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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
X Annual Report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the fiscal year ended June 30, 1996
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OR
Transition Report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the transition period from to
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Commission file number 0-17951
CORTEX PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
Delaware 33-0303583
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15241 Barranca Parkway, Irvine, California, 92618
(Address of principal executive offices, including zip code)
(714) 727-3157
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
(Titles of Classes)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days. YES X
NO -----
-----
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
-----
Revenues for the issuer's most recent fiscal year were $0. The aggregate market
value of the voting stock held by non-affiliates as of June 30, 1996 was
$32,305,770 (based on the last sale price of the common stock as reported by
Nasdaq).
As of September 30, 1996, there were 7,589,270 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of the registrant's definitive proxy statement for the Annual
Meeting of Stockholders to be held on December 12, 1996.
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters . . . . 14
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 15
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 18
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . 18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.. . . . . . . 18
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 18
Item 11. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 12. Certain Relationships and Related Transactions . . . . . . . . . 18
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
EXHIBIT INDEX AND EXHIBITS. . . . . . (Attached to this Report on Form 10-KSB)
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INTRODUCTORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include statements regarding (i) future research
plans, expenditures and results, (ii) potential collaborative arrangements,
(iii) the potential utility of the Company's proposed products, and (iv) the
need for, and availability of, additional financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive 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, actual results may differ
materially from those set forth in the 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
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 great 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, thes 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
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the research and early development of novel pharmaceuticals (where it believes
that it has a competitive advantage), and to eventually 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
prominant 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. According to
a General Accounting Office study, in 1985 approximately 3,900,000 Americans had
deficits severe enough to greatly interfere with daily activity. 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.
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.
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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."
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.
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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
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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.
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
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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 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.
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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 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
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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 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,
11
<PAGE>
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.
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
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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.
HUMAN RESOURCES
As of August 31, 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.
ITEM 2. DESCRIPTION OF PROPERTY
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1996, through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (Nasdaq symbol: CORX) began trading publicly in the
over-the-counter market on July 18, 1989 and is currently traded on the Nasdaq
Small-Cap Market. 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, 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 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 June 30, 1996, there were 568 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 October 9, 1996, as reported by Nasdaq, was $2
3/4.
The Company has never paid cash dividends on its 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
rate of $0.09 per share per annum, which accrue 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. The Company paid the
semiannual dividends on the 9% Preferred Stock that accrued on June 15 and
December 15, 1989, but elected not to distribute subsequent dividends in order
to conserve capital for operations. At June 30, 1996, accrued and unpaid
dividends on the 9% Preferred Stock totaled $64,350. The payment of future
dividends, if any, will be determined by the Board of Directors in light of
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; PLAN OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN.
RESULTS OF OPERATIONS
From inception (February 10, 1987) through June 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 $1,333,000, and (iii) $95,000 of grant
revenue.
From inception (February 10, 1987) through June 30, 1996, the Company has
sustained losses aggregating $25,220,000. 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-stage
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 fluctuations 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 the commencement of Phase I 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.
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PLAN OF OPERATION; 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 June 30, 1996 aggregating $28 million. An
additional $3.6 million in research and license payments was received from
Alkermes between in 1992 and 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 June 30, 1996, which approximates funds received,
was $1.3 million.
As of June 30, 1996, the Company had cash, cash equivalents and short-term
investments totaling $4.1 million and working capital of $3.8 million. In
comparison, as of June 30, 1995, the Company had cash, cash equivalents and
short-term investments of $3.8 million and working capital of $3.3 million. The
increases resulted from approximately $3.6 million received from a private
placement of Series C Preferred Stock completed in December 1995, partially
offset by amounts required to fund operating losses and to purchase capital
equipment. From inception (February 10, 1987) through June 30, 1996, net
expenditures for furniture, equipment and leasehold improvements aggregated
$1.9 million.
As of June 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 June 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 June 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 ("Subsequent Events") of the accompanying Financial
Statements.
Cortex anticipates that its existing cash, cash equivalents and short-term
investments, combined the proceeds from 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.
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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
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.
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ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company and other information required by this
item are set forth herein in a separate section beginning with the Index to
Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The sections entitled "Nominees for Director," "Executive Officers" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" included
in the Company's Proxy Statement are incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation," "Option Matters," "Employment
and Consulting Agreements" and "Director Compensation" included in the Company's
Proxy Statement are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Principal Stockholders" included in the Company's Proxy
Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" included in the Company's Proxy
Statement is incorporated herein by reference.
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PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) ITEM 601 EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Company, 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 and by Certificate of Designation filed December 8,
1995, incorporated by reference to Exhibit 3.1 of the Company's
Current Report on Form 8-K filed December 22, 1995.
3.2 By-Laws of the Company, as currently in effect.
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).
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. **
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EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
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.
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,
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.
10.51 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,
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.
10.52 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, 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.
10.53 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,
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EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
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 isssued
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.**
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (included on Signature Page).
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.
** Indicates management contract or compensatory plan or arrangement
required to be identified pursuant to Item 13 of Form 10-KSB.
(b) REPORTS ON FORM 8-K
On June 4, 1996, the Company filed a report on Form 8-K to report the
appointment of Vincent F. Simmon, Ph.D., as President and Chief
Executive Officer and member of the Board of Directors of the Company.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORTEX PHARMACEUTICALS, INC.
By: /s/ Vincent F. Simmon
-------------------------
Vincent F. Simmon, Ph.D.
President and Chief Executive Officer
Know all men by these presents, that each person whose signature appears below
constitutes and appoints each of Vincent F. Simmon, Ph.D. and D. Scott Hagen,
acting singly, as his true and lawful attorney-in-fact and agent, with full
power of substitution, and for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments to this report, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto each of said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes may lawfully do or cause to be done by virtue
hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Vincent F. Simmon President and Chief October 15, 1996
- ------------------------------ Executive Officer, Director
Vincent F. Simmon, Ph.D.
(Principal Executive Officer)
/s/ D. Scott Hagen Vice President, Chief October 15, 1996
- ------------------------------ Financial Officer and
D. Scott Hagen Secretary
(Principal Financial and
Accounting Officer)
/s/ Harvey S. Sadow Chairman of the Board October 15, 1996
- ------------------------------ and Director
Harvey S. Sadow, Ph.D.
/s/ Jerome M. Arnold Director October 15, 1996
- ------------------------------
Jerome M. Arnold
S-1
<PAGE>
/s/ Carl W. Cotman Director October 15, 1996
- ------------------------------
Carl W. Cotman, Ph.D.
/s/ Michael G. Grey Director October 15, 1996
- ------------------------------
Michael G. Grey
/s/ Davis L. Temple Director October 15, 1996
- ------------------------------
Davis L. Temple, Jr., Ph.D.
/s/ Robert F. Allnutt Director October 15, 1996
- ------------------------------
Robert F. Allnutt
S-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets--As of June 30, 1996 and 1995 . . . . . . . . . . . . F-3
Statements of Operations--For 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 June 30, 1996 . . . . . . F-5
Statements of Cash Flows--For 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
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE STOCKHOLDERS AND BOARD OF DIRECTORS
CORTEX PHARMACEUTICALS, INC.
We have audited the accompanying balance sheets of Cortex Pharmaceuticals, Inc.
as of June 30, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three 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. at
June 30, 1996 and 1995, and the results of its operations and its cash flows for
each of the three 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>
June 30, 1996 June 30, 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,091,550 $ 149,880
U.S. Government securities -- available for sale -- 3,689,356
Other current assets 88,427 92,212
------------ ------------
Total current assets 4,179,977 3,931,448
Furniture, equipment and leasehold improvements, net 807,601 931,794
Other 26,342 23,130
------------ ------------
$ 5,013,920 $ 4,886,372
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 217,332 $ 377,589
Accrued dividends 64,350 183,150
Accrued wages, salaries and related expenses 40,145 35,223
Current obligations under capital lease 8,501 7,698
------------ ------------
Total current liabilities 330,328 603,660
Obligations under capital leases 1,499 10,016
Note payable to Alkermes, Inc. 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: 110,000 110,000 370,000
(1996) and 370,000 (1995)
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
(1996) and 525,000 (1995) 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: 35 (1996) 752,476 --
Common stock, $0.001 par value; shares
authorized: 20,000,000; shares issued and
outstanding: 7,495,576 (1996) and
6,085,201 (1995) 7,496 6,085
Additional paid-in capital 28,048,414 23,957,790
Deferred compensation -- (145,359)
Unrealized loss on available for sale
U.S. Government securities (1,135) (18,606)
Deficit accumulated during the development stage (25,359,298) (21,201,051)
------------ ------------
Total stockholders' equity 3,644,763 3,272,696
------------ ------------
$ 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>
Period from
inception
(February 10,
Years ended June 30, 1987) through
-------------------------------- June 30,
1996 1995 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Research and license revenue under an
agreement with Alkermes, Inc. $ -- $ -- $ 3,600,000
Grant revenue -- -- 94,717
------------ ------------ ------------
Total revenues -- -- 3,694,717
------------ ------------ ------------
Operating expenses:
Research and development 2,677,577 4,138,731 18,969,112
General and administrative 1,643,732 1,665,134 10,050,559
Settlement with Alkermes, Inc. -- 1,227,977 1,227,977
------------ ------------ ------------
Total operating expenses 4,321,309 7,031,842 30,247,648
------------ ------------ ------------
Loss from operations (4,321,309) (7,031,842) (26,552,931)
Interest income, net 163,062 196,310 1,333,307
------------ ------------ ------------
Net loss $ (4,158,247) $ (6,835,532) $ (25,219,624)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding 6,532,884 6,075,454
------------ ------------
------------ ------------
Net loss per share $ (0.64) $ (1.13)
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
9% Series B Series C
convertible convertible convertible Additional
preferred preferred preferred Common paid-in
stock stock stock stock capital
- ------------------------------------------------------------------------------------------------------------------------------
<S> <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
Sale of 500,000 shares of common stock,
$2.50 per share, net of expenses -- -- -- 500 1,076,089
Issuance of 11,000 shares of common stock
for services, $2.50 per share -- -- -- 11 27,489
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1988 -- -- -- 1,931 1,109,258
Conversion of subordinated convertible note
and interest payable into 83,868 shares of
common stock, $2.50 per share -- -- -- 84 209,586
Issuance of 500 shares of common stock for
services, $2.50 per share -- -- -- 1 1,249
Conversion of 5,000 shares of 9% preferred
stock into 3,333 shares of common stock -- -- -- 3 22,903
9% preferred stock dividends -- -- -- -- (55,125)
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1989 -- -- -- 2,019 1,287,871
Initial public offering of 660,000 shares of
common stock, $10.00 per share,
net of expenses -- -- -- 660 5,244,230
Redemption of 70,000 shares of common
stock, $0.005 per share -- -- -- (70) (280)
9% preferred stock dividends -- -- -- -- (110,250)
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1990 -- -- -- 2,609 6,421,571
Sale of 3,181,253 shares of Series B
convertible preferred stock, $0.6667
per share, net of expenses -- 1,841,108 -- -- --
Conversion of 182,200 shares of 9% preferred
stock into 24,293 shares of common stock -- -- -- 24 170,039
Issuance of compensatory stock options -- -- -- -- 330,084
Amortization of deferred compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- (85,653)
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1991 $ -- $ 1,841,108 $ -- $ 2,633 $ 6,836,041
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
compensation securities stage Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 10, 1987
(date of inception) $ -- $ -- $ -- $ --
Sale of 1,420,000 shares of common stock,
$0.005 per share -- -- -- 7,100
Sale of 500,000 shares of common stock,
$2.50 per share, net of expenses -- -- -- 1,076,589
Issuance of 11,000 shares of common stock
for services, $2.50 per share -- -- -- 27,500
9% preferred stock accretion -- -- (2,560) (2,560)
Net loss -- -- (400,193) (400,193)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1988 -- -- (402,753) 708,436
Conversion of subordinated convertible note
and interest payable into 83,868 shares of
common stock, $2.50 per share -- -- -- 209,670
Issuance of 500 shares of common stock for
services, $2.50 per share -- -- -- 1,250
Conversion of 5,000 shares of 9% preferred
stock into 3,333 shares of common stock -- -- -- 22,906
9% preferred stock dividends -- -- -- (55,125)
9% preferred stock accretion -- -- (32,733) (32,733)
Net loss -- -- (1,222,517) (1,222,517)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1989 -- -- (1,658,003) (368,113)
Initial public offering of 660,000 shares of
common stock, $10.00 per share,
net of expenses -- -- -- 5,244,890
Redemption of 70,000 shares of common
stock, $0.005 per share -- -- -- (350)
9% preferred stock dividends -- -- -- (110,250)
9% preferred stock accretion -- -- (33,064) (33,064)
Net loss -- -- (2,187,870) (2,187,870)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1990 -- -- (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
Conversion of 182,200 shares of 9% preferred
stock into 24,293 shares of common stock -- -- -- 170,063
Issuance of compensatory stock options (291,938) -- -- 38,146
Amortization of deferred compensation 90,016 -- -- 90,016
9% preferred stock dividends -- -- -- (85,653)
9% preferred stock accretion -- -- (32,075) (32,075)
Net loss -- -- (2,593,968) (2,593,968)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1991 $ (201,922) $ -- $(6,504,980) $ 1,972,880
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
CONTINUED . . .
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
9% Series B Series C
convertible convertible convertible Additional
preferred preferred preferred Common paid-in
stock stock stock stock capital
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1991 $ -- $ 1,841,108 $ -- $ 2,633 $ 6,836,041
Sale of 150,000 shares of common stock to
Alkermes, Inc., $10.00 per share -- -- -- 150 1,499,850
Conversion of 306,275 shares of 9% preferred
stock into 40,835 shares of common stock -- -- -- 40 335,283
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
Issuance of two shares of common stock upon
exercise of warrants -- -- -- -- 27
Issuance of compensatory stock options -- -- -- -- 24,532
Forfeiture of compensatory stock options -- -- -- -- (146,182)
Amortization of deferred compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- (68,906)
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1992 -- 958,532 -- 3,047 9,473,384
Conversion of 287,150 shares of 9% preferred
stock into 38,287 shares of common stock -- -- -- 38 360,398
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)
Issuance of 30,789 shares of common stock
upon exercise of stock options -- -- -- 31 60,915
Issuance of compensatory stock options -- -- -- -- 350,000
Amortization of deferred compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- (53,028)
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1993 $ -- $ 332,774 $ -- $ 3,210 $10,720,659
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
compensation securities stage Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1991 $ (201,922) $ -- $(6,504,980) $ 1,972,880
Sale of 150,000 shares of common stock to
Alkermes, Inc., $10.00 per share -- -- -- 1,500,000
Conversion of 306,275 shares of 9% preferred
stock into 40,835 shares of common stock -- -- -- 335,323
Conversion of 1,525,003 shares of Series B
preferred stock into 149,629 shares of
common stock -- -- -- --
Issuance of 73,979 shares of common stock
upon exercise of stock options -- -- -- 110,387
Issuance of two shares of common stock upon
exercise of warrants -- -- -- 27
Issuance of compensatory stock options (19,375) -- -- 5,157
Forfeiture of compensatory stock options 146,182 -- -- --
Amortization of deferred compensation 58,567 -- -- 58,567
9% preferred stock dividends -- -- -- (68,906)
9% preferred stock accretion -- -- (23,242) (23,242)
Net loss -- -- (2,354,770) (2,354,770)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1992 (16,548) -- (8,882,992) 1,535,423
Conversion of 287,150 shares of 9% preferred
stock into 38,287 shares of common stock -- -- -- 360,436
Conversion of 1,081,250 shares of Series B
preferred stock into 106,088 shares of
common stock -- -- -- --
Redemption of 12,627 shares of common
stock, $7.65 per share -- -- -- (96,674)
Issuance of 30,789 shares of common stock
upon exercise of stock options -- -- -- 60,946
Issuance of compensatory stock options (280,000) -- -- 70,000
Amortization of deferred compensation 36,897 -- -- 36,897
9% preferred stock dividends -- -- -- (53,028)
9% preferred stock accretion -- -- (16,000) (16,000)
Net loss -- -- (761,536) (761,536)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1993 $ (259,651) $ -- $(9,660,528) $ 1,136,464
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
CONTINUED . . .
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
9% Series B Series C
convertible convertible convertible Additional
preferred preferred preferred Common paid-in
stock stock stock stock capital
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 $ -- $ 332,774 $ -- $ 3,210 $10,720,659
Sale of 2,750,000 shares of common stock,
$5.00 per share, net of expenses -- -- -- 2,750 12,359,611
Sale of 103,577 shares of common stock,
$6.40 per share, net of expenses -- -- -- 104 510,707
Conversion of 15,625 shares of 9% preferred stock
into 2,083 shares of common stock -- -- -- 2 20,545
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
Amortization of deferred compensation -- -- -- -- --
Issuance of 3,401 shares of common stock upon
exercise of stock options -- -- -- 3 6,461
9% preferred stock dividends -- -- -- -- (39,038)
Unrealized loss on available for sale
U.S. Government securities -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1994 -- 303,837 -- 6,074 23,708,502
Reclassification of unredeemed 9%
preferred stock 370,000 -- -- -- --
Issuance of warrants to purchase
265,000 shares of common stock -- -- -- -- 232,746
Adjustment of accrued dividends for
redemption of 9% preferred stock -- -- -- -- 25,819
Issuance of 11,272 shares of common stock
upon exercise of stock options -- -- -- 11 24,023
Amortization of deferred compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- (33,300)
Decrease in unrealized loss on available for
sale U.S. Government securities -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1995 $ 370,000 $ 303,837 $ -- $ 6,085 $23,957,790
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
compensation securities stage Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 $ (259,651) $ -- $(9,660,528) $ 1,136,464
Sale of 2,750,000 shares of common stock,
$5.00 per share, net of expenses -- -- -- 12,362,361
Sale of 103,577 shares of common stock,
$6.40 per share, net of expenses -- -- -- 510,811
Conversion of 15,625 shares of 9% preferred stock
into 2,083 shares of common stock -- -- -- 20,547
Conversion of 50,000 shares of Series B preferred
stock into 4,906 shares of common stock -- -- -- --
Issuance of compensatory stock options -- -- -- 100,625
Amortization of deferred compensation 58,200 -- -- 58,200
Issuance of 3,401 shares of common stock upon
exercise of stock options -- -- -- 6,464
9% preferred stock dividends -- -- -- (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 (201,451) (163,562) (14,365,519) 9,287,881
Reclassification of unredeemed 9%
preferred stock -- -- -- 370,000
Issuance of warrants to purchase
265,000 shares of common stock -- -- -- 232,746
Adjustment of accrued dividends for
redemption of 9% preferred stock -- -- -- 25,819
Issuance of 11,272 shares of common stock
upon exercise of stock options -- -- -- 24,034
Amortization of deferred compensation 56,092 -- -- 56,092
9% preferred stock dividends -- -- -- (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 $ (145,359) $ (18,606) $(21,201,051) $ 3,272,696
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
CONTINUED . . .
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
9% Series B Series C
convertible convertible convertible Additional
preferred preferred preferred Common paid-in
stock stock stock stock capital
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $ 370,000 $ 303,837 $ -- $ 6,085 $23,957,790
Sale of 160 shares of Series C convertible
preferred stock, $25,000 per share, net of
expenses -- -- 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 2,687,414 shares of common stock -- -- (2,687,414) 1,134 2,686,280
Adjustment of accrued dividends for conversion of
9% preferred stock -- -- -- -- 128,700
Issuance of 205,878 shares of common stock upon
exercise of stock options -- -- -- 205 775,185
Amortization of deferred compensation -- -- -- -- --
Reversal of unamortized deferred compensation upon
resignation of Chief Executive Officer -- -- -- -- (103,250)
9% preferred stock dividends -- -- -- -- (9,900)
Unrealized loss on available for sale
U.S. Government securities -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1996 110,000 86,810 752,476 7,496 28,048,414
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
compensation securities stage Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $ (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
Issuance of warrants to purchase 106,195 shares
of common stock -- -- -- --
Conversion of 260,000 shares of 9% preferred stock
into 34,667 shares of common stock -- -- -- --
Conversion of 375,000 shares of Series B preferred
stock into 36,793 shares of common stock -- -- -- --
Conversion of 125 shares of Series C preferred stock
into 2,687,414 shares of common stock -- -- -- --
Adjustment of accrued dividends for conversion of
9% preferred stock -- -- -- 128,700
Issuance of 205,878 shares of common stock upon
exercise of stock options -- -- -- 775,390
Amortization of deferred compensation 42,109 -- -- --
Reversal of unamortized deferred compensation upon
resignation of Chief Executive Officer 103,250 -- -- --
9% preferred stock dividends -- -- -- (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 -- (1,135) (25,359,298) 3,644,763
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
inception
(February 10,
Years ended June 30, 1987) through
--------------------------------- June 30,
1996 1995 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
NET LOSS $ (4,158,247) $ (6,835,532) $(25,219,624)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 230,224 208,928 1,109,022
Settlement with Alkermes, Inc. -- 1,227,977 1,227,977
Changes in operating assets/liabilities:
Accounts payable and accrued expenses (155,335) (131,886) 257,477
Accrued interest on U.S. Government securities (131,895) 52,014 (149,856)
Other current assets 3,785 26,677 (88,427)
Interest receivable from former officer -- -- (19,274)
Realized loss on sale of U.S. Government securities 1,270 53,047 54,317
Stock option compensation expense 42,109 56,092 555,809
Stock issued for services -- -- 28,750
Reduction in note receivable from former
officer -- compensation expense -- -- 22,600
Changes in other assets and other long term
liabilities 37,330 4,769 45,319
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (4,130,759) (5,337,914) (22,175,910)
------------ ------------ ------------
Cash flows from investing activities:
U.S. Government securities -- available for sale
Purchases (19,298,746) (3,868,775) (36,146,416)
Sales 23,136,197 9,642,408 36,240,820
Purchase of fixed assets (108,807) (401,912) (1,887,347)
Sale of fixed assets 2,777 -- 10,236
Decrease (increase) in --
Other assets (3,212) 1,092 (43,082)
Note receivable from former officer -- -- (100,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,728,209 5,372,813 (1,925,789)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 775,391 24,034 21,678,650
Redemption of 9% preferred stock -- (63,750) (63,750)
Principal payments on capitalized leases (7,714) (6,259) (13,973)
Proceeds from issuance of Series B
convertible preferred stock -- -- 1,841,108
Proceeds from issuance of 9% preferred stock -- -- 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
Payment of 9% preferred stock dividends -- -- (110,250)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,344,220 (45,975) 28,193,249
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 3,941,670 (11,076) 4,091,550
Cash and cash equivalents, beginning of period 149,880 160,956 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 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 June 30, 1996
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
June 30, 1996, the Company has generated only modest operating revenues and
has incurred losses aggregating $25,219,624. Successful completion of the
Company's development program and it 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 parnership
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 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.
F-10
<PAGE>
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 asset 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:
June 30,
1996 1995
-------------------------
Laboratory equipment $990,329 $963,169
Leasehold improvements 619,566 575,367
Furniture and equipment 89,773 89,773
Computers and software 193,372 158,700
---------- ----------
1,893,040 1,787,009
Accumulated depreciation (1,085,439) (855,215)
---------- ----------
$ 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"); 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.
The 9% Cumulative Convertible Preferred Stock as of June 30, 1996 and 1995
consisted of 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
F-11
<PAGE>
or stock dividends. Cash dividends on the 9% Preferred accrue semiannually 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 June 30, 1996 and 1995 were $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 June 30, 1996 and 1995 consisted of
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 June 30, 1996 consisted of 35 shares 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 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.
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.
F-12
<PAGE>
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 June 30, 1996, 339,119 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 895,931 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
June 30, 1996, options to purchase an aggregate of 542,524 shares of common
stock were outstanding under this plan, and an additional 53,854 shares of
common stock 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 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 June 30, 1996,
options to purchase an aggregate of 343,407 shares of common stock were
outstanding under this plan, and an additional 16,026 shares of common stock
were reserved for future option grants.
F-13
<PAGE>
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 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 June 30, 1996, options to purchase an aggregate of 361,552 shares of
common stock 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 $42,109, $56,092 and $555,809 for 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 are summarized below:
Number Exercise price
of shares per share
-------------------------------
Outstanding as of June 30, 1994 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
----------- -------------
----------- -------------
Available for future grant 278,751
-----------
-----------
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
F-14
<PAGE>
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 years
ended June 30, 1996 and 1995 and the period from inception (February 10, 1987)
through June 30, 1996 was $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 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
F-15
<PAGE>
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 the1993 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 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.
F-16
<PAGE>
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 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 shares 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 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.
F-17
<PAGE>
CORTEX PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-KSB
YEAR ENDED JUNE 30, 1996
EXHIBIT INDEX
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 and by Certificate
of Designation filed December 8, 1995, incorporated by
reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K filed December 22, 1995.
3.2 By-Laws of the Company, as currently in effect.
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).
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
EXH-1
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
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.
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 numberd 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, 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.
10.51 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, incorporated
by reference to the same numbered Exhibit to the 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.
10.52 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, 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.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
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.
10.57 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.**
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (included on Signature Page).
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.
** Indicates management contract or compensatory plan or arrangement
required to be identified pursuant to Item 13 of Form 10-KSB.
<PAGE>
BY-LAWS EXHIBIT 3.2
OF
CORTEX PHARMACEUTICALS, INC.
AS ADOPTED MARCH 4, 1987
AND AMENDED THROUGH OCTOBER 8, 1996
<PAGE>
CORTEX PHARMACEUTICALS, INC.
A DELAWARE CORPORATION
BY-LAWS
_______________________
ARTICLE I
STOCKHOLDERS
Section 1.1 ANNUAL MEETING.
An annual meeting of stockholders for the purpose of electing directors and
of transacting such other business as may come before it shall be held each year
at such date, time, and place, either within or without the State of Delaware,
as may be specified by the Board of Directors.
Section 1.2 SPECIAL MEETINGS.
Special meeting of stockholders for any purpose or purposes may be held at
any time upon call of the Chairman or the Board, if any, the President, the
Secretary, or a majority of the Board of Directors, at such time and place
either within or without the State of Delaware as may be stated in the notice.
A special meeting of stockholders shall be called by the President or the
Secretary upon the written request, stating time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record a majority
of the outstanding stock of all classes entitled to vote at such meeting.
Section 1.3 NOTICE OF MEETINGS.
Written notice of stockholders meetings, stating the place, date, and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be
<PAGE>
given by the Chairman of the Board, if any, the President, any Vice President,
the Secretary, or an Assistant Secretary, to each stockholder entitled to vote
thereat at least 10 days but not more than 60 days before the date of the
meeting, unless a different period is prescribed by law.
Section 1.4 QUORUM.
Except as otherwise provided by law or in the Certificate of Incorporation
or these By-Laws, at any meeting of stockholders, the holders of a majority of
the outstanding shares of each class of stock entitled to vote at the meeting
shall be present or represented by proxy in order to constitute a quorum for the
transaction of any business. In the absence of a quorum, a majority in interest
of the stockholders present or the chairman of the meeting may adjourn the
meeting from time to time in the manner provided in Section 1.5 of these By-Laws
until a quorum shall attend.
Section 1.5 ADJOURNMENT.
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
2
<PAGE>
Section 1.6 ORGANIZATION.
The Chairman of the Board, if any, or in his absence the President, or in
their absence any Vice President, shall call to order meetings of stockholders
and shall act as chairman of such meetings. The Board of Directors or, if the
Board fails to act, the stockholders may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the President, and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.
Section 1.7 VOTING.
Except as otherwise provided by law or in the Certificate of Incorporation
or these By-Laws and except for the election of directors, at any meeting duly
called and held at which a quorum is present, a majority of the votes cast at
such meeting upon a given question by the holders of outstanding shares of stock
of all classes of stock of the Corporation entitled to vote thereon who are
present in person or by proxy shall decide such question. At any meeting duly
called and held for the election of directors at which a quorum is present,
directors shall be elected by a plurality of the votes cast by the holders
(acting as such) of shares of stock of the Corporation entitled to elect such
directors.
3
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 NUMBER AND TERM OF OFFICE.
The business, property, and affairs of the Corporation shall be managed by
or under the direction of a Board of one director; provided, however, that the
Board, by resolution adopted by vote of a majority of the then authorized number
of directors, may increase or decrease the number of directors. The directors
shall be elected by the holders of shares entitled to vote thereon at the annual
meeting of stockholders, and each shall serve (subject to the provisions of
Article IV) until the next succeeding annual meeting of stockholders and until
his respective successor has been elected and qualified.
Section 2.2 CHAIRMAN OF THE BOARD.
The directors may elect one of their members to be Chairman of the Board of
Directors. The Chairman shall be subject to the control of and may be removed
by the Board of Directors. He shall perform such duties as may from time to
time be assigned to him by the Board.
Section 2.3 MEETINGS.
Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time and
place as shall be designated in the notice of the meeting whenever called by the
Chairman of the Board, if any, the President, or by a majority of the directors
then in office.
4
<PAGE>
Section 2.4 NOTICE OF SPECIAL MEETINGS.
The Secretary, or in his absence any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail at least three days before the
meeting, or by telegram, cable, radiogram, or personal service at least one day
before the meeting. Unless otherwise stated in the notice thereof, any and all
business may be transacted at any meeting without specification of such business
in the notice.
Section 2.5 QUORUM AND ORGANIZATION OF MEETINGS.
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except
as otherwise provided by law or in the Certificate of Incorporation or these By-
Laws, a majority of the directors present at any meeting at which a quorum is
present may decide any question brought before such meeting. Meetings shall be
presided over by the Chairman of the Board, if any, or in his absence by the
President, or in the absence of both by such other person as the directors may
select. The Secretary of the Corporation shall act as secretary of the meeting,
but in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
Section 2.6 COMMITTEES.
The Board of Directors may designate one or more committees, each committee
to consist of one or more of the directors of the Corporation. The Board may
designate one or more
5
<PAGE>
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members present at
any meeting and not disqualified from voting, whether or not such member or
members constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business,
property, and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to the following
matters: (i) approving or adopting, or recommending to the stockholders, any
action or matter expressly required by the Delaware General Corporation Law to
be submitted to stockholders for approval or (ii) adopting, amending or
repealing any by-law of the Corporation. Each committee which may be
established by the Board of Directors pursuant to these By-Laws may fix its own
rules and procedures. Notice of meetings of committees, other than of regular
meetings provided for by the rules, shall be given to committee members. All
action taken by committee shall be recorded in minutes of the meetings.
Section 2.7 ACTION WITHOUT MEETING.
Nothing contained in these By-Laws shall be deemed to restrict the power of
members of the Board of Directors or any committee designated by the Board to
take any action required or permitted to be taken by them without a meeting.
6
<PAGE>
Section 2.8 TELEPHONE MEETINGS.
Nothing contained in these By-Laws shall be deemed to restrict the power of
members of the Board of Directors, or any committee designated by the Board, to
participate in a meeting of the Board, or committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
ARTICLE III
OFFICERS
Section 3.1 EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a President, one or more
Vice Presidents, a Treasurer, and a Secretary, each of whom shall be elected by
the Board of Directors. The Board of Directors may elect or appoint such other
officers (including a Controller and one or more Assistant Treasurers and
Assistant Secretaries) as it may deem necessary or desirable. Each officer
shall hold office for such term as may be prescribed by the Board of Directors
from time to time. Any person may hold at one time two or more offices.
Section 3.2 POWERS AND DUTIES.
The Chairman of the Board, if any, or, in his absence, the President, shall
preside at all meetings of the stockholders and of the Board of Directors. The
President shall be the chief executive officer of the Corporation. In the
absence of the President, a Vice President appointed by the President or, if the
President fails to make such appointment, by the Board, shall perform all the
duties of the chief executive officer. The officers and agents of the
Corporation shall each have such powers and authority and shall perform such
duties in the management of the business, property, and affairs of the
Corporation as generally pertain to their respective offices, as well as
7
<PAGE>
such powers and authorities and such duties as from time to time may be
prescribed by the Board of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
Section 4.1 RESIGNATIONS.
Any director or officer of the Corporation, or any member of any committee,
may resign at any time by giving written notice to the Board of Directors, the
President, or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein or, if the time be not specified therein,
then upon receipt thereof. The acceptance of such resignation shall not be
necessary to make it effective.
Section 4.2 REMOVALS.
The Board of Directors, by a vote of not less than a majority of the entire
'board, at any meeting thereof, or by written consent, at any time, may, to the
extent permitted by law, remove with or without cause from office or terminate
the employment of any officer or member of any committee and may, with or
without cause, disband any committee.
Any director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares entitled at the time
to vote at an election of directors.
Section 4.3 VACANCIES.
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from increase in the number of directors, may be filled
at any time by a majority of the directors then in office (even
8
<PAGE>
though less than a quorum remains) or, in the case of any vacancy in the office
of any director, by the stockholders, and, subject to the provisions of this
Article IV, the person so chosen shall hold office until his successor shall
have been elected and qualified; or, if the person so chosen is a director
elected to fill a vacancy, he shall (subject to the provisions of this Article
IV) hold office for the unexpired term of his predecessor.
ARTICLE V
CAPITAL STOCK
Section 5.1 STOCK CERTIFICATES.
The certificates for shares of the capital stock of the Corporation shall
be in such form as shall be prescribed by law and approved, from time to time,
by the Board of Directors.
Section 5.2 TRANSFER OF SHARES.
Shares of the capital stock of the Corporation may be transferred on the
books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
Section 5.3 FIXING RECORD DATE.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the
9
<PAGE>
Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than 60 nor less than 10 days
before the date of such meeting, nor more than 60 days prior to any other
action.
Section 5.4 LOST CERTIFICATES.
The Board of Directors or any transfer agent of the Corporation may direct
a new share certificate or certificates to be issued in place of any certificate
or certificates theretofore issued by the Corporation, alleged to have been
lost, stolen, or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate to be lost, stolen, or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as the Board of Directors shall direct to indemnify the Corporation
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen, or destroyed or the issuance of
such new certificates, and such requirement may be general or confined to
specific instances.
Section 5.5 REGULATIONS.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
10
<PAGE>
ARTICLE VI
MISCELLANEOUS
Section 6.1 CORPORATE SEAL.
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal" and
"Delaware".
Section 6.2 FISCAL YEAR.
The fiscal year of the Corporation shall be determined by resolution of the
Board of Directors.
Section 6.3 NOTICES AND WAIVERS THEREOF.
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telegram,
cable, or radiogram, addressed to such address as appears on the books of the
Corporation. Any notice given by telegram, cable, or radiogram shall be deemed
to have been given when it shall have been delivered for transmission and any
notice given by mail shall be deemed to have been given when it shall have been
deposited in the United States mail with postage thereon prepaid.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-Laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
11
<PAGE>
Section 6.4 STOCK OF OTHER CORPORATIONS OR OTHER INTERESTS.
Unless otherwise ordered by the Board of Directors, the President, the
Secretary, and such attorneys or agents of the Corporation as may be from time
to time authorized by the Board of Directors or the President, shall have full
power and authority on behalf of this Corporation to attend and to act and vote
in person or by proxy at any meeting of the holders of securities of any
corporation or other entity in which this Corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President, the Secretary, or such attorneys or
agents, may also execute and deliver on behalf of this Corporation powers of
attorney, proxies, consents, waivers, and other instruments relating to the
shares or securities owned or held by this Corporation.
ARTICLE VII
AMENDMENTS
The Holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-Laws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board of Directors shall have power equal in all
respects to that of the stockholders to adopt, amend, or repeal the By-Laws by
vote of not less than a majority of the entire Board. However, any By-Law
adopted by the Board may be amended or repealed by vote of the holders of a
majority of the shares entitled at the time to vote for the election of
directors.
12
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NONE
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-43251; and 33-74608; and 33-43252; and 33-74610; and
33-43296; and 33-74606; and 33-89412; and 33-89414; and 33-89416; and
333-12001; and 333-11999) pertaining to the 1989 Special Nonqualified Stock
Option and Stock Purchase Plan; the 1989 Incentive Stock Option, Nonqualified
Stock Option and Stock Purchase Plan; and the Executive Stock Plan,
respectively, of our report dated July 26, 1996, with respect to financial
statements of Cortex Pharmaceuticals, Inc. included in this Annual Report
(Form 10-KSB) for the year ended June 30, 1996, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
October 15, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1996, AND THE RELATED STATEMENTS OF OPERATIONS,
STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,091,550
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,179,977
<PP&E> 1,893,040
<DEPRECIATION> 1,085,439
<TOTAL-ASSETS> 5,013,920
<CURRENT-LIABILITIES> 330,328
<BONDS> 1,037,330<F1>
0
949,286
<COMMON> 7,496
<OTHER-SE> 2,687,981
<TOTAL-LIABILITY-AND-EQUITY> 5,013,920
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,321,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,719
<INCOME-PRETAX> (4,158,247)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,158,247)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,158,247)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
<FN>
<F1>PROMISSORY NOTE ISSUED TO ALKERMES, INC.
</FN>
</TABLE>
