<PAGE>
As filed with the Securities and Exchange Commission on December 17, 1996
Registration No. 333-
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
under the Securities Act of 1933
CORTEX PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
DELAWARE 2834 33-0303583
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
15241 Barranca Parkway, Irvine, California 92618
(714) 727-3157
(Address and telephone number of principal executive offices
and principal place of business)
Vincent F. Simmon, Ph.D., President and Chief Executive Officer
15241 Barranca Parkway, Irvine, California 92618
(714) 727-3157
(Name, address and telephone number of agent for service)
Copies to:
Nick E. Yocca, Esq.
Lawrence B. Cohn, Esq.
Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
(714) 725-4000
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
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 for the same
offering: ______.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: ______.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: X .
---
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Aggregate Offering Aggregate Offering Amount
Securities to be Registered Registered Price(1) Price Registration Fee
- --------------------------- ---------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share 3,801,918 shares $3.0625 $11,643,374 $3,528*
</TABLE>
(1) The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c), using the average of the
high and low bid price for the Common Stock as reported on the Nasdaq
Small-Cap Market on November 8, 1996, which was $3.0625 per share.
* Previously paid.
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.
================================================================================
<PAGE>
PROSPECTUS
[LOGO]
CORTEX PHARMACEUTICALS, INC.
3,801,918 Shares of Common Stock
(Par Value $0.001 Per Share)
This Prospectus relates to the sale of up to 3,801,918 shares (the "Shares")
of the common stock, par value $0.001 per share (the "Common Stock"), of
Cortex Pharmaceuticals, Inc. ("Cortex" or the "Company") by certain
stockholders of the Company (the "Selling Stockholders"). The Shares include
440,573 shares of Common Stock issuable upon exercise of currently
outstanding warrants (the "Warrant Shares") and up to 3,361,345 shares of
Common Stock that may be issuable upon conversion of Series D Preferred Stock
(the "Conversion Shares"). The Conversion Shares include an allowance for
shares of Common Stock that may be issuable upon conversion of Series D
Preferred Stock in the event of a decline in the market price of the Common
Stock (see "Description of Securities -- Preferred Stock," "Selling
Stockholders -- Footnote 1," and "Risk Factors -- Shares Eligible for Future
Sale; Dilution; Control"). The Selling Stockholders may sell the Shares from
time to time in transactions in the over-the-counter market, in negotiated
transactions, by writing options on the Shares or by a combination of these
methods, at fixed prices that may be changed, at market prices prevailing at
the time of the sale, at prices related to such market prices or at negotiated
prices. The Selling Stockholders may effect these transactions by selling the
Shares to or through broker-dealers, who may receive compensation in the form
of discounts or commissions from the Selling Stockholders or from the purchasers
of the Shares for whom the broker-dealers may act as an agent or to whom they
may sell as a principal, or both. The Selling Stockholders and such
brokers-dealers may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, in connection with such sales. See "Selling
Stockholders" and "Plan of Distribution."
The Company will not receive any part of the proceeds from the sale of the
Shares. The Company has agreed to bear all of the expenses in connection with
the registration and sale of the Shares (other than underwriting discounts
and selling commissions and the fees and expenses of counsel or other
advisors to the Selling Stockholders).
The Common Stock of the Company trades on the Nasdaq Small-Cap Market under
the symbol CORX. On December 12, 1996, the high and low sale prices of a share
of Common Stock of the Company, as reported by Nasdaq, were $4.75 and
$4.3125, respectively. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING AT PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ________ _____, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: 7 World Trade Center, 13th Floor, New York, New
York 10048; 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Reports and other information on the Company may be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission.
This Prospectus constitutes part of a Registration Statement (the
"Registration Statement") on Form SB-2 under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities offered
hereby. For further information about the Company and the securities offered
hereby, reference is made to the Registration Statement and to the financial
statements and exhibits filed as a part thereof. The statements contained in
this Prospectus as to the contents of any contract or any other document are
not necessarily complete, and in each instance reference is made to the copy
of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including exhibits thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission as provided in the preceding paragraph, and copies of all or any
part thereof may be obtained from the Commission's Public Reference Section
at prescribed rates.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. ALL SHARE AND PER SHARE DATA HAVE BEEN RESTATED
TO REFLECT A ONE-FOR-FIVE REVERSE STOCK SPLIT THAT WAS EFFECTED JANUARY 11,
1995. AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS."
This Prospectus contains certain forward-looking statements that are based on
current expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Company will be
able to obtain sufficient financing to continue operations, that the
Company's technology will continue to be developed and will not be replaced
by new technology, that the Company will retain key technical and management
personnel, and that there will be no material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future technology, economic,
competitive and market conditions, and future business decisions, all of
which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements
will be realized. In addition, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation of the Company or
any other person that the objectives or plans of the Company will be
achieved. The following summary is qualified in its entirety by the more
detailed information and the Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
Cortex Pharmaceuticals, Inc. ("Cortex" or the "Company") is a development
stage enterprise organized in 1987 to engage in the discovery, development
and commercialization of innovative pharmaceuticals for the treatment of
neurodegenerative diseases and other neurological and psychiatric disorders.
The primary product development effort at Cortex is centered on the AMPA
receptor, a complex of proteins that is involved in most "excitatory"
communication between nerve cells in the human brain. Cortex is developing a
family of chemical compounds, known as AMPAKINEs-TM-, to enhance the activity
of this receptor. Cortex believes that AMPAKINEs hold promise for correcting
deficits brought on by a variety of diseases and disorders that are known, or
thought, to involve depressed functioning of pathways in the brain that use
glutamate as a neurotransmitter. In October 1994, the Company initiated human
safety studies with CX516 (AMPALEX-TM-) for the potential treatment of
deficits of memory and cognition due to Alzheimer's disease. To date, these
studies have involved healthy young adult and healthy elderly volunteers. The
Company plans to initiate a small study in Alzheimer's disease patients in
fiscal 1997. Cortex is also investigating the potential utility of its
AMPAKINEs in the treatment of schizophrenia. In fiscal 1996, the Company
maintained a strong focus on the AMPA receptor program but, with the
reacquisition of rights to calpain inhibitor compounds from Alkermes in
October 1995, reinstituted a research effort in this area.
Cortex believes that its competitive advantage is the quality of its science
and technology, and that it can compete effectively with larger, more
established, better capitalized entities in the area of discovery of
innovative pharmaceuticals. The Company does not, however, have the resources
or expertise for later-stage clinical development, manufacturing and
worldwide marketing of major pharmaceuticals. The Company's commercial
development plans therefore involve partnering with larger pharmaceutical
companies for Phase II and later clinical testing, manufacturing and global
marketing of its proposed products, while attempting to retain the right to
eventually co-promote in the United States. If the Company is successful in
the pursuit of this strategy, it is intended that it will be in a position to
contain its costs over the next few years, to maintain its focus on the
research and early development of innovative pharmaceuticals, and to
eventually participate more fully in the commercial development of its
proposed products in the United States. Cortex is actively seeking
collaborative or licensing arrangements with larger pharmaceutical companies
that will permit its product candidates to be advanced into the later stages
of clinical development and that will provide access to the extensive
clinical trials management, manufacturing and marketing expertise of such
companies. There can be no assurance, however, that the Company will secure
such arrangements on favorable terms, or at all, or that its products will be
successfully developed and approved for marketing by government regulatory
agencies, or accepted by patients, health care providers and insurers.
3
<PAGE>
Cortex was incorporated in Delaware on February 10, 1987. The Company's
offices and laboratories are located at 15241 Barranca Parkway, Irvine,
California, 92618, and its telephone number is (714) 727-3157.
AMPALEX-TM- and AMPAKINE-TM- are trademarks of Cortex Pharmaceuticals, Inc.
This Prospectus also includes registered trademarks of other companies.
RISK FACTORS
An investment in the Shares offered hereby involves a high degree of risk.
See "Risk Factors."
SELECTED FINANCIAL INFORMATION
The selected financial information set forth below is derived from and should be
read in conjunction with the more detailed financial statements (including the
notes thereto) appearing elsewhere in this Prospectus.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
(Unaudited) inception inception
Three months ended (February 10, (February 10,
September 30, 1987) through Years ended June 30, 1987) through
-------------------------- September 30 ------------------------------ June 30,
1996 1995 1996 1996 1995 1996
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ -- $ -- $ 3,694,717 $ -- $ -- $ 3,694,717
Total operating expenses 1,225,921 988,922 31,473,569 4,321,309 7,031,842 30,247,648
----------- ----------- ------------ ----------- ----------- ------------
Loss from operations (1,225,921) (988,922) (27,778,852) (4,321,309) (7,031,842) (26,552,931)
Interest income, net 34,393 34,312 1,367,700 163,062 196,310 1,333,307
----------- ----------- ------------ ----------- ----------- ------------
Net loss $(1,191,528) $ (954,610) $(26,411,152) $(4,158,247) $(6,835,532) $(25,219,624)
=========== ========== ============ =========== =========== ============
Weighted average common
shares outstanding 7,557,700 6,086,804 6,532,884 6,075,454
=========== ========== ========== ===========
Net loss per share $ (0.16) $ (0.16) $ (0.64) $ (1.13)
=========== ========== ========== ===========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
June 30,
(Unaudited) -----------------------------
September 30, 1996 1996 1995
------------------ ------------ ------------
<S> <C> <C> <C>
Total current assets (1) $ 3,053,999 $ 4,179,977 $ 3,931,448
Total assets (1) 3,838,052 5,013,920 4,886,372
Total current liabilities 331,606 330,328 603,660
Deficit accumulated during the development stage (26,550,826) (25,359,298) (21,201,051)
Total stockholders' equity (1) $ 2,454,958 $ 3,644,763 $ 3,272,696
Common shares outstanding 7,589,271 7,495,576 6,085,201
</TABLE>
____________
(1) Excludes net proceeds of approximately $950,000 received in October 1996 in
connection with a private placement of Series D Preferred Stock. See
"Capitalization," "Description of Securities" and Note 10 of Notes to
Financial Statements.
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY IS SPECULATIVE IN NATURE,
INVOLVES A HIGH DEGREE OF RISK, AND SHOULD NOT BE MADE BY ANY INVESTOR WHO
CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT. EACH PROSPECTIVE INVESTOR
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND SPECULATIVE FACTORS, AS
WELL AS OTHERS DESCRIBED ELSEWHERE IN THIS PROSPECTUS, ASSOCIATED WITH THIS
OFFERING BEFORE MAKING AN INVESTMENT.
NEED FOR ADDITIONAL FUNDS. Cortex anticipates that its existing capital
resources (including approximately $950,000 in net proceeds received in
October 1996 from the first tranche of a three-tranche private placement of
Series D Preferred Stock) will enable it to maintain its current and planned
operations through June 1997. The second and third tranches of the private
placement, if and when received, are expected to provide an additional
$3,000,000 of total gross proceeds, which amount is expected to fund
operations into calendar 1998. The Company will require additional funds to
continue its operations beyond the first calendar quarter of 1998. There can
be no assurance that the Company will be able to obtain the additional needed
funds on reasonable terms, or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES. Cortex is a development stage
enterprise. From inception on February 10, 1987 through September 30, 1996,
the Company has generated only modest operating revenues and has incurred net
losses aggregating $26,411,152. As of September 30, 1996, the Company had an
accumulated deficit of $26,550,826. The Company will require substantial
additional funds to advance its research and development programs,
particularly should the Company decide to independently conduct later-stage
clinical testing and apply for regulatory approval of any of its proposed
products. There can be no assurance that such additional financing will be
available on acceptable terms, or at all. If additional funds are raised by
issuing equity securities, further dilution to existing stockholders may
result. If the Company is unable to obtain additional funds when and as
needed, the Company may be required to significantly curtail one or more of
its product development programs. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
TECHNOLOGICAL UNCERTAINTY; EARLY STAGE OF PRODUCT DEVELOPMENT; NO ASSURANCE
OF REGULATORY APPROVALS. The Company's proposed products are in the
preclinical or early clinical stage of development and will require
significant further research, development, clinical testing and regulatory
clearances. They are subject to the risks of failure inherent in the
development of products based on innovative technologies. These risks include
the possibilities that any or all of the proposed products are found to be
ineffective or toxic, or otherwise fail to receive necessary regulatory
clearances, that the proposed products, although effective, will be
uneconomical to market, that third parties may now or in the future hold
proprietary rights that preclude the Company from marketing them, or that
third parties will market a superior or equivalent product. Accordingly, the
Company is unable to predict whether its research and development activities
will result in any commercially viable products or applications. Further, due
to the extended testing and regulatory review process required before
marketing clearance can be obtained, the Company does not expect to be able
to commercialize any therapeutic drug for at least five years, either
directly or through its corporate partners or licensees. There can be no
assurance that the Company's proposed products will prove to be safe or
effective or receive regulatory approvals that are required for commercial
sale. To date, the Company has conducted clinical trials in Europe only. The
Company has not yet filed an IND with the Food and Drug Administration,
which is required prior to the commencement of clinical testing in the United
States. See "Business."
DEPENDENCE ON THIRD PARTIES FOR CLINICAL TESTING, MANUFACTURING AND
MARKETING. The Company does not have the resources, and does not presently
intend, to conduct later-stage human clinical trials or to manufacture any of
its proposed products. The Company is therefore seeking larger pharmaceutical
company partners to conduct such activities for most or all of its proposed
products. In connection with its efforts to secure corporate partners, the
Company will seek to retain certain co-promotional rights to its proposed
products, so that it may promote such products to selected medical
specialists while its corporate partner promotes to the general medical
market. There can be no assurance that the Company will be able to enter into
any such partnering arrangements on this or any other basis. In addition,
there can be no assurance that either the Company or its prospective
corporate partners can successfully introduce its proposed products, that
they will achieve acceptance by patients, health care providers and insurance
companies, or that they can be manufactured and marketed at prices that would
permit the Company to operate profitably. See "Business."
DEPENDENCE ON RELATIONSHIPS WITH KEY CONSULTANTS AND THE UNIVERSITY OF
CALIFORNIA, IRVINE. The Company is highly dependent upon its relationships
with a number of key academic consultants, particularly Drs. Carl W. Cotman
and Gary S. Lynch of the University of California, Irvine ("UCI"). Drs.
Cotman and Lynch play an important role in guiding the
5
<PAGE>
internal research of the Company. In addition, Cortex sponsors research in
the laboratories of Dr. Lynch at UCI that is an important component of the
Company's product development and corporate partnering profile. The sponsored
research is highly technically demanding and involves the use of expensive
equipment, much of it custom-built, that is the property of UCI. Were
Cortex's relationships with Dr. Lynch or UCI to be disrupted, it is likely
that the Company's AMPA receptor research program would be adversely
affected, and there is no assurance that the Company would be able to conduct
the sponsored research internally at reasonable cost, or at all. The
Company's agreements with its consultants, including those with Drs. Cotman
and Lynch, are generally terminable by the consultant on short notice. The
loss of services of certain of these individuals, and particularly Dr. Lynch,
could have a material adverse effect on the Company. See "Management."
LIMITED PROPRIETARY RIGHTS; LACK OF PATENT PROTECTION. Since its initial
public offering in July 1989, the Company has negotiated technology rights
agreements giving it exclusive rights to its proposed cognition enhancement
products and calpain inhibitor products under patents or patent applications
owned wholly by other parties or by other parties as co-owners with the
Company. The Company also holds options or other rights to obtain exclusive
licenses under patent applications relating to certain of its potential
products. Certain of the Company's licenses and other agreements are
terminable if the Company does not make certain minimum annual payments, meet
certain milestones or diligently seek to commercialize the underlying
technology. In addition, the Company's related collaborative and consulting
agreements are generally terminable upon 30 to 60 days' written notice.
There can be no assurance that current or future patent applications in which
Cortex has an interest, either as sole owner or as a current or prospective
licensee, will result in patents being issued. There can also be no assurance
that patents issuing in the future in connection with current or future
patent applications will afford effective protection against competitors with
similar technology, or that any patents issued or licensed to Cortex will not
be infringed upon or designed around by others.
If Cortex is unable to obtain protection of its proprietary rights in its
products or processes prior to or after obtaining regulatory clearances,
whether through patents, trade secrets or otherwise, competitors may be able
to market competing products by obtaining regulatory clearance through
demonstration of equivalency to the Company's products, without being
required to conduct the same lengthy clinical tests conducted by the Company.
In some cases, Cortex may rely on trade secrets to protect its innovations.
There can be no assurance that secrecy obligations will be honored or that
others will not independently develop similar or superior technologies. To
the extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to the
Company's projects, disputes may arise as to the proprietary rights to such
information that may not be resolved in favor of the Company. See
"Business--Patents and Proprietary Rights."
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION; CONTROL. If all outstanding
warrants and options are exercised prior to their expiration, approximately
1,350,000 additional shares of Common Stock could become freely tradeable
without restriction under the Securities Act. An aggregate of 29,384 shares
of Common Stock are issuable upon conversion of currently outstanding 9%
Preferred Stock and Series B Preferred Stock. On issuance such shares will be
freely tradeable. As of December 12, 1996, 339,847 shares of Common Stock are
issuable upon conversion of 100 shares of Series D Preferred Stock issued in
the first tranche at an effective conversion price of $2.9425 per share of
Common Stock. However, the exact number of shares issuable depends on the
date of conversion and the then current market price of the Common Stock.
See "Description of Securities -- Preferred Stock." On December 12, 1996,
the last sale price of the Common Stock as reported by Nasdaq was $4.375 per
share. If the market price of the Common Stock is below $3.59 per share at
the time(s) of conversion, the effective conversion prices(s) of the Series D
Preferred Stock issued in the first tranche will be lower, and potentially
much lower, than $2.9425 per share, resulting in the issuance of more Common
Stock upon conversion of the Series D Preferred Stock. In the event of a
precipitous decline in the market price of the Common Stock, this may lead to
very substantial dilution to current holders of the Common Stock. Further,
since all of the shares of Series D Preferred Stock are being acquired by a
single investor, under such circumstances the investor may be in a position
to exert influence and control over the affairs of the Company.The Series D
Preferred Stock issued or issuable pursuant to the October 1996 private
placement (see Note 10 of Notes to Financial Statements) is also convertible
into shares of Common Stock at a conversion price indexed to the market price
of the Common Stock at the time of conversion. An additional 300 shares of
Series D Preferred Stock are planned for issuance upon closing of the second
and third tranches at effective conversion prices that cannot presently be
determined, but that may be lower than the effective conversion price for the
currently outstanding Series D Preferred Stock. The Series D Preferred Stock
to be issued in the second and third tranches of the October 1996 private
placement also presents the risks discussed immediately above pertaining to
dilution and control. On issuance upon conversion of Series D Preferred
Stock, all of such shares of Common Stock may be freely tradeable. Sales of
substantial amounts of Common Stock in the public market could adversely
affect the prevailing market price of the Common Stock and, dependent upon
the then current market price of the Common Stock, increase the risks
associated with conversion of Series D Preferred Stock that are discussed
above. See "Selling Stockholders -- Footnote 1," and "Description of
Securities -- Preferred Stock."
6
<PAGE>
COMPETITION. The Company's business is characterized by intensive research
efforts. Many companies, research institutes and universities are working in
a number of pharmaceutical or biotechnology disciplines to develop
therapeutic products similar to those under investigation by the Company.
Most of these companies, research institutes and universities have
substantially greater financial, technical, manufacturing, marketing,
distribution and/or other resources than Cortex. In addition, many of such
companies have experience in undertaking human clinical trials of new or
improved therapeutic products and obtaining FDA and other regulatory
clearances of products for use in human health care. The Company has no
experience in conducting and managing clinical testing or in preparing
applications necessary to gain regulatory clearances. Accordingly, other
companies may succeed in developing products that are safer or more effective
than those proposed to be developed by the Company and in obtaining FDA
clearances for such products more rapidly than the Company. Further, it is
expected that competition in this field will continue to intensify over the
next few years. See "Business--Competition."
DEPENDENCE UPON KEY PERSONNEL. Cortex is highly dependent upon key
management and technical personnel. Competition for qualified employees among
pharmaceutical and biotechnology companies is intense, and the loss of any of
such persons, or an inability to attract, retain and motivate the additional
highly-skilled employees and consultants required for the Company's
activities, could materially adversely affect its business and prospects.
There can be no assurance that Cortex will be able to retain its existing
personnel or attract additional qualified employees when they are needed. See
"Business" and "Management."
GOVERNMENT REGULATION. Therapeutic products such as those proposed to be
developed by Cortex are subject to an extensive and lengthy regulatory review
and approval process by the FDA and comparable agencies in other countries.
Prior to commercialization, the Company's products will require governmental
approvals that have not yet been obtained and that are not expected to be
obtained for several years, if at all. The regulatory process, which includes
pre-clinical, clinical and post-clinical testing of the Company's products to
establish their safety and efficacy, will take many years and require the
expenditure of substantial resources. There can also be no assurance that,
even after such time and expenditures, regulatory clearances will be obtained
for any of the Company's products. Even if regulatory clearances are
obtained, a marketed product is subject to continual review, and later
discovery of previously unknown problems may result in restrictions on
marketing or withdrawal of the product from the market. In addition, the
current administration in the U.S. is proposing changes in federal regulation
and reimbursement policies intended to facilitate the delivery of
cost-effective health care. The implementation of such proposed changes may
affect the regulation and availability of, and the pricing and reimbursement
for, health care products. The Company is unable to predict the effect, if
any, that these proposed changes will have on the Company. See
"Business--Government Regulation."
PRODUCT LIABILITY AND INSURANCE. The clinical testing, manufacturing and
marketing of the Company's products may expose the Company to product
liability claims. Cortex maintains liability insurance with coverage limits
of $5 million per occurrence and $5 million in the annual aggregate. Although
the Company has never been subject to a product liability claim, there can be
no assurance that the coverage limits of the Company's insurance policies
will be adequate or that one or more successful claims brought against the
Company would not have a material adverse effect upon the Company's business,
financial condition and results of operations.
LIMITED PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. The Company's
Common Stock has been publicly traded since July 1989. Although the Company
currently has approximately 20 market makers, there can be no assurance that
an active or established trading market for the Company's Common Stock will
be maintained. The Company's Common Stock currently trades on the Nasdaq
Small Cap Market. There can be no assurance that the Company's Common Stock
will continue to be traded on the Nasdaq Small Cap Market.
There is significant volatility in the market price of securities of life
sciences companies generally, and the trading price of the Company's Common
Stock has been subject to wide fluctuations. See "Price Range of Common
Stock." Various factors and events, including announcements by the Company or
its competitors concerning technological innovations, new products, proposed
governmental regulations or actions, developments or disputes relating to
patents or proprietary rights and public concern over the safety of
therapeutic products or other factors that affect the market generally, may
have a significant impact on the Company's business and on the market price
of the Company's securities.
DIVIDENDS. The Company has not paid cash dividends on its Common Stock and
does not anticipate doing so in the foreseeable future. The Company may not
pay any dividends on its Common Stock until accrued and unpaid dividends on
7
<PAGE>
the 9% Preferred Stock have been paid in full. As of September 30, 1996,
accrued and unpaid dividends on the 9% Preferred Stock were $64,350. See
"Dividend Policy."
ANTI-TAKEOVER PROVISIONS. The Board of Directors has the authority, without
further approval of the Company's stockholders, to issue up to 549,340 shares
of Preferred Stock having such rights, preferences and privileges as the
Board of Directors may determine. Any such issuance of additional shares of
Preferred Stock could, under certain circumstances, have the effect of
delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. See "Description of Securities."
USE OF PROCEEDS
The proceeds from the sale of each Selling Stockholder's Shares will belong
to the Selling Stockholders. The Company will not receive any of the proceeds
from such sales of the Shares.
PRICE RANGE OF COMMON STOCK
The Common Stock (Nasdaq symbol: "CORX") began trading publicly in the
over-the-counter market on July 18, 1989. The following table presents
quarterly information on the high and low sale prices of the Common Stock for
the fiscal years ended June 30, 1996 and 1995, and thereafter, as reported by
Nasdaq. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, may not represent actual transactions and have been
adjusted for a one-for-five reverse stock split that became effective January
11, 1995.
High Low
------- -------
FISCAL YEAR ENDING JUNE 30, 1997
Second Quarter (through December 12, 1996) $7-1/4 $2-7/16
First Quarter 4-1/2 2-5/8
FISCAL YEAR ENDED JUNE 30, 1996
Fourth Quarter 7-1/4 4
Third Quarter 8-3/4 3-1/2
Second Quarter 5-17/32 2-3/8
First Quarter 6-3/8 2-7/8
FISCAL YEAR ENDED JUNE 30, 1995
Fourth Quarter 3-3/4 2-1/2
Third Quarter 3-3/4 1-5/8
Second Quarter 5-5/32 3-1/8
First Quarter 5-5/16 3-3/4
As of November 30, 1996, there were 590 stockholders of record of the
Company's Common Stock, and approximately 7,400 beneficial owners. The last
sale price of the Company's Common Stock on December 12, 1996, as reported by
Nasdaq, was $4-3/8.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in the Company's
business. The outstanding shares of 9% Preferred Stock bear a fixed dividend
of $0.09 per share per annum, which accrues in equal semiannual installments
on June 15 and December 15 of each year, which dividends must be paid in full
before any dividends can be paid on the Common Stock. As of September 30,
1996, accrued and unpaid dividends on the 9% Preferred Stock were $64,350.
The payment of future dividends, if any, will be determined by the Board of
Directors in light of
8
<PAGE>
conditions then existing, including the Company's financial condition and
requirements, future prospects, restrictions in financing agreements,
business conditions and other factors deemed relevant by the Board of
Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996. The figures are unaudited, and this table should be read
in conjunction with the financial statements (including the notes thereto)
appearing elsewhere in this Prospectus.
September 30, 1996 (1)(2)
------------------------
Note payable to Alkermes, Inc. $ 1,051,488
Stockholders' equity (2):
9% cumulative convertible preferred stock,
$0.001 par value; $1.00 per share liquidation
preference; authorized: 1,250,000 shares;
issued and outstanding: 110,000 shares 110,000
Series B convertible preferred stock, $0.001 par
value; $0.6667 per share liquidation preference;
authorized: 3,200,000 shares; issued and
outstanding: 150,000 shares 86,810
Series C convertible preferred stock, $0.001 par
value; $25,000 per share liquidation preference;
authorized: 160 shares; issued and outstanding:
25 shares 537,483
Common stock, $0.001 par value; authorized
20,000,000 shares ; issued and outstanding:
7,589,271 shares 7,589
Additional paid-in capital 28,263,738
Unrealized gain on available for sale
U.S. Government securities 164
Deficit accumulated during the development stage (26,550,826)
------------
Total stockholders' equity 2,454,958
------------
Total capitalization $ 3,506,446
============
_______________
(1) Excludes an aggregate of 1,357,084 shares of Common Stock reserved for
issuance upon possible exercise of outstanding warrants and options and an
aggregate of 283,184 shares of Common Stock reserved for issuance upon
conversion of outstanding 9% Cumulative Convertible Preferred Stock, Series
B Convertible Preferred Stock and Series C Convertible Preferred Stock. See
"Description of Securities" and Notes 3, 4 and 5 of Notes to Financial
Statements.
(2) On October 15, 1996, the Company issued 100 shares of newly created Series
D Preferred Stock ("Series D Preferred") at a price of $10,000 per share in
the first tranche of a three-tranche Regulation D private placement. The
Series D Preferred Stock is convertible at an effective per share
conversion price that is the lower of (i) 110% of the average closing bid
price for the five trading days immediately preceding the closing date
($2.9425 for the first tranche) or (ii) that price that is 18% below the
average closing bid price for the five trading days immediately preceding
the conversion date, in each case subject to adjustment at the rate of six
percent per annum based on the length of the period from issuance of the
Series D Preferred until its conversion. The Company intends to sell a
second tranche of 150 shares of Series D Preferred (for gross proceeds of
$1,500,000) 15 days following the effectiveness of a registration statement
covering the resale of
9
<PAGE>
shares of Common Stock issuable upon conversion of the Series D Preferred,
and a third tranche of 150 shares 60 days following the closing of the
second tranche. The closing of the second and third tranches is subject
to certain conditions, which conditions are outside the control of the
investor, including but not limited to minimums for price and trading
volume of the Company's common stock. See "Description of Securities" and
Note 10 of Notes to Financial Statements.
10
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data with respect to the Company presented below for
the fiscal years ended and as of June 30, 1996 and 1995 and for the period
from inception (February 10, 1987) through June 30, 1996 are derived from and
should be read in conjunction with the more detailed financial statements
(including the notes thereto) of the Company, which have been audited by
Ernst & Young LLP, independent auditors, whose report thereon is included
elsewhere herein and in the Registration Statement. The selected financial
data for the years ended and as of June 30, 1994, 1993 and 1992 is derived
from audited financial statements that are not included in this Prospectus.
The selected financial data for the three-month periods ended September 30,
1996 and 1995 and the period from inception (February 10, 1987) through
September 30, 1996 and at September 30, 1996 are derived from unaudited
interim financial statements. The unaudited interim financial statements
include all adjustments (consisting only of normally recurring accruals) that
management considers necessary for a fair presentation of the Company's
financial position and results of operations for the periods presented.
Operating results for the three-month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 1997.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION> Period from
inception
(February 10,
Years ended June 30, 1987) though
---------------------------------------------------------------------------- June 30,
1996 1995 1994 1993 1992 1996
----------- ------------ ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Research/license revenue (1) $ -- $ -- $ -- $ 2,600,000 $ 1,000,000 $ 3,600,000
Grant revenue -- -- 39,665 10,103 -- 94,717
------------ ----------- ----------- ----------- ----------- -----------
Total operating revenues -- -- 39,665 2,610,103 1,000,000 3,694,717
------------ ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research & development 2,677,577 4,138,731 3,226,858 2,316,622 2,284,283 18,969,112
General & administrative 1,643,732 1,665,134 1,780,792 1,101,134 1,164,148 10,050,559
Settlement with Alkermes, Inc -- 1,227,977 -- -- -- 1,227,977
------------ ----------- ----------- ----------- ----------- -----------
Total operating expenses 4,321,309 7,031,842 5,007,650 3,417,756 3,448,431 30,247,648
------------ ----------- ----------- ----------- ----------- -----------
Loss from operations (4,321,309) (7,031,842) (4,967,985) (807,653) (2,448,431) (26,552,931)
Interest income, net 163,062 196,310 262,994 46,117 93,661 1,333,307
------------ ----------- ----------- ----------- ----------- -----------
Net loss $(4,158,247) $(6,835,532) $(4,704,991) $ (761,536) $(2,354,770) $(25,219,624)
============ =========== =========== =========== =========== ============
Weighted average common
shares outstanding 6,532,884 6,075,454 4,880,338 3,147,204 2,753,754
============= =========== =========== =========== ===========
Net loss per share $ (0.64) $ (1.13) $ (0.97) $ (0.26) $ (0.88)
============= =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Period from
inception
Three months ended (February 10,
September 30, 1987) through
------------------------------ September 30,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues:
Research/license revenue (1) $ -- $ -- $ 3,600,000
Grant revenue -- -- 94,717
----------- ----------- ------------
Total operating revenues -- -- 3,694,717
----------- ----------- ------------
Operating expenses:
Research & development 793,547 665,478 19,762,659
General & administrative 432,374 323,444 10,482,933
Settlement with Alkermes, Inc. -- -- 1,227,977
----------- ----------- ------------
Total operating expenses 1,225,921 988,922 31,473,569
----------- ----------- ------------
Loss from operations (1,225,921) (988,922) (27,778,852)
Interest income, net 34,393 34,312 1,367,700
----------- ----------- ------------
Net loss $(1,191,528) $ (954,610) $(26,411,152)
=========== =========== ============
Weighted average common
shares outstanding 7,557,700 6,086,804
=========== ==========
Net loss per share $ (0.16) $ (0.16)
=========== ==========
</TABLE>
___________
(1) Received under an agreement with Alkermes, Inc.
11
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION> June 30,
September 30, ----------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
-------------- ------------ ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Working capital (1) $ 2,722,393 $ 3,849,649 $ 3,327,788 $ 8,982,571 $ 888,199 $ 1,245,987
Total assets (1) 3,838,052 5,013,920 4,886,372 10,441,998 1,924,856 3,095,641
Total liabilities and
redeemable preferred stock 1,383,094 1,369,157 1,613,676 1,154,117 788,392 1,560,218
Deficit accumulated during
the development stage (26,550,826) (25,359,298) (21,201,051) (14,365,519) (9,660,528) (8,882,992)
Stockholders' equity (1) $ 2,454,958 $ 3,644,763 $ 3,272,696 $ 9,287,881 $ 1,136,464 $ 1,535,423
Common shares outstanding 7,589,271 7,495,576 6,085,201 6,073,942 3,209,975 3,047,438
</TABLE>
_________________
(1) Excludes net proceeds of approximately $950,000 received in October 1996 in
connection with a private placement of Series D Preferred Stock. See
"Capitalization," "Description of Securities" and Note 10 of Notes to
Financial Statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE HEREIN.
RESULTS OF OPERATIONS
From inception (February 10, 1987) through September 30, 1996, the Company's
revenue has consisted of (i) $3,600,000 of license fees and research and
development funding from January 1992 through June 1993 under the Company's
agreement with Alkermes, Inc. ("Alkermes," see Note 6 of Notes to Financial
Statements), (ii) net interest income aggregating $1,368,000, and (iii)
$95,000 of grant revenue.
From inception (February 10, 1987) through September 30, 1996, the Company
has sustained losses aggregating $26,411,152. Continuing losses are
anticipated over the next several years, as the Company's ongoing operating
expenses for preclinical research and early clinical development will only be
offset, if at all, by licensing revenues under planned strategic alliances
with larger pharmaceutical companies that the Company is seeking for the
later stages of clinical development, manufacturing and marketing of its
products. The nature and timing of payments to Cortex under these planned
strategic alliances, if and as entered into, is likely to significantly
affect the Company's operations, and to produce substantial period-to-period
fluctuation in reported financial results. Over the longer term, the Company
will be dependent upon successful commercial development of its products by
its prospective partners to attain profitable operations from product
royalties or other revenues based on product sales.
The Company believes that inflation and changing prices have not had a
material impact on its ongoing operations to date.
FISCAL YEARS ENDED JUNE 30, 1996 AND 1995
For the year ended June 30, 1996, the Company's net loss of $4,158,000
compares with a net loss of $6,836,000 for the prior year. The net loss for
the prior year includes $1,228,000 of expenses related to the settlement of
the dispute with Alkermes (see Note 6 of Notes to Financial Statements) and
higher research and development expenditures in connection with the
initiation of human clinical studies.
General and administrative expenses of $1,644,000 for the year ended June 30,
1996 were essentially unchanged from the prior year. The very slight decrease
was the result of lower outlays for consulting expenses, partially offset by
increased recruiting fees incurred with the hiring of the new Chief Executive
Officer.
Research and development expenses decreased to $2,678,000, or by 35%, in the
year ended June 30, 1996. Most of the decrease from the prior year was
attributable to clinical testing of AMPALEX (for the potential treatment of
memory deficits due to Alzheimer's disease) in the prior year, as well as
lower salary and related expenses due to a temporary reduction in scientific
personnel that was effected as of June 30, 1995. Lower outlays for scientific
consulting contributed most of the remaining decrease.
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
The net loss for the three-month period ended September 30, 1996 of
$1,192,000 compares with a net loss of $955,000 for the corresponding prior
year period. The increased operating expenses were primarily attributable to
scientific and administrative personnel additions, along with increased
levels of external research.
General and administrative expenses increased from $323,000 to $432,000 or by
$109,000 (34%) during the three-month period ended September 30, 1996
compared to the corresponding prior year period. The bulk of the increase was
from the relocation of the new Chief Executive Officer, the hiring of a
business development executive and increased travel expenses in connection
with corporate partnering activities.
13
<PAGE>
Research and development expenses increased from $665,000 to $794,000, or by
$129,000 (19%), during the three-month period ended September 30, 1996
compared to the corresponding prior year period. The increase was principally
due to higher outlays for sponsored research, additions to the complement of
scientific employees and a resultant increase in spending for laboratory
supplies, partially offset by lower clinical trials expenses.
PLAN OF OPERATIONS; LIQUIDITY AND CAPITAL RESOURCES
CORTEX has funded its organizational and research and development activities
primarily from the issuance of equity securities, with net proceeds from
inception (February 10, 1987) through September 30, 1996 aggregating $28
million. An additional $3.6 million in research and license payments was
received from Alkermes between January 1992 and June 1993 in connection with
the development and license agreement with that firm (see Note 6 of Notes to
Financial Statements). Interest income from inception through September 30,
1996, which approximates funds received, was $1.4 million.
As of September 30, 1996, the Company had cash, cash equivalents and
short-term investments totaling $2.9 million and working capital of $2.7
million. In comparison, as of September 30, 1995, the Company had cash, cash
equivalents and short-term investments of $3.1 million and working capital of
$2.6 million. The decreases resulted from amounts required to fund operating
losses and to purchase capital equipment, partially offset by approximately
$3.6 million received from a private placement of Series C Preferred Stock in
December 1995. From inception (February 10, 1987) through September 30, 1996,
net expenditures for furniture, equipment and leasehold improvements
aggregated $1.9 million.
As of September 30, 1996, Cortex had outstanding 110,000 shares of 9%
cumulative convertible preferred stock, which accrue cumulative semi-annual
dividends at an annual rate of $0.09 per share. To conserve capital for
operations, the Company has elected not to distribute the dividends that have
accrued from June 15, 1990. Accrued and unpaid dividends as of September 30,
1996 were $64,350.
The Company leases approximately 30,000 square feet of research laboratory,
office and expansion space under an operating lease that expires May 31,
1999, with an additional five-year option at 95% of the then fair market
rental rate. The commitments under the lease agreement for the years ending
June 30, 1997, 1998 and 1999 are $229,000, $234,000 and $220,000,
respectively.
In connection with the settlement in October 1995 of the license dispute with
Alkermes (see Note 6 of Notes to Financial Statements), the Company issued to
Alkermes a $1,000,000 three-year promissory note accruing interest
semi-annually at the then federal funds rate. The Company also agreed to pay
Alkermes a graduated royalty on calpain inhibitor development proceeds, as
defined and subject to certain limitations.
Over the next twelve months, the Company plans to conduct additional
preclinical and Phase I/II clinical studies on its AMPAKINE compounds. This
planned research involves a twelve-month expenditure of approximately $4.2
million. This amount includes approximately $966,000 of funding for sponsored
research in academic laboratories, to which the Company is or will be
committed under various license agreements and sponsored research agreements.
Significant investments in plant or equipment or substantial changes to
staffing levels are not contemplated under current spending plans for the
next twelve months. As of September 30, 1996, Cortex had 19 full-time
employees and one part-time employee.
On October 15, 1996, Cortex completed the first tranche of a Regulation D
private placement of Series D Preferred Stock and in connection therewith
received gross proceeds of $1,000,000. The Company is to receive an
additional $3,000,000 in two additional tranches, subject to certain
conditions. See Note 10 of Notes to Financial Statements.
Cortex anticipates that its existing cash, cash equivalents and short-term
investments, combined the proceeds from the first tranche of the October 1996
financing and a modest amount of anticipated interest income, will be
sufficient to satisfy its capital requirements through June 1997 under
current spending plans. The successful closing of the second and third
tranches of the October 1996 financing is expected to extend this through the
first calendar quarter of 1998.
Over the longer term, the Company will require substantial additional funds
to maintain and expand its research and development activities and to
ultimately commercialize, with or without the assistance of corporate
partners, any of its
14
<PAGE>
proposed products. The Company is seeking collaborative or other arrangements
with larger pharmaceutical companies, under which such companies would
provide additional capital to the Company in exchange for exclusive or
non-exclusive license or other rights to certain of the technologies and
products the Company is developing. However, the competition for such
arrangements with major pharmaceutical companies is intense, with a large
number of biopharmaceutical companies attempting to satisfy their funding
requirements through such arrangements. Accordingly, although the Company is
presently engaged in discussions with a number of suitable candidate
companies, there can be no assurance that an agreement or agreements will
arise from these discussions in a timely manner, or at all, or that revenues
that may be generated thereby will offset operating expenses sufficiently to
reduce the Company's short- or long-term funding requirements. Additional
equity or debt financings will be required, and there can be no assurance
that funds will be available from such financings on favorable terms, or at
all. If additional funds are raised by issuing equity securities, and
dependent upon the nature and timing of such issuances, dilution to then
existing stockholders is likely to result.
15
<PAGE>
BUSINESS
OVERVIEW
Cortex Pharmaceuticals, Inc. ("Cortex" or the "Company") is a development
stage enterprise that was organized in 1987 to engage in the discovery,
development and commercialization of innovative pharmaceuticals for the
treatment of neurodegenerative diseases and other neurological and
psychiatric disorders. The primary product development effort at Cortex is
centered on the AMPA receptor, a complex of proteins that is involved in most
"excitatory" communication between nerve cells in the human brain. Cortex is
developing a family of chemical compounds, known as AMPAKINEs-TM-, to enhance
the activity of this receptor. Cortex believes that AMPAKINEs hold promise
for correcting deficits brought on by a variety of diseases and disorders
that are known, or thought, to involve depressed functioning of pathways in
the brain that use glutamate as a neurotransmitter. In October 1994, the
Company initiated human safety studies with CX516 (AMPALEX-TM-) for the
potential treatment of deficits of memory and cognition due to Alzheimer's
disease. To date, these studies have involved healthy young adult and healthy
elderly volunteers. The Company plans to initiate a small study in
Alzheimer's disease patients in fiscal 1997. Cortex is also investigating the
potential utility of its AMPAKINEs in the treatment of schizophrenia. In
fiscal 1996, the Company maintained a strong focus on the AMPA receptor
program but, with the reacquisition of rights to calpain inhibitor compounds
from Alkermes in October 1995, reinstituted a research effort in this area.
In the fiscal years ended June 30, 1996 and 1995, the Company's expenditures
on research and development were $2,677,577 and $4,138,731, respectively,
with the decrease attributable to a higher level of human clinical testing of
AMPALEX in fiscal 1995.
Each of Cortex's programs addresses a large potential market. The Company's
current commercial development plans involve partnering with larger
pharmaceutical companies for Phase II and later clinical testing,
manufacturing and global marketing of its proposed products, while attempting
to retain the right to eventually co-promote in the United States. If the
Company is successful in the pursuit of this strategy, it is intended that it
will be in a position to contain its costs over the next few years, to
maintain its focus on the research and early development of novel
pharmaceuticals (where it believes that it has the ability to compete), and
eventually to participate more fully in the commercial development of its
proposed products in the United States. Cortex continues to seek
collaborative or licensing arrangements with larger pharmaceutical companies
that will permit AMPALEX-TM- to be advanced into later stages of clinical
development and provide access to the extensive clinical trials management,
manufacturing and marketing expertise of such companies. There can be no
assurance, however, that the Company will secure such arrangements on
favorable terms, or at all, or that its products will be successfully
developed and approved for marketing by government regulatory agencies.
AMPA RECEPTOR PROGRAM
In June 1993, Cortex licensed from the University of California a new class
of compounds--the AMPAKINEs--that facilitate the functioning of the AMPA
subtype of receptor for the neurotransmitter glutamate. These AMPAKINE
compounds interact in a highly specific manner with the AMPA receptor in the
brain, lowering the amount of neuronal stimulation required to generate a
response. It is hoped that this selective signal amplification will
eventually find utility in the treatment of neurological diseases and
disorders characterized by depressed functioning of brain pathways that
utilize glutamate as a neurotransmitter. Two prominent diseases that may
benefit from AMPA receptor-directed therapeutics are Alzheimer's disease and
schizophrenia, both of which represent large unmet medical needs.
DEFICITS OF MEMORY AND COGNITION -- ALZHEIMER'S DISEASE
Impairment of memory and cognition is becoming a very serious problem as the
elderly proportion of the population continues to increase. While not fatal
(except when associated with diseases such as Alzheimer's disease) the
incidence and prevalence of cognitive deficits increase inexorably with age.
Many elderly individuals are confined to nursing homes because of
psychological disorientation and functional difficulties. According to a 1985
survey of nursing homes conducted by the National Center for Health
Statistics, over half of the individuals in nursing homes have some degree of
cognitive impairment. Pharmaceuticals to alleviate deficits in memory and
cognition could potentially enable many of the elderly to remain independent
longer.
16
<PAGE>
Memory is not located in a specific area of the brain, but rather becomes
established in multiple areas of the brain that are involved with different
types of sensory information. The prevailing scientific theory is that the
brain deals with new information by constructing electrochemical and
structural frameworks to put the information into some sort of context. Most
of this processing, at least three-fourths of which is taken up with complex
activities often referred to as "associations," appears to be handled in the
cerebral cortex. The cerebral cortex is where the brain generates thoughts,
language and plans, controls sensations and voluntary movements, evokes
imagination, and stores certain types of permanent memory.
Substantial scientific evidence points to a long-lasting change--known as
"long-term potentiation," or LTP--in synapses (junctions between neurons) as
the basis of many types of memory. Long-term potentiation involves a series
of chemical reactions that creates a more stable information transfer point
between neurons. Experimental disruption of these chemical reactions in lower
animals has been shown to cause a disruption of memory acquisition. In an
important experiment with mice, for example, a single genetic change was made
to prevent the production of a protein involved in long-term potentiation.
When the mice were tested, they were unable to learn to swim out of a maze
that required memory of spatial cues.
Although disease and physiological malfunctions are thought to be the
fundamental cause of severe mental decline, age itself is a contributory
factor. The human brain loses about 10% of its weight over a normal life
span. In the cerebral cortex, a great deal of the communication between
neurons is mediated by receptors for the neurotransmitter glutamate,
including a subtype usually designated as the AMPA receptor (which is
involved in long-term potentiation). AMPA receptors and synapses decline in
number with aging, making it more difficult for information to pass through
and between areas of the cerebral cortex. A potential corrective approach to
alleviate age-related cognitive deficits is therefore to develop novel
compounds to enhance the activity of the AMPA receptors that are still
present.
Alzheimer's disease is the best known destroyer of memory, already afflicting
some four million Americans. With the aging of our population, unless a
treatment is found the number of Americans with Alzheimer's disease is
expected to double over the next two decades. According to the Alzheimer's
Association, Alzheimer's disease is the third most expensive disease in the
U.S. (after heart disease and cancer), with an estimated annual cost to
society of $100 billion and a lifetime cost per patient of $174,000. The
impact of an effective treatment, even a symptomatic one, would be enormous.
Because the disease is so closely tied to aging, it has been estimated that
delaying the onset of its symptoms by only five years would HALVE the number
of people diagnosed with the disease.
Alzheimer's disease is a progressive, degenerative and uniformly fatal
disease that slowly destroys the brain. The early symptoms are problems with
memory of recent events and difficulty performing familiar tasks. As the
disease progresses, other symptoms appear. These include confusion,
personality change, behavioral change, impaired judgment, and difficulty
finding words, finishing thoughts, or following directions. While the disease
progresses at different rates in different individuals, eventually the
victims are unable to care for themselves. Ultimately, they become less
resistant to infections and other illnesses, which are often the actual cause
of death.
It is in the early stages of Alzheimer's disease--the first few years--that
Cortex believes AMPAKINEs may someday play a valuable role, enhancing the
effectiveness of the brain cells that have not yet succumbed to the disease.
This may alleviate the memory and cognitive deficits that make up the early
symptoms. There is also a possibility that treatment with AMPAKINEs may slow
the progression of Alzheimer's disease. The reason for this is that brain
cells, or neurons, require continued excitatory input from other brain cells
to remain alive. As neurons die, other neurons begin to lose their excitatory
inputs, hastening their own death. It may be that maintaining the "tone" of
the remaining neurons, by using AMPAKINEs to increase the effectiveness of
the excitatory input that is still available, will slow this cascade of
neuronal death.
The first major results of AMPAKINE testing in animal behavioral models of
learning and memory were reported in early 1994 in the prestigious journal
PROCEEDINGS OF THE NATIONAL ACADEMY OF SCIENCES. In these studies, which
involved tests of both short- and long-term memory, AMPAKINE-treated rats
performed significantly better than untreated control animals. The authors
concluded that "facilitation of [excitatory] transmission causes a general
improvement in memory encoding."
17
<PAGE>
Perhaps the most compelling of the animal studies conducted to date involved
an assessment of the effects of an AMPAKINE on memory performance in
middle-aged rats. A number of researchers have demonstrated that healthy
middle-aged rats have significant deficits in memory performance when
compared to younger animals. This provides, in essence, an animal model for
age-associated memory impairment in humans. In the study, which was published
last year in SYNAPSE, the authors found that middle-aged rats showed striking
deficits in performance on a maze task when compared with young adult
animals, but when they were administered an AMPAKINE their performance was
improved to levels equivalent to those found in young animals.
In these and other preclinical studies, the experimental compounds
demonstrated pharmaceutically attractive qualities, including apparent low
toxicity, rapid onset of action, rapid excretion and an ability to freely
cross the blood-brain barrier (a semi-permeable barrier that prevents many
drugs from getting into the brain).
Three human clinical studies have now been completed with CX516 ("AMPALEX").
The results of the two most recent studies were announced in the year ended
June 30, 1996. In all three studies, CX516 was safe and well-tolerated on
acute oral administration and, importantly, statistically-significant
positive effects on memory performance were seen.
The initial study, conducted by AFB Parexel in Berlin, involved single
administrations of drug or placebo to a total of 48 healthy young adult
volunteers, ranging in age from 18 to 35. The trial was double-blinded and
placebo controlled, and involved administering a single dose of drug, in
capsule form, to each volunteer. Several dosages of drug were tested,
including levels that exceeded the expected therapeutic range. At all
dosages, the drug was safe and well-tolerated. In addition, analysis of
psychological data that was collected revealed a highly statistically
significant positive effect on a test of memory performance that involved
recall of a list of nonsense syllables.
The second trial, at the same clinical site in Berlin, involved 30 healthy
elderly volunteers, aged 65 to 76, each of whom was administered a single
oral dose of drug or placebo. In this double-blinded trial, AMPALEX was again
found to be safe and well-tolerated. The elderly volunteers were also given
the same nonsense syllable memory test that had been given to the young
volunteers in the first study. In the absence of drug, the elderly volunteers
were able to remember only about one-fourth as many syllables as their
younger counterparts. In the presence of drug, the positive effect on memory
performance that was seen in the earlier study was replicated. In fact,
several of the elderly volunteers receiving the highest dosage of AMPALEX
scored at or above the average score achieved by the young volunteers in the
earlier study.
The third study, at the Karolinska Hospital in Stockholm, Sweden, involved
administration of CX516 to healthy young adults under double-blind,
placebo-controlled conditions. The five-day study involved administration of
placebo on days 1, 4 and 5 and drug on days 2 and 3, with psychological
testing conducted on each day. AMPALEX was safe and well-tolerated by all
volunteers receiving drug, with no adverse events reported. Statistically
significant improvements in performance on several measures of learning and
memory were again noted in the drug group.
On the basis of the very encouraging results that were obtained in these
three studies, Cortex plans to initiate additional studies in the target
patient population, those experiencing deficits of memory and cognition due
to Alzheimer's disease.
The first step in moving to the patient population is to ensure that the drug
is safe in those affected by the disease. To address this issue, and to
obtain a preliminary indication of effects on delayed recall, Cortex is
working with clinical investigators at the National Institutes of Health who
plan to conduct a U.S. Phase I/II study in 16 to 20 Alzheimer's disease
patients. The double-blind, placebo-controlled dose escalation study will
involve administration of CX516 to patients for up to 28 consecutive days.
While preliminary indications of the desired effects on memory and cognition
may be obtained from this study, psychological testing of patients with
Alzheimer's disease is characterized by a high level of variability.
Full-scale Phase II studies designed to achieve significance on broad
psychological scales will require larger numbers of patients. The Company is
hopeful that the results from this preliminary study will encourage
prospective pharmaceutical company partners to commit the financial and other
resources to undertake additional clinical studies.
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SCHIZOPHRENIA
Schizophrenia is a major health care problem. The worldwide incidence of the
disease is approximately one percent, regardless of ethnic, cultural or
socioeconomic status. On any given day, approximately 100,000 of the
estimated two million U.S. schizophrenics are in public mental hospitals.
Schizophrenia typically develops in late adolescence or early adulthood, and
is best understood as a syndrome, or collection of symptoms. These are
generally characterized as POSITIVE SYMPTOMS (delusions and hallucinations),
NEGATIVE SYMPTOMS (social withdrawal, loss of emotional responsiveness and
expressiveness) and COGNITIVE SYMPTOMS (disordered thought and attentional
deficits).
The first "wonder drugs" for schizophrenia, the so-called neuroleptics or
conventional anti-psychotics, were developed in the 1950s and 1960s. These
drugs, such as chlorpromazine and haloperidol, helped to reduce the positive
symptoms of the disease, and greatly reduced the need for chronic
hospitalization. However, these drugs, which are still in use today, are
characterized by troublesome and occasionally life-threatening side effects.
The most common side effect of conventional anti-psychotics is EPS or
"extrapyramidal signs," which include restlessness and tremors. EPS side
effects have a strongly negative impact on quality of life and tend to lead
to poor patient compliance with medication.
More recently, a new type of anti-psychotic agent, referred to as ATYPICAL
due to the virtual lack of EPS side effects, has been developed. Clozapine
was the first such drug. It was first studied in the 1970s, but clinical
trials were halted due to the risk of a fatal blood disorder known as
agranulocytosis, and also a dose-dependent risk of seizures. Clozapine was
reintroduced in the 1980s, with approval by the FDA for use in patients who
cannot be adequately controlled on typical neuroleptics, either because of
lack of efficacy or side effects. Risperidone is another recent
clozapine-like anti-psychotic.
The newer atypical agents achieve good control of positive symptoms, partial
control of negative symptoms and better patient compliance with medication
due to lower levels of EPS side effects. However, schizophrenia clinicians
agree that the cognitive symptoms of schizophrenia are not addressed by any
available agents. It is the persistence of these cognitive symptoms that
keeps all but a few schizophrenic patients from successfully reintegrating
into society.
Schizophrenia has long been thought to have its biochemical basis in an
overactivity of dopamine pathways projecting into certain regions of the
brain. More recently, a developing body of evidence in the scientific
literature suggests that schizophrenia also involves an underactivity of
glutamate pathways projecting into the same areas. Cortex is therefore
studying whether AMPAKINEs, which increase current flow through the AMPA
subtype of glutamate receptor, might have relevance to the treatment of
schizophrenia.
In late 1995, Cortex announced that Professor John Larson, a University of
California, Irvine neuroscientist and Cortex consultant, found that an
AMPAKINE reduced stereotypic behavior (mechanical repetition of posture or
movement) in rats injected with methamphetamine. Reduction of
methamphetamine-induced stereotypic behavior is widely used for initial
screening of anti-psychotic drugs. The results have now been extended by
scientists at both UCI and Cortex to include several additional AMPAKINEs.
More recently, Cortex scientists have demonstrated that AMPAKINEs and either
conventional or atypical anti-psychotic drugs have additive effects in this
model system.
The Company is presently involved in discussions with clinical researchers
working in the schizophrenia field, and plans to initiate a small Phase I/II
study with CX516 in schizophrenic patients in fiscal 1997. This study will
primarily be designed as a safety study, but psychological testing will be
conducted in an attempt to obtain a preliminary indication that CX516 has a
beneficial effect on the symptoms of the disease, particularly the cognitive
symptoms that have thus far been resistant to treatment.
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CALPAIN INHIBITOR PROGRAM
Since 1989, the Company has been involved in research and early product
development of inhibitors of the enzyme calpain. Calpain is a protease, a
protein that digests other proteins. It is involved in a variety of
biological processes throughout the body, and has been implicated in the
pathology of several diseases and disorders. These include brain damage
following stroke or head injury and spasming of blood vessels (vasospasm).
The Company's first target for calpain inhibitor therapeutics was brain
damage following stroke. A stroke is a vascular event causing localized
damage to the brain. There are two general categories of stroke: ischemic
stroke, which is due to a blockage of blood flow, and hemorrhage stroke, in
which a blood vessel bursts in the brain. In either case, the insult to the
brain is often immediately life-threatening and initiates a cascade of
molecular events that ultimately leads to permanent brain damage. Each year
more than 500,000 Americans experience a stroke. Approximately 150,000 die,
and most survivors are left with some degree of permanent residual disability
due to damage to brain tissue. Although stroke is the third leading cause of
death in the U.S., no satisfactory therapy yet exists to limit or reverse the
brain damage brought on by this condition.
Interruption of the supply of oxygen and nutrients to the brain following a
stroke is not in and of itself responsible for the widespread destruction of
neurons that often follows. Rather, it is believed that these disruptions
trigger biochemical changes that lead over a period of hours or days to death
of the affected neurons. It is now fairly well accepted that this crucial
period of time between a stroke and the actual death of brain cells provides
a "window of opportunity" during which key chemical events can potentially be
blocked, to limit or prevent damage to nerve cells and thereby maintain their
viability until homeostasis is re-established following an ischemic episode.
Ischemia-induced release of the neurotransmitter glutamate appears to
initiate the cascade. Glutamate builds up in the extra-cellular space
following a stroke, stimulating receptors and allowing an excessive amount of
calcium to enter nerve cells. Calcium control systems become overwhelmed,
intracellular calcium concentrations rise high above normal physiological
levels, and several calcium-dependent enzymes are activated. Of particular
concern is calpain, which when activated, degrades the neuron's cytoskeleton
as well as regulatory proteins such as protein kinase C. This causes
progressively greater damage, and eventually the cell is no longer able to
recover.
In calendar 1990 and 1991, Cortex established laboratory models of ischemia
and used them to identify a range of calpain inhibitor compounds that
appeared to have the potential to block brain damage due to stroke and other
ischemic events. In January 1992, Cortex entered into a Development and
License Agreement, which was amended in October 1992, (the "Alkermes
Agreement") with Alkermes, Inc. ("Alkermes"), a larger neuroscience company.
Cortex granted to Alkermes an exclusive worldwide license, with a right to
sublicense, to commercialize products using the Company's calpain inhibitor
technology for products for the prevention or treatment of acute and chronic
neurodegenerative diseases and disorders of the nervous system.
Subsequently, Cortex shifted its own emphasis into calpain inhibitor research
outside the nervous system. The Company was particularly active in
investigating the potential role of calpain inhibitors as therapeutics for
the treatment of vasospasm and restenosis, two serious vascular disorders.
The Company established research collaborations and began screening compounds
for these purposes, and reported on its progress in its 1993 annual report.
This report of progress included a discussion of the Company's research in
cerebral vasospasm, which involved reversal of an existing spasm of blood
vessels in the brain. In October 1993, Alkermes notified the Company that
Alkermes believed that it had rights to this indication under the Alkermes
Agreement. On November 19, 1993, Alkermes filed an action in U.S. District
Court in Massachusetts alleging that the Company had breached the Alkermes
Agreement by developing calpain inhibitors for cerebral vasospasm.
On October 5, 1995, the Company and Alkermes agreed to a settlement of the
dispute. Alkermes agreed to dismiss its action against the Company and to
relinquish all rights previously granted them by the Company, as well as
rights to related technologies developed by Alkermes subsequent to October 6,
1992. In connection with the settlement, the Company issued to Alkermes a
$1,000,000 non-transferable, three-year promissory note accruing interest
semi-annually at the federal funds rate. The Company also committed to pay
Alkermes a graduated royalty on calpain inhibitor development proceeds, as
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defined and subject to certain limitations. The Company has reinstituted an
active research program on calpain inhibitors, and recently confirmed in an
animal model the earlier finding that calpain inhibitors are capable of
blocking vasospasm. Cortex presently intends to seek, with the assistance of
its advisor, Vector Securities International, Inc., a larger pharmaceutical
company partner for the further development of the calpain inhibitor
technology.
MANUFACTURING
Cortex has no experience in manufacturing pharmaceutical products and relies,
and presently intends to rely, on the manufacturing and quality control
expertise of contract manufacturing organizations or prospective corporate
partners. There is no assurance that the Company will be able to enter into
arrangements for manufacturing of its proposed products on favorable terms.
MARKETING
The Company has no experience in the marketing of pharmaceutical products and
does not anticipate having the resources to distribute and broadly market any
products that it may develop. The Company will therefore continue to seek
commercial development arrangements with other pharmaceutical companies for
its proposed products. However, in entering into such arrangements, the
Company will seek to retain the right to co-promote certain products in the
United States to selected medical specialties (such as geriatric physicians,
neurologists and psychiatrists). The Company believes that these specialties
can be effectively addressed with a relatively small sales force. There is no
assurance that the Company will be able to enter into co-promotional
arrangements in connection with its licensing activities, or that any
retention of co-promotional rights will lead to greater revenues for the
Company.
TECHNOLOGY RIGHTS AND COLLABORATIVE AGREEMENTS
AMPA RECEPTOR MODULATING COMPOUNDS
Effective June 25, 1993, Cortex entered into an agreement with the Regents of
the University of California, under which Cortex secured exclusive commercial
rights to AMPA receptor modulating compounds (AMPAKINEs) for the treatment of
deficits of memory and cognition. Under the agreement, the Company paid an
initial license fee and is obligated to make additional payments, including
license maintenance fees creditable against future royalties, over the course
of initiating and conducting human clinical testing and obtaining regulatory
approvals. When and if sales of licensed products commence, the Company will
begin paying royalties on net sales.
CALPAIN INHIBITORS
Effective February 11, 1991, Cortex entered into a series of agreements with
Georgia Tech Research Corporation, the licensing arm of the Georgia Institute
of Technology ("Georgia Tech"), under which Cortex secured exclusive
commercial rights, for selected disorders, to several novel classes of
chemical compounds that the Company has demonstrated are effective as calpain
inhibitors. Under the agreement, the Company paid an initial license fee and
is obligated to make additional payments, including license maintenance fees
creditable against future royalties, over the course of initiating and
conducting human clinical testing and obtaining regulatory approvals. When
and if sales of licensed products commence, the Company will begin paying
royalties on net sales.
PATENTS AND PROPRIETARY RIGHTS
The Company is aggressively pursuing patent protection of its technologies.
Cortex owns, or has exclusive rights (within its areas of product
development) to, a number of issued U.S. patents and a range of U.S. patent
applications and their international counterparts.
There can be no assurance that issued patents, whether already issued or issuing
in the future in connection with current or future patent applications, will
afford effective protection against competitors with similar technology. There
can also
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be no assurance that any patents issued or licensed to Cortex will not be
infringed upon or designed around by others. Further, since issuance of a
patent does not guarantee the right to practice the claimed invention, there
can be no assurance that others will not obtain patents that the Company
would need to license or design around in order to practice its patented
technologies, or that licenses that might be required to practice these
technologies due to patents of others would be available on reasonable terms.
Additionally, there can be no assurance that any unpatented manufacture, use
or sale of the Company's technology, processes or products will not infringe
on patents or proprietary rights of others, and the Company may be unable to
obtain licenses or other rights to these other technologies that may be
required for commercialization of the Company's proposed products or
processes.
Cortex relies to a certain extent upon unpatented proprietary technology, and
may determine in some cases that its interests would be better served by
reliance on trade secrets or confidentiality agreements rather than patents.
No assurance can be made that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to or disclose such technology. In addition, there is no
assurance that Cortex can meaningfully protect its rights in such unpatented
proprietary technology or that others will not wrongfully obtain such
technology.
On December 8, 1994, the United States adopted the Uruguay Round Agreements
Act ("URAA") to implement the General Agreement on Tariffs and Trade
("GATT"). The URAA significantly alters many United States intellectual
property laws. One of the most significant changes is to patent term length.
Any patent issued on an application filed on or after June 8, 1995 will have
a term that begins on the date the patent issues and ends 20 years from the
earliest United States filing date claimed in the patent. This is in contrast
to the 17-year term measured from the patent issue date, which has been the
law in the United States for nearly two centuries. Given the significance of
this change, the new law has a transition provision that applies to patents
issuing on applications filed before June 8, 1995 and to all patents still in
force on June 8, 1995. The term for these patents is the longer of either 17
years from the date of issuance or 20 years from the earliest United States
filing date. These changes are not presently expected to have a material
impact on the Company's business.
If Cortex is unable to obtain strong protection of its proprietary rights in
its products or processes prior to or after obtaining regulatory clearance,
whether through patents, trade secrets or otherwise, competitors may be able
to market competing products by obtaining regulatory clearance through
demonstration of equivalency to the Company's products, without being
required to conduct the same lengthy clinical tests conducted by the Company.
GOVERNMENT REGULATION
In order to test, produce and market human therapeutic products in the United
States, mandatory procedures and safety standards established by the Food and
Drug Administration ("FDA") must be satisfied. Obtaining FDA approval has
historically been a costly and time-consuming process. Although Cortex has
initiated Phase I (safety) testing in Europe, it has not yet filed a Notice
of Claimed Investigational Exemption for a New Drug ("IND") with the FDA for
testing in the United States. While the Company plans to conduct or
facilitate exploratory Phase I/II studies in the U.S. with CX516 in
Alzheimer's disease patients and in schizophrenics, it is the Company's
intent that a larger pharmaceutical company partner or partners, which the
Company is seeking, will pursue the required regulatory approvals to conduct
full-scale clinical tests in the United States and elsewhere.
The FDA must concur with an IND application before human clinical testing of
an investigational drug can begin in the United States. An IND application
includes the results of preclinical studies evaluating the potential safety
and efficacy of the drug, and a detailed description of the clinical
investigations to be undertaken.
Clinical trials are normally conducted in three phases. Phase I trials are
concerned primarily with the safety of the drug, involve fewer than 100
subjects, and may take from six months to over a year. Phase II trials
normally involve a few hundred patients and are designed primarily to
demonstrate effectiveness in treating or diagnosing the disease or condition
for which the drug is intended, although short-term side effects and risks in
people whose health is impaired may also be examined. Phase III trials may
involve up to several thousand patients who have the disease or condition for
which the drug is intended, to approximate more closely the conditions of
ordinary medical practice. Phase III trials are also designed to clarify the
drug's benefit-risk relationship, to uncover less common side effects and
adverse reactions, and to generate
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information for proper labeling of the drug. The FDA receives reports on the
progress of each phase of clinical testing, and may require the modification,
suspension, or termination of clinical trials if an unwarranted risk is
presented to patients. The FDA estimates that the clinical trial period of
drug development can take from two to ten years, and averages five years.
With certain exceptions, once clinical testing is completed, the sponsor can
submit a New Drug Application ("NDA") for approval to market a drug. The
FDA's review of an NDA is also lengthy and on average takes approximately two
and one-half years.
Therapeutic products that may be developed and sold by the Company outside
the United States will be subject to regulation by the various countries in
which they are to be distributed. In addition, products manufactured in the
United States that have not yet been cleared for domestic distribution will
require FDA approval in order to be exported to foreign countries for
distribution there.
In late 1992, legislation was enacted that imposed user fees on manufacturers
of prescription drugs, antibiotic and biological products. Such fees will now
be required for each application submitted for FDA review, with additional
annual product and establishment fees being imposed as well. The revenues
raised by these fees are earmarked specifically to increase the resources of
the FDA, and by so doing to increase the speed with which the FDA reviews and
approves drug and biological product marketing applications. By fiscal 1997,
the user fee established by the legislation for an NDA will be $233,000,
while the annual establishment fee will be $138,000. The legislation provides
small companies (I.E., companies with fewer than 500 employees that are not
currently marketing a prescription drug product) with a reduction in the
initial application fee, and contains provisions for fee waivers. The Company
is unable to predict the impact of this or similar user fee legislation upon
its product development plans.
Under FDA regulations, sponsors of promising investigational drugs and
biologics for certain immediately life-threatening or serious diseases may
make those drugs or biologics available for treatment of patients prior to
approval of an NDA. Cortex believes, therefore, that it, or its licensees,
may be able to distribute certain of its proposed products, in limited
fashion, while still in the clinical testing stage. However, because of the
limitations imposed on commercialization under this program, this is not
expected to be of significant economic benefit.
There can be no assurance that any required FDA or other governmental
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, or cause the Company to undertake additional procedures,
which may be both costly and lengthy, and thereby furnish a competitive
advantage to the competitors of the Company or its licensees.
Cortex does not have the financial and other resources to conduct the
clinical testing and other procedures required to obtain approval to market
its products and, accordingly, will be dependent on entering into joint
ventures or other collaborative arrangements with third parties with the
required resources in order to obtain the needed approvals. Cortex intends to
enter into license or other arrangements with larger pharmaceutical companies
under which those companies would conduct the required clinical trials and
bear the expenses of obtaining FDA approval for most or all of its proposed
products. There can be no assurance that Cortex will be able to enter into
such arrangements on favorable terms, or at all, or that such arrangements
will ultimately result in obtaining the necessary governmental approvals.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving technology
and intense competition. Many companies of all sizes, including both major
pharmaceutical companies and specialized biotechnology companies, are engaged
in activities similar to those of Cortex. A number of drugs intended for the
treatment of Alzheimer's disease, age-related cognitive deficits, stroke and
other neurodegenerative diseases and disorders are on the market or in the
later stages of clinical testing. For example, over 25 drugs are under
clinical investigation in the U.S. for the treatment of Alzheimer's disease.
The Company's competitors have substantially greater financial and other
resources and larger research and development staffs. Larger pharmaceutical
company competitors also have significant experience in preclinical testing,
human clinical trials and regulatory approval procedures.
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In addition, colleges, universities, governmental agencies and other public
and private research organizations will continue to conduct research and are
becoming more active in seeking patent protection and licensing arrangements
to collect license fees, milestone payments and royalties in exchange for
license rights to technology that they have developed, some of which may be
directly competitive with that of the Company. These institutions also
compete with companies such as Cortex in recruiting highly qualified
scientific personnel.
The Company expects technological developments in the neuropharmacology field
to continue to occur at a rapid rate and expects that competition will remain
intense as advances continue to be made. Although the Company believes, based
on the technical qualifications, expertise and reputations of its Scientific
Directors, consultants and other key scientists, that it will be able to
compete in the discovery and early clinical development of therapeutics for
neurological disorders, the Company does not have the resources, and does not
presently intend, to compete with major pharmaceutical companies in the areas
of later stage clinical testing, manufacturing and marketing.
PRODUCT LIABILITY INSURANCE
The clinical testing, manufacturing and marketing of the Company's products
may expose the Company to product liability claims. The Company maintains
liability insurance with coverage limits of $5 million per occurrence and $5
million in the annual aggregate. Although the Company has never been subject
to a product liability claim, there can be no assurance that the coverage
limits of the Company's insurance policies will be adequate or that one or
more successful claims brought against the Company would not have a material
adverse effect upon the Company's business, financial condition and results
of operations. Further, if AMPALEX or any other compound is approved by the
FDA for marketing, there can be no assurance that adequate product liability
insurance will be available, or if available, that it will be available at a
reasonable cost. Any adverse outcome resulting from a product liability claim
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of November 30, 1996, Cortex had 19 full-time employees and one part-time
employee and had engaged 11 part-time Ph.D.-level scientific consultants. Of
the 19 full-time employees, 14 are engaged in research and development and
five are engaged in management and administrative support. The Company also
sponsors a substantial amount of research in academic laboratories at the
University of California, Irvine, Wake Forest University and New York
University.
FACILITIES
The Company leases approximately 30,000 square feet of office, research
laboratory and expansion space under an operating lease that expires May 31,
1999, with an additional five-year option at 95% of the then fair market
rental rate. Current monthly rent on these facilities is approximately
$20,000. The Company believes that this facility will be adequate for its
research and development activities for at least the next three years.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SCIENTIFIC DIRECTORS
The directors, executive officers and scientific directors of the Company are
as follows:
Name Age Position
------------------------------- --- --------------------------------------
Robert F. Allnutt (2).......... 61 Director
Jerome M. Arnold (1)(3)........ 55 Director
Carl W. Cotman, Ph.D. (1)...... 56 Director, Scientific Director of
Alzheimer's Research
Michael G. Grey (2)(3)......... 43 Director
D. Scott Hagen................. 41 Vice President and Chief Financial
Officer, Corporate Secretary
Gary S. Lynch, Pd.D. (2)....... 53 Scientific Director of Memory Research
Harvey S. Sadow, Ph.D. (1)(2).. 74 Chairman of the Board, Director
Vincent F. Simmon, Ph.D........ 53 President and Chief Executive Officer,
Director
Davis L. Temple Jr., Ph.D. (1). 53 Director
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Stock Option Committee.
ROBERT F. ALLNUTT was elected as a director in December 1995. Mr. Allnutt was
Executive Vice President of the Pharmaceutical Manufacturers Association from
May 1985 until February 1995 and was Vice President for Governmental
Relations of Communications Satellite Corporation from May 1984 until May
1985. Prior to 1984, Mr. Allnutt held numerous positions in the Federal
Government for 25 years, including 15 years at NASA, where his positions
included Associate Deputy Administrator, the third ranking position in the
agency. Mr. Allnutt is a director of Penederm, Inc., a developer and marketer
of specialized dermatology products. He also serves as a member of the Board
of Directors of the National Health Council and the National Council on the
Aging. Mr. Allnutt holds a B.S. in Industrial Engineering from the Virginia
Polytechnic Institute and J.D. and L.L.M. degrees from George Washington
University.
JEROME M. ARNOLD was elected as a director in December 1993 and served as
co-member of the Office of the Chief Executive of the Company from October
1995 to May 1996. Mr. Arnold is an Executive Vice President with Houtz-Strawn
Associates, Inc., an executive search firm. From July 1994 to December 1995,
Mr. Arnold was Chief Operating Officer, Clinics and Analytical Laboratories
Worldwide, Pharmaco LSR Inc., a contract research organization. Prior to
that, he was President and Chief Executive Officer of CIBUS Pharmaceuticals,
Inc., a pharmaceutical company located in Redwood City, California, from
August 1992 to June 1994. From March to August 1992, Mr. Arnold was Vice
President of Market Planning and Development at Cato Research Ltd., and
Executive Vice President of Operations of Research Triangle Pharmaceuticals
Ltd., a contract clinical research organization and pharmaceutical company in
its developmental stage, respectively, both of which are operating divisions
of Cato Holdings, a privately-held firm. From June to December 1991, Mr.
Arnold was Vice President of Marketing and Sales of Serono Laboratories,
Inc., with responsibility for marketing, sales and business development. From
1988 to May 1991, Mr. Arnold was Vice President and General Manager of the
hospital products division of Burroughs Wellcome Co. Mr. Arnold holds B.A.
and B.S. degrees from Merrimack College, an M.B.A. degree from Suffolk
University and has completed the Executive Program at the University of North
Carolina Graduate School of Business Administration.
CARL W. COTMAN, PH.D. has been a Scientific Director of and consultant to the
Company since October 1987, served as a director of the Company from March
1989 to October 1990, and was reelected as a director in November 1991. Dr.
Cotman has been a Professor of Psychobiology, Neurology, and Psychiatry at
the University of California, Irvine since 1985. He was a Professor of
Psychobiology and Neurology at that University from 1983 to 1985, and has
held various other teaching and research positions at that University since
1968. He chaired the Scientific Advisory Council of the American Paralysis
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Association and is a member of numerous professional associations and
committees, including the Council of the American Society for Neurochemistry,
the National Institute of Aging Task Force, the American Association for the
Advancement of Science and the International Society for Neurochemistry. Dr.
Cotman has served on the editorial boards of numerous scientific journals and
has authored or co-authored seven books and over 400 articles in the fields
of neurobiology, memory and cognition, and the recovery of function after
brain injury. Dr. Cotman holds a B.A. in Chemistry from Wooster College, an
M.A. in Analytical Chemistry from Wesleyan University, and a Ph.D. in
Biochemistry from Indiana University.
MICHAEL G. GREY has been a director of the Company since September 1994.
Since November 1994, Mr. Grey has been President of BioChem Therapeutic Inc.,
a wholly-owned subsidiary of BioChem Pharma Inc., an international
biopharmaceutical company. From January 1994 to October 1994, Mr. Grey was
Senior Vice President, Corporate Development of Titan Pharmaceuticals, Inc. a
biopharmaceutical holding company and President and Chief Operating Officer
at Ansan, Inc., an early stage biopharmaceutical company. From 1991 until
1993, Mr. Grey served as Vice President, Corporate Development of Glaxo,
Inc., and from 1989 until 1991, Mr. Grey served as Director of International
Licensing of Glaxo Holdings p.l.c., and was responsible for the worldwide
licensing activities of Glaxo, Inc. Mr. Grey holds a B.Sc. degree in
Chemistry from the University of Notingham.
D. SCOTT HAGEN served as Acting President and Chief Operating Officer from
October 1995 to May 1996. He has been Vice President and Chief Financial
Officer of the Company since January 1992, and was Vice President-Finance and
Administration from September 1988 through December 1991. Mr. Hagen has been
Corporate Secretary since August 1991. From 1981 to August 1988, he was
employed by Chembiomed Ltd., a Canadian biopharmaceutical company, where he
served in a progression of scientific and administrative positions. Mr. Hagen
holds a B.Sc. in Biochemistry and an M.B.A. from the University of Alberta in
Edmonton, Canada, where he also completed two years of graduate level study
in biochemistry.
GARY S. LYNCH, PH.D. has been a Scientific Director of and consultant to the
Company since October 1987, and served as a director of the Company from
March 1988 to March 1989 and from December 1994 to December 1995. Dr. Lynch
has been a Professor in the Department of Psychobiology at the University of
California, Irvine, since 1981, and has held various other teaching and
research positions at that University since 1969. He is a Professor at the
University's Center for the Neurobiology of Learning and Memory. Dr. Lynch is
a member of the Neuroscience Society and the International Brain Research
Organization. He also serves on the Advisory Board of the Cognitive
Neuroscience Institute. Dr. Lynch has authored and co-authored over 400
articles and a number of books in the areas of neurobiology, cognition, and
memory. Dr. Lynch holds a B.A. in Psychology from the University of Delaware
and a Ph.D. in Psychology from Princeton University.
HARVEY S. SADOW, PH.D. has been a director of the Company since March 1988
and Chairman of the Board of Directors since January 1991. Dr. Sadow was
President and Chief Executive Officer of Boehringer Ingelheim Corporation, a
major health care company, from 1971 until his retirement in January 1988 and
was Chairman of the Board of that company from 1988 through December 1990.
Dr. Sadow was Chairman of the University of Connecticut Foundation, the
President's Council of the American Lung Association, and the Connecticut Law
Enforcement Foundation and was a member of the Board of Directors of the
Pharmaceutical Manufacturers Association ("PMA") and Chairman of the Board of
the PMA Foundation. Dr. Sadow is also a member of several other professional
committees and societies, including the American Society for Clinical
Pharmacology and Therapeutics. He has published extensively in the field of
treatment of diabetes mellitus. Dr. Sadow is Chairman of Cholestech
Corporation, a developer, manufacturer and seller of lipid measuring
diagnostic products; a director of Penederm, Inc., a developer and marketer
of specialized products in the dermatology area; a director of Cytel
Corporation, a biotechnology firm; and a director of several privately-held
companies in the health care field. Dr. Sadow holds a B.S. from the Virginia
Military Institute, an M.S. from the University of Kansas, and a Ph.D. from
the University of Connecticut.
VINCENT F. SIMMON, PH.D. was appointed President and Chief Executive Officer
and a director of the Company in May 1996. From November 1994 to December
1995, Dr. Simmon served as Chairman, President and Chief Executive Officer of
Prototek, Inc., a privately-held biopharmaceutical company focusing on the
development of protease inhibitors. From March 1990 to November 1994, Dr.
Simmon served as President, Chief Executive Officer and a director at Alpha
26
<PAGE>
1 Biomedicals, Inc., a biotechnology company. From February 1985 to March 1990,
Dr. Simmon served as Vice President for Biomedical and Biotechnology Research
at W.R. Grace and Co. From 1979 to 1985, Dr. Simmon served in varying
capacities including Senior Vice President of Research and Development for
Genex Corporation, a genetic engineering company, and from 1973 to 1979 in
varying capacities including Assistant Director, Department of Toxicology for
SRI International, a consulting company. Dr. Simmon has served as a governor
of the Emerging Companies Section of BIO (Biotechnology Industrial
Organization) and a director of the Chemical Industries Institute for
Toxicology (Research Triangle Park). Dr. Simmon holds a B.A. degree in
Biology and Chemistry from Amherst College, a M.S. degree from the University
of Toledo in Plant Physiology and a Ph.D. degree in Molecular Biology from
Brown University. Dr. Simmon was a post-doctoral fellow in 1971-1973 at
Stanford University.
DAVIS L. TEMPLE, JR., PH.D. has been a director of and consultant to the
Company since March 1994. He served as co-member of the Officer of the Chief
Executive of the Company from October 1995 to May 1996. Dr. Temple has been a
Managing Director at Stover Haley Burns, Inc., a life science advisory group
since January 1994. From 1990 until 1993, he served as Vice President, CNS
Drug Discovery, of Bristol-Myers Squibb and from 1984 to 1990 he served as
Senior Vice President, CNS Research at Bristol-Myers Company. Dr. Temple
holds a B.S. degree in Pharmacy from Louisiana State University and a Ph.D.
degree in Medicinal Chemistry and Pharmacology from the University of
Mississippi.
OTHER OFFICERS
PHILIP N. HAMILTON joined Cortex as Vice President, Business Development in
October 1995. From January 1995 to October 1995 he was an independent
consultant to a number of early stage biopharmaceutical companies. From 1987
to January 1995 he was with Cambridge NeuroScience, Inc., where he served in
a progression of scientific and administrative positions, most recently as
Director, Licensing and Strategic Alliances, with responsibility for
corporate partnering, new business opportunities and licensing. Prior to
joining Cambridge NeuroScience, Mr. Hamilton was engaged in research at
Harvard Medical School and St. George's Medical School, London, U.K. Mr.
Hamilton holds a B.Sc.(Hons) in Pharmacology from the University of Edinburgh
in Scotland, where he also completed four years of graduate level research in
Neurobiology. He also holds an M.B.A. from Suffolk University, Boston.
GARY A. ROGERS, PH.D. has been Vice President, Pharmaceutical Discovery since
June 1995. In February 1994, he founded Ligand Design, a private contract
design and synthesis firm located in Santa Barbara. From 1987 to 1994, Dr.
Rogers served as an associate research biochemist at the University of
California, Santa Barbara. Prior to that, he held a succession of research
and faculty positions at universities in the United States and abroad,
including three years as an assistant adjunct professor of bio-organic
chemistry under Dr. Paul Boyer at the University of California, Los Angeles
and four years as an assistant professor at the University of Texas. Dr.
Rogers is a co-inventor of the AMPAKINE family of AMPA receptor modulating
compounds. He holds a B.S. degree in organic chemistry from the University of
California, Los Angeles and a Ph.D. in bio-organic chemistry from the
University of California, Santa Barbara.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid or accrued by the Company for services rendered during the three fiscal
years ended June 30, 1996 to the Company's Chief Executive Officer and to the
other executive officer employed by the Company as of June 30, 1996.
27
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
---------------------------------- --------------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation(3) Options(#) Compensation
- ------------------ ------- --------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Vincent F. Simmon (1) 1996 $ 25,000 $20,410 $ 3,613 180,000 $ --
President and Chief
Executive Officer
D. Scott Hagen 1996 $128,751 $18,750 $ 14,636 11,000 $ --
Vice President, 1995 124,583 15,000 9,346 15,000 --
Chief Financial Officer 1994 114,035 25,000 9,577 -- --
and Secretary
Alan A. Steigrod (2) 1996 $ 66,667 $31,500 $53,077 -- $ --
President and Chief 1995 207,400 -- 12,559 195,600(4) --
Executive Officer 1994 196,602 74,000 17,483 119,500 --
</TABLE>
_______________
(1) Mr. Simmon was appointed President and Chief Executive Officer on May 15,
1996.
(2) Mr. Steigrod resigned as President and Chief Executive Officer on October
31, 1995.
(3) Accrued or paid-out vacation pay, sick pay and/or relocation
reimbursements, and in the case of Mr. Steigrod,
includes $50,000 in severance pay.
(4) Represents options issued to replace 195,600 of canceled options.
OPTION MATTERS
OPTION GRANTS. The following table sets forth certain information concerning
grants of stock options to each of the Company's executive officers named in
the Summary Compensation Table during the fiscal year ended June 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total
Options
Granted to
Options Employees in Exercise Expiration
Name Granted Fiscal Year Price($/Sh) Date
- ----------------------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Vincent F. Simmon, Ph.D. 180,000 74% $5.63 05/15/06
D. Scott Hagen 11,000 5% $7.25 02/19/06
Alan A. Steigrod -- 0% -- --
</TABLE>
________________
OPTION EXERCISES. The following table sets forth certain information concerning
the exercise of options by each of the Company's executive officers named in the
Summary Compensation Table during the fiscal year ended June 30, 1996, including
the aggregate value of gains on the date of exercise. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of June 30, 1996. Also reported are the values for "in the
money"
28
<PAGE>
options which represent the positive spread between the exercise prices of
any such existing stock options and $4-3/8, the last sale price of Common
Stock on June 30, 1996 as reported by Nasdaq.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value Realized Value of Unexercised
(market price Number of Unexercised In-the-Money
at exercise Options at FY-End Options at FY-End
Shares Acquired less exercise -------------------------- --------------------------
Name on Exercise price) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ --------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vincent F. Simmon, Ph.D. 0 $ 0 4,999 175,001 $ 0 $ 0
D. Scott Hagen 0 0 26,950 23,050 30,938 14,062
Alan A. Steigrod 194,300 173,077 0 0 0 0
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Dr. Vincent F. Simmon joined the Company as President and Chief Executive
Officer in May 1996. His one-year employment agreement entitles Dr. Simmon to
a base salary of $200,000 per year as well as an annual bonus of from 15% to
50% of his base salary, at the discretion of the Board of Directors of the
Company. In addition, Dr. Simmon received a one-time signing bonus of
$20,410. In connection with his employment, Dr. Simmon was granted options to
purchase 180,000 shares of Common Stock at an exercise price of $5.625 per
share, representing 100% of the fair market value as of the grant date. The
options vest evenly each month over a three-year period commencing one month
from the date of grant and have a ten-year term.
Mr. Hagen entered into a three-year employment agreement with the Company,
commencing September 1, 1988. The employment agreement was renewed for
additional one-year terms as of September 1, 1991, 1992 and 1993, and was
amended and extended effective January 1, 1996 for a term ending December 31,
1996. The agreement provided for a base salary of $132,500 with an annual
bonus of between $10,000 and $30,000. In December 1993, options to purchase a
total of 14,000 shares of Common Stock at an exercise price of $2.50 per
share, which were originally granted in 1989, were extended by the Stock
Option Committee for an additional three-year period, or until February 1997.
The aggregate difference between exercise price and fair market value of the
Common Stock on the date of the extension has been recorded as compensation
expense. In the event that Mr. Hagen's employment is terminated other than
for cause or as a result of his voluntary resignation, death or disability,
he will receive a severance payment equal to six months' salary.
In February 1993, the Company entered into a three-year employment agreement
with Mr. Steigrod. Mr. Steigrod resigned as President and Chief Executive
Officer as of October 31, 1995. Under the agreement, Mr. Steigrod was
entitled to a base salary of $210,000 per year with an annual bonus at the
discretion of the Board of Directors of the Company, in cash and/or equity
equal to between 15% and 50% of his base salary. In connection with his
employment, Mr. Steigrod was granted options to purchase an aggregate of
180,000 shares of Common Stock, of which 100,000 shares have an exercise
price of $8.75, the fair market value on the date of grant, and 80,000 shares
have an exercise price of $4.375, representing 50% of fair market value on
the date of grant. The options were 20% vested on the date of grant with the
balance vesting periodically through January 31, 1998. In March 1995, 100,000
of these options were canceled and reissued as options to purchase 100,000
shares of common stock at $3.50 per share, the then fair market value of the
common stock. Options to purchase an additional 95,600 shares with an
exercise price of $9.375 per share, representing 100% of then fair market
value, were granted to Mr. Steigrod on December 1, 1993 pursuant to a
one-time anti-dilution provision in his employment agreement. These options
were canceled on March 23, 1995 and reissued as options to purchase 65,560
shares of common stock at an exercise price of $3.50 per share, the then fair
market value of the common stock, and options to purchase
29
<PAGE>
30,040 shares of common stock at $4.50 per share. Such options have a term
and vesting provisions identical to the options described above. In June
1995, Mr. Steigrod's annual salary was voluntarily decreased by $10,000. In
October 1995, Mr. Steigrod resigned as President and Chief Executive Officer.
Drs. Carl W. Cotman and Gary S. Lynch (both of whom are co-founders and
Scientific Directors of the Company) have each entered into a consulting
agreement with the Company that provides for the payment of an annual
consulting fee of $30,000. In December 1993, Dr. Lynch was awarded a bonus of
$25,000 by the Board of Directors in recognition of his contributions to the
AMPAKINE-TM-program. In September 1994, and again in July 1995, his
consulting fee was increased to $50,000 and $75,000 per year, respectively.
Also in September 1994, Dr. Cotman's consulting fee was increased to $33,000
per year. The term of each consulting agreement commenced in November 1987
and will continue until terminated by the respective parties thereto. The
consulting agreements obligate the respective consultants to make themselves
available to the Company for consulting and advisory services for an average
of three days per month. In June 1995, each of the consultants voluntarily
reduced their annual consulting fees by $10,000. In December 1993, the Board
of Directors instructed its Stock Option Committee to annually review the
contributions of Drs. Cotman and Lynch and to grant stock options in
recognition of those contributions, and to encourage future contributions, to
them in such amounts as are deemed appropriate by the Committee. On December
13, 1993, the Committee granted options to purchase 5,000 shares of Common
Stock, with an exercise price equal to 100% of fair market value of the
Common Stock on the date of grant and vesting over a three-year period, to
each of Drs. Cotman and Lynch. On the same date, an additional option to
purchase 7,000 shares of Common Stock, with an exercise price equal to 100%
of fair market value of the Common Stock and full vesting on the date of
grant, was granted to Dr. Lynch in recognition of his contributions to the
AMPAKINE-TM-program. On March 24, 1994, the Committee granted options to
purchase 5,000 shares of Common Stock, with an exercise price equal to 100%
of fair market value of the Common Stock on the date of grant and vesting
over a three-year period, to each of Drs. Cotman and Lynch. On December 15,
1994, the Committee granted options to purchase 20,000 shares of Common Stock
with an exercise price of $3.125 per share, the then fair market value, and
vesting over a four-year period to Dr. Cotman. On the same date, Dr. Lynch
was granted options to purchase 70,000 shares of Common Stock at the same
exercise price, and with the same vesting period. On January 4, 1996, the
Stock Option Committee granted options to Dr. Lynch to purchase 100,000
shares of Common Stock with an exercise price of $3.50 per share, the then
fair market value, and immediate vesting. See also "Director Compensation."
Dr. Davis L. Temple, a director of the Company, signed a consulting agreement
with the Company that includes the payment of consulting fees of $10,000 for
each six months of service. On February 27, 1995, the Stock Option Committee,
in recognition of his contributions to the Company, granted Dr. Temple an
option to purchase 20,000 shares of the Company's common stock at an exercise
price of $2.125 per share, representing the fair market value of the common
stock on that date. See also "Director Compensation."
DIRECTOR COMPENSATION
Each non-employee director (other than those who join the Board of Directors
to oversee an investment in the Company) receives $1,500 at each Board of
Directors meeting attended, and an additional $750 annual retainer for each
committee on which he or she serves.
Under the Company's 1996 Stock Incentive Plan, each non-employee director
(other than those who serve on the Board of Directors to oversee an
investment in the Company) is automatically granted options to purchase
15,000 shares of Common Stock upon commencement of service as a director and
additional options to purchase 6,000 shares of Common Stock on the date of
each Annual Meeting of Stockholders. Non-employee directors who serve on the
Board of Directors to oversee an investment in the Company receive options to
purchase 7,500 shares of Common Stock upon commencement of service as a
director and additional options to purchase 3,000 shares of Common Stock on
the date of each Annual Meeting of Stockholders. These nonqualified options
have an exercise price equal to 100% of the fair market value of the Common
Stock on the date of grant, have a ten-year term and vest in equal increments
of 33-1/3% on each anniversary date of the dates of grant, and will otherwise
be subject to the terms and provisions of the 1996 Stock Incentive Plan.
30
<PAGE>
CERTAIN TRANSACTIONS
The Company's Restated Certificate of Incorporation provides that, pursuant
to Delaware law, directors of the Company shall not be liable for monetary
damages for breach of the directors' fiduciary duty of care to the Company
and its stockholders. This provision does not eliminate the duty of care, and
in appropriate circumstances equitable remedies such as injunctions or other
forms of non-monetary relief remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company, for acts or omissions not
in good faith or involving intentional misconduct, for knowing violations of
law, for actions leading to improper personal benefit to the director and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibility under any other law, such as the Federal securities laws. The
Company has entered into Indemnification Agreements with each of the officers
and directors that obligate the Company to indemnify such officers and
directors as permitted by applicable law.
On July 23, 1993, the Company entered into an agreement with Vector
Securities International, Inc. ("Vector"), under which it was agreed that
Vector would serve the Company through November 30, 1995 as exclusive
financial advisor in financial transactions and corporate partnering
activities, as placement agent in future private offerings of securities of
the Company and as co-managing underwriter in future public offerings of
securities of the Company. In connection with the agreement, Vector was paid
a $50,000 financial advisory fee and was issued a five-year non-redeemable
warrant to purchase 11,448 shares of Common Stock, as adjusted and subject to
further adjustment. The Company also granted Vector a right of first refusal
to act as co-managing underwriter in any public offering or as placement
agent in any private placement completed prior to December 1, 1995. See
"Description of Securities--Vector Warrants."
As consideration for its agreement to provide financial advisory services
related to corporate finance transactions and corporate partnering
activities, as amended and extended November 29, 1994, Vector was paid an
additional cash retainer of $50,000 and was issued a six-year non-redeemable
warrant to purchase 38,293 shares of the Company's common stock at $4.57 per
share, as adjusted and subject to adjustment under certain circumstances.
Warrants to purchase 5,471 shares of the Company's common stock vested
immediately, and warrants to purchase 16,411 shares of the Company's common
stock shall vest upon the consummation of each strategic alliance when and as
secured by Vector. Such strategic alliance may include, but is not limited
to, a joint venture, partnership, license or other contract for the research,
development, manufacture, distribution, sale or other activity relating to
the Company's present or future products, the sale of any of the Company's
assets or any rights in respect to its products or technology, or a
commitment to provide funding for all or part of the Company's research and
development activities. For its financial advisory assistance related to the
licensing of the Company's calpain inhibitor technology, in January 1995 the
Company paid a $20,000 cash retainer and issued to Vector a five-year
non-redeemable warrant to acquire 50,000 shares of the Company's common stock
at $3.00 per share, subject to adjustment under certain circumstances. The
Company may be required to make substantial additional payments for each
strategic alliance secured by Vector. If a sale of the Company as presented
by Vector is consummated, Vector may be entitled to receive a fee based on
the aggregate consideration to be received by the Company. See "Description
of Securities--Vector Warrants."
31
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, to the knowledge of the Company, certain
information regarding the beneficial ownership of the Company's Common Stock
as of November 30, 1996, by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) each
of the Company's directors and nominees, (iii) each of the named executive
officers in the Summary Compensation Table and (iv) all of the Company's
executive officers and directors as a group. Except as indicated in the
footnotes to this table, the Company believes that the persons named in this
table have sole voting and investment power with respect to the shares of
Common Stock indicated.
DIRECTORS, NOMINEES, SHARES PERCENT OF
OFFICERS, AND 5% BENEFICIALLY COMMON STOCK
STOCKHOLDERS OWNED BENEFICIALLY OWNED
- ---------------------------- -------------- ------------------
Robert F. Allnutt 5,375 (1) *
Jerome M. Arnold 11,625 (2) *
Carl W. Cotman, Ph.D. 127,959 (3) 1.6
Michael G. Grey 9,375 (4) *
D. Scott Hagen 31,100 (5) *
Harvey S. Sadow, Ph.D. 40,959 (6) *
Vincent F. Simmon, Ph.D. 54,999 (7) *
Alan A. Steigrod 0 *
Davis L. Temple, Jr., Ph.D. 18,125 (8) *
Quantum Partners LDC (9) 885,000 11.2
Soros Fund Management
888 Seventh Avenue, 33rd Floor
New York, NY 10106
All officers, directors and nominees
as a group (8 persons) 299,517 3.7
__________________
* Less than one percent
(1) Includes 4,375 shares that may be purchased upon exercise of options within
60 days of November 30, 1996.
(2) Includes 11,625 shares that may be purchased upon exercise of options within
60 days of November 30, 1996.
(3) Includes 29,959 shares that may be purchased upon exercise of options
within 60 days of November 30, 1996.
(4) Includes 9,375 shares that may be purchased upon exercise of options within
60 days of November 30, 1996.
(5) Includes 31,100 shares that may be purchased upon exercise of options
within 60 days of November 30, 1996.
(6) Includes 30,959 shares that may be purchased upon exercise of options
within 60 days of November 30, 1996.
(7) Includes 39,999 shares that may be purchased upon exercise of options
within 60 days of November 30, 1996.
(8) Includes 18,125 shares that may be purchased upon exercise of options
within 60 days of November 30, 1996.
(9) According to a Schedule 13D filed by George Soros (in his capacity as
sole proprietor of Soros Fund Management), these shares are held for the
account of Quantum Partners, LDC, which has granted investment discretion
to Soros Fund Management. Mr. Soros may be deemed to be beneficial owner
of such shares.
The Company is not aware of any arrangements that may at a subsequent date
result in a change of control of the Company.
32
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of: 20,000,000 shares of
Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred
Stock, par value $0.001 per share, of which 1,250,000 shares have been
designated as 9% Cumulative Convertible Preferred Stock (the "9% Preferred
Stock"), 3,200,000 shares have been designated as Series B Convertible
Preferred Stock (the "Series B Preferred Stock") 160 shares have been
designated as Series C Preferred Stock (the "Series C Preferred Stock") and
500 shares have been designated as Series D Preferred Stock (the "Series D
Preferred Stock").
As of November 30, 1996, there were 7,896,812 shares of Common Stock,
110,000 shares of 9% Preferred Stock, 150,000 shares of Series B Preferred
Stock, no shares of Series C Preferred Stock and 100 shares of Series D
Preferred Stock outstanding (See Note 10 of Notes to Financial Statements).
As of the same date, Vector Securities International, Inc. ("Vector") held
warrants to acquire 334,378 shares of Common Stock and Swartz Investments,
Inc. ("Swartz") and its transferees held warrants to purchase 106,195 shares
of Common Stock. Also as of November 30, 1996, there were 590 record holders
of Common Stock, 4 record holders of 9% Preferred Stock, 3 record holders of
Series B Preferred Stock, one record holder of the Vector warrants and ten
record holders of the Swartz warrants.
In addition, as of November 30, 1996 the Company had reserved an aggregate
of 925,976 shares of Common Stock for issuance upon exercise of outstanding
stock options held by employees, officers and consultants to the Company,
14,667 shares for issuance upon conversion of the 9% Preferred Stock, 14,717
shares for issuance upon conversion of the Series B Preferred Stock, 334,378
shares for issuance upon exercise of the Vector warrants and 106,195 shares
for issuance upon exercise of the Swartz warrant.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share held
of record on all matters submitted to a vote of stockholders, including the
election of directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors, in its
discretion, out of funds legally available therefor, subject to preferences
that may be applicable to any outstanding shares of Preferred Stock. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all of the assets of the Company remaining after payment of liabilities and
after payment of any preferential amounts to which holders of shares of the
9% Preferred Stock, the Series B Preferred Stock, the Series D Preferred
Stock and any other series of Preferred Stock that may be outstanding in the
future, may be entitled. Holders of Common Stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of Common Stock are, and the Shares of Common Stock when issued will
be, fully paid and nonassessable.
WARRANTS
On July 23, 1993, in connection with the appointment of Vector Securities
International, Inc. as exclusive financial advisor to the Company, Cortex
issued to Vector a non-redeemable warrant to purchase 11,448 shares of Common
Stock at a price of $6.77 per share, as adjusted and subject to further
adjustment under certain circumstances such as stock splits or stock
dividends, at any time through July 22, 1998.
On December 1, 1993, in connection with the closing of a private placement of
2,750,000 shares of Common Stock, for which Vector acted as placement agent,
the Company issued to Vector a similar warrant to purchase 274,200 shares of
Common Stock at a price of $9.375 per share at any time through November 30,
1998. As consideration for Vector's assistance in reaching the settlement
with Alkermes (see "Business--Legal Proceedings"), this warrant was canceled
and
33
<PAGE>
reissued as a new warrant to purchase 234,637 shares of the Company's common
stock at $5.37 per share, as adjusted and subject to further adjustment, at
any time through January 15, 2000.
As consideration for its agreement to provide financial advisory services
related to corporate finance transactions and corporate partnering
activities, as amended and extended November 29, 1994, Vector was issued a
six-year non-redeemable warrant to purchase 38,293 shares of the Company's
common stock at $4.57 per share, subject to adjustment under certain
circumstances. Warrants to purchase 5,471 shares of the Company's common
stock vested immediately, and warrants to purchase 16,411 shares of the
Company's common stock shall vest upon the consummation of each strategic
alliance, as defined, when and as secured by Vector.
For its financial advisory assistance related to the licensing of the
Company's calpain inhibitor technology, in January 1995 the Company issued
Vector a five-year non-redeemable warrant to acquire 50,000 shares of the
Company's common stock at $3.00 per share, subject to adjustment under
certain circumstances, such as stock splits or stock dividends.
On December 8, 1995, in connection with the issuance of 160 shares of Series
C Preferred Stock for an aggregate of $4,000,000, the Company issued to
Swartz Investments, Inc. a five-year non-redeemable warrant to purchase
106,195 shares of the Company's Common Stock at an exercise price of $2.825.
PREFERRED STOCK
The holders of the 9% Preferred Stock are not entitled to vote for the
election of directors or upon any other matter presented to the stockholders,
except and to the extent provided by applicable law. The holders of the 9%
Preferred Stock are entitled to receive cumulative dividends, from and after
June 15, 1989, at the rate of $.09 per share per annum, out of funds legally
available therefor, when and as declared by the Board of Directors. Upon any
liquidation, dissolution or winding up of the Company, or any merger or
consolidation of the Company or other transaction in which more than 50% of
the Company's voting power is transferred (except for an issuance of the
Company's securities), the holders of the 9% Preferred Stock are entitled to
receive an amount equal to $1.00 per share plus accrued and unpaid dividends.
The holders of the 9% Preferred Stock are not entitled to share in assets
remaining after such preference is satisfied. The Company has the right at
any time to redeem the 9% Preferred Stock, in whole or in part, upon not less
than 30 days' nor more than 60 days' written notice, at a price of $1.00 per
share.
Each share of 9% Preferred Stock is convertible at any time at the option of
the holder thereof into approximately 0.1333 shares of Common Stock, for an
effective conversion price of $7.50 per share, subject to adjustment under
certain circumstances (such as a stock dividend or a stock split) that result
in an increase in the number of shares of Common Stock outstanding. Upon
conversion of 9% Preferred Stock, accrued and unpaid dividends pertaining
thereto do not convert to Common Stock, but rather are credited to additional
paid-in capital.
The holders of Series B Preferred Stock are not entitled to vote for the
election of directors or upon any other matter presented to the stockholders,
except and to the extent provided by applicable law. In the event of any
liquidation, dissolution, winding-up or other distribution of the assets of
the Company, holders of Series B Preferred Stock are entitled to receive,
after payment of the full liquidation preference to holders of 9% Preferred
Stock, an amount equal to $0.6667 per share of Series B Preferred Stock. The
Company has the right to redeem the Series B Preferred Stock for $0.6667 per
share. Each share of Series B Preferred Stock is convertible at any time at
the option of the holder thereof into approximately 0.09812 shares of Common
Stock at an effective conversion price of $6.795 per share, subject to
adjustment under certain circumstances (such as a stock dividend or a stock
split) that result in an increase in the number of shares of Common Stock
outstanding.
34
<PAGE>
Shares of the Series D Preferred Stock do not entitle the holder to vote for
the election of directors or upon any other matter presented to the
stockholders, except to the extent provided by law. Each share of Series D
Preferred is convertible into common stock at an effective per share
conversion price that is the lower of (I) 110% of the average closing bid
price for the five trading days immediately preceding the closing date
($2.9425 for the first tranche) or (ii) that price that is 18% below the
average closing bid price for the five trading days immediately preceding the
conversion date, in each case subject to adjustment at the rate of six
percent per annum based on the length of the period from issuance of the
Series D Preferred until its conversion. Pursuant to the Series D Preferred
Stock subscripion documents, the purchaser of the Series D Preferred Stock is
prohibited from converting any portion of the Series D Preferred Stock which
would result in the purchaser being deemed the beneficial owner, in
accordance with the rules of the Securities and Exchange Commission, of five
percent or more of the then issued and outstanding Common Stock of the
Company. The Company intends to sell a second tranche of 150 shares of Series
D Preferred 15 days following the effectiveness of a registration statement
covering resales of common stock issuable upon conversion of the Series D
Preferred, and a third tranche of 150 shares 60 days following the closing of
the second tranche. Holders of the Series D Preferred have a liquidation
preference, after payment of full liquidation preference to holders of the 9%
Preferred and Series B Preferred, of an amount equal to $10,000 per share,
plus $600 per share for each year that such share is outstanding. Shares of
Series D Preferred automatically convert into common stock on that date which
is two years from the date of issuance of such shares.
The Restated Certificate of Incorporation of the Company authorizes the
issuance of 5,000,000 shares of Preferred Stock, of which 549,340 shares
remain undesignated. The Board of Directors, within the limitations and
restrictions contained in the Restated Certificate of Incorporation and
without further action by the Company's stockholders, has the authority to
issue this undesignated Preferred Stock from time to time in one or more
series and to fix the number of shares and the relative rights, conversion
rights, voting rights, rights and terms of redemption, liquidation
preferences and any other preferences, special rights and qualifications of
any such series. If shares of Preferred Stock with voting rights are issued,
such issuance could affect the voting rights of the holders of the Company's
Common Stock by increasing the number of outstanding shares entitled to vote
and by the creation of class or series voting rights. In addition, any
further issuance of Preferred Stock could, under certain circumstances, have
the effect of delaying or preventing a change in control of the Company and
may adversely affect the rights of holders of Common Stock. Other than the
shares of 9% Preferred Stock, Series B Preferred Stock, and Series D
Preferred Stock, there are no shares of Preferred Stock currently issued and
outstanding and the Company has no present plans to issue any additional
shares of Preferred Stock or to establish or designate any new series of
Preferred Stock.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer and Trust Company, 40 Wall Street, New York, New
York, 10005 serves as Transfer Agent for the Common Stock, 9% Preferred Stock
and Series B Preferred Stock of the Company.
35
<PAGE>
SELLING STOCKHOLDERS
The Shares are to be offered by and for the respective accounts of the Selling
Stockholders. The number of Shares which each Selling Stockholder may offer is
as follows:
<TABLE>
<CAPTION>
Owned Shares offered Owned
Before Offering pursuant After Offering
---------------------------- to this ------------------------------
Selling Stockholder Shares Percent Prospectus Shares Percent
- ---------------------------------------- --------------- --------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C>
Ashline Ltd. ........................... -- (1) -- (1) 3,361,345 (1) 0 0
Bronnum, Dwight B. ..................... 1,500 (2) * 1,500 0 0
Bury, Lance T. ......................... 5,000 (2) * 5,000 0 0
Enigma Investments ..................... 3,451 (2) * 3,451 0 0
Hale, Joseph H. ........................ 13,274 (2) * 13,274 0 0
Hathorn, P. Bradford ................... 5,000 (2) * 5,000 0 0
Hopkins, Robert L. ..................... 1,500 (2) * 1,500 0 0
Kendrick Family Partnership L.P. ....... 32,987 (2) * 8,496 0 0
Peteler, David K. ...................... 2,000 (2) * 2,000 0 0
Swartz Family Partnership, L.P. ........ 32,987 (2) * 32,987 0 0
Vector Securities International, Inc. .. 334,378 (3) 4.1 334,378 0 0
</TABLE>
__________________
* Less than one percent
(1) Ashline Ltd. purchased 100 shares of Series D Preferred Stock in October
1996 and, subject to certain conditions outside the control of Ashline
Ltd. is obligated to purchase an additional 300 shares of Series D
Preferred Stock. The Series D Preferred Stock is converible into Common
Stock at a conversion price that may vary. See "Description of
Securities -- Preferred Stock" and Note 10 of Notes to Financial
Statements. As a result, the exact number of shares of Common Stock
into which such shares of Series D Preferred Stock may be convertible,
and the number of shares of Common Stock which may be sold by Ashline
Ltd. is not presently determinable. In order to provide for the effects
of possible future declines in the market value of the Company's Common
Stock, and in accordance with the terms of the subscription documents
for the Series D Preferred, an effective conversion price of $1.19 per
share has been assumed, representing 50% of the conversion price that
would apply were all of the shares of Series D Preferred converted into
shares of Common Stock on the date of filing of the Registration
Statement of which this Prospectus is a part and an aggregate of
3,361,345 shares have been registered for resale by Ashline Ltd. See
"Risk Factors -- Shares Eligible for Future Sale; Dilution; Control" and
"Description of Securities -- Preferred Stock."
(2) Represents shares of Common Stock that may be acquired upon exercise of
warrants.
(3) Represents shares of Common Stock that may be acquired upon exercise of
warrants. Vector Securities International, Inc. acts as a financial advisor
to the Company and acted as placement agent for the Regulation D Placement
in December 1993.
PLAN OF DISTRIBUTION
The Company has been advised by each Selling Stockholder that the Selling
Stockholder may sell its Shares from time to time in transactions on Nasdaq
in negotiated transactions, by writing options on the Shares or by a
combination of these methods, at fixed prices which may be changed, at market
prices at the time of sale, at prices related to market prices or at
negotiated prices. The Selling Stockholders may effect these transactions by
selling the Shares to or through broker-dealers, who may receive compensation
in the form of discounts, concessions or commissions from the Selling
Stockholders or the purchasers of the Shares for whom the broker-dealer may
act as an agent or to whom they may sell the Shares as a principal, or both.
The compensation to a particular broker-dealer may be in excess of customary
commissions.
The Selling Stockholders and broker-dealers who act in connection with the
sale of the Shares may be deemed to be "underwriters" within the meaning of
the Securities Act, and any commissions received by such broker-dealers and
profits on any resale of the Shares as a principal may be deemed to be
underwriting discounts and commissions under the Securities Act.
36
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Stradling, Yocca, Carlson & Rauth, a Professional Corporation,
Newport Beach, California.
EXPERTS
The financial statements of Cortex Pharmaceuticals, Inc. as of June 30, 1996
and 1995, for each of the two years in the period ended June 30, 1996, and
for the period from inception (February 10, 1987) through June 30, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
37
<PAGE>
[This page intentionally left blank]
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets -- As of September 30, 1996 (unaudited) and June 30, 1996, and
June 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations -- For the three-month periods ended September 30, 1996
and 1995 (unaudited), the period from inception (February 10, 1987) through
September 30, 1996 (unaudited), the years ended June 30, 1996 and 1995,
and the period from inception (February 10, 1987) through June 30, 1996. . . . . . F-4
Statements of Stockholders' Equity -- For the period from
inception (February 10, 1987) through September 30, 1996. . . . . . . . . . . . . F-5
Statements of Cash Flows -- For the three-month periods ended September 30, 1996
and 1995 (unaudited), the period from inception (February 10, 1987) through
September 30, 1996 (unaudited), the years ended June 30, 1996 and 1995,
and the period from inception (February 10, 1987) through June 30, 1996. . . . . . F-9
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE STOCKHOLDERS AND BOARD OF DIRECTORS
CORTEX PHARMACEUTICALS, INC.
We have audited the accompanying balance sheets of Cortex Pharmaceuticals,
Inc. (a development stage enterprise) as of June 30, 1996 and 1995, and the
related statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended June 30, 1996 and for the period
from inception (February 10, 1987) through June 30, 1996. 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. 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 Cortex Pharmaceuticals, Inc.
(a development stage enterprise) at June 30, 1996 and 1995, and the results
of its operations and its cash flows for each of the two years in the period
ended June 30, 1996 and for the period from inception (February 10, 1987)
through June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
-----------------------------------
San Diego, California
July 26, 1996,
except for Note 10, as to which the date is
October 15, 1996
F-2
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
------------------ -------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,936,064 $ 4,091,550 $ 149,880
U.S. Government securities -- available for sale -- -- 3,689,356
Other current assets 117,935 88,427 92,212
------------ ------------ ------------
Total current assets 3,053,999 4,179,977 3,931,448
Furniture, equipment and leasehold improvements, net 758,337 807,601 931,794
Other 25,716 26,342 23,130
------------ ------------ ------------
$ 3,838,052 $ 5,013,920 $ 4,886,372
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 199,812 $ 217,332 $ 377,589
Accrued dividends 64,350 64,350 183,150
Accrued wages, salaries and related expenses 59,493 40,145 35,223
Current obligations under capital lease 7,951 8,501 7,698
------------ ------------ ------------
Total current liabilities 331,606 330,328 603,660
Obligations under capital leases -- 1,499 10,016
Note payable to Alkermes, Inc. 1,051,488 1,037,330 1,000,000
Stockholders' equity:
9% cumulative convertible preferred stock, $0.001
par value; $1.00 per share liquidation preference;
shares authorized: 1,250,000; shares issued and
outstanding: 110,000 (September 30, 1996 and
June 30, 1996) and 370,000 (June 30, 1995) 110,000 110,000 370,000
Series B convertible preferred stock, $0.001 par
value; $0.6667 per share liquidation preference;
shares authorized: 3,200,000; shares issued and
outstanding: 150,000 (September 30, 1996 and
June 30, 1996) and 525,000 (June 30, 1995) 86,810 86,810 303,837
Series C convertible preferred stock, $0.001 par
value; $25,000 per share liquidation preference;
shares authorized: 160; shares issued and
outstanding: 25 (September 30, 1996) and 35
(June 30, 1996) 537,483 752,476 --
Common stock, $0.001 par value; shares authorized:
20,000,000; shares issued and outstanding:
7,589,271 (September 30, 1996), 7,495,576
(June 30, 1996) and 6,085,201 (June 30, 1995) 7,589 7,496 6,085
Additional paid-in capital 28,263,738 28,048,414 23,957,790
Deferred compensation -- -- (145,359)
Unrealized gain (loss) on available for sale
U.S. Government securities 164 (1,135) (18,606)
Deficit accumulated during the development stage (26,550,826) (25,359,298) (21,201,051)
------------ ------------ ------------
Total stockholders' equity 2,454,958 3,644,763 3,272,696
------------ ------------ ------------
$ 3,838,052 $ 5,013,920 $ 4,886,372
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
(Unaudited) Inception Inception
Three months ended (February 10, (February 10,
September 30, 1987) through June 30, 1987) through
-------------------------- September 30, ---------------------------- June 30,
1996 1995 1996 1996 1995 1996
----------- ------------ --------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Research and license revenue under
an agreement with Alkermes, Inc. $ -- $ -- $ 3,600,000 $ -- $ -- $ 3,600,000
Grant revenue -- -- 94,717 -- -- 94,717
----------- --------- ------------ ------------ ----------- ------------
Total revenues -- -- 3,694,717 -- -- 3,694,717
----------- --------- ------------ ------------ ----------- ------------
Operating expenses:
Research and development 793,547 665,478 19,762,659 2,677,577 4,138,731 18,969,112
General and administrative 432,374 323,444 10,482,933 1,643,732 1,665,134 10,050,559
Settlement with Alkermes, Inc. -- -- 1,227,977 -- 1,227,977 1,227,977
----------- --------- ----------- ------------ ----------- ------------
Total operating expenses 1,225,921 988,922 31,473,569 4,321,309 7,031,842 30,247,648
----------- --------- ----------- ------------ ----------- ------------
Loss from operations (1,225,921) (988,922) (27,778,852) (4,321,309) (7,031,842) (26,552,931)
Interest income, net 34,393 34,312 1,367,700 163,062 196,310 1,333,307
----------- --------- ------------ ------------ ----------- ------------
Net loss $(1,191,528) $ (954,610) $(26,411,152) $(4,158,247) $(6,835,532) $(25,219,624)
=========== ========== ============ ============ =========== ============
Weighted average common shares
outstanding 7,557,700 6,086,804 6,532,884 6,075,454
=========== ========== ============ ==========
Net loss per share $ (0.16) $ (0.16) $ (0.64) $ (1.13)
=========== ========== ============ ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized loss Deficit
9% Series B Series C on available accumulated
convertible convertible convertible Additional for sale U.S. during the
preferred preferred preferred Common paid-in Deferred Government development
stock stock stock stock capital compensation securities stage Total
----------- ----------- ----------- ------ ---------- ------------ ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 10, 1987
(date of inception) $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Sale of 1,420,000 shares
of common stock, $0.005 per
share -- -- -- 1,420 5,680 -- -- -- 7,100
Sale of 500,000 shares of
common stock, $2.50 per
share, net of expenses -- -- -- 500 1,076,089 -- -- -- 1,076,589
Issuance of 11,000 shares
of common stock for
services, $2.50 per share -- -- -- 11 27,489 -- -- -- 27,500
9% preferred stock
accretion -- -- -- -- -- -- -- (2,560) (2,560)
Net loss -- -- -- -- -- -- -- (400,193) (400,193)
------- -------- -------- -------- --------- --------- -------- --------- ----------
BALANCE, JUNE 30, 1988 -- -- -- 1,931 1,109,258 -- -- (402,753) 708,436
Conversion of subordinated
convertible note and interest
payable into 83,868 shares of
common stock, $2.50 per share -- -- -- 84 209,586 -- -- -- 209,670
Issuance of 500 shares of
common stock for services,
$2.50 per share -- -- -- 1 1,249 -- -- -- 1,250
Conversion of 5,000 shares
of 9% preferred stock into
3,333 shares of common stock -- -- -- 3 22,903 -- -- -- 22,906
9% preferred stock dividends -- -- -- -- (55,125) -- -- -- (55,125)
9% preferred stock accretion -- -- -- -- -- -- -- (32,733) (32,733)
Net loss -- -- -- -- -- -- -- (1,222,517) (1,222,517)
------- -------- -------- -------- --------- --------- -------- --------- ----------
BALANCE, JUNE 30, 1989 -- -- -- 2,019 1,287,871 -- -- (1,658,003) (368,113)
Initial public offering of
660,000 shares of common
stock, $10.00 per share,
net of expenses -- -- -- 660 5,244,230 -- -- -- 5,244,890
Redemption of 70,000 shares
of common stock, $0.005
per share -- -- -- (70) (280) -- -- -- (350)
9% preferred stock dividends -- -- -- -- (110,250) -- -- -- (110,250)
9% preferred stock accretion -- -- -- -- -- -- -- (33,064) (33,064)
Net loss -- -- -- -- -- -- -- (2,187,870) (2,187,870)
------- -------- -------- -------- --------- --------- -------- --------- ----------
BALANCE, JUNE 30, 1990 -- -- -- 2,609 6,421,571 -- -- (3,878,937) 2,545,243
Sale of 3,181,253 shares of
Series B convertible
preferred stock, $0.6667 per
share, net of expenses -- 1,841,108 -- -- -- -- -- -- 1,841,108
Conversion of 182,200 shares
of 9% preferred stock into
24,293 shares of common stock -- -- -- 24 170,039 -- -- -- 170,063
Issuance of compensatory stock
options -- -- -- -- 330,084 (291,938) -- -- 38,146
Amortization of deferred
compensation -- -- -- -- -- 90,016 -- -- 90,016
9% preferred stock dividends -- -- -- -- (85,653) -- -- -- (85,653)
9% preferred stock accretion -- -- -- -- -- -- -- (32,075) (32,075)
Net loss -- -- -- -- -- -- -- (2,593,968) (2,593,968)
------- -------- -------- -------- --------- --------- -------- --------- ----------
BALANCE, JUNE 30, 1991 $ -- $1,841,108 $ -- $ 2,633 $6,836,041 $ (201,922) $ -- $(6,504,980) $1,972,880
</TABLE>
CONTINUED . . .
F-5
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
Unrealized loss Deficit
9% Series B Series C on available accumulated
convertible convertible convertible Additional for sale U.S. during the
preferred preferred preferred Common paid-in Deferred Government development
stock stock stock stock capital compensation securities stage Total
----------- ----------- ----------- ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1991 $ -- $1,841,108 $ -- $2,633 $ 6,836,041 $(201,922) $ -- $(6,504,980) $1,972,880
Sale of 150,000 shares
of common stock to
Alkermes, Inc., $10.00
per share -- -- -- 150 1,499,850 -- -- -- 1,500,000
Conversion of 306,275
shares of 9% preferred
stock into 40,835 shares
of common stock -- -- -- 40 335,283 -- -- -- 335,323
Conversion of 1,525,003
shares of Series B
preferred stock into
149,629 shares of
common stock -- (882,576) -- 150 882,426 -- -- -- --
Issuance of 73,979 shares
of common stock upon
exercise of stock options -- -- -- 74 110,313 -- -- -- 110,387
Issuance of two shares of
common stock upon
exercise of warrants -- -- -- -- 27 -- -- -- 27
Issuance of compensatory
stock options -- -- -- -- 24,532 (19,375) -- -- 5,157
Forfeiture of compensatory
stock options -- -- -- -- (146,182) 146,182 -- -- --
Amortization of deferred
compensation -- -- -- -- -- 58,567 -- -- 58,567
9% preferred stock dividends -- -- -- -- (68,906) -- -- -- (68,906)
9% preferred stock accretion -- -- -- -- -- -- -- (23,242) (23,242)
Net loss -- -- -- -- -- -- -- (2,354,770) (2,354,770)
-------- ---------- -------- ------ ---------- ------- -------- ---------- ---------
BALANCE, JUNE 30, 1992 -- 958,532 -- 3,047 9,473,384 (16,548) -- (8,882,992) 1,535,423
Conversion of 287,150
shares of 9% preferred
stock into 38,287
shares of common stock -- -- -- 38 360,398 -- -- -- 360,436
Conversion of 1,081,250
shares of Series B
preferred stock into
106,088 shares of
common stock -- (625,758) -- 106 625,652 -- -- -- --
Redemption of 12,627
shares of common
stock, $7.65 per share -- -- -- (12) (96,662) -- -- -- (96,674)
Issuance of 30,789 shares
of common stock upon
exercise of stock options -- -- -- 31 60,915 -- -- -- 60,946
Issuance of compensatory
stock options -- -- -- -- 350,000 (280,000) -- -- 70,000
Amortization of deferred
compensation -- -- -- -- -- 36,897 -- -- 36,897
9% preferred stock dividends -- -- -- -- (53,028) -- -- -- (53,028)
9% preferred stock accretion -- -- -- -- -- -- -- (16,000) (16,000)
Net loss -- -- -- -- -- -- -- (761,536) (761,536)
-------- ---------- -------- ------ ---------- ------- -------- ---------- ---------
BALANCE, JUNE 30, 1993 $ -- $ 332,774 $ -- $3,210 $10,720,659 $(259,651) $ -- $(9,660,528 $1,136,464
-------- ---------- -------- ------ ---------- ------- -------- ---------- ---------
</TABLE>
CONTINUED . . .
F-6
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
Unrealized loss Deficit
9% Series B Series C on available accumulated
convertible convertible convertible Additional for sale U.S. during the
preferred preferred preferred Common paid-in Deferred Government development
stock stock stock stock capital compensation securities stage Total
----------- ----------- ---------- ------ ----------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 $ -- $332,774 $ -- $3,210 $10,720,659 $(259,651) $ -- $ (9,660,528) $ 1,136,464
Sale of 2,750,000 shares
of common stock, $5.00
per share, net of
expenses -- -- -- 2,750 12,359,611 -- -- -- 12,362,361
Sale of 103,577 shares of
common stock, $6.40 per
share, net of expenses -- -- -- 104 510,707 -- -- -- 510,811
Conversion of 15,625
shares of 9% preferred
stock into 2,083 shares
of common stock -- -- -- 2 20,545 -- -- -- 20,547
Conversion of 50,000
shares of Series B
preferred stock into
4,906 shares of
common stock -- (28,937) -- 5 28,932 -- -- -- --
Issuance of compensatory
stock options -- -- -- -- 100,625 -- -- -- 100,625
Amortization of deferred
compensation -- -- -- -- -- 58,200 -- -- 58,200
Issuance of 3,401 shares
of common stock upon
exercise of stock options -- -- -- 3 6,461 -- -- -- 6,464
9% preferred stock dividends -- -- -- -- (39,038) -- -- -- (39,038)
Unrealized loss on available
for sale U.S. Government
securities -- -- -- -- -- -- (163,562) -- (163,562)
Net loss -- -- -- -- -- -- -- (4,704,991) (4,704,991)
------- ------- ------- ------- ---------- -------- -------- ----------- -----------
BALANCE, JUNE 30, 1994 -- 303,837 -- 6,074 23,708,502 (201,451) (163,562) (14,365,519) 9,287,881
Reclassification of
unredeemed 9% preferred
stock 370,000 -- -- -- -- -- -- -- 370,000
Issuance of warrants to
purchase 265,000 shares
of common stock -- -- -- -- 232,746 -- -- -- 232,746
Adjustment of accrued
dividends for redemption
of 9% preferred stock -- -- -- -- 25,819 -- -- -- 25,819
Issuance of 11,272 shares
of common stock upon
exercise of stock options -- -- -- 11 24,023 -- -- -- 24,034
Amortization of deferred
compensation -- -- -- -- -- 56,092 -- -- 56,092
9% preferred stock dividends -- -- -- -- (33,300) -- -- -- (33,300)
Decrease in unrealized
loss on available for sale
U.S. Government securities -- -- -- -- -- -- 144,956 -- 144,956
Net loss -- -- -- -- -- -- -- (6,835,532) (6,835,532)
------- ------- ------- ------- ---------- -------- -------- ----------- -----------
BALANCE, JUNE 30, 1995 370,000 303,837 -- 6,085 23,957,790 (145,359) (18,606) (21,201,051) 3,272,696
------- ------- ------- ------- ---------- -------- -------- ----------- -----------
</TABLE>
CONTINUED . . .
F-7
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
Unrealized
gain (loss) Deficit
9% Series B Series C on available accumulated
convertible convertible convertible Additional for sale U.S. during the
preferred preferred preferred Common paid-in Deferred Government development
stock stock stock stock capital compensation securities stage Total
----------- ----------- ---------- ------ ----------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $370,000 $303,837 $ -- $6,085 $23,957,790 $(145,359) $(18,606) $(21,201,051) $3,272,696
Sale of 160 shares of
Series C convertible
preferred stock,
$25,000 per share,
net of expenses -- -- 3,576,544 -- -- -- -- -- 3,576,544
Issuance of warrants
to purchase 106,195
shares of common
stock -- -- (136,654) -- 136,654 -- -- -- --
Conversion of 260,000
shares of 9%
preferred stock into
34,667 shares of
common stock (260,000) -- -- 35 259,965 -- -- -- --
Conversion of 375,000
shares of Series B
preferred stock into
36,793 shares of
common stock -- (217,027) -- 37 216,990 -- -- -- --
Conversion of 125
shares of Series C
preferred stock into
1,133,037 shares of
common stock -- -- (2,687,414) 1,134 2,686,280 -- -- -- --
Adjustment of accrued
dividends for conversion
of 9% preferred stock -- -- -- -- 128,700 -- -- -- 128,700
Issuance of 205,878
shares of common
stock upon exercise
of stock options -- -- -- 205 775,185 -- -- -- 775,390
Amortization of deferred
compensation -- -- -- -- -- 42,109 -- -- 42,109
Reversal of unamortized
deferred compensation
upon resignation of
Chief Executive Officer -- -- -- -- (103,250) 103,250 -- -- --
9% preferred stock
dividends -- -- -- -- (9,900) -- -- -- (9,900)
Unrealized loss on
available for sale
U.S. Government
securities -- -- -- -- -- -- 17,471 -- 17,471
Net loss -- -- -- -- -- -- -- (4,158,247) (4,158,247)
--------- ------- --------- ----- ---------- ------- -------- ------------ ----------
BALANCE, JUNE 30, 1996 110,000 86,810 752,476 7,496 28,048,414 -- (1,135) (25,359,298) 3,644,763
Conversion of 10 shares
of Series C convertible
preferred stock into
93,495 shares of common
stock (unaudited) -- -- (214,993) 93 214,900 -- -- -- --
Issuance of 200 shares
of common stock upon
exercise of stock
options (unaudited) -- -- -- -- 424 -- -- -- 424
Unrealized gain on
available for sale U.S.
Government securities
(unaudited) -- -- -- -- -- -- 1,299 -- 1,299
Net loss (unaudited) -- -- -- -- -- -- -- (1,191,528) (1,191,528)
--------- ------- ---------- ----- ---------- ------- -------- ------------ ----------
BALANCE, SEPTEMBER 30,
1996 (UNAUDITED) $110,000 $ 86,810 $ 537,483 $7,589 $28,263,738 $ -- $ 164 $(26,550,826) $2,454,958
========= ======== ========== ====== =========== ======== ======== ============ ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
(Unaudited) Inception Inception
Three months ended (February 10, (February 10,
September 30, 1987) through Years ended June 30, 1987) through
------------------------ September 30, ------------------------- June 30,
1996 1995 1996 1996 1995 1996
------------- ---------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
NET LOSS $(1,191,528) $(954,610) $(26,411,152) $(4,158,247) $(6,835,532) $(25,219,624)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 53,350 58,173 1,162,372 230,224 208,928 1,109,022
Settlement with Alkermes, Inc. -- -- 1,227,977 -- 1,227,977 1,227,977
Changes in operating assets/liabilities:
Accounts payable and accrued expenses 1,828 32,341 259,305 (155,335) (131,886) 257,477
Accrued interest on U.S. Govt. securities -- (21,080) (149,856) (131,895) 52,014 (149,856)
Other current assets (29,508) 50,934 (117,935) 3,785 26,677 (88,427)
Interest receivable from former officer -- -- (19,274) -- -- (19,274)
Realized loss on sale of U.S. Govt. securities -- 551 54,317 1,270 53,047 54,317
Stock option compensation expense -- 14,139 555,809 42,109 56,092 555,809
Stock issued for services -- -- 28,750 -- -- 28,750
Reduction in note receivable from former
officer -- compensation expense -- -- 22,600 -- -- 22,600
Other 15,457 -- 60,776 37,330 4,769 45,319
---------- -------- ----------- ---------- ---------- ---------
NET CASH USED IN OPERATING ACTIVITIES (1,150,401) (819,552) (23,326,311) (4,130,759) (5,337,914) (22,175,910)
---------- -------- ----------- ---------- ---------- -----------
Cash flows from investing activities:
U.S. Government securities -- available for sale
Purchases -- -- (36,146,416) (19,298,746) (3,868,775) (36,146,416)
Sales -- 749,418 36,240,820 23,136,197 9,642,408 36,240,820
Purchase of fixed assets (4,086) -- (1,891,433) (108,807) (401,912) (1,887,347)
Sale of fixed assets -- 2,777 10,236 2,777 -- 10,236
Decrease (increase) in -- --
Other assets 626 (529) (42,456) (3,212) 1,092 (43,082)
Note receivable from former officer -- -- (100,000) -- -- (100,000)
---------- -------- ----------- ---------- ---------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (3,460) 751,666 (1,929,249) 3,728,209 5,372,813 (1,925,789)
---------- -------- ----------- ---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 424 9,839 21,679,074 775,391 24,034 21,678,650
Redemption of 9% preferred stock -- -- (63,750) -- (63,750) (63,750)
Principal payments on capitalized leases (2,049) (1,859) (16,022) (7,714) (6,259) (13,973)
Proceeds from issuance of Series B
convertible preferred stock -- -- 1,841,108 -- -- 1,841,108
Proceeds from issuance of 9% preferred stock -- -- 1,076,588 -- -- 1,076,588
Proceeds from issuance of Series C
convertible preferred stock -- -- -- 3,576,543 -- 3,576,543
Proceeds from subordinated convertible note -- -- 208,333 -- -- 208,333
Payment of 9% preferred stock dividends -- -- (110,250) -- -- (110,250)
---------- -------- ----------- ---------- ---------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,625) 7,980 28,191,624 4,344,220 (45,975) 28,193,249
---------- -------- ----------- ---------- ---------- ---------
Increase (decrease) in cash and cash equivalents (1,155,486) (59,906) 2,936,064 3,941,670 (11,076) 4,091,550
Cash and cash equivalents, beginning of period 4,091,550 149,880 -- 149,880 160,956 --
---------- -------- ----------- ---------- ---------- ---------
Cash and cash equivalents, end of period $2,936,064 $ 89,974 $ 2,936,064 $4,091,550 $ 149,880 $4,091,550
========== ========= ============ ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Period from inception (February 10, 1987) through September 30, 1996
ALL INFORMATION AS OF SEPTEMBER 30, 1996, FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995, AND FOR THE PERIOD FROM INCEPTION (FEBRUARY 10,
1987) THROUGH SEPTEMBER 30, 1996 IS UNAUDITED. IN THE OPINION OF MANAGEMENT,
ALL ADJUSTMENTS (CONSISTING ONLY OF NORMAL RECURRING ACCRUALS) CONSIDERED
NECESSARY FOR A FAIR PRESENTATION HAVE BEEN INCLUDED. OPERATING RESULTS FOR
THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE FISCAL YEAR ENDING
JUNE 30, 1997.
NOTE 1 -- BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Cortex Pharmaceuticals, Inc. (the "Company") was formed to engage
in the discovery, development and commercialization of innovative
pharmaceuticals for the treatment of neurodegenerative diseases and other
neurological and psychiatric disorders. Since its formation in 1987, the
Company has been engaged in research and development activities.
BASIS OF PRESENTATION; DEVELOPMENT STAGE ENTERPRISE -- From inception through
September 30, 1996, the Company has generated only modest operating revenues
and has incurred losses aggregating $26,411,152. Successful completion of the
Company's development program and its transition, ultimately, to attaining
profitable operations is dependent upon obtaining additional financing
adequate to fulfill its research and development activities, and achieving a
level of revenue adequate to support the Company's cost structure. There can
be no assurance that the Company will be successful in these areas. To
supplement its existing resources, the Company is exploring several near-term
alternatives for raising additional capital, including corporate partnership
arrangements and the issuance of additional securities. The Company is
planning to raise additional capital through the sale of debt or equity. When
the Company proceeds with a debt or equity financing, there can be no
assurance that funds will be available on favorable terms, or at all. If
additional funds are raised by issuing equity securities, dilution to
existing stockholders is likely to result. See Note 10.
The Company is seeking collaborative or other arrangements with larger
pharmaceutical companies, under which such companies would provide additional
capital to the Company in exchange for exclusive or non-exclusive license or
other rights to certain of the technologies and products the Company is
developing. Because of the current adverse market conditions for
biopharmaceutical company financings, the competition for corporate
partnering arrangements with major pharmaceutical companies has become very
intense, with a large number of biopharmaceutical companies attempting to
satisfy their short-term funding requirements through such arrangements.
Accordingly, although the Company is presently engaged in discussions with a
number of candidate companies, there can be no assurance that an agreement
will arise from these discussions in a timely manner, or at all, or that any
agreement that may arise from these discussions will successfully reduce the
Company's short-term or long-term funding requirements.
REVERSE STOCK SPLIT; AUTHORIZED SHARES -- On January 11, 1995, the Company
effected a one-for-five reverse stock split of its common stock and revised
the authorized number of shares of common stock from 50,000,000 to
20,000,000, with no change in the par value of $0.001 per share. The
accompanying financial statements and all references to the number of shares
and per share amounts have been adjusted to reflect the effect of the reverse
split.
CASH EQUIVALENTS -- The Company considers all highly liquid short-term
investments with maturities of less than three months when acquired to be
cash equivalents.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
F-10
<PAGE>
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION -- In November 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("FAS 123"). The Company has
elected to continue accounting for stock options under APB No. 25 "Accounting
for Stock Issued to Employees." The adoption of FAS 123 was not expected to
have a material effect on the Company's financial position or results of
operations for the year ended June 30, 1996.
LONG-LIVED ASSETS -- In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121 "Accounting for
Impairment of Long-Lived Assets to be Disposed Of" ("FAS 121") which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets carrying
amount. FAS 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company's adoption of FAS 121 in the first
quarter of fiscal 1996 did not have a material effect on the Company's
financial position or results of operations.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Furniture, equipment and
leasehold improvements are recorded at cost and are being depreciated on a
straight-line basis over the lesser of their estimated useful lives, ranging
from five to ten years, or the life of the lease, as appropriate.
NET LOSS PER SHARE -- Net loss per share is computed based on the weighted
average number of common shares outstanding during the period, and
incorporates preferred stock dividends that accrued during the period. Shares
issuable upon conversion of preferred stock and upon exercise of outstanding
stock options and warrants are not included since the effects would be
anti-dilutive.
RESEARCH AND DEVELOPMENT COSTS -- All costs related to research and
development activities are treated as expenses in the period incurred.
NOTE 2 -- FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
September 30, 1996 June 30, 1996 June 30, 1995
------------------ ------------- -------------
Laboratory equipment $ 992,349 $ 990,329 $ 963,169
Leasehold improvements 620,716 619,566 575,367
Furniture and equipment 90,689 89,773 89,773
Computers and software 193,372 193,372 158,700
----------- ----------- ----------
1,897,126 1,893,040 1,787,009
Accumulated depreciation (1,138,789) (1,085,439) (855,215)
----------- ----------- ----------
$ 758,337 $ 807,601 $ 931,794
=========== =========== =========
NOTE 3 -- PREFERRED STOCK
The Company has authorized a total of 5,000,000 shares of preferred stock,
par value $0.001 per share, of which 1,250,000 shares have been designated as
9% Cumulative Convertible Preferred Stock (non-voting, "9% Preferred");
3,200,000 shares have been designated as Series B Convertible Preferred Stock
(non-voting, "Series B Preferred"); and 160 shares have been designated as
Series C Convertible Preferred Stock (non-voting, "Series C Preferred"); and
549,840 shares are presently undesignated and may be issued with such rights
and powers as the Board of Directors may designate.
F-11
<PAGE>
The 9% Cumulative Convertible Preferred Stock as of September 30, 1996, June
30, 1996 and June 30, 1995 consisted of 110,000, 110,000 and 370,000 shares,
respectively, of an original 1,250,000 shares of 9% Preferred issued in a
1988 private placement. Each share of 9% Preferred is convertible into
approximately 0.1333 shares of common stock at an effective conversion price
of $7.50 per share of common stock, subject to adjustment under certain
circumstances, such as stock splits or stock dividends. Cash dividends on the
9% Preferred accrue semi-annually on June 15th and December 15th at the rate
of $0.09 per share per annum. In order to conserve capital for operations,
the Company has elected not to distribute the dividends that have accrued
from June 15, 1990. Upon conversion of 9% Preferred, accrued and unpaid
dividends are credited to additional paid-in capital. Accrued and unpaid
dividends as of September 30, 1996, June 30, 1996 and June 30, 1995 were
$64,350, $64,350 and $183,150, respectively. In September 1995, holders of
260,000 shares of 9% Preferred converted their shares into 34,667 shares of
the Company's common stock. The Company may redeem the 9% Preferred at any
time at a price of $1.00 per share, an amount equal to its liquidation
preference, upon not less than 30 nor more than 60 days' notice.
Series B Convertible Preferred Stock as of September 30, 1996, June 30, 1996
and June 30, 1995 consisted of 150,000, 150,000 and 525,000 shares,
respectively, of Series B Preferred issued in a May 1991 private placement.
Each share of Series B Preferred is convertible into approximately 0.09812
shares of common stock at an effective conversion price of $6.795 per share
of common stock, subject to adjustment under certain circumstances such as
stock splits or stock dividends. In September 1995, holders of 375,000 shares
of Series B Preferred converted their shares into 36,793 shares of the
Company's common stock. The Series B Preferred may be redeemed by the Company
at a price of $0.6667 per share, an amount equal to its liquidation
preference, at any time upon 30 days' notice. The liquidation preference of
the Series B Preferred is subordinate to that of the 9% Preferred.
Series C Convertible Preferred Stock at September 30, 1996 and June 30, 1996
consisted of 25 and 35 shares, respectively, of an original 160 shares of
Series C Preferred issued in a private placement completed in December 1995.
Each share of Series C Preferred is convertible into common stock in
accordance with a formula that is indexed to the average bid price of the
Company's common shares. Holders of the Series C Preferred have a liquidation
preference, after payment of full liquidation preference to holders of 9%
Preferred and in parity with the Series B Preferred, of an amount equal to
$25,000 per share, plus an amount equal to $2,500 per share per year. Upon
receipt of a notice of conversion from a Series C Preferred Stock holder, the
Company may elect to redeem the shares for a price equal to the closing bid
price on the date of conversion multiplied by the number of shares of common
stock issuable upon such conversion. On December 8, 1997 each share of Series
C Preferred then outstanding will automatically convert into common stock at
the conversion price then in effect. The Company may redeem the Series C
Preferred at any time, subject to certain restrictions, at a redemption price
ranging from 115% to 130% of the liquidation preference.
NOTE 4 -- COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
In July 1989, the Company completed an initial public offering of 1,100,000
Units, with each Unit consisting of 0.6 shares of common stock and two
redeemable Class A warrants, for an aggregate of 660,000 shares of common
stock and 2,200,000 Class A warrants. Each Class A warrant entitled the
holder to purchase 0.26 shares of common stock and one redeemable Class B
warrant at a price of $10.62 per share of common stock, as adjusted. During
the year ended June 30, 1992, ten Class A warrants were exercised. The
balance of the Class A warrants, and the Class B warrants issuable upon
exercise of the Class A warrants, expired on December 31, 1995.
In 1991, the Company issued 1,060,417 Class C warrants in a private placement
transaction. Each Class C warrant entitled the holder to purchase 0.26 shares
of common stock at a price of $9.185 per share, as adjusted. None of the
Class C warrants were exercised prior to their expiration on December 31,
1995.
In connection with its agreement with Alkermes, Inc. ("Alkermes"; Note 6),
the Company sold Alkermes 150,000 shares of common stock and issued
non-redeemable warrants to Alkermes to purchase an additional 400,000 shares
of common stock, for aggregate consideration of $1,500,000. The warrants have
since expired.
F-12
<PAGE>
In October 1993, the Company sold 103,577 shares of common stock at a price
of $6.40 per share. The shares were acquired by four non-U.S. purchasers in a
private placement transaction pursuant to Regulation S of the Securities and
Exchange Commission.
In December 1993, the Company completed a private placement of 2,750,000
shares of common stock at a price of $5.00 per share. The shares were
acquired by 39 institutional and accredited individual purchasers in a
private placement transaction pursuant to Regulation D of the Securities and
Exchange Commission. Vector Securities International, Inc. acted as placement
agent for the transaction and was issued warrants in connection therewith
(Note 8).
In connection with the December 1995 private placement of 160 shares of
Series C Preferred Stock (Note 3), the Company issued to Swartz Investments,
Inc., the placement agent for the transaction, a five-year non-redeemable
warrant to purchase 106,195 shares of common stock at a price of $2.825 per
share, subject to adjustment under certain circumstances. The warrants
contain cashless exercise provisions and include piggyback registration
rights.
As of September 30, 1996, 283,184 shares of common stock were reserved for
issuance upon conversion of outstanding 9% Preferred, Series B Preferred and
Series C Preferred Stock (Note 3); 440,573 shares were reserved for issuance
upon exercise of warrants; and 916,511 shares were reserved for issuance upon
exercise of outstanding stock options (Note 5).
NOTE 5 -- STOCK OPTION AND STOCK PURCHASE PLANS
EMPLOYEE/DIRECTOR OPTION PLAN -- The Company's 1989 Incentive Stock Option,
Nonqualified Stock Option and Stock Purchase Plan provides for the granting
by the Company of options and rights to purchase up to an aggregate of
500,000 shares of the Company's authorized but unissued common stock (subject
to adjustment under certain circumstances, such as stock splits,
recapitalizations and reorganizations) to directors, officers and other
employees of the Company. The exercise price of nonqualified stock options
and the purchase price of stock offered under this plan, which terminates
February 2, 1999, must be at least 85% of the fair market value of the common
stock on the date of grant. The exercise price of incentive stock options
must be at least equal to the fair market value of the common stock on the
date of grant. Each non-employee director (other than those who serve on the
Board of Directors to oversee an investment in the Company) is automatically
granted options to purchase 15,000 shares of Common Stock upon commencement
of service as a director and additional options to purchase 2,500 shares of
Common Stock on the date of each Annual Meeting of Stockholders. These
nonqualified options have an exercise price equal to 100% of the fair market
value of the common stock on the date of grant, have a ten-year term and vest
in equal increments of 25% on the anniversary dates of the dates of grant.
Non-employee directors who serve on the Board of Directors to oversee an
investment in the Company receive options to purchase 5,000 shares of common
stock upon commencement of service as a director and additional options to
purchase 1,000 shares of common stock on the date of each Annual Meeting of
Stockholders. These nonqualified options have an exercise price equal to 100%
of the fair market value of the Common Stock on the date of grant, have a
ten-year term and vest in equal increments of 25% on the last day of each
calendar quarter following the dates of grant. On March 23, 1995, options to
purchase 100,000 shares of common stock at an exercise price of $8.75 per
share previously granted to the Company's former President and Chief
Executive Officer were canceled and reissued as options to purchase 100,000
shares of common stock at $3.50 per share, the then fair market value of the
common stock. As of September 30, 1996 and June 30, 1996, options to purchase
an aggregate of 550,104 and 542,524 shares of common stock, respectively,
were outstanding under this plan, and an additional 46,074 and 53,854 shares
of common stock, respectively, were reserved for future option grants.
CONSULTANT PLAN -- The Company's 1989 Special Nonqualified Stock Option and
Stock Purchase Plan provides for the granting by the Company of options and
rights to purchase up to an aggregate of 300,000 shares of the Company's
authorized but unissued common stock (subject to adjustment under certain
circumstances, such as stock splits, recapitalizations and reorganizations)
to consultants to the Company. The exercise price of nonqualified stock
options and the purchase price of stock offered under this plan, which
terminates February 2, 1999, must be at least 50% of the fair market value of
the common stock on the date of grant. On May 24, 1995, options to purchase
an aggregate of 51,000 shares of common stock previously granted to several
consultants to
F-13
<PAGE>
the Company were repriced from a weighted average exercise price of $7.19 per
share to $3.125 per share, the then fair market of the common stock. As of
September 30, 1996 and June 30, 1996, options to purchase an aggregate of
356,407 and 343,407 shares of common stock, respectively, were outstanding
under this plan, and an additional 3,026 and 16,026 shares of common stock,
respectively, were reserved for future option grants.
EXECUTIVE STOCK PLAN -- In 1991, in connection with his election as Chairman
of the Board, Harvey S. Sadow, Ph.D. was granted an option to purchase 10,000
shares of common stock at an exercise price of $2.19 per share, representing
50% of the fair market value of the common stock on the date of grant. In
1993, a former President and Chief Executive Officer was granted an option to
purchase 80,000 shares of common stock at an exercise price of $4.375 per
share, representing 50% of the then fair market value of the common stock. On
March 23, 1995 options held by the former officer to purchase 95,600 shares
of common stock at an exercise price of $9.375 per share were canceled and
reissued as options to purchase 65,560 shares of common stock at $3.50 per
share, the then fair market value of the common stock, and options to
purchase 30,040 shares of common stock at an exercise price of $4.50 per
share. As of September 30, 1996 and June 30, 1996, options to purchase an
aggregate of 10,000 shares of common stock were outstanding under the
Executive Stock Plan, and an additional 208,871 shares of common stock were
reserved for future option grants.
As of September 30, 1996 and June 30, 1996, options to purchase an aggregate
of 385,042 and 361,552 shares of common stock, respectively, were exercisable
under the Company's stock option plans. During the years ended June 30, 1996
and 1995 and the period from inception (February 10, 1987) through June 30,
1996, options to purchase 0, 0, and 261,289 shares of common stock,
respectively, were issued to certain directors, officers and consultants of
the Company with exercise prices below the fair market value of the common
stock on the dates of grant. The aggregate difference between the fair market
value on the date of grant and the exercise price of the options granted has
been recorded as compensation expense over the vesting period of the options.
In February 1994, an option to purchase 14,000 shares of common stock that
was previously issued to an officer was extended for three years. The
aggregate difference between fair market value at the time of the extension
and the exercise price of the options was recorded as compensation expense at
the time of the extension. Stock option compensation expense related to these
transactions, aggregating $0, $14,139, $555,809, $42,109, $56,092 and
$555,809 for the three-month periods ended September 30, 1996 and 1995, and
the period from inception (February 10, 1987) through September 30, 1996, the
years ended June 30, 1996 and 1995 and the period from inception (February
10, 1987) through June 30, 1996, respectively, has been recorded in the
accompanying statements of operations.
Stock option transactions under the Company's stock option plans for the two
years ended June 30, 1996 and the three-month period ended September 30, 1996
are summarized below:
Number Exercise price
of shares per share
---------- ---------------
Outstanding as of June 30, 1995 549,667 $0.94 - 10.94
Granted 556,970 1.75 - 5.00
Exercised (11,272) 1.56 - 3.13
Forfeited (266,497) 1.88 - 9.38
-------- ---------------
Outstanding as of June 30, 1995 828,868 0.94 - 10.94
Granted 409,101 2.63 - 7.25
Exercised (205,878) 0.94 - 4.53
Forfeited (136,160) 1.88 - 9.06
-------- ---------------
Outstanding as of June 30, 1996 895,931 1.56 - 10.94
Granted 20,980 2.63 - 4.25
Exercised (200) 2.13
Forfeited (200) 9.06
-------- ---------------
Outstanding as of September 30, 1996 916,511 $1.56 - 10.94
======== ===============
Available for future grant 258,171
========
F-14
<PAGE>
NOTE 6 -- AGREEMENT WITH ALKERMES, INC.; LEGAL PROCEEDINGS
In January 1992, the Company entered into a development and license agreement
with Alkermes, Inc. ("Alkermes") for the development, clinical testing and
commercialization of the Company's calpain inhibitor products, which was
subsequently amended in October 1992 (the "Alkermes Agreement"). Under the
Alkermes Agreement, the Company granted to Alkermes an exclusive worldwide
license to commercialize calpain inhibitor products for the prevention and
treatment of acute and chronic neurodegenerative diseases and disorders of
the central and peripheral nervous systems. Under the Alkermes Agreement, the
Company received an aggregate of $3,100,000 in research payments over the
18-month period ended June 30, 1993, and a $500,000 payment in October 1992
in connection with a limited expansion of Alkermes' commercial rights. In
November 1993, Alkermes filed an action in U.S. District Court in
Massachusetts alleging that the Company had breached the Alkermes Agreement
by developing calpain inhibitors for cerebral vasospasm. On October 5, 1995,
the Company and Alkermes agreed to a settlement of the dispute. Alkermes
agreed to dismiss its action against the Company and to relinquish all rights
previously granted them by the Company, as well as rights to related
technologies developed by Alkermes subsequent to October 6, 1992. In
connection with the settlement, the Company issued to Alkermes a $1,000,000
three-year promissory note accruing interest semi-annually at the federal
funds rate. The Company also committed to pay Alkermes a graduated royalty on
calpain inhibitor development proceeds, as defined and subject to certain
limitations.
NOTE 7 -- COMMITMENTS
The Company leases its offices and research laboratories under an operating
lease that expires May 31, 1999, with an additional five-year option at 95%
of the then fair market rental rate. Rent expense under this lease for the
three-month periods ended September 30, 1996 and 1995, the period from
inception (February 10, 1989) through September 30, 1996, the years ended
June 30, 1996 and 1995 and the period from inception (February 10, 1987)
through June 30, 1996 was $47,000, $43,000, $1,471,000, $193,000, $232,000
and $1,424,000, respectively. Commitments under the lease for the years
ending June 30, 1997, 1998 and 1999 are $229,000, $235,000 and $220,000,
respectively.
As of June 30, 1996, the Company was obligated to two executive officers
under employment agreements expiring through May 1997 that involve annual
salary payments aggregating $332,500 and that provide for bonuses under
certain circumstances. Additionally, in the event that a compound developed
by or under the supervision of a senior scientific employee of the Company is
commercialized by the Company, the Company will be obligated under certain
circumstances to pay the employee a royalty based on net sales, as defined
and subject to adjustment, of products containing the compound. Also as of
June 30, 1996, the Company was committed under scientific consulting and
external research agreements to annual payments aggregating approximately
$1,253,000.
The Company has entered agreements with two academic institutions that
provide the Company exclusive rights to certain of the technologies that it
is developing. Under the terms of the agreements, the Company is committed to
royalty payments, including minimum annual royalties of $95,000 for the years
ending June 30, 1997 and 1998. Thereafter, minimum annual royalties are
$105,000 for the remaining life of the patents covering the subject
technologies. One of the agreements commits the Company to pay up to an
additional $875,000 dependent upon achieving clinical testing and regulatory
approval milestones. The same institution is eligible to receive a proportion
of certain remuneration received by the Company in connection with
sublicensing agreements that the Company may enter into.
NOTE 8 -- RELATED PARTY TRANSACTIONS
From inception (February 10, 1987) through June 30, 1991, the Company made
payments aggregating $1,319,112 to a founding stockholder for commissions and
underwriting fees for private and public offerings and for interest payments
on a note formerly held by such stockholder. No such payments have been made
since June 30, 1991.
From inception (February 10, 1987) through June 30, 1993, the Company paid or
accrued scientific and other consulting fees to stockholders aggregating
$606,993. In the years ended June 30, 1996 and 1995, such consulting
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<PAGE>
fees aggregated $87,160 and $106,583, respectively. In addition, the Company
is obligated under certain circumstances to make royalty payments to certain
of its scientific consultants, some of whom are stockholders, and to one
employee, upon successful commercialization of certain of its products by the
Company or its licensees.
In 1988, the Company provided to a former officer a relocation loan in the
amount of $100,000, bearing interest at 5% per annum, originally due in June
1991 and subsequently extended to December 1992. The Board of Directors
reduced the principal amount of the loan to $90,000 as of January 1, 1990 and
to $77,400 as of July 1, 1991, with the reductions recorded as salary
expense. The outstanding principal and accrued interest on this loan
aggregating $96,674 was paid off by the former officer in September 1992 by
surrender of 12,627 shares of common stock at the then fair market value.
In connection with its initial public offering in July 1989, the Company
entered into an agreement granting a then related party entity a five-year
right of first refusal to act as underwriter or agent for public and private
offerings. In July 1993, the formerly related party entity agreed to
surrender its right of first refusal to act as underwriter or agent in future
private and public offerings of securities by the Company, in exchange for a
cash payment of $66,000.
On July 23, 1993, the Company entered into an agreement with Vector
Securities International, Inc. ("Vector"), under which Vector agreed to serve
as financial advisor to the Company in connection with corporate finance
transactions and corporate partnering of the Company's cognition enhancement
and Alzheimer's disease programs. In connection with the agreement, the
Company paid a $50,000 retainer and issued to Vector a five-year
non-redeemable warrant to acquire 11,448 shares of common stock at an
exercise price of $6.77 per share, as adjusted and subject to further
adjustment under certain circumstances.
In connection with its services as placement agent in the 1993 private
placement (Note 4), Vector was paid a fee of $1,096,800 and was issued a
five-year non-redeemable warrant to purchase 274,200 shares of the Company's
common stock at $9.375 per share. In connection with Vector's assistance in
reaching the settlement with Alkermes (Note 6), this warrant was canceled and
reissued as a new warrant to purchase 234,637 shares of the Company's common
stock at $5.37 per share, as adjusted and subject to further adjustment, at
any time through January 15, 2000. The value of this new warrant was computed
utilizing the Black-Scholes option pricing model, and was recorded with the
expense of the settlement with Alkermes in the accompanying statement of
operations.
As consideration for its agreement to provide financial advisory services, as
amended and extended November 29, 1994, Vector was paid a retainer of $50,000
and was issued a six-year non-redeemable warrant to purchase 38,293 shares of
the Company's common stock at $4.57 per share, subject to adjustment under
certain circumstances. Warrants to purchase 5,471 shares of the Company's
common stock vested immediately, and warrants to purchase 16,411 shares of
the Company's common stock vest upon the consummation of each strategic
alliance when and as secured by Vector. For an expansion in January 1995 of
its financial advisory assistance to include the Company's calpain inhibitor
technology, the Company paid a $20,000 retainer and issued to Vector a
five-year non-redeemable warrant to acquire 50,000 shares of the Company's
common stock at $3.00 per share, subject to adjustment under certain
circumstances. The Company may be required to make substantial additional
payments for each strategic alliance secured by Vector. If a sale of the
Company as presented by Vector is consummated, Vector may be entitled to
receive a fee based on the aggregate consideration received by the Company.
NOTE 9 -- INCOME TAXES
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes". Under the liability method, deferred taxes are determined
based on differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates.
As of June 30, 1996, the Company had federal and California tax net operating
loss carryforwards of approximately $23,263,000 and $4,040,000, respectively.
The difference between the federal and California tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for
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<PAGE>
California franchise tax purposes and the fifty percent limitation on
California loss carryforwards. The federal and California tax loss
carryforwards will begin expiring in 2003 and 1996, respectively. The Company
also has federal and California research and development tax credit
carryforwards totaling $665,000 and $152,000, respectively, which will begin
expiring in 2003.
Utilization of the net operating losses and tax credit carryforwards from the
tax years ended on or before June 30, 1992 is subject to an annual limitation
of approximately $1,500,000, due to ownership change limitations provided by
the Internal Revenue Code of 1986 and similar state provisions. Due to the
equity transactions that occurred during the year ended June 30, 1996, the
Company may have had another ownership change pursuant to Internal Revenue
Code Section 382. If the Company is determined to have had such a change or
if there should be future changes of ownership, these annual limitations for
utilization of net operating loss carryforwards and tax credit carryforwards
may become more restrictive. Pursuant to Internal Revenue Code Sections 382
and 383, use of the Company's net operating loss carryforwards may be limited
if a cumulative change in ownership of more than 50% occurs within any three
year period since the last ownership change.
Significant components of the Company's deferred tax assets as of June 30,
1996 and June 30, 1995 are shown below. The valuation allowance related to
deferred tax assets is $10,847,000 and $9,079,000 for the years ended June
30, 1996 and 1995, respectively. The increase in the valuation allowance for
the year ended June 30, 1996 of $1,768,000 is primarily due to additional
reserves required for new deferred tax assets.
Deferred tax assets:
June 30,
------------------------
1996 1995
------------ ----------
Net operating loss carryforwards $ 8,285,000 $ 6,836,000
Capital loss carryforwards 23,000 --
Research and development credits 817,000 817,000
Capitalized research and development costs 1,244,000 980,000
Settlement with Alkermes, Inc. 433,000 430,000
Other-net 45,000 16,000
------------ -----------
Net deferred tax assets 10,847,000 9,079,000
------------ -----------
Valuation allowance for deferred tax assets (10,847,000) (9,079,000)
------------ -----------
Total deferred tax assets $ -- $ --
============ ===========
NOTE 10 -- SUBSEQUENT EVENTS
In October 1996, the Board of Directors designated 500 shares of a new series
of preferred stock, the Series D Convertible Preferred Stock ("Series D
Preferred"). Each share of Series D Preferred is convertible into common
stock in accordance with a formula that is indexed to the average bid price
of the Company's common shares. Holders of the Series D Preferred have a
liquidation preference, after payment of full liquidation preference to
holders of the 9% Preferred, Series B Preferred and Series C Preferred, of an
amount equal to $10,000 per share, plus $600 per share for each year that
such share is outstanding. Shares of Series D Preferred automatically convert
into common stock on that date which is two years from the date of issuance
of such shares.
On October 15, 1996, the Company completed the first tranche of a
three-tranche Regulation D private placement of Series D Preferred. The
Company sold 100 shares of Series D Preferred at a price of $10,000 per
share, for gross proceeds of $1,000,000. The Series D Preferred issued in
this tranche is convertible at an effective per share conversion price that
is the lower of (i) 110% of the average closing bid price for the five
trading days immediately preceding the closing date ($2.9425 for the first
tranche) or (ii) that price that is 18% below the average closing bid price
for the five trading days immediately preceding the conversion date, in each
case subject to adjustment at the rate of six percent per annum based on the
length of the period from issuance of the Series D Preferred until its
conversion. The Company is preparing a registration statement covering
resales of common stock issuable upon conversion of the Series D Preferred,
and is to sell a second tranche of 150 shares of Series D Preferred (for
gross proceeds of $1,500,000) 15 days following the effectiveness of such
registration statement and a third tranche of
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<PAGE>
150 shares 60 days following the closing of the second tranche. The closing
of the second and third tranches is subject to certain conditions, which
conditions are outside the control of the investor, including but not limited
to minimums for price and trading volume of the Company's common stock.
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<PAGE>
[This page intentionally left blank]
<PAGE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THE OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
ANY OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
================
TABLE OF CONTENTS
PAGE
----
Prospectus Summary. . . . . . . . . . . . . . . . 3
Risk Factors. . . . . . . . . . . . . . . . . . . 5
Use of Proceeds. . . . . . . . . . . . . . . . . 8
Price Range of Common Stock. . . . . . . . . . . 8
Dividend Policy. . . . . . . . . . . . . . . . . 8
Capitalization. . . . . . . . . . . . . . . . . . 9
Selected Financial Data. . . . . . . . . . . . . 11
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations. . . . . . . . . . . . . . . . . . 13
Business. . . . . . . . . . . . . . . . . . . . . 16
Management. . . . . . . . . . . . . . . . . . . . 25
Certain Transactions. . . . . . . . . . . . . . . 31
Principal Stockholders. . . . . . . . . . . . . . 32
Description of Securities. . . . . . . . . . . . 33
Selling Stockholders. . . . . . . . . . . . . . . 36
Plan of Distribution. . . . . . . . . . . . . . . 36
Legal Matters. . . . . . . . . . . . . . . . . . 37
Experts. . . . . . . . . . . . . . . . . . . . . 37
Index to Financial Statements. . . . . . . . . . F-1
Report of Independent Auditors. . . . . . . . . . F-2
Financial Statements. . . . . . . . . . . . . . . F-3
==============
3,801,918 SHARES
CORTEX PHARMACEUTICALS, INC.
COMMON STOCK
=============
PROSPECTUS
=============
________, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law makes provision for the
indemnification of officers and directors in terms sufficiently broad as to
include indemnification under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under the Securities
Act of 1933, as amended (the "Act"). The Restated Certificate of
Incorporation of the Company provides that the Company shall indemnify
officers and directors to the fullest extent permitted by statute.
In addition, as permitted by Section 102(b)(7) of the Delaware Corporation
Law, the Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be liable to the Company or its
stockholders for monetary damages for breach of the director's fiduciary duty
of care. However, as provided by Delaware law, such limitation of liability
will not act to limit liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for any acts or omissions
not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) arising under the provision of the Delaware General
Corporation Law relating to unlawful distributions, or (iv) for any
transaction from which the director derived an improper benefit.
The Company has entered into indemnification agreements with each of its
directors and officers, which provide for the indemnification of directors
and officers of the Company against any and all expenses, judgements, fines,
penalties and amounts paid in settlement, to the fullest extent permitted by
law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses of this offering
(excluding commissions). All of the amounts shown are estimates except the
Securities and Exchange Commission registration fee.
Amount
---------
SEC Registration Fee. . . . . . . . . $ 3,528
Accounting Fees and Expenses. . . . . 7,500
Legal Fees and Expenses. . . . . . . 5,000
Miscellaneous. . . . . . . . . . . . 5,000
--------
$21,028
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following consists of information relating to unregistered securities
sold by the Company during the past three years. Numbers of shares have been
revised to reflect a one-for-five reverse stock split that was effected
January 11, 1995.
1. On December 1, 1993, the Company sold an aggregate of 2,750,000
shares of Common Stock to 39 accredited investors for an
aggregate of $13,750,000, and issued a warrant to purchase
274,200 shares of Common Stock to Vector, who acted as placement
agent for the transaction.
2. On November 29, 1994, the Company issued a warrant to purchase
38,293 shares of Common Stock to Vector, in connection with
Vector's assistance with corporate partnering activities.
3. On January 20, 1995, the Company issued a warrant to purchase
50,000 shares of Common Stock to Vector, in connection with their
assistance in negotiating a resolution to the dispute with
Alkermes, Inc.
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<PAGE>
4. On December 8, 1995, the Company sold an aggregate of 160 shares
of Series C Preferred Stock to 12 overseas investors for gross
proceeds of $4,000,000.
5. On December 8, 1995, the Company issued a warrant to purchase
106,195 shares of Common Stock to Swartz Investments, Inc. in
connection with their assistance with the foregoing placement.
6. On October 15, 1996, the Company sold 100 shares of Series D
Preferred Stock to one accredited investor for gross proceeds of
$1,000,000.
The foregoing sales of securities described in paragraphs 1,2,3,5 and 6 above
were made in reliance upon the exemption from the registration provisions of
the Securities Act of 1933 set forth in Section 4(2) thereof as transactions
by an issuer not involving any public offering. The Company has reason to
believe that all of the foregoing purchasers were familiar with or had access
to information concerning the operations and financial condition of the
Company, and each of the purchasers acquiring securities in exchange for cash
consideration represented that it was acquiring the shares for investment and
not with a view to the distribution thereof. At the time of issuance, all of
the foregoing shares of Common Stock were deemed to be restricted securities
for purposes of the Securities Act of 1933 and the certificates representing
such securities bear legends to that effect. The foregoing sale of securities
described in paragraph 4 above was made pursuant to Regulation S under the
Securities Act of 1933.
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
3.1 Restated Certificate of Incorporation dated April 11, 1989, as amended
by Certificate of Amendment on June 27, 1989, by Certificate of
Designation filed April 29, 1991, by Certificate of Correction filed
May 1, 1991, by Certificate of Amendment of Certificate of Designation
filed June 13, 1991, by Certificate of Amendment of Certificate of
Incorporation filed November 12, 1992, by Certificate of Amendment of
Restated Certificate of Incorporation filed January 11, 1995, by
Certificate of Designation filed December 8, 1995, and by Certificate
of Designation filed October 15, 1996, incorporated by reference to the
same numbered Exhibit to the Company's Quarterly Report on Form
10-QSB filed November 12, 1996.
3.2 By-Laws of the Company, as adopted March 4, 1987, and amended through
October 8, 1996, incorporated by reference to the Company's Annual
Report on Form 10-KSB filed October 15, 1996.
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation, Counsel to the Registrant.**
10.2 Consulting Agreement, dated October 30, 1987, between the Company and
Carl W. Cotman, Ph.D. *
10.3 Consulting Agreement, dated as October 30, 1987, between the Company
and Gary S. Lynch, Ph.D. *
10.8 1989 Incentive Stock Option, Nonqualified Stock Option and Stock
Purchase Plan. *
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan. *
10.18 License Agreement, dated February 11, 1991 between the Company
and Georgia Tech Research Corporation, incorporated by reference
to Exhibit 10.18 of the Company's Amendment on Form 8 filed
November 27, 1991 to the Company's Annual Report on Form 10-K
filed September 30, 1991. (Portions of this Exhibit are omitted
and were filed separately with the Secretary of the Commission
pursuant to the Company's application requesting confidential
treatment under Rule 24b-2 under the Securities Exchange Act of
1934).
10.19 License Agreement dated March 27, 1991 between the Company and
the Regents of the University of California, incorporated by
reference to Exhibit 10.19 of the Company's Amendment on Form 8
filed November 27, 1991 to the Company's Annual Report on Form
10-K filed September 30, 1991. (Portions of this Exhibit are
omitted and were filed separately with the Secretary of the
Commission pursuant to the Company's application requesting
confidential treatment under Rule 24b-2 under the Securities
Exchange Act of 1934).
10.28 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted October 22, 1992,
incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K filed September 16, 1992.
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<PAGE>
10.30 Employment Agreement dated February 4, 1993 between the Company
and Alan A. Steigrod, incorporated by reference to Exhibit 10.30
of the Company's Quarterly Report on Form 10-Q filed May 14,
1992.
10.31 License Agreement dated June 25, 1993 between the Company and the
Regents of the University of California, incorporated by
reference to the Company's Amendment of Annual Report on Form
10-KSB/A filed November 26, 1993. (Portions of this Exhibit are
omitted and were filed separately with the Secretary of the
Commission pursuant to the Company's application requesting
confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934).
10.34 Warrant for the Purchase of shares of common stock dated July 23,
1993 issued to Vector Securities International, Inc.,
incorporated by reference to Exhibit 10.34 of the Company's
Annual Report on Form 10-KSB filed October 13, 1993.
10.36 Amended and Restated Employment Agreement between the Company and
D. Scott Hagen, dated September 1, 1993, incorporated by
reference to Exhibit 10.36 of the Company's Annual Report on Form
10-KSB filed October 13, 1993.
10.36.1 Amendment No. 1, dated January 1, 1995, to the Amended and
Restated Employment Agreement between the Company and D. Scott Hagen,
dated September 1, 1993, incorporated by reference to the same numbered
Exhibit to the Company's Quarterly Report on Form 10-QSB filed April
28, 1995.
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.9 of the Company's
Registration Statement on Form S-8 filed January 28, 1994.
10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 13, 1993, incorporated by
reference to Exhibit 4.8 of the Company's Registration Statement
on Form S-8 filed January 28, 1994.
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement on Form S-8 filed January 28, 1994.
10.44 Lease Agreement, dated January 31, 1994, for the Company's
facilities in Irvine, California, incorporated by reference to
Exhibit 10.44 of the Company's Quarterly Report on Form 10-QSB
filed May 16, 1994.
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted December 15, 1994, incorporated
by reference to Exhibit 4.10 of the Company's Registration Statement
on Form S-8 filed February 8, 1995.
10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 1994, incorporated by reference to
Exhibit 4.9 of the Company's Registration Statement on Form S-8 filed
February 8, 1995.
10.47 Amendment to Executive Stock Plan adopted September 9, 1994,
incorporated by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-KSB filed October 13, 1995.
10.48 Amendment to the Non-Employee Director Formula Grant Plan,
adopted December 15, 1994, incorporated by reference to the same
numbered Exhibit to the Company's Annual Report on Form 10-KSB filed
October 13, 1995.
10.49 Settlement Agreement between the Company and Alkermes, Inc.,
dated October 5, 1995, incorporated by reference to the same
numbered Exhibit to the Company's Annual Report on Form 10-KSB
filed October 13, 1995. (Portions of this Exhibit are omitted and
were filed separately with the Secretary of the Commission
pursuant to the Company's Application requesting confidential
treatment under Rule 406 of the Securities Act of 1933).
10.50 Form of Subscription Agreement entered into with each purchaser
of Series C Preferred Stock, incorporated by reference to
Exhibit 4.1 of the Company's Current Report on Form 8-K filed
December 22, 1995.
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued
to Swartz Investments, Inc., incorporated by reference to
Exhibit 4.3 of the Company's Current Report on Form 8-K filed
December 22, 1995.
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<PAGE>
10.52 Registration Rights Agreement dated December 8, 1995, entered
into with purchasers of Series C Preferred Stock and Swartz
Investments, Inc., incorporated by reference to Exhibit 4.2 of the
Company's Current Report on Form 8-K filed December 22, 1995.
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued to
Vector Securities International, Inc., incorporated by reference to
the same numbered Exhibit to the Company's Pre-Effective Amendment
No. 1 to Post Effective Amendment No. 2 to Registration Statement on
Form SB-2, No. 33-71894, filed January 26, 1996.
10.54 Warrant dated January 20, 1995, to purchase 50,000 shares issued
to Vector Securities International, Inc., incorporated by reference
to the same numbered Exhibit to the Company's Pre-Effective
Amendment No. 1 to Post Effective Amendment No. 2 to Registration
Statement on Form SB-2, No. 33-71894, filed January 26, 1996.
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares
issued to Vector Securities International, Inc., incorporated by
reference to the same numbered Exhibit to the Company's
Pre-Effective Amendment No. 1 to Post Effective Amendment No. 2 to
Registration Statement on Form SB-2, No. 33-71894, filed January
26, 1996.
10.56 Employment Agreement dated May 15, 1996, between the Company and
Vincent F. Simmon, Ph.D., incorporated by reference to the same
numbered Exhibit to the Company's Current Report on Form 8-K
filed June 4, 1996.
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted December 12, 1995,
incorporated by reference to Exhibit 4.11 of the Company's
Registration Statement on Form S-8 filed September 13, 1996.
10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 12, 1995, incorporated by
reference to Exhibit 4.10 of the Company's Registration Statement
on Form S-8 filed September 13, 1996.
10.59 Securities Subscription Agreement for Series D Preferred Stock dated
October 15, 1996, between the Company and Ashline Ltd., incorporated
by reference to the same numbered Exhibit to the Company's Quarterly
Report on Form 10-QSB filed November 12, 1996.
10.60 1996 Stock Incentive Plan, incorporated by reference to the same
numbered Exhibit to the Company's Quarterly Report on Form 10-QSB
filed November 12, 1996.
21 Subsidiaries of the Registrant.**
23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.1).**
23.2 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney.**
27 Financial Data Schedule.**
_____________
* Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form S-1, No. 33-28284, effective
on July 18, 1989.
** Previously filed.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
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 Securities Act of 1933 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.
For purposes of determining any liability under the Securities Act, the
Registrant will treat the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective;
and will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as
the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on
behalf of the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 17th day of December, 1996.
CORTEX PHARMACEUTICALS, INC.
By: /s/ Vincent F. Simmon, Ph.D.
-------------------------------------
Vincent F. Simmon, Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- -----
*
__________________________ Director December 17, 1996
Robert F. Allnutt
*
__________________________ Director December 17, 1996
Jerome M. Arnold
*
__________________________ Director December 17, 1996
Carl W. Cotman, Ph.D.
*
__________________________ Director December 17, 1996
Michael G. Grey
S-1
<PAGE>
/s/ D. Scott Hagen
__________________________ Vice President, Chief December 17, 1996
D. Scott Hagen Financial Officer
and Secretary
(Principal Financial and
Acounting Officer)
*
__________________________ Chairman of the Board December 17, 1996
Harvey S. Sadow, Ph.D. and Director
/s/ Vincent F. Simmon, Ph.D.
__________________________ President and Chief December 17, 1996
Vincent F. Simmon, Ph.D. Executive Officer,
Director
(Principal Executive
Officer)
*
__________________________ Director December 17, 1996
Davis L. Temple, Jr., Ph.D.
/s/ D. Scott Hagen
__________________________________
* D. Scott Hagen, Attorney-in-fact
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------
3.1 Restated Certificate of Incorporation dated April
11, 1989, as amended by Certificate of Amendment of
June 27, 1989, by Certificate of Designation filed
April 29, 1991, by Certificate of Correction filed
May 1, 1991, by Certificate of Amendment of
Certificate of Designation filed June 13, 1991, by
Certificate of Amendment of Certificate of
Incorporation filed November 12, 1992, by
Certificate of Amendment of Restated Certificate
of Incorporation filed January 11, 1995, by
Certificate of Designation filed December 8, 1995,
and by Certificate of Designation filed
October 15, 1996, incorporated by reference to the
same numbered Exhibit to the Company's Quarterly
Report on Form 10-QSB filed November 12, 1996.
3.2 By-Laws of the Company, as adopted March 4, 1987, and
amended through October 8, 1996, incorporated by
reference to the Company's Annual Report on Form
10-KSB filed October 15, 1996.
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a
Professional Corporation, Counsel to the Registrant.**
10.2 Consulting Agreement, dated October 30, 1987, between
the Company and Carl W. Cotman, Ph.D. *
10.3 Consulting Agreement, dated as October 30, 1987,
between the Company and Gary S. Lynch, Ph.D. *
10.8 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan. *
10.9 1989 Special Nonqualified Stock Option and Stock
Purchase Plan. *
10.18 License Agreement, dated February 11, 1991 between
the Company and Georgia Tech Research Corporation,
incorporated by reference to Exhibit 10.18 of the
Company's Amendment on Form 8 filed November 27,
1991 to the Company's Annual Report on Form 10-K
filed September 30, 1991. (Portions of this Exhibit
are omitted and were filed separately with the
Secretary of the Commission pursuant to the Company's
application requesting confidential treatment under
Rule 24b-2 under the Securities Exchange Act of 1934).
10.19 License Agreement dated March 27, 1991 between the
Company and the Regents of the University of California,
incorporated by reference to Exhibit 10.19 of the
Company's Amendment on Form 8 filed November 27, 1991
to the Company's Annual Report on Form 10-K filed
September 30, 1991. (Portions of this Exhibit are
omitted and were filed separately with the Secretary
of the Commission pursuant to the Company's application
requesting confidential treatment under Rule 24b-2
under the Securities Exchange Act of 1934).
10.28 Amendment to 1989 Incentive Stock Option, Nonqualified
Stock Option and Stock Purchase Plan adopted October
22, 1992, incorporated by reference to Exhibit 10.28
of the Company's Annual Report on Form 10-K filed
September 16, 1992.
10.30 Employment Agreement dated February 4, 1993 between the
Company and Alan A. Steigrod, incorporated by reference
to Exhibit 10.30 of the Company's Quarterly Report on
Form 10-Q filed May 14, 1992.
10.31 License Agreement dated June 25, 1993 between the Company
and the Regents of the University of California,
incorporated by reference to the Company's Amendment of
Annual Report on Form 10-KSB/A filed November 26, 1993.
(Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant
to the Company's application requesting confidential
treatment under Rule 24b-2 of the Securities Exchange
Act of 1934).
EXH-1
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------
10.34 Warrant for the Purchase of shares of common stock
dated July 23, 1993 issued to Vector Securities
International, Inc., incorporated by reference to
Exhibit 10.34 of the Company's Annual Report on
Form 10-KSB filed October 13, 1993.
10.36 Amended and Restated Employment Agreement between
the Company and D. Scott Hagen, dated September 1,
1993, incorporated by reference to Exhibit 10.36
of the Company's Annual Report on Form 10-KSB
filed October 13, 1993.
10.36.1 Amendment No. 1, dated January 1, 1995, to the
Amended and Restated Employment Agreement between
the Company and D. Scott Hagen, dated September
1, 1993, incorporated by reference to the
same numbered Exhibit to the Company's Quarterly
Report on Form 10-QSB filed April 28, 1995.
10.41 Amendment to 1989 Incentive Stock Option,
Nonqualified Stock Option and Stock Purchase Plan
adopted December 13, 1993, incorporated by reference
to Exhibit 4.9 of the Company's Registration Statement
on Form S-8 filed January 28, 1994.
10.42 Amendment to 1989 Special Nonqualified Stock Option
and Stock Purchase Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.8 of the
Company's Registration Statement on Form S-8 filed
January 28, 1994.
10.43 Amendment to Executive Stock Plan adopted December 13,
1993, incorporated by reference to Exhibit 4.7 of the
Company's Registration Statement on Form S-8 filed
January 28, 1994.
10.44 Lease Agreement, dated January 31, 1994, for the
Company's facilities in Irvine, California,
incorporated by reference to Exhibit 10.44 of the
Company's Quarterly Report on Form 10-QSB filed
May 16, 1994.
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified
Stock Option and Stock Purchase Plan adopted December 15,
1994, incorporated by reference to Exhibit 4.10 of the
Company's Registration Statement on Form S-8 filed
February 8, 1995.
10.46 Amendment to 1989 Special Nonqualified Stock Option
and Stock Purchase Plan adopted December 1994,
incorporated by reference to Exhibit 4.9 of the
Company's Registration Statement on Form S-8 filed
February 8, 1995.
10.47 Amendment to Executive Stock Plan adopted September
9, 1994, incorporated by reference to the same
numbered Exhibit to the Company's Annual Report
on Form 10-KSB filed October 13, 1995.
10.48 Amendment to the Non-Employee Director Formula Grant
Plan, adopted December 15, 1994, incorporated by
reference to the same numbered Exhibit to the Company's
Annual Report on Form 10-KSB filed October 13, 1995.
10.49 Settlement Agreement between the Company and Alkermes,
Inc., dated October 5, 1995, incorporated by reference
to the same numbered Exhibit to the Company's Annual
Report on Form 10-KSB filed October 13, 1995.
(Portions of this Exhibit are omitted and were
filed separately with the Secretary of the Commission
pursuant to the Company's Application requesting
confidential treatment under Rule 406 of the Securities
Act of 1933).
10.50 Form of Subscription Agreement entered into with each
purchaser of Series C Preferred Stock, incorporated by
reference to Exhibit 4.1 of the Company's Current Report
on Form 8-K filed December 22, 1995.
EXH-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------
10.51 Warrant dated December 8, 1995, to purchase 106,195
shares issued to Swartz Investments, Inc., incorporated
by reference to Exhibit 4.3 of the Company's Current
Report on Form 8-K filed December 22, 1995.
10.52 Registration Rights Agreement dated December 8, 1995, entered
into with purchasers of Series C Preferred Stock and
Swartz Investments, Inc., incorporated by reference
to Exhibit 4.2 of the Company's Current Report on
Form 8-K filed December 22, 1995.
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares
issued to Vector Securities International, Inc., incorporated
by reference to the same numbered Exhibit to the Company's
Pre-Effective Amendment No. 1 to Post Effective Amendment
No. 2 to Registration Statement on Form SB-2, No. 33-71894,
filed January 26, 1996.
10.54 Warrant dated January 20, 1995, to purchase 50,000 shares
issued to Vector Securities International, Inc., incorporated
by reference to the same numbered Exhibit to the Company's
Pre-Effective Amendment No. 1 to Post Effective Amendment
No. 2 to Registration Statement on Form SB-2, No. 33-71894,
filed January 26, 1996.
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares
issued to Vector Securities International, Inc., incorporated
by reference to the same numbered Exhibit to the Company's
Pre-Effective Amendment No. 1 to Post Effective Amendment
No. 2 to Registration Statement on Form SB-2, No. 33-71894,
filed January 26, 1996.
10.56 Employment Agreement dated May 15, 1996, between the
Company and Vincent F. Simmon, Ph.D., incorporated by
reference to the same numbered Exhibit to the Company's
Current Report on Form 8-K filed June 4, 1996.
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified
Stock Option and Stock Purchase Plan adopted December 12,
1995, incorporated by reference to Exhibit 4.11 of the
Company's Registration Statement on Form S-8 filed September
13, 1996.
10.58 Amendment to 1989 Special Nonqualified Stock Option and
Stock Purchase Plan adopted December 12, 1995, incorporated
by reference to Exhibit 4.10 of the Company's Registration
Statement on Form S-8 filed September 13, 1996.
10.59 Securities Subscription Agreement of Series D Preferred Stock
dated October 15, 1996, between the Company and Ashline Ltd.,
incorporated by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-QSB filed November 12,
1996.
10.60 1996 Stock Incentive Plan, incorporated by reference to the
same numbered Exhibit to the Company's Quarterly Report on
Form 10-QSB filed November 12, 1996.
21 Subsidiaries of the Registrant.**
23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.1).**
23.2 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney.**
27 Financial Data Schedule.**
____________
* Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form S-1, No. 33-28284, effective
on July 18, 1989.
** Previously filed.
<PAGE>
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated July 26,
1996 (except Note 10, as to which the date is October 15, 1996) in the
Pre-Effective Amendment No. 1 to the Registration Statement (Form SB-2, No.
333-16071), and related Prospectus of Cortex Pharmaceuticals, Inc. for the
Registration of 3,801,918 shares of its common stock.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
December 14, 1996
