that have shown efficacy in prevention of restenosis in
clinical trials. One of these drugs, Tranilast, is currently in a worldwide
Phase II/III clinical trial sponsored by SmithKline Beecham PLC. The rationale
for this clinical trial is based on efficacy in a limited Phase II clinical
trial in Japan. However, another major pharmaceutical company previously
discontinued Tranilast development during Phase II in the United States as a
treatment of asthma due to significant human liver toxicity. The second drug,
Lorelco, decreased the rate of restenosis in a North American clinical trial
undertaken by an independent investigator. This trial confirmed and extended
results from Japan, where Lorelco is still marketed. However, Aventis SA
previously withdrew Lorelco from North American markets as a lipid-lowering drug
due to lack of efficacy. We believe that a rare but potentially fatal side
effect makes Lorelco's return to the marketplace highly unlikely. In addition to
these drugs, some physicians advocate the use of anti-oxidant vitamins or the
use of specially designed catheters or improved angioplasty techniques to
decrease the incidence or severity of restenosis.
In addition to the drugs and devices that may compete with AGI-1067 in the
treatment of restenosis, there are a number of other drugs and compounds in
development for other indications that we target. A number of companies are
pursuing drugs that control aspects of the immune system across the range of
diseases that we target. For example, Genentech, Inc. in collaboration with
Tanox, Inc. and Novartis AG is developing a novel injectable asthma therapy
based on delivery of an anti-IgE monoclonal antibody, which targets the allergic
component of chronic asthma. In addition, a number of companies are pursuing
cystic fibrosis intervention either through gene therapy in children or through
drugs that target the white blood cell response to chronic bacterial infection
in children and adults.
GOVERNMENTAL REGULATION
We plan to develop prescription-only drugs for the foreseeable future. The
FDA is the regulatory agency that is charged to protect 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.
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Regulatory agencies have established guidelines and regulations for the
drug development process. This process involves several steps. First, the drug
company must generate sufficient pre-clinical 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 pre-clinically.
- 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 use the new drug.
- Phase IV clinical trials support marketing of the drug for its approved
indication. Phase IV clinical trials generate data to allow 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
candidate drug product. 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 drug throughout its life cycle;
- Good Laboratory Practices, which govern the use of 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 protect patients whether they receive an
experimental drug, an approved drug, or an inactive look-alike called a
placebo.
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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 the 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 and to request an accelerated or priority
review of the New Drug Application based on clinical effectiveness in a smaller
number of patients. If the FDA accepts the submission as a priority review, the
time for New Drug Application review and approval is reduced from one year to
six months. We plan to request fast track designation as appropriate for
internal drug development programs.
EMPLOYEES
We currently have 55 full-time employees, including 40 in research and
development. The employee group includes 14 Ph.D.s, five M.D.s and 11 employees
with Masters degrees. We believe that our employee relations are good.
FACILITIES
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 aggregate commitment
under this long-term, non-cancelable lease is approximately $10 million. This
lease may be extended at our option to 2019.
LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
ADVISORY BOARDS
We have established advisory boards to provide guidance and counsel on
aspects of our business. These boards are convened once a year and individual
members are contacted as required. Members of these boards provide input on
product research and development strategy, education and publication plans. The
advisory board members are paid an annual stipend and receive options for common
stock for their services, and are reimbursed for expenses in connection with
attendance at advisory board meetings. The names and members of these boards are
as follows:
<TABLE>
<S> <C>
Scientific Advisory Board
R. Wayne Alexander, M.D., Ph.D., Chairman.......... Professor and Chairman of the Department of
Medicine, Emory University School of
Medicine
Victor J. Dzau, M.D. .............................. Chairman, Department of Medicine, Harvard
Medical School
David Harrison, M.D. .............................. Professor of Medicine, Division of Cardiology,
Emory University School of Medicine
Dennis Liotta, Ph.D. .............................. Professor of Chemistry and Vice President of
Research, Emory University School of
Medicine
Robert M. Nerem, Ph.D. ............................ Parker H. Petit Professor and Director,
Bioengineering and Bioscience, Georgia
Institute of Technology
</TABLE>
40
<PAGE> 43
<TABLE>
<S> <C>
Sampath Parthasarathy, Ph.D. ...................... Professor, Department of Gynecology and
Obstetrics, Emory University School of
Medicine
Robert D. Rosenberg, M.D., Ph.D. .................. Professor of Biology, Massachusetts Institute
of Technology and Professor of Medicine,
Harvard Medical School
Clinical Advisory Board
William Virgil Brown, M.D. ........................ Professor of Medicine, Director of Division of
Atherosclerosis & Lipid Metabolism, Emory
University School of Medicine
Harvey M. Golomb, M.D. ............................ Professor and Chairman, Department of
Medicine, and Director, Section of
Hematology/Oncology, The University of
Chicago
Joseph L. Witzum, M.D. ............................ Professor of Medicine, University of
California at San Diego
</TABLE>
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information regarding our executive
officers, key employees and directors as of June 27, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Russell M. Medford, M.D., Ph.D................. 45 President, Chief Executive Officer and
Director
Mark P. Colonnese.............................. 44 Vice President of Finance and Administration,
Chief Financial Officer and Assistant
Secretary
Mitchell Glass, M.D............................ 48 Vice President, Clinical Development and
Regulatory Affairs
Don Kirksey, Ph.D.............................. 52 Vice President of Business and Corporate
Development
William A. Scott, Ph.D......................... 60 Vice President -- Research and Director
Michael A. Henos (1)........................... 51 Chairman of the Board of Directors
R. Wayne Alexander, M.D., Ph.D................. 59 Director and Secretary
Vaughn D. Bryson............................... 62 Director
T. Forcht Dagi, M.D. (2)....................... 51 Director
Vijay K. Lathi (2)............................. 27 Director
Arda Minocherhomjee (1)........................ 46 Director
Arthur M. Pappas (1)........................... 52 Director
Richard S. Schneider (2)....................... 59 Director
</TABLE>
---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Russell M. Medford, M.D., Ph.D. is our scientific co-founder, President and
Chief Executive Officer and has served as a member of our board of directors
since our inception in 1993. Dr. Medford has been our President and Chief
Executive Officer since 1995 after serving as Executive Vice President from 1993
to 1995. Since 1989, Dr. Medford has held a number of academic appointments at
the Emory University School of Medicine, most recently as Associate Professor of
Medicine and Director of Molecular Cardiology. Dr. Medford is a molecular
cardiologist whose research has focused on the molecular basis of cardiovascular
disease and holds 11 U.S. patents. Dr. Medford currently serves on advisory
committees to the National Heart, Lung and Blood Institute of the National
Institutes of Health. He is also a director of privately-held Inhibitex, Inc.
and Helios Health, Inc. Dr. Medford also serves on the Board of Trustees of
EmTech Biotechnology Development, Inc. Dr. Medford received a B.A. from Cornell
University, and an M.D. with Distinction and a Ph.D. in molecular and cell
biology from the Albert Einstein College of Medicine. Dr. Medford completed his
residency in internal medicine at the Beth Israel Hospital and his fellowship in
cardiology at the Brigham and Women's Hospital and Harvard Medical School, where
he also served on the faculty of Medicine.
Mark P. Colonnese has served as our Vice President of Finance &
Administration and Chief Financial Officer since 1999. Prior to joining us, Mr.
Colonnese was at Medaphis Corporation from 1997 to 1998, serving most recently
as Senior Vice President and Chief Financial Officer. Previously, Mr. Colonnese
was Vice President of Finance and Chief Financial Officer and a member of the
executive committee at Applied Analytical Industries, Inc., a pharmaceutical
development company, from 1993 to 1997. Mr. Colonnese served on the board of
directors of Endeavor Pharmaceuticals, Inc. from 1994 to 1997. From 1983 to
1993, Mr. Colonnese held a number of executive and management positions at
Schering-Plough Corporation, culminating as Senior Director of Planning and
Business Analysis. Mr. Colonnese
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<PAGE> 45
holds an M.B.A. from Fairleigh Dickinson University and a B.S. magna cum laude
from Ithaca College, and is a Certified Public Accountant.
Mitchell Glass, M.D. has served as our Vice President, Clinical Development
and Regulatory Affairs since 1997. From 1995 to 1996, Dr. Glass served as Vice
President and Director of Cardiopulmonary Clinical Research, Development and
Medical Affairs at SmithKline Beecham PLC. From 1988 to 1995, Dr. Glass held
various positions at ICI Pharmaceuticals PLC, subsequently Zeneca PLC, where he
was responsible for developing the pulmonary therapeutics group. From 1985 to
1987, Dr. Glass served as an attending physician in Pulmonary Medicine and
Critical Care at Graduate Hospital while maintaining a teaching position at the
University of Pennsylvania. From 1981 to 1984, Dr. Glass was a postdoctoral
Fellow and Research Associate in Pulmonary Medicine and Respiratory Physiology
at the University of Pennsylvania. Dr. Glass received B.A. and M.D. degrees from
the University of Chicago and completed his residency in internal medicine and
clinical fellowship in Pulmonary Medicine at Presbyterian, University of
Pennsylvania Medical Center.
Don Kirksey, Ph.D. has served as our Vice President of Business and
Corporate Development since 1998. Prior to joining us, Dr. Kirksey was Vice
President of Licensing and Business Development at Medco Research, Inc. from
1996 to 1998. From 1989 to 1996, Dr. Kirksey served as Director of Global
Research Alliances at Glaxo Wellcome, Inc. Dr. Kirksey received his Ph.D. from
the University of Mississippi and a B.S. from Delta State University. He was a
National Institutes of Health Neuroscience Fellow and is a member of the
American Association for the Advancement of Science and the Licensing Executive
Society.
William A. Scott, Ph.D. has served as a member of our board of directors
since 1997 and in a consulting role as our Vice President -- Research since May
2000. Dr. Scott was Chief Executive Officer and a member of the board of
directors of Physiome Sciences, Inc., a company that specializes in the design
of computer models of human organs, from 1997 to 1999. From 1983 to 1996, Dr.
Scott held numerous positions at the Bristol-Myers Squibb Research Institute,
most recently as Senior Vice President of Drug Discovery from 1990 until 1996.
Dr. Scott has served as an Adjunct Professor at the Rockefeller University since
1983 and as an Associate Dean and Associate Professor at Rockefeller University.
Michael A. Henos has served as Chairman of our board of directors since
1994 and was our Chief Financial Officer from 1994 to 1999. From 1991 to the
present, Mr. Henos has served as managing general partner of Alliance Technology
Ventures, L.P., a venture capital fund formed to invest in technology-based
startup companies located in the Southeastern United States. Mr. Henos served as
a general partner with Aspen Ventures, a $150 million early stage venture
capital partnership from 1986 to 1993. Mr. Henos previously served as a vice
president of 3I Ventures Corporation, the predecessor of Aspen Ventures from
1986 to 1991. From 1984 to 1986, Mr. Henos served as a healthcare consultant
with Ernst & Young, specializing in venture financing of startup medical
technology companies. Before joining Ernst & Young, Mr. Henos served in a
variety of operating management positions and co-founded and served as Chief
Executive Officer of ProMed Technologies, Inc. Mr. Henos previously served as a
director of KeraVision, Inc.
R. Wayne Alexander, M.D., Ph.D. is our scientific co-founder and has served
as a member of our board of directors since our inception in 1993. Dr. Alexander
has been a Professor of Medicine since 1988 and Chairman of the Department of
Medicine of Emory University School of Medicine and Emory University Hospital
since 1999. From 1988 to 1999, Dr. Alexander served as the Director of the
Division of Cardiology at the Emory University School of Medicine and Emory
University Hospital. Prior to his appointment at Emory University School of
Medicine, Dr. Alexander served as Associate Professor of Medicine at Harvard
Medical School from 1982 to 1988. Dr. Alexander received his Ph.D. in physiology
from Emory University and his M.D. from Duke University School of Medicine. Dr.
Alexander completed his residency in internal medicine at the University of
Washington and completed his fellowship in cardiology at Duke University.
Vaughn D. Bryson has served as a consultant to us since 1996 and a member
of our board of directors since February 2000. Mr. Bryson is President of Life
Science Advisors, a consulting firm focused on
43
<PAGE> 46
assisting biopharmaceutical and medical device companies in building shareholder
value. Mr. Bryson was a 32-year employee of Eli Lilly & Company and served as
President and Chief Executive Officer of Eli Lilly from 1991 to 1993. Mr. Bryson
was Executive Vice President of Eli Lilly from 1986 until 1991 and served as a
member of Eli Lilly's board of directors from 1984 until his retirement in 1993.
Mr. Bryson was Vice Chairman of Vector Securities International from 1994 to
1996. He is also a director of Amylin Pharmaceuticals Inc., Ariad
Pharmaceuticals Inc., Boehringer Ingelheim Corporation, the U.S. subsidiary of
Boehringer Ingelheim GmbH, Chiron Corporation and Quintiles Transnational Corp.,
and privately-held Fusion Medical Technologies, Inc. and Molecular Geriatrics,
Inc. Mr. Bryson received a B.S. degree in Pharmacy from the University of North
Carolina and completed the Sloan Program at the Stanford University Graduate
School of Business.
T. Forcht Dagi, M.D., M.P.H., F.A.C.S., F.C.C.M. has served as a member of
our board of directors since 1999. Dr. Dagi joined Cordova Ventures, LLP, a
venture fund with over $250 million under management as a Managing Partner in
1996. Prior to joining Cordova, Dr. Dagi served as director and principal of
Access Partners, an early stage biotechnology fund. Dr. Dagi serves as a
director of the following privately-held companies: AviGenics, Inc., Inhibitex,
Inc., Cogent Neuroscience, Inc., Encelle, Inc., iPhysicianNet Inc., Merix
Biosciences, Inc. and Xanthon, Inc. Dr. Dagi received an A.B. from Columbia
College, an M.D. from the Johns Hopkins School of Medicine, an M.P.H. from the
Johns Hopkins School of Hygiene and Public Health, an M.T.S. from Harvard
University, and an M.B.A. in finance and strategic planning from the Wharton
School of the University of Pennsylvania. Dr. Dagi was trained in neurosurgery
and neurophysiology at the Massachusetts General Hospital and Harvard Medical
School, where he was a Neuroresearch Foundation Fellow. Dr. Dagi is a diplomat
of American Board of Neurological Surgeons and a Fellow of both the American
College of Surgeons and the College of Critical Care Medicine.
Vijay K. Lathi has served as a member of our board of directors since 1999.
Mr. Lathi joined The Sprout Group in 1998 as an associate focused on life
science, medical devices and information technology related to healthcare. Prior
to joining Sprout, Mr. Lathi served as an analyst with the healthcare venture
capital group at Robertson Stephens & Company from 1997 to 1998. From 1995 to
1997, Mr. Lathi served as an analyst at Cornerstone Research, an economic and
financial consulting firm. Mr. Lathi received his B.S. in chemical engineering
from Massachusetts Institute of Technology and his M.S. in chemical engineering
from Stanford University.
Arda M. Minocherhomjee, Ph.D. has served as a member of our board of
directors since 1999. Dr. Minocherhomjee currently serves as Managing Director
of William Blair Capital Partners, LLC. He joined William Blair & Company in
1992 as a Senior Healthcare Analyst. Dr. Minocherhomjee subsequently served as
head of the firm's healthcare research group. Dr. Minocherhomjee serves as a
director of the following privately-held companies: Morton Grove Pharmaceuticals
Inc., Pharma Research Corporation, Cypres Medical Products, Inc. and DJ Pharma,
Inc. He received an M.Sc. in Pharmacology from the University of Toronto and a
Ph.D. in Pharmacology and an M.B.A. from University of British Columbia. Dr.
Minocherhomjee was a post-doctoral fellow in pharmacology at University of
Washington Medical School.
Arthur M. Pappas has served as a member of our board of directors since
June 1995. Mr. Pappas is Chairman and Chief Executive Officer of A.M. Pappas &
Associates, LLC, an international consulting, investment and venture company
that works with life science companies, products and related technologies. Prior
to founding A.M. Pappas & Associates in 1994, Mr. Pappas was a director on the
main board of Glaxo Holdings PLC with executive responsibilities for operations
in Asia Pacific, Latin America, and Canada. In this capacity, Mr. Pappas was
Chairman and Chief Executive of Glaxo Far East (Pte) Ltd. and Glaxo Latin
America Inc., as well as Chairman of Glaxo Canada Inc. Mr. Pappas has held
various senior positions with Abbott Laboratories International Ltd., Merrell
Dow Pharmaceuticals and the Dow Chemical Company, in the United States and
internationally. Mr. Pappas is a director of KeraVision, Inc., Quintiles
Transnational Corp. and Valentis Inc., and privately-held ArgoMed, Inc. and
Embrex, Inc. Mr. Pappas received a B.S. in biology from Ohio State University
and an M.B.A. in finance from Xavier University.
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<PAGE> 47
Richard S. Schneider, Ph.D. has served as a member of our board of
directors since 1997 and currently serves as a general partner of One Palmer
Square Associates, L.L.C., the general partner of various Domain Associates,
L.L.C. affiliates. Dr. Schneider served as a Managing Member of Domain
Associates, a venture capital firm that manages over $500 million and invests in
life sciences companies, from 1990 until his retirement in 1998. Prior to
joining Domain Associates, Dr. Schneider served as a Vice President of 3I
Ventures Corporation, a venture capital firm, from 1986 to 1990. From 1983 to
1989, Dr. Schneider served as President of Biomedical Consulting Associates Inc.
Dr. Schneider was a founder and Vice President from 1967 to 1983 of Syva
Company, subsequently a division of Syntex Corporation. Dr. Schneider also is a
director of the following privately-held companies: Landec Corporation, Mitokor,
Inc. and Selective Genetics, Inc.
BOARD COMPOSITION
Pursuant to our amended and restated articles of incorporation and amended
and restated bylaws, our board of directors is divided into three classes, with
each director serving a three-year term (after the initial term). Directors are
elected to serve until they resign or are removed, or are otherwise disqualified
to serve, or until their successors are elected and qualified. The directors of
Class I, Mr. Bryson, Mr. Lathi and Dr. Schneider, hold office until the first
scheduled annual meeting of shareholders following the offering. The directors
of Class II, Dr. Alexander, Dr. Dagi, Dr. Minocherhomjee and Dr. Scott, hold
office until the second annual meeting of shareholders following the offering.
The Directors of Class III, Mr. Henos, Dr. Medford and Mr. Pappas, hold office
until the third scheduled annual meeting of shareholders. Executive officers are
elected by and serve at the discretion of our board of directors. No family
relationships exist among any of our directors or executive officers.
BOARD COMMITTEES
We have established an audit committee, a compensation committee, an
M&A/strategic committee and a science committee.
Audit Committee. The audit committee, which consists of Dr. Dagi, Mr.
Lathi and Dr. Schneider, is responsible for nominating our independent auditors
for approval by the board of directors and reviewing the scope, results and
costs of the audits and other services provided by our independent auditors.
Compensation Committee. The compensation committee, which consists of Mr.
Henos, Dr. Minocherhomjee and Mr. Pappas, reviews and approves the compensation
and benefits for our executive officers, administers our 1995 Stock Option Plan
and 1997 Equity Ownership Plan, and makes recommendations to the board of
directors regarding such matters.
M&A/Strategic Committee. The M&A/strategic committee, which consists of
Drs. Medford, Minocherhomjee and Schneider, is responsible for providing
guidance to us on matters relating to mergers and acquisitions and other
strategic issues.
Science Committee. The science committee, which consists of Drs. Alexander
and Scott, is responsible for providing guidance to us on science-related
matters.
DIRECTOR COMPENSATION
During 1999, we did not provide any compensation to members of our board of
directors for serving on our board or for attendance at committee meetings. We
reimbursed our non-management directors for ordinary and necessary travel
expenses to attend board and committee meetings.
In connection with joining our board of directors in February 2000, we have
entered into a four-year consulting agreement with Mr. Bryson pursuant to which
he will assist management in assessing growth opportunities and strategic
direction. Our board of directors has agreed to pay Mr. Bryson for his
consulting services a non-qualified stock option to acquire up to 20,000 shares
of common stock with an exercise price equal to the fair market value of our
common stock on the date of grant. The option vests 25% on the first anniversary
of the date of grant and approximately 2% per month thereafter.
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<PAGE> 48
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or compensation
committee.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned during
the year ended December 31, 1999 by our Chief Executive Officer and four other
most highly compensated executive officers whose total salary and bonus exceeded
$100,000 for services rendered to us in all capacities during 1999. The
executive officers listed in the table below are referred to as the Named
Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
---------------------- OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) (#) ($)(1)
--------------------------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Russell M. Medford, M.D., Ph.D..................... 237,000 -- 300,000 4,990
President and Chief Executive Officer
Mark P. Colonnese.................................. 182,083 30,000 140,000 3,681(2)
Vice President, Finance and Administration,
Chief Financial Officer and Assistant
Secretary
Mitchell Glass, M.D................................ 210,000 -- 20,000 27,508(3)
Vice President, Clinical Development and
Regulatory Affairs
Don Kirksey, Ph.D.................................. 182,292 -- 50,000 44,914(4)
Vice President, Business and Corporate
Development
Uday Saxena, Ph.D.(5).............................. 120,000 -- -- 3,600
Vice President, Pre-Clinical Research
</TABLE>
---------------
(1) Includes for each named executive officer a 401(k) Plan matching
contribution by us as follows: Dr. Medford: $4,990; Mr. Colonnese: $1,420;
Dr. Kirksey: $1,312; Dr. Saxena: $3,600.
(2) Includes $2,256 for consulting services prior to employment.
(3) Represents reimbursement for personal travel.
(4) Represents reimbursement for moving and relocation expenses.
(5) Dr. Saxena resigned as Vice President, Pre-Clinical Research as of April 30,
2000. Dr. Saxena has agreed to serve as a consultant to us during the
transition of his job responsibilities to Dr. Scott.
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<PAGE> 49
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1999
The following table sets forth information concerning the individual grants
of stock options to each of the Named Executive Officers during the fiscal year
ended December 31, 1999. All options were granted under our 1997 Equity
Ownership Plan. Each option has a ten-year term, subject to earlier termination
if the optionee's service with us terminates. Options vest at the rate of 25% on
the anniversary of the vesting commencement date and 1/48th monthly thereafter
in 36 equal installments. All options are granted at the fair value on the date
of grant as determined by our board of directors. In reaching the determination
of fair value at the time of each grant, the board of directors considers a
range of factors, including the price at which we were able to raise funds from
third-party investors through the sale of convertible preferred stock in recent
transactions and the rights of common stock compared to this preferred stock, as
well as the illiquidity of an investment in the common stock. Subsequent to June
30, 1999, fair value has been determined by independent valuations.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANT AT ASSUMED ANNUAL RATES
-------------------------------------------- OF STOCK PRICE
PERCENT OF TOTAL APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM(2)
UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION ---------------------------
NAME GRANTED (#) IN FISCAL YEAR (%)(1) ($/SH) DATE 5%($) 10%($)
---- -------------------- --------------------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Russell M. Medford, M.D.,
Ph.D....................... 200,000 26.9 0.30 4/28/09 3,849,347 6,164,982
100,000 13.5 0.31 12/8/09 1,923,674 3,081,491
Mark P. Colonnese............ 120,000 16.1 0.30 2/23/09 2,309,608 3,698,989
20,000 2.7 0.31 12/8/09 384,735 616,298
Mitchell Glass, M.D. ........ 20,000 2.7 0.30 4/28/09 384,935 616,498
Don Kirksey, Ph.D............ 50,000 6.7 0.31 12/8/09 961,837 1,540,745
Uday Saxena, Ph.D............ -- -- -- -- -- --
</TABLE>
---------------
(1) In 1999, we granted options to employees to purchase an aggregate of 743,500
shares of common stock.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. The 5% and 10% assumed rates of appreciation are
mandated by the rules of the Securities and Exchange Commission and are
applied to an assumed initial public offering price of $12.00 per share.
These assumptions are not intended to forecast future appreciation of our
stock price. The potential realizable value computation does not take into
account federal or state income tax consequences of option exercises or
sales of appreciated stock. The actual gains, if any, on the stock option
exercises will depend on the future performance of the common stock, the
optionee's continued employment through applicable vesting periods and the
date on which the options are exercised and the underlying shares are sold.
AGGREGATE OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
The following table provides certain summary information concerning stock
options held as of December 31, 1999, by each of the Named Executive Officers.
None of the Named Executive Officers exercised stock options in 1999.
47
<PAGE> 50
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT AT DECEMBER 31,
DECEMBER 31, 1999(#) 1999($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Russell M. Medford, M.D., Ph.D................... 100,000 300,000 1,190,000 3,509,000
Mark P. Colonnese................................ -- 140,000 -- 1,636,600
Mitchell Glass, M.D.............................. 75,000 75,000 877,500 877,500
Don Kirksey, Ph.D................................ 25,000 125,000 292,500 1,462,000
Uday Saxena, Ph.D................................ 91,300 28,700 1,068,210 335,790
</TABLE>
---------------
(1) There was no public trading market for our common stock as of December 31,
1999. Accordingly, the value of unexercised in-the-money options as of that
date was calculated on the basis of an assumed initial public offering price
of $12.00 per share, less the aggregate exercise price of the options.
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan
As of June 27, 2000, a total of 277,800 shares of common stock were
reserved for issuance under our 1995 Stock Option Plan, or 1995 Plan, 260,000 of
which were subject to outstanding options. The 1995 Plan provides for the grant
of options to which Internal Revenue Code sec.422, relating generally to
incentive stock options and other options, does not apply. The 1995 Plan
provides for granting stock options to our directors, employees, consultants and
contractors. The 1995 Plan is administered by our board of directors. Subject to
the provisions of the 1995 Plan, the board of directors has the authority and
sole discretion to determine and designate those persons to whom options are
granted, the option price of the shares covered by any options granted, the
manner in and conditions under which options are exercisable, including any
limitations or restrictions thereon, and the time or times at which options
shall be granted. Our board of directors may not grant any options under the
1995 Plan more than ten years after its date of adoption. The maximum term of
options granted under the 1995 Plan is ten years. Unless terminated earlier in
accordance with the provisions of the 1995 Plan, the 1995 Plan will terminate
upon the later of:
- the complete exercise or lapse of the last outstanding option, or
- the last date upon which options may be granted under the 1995 Plan.
1997 Equity Ownership Plan
As of June 27, 2000, a total of 3,354,163 shares of common stock were
reserved for issuance under our 1997 Equity Ownership Plan, or 1997 Plan, of
which options to purchase an aggregate of 2,320,725 shares were outstanding and
1,033,438 shares were available for future grant. No participant in the 1997
Plan may be granted awards in excess of 30% of the total number of shares
authorized for issuance under the 1997 Plan. The 1997 Plan provides for the
grant of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code, nonqualified stock options, shares of restricted stock,
stock appreciation rights and performance awards to our employees, directors,
consultants and advisors. Incentive stock options may be granted only to our
employees. The 1997 Plan is administered by our board of directors or its
designee(s). Subject to the provisions of the 1997 Plan, the administrator has
the authority to determine:
- to whom awards will be granted,
- the time when awards may be granted,
- the number of shares to be covered by an award,
- when an award becomes exercisable,
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<PAGE> 51
- the exercise price of an award, which price, in the case of incentive
stock options, shall not be less than the fair market value of our common
stock on the date of grant or, in the case of incentive stock options
granted to employees who own, directly or indirectly, more than 10% of
our total combined voting power, 110% of the fair market value of our
common stock on the date of grant, and
- any restrictions or conditions on the shares subject to awards.
The maximum term of incentive stock options granted under the 1997 Plan is ten
years. Our board of directors may terminate the 1997 Plan at any time, provided
that no termination without the consent of the holder of an award shall
adversely affect the rights of the participant under the award.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan,
or 401(k) Plan. Under the 401(k) Plan, eligible participating employees may
elect to contribute up to 15% of their salary, up to the maximum amount of tax
deferred contribution allowed by the Internal Revenue Code. The 401(k) Plan
permits us to make discretionary matching contributions. During 1999 we matched
50% of employees' contributions, up to a maximum of 6% of employees' annual base
compensation. The 401(k) Plan is intended to qualify under Section 401 of the
Internal Revenue Code so that contributions by employees or by us to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that our contributions will be
deductible by us when made. The trustee under the 401(k) Plan, at the direction
of each participant, invests the assets of the 401(k) Plan in any number of
investment options.
EMPLOYMENT AND CONSULTING AGREEMENTS
We do not have employment agreements with any of our employees. We expect
to enter into an employment agreement with Dr. Medford within the next 30 days.
Our proposed employment agreement with Dr. Medford will have an initial
term of three years, commencing on the effective date of the agreement. The
initial term will extend automatically for one year on the second anniversary of
the effective date of the agreement and on each anniversary thereafter, unless,
prior to such anniversary, either party gives notice that it wishes to terminate
the agreement at the end of the then current employment term. The proposed
agreement provides for a base salary of not less than $275,000 per year and
annual incentive compensation to be determined by our board of directors in its
discretion. However, for the first year of the agreement, the target annual
incentive would be $100,000 or 38% of base salary. Following our initial public
offering, our board of directors would grant annually to Dr. Medford (subject to
availability) additional stock or stock options with a value of at least 60% of
Dr. Medford's then current base salary. The proposed employment agreement also
provides Dr. Medford with an allowance for financial and tax planning assistance
not to exceed $15,000 during the first year of the agreement and not to exceed
$7,500 annually in subsequent years.
If we terminate the agreement other than for cause or we choose not to
extend the agreement, or if Dr. Medford terminates the agreement as a result of
a constructive discharge or a change of control of AtheroGenics, we must
continue Dr. Medford's then current base salary and target annual incentive for
two years from the effective date of such termination. In the event that Dr.
Medford voluntarily resigns or is discharged for cause, he will receive no
special severance benefits or compensation. We expect that Dr. Medford's
employment contract will have post-termination noncompete and nonsolicitation
provisions typical for a person serving as an executive officer of a company.
On May 11, 2000, we entered into a consulting agreement with Dr. Scott, a
member of our board of directors, to engage him to serve as Vice
President -- Research for a period of up to six months. We agreed to pay Dr.
Scott $900 per day onsite, plus we will award him 1,000 shares of common stock
for each month of service. As of June 27, 2000, we have awarded Dr. Scott 3,000
shares of common stock. The agreement may be terminated at any time by either
party.
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<PAGE> 52
CERTAIN TRANSACTIONS
Since January 1, 1997, we have engaged in the following transactions with
our directors, officers and 5% shareholders and affiliates of our directors,
officers and 5% shareholders:
In January 1995, we entered into a license agreement with Emory University.
Under the terms of this agreement, Emory granted to us an exclusive right and
license to make, use and sell products utilizing inventions claimed in several
patents developed by employees of Emory. The Emory employees who developed the
licensed patents include Russell M. Medford, M.D., Ph.D., our President, Chief
Executive Officer and director, R. Wayne Alexander, M.D., Ph.D., our Secretary
and a member of our board of directors, and Sampath Parthasarathy, Ph.D., a
member of our scientific advisory board. The license agreement requires us to
make royalty payments to Emory based on certain percentages of net revenue we
derive from sales of products utilizing inventions claimed in the licensed
patents and from sublicensing of the licensed patents. The license agreement
also provides for milestone payments to Emory upon the occurrence of certain
events relating to the development of products utilizing the licensed patents.
Drs. Alexander, Medford and/or Margaret K. Offermann, M.D., Ph.D., Dr. Medford's
wife, will receive a portion of our payments to Emory under the license
agreement. We paid a signing fee to Emory upon the execution of this agreement
and an additional amount for achievement of the first milestone under the
agreement. We are required to pay Emory royalties upon sales of products
utilizing the patent technology and milestone payments totaling $250,000, if all
sales and milestone objections are met. We have not made any other royalty or
milestone payments to Emory under this agreement to date.
We are a party to a sponsored research agreement with Emory dated October
14, 1996. Under the terms of this agreement, Emory agrees to collaborate with us
and furnish the facilities necessary to carry out a specified research program.
As discussed above, some of our directors and executive officers are employees
of Emory. We have paid approximately $300,000 to Emory pursuant to this
agreement.
We are a party to a patent purchase agreement dated April 26, 1995 with
Sampath Parthasarathy, Ph.D., a member of our scientific advisory board, whereby
we are obligated to pay to Dr. Parthasarathy royalties based upon the gross
selling price paid to us by a purchaser of any process, service or product that
utilizes one of the claimed inventions of the patents purchased from Dr.
Parthasarathy. We have not made any royalty payments to Dr. Parthasarathy
pursuant to this agreement.
In August 1998 we consummated a bridge financing in which we issued an
aggregate of $6,000,000 principal amount notes bearing interest at a rate per
annum equal to the prime rate as published in The Wall Street Journal plus 2%.
At that time we also issued warrants exercisable for shares of our Series B
convertible preferred stock covering an aggregate of 10% of the original
principal amount of the notes to the purchasers of the notes. We issued $150,000
principal amount notes with the same terms to additional investors in February
1999. In April 1999 we issued warrants exercisable for shares of our Series C
convertible preferred stock covering an aggregate of 10% of the original
principal amount of the notes to the participants in the bridge financing as
consideration for extending the maturity of the notes. The notes and a portion
of the accrued interest on the notes were converted into 2,140,357 shares of our
Series C convertible preferred stock in April 1999. The investors in this
financing consisted principally of the holders of our convertible preferred
stock. These investors included 5% shareholders Alliance Technology Ventures,
L.P. and related entities, Domain Associates, L.L.C. and related entities and
The Sprout Group, as well as Arthur M. Pappas, a member of our board of
directors. Russell M. Medford, our President and Chief Executive Officer and a
member of our board of directors, is a Special Limited Partner of Alliance,
Michael A. Henos, Chairman of our board of directors, is the General Partner of
Alliance, Richard S. Schneider, a member of our board of directors, is a General
Partner of One Palmer Square Associates III, L.P., the General Partner of Domain
Partners III, L.P. and DP III Associates, L.P., and was a Managing Member of
Domain Associates, L.L.C. until 1998, and Vijay K. Lathi, a member of our board
of directors, is an associate with Sprout.
In July 1999, we entered into a sublease agreement with ATV Management
Corp. for certain office space that, unless otherwise extended, will expire in
July 2002. Michael A. Henos, Chairman of our board of directors, is the
President and sole shareholder of ATV Management. The agreement provides for
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<PAGE> 53
monthly lease payments of approximately $6,200 to us from ATV Management. This
monthly lease payment is substantially equivalent to our monthly lease payment
for equivalent space. To date, we have received approximately $62,000 from ATV
Management pursuant to this agreement.
In April, May and August of 1999, we issued an aggregate of 5,899,999
shares of Series C convertible preferred stock at a price of $3.00 per share.
Investors in this financing included 5% shareholders Alliance, Domain and
Sprout, and their related entities, referred to above.
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<PAGE> 54
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of June 27, 2000 and as adjusted to reflect the
sale of common stock offered hereby for:
- each person who is known by us to beneficially own more than 5% of
our common stock;
- our Chief Executive Officer and each of our Named Executive
Officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons and entities named in the table
below have sole voting and sole investment power with respect to the shares set
forth opposite such person's or entity's name.
The percentage of beneficial ownership before the offering is based on
16,820,585 shares, consisting of 2,961,483 shares of common stock outstanding as
of June 27, 2000, and 13,859,102 shares issuable upon conversion of preferred
stock. The percentage of beneficial ownership after the offering is based on
22,820,585 shares, including the shares to be sold in this offering. Shares of
common stock subject to options or warrants currently exercisable or exercisable
within 60 days of June 27, 2000 are deemed outstanding for purposes of computing
the percentage ownership of the person holding such options or warrants, but are
not deemed outstanding for purposes of computing the percentage ownership of any
other person. The post-offering ownership percentages in the table below do not
take into account any exercise of the underwriters' over-allotment option.
Unless otherwise indicated, the address for each of the individuals listed in
the table is c/o AtheroGenics, Inc., 8995 Westside Parkway, Alpharetta, Georgia
30004.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
OWNED
-------------------
SHARES BEFORE AFTER
BENEFICIALLY THE THE
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with Alliance Technology Ventures,
L.P. ..................................................... 2,735,008(1) 16.3% 12.0%
8995 Westside Parkway
Suite 200
Alpharetta, Georgia 30004
Entities affiliated with William Blair Capital Partners VI,
L.P. ..................................................... 2,678,667(2) 15.9% 11.7%
232 West Adams Street
Chicago, Illinois 60606
Entities affiliated with Sprout Capital, VII, L.P........... 1,709,212(3) 10.1% 7.5%
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, California 94025
Entities affiliated with Domain Associates, L.L.C........... 1,655,557(4) 9.8% 7.2%
One Palmer Square
Suite 515
Princeton, New Jersey 08542
3i Bioscience Investment
Trust plc................................................... 953,912(4) 5.7% 4.2%
91 Waterloo Road
London SE18XP
England
Michael A. Henos............................................ 2,891,008(5) 17.2% 12.7%
</TABLE>
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<PAGE> 55
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
OWNED
-------------------
SHARES BEFORE AFTER
BENEFICIALLY THE THE
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Arda Minocherhomjee, Ph.D. ................................. 2,678,667(6) 15.9% 11.7%
Richard S. Schneider, Ph.D. ................................ 1,524,557(7) 9.0% 6.7%
Russell M. Medford, M.D., Ph.D. ............................ 821,900(8) 4.8% 3.6%
R. Wayne Alexander, M.D., Ph.D. ............................ 798,900(9) 4.7% 3.5%
T. Forcht Dagi, M.D. ....................................... 678,666(10) 4.0% 3.0%
Arthur M. Pappas............................................ 125,301(11) * *
Uday Saxena, Ph.D........................................... 97,850 * *
Mitchell Glass, M.D......................................... 89,800(12) * *
Vaughn D. Bryson............................................ 55,032 * *
Mark P. Colonnese........................................... 44,400(12) * *
William A. Scott, Ph.D...................................... 44,000(13) * *
Don Kirksey, Ph.D........................................... 39,000(12) * *
Vijay K. Lathi.............................................. 12,000(12) * *
All directors and executive officers as a group (14
persons).................................................. 9,901,081 56.7% 42.2
</TABLE>
---------------
* Less than one percent (1%) of outstanding shares.
(1) Includes 2,089,879 shares owned by Alliance Technology Ventures, L.P.,
483,011 shares owned by ATV/GP Parallel Fund, L.P., and 162,118 shares
owned by ATV/MFJ Parallel Fund, L.P. Michael A. Henos, managing general
partner of Alliance Technology Venture, L.P., exercises voting and
investment power over the shares owned by these entities. See footnote (5)
below.
(2) Includes 12,000 shares subject to options exercisable within 60 days by
William Blair & Company, L.L.C. and 2,666,667 shares owned by William Blair
Capital Partners VI, L.P. Arda Minocherhomjee, Managing Director of William
Blair Capital Partners, LLC, which is the general partner of William Blair
Capital Partners VI, L.P., exercises voting and investment power over these
shares. See footnote (6) below.
(3) Includes 1,424,388 shares owned and 62,468 shares subject to warrants
exercisable within 60 days by Sprout Capital VII, L.P.; 16,525 shares owned
and 726 shares subject to warrants exercisable within 60 days by Sprout CEO
Fund, L.P.; 163,740 shares owned and 7,182 shares subject to warrants
exercisable within 60 days by DLJ First ESC, L.P.; and 32,747 shares owned
and 1,436 shares subject to warrants exercisable within 60 days by DLJ
Capital Corp. Philippe Chambon, Vice President of Sprout Group, exercises
voting and investment power over the shares owned by these entities.
(4) Includes 46,443 shares owned and 2,230 shares subject to warrants
exercisable within 60 days by DP III Associates, L.P.; 1,342,446 shares
owned and 64,438 shares subject to warrants exercisable within 60 days by
Domain Partners III, L.P.; and 200,000 shares owned by Domain Associates,
L.L.C. Kathleen Shoemaker, a partner with Domain Associates, L.L.C.,
exercises voting and investment power over the shares owned by these
entities. The shares indicated do not include 906,038 shares owned or
47,874 shares subject to warrants exercisable within 60 days by 3i
Bioscience Investment Trust plc, for whom Domain Associates serves as U.S.
venture capital adviser and with respect to whose shares Domain Associates
has no voting or investment power.
(5) Includes 2,735,008 shares owned by entities affiliated with Alliance
Technology Ventures, L.P. Alliance Technology Ventures, L.P. is a limited
partnership of which Mr. Henos is managing general partner. As such, Mr.
Henos shares voting and investment power over the shares owned by Alliance.
(6) Includes 2,666,667 shares owned by William Blair Capital Partners VI, L.P.
Dr. Minocherhomjee is Managing Director of William Blair Capital Partners,
LLC, which is the general partner of William Blair Capital Partners VI,
L.P. As such, Dr. Minocherhomjee shares voting and investment power over
the shares owned by William Blair Capital Partners VI, L.P. Also includes
12,000 shares
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<PAGE> 56
subject to options exercisable within 60 days by William Blair & Company,
L.L.C. over which Dr. Minocherhomjee shares voting and investment power.
(7) Includes 46,443 shares owned and 2,230 shares subject to warrants
exercisable within 60 days by DP III Associates, L.P.; 1,342,446 shares
owned and 64,438 shares subject to warrants exercisable within 60 days by
Domain Partners III, L.P.; and 48,000 shares held in the name of Domain
Associates, L.L.C. as nominee for Dr. Schneider. Dr. Schneider is a general
partner of One Palmer Square Associates III, L.P., the general partner of
Domain Partners III, L.P. and DP III Associates, L.P. As such, Dr.
Schneider shares voting and investment power over the shares owned by DP
III Associates and Domain Partners III. The shares indicated also include
21,000 shares subject to options exercisable by Dr. Schneider within 60
days.
(8) Includes 166,000 shares subject to options exercisable within 60 days.
(9) Includes 139,000 shares subject to options exercisable within 60 days.
(10) Includes 666,666 shares owned by Cordova Technology Partners, L.P. Cordova
is a limited partnership of which Dr. Dagi is both a limited and general
partner. As such, Dr. Dagi has voting and investment power over the shares
owned by Cordova. The shares indicated also include 12,000 shares subject
to options exercisable by Dr. Dagi within 60 days.
(11) Includes 87,301 shares held by A.M. Pappas Strategic Equities Fund II,
L.P., a limited partnership of which Mr. Pappas is the general partner and
30,000 shares held by A.M. Pappas & Associates, LLC, in which Mr. Pappas
holds a controlling interest and of which Mr. Pappas is the Chairman and
Chief Executive Officer. As such, Mr. Pappas exercises voting and
investment power over these shares.
(12) All of the shares indicated are subject to options exercisable within 60
days.
(13) Includes 41,000 shares subject to options exercisable within 60 days.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our Fourth Amended and Restated Articles of Incorporation, which will
become effective immediately prior to the closing of this offering, authorizes
the issuance of up to 100 million shares of common stock, no par value, and five
million shares of preferred stock, no par value, the rights and preferences of
which may be established from time to time by our board of directors. As of June
27, 2000, 2,961,483 shares of common stock were issued and outstanding and
13,859,102 shares of preferred stock convertible into the same number of shares
of common stock immediately prior to the completion of this offering were issued
and outstanding. As of June 27, 2000, we had 42 common shareholders of record.
Immediately after the closing of this offering, we will have 22,820,525
shares of common stock outstanding, assuming no exercise of options to acquire
2,580,725 additional shares of common stock or warrants to purchase 250,290
additional shares of common stock that are outstanding as of the date of this
prospectus.
The description set forth below gives effect to the filing of the Fourth
Amended and Restated Articles of Incorporation and the adoption of the Third
Amended and Restated Bylaws. The following summary is qualified in its entirety
by reference to our Fourth Amended and Restated Articles of Incorporation and
Third Amended and Restated Bylaws, copies of which will be filed as exhibits to
the registration statement of which this prospectus is a part.
COMMON STOCK
Holders of our common stock have unlimited voting rights. Each shareholder
is entitled to one vote for each share on all matters to be voted upon by the
shareholders. There are no cumulative voting rights and no preemptive or
conversion rights. There are no redemption or sinking fund provisions available
to the common stock. Holders of our common stock are entitled to receive
dividends share for share on a pro rata basis when, as and if declared by the
board of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of AtheroGenics, holders of common stock
will be entitled to share ratably in all assets remaining after payment of
liabilities of AtheroGenics.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed
by law, without shareholder approval, to issue from time to time up to an
aggregate of five million shares of preferred stock, in one or more series, each
series to have such rights and preferences, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences as
shall be determined by our board of directors. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights of
holders of any preferred stock that may be issued in the future. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. As of the consummation of the offering, we will have no shares of
preferred stock outstanding and we have no present plans to issue any shares of
preferred stock.
WARRANTS
We have issued and outstanding warrants to purchase an aggregate of 250,290
shares of our capital stock. In February 1996 and October 1997 we issued to
Phoenix Leasing Incorporated warrants to purchase 12,500 shares of Series B
convertible preferred stock at an exercise price of $3.00 per share, which are
exercisable for five years following this offering. Prior to this offering,
these warrants will convert into the right to purchase 12,500 shares of common
stock at the same price per share. In July 1998, we issued to Cousins
Properties, Inc. a warrant to purchase 50,000 shares of Series B-1 convertible
preferred stock at an exercise price of $5.00 per share, which is exercisable
until January 2009. Prior to this offering,
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<PAGE> 58
this warrant will convert into the right to purchase 50,000 shares of common
stock at the same price per share. In August 1998, we issued to certain
investors warrants to purchase 205,002 shares of Series B convertible preferred
stock at an exercise price of $3.00 per share, which are exercisable until
August 19, 2008. Prior to this offering, these warrants will convert into the
right to purchase 205,002 shares of common stock at the same price per share. In
April 1999, we issued to certain investors warrants to purchase 200,001 shares
of Series C convertible preferred stock at an exercise price of $3.00 per share,
which are exercisable until December 31, 2008. Prior to this offering, these
warrants will convert into the right to purchase 200,001 shares of common stock
at the same price per share.
REGISTRATION RIGHTS
Demand Registration. According to the terms of the Amended and Restated
Master Rights Agreement dated as of October 31, 1995, as amended, beginning 180
days after the closing of this offering the holders of 14,724,342 shares of
common stock and warrants to acquire 200,290 additional shares of common stock
have the right to require us to effect a registration of their stock on Form
S-1, Form S-2, Form SB-1 or Form SB-2 so that those shares may be resold to the
public. To demand a registration, the holders having such registration rights
must propose to dispose of at least 20% of the common stock subject to
registration or the anticipated aggregate offering price must be at least
$15,000,000. If such a request is made, then the Company must use its best
efforts to effect the registration. We only have to file two registration
statements requested in this manner.
In addition, the holders of common stock having registration rights may
require us to effect a registration of their stock of Form S-3 at any time that
we are eligible to file a registration on that form if those shareholders making
the request propose to dispose of at least $1,000,000 in the offering.
We may delay filing a demand registration if the statement would become
effective within 180 days of an underwritten registration statement filed by us.
We may also defer the filing of a demand registration for a period of up to 90
days once in any 12-month period.
Piggyback Registration. In addition, if we register in an underwritten
offering any securities for public sale, other than a registration relating
solely to employee benefit plans, a registration relating solely to a Rule 145
transaction, or a registration on any form that does not include substantially
the same information as would be required in a registration statement covering
secondary sales of stock, holders of demand registration rights will have the
right to include their shares in the registration statement.
Piggyback registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear the expenses of all registrations, except underwriting
discounts and commissions. The Master Rights Agreement also contains our
commitment to indemnify the holders of registration rights for losses
attributable to statements or omissions by us incurred in connection with
registrations under the agreement.
EFFECTS OF CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND
GEORGIA LAW
Classified Board and Removal of Directors. Our Articles of Incorporation
provide for our board of directors to be elected initially to staggered one, two
and three year terms and, thereafter, for three year terms. In addition, members
of our board of directors may only be removed for cause, which requires the
affirmative vote of the holders of at least 75% of the outstanding shares of our
common stock. The classification of directors, together with the limitation on
the removal of directors, has the effect of making it more difficult for
shareholders to change the composition of our board of directors.
Shareholder Action; Special Meeting of Shareholders. Our shareholders may
not take action, outside of a duly called annual or special meeting, by less
than unanimous consent. Our bylaws further provide that special meetings of our
shareholders may be called only upon the request of the holders of not less than
75% of the shares then outstanding and entitled to vote.
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<PAGE> 59
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. Our bylaws provide that any shareholder proposals or director
nominations must be provided to us in writing at least 60 days before the date
of an annual meeting of shareholders or, in the case of a special meeting of
shareholders, at least 60 days prior to such meeting or the tenth day following
the day on which public announcement is made of the date of the meeting. Our
bylaws also specify requirements as to form and content of a shareholder's
notice. Such provisions may preclude shareholders from bringing matters before
the shareholders at an annual or special meeting.
Anti-takeover Provisions and Georgia Law. The Georgia Business Corporation
Code, or Georgia Code, generally restricts a corporation from entering into
certain business combinations with an interested shareholder, which is defined
as any person or entity that is the beneficial owner of at least 10% of a
company's voting stock, or its affiliates, for a period of five years after the
date on which the shareholder became an interested shareholder, unless:
- the transaction is approved by the board of directors of the corporation
prior to the date the person became an interested shareholder;
- the interested shareholder acquires 90% of the corporation's voting stock
in the same transaction in which it exceeds 10%; or
- subsequent to becoming an interested shareholder, the shareholder
acquires 90% of the corporation's voting stock and the business
combination is approved by the holders of a majority of the voting stock
entitled to vote on the transaction.
The fair price provisions of the Georgia Code further restrict business
combination transactions with 10% shareholders. These provisions require that
the consideration paid for stock acquired in the business combination must meet
specified tests that are designed to ensure that shareholders receive at least
fair market value for their shares in the business combination.
The interested shareholder and fair price provisions of the Georgia Code do
not apply to a corporation unless the bylaws of the corporation specifically
provide that these provisions are applicable to the corporation. We have elected
to be covered by these provisions in our bylaws, provided, however, that,
notwithstanding anything to the contrary in the provisions, the provisions shall
not apply to any business combination with (1) any shareholder who was an
interested shareholder as of the date we adopted our bylaws or (2) any person or
entity that is at the time of such business combination wholly owned by such
interested shareholder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is American Stock
Transfer & Trust Company.
LISTING
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol "AGIX."
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<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock, including shares issued upon exercise of outstanding options
and warrants, in the public market following this offering could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through the sale of our equity securities. As described below,
6,002,054 shares currently outstanding will be available for sale immediately
after this offering.
SALES OF RESTRICTED SECURITIES
Upon completion of this offering, we will have outstanding 22,820,585
shares of common stock, based upon shares outstanding as of June 27, 2000,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options or warrants that do not expire prior to completion of
this offering. Of these shares, the shares sold in this offering will be freely
tradable without restriction under the Securities Act, except for any shares
purchased by our "affiliates" as defined in Rule 144 under the Securities Act.
An additional 2,054 shares will also be freely tradeable under Rule 144(k). The
remaining 16,818,531 shares of common stock held by existing shareholders are
"restricted shares" as defined in Rule 144. 114,096 of these shares are subject
to a 120-day lock-up pursuant to a master rights agreement between us and
certain shareholders of AtheroGenics. All of the remaining restricted shares are
subject to lock-up agreements providing that for a period of 180 days after the
date of this prospectus, without the prior written consent of Chase Securities
Inc., the shareholder will not offer to sell, contract to sell or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to any shares of
common stock owned as of the date of this prospectus or acquired directly from
us by the shareholder or with respect to which they have or may acquire the
power of disposition, other than transfers by individual shareholders to family
members or trusts or other legal entities for the benefit of family members,
charitable organizations, or other legal entities over which such individual
shareholder maintains control over the disposition and voting of such shares; or
by non-individual shareholders to equity owners of that entity provided that
such equity owners maintain control over the disposition and voting of such
shares. As a result of these lock-up agreements, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
none of these shares will be resellable until 181 days after the date of this
prospectus. Chase Securities Inc. may, in its sole discretion, and at any time
without notice, release all or any portion of the restricted shares subject to
lock-up agreements.
Beginning 181 days after the date of this prospectus, approximately
15,283,911 restricted shares will be eligible for sale in the public market. All
of these shares are subject to volume limitations under Rule 144, except
2,107,355 shares eligible for sale under Rule 144(k) and no shares eligible for
sale under Rule 701, subject in some cases to repurchase rights of AtheroGenics.
In addition, as of June 27, 2000, there were outstanding warrants to
purchase 250,290 shares of common stock.
Rule 144. In general, under Rule 144, as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
restricted shares for at least one year, including the holding period of any
prior owner except an affiliate of AtheroGenics, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1.0% of the number of shares of common stock then outstanding, which will
equal approximately 228,206 shares immediately after this offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of us at any time during the three months preceding a sale, and who
has
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beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701. Rule 701, as currently in effect, permits resales of shares in
reliance upon Rule 144 but without compliance with certain restrictions of Rule
144. Any employee, officer or director of or consultant to us who purchased
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell
their Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may sell
their Rule 701 shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this prospectus before selling their Rule 701 shares. However,
certain Rule 701 shares are subject to lock-up agreements and will only become
eligible for sale at the earlier of the expiration of the 180-day lock-up
agreements or the receipt of the written consent of Chase Securities Inc. more
than 90 days after the date of this prospectus.
After this offering, we intend to file a registration statement on Form S-8
registering shares of common stock subject to outstanding options or reserved
for future issuance under our benefit plans. As of June 27, 2000, options to
purchase a total of 2,580,725 shares were outstanding and 1,051,238 shares were
reserved for future issuance under our benefit plans. Any shares of common stock
issued upon exercise of outstanding vested options, other than common stock
issued to our affiliates or subject to lock-up agreements, will be available for
immediate resale in the open market following the effectiveness of such
registration statement.
LOCK-UP AGREEMENTS
We, all of our executive officers and directors, all principal shareholders
and other existing shareholders who, upon the closing of this offering, will
beneficially own an aggregate of 16,686,317 outstanding shares of common stock,
together with holders of options to purchase 2,580,725 shares of common stock
and holders of warrants to purchase 187,072 shares of common stock, have agreed
that for a period of 180 days following the date of this prospectus, without the
prior written consent of Chase Securities Inc., they will not:
- directly or indirectly, offer, sell, assign, transfer, encumber, pledge,
contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise dispose of, other than by operation of law,
any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, including, without
limitation, common stock which may be deemed to be beneficially owned in
accordance with the rules and regulations promulgated under the
Securities Act; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or otherwise.
Notwithstanding the foregoing, our shareholders who have agreed to sign the
lock-up agreement have the right, without the prior written consent of Chase
Securities Inc., to transfer shares held by individual shareholders to family
members, trusts, charitable organizations, or other legal entities over which
such individual shareholder maintains control over the disposition and voting of
such shares; or by non-individual shareholders to equity owners of that entity
provided that such equity owners maintain control over the disposition and
voting of such shares.
59
<PAGE> 62
UNDERWRITING
Chase Securities Inc., FleetBoston Robertson Stephens Inc., Adams, Harkness
& Hill, Inc. and A.G. Edwards & Sons, Inc. are the representatives of the
underwriters. Subject to the terms and conditions of the underwriting agreement,
the underwriters named below, through their representatives, have severally
agreed to purchase from us the following respective numbers of shares of common
stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Chase Securities Inc........................................
FleetBoston Robertson Stephens Inc..........................
Adams, Harkness & Hill, Inc.................................
A.G. Edwards & Sons, Inc....................................
---------
Total..................................................... 6,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the common shares
offered by us if they purchase any shares.
The following table shows the per share and total underwriting discounts
and commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share.................................................. $ $
Total...................................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $2.0 million.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at that price less a concession not in
excess of $ per share. The underwriters may allow and such dealers may
re-allow a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the underwriters. The representatives have
advised us that the underwriters do not intend to confirm discretionary sales in
excess of 5% of the shares of common stock offered in this offering.
We have granted to the underwriters a 30-day option to purchase up to
900,000 additional shares of common stock at the initial public offering price,
less the underwriting discount set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered hereby. We will be obligated, pursuant to this option, to sell shares to
the underwriters to the extent the options are exercised. The underwriters may
exercise these options only to cover over-allotments made in connection with the
sale of shares of common stock offered by us.
60
<PAGE> 63
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of these liabilities.
Substantially all of our security holders and all of our executive officers
and directors have agreed or will agree, subject to certain limited exceptions,
prior to completion of this offering, that they will not, without the prior
written consent of Chase Securities Inc., offer, sell, assign, transfer, pledge,
contract to sell, or otherwise dispose of any shares of capital stock, options
or warrants to acquire shares of capital stock or securities exchangeable for or
convertible into shares of capital stock owned by them for a period of 180 days
following the date of this prospectus. We have agreed that we will not, without
the prior written consent of Chase Securities Inc., offer, sell, assign,
transfer, pledge, contract to sell, or otherwise dispose of any shares of
capital stock, options or warrants to acquire shares of capital stock or
securities exchangeable for or convertible into shares of capital stock for a
period of 180 days following the date of this prospectus, except that we may
issue shares upon the exercise of options and warrants granted prior to the date
hereof. We may also grant additional options or other awards under our stock
option plans. Without the prior written consent of Chase Securities Inc., any
additional options granted shall not be exercisable during this 180-day period.
The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common shares at levels above those which might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids. A
stabilizing bid means the placing of any bid or effecting of any purchase, for
the purpose of pegging, fixing or maintaining the price of the shares of common
stock. A syndicate covering transaction means the placing of any bid on behalf
of the underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when common shares sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
Prior to this offering, there has been no public market for our common
shares. The initial public offering price for the common shares will be
determined by negotiations among us and the representatives. Among the factors
to be considered in determining the initial public offering price will be
prevailing market and economic conditions, our revenue and earnings, market
valuations of other companies engaged in activities similar to our business
operations and our management. The estimated initial public offering price range
set forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions or other factors.
At our request, the underwriters have reserved up to 10% of the shares of
common stock for sale at the initial public offering price to our directors,
business associates and related persons. The number of common shares available
for sale to the general public will be reduced if such persons purchase the
reserved shares. Any reserved shares which are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered hereby.
We have applied for listing of our shares of common stock on the Nasdaq
National Market under the symbol AGIX.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Long Aldridge & Norman LLP, Atlanta, Georgia. Certain legal
matters will be passed upon for the Underwriters by Brown & Wood LLP, New York,
New York. As of the date of this prospectus, Long Aldridge & Norman LLP is the
beneficial owner of 33,332 shares of our common stock.
61
<PAGE> 64
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, as set forth in their report. We've included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
King & Spalding is our patent counsel. The statements in this prospectus
under the captions "Our failure to adequately protect 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" in the risk factors section, and
"Patents and Intellectual Property" in the business section have been reviewed
and approved by King & Spalding, as experts in such matters. We have included
these statements in reliance upon that review and approval.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the shares of common stock offered by this prospectus. This
prospectus, which constitutes part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents of
any contract or other document that is filed as an exhibit to the registration
statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document.
You may read and copy all or any portion of the registration statement and
the exhibits at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents, upon payment of a duplication fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the SEC's public reference rooms. Also, the SEC maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC.
As a result of this offering, we will become subject to the information and
periodic reporting requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, will file periodic reports, proxy and information
statements and other information with the SEC. These periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the public reference facilities, regional offices and SEC's
website referred to above.
62
<PAGE> 65
ATHEROGENICS, INC.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Redeemable Convertible Preferred Stock
and Common Shareholders' Deficit.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
AtheroGenics, Inc.
We have audited the accompanying balance sheets of AtheroGenics, Inc. as of
December 31, 1998 and 1999, and the related statements of operations, redeemable
convertible preferred stock and common shareholders' deficit and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AtheroGenics, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles in the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 18, 2000
F-2
<PAGE> 67
ATHEROGENICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA COMMON
DECEMBER 31, MARCH 31, SHAREHOLDERS' EQUITY
--------------------------- ----------- AT
1998 1999 2000 MARCH 31, 2000
------------ ------------ ----------- ----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 3,683,423 $ 13,409,450 $10,010,491
Unbilled receivables................................. -- 791,653 2,049,600
Interest and other receivables....................... 62,160 32,708 51,549
Reimbursable expenditures under operating lease...... 1,153,440 -- --
Prepaid expenses..................................... 43,422 56,911 465,986
------------ ------------ -----------
Total current assets........................... 4,942,445 14,290,722 12,577,626
Equipment and leasehold improvements:
Leasehold improvements............................... 369,627 1,137,868 1,137,868
Laboratory equipment................................. 796,683 904,599 1,130,776
Computer and office equipment........................ 54,701 168,899 264,454
Construction in progress............................. -- 124,730 311,896
------------ ------------ -----------
1,221,011 2,336,096 2,844,994
Less accumulated depreciation and amortization....... 821,640 1,101,463 1,196,422
------------ ------------ -----------
399,371 1,234,633 1,648,572
Long-term note receivable.............................. -- 191,859 190,500
------------ ------------ -----------
Total assets................................... $ 5,341,816 $ 15,717,214 $14,416,698
============ ============ ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 1,449,553 $ 679,142 $ 559,080
Accrued liabilities.................................. 46,755 285,600 323,958
Accrued development costs............................ 1,291,514 240,000 418,799
Accrued interest..................................... 215,753 -- --
Current portion of capitalized lease obligation...... 198,236 101,408 138,378
Current portion of deferred revenues................. -- 3,333,333 3,333,333
Bridge loan.......................................... 6,000,000 -- --
------------ ------------ -----------
Total current liabilities...................... 9,201,811 4,639,483 4,773,548
Long-term portion of capitalized lease obligation...... 163,262 61,854 164,811
Long-term portion of deferred revenues................. -- 1,111,111 277,778
Redeemable convertible preferred stock:
Series A, $1 par and liquidation value:
Authorized -- 1,000,000 shares; issued and
outstanding -- 1,000,000 shares (none pro forma)... 1,000,000 1,000,000 1,000,000 $ --
Series B, $3 par and liquidation value:
Authorized -- 4,804,382 shares; issued and
outstanding -- 4,586,815 shares at December 1998
and 1999 and 4,695,974 at March 31, 2000 (none pro
forma)............................................. 13,704,499 13,704,499 14,164,057 --
Series C, $3 par and liquidation value:
Authorized -- 8,500,000 shares; issued and
outstanding -- 8,057,022 and 8,163,128 shares at
December 31, 1999 and March 31, 2000, respectively
(none pro forma)................................... -- 24,006,992 24,440,231 --
Series B-1, $5 par and liquidation value:
Authorized 50,000 shares (none outstanding).......... -- -- -- --
Preferred stock warrants............................. 246,125 481,875 225,713 --
Commitments and contingencies........................ -- -- -- --
Common shareholders' equity (deficit):
Common stock, no par value:
Authorized -- 21,100,000 shares; issued and
outstanding -- 2,410,375, 2,536,543 and 2,805,308
shares at December 31, 1998 and 1999 and March 31,
2000, respectively (16,180,380 shares pro forma)... 281,751 2,209,962 11,237,117 50,841,405
Warrants............................................. -- -- -- 225,713
Deferred stock compensation.......................... -- (1,809,680) (9,186,237) (9,186,237)
Accumulated deficit.................................. (19,255,632) (29,688,882) (32,680,320) (32,680,320)
------------ ------------ ----------- ------------
Total common shareholders' equity (deficit).... (18,973,881) (29,288,600) (30,629,440) 9,200,561
------------ ------------ -----------
Total liabilities, redeemable convertible
preferred stock and shareholders' deficit.... $ 5,341,816 $ 15,717,214 $14,416,698
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 68
ATHEROGENICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees.......................... $ -- $ -- $ 555,556 $ -- $ 833,333
Research and development.............. -- -- 791,653 1,257,947
----------- ------------ ------------ ----------- -----------
Total revenues................. -- -- 1,347,209 -- 2,091,280
Operating expenses:
Research and development, exclusive of
$23,649 and $360,751 for the year
ended December 31, 1999 and three
months ended March 31, 2000,
respectively, reported below as
amortization of deferred stock
compensation........................ 4,656,478 8,954,904 9,041,345 2,200,960 2,885,640
General and administrative, exclusive
of $61,831 and $1,207,732 for the
year ended December 31, 1999 and
three months ended March 31, 2000,
respectively, reported below as
amortization of deferred stock
compensation........................ 988,230 1,573,807 2,593,017 427,132 786,362
Amortization of deferred stock
compensation........................ -- -- 85,480 -- 1,568,483
----------- ------------ ------------ ----------- -----------
Total operating expenses....... 5,644,708 10,528,711 11,719,842 2,628,092 5,240,485
----------- ------------ ------------ ----------- -----------
Operating loss.......................... (5,644,708) (10,528,711) (10,372,633) (2,628,092) (3,149,205)
Net interest income (expense)........... 485,392 (205,130) (60,617) (122,243) 157,767
----------- ------------ ------------ ----------- -----------
Net loss................................ $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438)
=========== ============ ============ =========== ===========
Net loss per share -- basic and
diluted............................... $ (2.25) $ (4.45) $ (4.27) $ (1.14) $ (1.13)
=========== ============ ============ =========== ===========
Weighted average shares
outstanding -- basic and diluted...... 2,292,966 2,409,948 2,443,237 2,412,125 2,635,816
=========== ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 69
ATHEROGENICS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON SHAREHOLDERS'
DEFICIT
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------------------
SERIES A SERIES B
------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 1,000,000 $1,000,000 4,570,149 $13,654,501
Issuance of stock for exercise of stock options
at $.10 to $.30 per share...................... -- -- -- --
Issuance of warrants in relation to capital
lease.......................................... -- -- -- --
Issuance of stock options for consulting
services at fair value of $.08 per share....... -- -- -- --
Net loss........................................ -- -- -- --
--------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 1997 1,000,000 1,000,000 4,570,149 13,654,501
Issuance stock for exercise of stock options at
$.30 per share................................. -- -- -- --
Issuance of 50,000 Series B-1 convertible
preferred stock warrant in relation to building
agreement...................................... -- -- -- --
Issuance of 200,001 Series B convertible
preferred stock warrants in relation to bridge
loan agreement................................. -- -- -- --
Issuance of stock for legal services at $3 per
share.......................................... -- -- 16,666 49,998
Net loss........................................ -- -- -- --
--------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 1998.................... 1,000,000 1,000,000 4,586,815 13,704,499
Issuance of stock for exercise of stock options
at $.10 to $.30 per share...................... -- -- -- --
Issuance of stock at $3 per share, net of
issuance cost of $164,074...................... -- -- -- --
Issuance of 205,002 Series C convertible
preferred stock warrants in relation to
extension of bridge loan agreement............. -- -- -- --
Issuance of stock for the conversion of the
bridge loan and accrued interest at $3 per
share.......................................... -- -- -- --
Issuance of stock for legal services at $3 per
share.......................................... -- -- -- --
Deferred stock compensation related to stock
option grants.................................. -- -- -- --
Amortization of deferred stock compensation..... -- -- -- --
Net loss........................................ -- -- -- --
--------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 1999.................... 1,000,000 1,000,000 4,586,815 13,704,499
Issuance of stock for exercise of stock options
at $.30 to $.38 per share (unaudited).......... -- -- -- --
Issuance of stock upon exercise of stock
warrants (unaudited)........................... -- -- 109,159 459,558
Deferred stock compensation related to stock
option grants (unaudited)...................... -- -- -- --
Amortization of deferred stock compensation
(unaudited).................................... -- -- -- --
Net loss (unaudited)............................ -- -- -- --
--------- ---------- --------- -----------
BALANCE AT MARCH 31, 2000 (UNAUDITED)........... 1,000,000 $1,000,000 4,695,974 $14,164,057
========= ========== ========= ===========
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
SERIES C PREFERRED
------------------------------ STOCK
SHARES AMOUNT WARRANTS
--------- ----------- ---------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 -- $ -- $ 103
Issuance of stock for exercise of stock options
at $.10 to $.30 per share...................... -- -- --
Issuance of warrants in relation to capital
lease.......................................... -- -- 22
Issuance of stock options for consulting
services at fair value of $.08 per share....... -- -- --
Net loss........................................ -- -- --
--------- ----------- ---------
BALANCE AT DECEMBER 31, 1997 -- -- 125
Issuance stock for exercise of stock options at
$.30 per share................................. -- -- --
Issuance of 50,000 Series B-1 convertible
preferred stock warrant in relation to building
agreement...................................... -- -- 4,000
Issuance of 200,001 Series B convertible
preferred stock warrants in relation to bridge
loan agreement................................. -- -- 242,000
Issuance of stock for legal services at $3 per
share.......................................... -- -- --
Net loss........................................ -- -- --
--------- ----------- ---------
BALANCE AT DECEMBER 31, 1998.................... -- -- 246,125
Issuance of stock for exercise of stock options
at $.10 to $.30 per share...................... -- -- --
Issuance of stock at $3 per share, net of
issuance cost of $164,074...................... 5,899,999 17,535,923 --
Issuance of 205,002 Series C convertible
preferred stock warrants in relation to
extension of bridge loan agreement............. -- -- 235,750
Issuance of stock for the conversion of the
bridge loan and accrued interest at $3 per
share.......................................... 2,140,357 6,421,071 --
Issuance of stock for legal services at $3 per
share.......................................... 16,666 49,998 --
Deferred stock compensation related to stock
option grants.................................. -- -- --
Amortization of deferred stock compensation..... -- -- --
Net loss........................................ -- -- --
--------- ----------- ---------
BALANCE AT DECEMBER 31, 1999.................... 8,057,022 24,006,992 481,875
Issuance of stock for exercise of stock options
at $.30 to $.38 per share (unaudited).......... -- -- --
Issuance of stock upon exercise of stock
warrants (unaudited)........................... 106,106 433,239 (256,162)
Deferred stock compensation related to stock
option grants (unaudited)...................... -- -- --
Amortization of deferred stock compensation
(unaudited).................................... -- -- --
Net loss (unaudited)............................ -- -- --
--------- ----------- ---------
BALANCE AT MARCH 31, 2000 (UNAUDITED)........... 8,163,128 $24,440,231 $225,713
========= =========== =========
<CAPTION>
COMMON SHAREHOLDERS' DEFICIT
-----------------------------------------------------------------------
COMMON STOCK TOTAL COMMON
----------------------- DEFERRED STOCK ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT DEFICIT
--------- ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 2,287,946 $ 244,822 $ -- $(3,362,475) $ (3,117,653)
Issuance of stock for exercise of stock options
at $.10 to $.30 per share...................... 121,084 12,325 -- -- 12,325
Issuance of warrants in relation to capital
lease.......................................... -- -- -- -- --
Issuance of stock options for consulting
services at fair value of $.08 per share....... -- 24,200 -- -- 24,200
Net loss........................................ -- -- -- (5,159,316) (5,159,316)
--------- ----------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1997 2,409,030 281,347 -- (8,521,791) (8,240,444)
Issuance stock for exercise of stock options at
$.30 per share................................. 1,345 404 -- -- 404
Issuance of 50,000 Series B-1 convertible
preferred stock warrant in relation to building
agreement...................................... -- -- -- -- --
Issuance of 200,001 Series B convertible
preferred stock warrants in relation to bridge
loan agreement................................. -- -- -- -- --
Issuance of stock for legal services at $3 per
share.......................................... -- -- -- -- --
Net loss........................................ -- -- (10,733,841) (10,733,841)
--------- ----------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1998.................... 2,410,375 281,751 -- (19,255,632) (18,973,881)
Issuance of stock for exercise of stock options
at $.10 to $.30 per share...................... 126,168 33,051 -- -- 33,051
Issuance of stock at $3 per share, net of
issuance cost of $164,074...................... -- -- -- -- --
Issuance of 205,002 Series C convertible
preferred stock warrants in relation to
extension of bridge loan agreement............. -- -- -- -- --
Issuance of stock for the conversion of the
bridge loan and accrued interest at $3 per
share.......................................... -- -- -- -- --
Issuance of stock for legal services at $3 per
share.......................................... -- -- -- -- --
Deferred stock compensation related to stock
option grants.................................. -- 1,895,160 (1,895,160) -- --
Amortization of deferred stock compensation..... -- -- 85,480 -- 85,480
Net loss........................................ -- -- -- (10,433,250) (10,433,250)
--------- ----------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1999.................... 2,536,543 2,209,962 (1,809,680) (29,688,882) (29,288,600)
Issuance of stock for exercise of stock options
at $.30 to $.38 per share (unaudited).......... 268,765 82,115 -- -- 82,115
Issuance of stock upon exercise of stock
warrants (unaudited)........................... -- -- -- -- --
Deferred stock compensation related to stock
option grants (unaudited)...................... -- 8,945,040 (8,945,040) -- --
Amortization of deferred stock compensation
(unaudited).................................... -- -- 1,568,483 -- 1,568,483
Net loss (unaudited)............................ -- -- -- (2,991,438) (2,991,438)
--------- ----------- ----------- ------------ ------------
BALANCE AT MARCH 31, 2000 (UNAUDITED)........... 2,805,308 $11,237,117 $(9,186,237) $(32,680,320) $(30,629,440)
========= =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 70
ATHEROGENICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................... $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 186,055 250,095 279,823 56,058 99,115
Amortization of deferred stock
compensation................... -- -- 85,480 1,568,483
Amortization of debt discount.... -- 242,000 235,750
Stock issued for services........ 24,200 49,998 49,998 -- --
Stock issued for interest........ -- -- 271,071 -- --
Changes in operating assets and
liabilities:
Interest and other
receivables................. 20,073 (1,181,362) 991,033 (837,195) (17,482)
Unbilled receivable............ -- -- (791,653) -- (1,257,947)
Prepaid expenses............... (37,134) 22,892 (13,489) (40,506) (409,075)
Accounts payable............... 706,167 693,404 (770,411) 585,083 (120,062)
Accrued liabilities............ -- 1,554,022 (1,028,422) 550,754 217,157
Deferred revenues.............. -- -- 4,444,444 (833,333)
----------- ------------ ------------ ----------- -----------
Net cash used in operating
activities.............. (4,259,955) (9,102,792) (6,679,626) (2,436,141) (3,744,582)
INVESTING ACTIVITIES
Purchases of equipment and
leasehold improvements........... (295,284) (62,586) (1,115,085) (70,510) (513,054)
----------- ------------ ------------ ----------- -----------
Net cash used in investing
activities.............. (295,284) (62,586) (1,115,085) (70,510) (513,054)
FINANCING ACTIVITIES
Proceeds of capital lease.......... 192,872 99,984 -- -- 222,500
Payments on capital lease.......... (128,758) (180,951) (198,236) (48,053) (82,573)
Proceeds from the issuance of
preferred stock, Series C........ -- -- 17,535,923 -- --
Proceeds from the issuance and
exercise of preferred stock
warrants......................... 22 246,000 -- -- 636,635
Proceeds from the exercise of
common stock options............. 12,325 404 33,051 844 82,115
Proceeds from bridge loan
financing, net of warrants....... -- 5,758,000 150,000 150,000 --
----------- ------------ ------------ ----------- -----------
Net cash provided by
financing activities.... 76,461 5,923,437 17,520,738 102,791 858,677
----------- ------------ ------------ ----------- -----------
(Decrease) increase in cash and
cash equivalents................. (4,478,778) (3,241,941) 9,726,027 (2,403,860) (3,398,959)
Cash and cash equivalents at
beginning of period.............. 11,404,142 6,925,364 3,683,423 3,683,423 13,409,450
----------- ------------ ------------ ----------- -----------
Cash and cash equivalents at end of
period........................... $ 6,925,364 $ 3,683,423 $ 13,409,450 $ 1,279,563 $10,010,491
=========== ============ ============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid...................... $ 40,567 $ 32,622 $ 28,317 $ 7,073 $ 3,085
Conversion of bridge loan and
accrued interest to preferred
stock............................ -- -- 6,421,071 -- --
Warrants issued for extension of
bridge loan...................... -- -- 235,750 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 71
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
AtheroGenics, Inc. (the "Company") was incorporated on November 23, 1993
(date of inception) in the State of Georgia to focus on the discovery,
development and commercialization of novel drugs for the treatment of chronic
inflammatory diseases, such as atherosclerosis, asthma, and arthritis. Prior to
1999, the Company's operations were focused on organizational activities,
obtaining financing, recruiting personnel and conducting research and
development; therefore, through 1998, the Company was considered to be a
development stage company for financial reporting purposes.
Unaudited Interim Financial Statements
The financial statements as of March 31, 2000 and for the three month
periods ended March 31, 1999 and 2000 are unaudited and reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of the
Company's management, necessary for a fair presentation of financial position,
results of operations and cash flows.
Use of Estimates
The preparation of the financial statements in conformity with 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
The Company's cash equivalents consist primarily of money market accounts
on deposit with several financial institutions and the carrying amounts reported
in the balance sheets approximate their fair value.
At December 31, 1999, $5,489,334, $5,662,567, and $1,915,026 of cash and
cash equivalents were on deposit at three individual financial institutions.
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.
Revenue Recognition
License fees, which are nonrefundable, are recognized when the related
license agreements specify that no further efforts or obligations are required
of the Company. The Company has committed to perform certain research and
development activities as part of the license agreement: accordingly, the
upfront license payment is being amortized over the anticipated time period to
conduct such activities. Revenues under research and development arrangements
are recognized as the research and development activities are performed pursuant
to the terms of the related agreements (see Note 2). These revenues are billed
quarterly and the related payments are not refundable. Revenues which have not
been invoiced are reflected as unbilled receivables in the accompanying balance
sheets.
F-7
<PAGE> 72
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development and Patent Costs
Research and development costs, including all clinical trial expenses and
expenditures related to obtaining patents, are charged to expense when incurred.
Stock-Based Compensation
The Company 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 Statement of Financial Accounting Standards
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. The Company 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.
Income Taxes
The liability method is used in accounting for income taxes; deferred
income 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.
2. LICENSE AGREEMENT
On October 22, 1999 the Company entered into an exclusive license agreement
(the "Agreement"), consisting of contracts with each of Schering Corporation and
Schering-Plough Ltd. (collectively, "Schering-Plough"). The Agreement provides
for license fees and milestone payments to be made by Schering-Plough to the
Company.
In November 1999, pursuant to the terms of the Agreement, the Company
received a $5,000,000 non-refundable license fee for the exclusive worldwide
license to patent rights and licensor know-how held by the Company. Under the
Agreement, the Company granted to Schering-Plough rights to develop, make, have
made, import, export, use, distribute, market, promote, offer for sale and sell
AGI-1067, the Company's lead product candidate, and specified compounds.
The Agreement provides for payments to the Company by Schering-Plough
related to development and sales milestones. Development milestone payments to
the Company will be based on the successful achievement by Schering-Plough of
certain trials and regulatory approvals. Sales milestone payments shall be based
on the achievement of certain sales levels of licensed product by
Schering-Plough. Schering-Plough is also to make royalty payments to the Company
based on licensed product sales, as defined, by Schering-Plough and its
affiliates.
The milestone payments discussed above will be paid to the Company
regardless of the Company's involvement, if any, in the development of the
licensed product as the related milestones are achieved. The Agreement states
that Schering-Plough shall be responsible, at its cost and expense, and in its
sole judgment, for all research and development activities necessary to obtain
regulatory approval for a licensed product. Schering-Plough may choose to
complete the development of the licensed product without additional help from
the Company. To the extent that the Company performs additional research and
development at Schering-Plough's request, the Company is to be paid for
performing such research and development. The Company recognized research and
development revenues of $791,653 during 1999 and $1,257,947 for the three month
period ended March 31, 2000 in relation to such requests.
F-8
<PAGE> 73
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Agreement will terminate pursuant to its terms when the last patent
right which is the subject of the Agreement expires. Schering-Plough has the
unilateral right to terminate the Agreement at any time (giving 60 days notice
to the other party). Either party may terminate the Agreement upon proper notice
of certain uncured material violations of the Agreement. In addition, either
party may terminate the Agreement on a product-by-product basis if
Schering-Plough ceases commercialization of a licensed product. The Company may
also terminate the Agreement if: (a) no licensed product is in clinical trials
on a specified date; and/or (b) if a New Drug Application has not been filed
with the U.S. Food and Drug Administration by a specified date. Upon certain
material breaches of the Agreement by the Company, Schering-Plough may either
terminate the Agreement, continue the Agreement with future milestone payments
materially reduced by a specified percentage, or continue the Agreement with
future royalty payments reduced by a specified percentage. Should the Agreement
be terminated by either party for any reason other than a breach thereof, all
right, title and interest in the licensed product, licensed compounds, licensed
patents and regulatory approvals and applications and know-how relating to the
preceding shall revert to the Company.
3. NET LOSS PER SHARE
Net loss per share has been computed according to SFAS No. 128, "Earnings
Per Share" ("SFAS 128"), which requires disclosure of basic and diluted earnings
per share. Basic earnings per share excludes any dilutive effects of options,
shares subject to repurchase, warrants, and convertible securities. Diluted
earnings per share includes the impact of potentially dilutive securities. The
Company's potentially dilutive securities are antidilutive and, therefore, are
not included in the computation of weighted average shares used in computing
diluted loss per share. Following the guidance given by the Securities and
Exchange Commission, common stock and preferred stock that has been issued or
granted for nominal consideration prior to the anticipated effective date of the
initial public offering must be included in the calculation of basic and diluted
net loss per common share as if these shares had been outstanding for all
periods presented. The Company has not issued or granted shares for nominal
consideration since its formation.
F-9
<PAGE> 74
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the numerator and denominator of basic
and diluted net loss per share amounts:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Net loss...................... $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438)
=========== ============ ============ =========== ===========
Weighted average shares used
in computing basic and
diluted net loss per
share....................... 2,292,966 2,409,948 2,443,237 2,412,125 2,635,816
=========== ============ ============ =========== ===========
Basic and diluted net loss per
share....................... $ (2.25) $ (4.45) $ (4.27) $ (1.14) $ (1.13)
=========== ============ ============ =========== ===========
Pro forma basic and diluted:
Shares used above............. 2,443,237 2,635,816
Pro forma adjustment to
reflect weighted average
effect of assumed conversion
of preferred stock.......... 10,268,792 13,696,740
------------ -----------
Pro forma weighted average
shares of common stock
outstanding................. 12,712,029 16,332,556
============ ===========
Basic and diluted pro forma
loss per share.............. $ (.82) $ (.18)
============ ===========
</TABLE>
During all periods presented the Company 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:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Convertible (at one share
for one share) preferred
stock.................... 5,570,149 5,586,815 13,643,837 5,570,149 13,859,102
Options.................... 1,089,750 1,235,875 1,785,325 1,411,562 2,789,475
Warrants................... 12,500 262,501 467,503 262,500 250,290
---------- ---------- ----------- ---------- -----------
Total...................... 6,672,399 7,085,191 15,896,665 7,244,211 16,898,867
========== ========== =========== ========== ===========
Weighted average exercise
price of options per
share.................... $ .26 $ .26 $ .28 $ .27 $ .49
========== ========== =========== ========== ===========
Weighted average exercise
price of warrants per
share.................... $ 3.00 $ 3.38 $ 3.21 $ 3.21 $ 3.40
========== ========== =========== ========== ===========
</TABLE>
4. BRIDGE LOAN
The Company entered into a $6,000,000 bridge loan agreement on August 24,
1998 with various lenders, under which the Company had an obligation in the form
of unsecured promissory notes (some of the lenders are also shareholders of the
Company). The initial maturity date was December 31, 1998.
F-10
<PAGE> 75
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company issued the lenders warrants for 205,002 shares of Series B
Redeemable Convertible Preferred Stock. These warrants became exercisable
January 1, 1999 for $3.00 per share and expire on August 19, 2008. The warrants
have been valued at approximately $1.21 per share based on an independent
appraisal, and the principal balance of the bridge loan payable has been
discounted in an amount equal to such value. Such discount was amortized as
additional interest expense over the original term of the bridge loan.
On February 24, 1999 the bridge loan was increased to $6,150,000. In
addition, as an inducement to extend the loan maturity date from December 31,
1998 to April 30, 1999, the Company issued the lenders additional warrants to
purchase 200,001 shares of Series C Redeemable Convertible Preferred Stock.
These warrants became exercisable April 13, 1999 for $3.00 per share and expire
on December 31, 2008. The warrants have been valued at approximately $1.15 per
share based on an independent appraisal, and the principal balance of the bridge
loan payable has been discounted in an amount equal to such value. Such discount
was amortized as additional interest expense over the extended term of the
bridge loan.
Accordingly, 205,002 shares of Series B Redeemable Convertible Preferred
Stock and 200,001 shares of Series C Redeemable Convertible Preferred Stock have
been reserved for issuance under these warrants at December 31, 1999. During the
three months ended March 31, 2000, 217,213 of these warrants were exercised.
On April 13, 1999 the promissory notes were converted to 2,050,000 shares
of Series C Redeemable Convertible Preferred Stock. On the date of conversion,
accrued interest totaling $382,799 was paid by a combination of $111,728 in cash
and the issuance of 90,357 additional shares of Series C Redeemable Convertible
Preferred Stock based on the fair values of such shares as determined by the
most recent arms-length stock purchase transaction.
The weighted average interest rate for the bridge loan for August 24
through December 31, 1998 was 10.1%, and such rate for the period from January 1
through April 13, 1999 was 9.75%.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series A, Series B, Series B-1 and Series C Redeemable Convertible
Preferred Stock are convertible into common stock at the option of each holder,
or automatically upon the completion of an underwritten public offering of the
Company's common stock providing net proceeds of at least $15,000,000 or an
offering price of at least $7.50 per share, at a conversion rate of one-to-one,
which rate is to be adjusted in the event of a subdivision or combination of
stock or reorganization, consolidation, merger or sale of the Company. Any
outstanding shares of Series A, Series B, Series B-1 and Series C Redeemable
Convertible Preferred Stock are redeemable at the option of the holder on April
15, 2004 and on each subsequent October 15 and April 15 thereafter for the
Series C Redeemable Convertible Preferred Stock, at the greater of the fair
value of the shares of the Series A, Series B, Series B-1 and Series C
Redeemable Convertible Preferred Stock on that date, or $1.00, $3.00, $5.00 and
$3.00 per share, respectively, plus declared and accrued but unpaid dividends.
The holders of shares of Series A, Series B, Series B-1 and Series C Redeemable
Convertible Preferred Stock have voting rights equal to the number of shares of
common stock into which such preferred shares are then convertible, and the
holders of the common shares and each such Series of Redeemable Convertible
Preferred Stock are each entitled to elect two members of the Board of
Directors. The remaining member of the Board of Directors shall be elected by a
plurality of the holders of preferred and common stocks, with each share of
preferred having voting rights equal to the number of shares of common stock
into which such preferred shares are then convertible. Dividends are payable as
declared by the Board of Directors. In the event of liquidation of the Company,
the Series A, Series B, Series B-1 and Series C Redeemable Convertible Preferred
Shareholders are entitled to receive, prior to and in preference to the holders
of common stock, an amount equal to $1.00, $3.00, $5.00 and $3.00 per share,
respectively, plus any declared and accrued but unpaid
F-11
<PAGE> 76
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
dividends. In the event that funds are not adequate to pay the stated
liquidation prices, the preferred shareholders shall be paid on a pro rata
basis.
On April 13, 1999 the Company authorized 5,000,000 and issued 2,333,333
shares of Series C Redeemable Convertible Preferred Stock for cash at $3.00 per
share, net of issuance costs of $58,000. On May 11, 1999 the Company authorized
the issuance of an additional 2,500,000 shares of Series C Redeemable
Convertible Preferred Stock of which 899,999 shares were issued for cash at
$3.00 per share, net of issuance costs of $45,000. On August 30, 1999 the
Company authorized an additional 1,000,000 and issued 2,666,667 shares of Series
C Redeemable Convertible Preferred Stock for cash at $3.00 per share, net of
issuance costs of approximately $61,000.
At December 31, 1999, the Company has reserved a total of 14,111,340 shares
of common stock for the conversion of the Series A, Series B, Series B-1 and
Series C Redeemable Convertible Preferred Stock and warrants.
6. COMMON STOCK
On January 11, 1995 the Company entered into a license agreement with Emory
University (the "License Agreement") under which the Company received the
exclusive rights to certain patents as to which key employees of the Company
were named as the inventors. In addition, the Company has an option to obtain
the exclusive rights to additional patents which are currently pending. In
consideration for entering into the License Agreement, the Company paid Emory
University a signing fee and will be required to pay royalties upon sales of
products utilizing the patented technology, and milestone payments totaling
$250,000 upon the occurrence of certain specified events. In addition, the
Company agreed to issue Emory University common stock up to specified limits.
The Company issued 188,108 shares of common stock at $.10 per share on January
19, 1995, and, on October 31, 1995, the Company issued 54,038 shares of common
stock at $.30 per share in connection with the closing of the Series B
Redeemable Convertible Preferred Stock purchase agreement. These issuances
completed the Company's equity obligation under the terms of the License
Agreement.
7. STOCK OPTIONS
During 1995 the Company established a stock option plan (the "1995 Plan")
which, as amended, provides that options to purchase the Company's common stock
may be granted to employees, directors, consultants or contractors at 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 the Company's common stock, and as of December 31, 1999, the
Company has reserved 433,000 shares of common stock for future issuance under
the 1995 Plan. Options granted under the 1995 Plan vest immediately, but,
pursuant to the terms of an equity ownership agreement, the Company may, if it
chooses to do so, repurchase a declining percentage of shares issued pursuant
the exercise of options
F-12
<PAGE> 77
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
during the four-year period following the grant date if the optionee's
employment or affiliation with the Company is terminated. A summary of stock
option activity under the 1995 Plan follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES PRICE RANGE AVERAGE PRICE
-------- ----------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1997.............................. 564,250 $.10-.30 $.15
Granted................................................... 342,750 .30 .30
Exercised................................................. (121,084) .10-.30 .10
Canceled.................................................. (328,916) .10-.30 .26
--------
Outstanding at January 1 and
December 31, 1998......................................... 457,000 .10-.30 .20
Exercised................................................. (24,000) .10 .10
Canceled.................................................. (17,800) .30 .30
--------
Outstanding at December 31, 1999............................ 415,200 .10-.30 .20
Exercised................................................. 155,200 .30 .30
--------
Outstanding at March 31, 2000............................... 260,000 .10-.30 .15
========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options under the 1995 Plan as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.10........................ 206,000 5.5 $.10 206,000 $.10
.30........................ 209,200 7.3 .30 209,200 .30
------- -------
415,200 6.4 .20 415,200 .20
======= =======
</TABLE>
Effective July 30, 1997, the Company established an equity ownership plan
(the "1997 Plan") whereby options to purchase the Company's common stock may be
granted to employees, directors, consultants or contractors at prices not less
than the fair values of the shares on the dates of grant. The 1997 Plan
authorizes the grant of options for up to 1,474,416 shares of the Company's
common stock, and as of December 31, 1999, the Company has reserved 1,370,903
shares of common stock for issuance under the 1997 Plan. The 1997 Plan allows
for grants of non-qualified options and incentive stock options. Non-qualified
options granted under the 1997 Plan vest immediately, but, pursuant to the terms
of an equity ownership agreement, the Company may, if it chooses to do so,
repurchase a declining percentage of shares issued pursuant the exercise of
options during the four-year period following the grant date if the optionee's
employment or affiliation with the Company is terminated. Incentive stock
options generally vest over four years. The majority of the stock options
granted under the 1997 Plan are incentive stock options.
F-13
<PAGE> 78
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity under the 1997 Plan follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE RANGE PRICE
--------- ----------- ----------------
<S> <C> <C> <C>
Outstanding at January 1, 1997................... -- $ -- $ --
Granted........................................ 632,750 .30 .30
---------
Outstanding at December 31, 1997................. 632,750 .30 .30
Granted........................................ 151,500 .30 .30
Exercised...................................... (1,345) .30 .30
Canceled....................................... (4,030) .30 .30
---------
Outstanding at December 31, 1998................. 778,875 .30 .30
Granted........................................ 748,000 .30-.31 .30
Exercised...................................... (102,168) .30 .30
Canceled....................................... (54,582) .30 .30
---------
Outstanding at December 31, 1999................. 1,370,125 .30-.31 .30
Granted........................................ 1,277,250 .38-8.25 .70
Exercised...................................... (113,565) .30 .30
Canceled....................................... (4,335) .30 .30
---------
Outstanding, at March 31, 2000 (unaudited)....... 2,529,475 .38-8.25 .50
=========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options granted under the 1997 Plan as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------ ------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.30................. 1,073,125 8.25 $.30 452,801 $.30
.31................. 297,000 9.8 .31 -- --
---------
1,370,125 8.5 .30 452,801 .30
=========
</TABLE>
During 1999, in connection with the grant of certain options to employees,
the Company recorded non-cash deferred stock compensation of $1,895,160
representing the difference between the exercise price and the deemed fair value
of the Company's common stock on the dates these stock options were granted.
Deferred stock compensation is included as a reduction of shareholders' 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 1999, the Company recorded amortization of
deferred stock compensation of $85,480. At December 31, 1999, the Company had a
total of approximately $1,800,000 remaining to be amortized over the
corresponding vesting period of each respective option, generally four years.
Such amortization will approximate $900,000 in 2000, $500,000 in 2001, $300,000
in 2002, and $100,000 in 2003.
On January 28, 2000 the Company's board of directors authorized options as
to an additional 2,250,000 shares to be granted under the 1997 Plan and granted
options as to 1,222,000 shares of common stock, at an exercise price of $.38 per
share, to certain employees and directors. This grant resulted in additional
non-cash deferred stock compensation of approximately $9,000,000. The Company
will amortize such deferred stock compensation using the graded vesting method
in the approximate amounts of: $5,300,000 in 2000; $2,100,000 in 2001;
$1,100,000 in 2002; and $500,000 in 2003. The amount of deferred stock
compensation amortization to be recorded in future periods could decrease if
options for which such deferred stock compensation has been recorded are
forfeited.
F-14
<PAGE> 79
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net income is required by FASB 123, which
also requires that the information be determined as if the Company has accounted
for its employee stock options granted subsequent to December 31, 1994 under the
fair value method. The fair value for these options (which are granted with an
exercise price equal to fair market value as determined by the Board of
Directors on the grant date) was estimated at the date of grant using the
minimum value method with the following weighted-average assumptions for 1997,
1998 and 1999: risk-free interest rates of 6.01%, 4.65% and 5.75%, respectively;
no dividend yield; and a weighted-average expected life of the options of 5
years.
For purposes of pro forma disclosures, the estimated fair values of the
options are amortized to expense over the options' vesting periods. The weighted
average fair values of options granted during 1997, 1998 and 1999 equal $.08,
$.06 and $2.54, respectively. The amount for 1999 was determined on the graded
vesting method after giving consideration to the above mentioned $1,895,160 of
deferred stock compensation. Pro forma net loss and net loss per share are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss...................................... $(5,168,000) $(10,744,826) $(10,503,993)
Net loss per share (basic and diluted)........ (2.25) (4.45) (4.30)
</TABLE>
Options granted to non-employees of the Company during 1997 generated
$24,200 of operating expense which is included in the statement of operations.
Since FASB 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect was not fully reflected until 1999.
8. INCOME TAXES
At December 31, 1999 the Company has net operating loss carryforwards and
research and development credit carryforwards of $24,855,283 and $1,111,891,
respectively, for income tax purposes which both begin to expire in 2009. The
significant components of the Company's deferred tax assets are:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $7,205,452 $ 9,445,008
Deferred revenue............................................ -- 1,688,889
Research credits............................................ 777,000 1,111,891
---------- -----------
Total deferred tax assets......................... 7,982,452 12,245,788
Valuation allowance......................................... 7,982,452 12,245,788
---------- -----------
Net deferred tax assets..................................... $ -- $ --
========== ===========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased $2,063,400, $4,827,312 and $4,263,335 in 1997, 1998 and 1999,
respectively.
The Company's net operating loss carryforwards may be subject to certain
IRC Section 382 limitations on annual utilization in the event of changes in
ownership of the Company. These limitations could significantly reduce the
amount of the net operating loss carryforwards available to the Company in the
future.
The Company has not yet completed a full analysis of IRC Section 382
limitations on the cumulative net operating loss carryforward. However, the
annual limitations are not expected to prevent utilization of the net operating
loss carryforward due to the significant increases in value indicated by the
successive
F-15
<PAGE> 80
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
issues of preferred stock. If a change in ownership has occurred, there will be
an annual accrual limitation; however, this limitation is not expected to result
in a loss of the deferred tax benefit.
9. LEASES
Rent expense under operating leases amounted to $86,939 in both 1997 and
1998 and $639,934 in 1999.
On June 19, 1998 the Company entered into an operating lease for office and
laboratory space through March 1, 2009. Monthly lease payments of approximately
$60,400 began March 2, 1999, the date occupancy commenced, and are subject to
increases during each successive twelve-month period based on changes in the
Consumer Price Index. 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. The
Company may extend the lease term for two successive five-year periods. The
Company's other operating lease obligations are not significant.
As of December 31, 1998 the Company had incurred directly approximately
$1,153,000 of laboratory and office construction costs which were reimbursed to
the Company by the lessor during 1999 pursuant to the lease agreement and
included in the lessor costs covered by the operating lease. The Company also
makes additional lease payments to the lessor of approximately $29,000 per month
through March 1, 2009 related to additional expenditures made by the lessor for
leasehold improvements and equipment, all of which have estimated useful lives
well in excess of ten years.
In conjunction with the above-described lease, the Company issued the
lessor a warrant for 50,000 shares of Series B-1 Redeemable Convertible
Preferred Stock. The warrant has been valued at $.08 per share based on an
independent professional appraisal. The warrant became exercisable on January 1,
1999 for $5 per share and expires on January 1, 2009.
On March 25, 1999 the Company entered into a sublease agreement for a
portion of its new office and laboratory space with Inhibitex, Inc. and monthly
lease payments of $11,923 began March 26, 1999. The lease term ends on March 31,
2009.
On July 31, 1999 the Company entered into a sublease agreement for a
portion of its new office space with ATV Management Corp. and monthly lease
payments of approximately $6,200 began on September 1, 1999. The lease term ends
on July 31, 2002. The Chairman of the Board of Directors of the Company is the
President and sole shareholder of ATV Management Corp.
At December 31, 1999, the Company's minimum aggregate commitments (net of
sublease income) under long-term, non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
GROSS SUBLEASE INCOME NET
----------- --------------- ----------
<S> <C> <C> <C>
2000........................................... $ 1,118,606 $ 217,848 $ 900,758
2001........................................... 1,109,136 217,848 891,288
2002........................................... 1,096,106 186,693 909,413
2003........................................... 1,084,681 143,076 941,605
Thereafter..................................... 5,674,609 751,149 4,923,460
----------- ---------- ----------
$10,083,138 $1,516,614 $8,566,524
=========== ========== ==========
</TABLE>
In February 1996 the Company entered into a sale leaseback agreement for up
to $750,000 of equipment. Equipment in the cumulative amount of $750,000 was
sold to the lessor and leased back to the Company for four-year lease terms
commencing on various dates during 1996 through 1998. The capital leases have
been recorded using the financing method. In addition, in February 1996, the
Company issued
F-16
<PAGE> 81
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to the lessor warrants to purchase 12,500 shares of Series B Redeemable
Convertible Preferred Stock at $3 per share.
Shares of preferred stock and common stock have been reserved for the
exercise and conversion, respectively, of the above-described warrants.
Equipment and leasehold improvements include the following amounts for
leases which have been capitalized at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Lab equipment............................................... $750,000 $750,000
Less accumulated amortization............................... 412,000 600,000
-------- --------
$338,000 $150,000
======== ========
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense. The equipment leases provide for one-year extensions at the end of the
lease terms.
Future minimum lease payments under capital leases consist of the following
at December 31, 1999:
<TABLE>
<S> <C>
2000........................................................ $114,625
2001........................................................ 57,241
2002........................................................ 2,449
--------
Total minimum lease payments...................... 174,315
Less amounts representing interest and warrants............. 11,053
--------
Present value of net minimum lease payments................. 163,262
Less current portion........................................ 101,408
--------
$ 61,854
========
</TABLE>
The amounts recorded as capital lease obligations approximate the estimated
fair market values.
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering eligible employees
which is qualified under Section 401(k) of the Internal Revenue Code. Under the
provisions of the plan, eligible participating employees may elect to contribute
up to 15% of their salary (up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code). The Company may make a discretionary
contribution. During 1999 the Company matched 50% of employees' contributions,
up to a maximum of 6% of the employees' annual base compensation. The Company's
contribution to the plan for 1998 and 1999 aggregated $33,932 and $37,703,
respectively.
11. CONCENTRATIONS OF SUPPLIERS
The Company has contracts with two third party manufacturers which serve as
sole source suppliers of bulk drug substance and formulated drug product. The
Company believes that it could obtain bulk drug and formulated drug product from
other manufacturers and formulators at competitive prices, if necessary.
F-17
<PAGE> 82
12. INITIAL PUBLIC OFFERING
In January 2000 the Board of Directors authorized the officers of the
Company to proceed with the preparation and filing of a registration statement
with the Securities and Exchange Commission to register shares of its common
stock in connection with a proposed Initial Public Offering. If the offering
contemplated by this prospectus is consummated, the preferred stock outstanding
as of the closing date will be converted into shares of the Company's common
stock. The unaudited pro forma shareholders' equity in the accompanying balance
sheet as of December 31, 1999 reflects conversion of the outstanding preferred
stock into 13,859,102 shares of common stock. Unaudited pro forma net loss per
share (see Note 3) is computed as if the outstanding preferred stock had been
converted into common stock on the date of issuance.
F-18
<PAGE> 83
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
6,000,000 SHARES
(ATHEROGENICS LOGO)
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
CHASE H&Q
ROBERTSON STEPHENS
ADAMS, HARKNESS & HILL, INC.
A.G. EDWARDS & SONS, INC.
------------------------
, 2000
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON SHARES OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with the issuance
and distribution of the securities being registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $26,400
National Association of Securities Dealers, Inc. filing
fee....................................................... 10,500
Nasdaq National Market listing fee.......................... 95,000
Printing fees............................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. *
Transfer agent and registrar fees........................... *
Miscellaneous fees.......................................... *
-------
Total............................................. $ *
=======
</TABLE>
---------------
* To be completed by amendment.
The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. filing
fee and the Nasdaq National Market listing fee, are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Fourth Amended and Restated Articles of Incorporation eliminate, as
permitted by Section 14-2-202(b)(4) of the Georgia Business Corporation Code,
the personal liability of directors and officers for monetary damages to the
corporation or its shareholders for breach of their duty of care and other
duties; provided, however, that our Articles of Incorporation and Section
14-2-202(b)(4) of the Georgia Code do not permit us to eliminate or limit
liability for (1) a breach of duty involving appropriation of a business
opportunity of ours; (2) an act or omission which involves intentional
misconduct or a knowing violation of law; (3) any transaction from which an
improper personal benefit is derived; or (4) any payments of a dividend or any
other type of distribution that is illegal under Section 14-2-832 of the Georgia
Code. In addition, if at any time the Georgia Code is amended to authorize
further elimination or limitation of personal liability, then the liability of
each of our directors and officers shall be eliminated or limited to the fullest
extent permitted by such provisions, as so amended, without further action by
the shareholders, unless the provisions of the Georgia Code require such action.
Sections 14-2-850 to 14-2-859, inclusive, of the Georgia Code govern the
indemnification of directors, officers, employees and agents. Section 14-2-851
of the Georgia Code provides for indemnification of any of our directors for
liability incurred by him in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative and whether formal or informal, in which he may
become involved by reason of being a member of our board of directors. Section
14-2-851 also provides such indemnity for directors who, at our request, act as
directors, officers, partners, trustees, employees or agents of another foreign
or domestic corporation, partnership, joint venture, trust, employee benefit
plan or another enterprise. Section 14-2-851 permits indemnification if the
director acted in a manner he believed in good faith to be in or not opposed to
our best interest and, in addition, in criminal proceedings, if he had no
reasonable cause to believe his conduct was unlawful. If the required standard
of conduct is met, indemnification may include judgments, settlements,
penalties, fines or reasonable expenses, including attorneys' fees, incurred
with respect to a proceeding. However, if the director is adjudged liable to us
in a derivative action or on the basis that personal benefit was
II-1
<PAGE> 85
improperly received by him, the director will only be entitled to such
indemnification for reasonable expenses as a court finds to be proper in
accordance with the provisions of Section 14-2-854.
Section 14-2-852 of the Georgia Code provides that directors who are
successful with respect to any claim brought against them, which claim is
brought because they are or were directors, are entitled to indemnification
against reasonable expenses as of right. Conversely, if the charges made in any
action are sustained, the determination of whether the required standard of
conduct has been met will be made, in accordance with the provisions of Section
14-2-855 of the Georgia Code, as follows: (1) if there are two or more
disinterested members of the board of directors, by the majority vote of a
quorum of the disinterested members of the board of directors, (2) by a majority
of the members of a committee of two or more disinterested directors, (3) by
special legal counsel or (4) by the shareholders, but, in such event, the shares
owned by or voted under the control of directors seeking indemnification may not
be voted.
Section 14-2-857 of the Georgia Code provides that an officer who is not a
director has the mandatory right of indemnification granted to directors under
Section 14-2-852, as described above. In addition, we may, as provided by our
Articles, Bylaws, general or specific actions by our board of directors, or by
contract, indemnify and advance expenses to an officer, employee or agent who is
not a director to the extent that such indemnification is consistent with public
policy.
We plan to enter into indemnification agreements with each of our directors
and certain executive officers. The indemnification agreements set forth certain
procedural matters relating to indemnification, including the manner in which an
indemnified party may make a claim and the right of an indemnified party to
court adjudication of his or her claim if we deny such indemnification.
Our officers and directors are presently covered by insurance which (with
certain exceptions and within certain limitations) indemnifies them against any
losses or liabilities arising from any alleged "wrongful act," including any
alleged breach of duty, neglect, error, misstatement, misleading statement,
omissions or other act done or wrongfully attempted. We pay the cost of such
insurance as permitted by our Bylaws and the laws of the State of Georgia.
Reference is hereby made to Section of the underwriting agreement,
the form of which will be filed as Exhibit 1.01 hereto, in which the
underwriters agree to indemnify our directors and officers and certain other
persons against certain civil liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, we
have sold and issued the following securities:
1. In April, May and August 1999, we issued an aggregate of 5,899,999
shares of Series C convertible preferred stock to 21 institutional
and sophisticated investors, consisting primarily of venture
capital companies, for a consideration of $3.00 per share, or an
aggregate of $17,699,997 before expenses of the private placements
of approximately $164,000. In accordance with the terms of the
Series C convertible preferred stock, each share of Series C
convertible preferred stock will be converted into one share of our
common stock immediately prior to the consummation of the public
offering.
2. In August and December 1998, we issued to some of the holders of
our Series A and Series B convertible preferred stock $6,150,000
principal amount notes bearing interest at a rate per annum equal
to the prime rate as published in The Wall Street Journal plus 2%.
At that time we also issued warrants exercisable for 205,002 shares
of our Series B convertible preferred stock. In April 1999 we
issued warrants exercisable for 200,001 shares of our Series C
convertible stock to the noteholders as consideration for extending
the maturity of the notes. The notes and, at the option of the
noteholders, the accrued and unpaid interest on the notes were
converted into 2,140,357 shares of our Series C convertible
preferred stock in April 1999. In accordance with the terms of the
Series B convertible preferred stock and the Series C
II-2
<PAGE> 86
convertible preferred stock, each share of convertible preferred stock
will be converted into one share of our common stock immediately prior
to the consummation of the public offering.
3. From January 1, 1997 through June 27, 2000, we granted incentive
stock options and nonqualified stock options to purchase an
aggregate of 3,159,250 shares of our common stock at exercise
prices ranging from $.30 to $8.25 per share to employees and
directors under our 1995 Stock Option Plan and our 1997 Equity
Ownership Plan, and issued an aggregate of 407,772 shares upon the
exercise of these and previously granted options. Of these options
granted, options to purchase 472,238 shares of common stock have
been canceled.
4. In July 1998, we issued to Cousins Properties, Inc. a warrant to
purchase 50,000 shares of our Series B-1 convertible preferred
stock at an exercise price of $5.00 per share. This warrant will be
converted into a warrant to purchase 50,000 shares of our common
stock at an exercise price of $5.00 per share immediately prior to
the consummation of the public offering in accordance with the
terms of the Series B-1 convertible preferred stock.
5. In December 1998, we issued to Long Aldridge & Norman LLP 16,666
shares of Series B convertible preferred stock for consideration of
$3.00 per share or an aggregate of $49,998 in legal fees incurred
by AtheroGenics in 1998. In accordance with the terms of the Series
B convertible preferred stock, each share of Series B convertible
preferred stock will be converted into one share of our common
stock prior to the consummation of the public offering.
6. In April 1999, we issued to Long Aldridge & Norman LLP 16,666
shares of Series C convertible preferred stock for consideration of
$3.00 per share or an aggregate of $49,998 in legal fees incurred
by AtheroGenics in 1998. In accordance with the terms of the Series
C convertible preferred stock, each share of Series C convertible
preferred stock will be converted into one share of our common
stock prior to the consummation of the public offering.
7. In October 1997, we issued to Phoenix Leasing Incorporated a
warrant to purchase 2,200 shares of Series B convertible preferred
stock at an exercise price of $3.00 per share in connection with
the Master Lease Agreement between Phoenix Leasing and us dated
November 1, 1995. This warrant will be converted into a warrant to
purchase 2,200 shares of our common stock at an exercise price of
$3.00 per share immediately prior to the consummation of the public
offering in accordance with the terms of the Series B convertible
preferred stock.
No underwriters were involved in the foregoing sales of securities. The
issuance of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of such Securities Act as
transactions by an issuer not involving any public offering, or, in the case of
some options to purchase common stock, Rule 701 of the Securities Act. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
II-3
<PAGE> 87
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
1.01* -- Form of Underwriting Agreement.
3.01** -- Form of Fourth Amended and Restated Articles of
Incorporation of AtheroGenics, Inc.
3.02** -- Form of Third Amended and Restated Bylaws of AtheroGenics,
Inc.
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. (to be incorporated by
reference to Exhibits 3.01 and 3.02).
5.01* -- Opinion of Long Aldridge & Norman LLP (including consent).
10.01**+ -- Exclusive License Agreements dated October 22, 1999 by and
between AtheroGenics, Inc. and each of Schering-Plough Ltd.
and Schering Corporation.
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.
10.06** -- Consulting Agreement dated May 11, 2000 between
AtheroGenics, Inc. and William Scott, Ph.D.
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.
10.13**++ -- Master Equipment Lease dated November 1, 1995 between
Phoenix Leasing Incorporated and AtheroGenics, Inc.
23.01** -- Consent of Ernst & Young LLP.
23.02 -- Consent of Long Aldridge & Norman LLP (to be contained in
Exhibit 5.01).
23.03** -- Consent of King & Spalding.
24.01** -- Powers of Attorney.
27.01** -- Financial Data Schedule (for SEC use only).
</TABLE>
---------------
* To be filed by amendment.
** Previously filed.
II-4
<PAGE> 88
+ 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.
(b) 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.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information which may be omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form or prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Atlanta, State of Georgia, on July 14,
2000.
ATHEROGENICS, INC.
By:/s/ RUSSELL M. MEDFORD, M.D., PH.D.
---------------------------------------
RUSSELL M. MEDFORD, M.D., PH.D.
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ RUSSELL M. MEDFORD President and Chief Executive July 14, 2000
------------------------------------------------ Officer, Director
RUSSELL M. MEDFORD
PRINCIPAL FINANCIAL AND PRINCIPAL
ACCOUNTING OFFICER:
/s/ MARK P. COLONNESE Vice President of Finance and July 14, 2000
------------------------------------------------ Administration and Chief
MARK P. COLONNESE Financial Officer
ADDITIONAL DIRECTORS:
* Director July 14, 2000
------------------------------------------------
MICHAEL A. HENOS
* Director July 14, 2000
------------------------------------------------
R. WAYNE ALEXANDER
* Director July 14, 2000
------------------------------------------------
VAUGHN D. BRYSON
* Director July 14, 2000
------------------------------------------------
T. FORCHT DAGI
* Director July 14, 2000
------------------------------------------------
VIJAY K. LATHI
* Director July 14, 2000
------------------------------------------------
ARDA MINOCHERHOMJEE
* Director July 14, 2000
------------------------------------------------
ARTHUR M. PAPPAS
* Director July 14, 2000
------------------------------------------------
RICHARD S. SCHNEIDER
[Signatures continued on following page.]
</TABLE>
II-6
<PAGE> 90
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
* Director July 14, 2000
------------------------------------------------
WILLIAM A. SCOTT
*By: /s/ MARK P. COLONNESE
------------------------------------------
Mark P. Colonnese
Attorney-in-fact
</TABLE>
II-7
