<PAGE>
As filed with the Securities and Exchange Commission on February 23, 1998
Registration No. 333-29493
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
under the Securities Act of 1933
------------------------
CORTEX PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
Delaware 2834 33-0303583
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
15241 Barranca Parkway, Irvine, California 92618
(714) 727-3157
(Address and telephone number of principal executive offices
and principal place of business)
Vincent F. Simmon, Ph.D., President and Chief Executive Officer
15241 Barranca Parkway, Irvine, California 92618
(714) 727-3157
(Name, address and telephone number of agent for service)
Copies to:
Nick E. Yocca, Esq.
Lawrence B. Cohn, Esq.
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
(714) 725-4000
------------------------
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Registered Amount to be Aggregate Offering Aggregate Offering Amount of
Registered (1) Price(2) Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share 4,600,537 shares $ 2.937 $ 13,511,777 $ 4,095*
===================================================================================================================================
</TABLE>
(1) The number of shares of Common Stock registered hereunder represents the
Company's good faith estimate of the number of shares which may be issuable upon
conversion of the Company's Series A Preferred Stock, the additional purchase
rights or upon the exercise of warrants, as the case may be. Pursuant to Rule
416, the Registration Statement also covers an indeterminate number of
additional shares of Common Stock which may become issuable upon conversion of
the Series A Preferred Stock and the additional purchase rights by reason of
reductions of the conversion price in accordance with the terms of the
Certificate of Designation of Series A Preferred Stock.
(2) The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c), using the average of the high
and low bid price for the Common Stock as reported on the Nasdaq Small-Cap
Market on June 16, 1997, which was $2.937 per share.
* Previously paid.
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
[LOGO OF CORTEX] CORTEX PHARMACEUTICALS, INC.
4,599,765 Shares of Common Stock
(Par Value $0.001 Per Share)
This Prospectus relates to the sale of up to 4,599,765 shares (the "Shares") of
the common stock, par value $0.001 per share (the "Common Stock"), of Cortex
Pharmaceuticals, Inc. ("Cortex" or the "Company") by certain stockholders of the
Company (the "Selling Stockholders"). The Shares include 1,211,694 shares of
Common Stock issuable upon exercise of warrants (the "Warrant Shares") and up to
3,388,071 shares of Common Stock that may be issuable upon conversion of Series
A Preferred Stock. The Selling Stockholders may sell the Shares from time to
time in transactions in the over-the-counter market, in negotiated transactions,
by writing options on the Shares or by a combination of these methods, at fixed
prices that may be changed, at market prices prevailing at the time of the sale,
at prices related to such market prices or at negotiated prices. The Selling
Stockholders may effect these transactions by selling the Shares to or through
broker-dealers, who may receive compensation in the form of discounts or
commissions from the Selling Stockholders or from the purchasers of the Shares
for whom the broker-dealers may act as an agent or to whom they may sell as a
principal, or both. The Selling Stockholders and such broker-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, in
connection with such sales. See "Selling Stockholders" and "Plan of
Distribution."
The Company will not receive any part of the proceeds from the sale of the
Shares. The Company has agreed to bear all of the expenses in connection with
the registration and sale of the Shares (other than underwriting discounts and
selling commissions and the fees and expenses of counsel or other advisors to
the Selling Stockholders).
The Common Stock of the Company trades on the Nasdaq Small-Cap Market under the
symbol CORX. On February 18, 1998, the high and low sale prices of a share of
Common Stock of the Company, as reported by Nasdaq, were $1.75 and $1.625,
respectively. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING AT PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ________ __, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048; 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Reports and other
information on the Company may be obtained from the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, such as the Company.
This Prospectus constitutes part of a Registration Statement (the "Registration
Statement") on Form SB-2 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. For further
information about the Company and the securities offered hereby, reference is
made to the Registration Statement and to the financial statements and exhibits
filed as a part thereof. The statements contained in this Prospectus as to the
contents of any contract or any other document are not necessarily complete, and
in each instance reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including exhibits thereto, may be inspected without charge at the public
reference facilities maintained by the Commission as provided in the preceding
paragraph, and copies of all or any part thereof may be obtained from the
Commission's Public Reference Section at prescribed rates.
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. All share and per share data have been restated to
reflect a one-for-five reverse stock split that was effected January 11, 1995.
An investment in the Shares offered hereby involves a high degree of risk. See
"Risk Factors."
This Prospectus contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and is subject to the safe harbors created thereby. The
forward looking statements are based on current expectations that involve a
number of risks and uncertainties. These forward-looking statements are based on
assumptions that the Company will be able to obtain sufficient financing to
continue operations, that the Company's technology will continue to be developed
and will not be replaced by new technology, that the Company will retain key
technical and management personnel and that there will be no material adverse
change in the Company's operations or business. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
technology, economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
is no assurance that the results contemplated in the forward-looking statements
will be realized. In addition, the business and operations of the Company are
subject to substantial risks that increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation of the Company or any
other person that the objectives or plans of the Company will be achieved.
The Company
Cortex Pharmaceuticals, Inc. ("Cortex" or the "Company") is a development stage
enterprise that was organized in 1987 to engage in the discovery, development
and commercialization of innovative pharmaceuticals for the treatment of
neurodegenerative diseases and other neurological and psychiatric disorders. The
primary product development effort at Cortex is centered on the AMPA receptor, a
complex of proteins that is involved in most "excitatory" communication between
nerve cells in the human brain. Cortex is developing a family of chemical
compounds, known as Ampakines(TM), to enhance the activity of this receptor.
Cortex believes that Ampakines hold promise for correcting deficits brought on
by a variety of diseases and disorders that are known, or thought, to involve
depressed functioning of pathways in the brain that use glutamate as a
neurotransmitter. In October 1994, the Company initiated human safety studies
with CX516 (Ampalex(TM)) for the potential treatment of deficits of memory and
cognition. These studies have involved healthy young adult and elderly
volunteers and, more recently, patients with Alzheimer's disease and with
schizophrenia. Cortex is also investigating the potential utility of its
Ampakines in the treatment of other disorders, such as depression.
Cortex believes that its competitive advantage is the quality of its science and
technology, and that it can compete effectively with larger, more established,
better capitalized entities in the discovery of innovative pharmaceuticals. The
Company does not, however, have the resources or expertise for later-stage
clinical development, manufacturing and worldwide marketing. The Company's
commercial development plans therefore involve partnering with larger
pharmaceutical companies for later-stage clinical testing, manufacturing and
global marketing of its proposed products, while seeking to retain the right to
co-promote in North America. If the Company is successful in the pursuit of this
business strategy, it is intended that it will be in a position to cover its
costs over the next few years, to maintain its focus on the research and early
development of innovative pharmaceuticals and to eventually participate directly
in the commercial development of its products in the United States. Cortex is
actively seeking collaborative or licensing arrangements with larger
pharmaceutical companies that will permit its product candidates to be advanced
into the later stages of clinical development and that will provide access to
the clinical trials management, manufacturing and marketing expertise of such
companies. There is no assurance, however, that the Company will secure such
arrangements on favorable terms, or at all, or that its products will be
successfully developed, approved for marketing by government regulatory
agencies, or accepted by patients, health care providers and insurers.
Cortex was incorporated in Delaware on February 10, 1987. The Company's offices
and laboratories are located at 15241 Barranca Parkway, Irvine, California,
92618 and its telephone number is (714) 727-3157.
3
<PAGE>
Ampalex(TM) and Ampakine(TM) are trademarks of Cortex Pharmaceuticals, Inc. This
Prospectus also includes registered trademarks of other companies.
Risk Factors
An investment in the Shares offered hereby involves a high degree of risk. See
"Risk Factors."
Selected Financial Information
The selected financial information set forth below is derived from and should be
read in conjunction with the more detailed financial statements (including the
notes thereto) appearing elsewhere in this Prospectus.
Statements of Operations Data:
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
(Unaudited) inception inception
Six months ended (February 10, (February 10,
December 31, 1987) through Years ended June 30, 1987 through
-------------------------- December 31, ----------------------------- June 30,
1997 1996 1997 1997 1996 1997
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 50,000 $ - $ 3,744,717 $ - $ - $ 3,694,717
Total operating expenses 2,817,705 2,566,578 38,150,957 5,085,604 4,321,309 35,333,252
----------- ----------- ------------ ----------- ----------- ------------
Loss from operations (2,767,705) (2,566,578) (34,406,240) (5,085,604) (4,321,309) (31,638,535)
Interest income, net 140,124 64,078 1,629,055 155,624 163,062 1,488,931
----------- ----------- ------------ ----------- ----------- ------------
Net loss $(2,627,581) $(2,502,500) $(32,777,185) $(4,929,980) $(4,158,247) $(30,149,604)
=========== =========== ============ =========== =========== ============
Weighted average common
shares outstanding 9,467,345 7,653,682 8,252,047 6,532,884
=========== =========== =========== ===========
Net loss per share $ (0.28) $ (0.36) $ (0.83) $ (0.64)
=========== =========== =========== ===========
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30,
(Unaudited) -----------------------------
December 31, 1997 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total current assets $ 4,792,835 $ 7,640,333 $ 4,179,977
Total assets 5,494,843 8,333,307 5,013,920
Total current liabilities 544,277 636,035 330,328
Deficit accumulated during the development stage (34,809,024) (32,181,443) (25,359,298)
Total stockholders' equity $ 436,456 $ 2,668,287 $ 3,644,763
Common shares outstanding 9,573,067 9,394,249 7,495,576
--------------------------
</TABLE>
4
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby is speculative in nature,
involves a high degree of risk, and should not be made by any investor who
cannot afford the loss of his entire investment. Each prospective investor
should carefully consider the following risks and speculative factors, as well
as others described elsewhere in this Prospectus, associated with this offering
before making an investment.
Need for Additional Funds. Cortex anticipates that its existing capital
resources will enable it to maintain its current and planned operations through
calendar 1998. The Company will require additional funds to continue its
operations beyond that time. There is no assurance that the Company will be able
to obtain the additional needed funds on reasonable terms, or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Development Stage Company; History of Losses. Cortex is a development stage
enterprise. From inception on February 10, 1987 through December 31, 1997, the
Company has generated only modest operating revenues and has incurred net losses
aggregating $32,777,185. As of December 31, 1997, the Company had an accumulated
deficit of $34,809,024. The Company will require substantial additional funds to
advance its research and development programs, particularly should the Company
decide to independently conduct later-stage clinical testing and apply for
regulatory approval of any of its proposed products. There is no assurance that
such additional financing will be available on acceptable terms, or at all. If
additional funds are raised by issuing equity securities, further dilution to
existing stockholders may result. If the Company is unable to obtain additional
funds when and as needed, the Company may be required to significantly curtail
one or more of its product development programs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
Technological Uncertainty; Early Stage of Product Development; No Assurance of
Regulatory Approvals. The Company's proposed products are in the preclinical or
early clinical stage of development and will require significant further
research, development, clinical testing and regulatory clearances. They are
subject to the risks of failure inherent in the development of products based on
innovative technologies. These risks include the possibilities that any or all
of the proposed products will be found to be ineffective or toxic, or otherwise
fail to receive necessary regulatory clearances, that the proposed products,
although effective, will be uneconomical to market, that third parties may now
or in the future hold proprietary rights that preclude the Company from
marketing them, or that third parties will develop and market a superior or
equivalent product. Accordingly, the Company is unable to predict whether its
research and development activities will result in any commercially viable
products or applications. Further, due to the extended testing and regulatory
review process required before marketing clearance can be obtained, the Company
does not expect to be able to commercialize any therapeutic drug for at least
five years, either directly or through its corporate partners or licensees.
There is no assurance that the Company's proposed products will prove to be safe
or effective or receive regulatory approvals that are required for commercial
sale. See "Business."
Dependence on Strategic Alliances and Third Parties for Clinical Testing,
Manufacturing and Marketing. The Company does not have the resources, and does
not presently intend, to conduct later-stage human clinical trials or to
manufacture its proposed products. The Company is therefore seeking larger
pharmaceutical company partners to conduct such activities for most or all of
its proposed products. In connection with its efforts to secure corporate
partners, the Company will seek to retain certain co-promotional rights to its
proposed products, so that it may promote such products to selected medical
specialists while its corporate partner promotes to the general medical market.
There is no assurance that the Company will be able to enter into any such
partnering arrangements on this or any other basis. In addition, there is no
assurance that either the Company or its prospective corporate partners can
successfully introduce its proposed products, that they will achieve acceptance
by patients, health care providers and insurance companies, or that they can be
manufactured and marketed at prices that would permit the Company to operate
profitably. See "Business."
Limited Proprietary Rights; Lack of Patent Protection. The Company has
negotiated technology rights agreements that provide for exclusive rights to its
Ampakine compounds and calpain inhibitor compounds for selected indications
under patents or patent applications owned wholly by other parties or by other
parties as co-owners with the Company. The Company also holds options or other
rights to obtain exclusive licenses under patent applications relating to
certain of its potential products. Certain of the Company's licenses and other
agreements are terminable if the Company does not make certain minimum annual
payments, meet certain milestones or diligently seek to commercialize the
underlying technology. In addition, the Company's related collaborative and
consulting agreements are generally terminable upon 30 to 60 days' written
notice.
5
<PAGE>
There is no assurance that current or future patent applications in which Cortex
has an interest, either as sole owner or as a current or prospective licensee,
will result in further patents being issued. There is also no assurance that
current patents or patents issuing in the future in connection with current or
future patent applications will afford effective protection against competitors
with similar technology, or that patents issued or licensed to Cortex will not
be infringed upon or designed around by others.
If Cortex is unable to obtain sufficient protection of its proprietary rights in
its products or processes prior to or after obtaining regulatory clearances,
whether through patents, trade secrets or otherwise, competitors may be able to
market competing products by obtaining regulatory clearance through
demonstration of equivalency to the Company's products, without being required
to conduct the same lengthy clinical tests conducted by the Company.
In some cases, Cortex may rely on trade secrets to protect its innovations.
There is no assurance that secrecy obligations will be honored or that others
will not independently develop similar or superior technologies. To the extent
that consultants, key employees or other third parties apply technological
information independently developed by them or by others to the Company's
projects, disputes may arise as to the proprietary rights to such information
that may not be resolved in favor of the Company. See "Business--Patents and
Proprietary Rights."
Shares Eligible for Future Sale; Dilution. If all outstanding warrants and
options are exercised prior to their expiration, approximately 2.3 million
additional shares of Common Stock could become freely tradable without
restriction under the Securities Act. An aggregate of 19,384 shares of Common
Stock are issuable upon conversion of currently outstanding 9% Preferred Stock
and Series B Preferred Stock. On issuance such shares will be freely tradable.
As of December 31, 1997, up to 2.6 million shares of Common Stock are issuable
upon conversion of outstanding shares of Series A Convertible Preferred Stock
(the "Series A Preferred"). If conversions of Series A Preferred occur at an
effective conversion price of $2.75 or higher (which would occur at Common Stock
prices above $3.44 per share), the holder of the shares of Series A Preferred
being converted may exercise, at the time of conversion, rights to purchase
additional shares of Common Stock. The number of additional shares of Common
Stock subject to this additional purchase right will equal the number of shares
of Common Stock issuable upon conversion of the shares of Series A Preferred
then being converted. Any election to exercise the foregoing right to purchase
additional shares shall be exercised with respect to any given Series A
Preferred at the time of conversion of such shares and is forfeited to the
extent it is not fully exercised at the time of such conversion. Depending on
the date of conversion, the then current sales price of the Common Stock and
whether any additional purchase rights are exercised, the exact number of shares
of Common Stock issued upon conversion of the Series A Preferred may increase or
decrease substantially from the number of shares of Common Stock issuable as of
December 31, 1997 set forth above. All shares of Common Stock issuable upon
conversion of Series A Preferred, the exercise of related rights of additional
purchase and the exercise of the related warrants may be freely tradable under
the Registration Statement of which this Prospectus is part. Sales of
substantial amounts of Common Stock in the public market could adversely affect
the prevailing market price of the Common Stock. See "Description of
Securities."
Intense Competition. The Company's business is characterized by intensive
research efforts. Many companies, research institutes and universities are
working in a number of pharmaceutical or biotechnology disciplines to develop
therapeutic products similar to those under investigation by the Company. Most
of these companies, research institutes and universities have substantially
greater financial, technical, manufacturing, marketing, distribution and/or
other resources than Cortex. In addition, many of such companies have experience
in undertaking human clinical trials of new or improved therapeutic products and
obtaining FDA and other regulatory clearances of products for use in human
health care. The Company has no experience in conducting and managing later-
stage clinical testing or in preparing applications necessary to gain regulatory
clearances. Accordingly, other companies may succeed in developing products that
are safer or more effective than those being developed by the Company and in
obtaining FDA clearances for such products more rapidly than the Company.
Further, it is expected that competition in this field will continue to
intensify. See "Business--Competition."
Dependence Upon Key Personnel. Cortex is highly dependent upon key management
and technical personnel. Competition for qualified employees among
pharmaceutical and biotechnology companies is intense, and the loss of any of
such persons, or an inability to attract, retain and motivate the additional
highly-skilled employees and consultants required for the Company's activities,
could materially adversely affect its business and prospects. There is no
assurance that Cortex will be able to retain its existing personnel or attract
additional qualified employees when they are needed. See "Business" and
"Management."
6
<PAGE>
Dependence on Relationships with Consultants and the University of California,
Irvine. The Company is dependent upon its relationships with a number of
academic consultants, particularly Drs. Carl W. Cotman and Gary S. Lynch of the
University of California, Irvine ("UCI"). Drs. Cotman and Lynch play a role in
guiding the internal research of the Company. In addition, Cortex sponsors
preclinical research in the laboratories of Dr. Lynch at UCI that is a component
of the Company's product development and corporate partnering profile. Were
Cortex's relationships with Dr. Lynch or UCI to be disrupted, it is possible
that the Company's AMPA receptor research program would be adversely affected,
and there is no assurance that the Company would be able to conduct the
sponsored research internally at reasonable cost, or at all. The Company's
agreements with its consultants, including those with Drs. Cotman and Lynch, are
generally terminable by the consultant on short notice. See "Management."
Government Regulation. Therapeutic products such as those Cortex is attempting
to develop are subject to an extensive and lengthy regulatory review and
approval process by the FDA and comparable agencies in other countries. Prior to
commercialization, the Company's products will require governmental approvals
that have not yet been obtained and that are not expected to be obtained for at
least several years, if at all. The testing and regulatory approval process,
which includes preclinical, clinical and post-clinical testing of the Company's
products to establish their safety and efficacy, will take many years and
require the expenditure of substantial resources. There is no assurance that,
even after such time and expenditures, regulatory clearances will be obtained
for any of the Company's products. Even if regulatory clearances are obtained, a
marketed product is subject to continual review, and later discovery of
previously unknown problems may result in restrictions on marketing or
withdrawal of the product from the market. See "Business--Government
Regulation."
Product Liability and Insurance. Clinical testing, manufacturing and marketing
of the Company's products may expose the Company to product liability claims.
Although the Company has never been subject to a product liability claim, there
is no assurance that such claims will not be brought in the future, that the
coverage limits of the Company's insurance policies will be adequate or that one
or more successful claims brought against the Company would not have a material
adverse effect upon the Company's business, financial condition and results of
operations.
Limited Public Market; Change in Listing Standards; Volatility of Stock Price.
The Company's Common Stock has been traded on the Nasdaq Small Cap Market since
1989. Although approximately 20 firms make a market in Cortex Common Stock,
there is no assurance that an active or established trading market will be
maintained or that the Company's Common Stock will continue to be traded on the
Nasdaq Small Cap Market.
Nasdaq has recently implemented changes to the listing standards for the Nasdaq
Small Cap Market that institute a net tangible asset, market capitalization, or
net income test in place of the total asset and total equity tests. Further,
Nasdaq requires a minimum bid price of $1.00 per share in order to continue to
be listed. In the event the Company fails such requirements on a continuous
basis, the Company's Common Stock may be removed from listing on the Nasdaq
Small Cap Market. In such event, the liquidity of the Company's Common Stock may
be impaired and the trading price reduced. In addition, in such event, the
holders of the Company's Series A Preferred Stock may require the Company to
redeem such shares for cash.
There is significant volatility in the market price of securities of life
sciences companies generally, and the trading price of the Company's Common
Stock has been subject to wide fluctuations. See "Price Range of Common Stock."
Various factors and events, including announcements by the Company or its
competitors concerning technological innovations, new products, proposed
governmental regulations or actions, developments or disputes relating to
patents or proprietary rights and public concern over the safety of therapeutic
products or other factors that affect the market generally, may have a
significant impact on the Company's business and on the market price of the
Company's securities.
Dividends. The Company has not paid cash dividends on its Common Stock and does
not anticipate doing so in the foreseeable future. The Company may not pay any
dividends on its Common Stock until accrued and unpaid dividends on the 9%
Preferred Stock have been paid in full. As of December 31, 1997, accrued and
unpaid dividends on the 9% Preferred Stock were $25,200. See "Dividend Policy."
Anti-Takeover Provisions. The Board of Directors has the authority, without
further approval of the Company's stockholders, to issue up to 549,100 shares of
preferred stock having such rights, preferences and privileges as the Board of
Directors may determine. Any such issuance of additional shares of preferred
stock could, under certain circumstances, have the effect of delaying or
preventing a change in control of the Company and may adversely affect the
rights of holders of Common Stock. See "Description of Securities."
7
<PAGE>
USE OF PROCEEDS
The proceeds from the sale of each Selling Stockholder's Shares will belong to
such Selling Stockholder. The Company will not receive any of the proceeds from
such sales of the Shares.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock (Nasdaq symbol: CORX) began trading publicly in the
over-the-counter market on July 18, 1989. The following table presents quarterly
information on the high and low sale prices of the Common Stock since July 1,
1995 as reported by Nasdaq. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year ending June 30, 1998
Third Quarter (through February 18, 1998)... $1-13/16 $ 1-3/8
Second Quarter.............................. 3-1/8 1-3/8
First Quarter............................... 3-1/4 2-5/8
Fiscal Year ended June 30, 1997
Fourth Quarter.............................. 3-5/8 2-7/16
Third Quarter............................... 5-1/4 2-11/16
Second Quarter.............................. 7-1/4 2-7/16
First Quarter............................... 4-1/2 2-5/8
Fiscal Year ended June 30, 1996
Fourth Quarter.............................. 7-1/4 4
Third Quarter............................... 8-3/4 3-1/2
Second Quarter.............................. 5-17/32 2-3/8
First Quarter............................... 6-3/8 2-7/8
</TABLE>
As of December 31, 1997, there were 691 stockholders of record of the Company's
Common Stock, and approximately 9,500 beneficial owners. The last sale price of
the Company's Common Stock on February 18, 1998, as reported by Nasdaq, was $1-
5/8.
8
<PAGE>
DIVIDEND POLICY
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 of
$0.09 per share per annum, which accrues in equal semi-annual installments on
June 15th and December 15th of each year, which dividends must be paid in full
before any dividends can be paid on the Common Stock. As of December 31, 1997,
accrued and unpaid dividends on the 9% Preferred Stock were $25,200. 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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December
31, 1997. The figures are unaudited, and this table should be read in
conjunction with the financial statements (including the notes thereto)
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
December 31, 1997 (1)
-----------------
<S> <C>
Note payable to Alkermes, Inc. (non-current portion) $ 921,853
Redeemable preferred stock:
Series A convertible preferred stock,
$0.001 par value; $10,000 per share liquidation
preference; authorized: 400 shares; issued and
outstanding: 365 shares 3,592,257
Stockholders' equity:
9% cumulative convertible preferred stock,
$0.001 par value; $1.00 per share liquidation
preference; authorized: 1,250,000 shares;
issued and outstanding: 35,000 shares 35,000
Series B convertible preferred stock, $0.001 par
value; $0.6667 per share liquidation preference;
authorized: 3,200,000 shares; issued and
outstanding: 150,000 shares 86,810
Common stock, $0.001 par value; authorized
20,000,000 shares; issued and outstanding:
9,573,067 shares 9,573
Additional paid-in capital 35,113,156
Unrealized gain on available for sale
U.S. Government securities 941
Deficit accumulated during the development stage (34,809,024)
------------
Total stockholders' equity 436,456
------------
Total capitalization $ 4,950,566
============
</TABLE>
- --------------
(1) Excludes an aggregate of approximately 2.3 million shares of Common
Stock reserved for issuance upon possible exercise of outstanding
warrants and options and an aggregate of up to 2.6 million shares of
Common Stock reserved for issuance upon conversion of outstanding
Series A Convertible Preferred Stock, 9% Cumulative Convertible
Preferred Stock and Series B Convertible Preferred Stock. See
"Description of Securities" and Notes 3, 4 and 5 of Notes to
Financial Statements.
9
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended and as of
June 30, 1997 and 1996 and for the period from inception (February 10, 1987)
through June 30, 1997 are derived from and should be read in conjunction with
the more detailed financial statements (including the notes thereto) of the
Company, which have been audited by Ernst & Young LLP, independent auditors,
whose report thereon is included elsewhere herein and in the Registration
Statement. The selected financial data for the years ended and as of June 30,
1995, 1994 and 1993 are derived from audited financial statements that are not
included in this Prospectus. The selected financial data for the six-month
periods ended December 31, 1997 and 1996, for the period from inception
(February 10, 1987) through December, 31, 1997 and at December 31, 1997 are
derived from unaudited interim financial statements. The unaudited interim
financial statements include all adjustments (consisting only of normally
recurring accruals) that management considers necessary for a fair presentation
of the Company's financial position and results of operations for the periods
presented. Operating results for the six-month period ended December 31, 1997
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1998.
Statements of Operations Data:
<TABLE>
<CAPTION>
Period from
inception
(February 10,
Years ended June 30, 1987) through
------------------------------------------------------------------------ June 30,
1997 1996 1995 1994 1993 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Research/license revenue (1) $ -- $ -- $ -- $ -- $ 2,600,000 $ 3,600,000
Grant revenue -- -- -- 39,665 10,103 94,717
----------- ----------- ----------- ----------- ----------- ------------
Total operating revenues -- -- -- 39,665 2,610,103 3,694,717
----------- ----------- ----------- ----------- ----------- ------------
Operating expenses:
Research & development 3,376,284 2,677,577 4,138,731 3,226,858 2,316,622 22,345,396
General & administrative 1,709,320 1,643,732 1,665,134 1,780,792 1,101,134 11,759,879
Settlement with Alkermes, Inc. -- -- 1,227,977 -- -- 1,227,977
----------- ----------- ----------- ----------- ------------ ------------
Total operating expenses 5,085,604 4,321,309 7,031,842 5,007,650 3,417,756 35,333,252
----------- ----------- ----------- ----------- ------------ ------------
Loss from operations (5,085,604) (4,321,309) (7,031,842) (4,967,985) (807,653) (31,638,535)
Interest income, net 155,624 163,062 196,310 262,994 46,117 1,488,931
----------- ----------- ----------- ----------- ------------ ------------
Net loss $(4,929,980) $(4,158,247) $(6,835,532) $(4,704,991) $ (761,536) $(30,149,604)
=========== =========== =========== =========== ============ ============
Weighted average common
shares outstanding 8,252,047 6,532,884 6,075,454 4,880,338 3,147,204
=========== =========== =========== =========== ============
Net loss per share $ (0.83) $ (0.64) $ (1.13) $ (0.97) $ (0.26)
=========== =========== =========== =========== ============
<CAPTION>
(Unaudited)
Period from
(Unaudited) inception
Six months ended (February 10
December 31, 1987) through
-------------------------- December 31,
1997 1996 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Research/license revenue (1) $ -- $ -- $ 3,600,000
Grant revenue 50,000 -- 144,717
----------- ----------- -----------
Total operating revenues 50,000 -- 3,744,717
----------- ----------- -----------
Operating expenses:
Research & development 1,972,569 1,662,473 24,317,965
General & administrative 845,136 904,105 12,605,015
Settlement with Alkermes, Inc. -- -- 1,227,977
----------- ----------- -----------
Total operating expenses 2,817,705 2,566,578 38,150,957
----------- ----------- ------------
Loss from operations (2,767,705) (2,566,578) (34,406,240)
Interest income, net 140,124 64,078 1,629,055
----------- ----------- ------------
Net loss $(2,627,581) $(2,502,500) $(32,777,185)
=========== =========== ============
Weighted average common
shares outstanding 9,467,345 7,653,682
=========== ===========
Net loss per share $ (0.28) $ (0.33)
============ ==========
- -------------------
</TABLE>
(1) Received under an agreement with Alkermes, Inc.
10
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data:
June 30,
(Unaudited) ---------------------------------------------------------------------------
December 31, 1997 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 4,248,558 $ 7,004,298 $ 3,849,649 $ 3,327,788 $ 8,982,571 $ 888,199
Total assets 5,494,843 8,333,307 5,013,920 4,886,372 10,441,998 1,924,856
Total liabilities 1,446,130 1,728,300 1,369,157 1,613,676 720,367 339,017
Redeemable preferred stock 3,592,257 3,936,720 -- -- 433,750 449,375
Deficit accumulated during
the development stage (34,809,024) (32,181,443) (25,359,298) (21,201,051) (14,365,519) (9,660,528)
Stockholders' equity $ 436,456 $ 2,668,287 $ 3,644,763 $ 3,272,696 $ 9,287,881 $ 1,136,464
Common shares outstanding 9,573,067 9,394,249 7,495,576 6,085,201 6,073,942 3,209,975
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1997 Annual Report on Form 10-KSB.
Introductory Note
This discussion and analysis 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 relate to (i) future research plans and expenditures,
(ii) potential collaborative arrangements, and (iii) 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, there is no assurance that
the results contemplated in forward-looking statements will be realized and
actual results may differ materially. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
Results of Operations
From inception (February 10, 1987) through December 31, 1997, the Company's
revenue has consisted of (i) $3,650,000 of license fees and research and
development funding, (ii) net interest income aggregating $1,629,000, and (iii)
$95,000 of grant revenue.
From inception (February 10, 1987) through December 31, 1997, the Company has
sustained losses aggregating $32,777,000. Continuing losses are anticipated over
the next several years, as the Company's ongoing operating expenses for research
and early clinical development will only be offset, if at all, by license fees,
milestone payments, research support payments and/or other revenues under
planned strategic alliances that the Company is seeking with larger
pharmaceutical companies for the later stages of clinical development,
manufacturing and marketing of its products. The nature and timing of payments
to Cortex under these planned strategic alliances, if and as entered into, is
likely to significantly affect the Company's operations and to produce
substantial period-to-period 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.
Fiscal Years ended June 30, 1997 and 1996
For the year ended June 30, 1997, the Company's loss from operations was
$4,930,000 compared to a loss from operations of $4,158,000 for the prior year,
with the increase attributable to higher levels of research and development
spending.
Research and development expenses increased to $3,376,000, or by 26%, during the
year ended June 30, 1997 compared to the prior year. Most of the increase
related to the commencement of Phase I/IIa clinical testing of Ampalex in
patients with Alzheimer's disease and a similar study of Ampalex in patients
suffering from schizophrenia. Salary expenses for scientific personnel added
late in the prior year and a concomitant increase in spending for laboratory
supplies contributed most of the remaining increase, along with higher outlays
for sponsored external research.
12
<PAGE>
General and administrative expenses were $1,709,000 for the year ended June 30,
1997, increasing 4% from the prior year. The slight increase primarily
represented a full year of salary and related expenses for the Chief Executive
Officer, who joined the Company in the fourth quarter of the prior year.
Six-month periods ended December 31, 1997 and 1996
The loss for the six-month period ended December 31, 1997 was $2,628,000,
compared to a loss of $2,503,000 for the corresponding prior year period, with
higher levels of research and development spending responsible for the
increase.
Research and development expenses increased from $1,662,000 to $1,973,000, or by
$311,000 (19%), during the six-month period ended December 31, 1997 compared to
the prior year period. Costs related to Phase I/IIa human clinical testing (in
the United States) produced most of the increase, along with technology access
payments and salary expenses resulting from additions to the scientific employee
complement. A decrease in external research partially offset these increases.
General and administrative expenses for the six month period ended December 31,
1997 were $845,000 compared to $904,000 for the corresponding prior year period.
Most of this decrease represents lower salary expenses due to a decrease in
administrative employees.
The Company believes that inflation and changing prices have not had a material
impact on its ongoing operations to date. Management has assessed all issues
relating to the year 2000. Management believes that the Company will be ready
for the year 2000 on a timely basis and that the cost to address the year 2000
issue will be insignificant.
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 such
issuances from inception (February 10, 1987) through December 31, 1997
aggregating $36 million. An additional $3.6 million in research and license
payments was received from Alkermes, Inc. in 1992 and 1993 in connection with a
development and license agreement with that firm. Net interest income from
inception through December 31, 1997 was $1.6 million.
A private placement of Series A Preferred Stock in June 1997 included the
issuance of special purchase rights that, under certain circumstance, allow the
investors to purchase additional shares of common stock at the conversion price
in effect at the time of conversion of the Series A Preferred. These rights are
only exercisable at the time of such conversion and expire to the extent they
are not utilized. If fully exercised, of which there can be no assurance, the
special purchase rights may provide approximately $3.6 million of additional
working capital.
As of December 31, 1997, Cortex had outstanding 35,000 shares of 9% cumulative
convertible preferred stock, which shares accrue cumulative dividends semi-
annually 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 December 31, 1997
were $25,200.
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, 1998 and
1999 are $234,000 and $229,000, respectively.
In connection with the settlement of a license dispute, in October 1995 the
Company issued to Alkermes, Inc. a $1,000,000 three-year promissory note
accruing interest semi-annually at the current 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. Subsequent to December
31, 1997, the terms of the note were restructured to include a principal payment
of $200,000 upon signing of the new agreement. The balance of the note and
accrued interest are payable in October 1999 or upon consummation of a corporate
partnership between Cortex and a larger pharmaceutical company, whichever is
earlier.
13
<PAGE>
As of December 31, 1997, the Company had cash, cash equivalents and short-term
investments totaling $4.7 million and working capital of $4.2 million. In
comparison, as of June 30, 1997, the Company had cash, cash equivalents and
short-term investments totaling $7.6 million and working capital of $7.0
million. The decreases represent amounts required to fund operating losses and
to purchase capital equipment. From inception (February 10, 1987) through
December 31, 1997, net expenditures for furniture, equipment and leasehold
improvements aggregated $2.1 million.
Over the next twelve months, the Company plans to conduct additional preclinical
and Phase I/II clinical studies on its Ampakine(TM) compounds. These planned
research and development activities involve a twelve-month expenditure of
approximately $750,000. 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 December 31, 1997, Cortex had
21 full-time employees.
Cortex anticipates that its existing cash, cash equivalents and short-term
investments, combined with a modest amount of anticipated interest income, will
be sufficient to satisfy its capital requirements through calendar 1998 under
current spending plans. Additional funds will be required to continue operations
beyond that time.
In order to provide resources for both its short and long-term requirements, the
Company is presently seeking collaborative or other arrangements with larger
pharmaceutical companies, under which it is intended that 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, competition for such arrangements is
intense, with a large number of biopharmaceutical companies attempting to secure
alliances with more established pharmaceutical companies. Although the Company
is engaged in discussions with a number of candidate companies, there is 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 is 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, dilution to existing stockholders is likely to
result.
The Company's proposed products are in the preclinical or early clinical stage
of development and will require significant further research, development,
clinical testing and regulatory clearances. They are subject to the risks of
failure inherent in the development of products based on innovative
technologies. These risks include the possibilities that any or all of the
proposed products will be found to be ineffective or toxic, or otherwise fail to
receive necessary regulatory clearances, that the proposed products, although
effective, will be uneconomical to market, that third parties may now or in the
future hold proprietary rights that preclude the Company from marketing them, or
that third parties will develop and market a superior or equivalent product.
Accordingly, the Company is unable to predict whether its research and
development activities will result in any commercially viable products or
applications. Further, due to the extended testing and regulatory review process
required before marketing clearance can be obtained, the Company does not expect
to be able to commercialize any therapeutic drug for at least five years, either
directly or through prospective corporate partners or licensees. There is no
assurance that the Company's proposed products will prove to be safe or
effective or receive regulatory approvals that are required for commercial sale.
14
<PAGE>
BUSINESS
Overview
Cortex Pharmaceuticals, Inc. ("Cortex" or the "Company") is a development stage
enterprise that was organized in 1987 to engage in the discovery, development
and commercialization of innovative pharmaceuticals for the treatment of
neurodegenerative diseases and other neurological and psychiatric disorders. The
primary effort at Cortex is centered on developing products that affect the
AMPA-type glutamate 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, to enhance the
activity of this receptor. Cortex believes that Ampakines hold promise for
correcting deficits brought on by a variety of diseases and disorders that are
known, or thought, to involve depressed functioning of pathways in the brain
that use glutamate as a neurotransmitter. In October 1994, the Company initiated
human safety studies with CX516 (Ampalex) for the potential treatment of
deficits of memory and cognition. To date, these studies have involved healthy
young adult and healthy elderly volunteers as well as patients with Alzheimer's
disease and with schizophrenia. Cortex is also investigating the safety and
potential utility of its Ampakines in the treatment of other disorders, such as
depression. In the fiscal years ended June 30, 1997 and 1996, the Company's
expenditures on research and development were $3,376,284 and $2,677,577,
respectively, with the increase attributable to the costs of Phase I/IIa human
clinical testing of Ampalex.
Cortex's Ampakine programs addresses large potential markets. The Company's
current commercial development plans therefore involve partnering with larger
pharmaceutical companies for later-stage clinical testing, manufacturing and
global marketing of its proposed products, while seeking to retain the right to
co-promote in North America. If the Company is successful in the pursuit of this
strategy, it is intended that it will be in a position to contain its costs over
the next few years, to maintain its focus on the research and early development
of novel pharmaceuticals (where it believes that it has the ability to compete),
and eventually to participate directly in the commercial development of its
products in the United States. Cortex continues to seek collaborative or
licensing arrangements with larger pharmaceutical companies that will permit
Ampalex 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 is 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 activity of the AMPA receptor,
which binds the neurotransmitter glutamate. These compounds interact in a highly
specific manner with the AMPA receptor in the brain, lowering the amount of
neurotransmitter required to generate a response. It is hoped that this
selective amplification of the normal glutamate signal will eventually find
utility in the treatment of neurological diseases and disorders characterized by
depressed functioning of brain pathways that utilize glutamate as a
neurotransmitter. Two prominent diseases that may benefit from AMPA receptor-
directed therapeutics are Alzheimer's disease and schizophrenia, both of which
represent large unmet medical needs. The Company has also obtained encouraging
results in animal models of depression.
Deficits of Memory and Cognition--Alzheimer's Disease
Impairment of memory and cognition is a serious health care problem that is
growing as the elderly proportion of the population continues to increase. While
not fatal (except when associated with diseases such as Alzheimer's disease),
incidence and prevalence of cognitive deficits increase inexorably with age.
Many elderly individuals are confined to nursing homes because of psychological
disorientation and functional difficulties. According to a 1985 survey of
nursing homes conducted by the National Center for Health Statistics, over half
of the individuals in nursing homes have some degree of cognitive impairment.
Pharmaceuticals to alleviate deficits in memory and cognition could potentially
enable these elderly to remain independent longer.
15
<PAGE>
Memory is not located in a specific area of the brain, but rather becomes
established in multiple areas of the brain. 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 appears to be handled in the cerebral cortex, 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 chemical changes that
create a more stable information transfer point between neurons.
Although disease and physiological malfunctions are thought to be the
fundamental cause of severe mental decline, age itself is a contributory factor,
with the human brain losing 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
known 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.
Therefore a potential corrective approach to alleviate age-related cognitive
deficits is to enhance the activity of the remaining AMPA receptors that are
still functioning.
Alzheimer's disease is the best known destroyer of memory, currently 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.
Alzheimer's disease is a progressive, degenerative and ultimately 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 help to 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 input from other brain cells to remain
alive. As neurons die, other neurons begin to lose their inputs, hastening their
own 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.
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 an animal model for age-associated memory impairment in
humans. In the study, which was published 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 improved to levels equivalent to those found in young animals.
Three human clinical safety studies have now been completed with CX516
("Ampalex"). 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 in healthy volunteers.
16
<PAGE>
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' memory was
substantially worse than that of the young volunteers. In the presence of drug,
a statistically significant positive effect on memory performance was observed.
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 noted in the group
that received CX516.
On the basis of these encouraging results, Cortex initiated a Phase I/IIa study
in patients experiencing deficits of memory and cognition due to Alzheimer's
disease. The study is being conducted at the National Institutes of Health in
Bethesda, Maryland. The double-blind, placebo-controlled dose escalation study
involves administration of CX516 to 16 to 20 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.
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. patients with schizophrenia 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 and loss of emotional responsiveness) and cognitive
symptoms (disordered thought and attention 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 initially studied in the 1970s, but clinical trials were
halted due to the risk of a fatal blood disorder known as agranulocytosis and a
dose-dependent risk of seizures. Clozapine was reintroduced
17
<PAGE>
in the 1980s, with approval by the FDA for use in patients who cannot be
adequately treated with 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 there are still substantial side effects and that the symptoms of
schizophrenia are not addressed completely by any available agents. The
persistence of cognitive symptoms prevents all but a few patients with
schizophrenia 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, at the time a
University of California, Irvine neuroscientist and Cortex consultant, found
that an Ampakine reduced stereotypic behavior (mechanical repetition of posture
or movement) in rats that had been injected with methamphetamine. Reduction of
methamphetamine-induced stereotypic behavior is widely used for initial
screening of anti-psychotic drugs. The results have since been extended by
scientists at both UCI and Cortex to include several additional Ampakines.
Further, Cortex scientists have demonstrated that Ampakines in combination with
either conventional or atypical anti-psychotic drugs have additive effects in
this model system.
The Company has initiated a study with CX516 in patients with schizophrenia
being treated with clozapine at Massachusetts General Hospital. This Phase I/IIa
study is primarily designed as a safety study, but psychological testing is also
being conducted in an attempt to obtain a preliminary indication that CX516 has
an effect on psychological parameters that likely contribute to 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 hemorrhagic stroke, which involves a blood
vessel bursting in the brain. In either case, the insult to the brain is often
immediately life-threatening and initiates a cascade of molecular events that
may ultimately lead 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.
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 can follow. 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 a therapy might be administered to prevent or limit
damage to nerve cells and thereby maintain their viability until homeostasis is
re-established following an ischemic episode.
Ischemia-induced release of excessive glutamate appears to initiate the cascade.
Glutamate builds up in the extra-cellular space following a stroke, allowing an
excessive amount of calcium to enter nerve cells. This in turn causes activation
of certain calcium-dependent enzymes, including calpain. At higher levels of
activity, calpain can degrade the neuron's cytoskeleton and cause progressively
greater damage. Eventually the cell is no longer able to recover.
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<PAGE>
In 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 using
the Company's calpain inhibitor technology products for the prevention or
treatment of acute and chronic neurodegenerative diseases and disorders of the
nervous system.
Subsequently, Cortex shifted its emphasis into calpain inhibitor research
outside the nervous system. The Company was particularly active in investigating
a potential role of calpain inhibitors in the treatment of vasospasm and
restenosis, two serious vascular disorders. The Company established preclinical
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. 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.
In October 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. 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. Subsequent to December
31, 1997, the terms of the note were restructured to include a principal payment
of $200,000 upon signing of the new agreement. The balance of the note and
accrued interest are payable in October 1999 or upon consummation of a corporate
partnership between Cortex and a larger pharmaceutical company, whichever is
earlier. 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 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 North America 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
In 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
19
<PAGE>
memory and cognition. The agreement has subsequently been amended to include
additional indications. 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 pay royalties on net sales.
Calpain Inhibitors
Beginning in 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 pay 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
approximately 15 issued U.S. patents and a number of additional U.S. patent
applications and their international counterparts.
There is 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 is also
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 is no assurance
that others will not obtain patents that the Company would then 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 is 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 is 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.
If Cortex is unable to obtain strong protection of its proprietary rights in its
products or processes prior to or after obtaining regulatory clearance, whether
through patents, trade secrets or otherwise, competitors may be able to market
competing products by obtaining regulatory clearance through demonstration of
equivalency to the Company's products, without being required to conduct the
same lengthy clinical tests conducted by the Company.
Government Regulation
In order to test, produce and market human therapeutic products in the United
States, mandatory procedures and safety standards established by the Food and
Drug Administration ("FDA") must be satisfied. Obtaining FDA approval is 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. The Company is conducting Phase I/IIa studies in the U.S. with
CX516 in Alzheimer's disease patients and in patients with schizophrenia under
INDs filed by its clinical collaborators. 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 later-stage clinical
tests in the United States and elsewhere.
20
<PAGE>
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 can also be lengthy.
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.
There is no assurance that any required FDA or other governmental approval will
be granted or, if granted, will not be withdrawn. Governmental regulation may
substantially delay or prevent 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 partnerships 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 is 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, schizophrenia, depression and other
neurological and psychiatric 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
and psychiatric
21
<PAGE>
disorders, the Company does not have the resources, and does not presently
intend, to compete with major pharmaceutical companies in 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, against which the Company
maintains liability insurance. Although the Company has never been subject to a
product liability claim, there is no assurance that such claims will not be
brought in the future, 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.
Employees
As of January 31, 1998, Cortex had 20 full-time employees and had engaged ten
part-time Ph.D.-level scientific consultants. Of the 20 full-time employees, 14
are engaged in research and development and six are engaged in management and
administrative support. The Company also sponsors a substantial amount of
research in academic laboratories.
Facilities
The Company leases approximately 30,000 square feet of office, research
laboratory and expansion space under an operating lease that expires May 31,
1999, with an additional five-year option at 95% of the then fair market rental
rate. Current monthly rent on these facilities is approximately $20,000. The
Company believes that this facility will be adequate for its research and
development activities for at least the next three years.
Legal Proceedings
The Company is not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
Directors, Executive Officers and Scientific Directors
The directors, executive officers and scientific directors of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Robert F. Allnutt (2) 62 Director
Charles J. Casamento (2) 52 Director
Carl W. Cotman, Ph.D. (1) 57 Director, Scientific Director
Michael G. Grey (1) 45 Director
D. Scott Hagen 42 Vice President and Chief Financial Officer,
Corporate Secretary
Gary S. Lynch, Ph.D. 54 Scientific Director
Harvey S. Sadow, Ph.D. (2) 75 Chairman of the Board, Director
Vincent F. Simmon, Ph.D. 53 President and Chief Executive Officer, Director
Davis L. Temple Jr., Ph.D. (1) 53 Director
</TABLE>
(1) Member of the Compensation/Stock Option Committee.
(2) Member of the Audit Committee.
Robert F. Allnutt was elected as a director in December 1995. Since February
1995, Mr. Allnutt has been a Senior Counselor for APCO Associates, Inc., a
public affairs and strategic communications company. Mr. Allnutt was Executive
Vice President of the Pharmaceutical Manufacturers Association from May 1985
until February 1995 and was Vice President for Governmental Relations of
Communications Satellite Corporation from May 1984 until May 1985. Prior to
1984, Mr. Allnutt held numerous positions in the Federal Government for 25
years, including 15 years at NASA, where his positions included Associate Deputy
Administrator, the third ranking position in the agency. Mr. Allnutt is a
director of Penederm, Inc., a developer and marketer of specialized dermatology
products, and a director of Cypros Pharmaceuticals Corporation, a developer and
marketer of acute-care products. He also serves as a member of the Board of
Directors of the National Health Council and the National Council on the Aging.
Mr. Allnutt holds a B.S. in Industrial Engineering from the Virginia Polytechnic
Institute and J.D. and L.L.M. degrees from George Washington University.
Charles J. Casamento was elected to the Board of Directors of the Company in
July 1997. Since June 1993, Mr. Casamento has been Chairman, President and Chief
Executive Officer of RiboGene, Inc., a privately-held biopharmaceutical company
based in Hayward, California. Prior to that, he was President and Chief
Executive Officer of Interneuon Pharmaceuticals, a neuropharmaceutical company,
from its founding in March 1989 until May 1993. From January 1986 to March 1989,
he was Senior Vice President and General manager, Pharmaceuticals & Biochemicals
at Genzyme Corp., a biotechnology company. From 1970 through 1985, Mr. Casamento
held senior management positions in marketing, finance and business development
at Sandoz, Johnson & Johnson and American Hospital Supply Corp., where he was
Vice President, Business Development and Strategic Planning for the Critical
Care Division. He holds a B.S. in Pharmacy and an M.B.A. from Fordham University
and is a licensed pharmacist.
Carl W. Cotman, Ph.D. has been a Scientific Director of and consultant to the
Company since October 1987, served as a director of the Company from March 1989
to October 1990, and was reelected as a director in November 1991. Dr. Cotman
has been a Professor of Psychobiology, Neurology, and Psychiatry at the
University of California, Irvine since 1985. He was a Professor of Psychobiology
and Neurology at that University from 1983 to 1985, and has held various other
teaching and research positions at that University since 1968. He chaired the
Scientific Advisory Council of the American Paralysis Association and is a
member of numerous professional associations and committees, including the
Council of the American Society for Neurochemistry, the National Institute of
Aging Task Force, the American Association for the Advancement of Science and
the International Society for Neurochemistry. Dr. Cotman has served on the
editorial boards of numerous
23
<PAGE>
scientific journals and has authored or co-authored seven books and over 400
articles in the fields of neurobiology, memory and cognition, and the recovery
of function after brain injury. Dr. Cotman holds a B.A. in Chemistry from
Wooster College, an M.A. in Analytical Chemistry from Wesleyan University, and a
Ph.D. in Biochemistry from Indiana University.
Michael G. Grey has been a director of the Company since September 1994. Since
November 1994, Mr. Grey has been President of BioChem Therapeutic Inc., a
wholly-owned subsidiary of BioChem Pharma Inc., an international
biopharmaceutical company. From January 1994 to October 1994, Mr. Grey was
Senior Vice President, Corporate Development of Titan Pharmaceuticals, Inc. a
biopharmaceutical holding company and President and Chief Operating Officer at
Ansan, Inc., an early stage biopharmaceutical company. From 1991 until 1993, Mr.
Grey served as Vice President, Corporate Development of Glaxo, Inc., and from
1989 until 1991, Mr. Grey served as Director of International Licensing of Glaxo
Holdings p.l.c., and was responsible for the worldwide licensing activities of
Glaxo, Inc. Mr. Grey holds a B.Sc. in Chemistry from the University of
Notingham.
D. Scott Hagen has been Vice President and Chief Financial Officer of the
Company since January 1992, and was Vice President-Finance and Administration
from September 1988 through December 1991. He served as Acting President and
Chief Operating Officer from October 1995 to May 1996. Mr. Hagen has been
Corporate Secretary since August 1991. From 1981 to August 1988, he was employed
by Chembiomed Ltd., a Canadian biopharmaceutical company, where he served in a
progression of scientific and administrative positions. Mr. Hagen holds a B.Sc.
in Biochemistry and an M.B.A. from the University of Alberta in Edmonton,
Canada.
Gary S. Lynch, Ph.D. has been a Scientific Director of and consultant to the
Company since October 1987, and served as a director of the Company from March
1988 to March 1989 and again from December 1994 to December 1995. Dr. Lynch has
been a Professor in the Department of Psychobiology at the University of
California, Irvine since 1981, and has held various other teaching and research
positions at that University since 1969. He is a Professor at the University's
Center for the Neurobiology of Learning and Memory. Dr. Lynch is a member of the
Neuroscience Society and the International Brain Research Organization. He also
serves on the Advisory Board of the Cognitive Neuroscience Institute. Dr. Lynch
has authored and co-authored over 400 articles and a number of books in the
areas of neurobiology, cognition, and memory. Dr. Lynch holds a B.A. in
Psychology from the University of Delaware and a Ph.D. in Psychology from
Princeton University.
Harvey S. Sadow, Ph.D. has been a director of the Company since March 1988 and
Chairman of the Board of Directors since January 1991. Dr. Sadow was President
and Chief Executive Officer of Boehringer Ingelheim Corporation, a major health
care company, from 1971 until his retirement in January 1988 and was Chairman of
the Board of that company from 1988 through December 1990. Dr. Sadow was
Chairman of the University of Connecticut Foundation, the President's Council of
the American Lung Association, and the Connecticut Law Enforcement Foundation
and was a member of the Board of Directors of the Pharmaceutical Manufacturers
Association ("PMA") and Chairman of the Board of the PMA Foundation. Dr. Sadow
is also a member of several other professional committees and societies,
including the American Society for Clinical Pharmacology and Therapeutics. He
has published extensively in the field of treatment of diabetes mellitus. Dr.
Sadow is Chairman of Cholestech Corporation, a developer, manufacturer and
seller of lipid measuring diagnostic products; a director of Penederm, Inc., a
developer and marketer of specialized products in the dermatology area; and a
director of several privately-held companies in the health care field. Dr. Sadow
holds a B.S. from the Virginia Military Institute, an M.S. from the University
of Kansas, and a Ph.D. from the University of Connecticut.
Vincent F. Simmon, Ph.D. was appointed President and Chief Executive Officer and
a director of the Company in May 1996. From November 1994 to December 1995, Dr.
Simmon served as Chairman, President and Chief Executive Officer of Prototek,
Inc., a privately-held biopharmaceutical company focusing on the development of
protease inhibitors. From March 1990 to November 1994, Dr. Simmon served as
President, Chief Executive Officer and a director at Alpha 1 Biomedicals, Inc.,
a biotechnology company. From February 1985 to March 1990, Dr. Simmon served as
Vice President for Biomedical and Biotechnology Research at W.R. Grace and Co.
From 1979 to 1985, Dr. Simmon served in varying capacities including Senior Vice
President of Research and Development for Genex Corporation, a genetic
engineering company, and from 1973 to 1979 in varying capacities including
Assistant Director, Department of Toxicology for SRI International, a consulting
company. Dr. Simmon has served as a governor of the Emerging Companies Section
of BIO (Biotechnology Industrial Organization) and a director of the Chemical
Industries Institute for Toxicology (Research
24
<PAGE>
Triangle Park). Dr. Simmon holds a B.A. in Biology and Chemistry from Amherst
College, a M.S. from the University of Toledo in Plant Physiology and a Ph.D.
degree in Molecular Biology from Brown University. Dr. Simmon was a post-
doctoral fellow from 1971 to 1973 at Stanford University.
Davis L. Temple, Jr., Ph.D. has been a director of and consultant to the Company
since March 1994. He served as co-member of the Office of the Chief Executive of
the Company from October 1995 to May 1996. In April 1997, Dr. Temple was
appointed as Chairman and Chief Executive Officer of Cognetix, a privately held
biopharmaceutical drug discovery and development company. From November 1995
until his appointment, he was a Senior Consultant for Kaufman Brothers, a New
York Investment Bank. Prior to that, from January 1994 to November 1995 he was a
Managing Director at Stover Haley Burns, Inc., a life science advisory group.
From 1990 until 1993, Dr. Temple served as Vice President, CNS Drug Discovery,
of Bristol-Myers Squibb and from 1984 to 1990 he served as Senior Vice
President, CNS Research at Bristol-Myers Company. Dr. Temple holds a B.S. in
Pharmacy from Louisiana State University and a Ph.D. in Medicinal Chemistry and
Pharmacology from the University of Mississippi.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Company's Board of Directors.
There are no family relationships among any of the directors or officers of the
Company.
Other Officer
Gary A. Rogers, Ph.D. has been Vice President, Pharmaceutical Discovery since
June 1995. In February 1994, he founded Ligand Design, a private contract design
and synthesis firm located in Santa Barbara. From 1987 to 1994, Dr. Rogers
served as an associate research biochemist at the University of California,
Santa Barbara. Prior to that, he held a succession of research and faculty
positions at universities in the United States and abroad, including three years
as an assistant adjunct professor of bio-organic chemistry under Dr. Paul Boyer
at the University of California, Los Angeles and four years as an assistant
professor at the University of Texas. Dr. Rogers is a co-inventor of the
Ampakine family of AMPA receptor modulating compounds. He holds a B.S. degree in
organic chemistry from the University of California, Los Angeles and a Ph.D. in
bio-organic chemistry from the University of California, Santa Barbara.
Executive Compensation
The following table sets forth summary information concerning compensation paid
or accrued by the Company for services rendered during the three fiscal years
ended June 30, 1997 to the Company's Chief Executive Officer and to the other
executive officer employed by the Company as of June 30, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation (2) Options(#) Compensation
- ---------------------------- ------ -------- ------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Vincent F. Simmon, Ph.D. (1) 1997 $200,000 $53,138 $50,005 -- $ --
President and Chief 1996 25,000 20,410 3,613 180,000 --
Executive Officer 1995 -- -- -- -- --
D. Scott Hagen 1997 $139,677 $11,024 $10,282 40,000 $ --
Vice President, 1996 128,751 18,750 14,663 11,000 --
Chief Financial Officer 1995 124,583 15,000 9,346 15,000 --
and Secretary
</TABLE>
_______________
25
<PAGE>
(1) Dr. Simmon was appointed President and Chief Executive Officer on May 15,
1996.
(2) Represents accrued or paid-out vacation pay, sick pay and/or relocation
reimbursements.
Option Matters
Option Grants. The following table sets forth certain information concerning
grants of stock options to each of the Company's executive officers named in the
Summary Compensation Table during the fiscal year ended June 30, 1997.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total
Options
Granted to
Options Employees in Exercise Expiration
Name Granted Fiscal Year Price($/Sh) Date
---- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Vincent F. Simmon, Ph.D. -- 0% -- --
D. Scott Hagen 10,000 12% $2.8125 10/03/06
30,000 36% $2.8750 06/17/07
</TABLE>
_______________
Option Exercises. The following table sets forth certain information concerning
the exercise of options by each of the Company's executive officers named in the
Summary Compensation Table during the fiscal year ended June 30, 1997, including
the aggregate value of gains on the date of exercise. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of June 30, 1997. Also reported are the values for "in the
money" options which represent the positive spread between the exercise prices
of any such existing stock options and $3-1/8, the last sale price of Common
Stock on June 30, 1997 as reported by Nasdaq.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-end Option Values
Value Realized
(market price Value of Unexercised
at exercise Number of Unexercised In-the-Money
Shares Acquired less exercise Options at FY-End Options at FY-End
Name on Exercise price) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- --------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vincent F. Simmon, Ph.D. 0 $ 0 64,999 115,001 $0 $ 0
D. Scott Hagen 14,000(1) 19,900 20,767 55,233 0 10,625
</TABLE>
_______________
(1) Acquired upon exercise of a stock option that expired January 31, 1997.
Employment and Consulting Agreements
Vincent F. Simmon joined the Company as President and Chief Executive Officer in
May 1996. Dr. Simmon's employment agreement provides for a base salary of
$200,000 per year and an annual bonus at the discretion of the Board of
Directors of the Company, in cash and/or equity equal to between 15% and 50% of
his base salary, subject to annual review by the Compensation Committee. For the
term commencing May 1996 and ending May 1997, Dr. Simmon received an annual
bonus of $50,000. In addition, Dr. Simmon received a one-time payment of $23,500
to accommodate certain expenses
26
<PAGE>
incurred in connection with relocation. In connection with his employment, Dr.
Simmon was granted options to purchase 180,000 shares of Common Stock at an
exercise price of $5.625 per share, representing 100% of the fair market value
as of the date of grant. The options vest monthly over a three-year period
commencing one month from the date of grant and have a ten-year term.
D. Scott Hagen entered into a three-year employment agreement with the Company
commencing September 1, 1988. The employment agreement has been extended for
additional terms, most recently as of January 1, 1998 for a term ending December
31, 1998. The agreement currently provides for a base salary of $143,100 with an
annual bonus of between $10,000 and $30,000. In the event that Mr. Hagen's
employment is terminated other than for cause or as a result of his voluntary
resignation, death or disability, he will receive a severance payment equal to
six months' salary.
Drs. Carl W. Cotman and Gary S. Lynch (both of whom are co-founders and
Scientific Directors of the Company) have each entered into a consulting
agreement with the Company. Dr. Lynch receives a consulting fee of $65,000 per
year and Dr. Cotman receives a consulting fee of $23,000 per year. The term of
each consulting agreement commenced in 1987 and will continue until terminated
by the respective parties thereto. The consulting agreements obligate the
respective consultants to make themselves available to the Company for
consulting and advisory services for an average of three days per month. In
January 1996, the Stock Option Committee granted fully vested options to Dr.
Lynch to purchase 100,000 shares of Common Stock with an exercise price of $3.50
per share, the then fair market value. Dr. Lynch will be entitled to additional
option grants in connection with the Company's success in corporate partnering
its Ampakine(TM) technology. See also "Director Compensation."
Dr. Davis L. Temple, a director of the Company, entered into a consulting
agreement with the Company in 1994 that provided for the payment of consulting
fees of $10,000 for each six months of service through December 31, 1997.
In connection with his assistance on corporate partnering matters, in July 1997
the Company granted options to Charles Casamento, a director of the Company, to
purchase 40,000 shares of Common Stock with an exercise price of $3.00 per
share, the then fair market value, which options will vest under certain defined
conditions.
Director Compensation
Each non-employee director (other than the Chairman of the Board or those who
join the Board of Directors to oversee an investment in the Company) receives
$1,500 at each Board of Directors meeting attended and an additional $750 annual
retainer for each committee on which he or she serves. The Chairman of the Board
receives $2,500 at each Board of Directors meeting attended and an additional
$750 annual retainer for each committee on which he or she serves.
Under the Company's 1996 Stock Incentive Plan, each non-employee director (other
than those who serve on the Board of Directors to oversee an investment in the
Company) is automatically granted options to purchase 15,000 shares of Common
Stock upon commencement of service as a director and additional options to
purchase 6,000 shares of Common Stock on the date of each Annual Meeting of
Stockholders. Non-employee directors who serve on the Board of Directors to
oversee an investment in the Company receive options to purchase 7,500 shares of
Common Stock upon commencement of service as a director and additional options
to purchase 3,000 shares of Common Stock on the date of each Annual Meeting of
Stockholders. These nonqualified options have an exercise price equal to 100% of
the fair market value of the Common Stock on the date of grant, have a ten-year
term and vest in equal increments of 33-1/3% on each anniversary date of the
dates of grant, and are otherwise subject to the terms and provisions of the
1996 Stock Incentive Plan.
27
<PAGE>
CERTAIN TRANSACTIONS
The Company's Restated Certificate of Incorporation provides that, pursuant to
Delaware law, directors of the Company shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Company and its
stockholders. This provision does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctions or other forms
of non-monetary relief remain available under Delaware law. In addition, each
director continues to be subject to liability for breach of the director's duty
of loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director's responsibility under any
other law, such as the Federal securities laws. The Company has entered into
Indemnification Agreements with each of the officers and directors that obligate
the Company to indemnify such officers and directors as permitted by applicable
law.
As consideration for its agreement to provide financial advisory services
related to corporate finance transactions and corporate partnering activities,
as amended and extended November 29, 1994, Vector Securities International, Inc.
("Vector") was paid an additional cash retainer of $50,000 and was issued a six-
year non-redeemable warrant to purchase 40,604 shares of the Company's Common
Stock at $4.31 per share, as adjusted and subject to adjustment under certain
circumstances. Warrants to purchase 5,800 shares of the Company's Common Stock
vested immediately, and warrants to purchase 17,402 shares of the Company's
Common Stock will vest upon the consummation of each strategic alliance when and
as secured by Vector. Such strategic alliance may include, but is not limited
to, a joint venture, partnership, license or other contract for the research,
development, manufacture, distribution, sale or other activity relating to the
Company's present or future products, the sale of any of the Company's assets or
any rights to its products or technology, or a commitment to provide funding for
all or part of the Company's research and development activities. For its
financial advisory assistance related to the licensing of the Company's calpain
inhibitor technology, in January 1995 the Company paid a $20,000 cash retainer
and issued to Vector a five-year non-redeemable warrant to acquire 50,000 shares
of the Company's Common Stock at $3.00 per share, subject to adjustment under
certain circumstances. This warrant was exercised in February 1997. The Company
may be required to make substantial additional payments for each strategic
alliance secured by Vector. If a sale of the Company as presented by Vector is
consummated, Vector may be entitled to receive a fee based on the aggregate
consideration to be received by the Company. See "Description of
Securities-Vector Warrants."
28
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, to the knowledge of the Company, certain
information regarding the beneficial ownership of the Company's Common Stock as
of January 31, 1998, by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of
the Company's directors, (iii) each of the named executive officers in the
Summary Compensation Table and (iv) all of the Company's executive officers and
directors as a group. Except as indicated in the footnotes to this table, the
Company believes that the persons named in this table have sole voting and
investment power with respect to the shares of Common Stock indicated.
<TABLE>
<CAPTION>
Directors, Nominees, Shares Percent of
Officers, and 5% Beneficially Common Stock
Stockholders Owned Beneficially Owned
- ----------------------- ------------ ------------------
<S> <C> <C>
Robert F. Allnutt 21,750(1) *
Charles J. Casamento 0 *
Carl W. Cotman, Ph.D. 141,125(2) 1.5
Michael G. Grey 16,375(3) *
D. Scott Hagen 27,318(4) *
Harvey S. Sadow, Ph.D. 62,125(5) *
Vincent F. Simmon, Ph.D. 164,599(6) 1.7
Davis L. Temple, Jr., Ph.D. 36,750(7) *
Quantum Partners LDC 660,000(8) 6.9
Soros Fund Management
888 Seventh Avenue, 33rd Floor
New York, NY 10106
All officers, directors and nominees
as a group (8 persons) 470,042 4.8
</TABLE>
_______________
* Less than one percent
(1) Includes 10,750 shares that may be purchased upon exercise of options within
60 days of January 31, 1998.
(2) Includes 43,125 shares that may be purchased upon exercise of options within
60 days of January 31, 1998.
(3) Includes 16,375 shares that may be purchased upon exercise of options within
60 days of January 31, 1998.
(4) Includes 26,918 shares that may be purchased upon exercise of options within
60 days of January 31, 1998.
(5) Includes 52,125 shares that may be purchased upon exercise of options within
60 days of January 31, 1998.
(6) Includes 109,999 shares that may be purchased upon exercise of options
within 60 days of January 31, 1998.
(7) Includes 36,750 shares that may be purchased upon exercise of options within
60 days of January 31, 1998.
(8) According to Amendment No. 4 to Schedule 13D filed by George Soros (in his
capacity as sole proprietor of Soros Fund Management on February 18, 1997),
these shares are held for the account of Quantum Partners LDC, which has
granted investment discretion to Soros Fund Management. Mr. Soros may be
deemed to be beneficial owner of such shares.
The Company is not aware of any arrangements that may at a subsequent date
result in a change of control of the Company.
29
<PAGE>
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of: 20,000,000 shares of
Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred
Stock, par value $0.001 per share, of which 1,250,000 shares have been
designated as 9% Cumulative Convertible Preferred Stock (the "9% Preferred
Stock"), 3,200,000 shares have been designated as Series B Convertible Preferred
Stock (the "Series B Preferred Stock"), 500 shares have been designated as
Series D Convertible Preferred Stock (the "Series D Preferred Stock") and 400
shares have been designated as Series A Convertible Preferred Stock (the "Series
A Preferred Stock").
As of December 31, 1997, there were 9,573,067 shares of Common Stock, 35,000
shares of 9% Preferred Stock, 150,000 shares of Series B Preferred Stock, no
shares of Series D Preferred Stock and 365 shares of Series A Preferred Stock
outstanding. As of the same date, investors in the Series A Preferred Stock
private placement held warrants to purchase 800,000 shares of Common Stock (the
"Series A Warrants"), Vector Securities International, Inc. ("Vector") held
warrants to acquire 305,499 shares of Common Stock (the "Vector Warrants") and
Swartz Investments, Inc. ("Swartz") and its transferees held warrants to
purchase 106,195 shares of Common Stock (the "Swartz Warrants"). Also as of
December 31, 1997, there were 691 record holders of Common Stock, three record
holders of 9% Preferred Stock, three record holders of Series B Preferred Stock,
eleven record holders of Series A Preferred Stock, eleven record holders of the
Series A Warrants, one record holder of the Vector Warrants and ten record
holders of the Swartz Warrants.
In addition, as of December 31, 1997 the Company had reserved an aggregate of
1,052,136 shares of Common Stock for issuance upon exercise of outstanding stock
options held by employees and officers, directors and consultants to the
Company, 4,667 shares for issuance upon conversion of the 9% Preferred Stock,
14,717 shares for issuance upon conversion of the Series B Preferred Stock,
2,594,264 shares for issuance upon conversion of the Series A Preferred Stock,
800,000 shares for issuance upon exercise of the Series A Warrants, 305,499
shares for issuance upon exercise of the Vector Warrants and 106,195 shares for
issuance upon exercise of the Swartz Warrants.
Common Stock
Holders of shares of Common Stock are entitled to one vote per share held of
record on all matters submitted to a vote of stockholders, including the
election of directors. The holders are entitled to receive dividends when, as
and if declared by the Board of Directors, in its discretion, out of funds
legally available therefor, subject to preferences that may be applicable to any
outstanding shares of Preferred Stock. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all of the assets of the Company
remaining after payment of liabilities and after payment of any preferential
amounts to which holders of shares of the 9% Preferred Stock, the Series B
Preferred Stock, the Series A Preferred Stock and any other series of Preferred
Stock that may be outstanding in the future, may be entitled. Holders of Common
Stock have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to such
shares. All of the outstanding shares of Common Stock are, and the Shares of
Common Stock when issued will be, fully paid and nonassessable.
Warrants
In July 1993, in connection with the appointment of Vector Securities
International, Inc. as exclusive financial advisor to the Company, Cortex issued
to Vector a non-redeemable warrant to purchase 12,895 shares of Common Stock at
a price of $6.01 per share, as adjusted and subject to further adjustment under
certain circumstances such as stock splits or stock dividends, at any time
through July 22, 1998.
In December 1993, in connection with the closing of a private placement of
2,750,000 shares of Common Stock, for which Vector acted as placement agent, the
Company issued to Vector a similar warrant to purchase 274,200 shares of Common
Stock at a price of $9.375 per share at any time through November 30, 1998. As
consideration for Vector's assistance in
30
<PAGE>
reaching the settlement with Alkermes, this warrant was canceled and reissued as
a new warrant to purchase 252,000 shares of the Company's Common Stock at $5.00
per share, as adjusted and subject to further adjustment, at any time through
January 15, 2000.
As consideration for its agreement to provide financial advisory services
related to corporate finance transactions and corporate partnering activities,
as amended and extended in November 1994, Vector was issued a six-year non-
redeemable warrant to purchase 40,604 shares of the Company's Common Stock at
$4.31 per share, subject to adjustment under certain circumstances. Warrants to
purchase 5,800 shares of the Company's Common Stock vested immediately, and
warrants to purchase 17,402 shares of the Company's Common Stock will vest upon
the consummation of each strategic alliance, as defined, when and as secured by
Vector.
In connection with the December 1995 private placement of 160 shares of Series C
Preferred Stock, the Company issued to 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.
In connection with the June 1997 private placement of 400 shares of Series A
Preferred Stock, the Company issued to the eleven participating institutional
investors four-year non-redeemable warrants to purchase an aggregate of 800,000
shares of Common Stock at a price of $3.08 per share, subject to adjustment
under certain circumstances.
In connection with the restructuring of the note payable to Alkermes, Inc.,
subsequent to December 31, 1997 the Company agreed to issue to Alkermes a five-
year warrant to purchase 75,000 shares of Common Stock at an exercise price of
$1.547 per share, representing the average of the high and low sale prices of
Cortex Common Stock as reported on the Nasdaq small-cap market on the date of
the restructuring.
Preferred Stock
The holders of the 9% Preferred Stock are not entitled to vote for the election
of directors or upon any other matter presented to the stockholders, except as
and to the extent provided by applicable law. The holders of the 9% Preferred
Stock are entitled to receive cumulative dividends, from and after June 15,
1989, at the rate of $.09 per share per annum, out of funds legally available
therefor, when and as declared by the Board of Directors. Upon any liquidation,
dissolution or winding up of the Company, or any merger or consolidation of the
Company or other transaction in which more than 50% of the Company's voting
power is transferred (except for an issuance of the Company's securities), the
holders of the 9% Preferred Stock are entitled to receive an amount equal to
$1.00 per share plus accrued and unpaid dividends. The holders of the 9%
Preferred Stock are not entitled to share in assets remaining after such
preference is satisfied. The Company has the right at any time to redeem the 9%
Preferred Stock, in whole or in part, upon not less than 30 days' nor more than
60 days' written notice, at a price of $1.00 per share.
Each share of 9% Preferred Stock is convertible at any time at the option of the
holder thereof into approximately 0.1333 shares of Common Stock, at an effective
conversion price of $7.50 per share, subject to adjustment under certain
circumstances. Upon conversion of 9% Preferred Stock, accrued and unpaid
dividends pertaining thereto do not convert to Common Stock, but rather are
credited to additional paid-in capital.
The holders of Series B Preferred Stock are not entitled to vote for the
election of directors or upon any other matter presented to the stockholders,
except as and to the extent provided by applicable law. In the event of any
liquidation, dissolution, winding-up or other distribution of the assets of the
Company, holders of Series B Preferred Stock are entitled to receive, after
payment of the full liquidation preference to holders of 9% Preferred Stock, an
amount equal to $0.6667 per share of Series B Preferred Stock. The Company has
the right to redeem the Series B Preferred Stock for $0.6667 per share. Each
share of Series B Preferred Stock is convertible at any time at the option of
the holder thereof into approximately 0.09812 shares of Common Stock at an
effective conversion price of $6.795 per share, subject to adjustment under
certain circumstances.
31
<PAGE>
Holders of the Series A Preferred Stock are not entitled to vote for the
election of directors or upon any other matter presented to the stockholders,
except as to the extent provided by law. Each share of Series A Preferred is
convertible into Common Stock at an effective conversion price based on the
lowest of the dollar volume weighted average sales prices of the common stock
during the five trading days immediately preceding the date of conversion (the
"Average Stock Price"). The effective conversion price will be equal to 80% of
the Average Stock Price if the Average Stock Price is greater than $2.50 per
share; $2.00 per share if the Average Stock Price is less than $2.50 but greater
than $2.10 per share; or 95% of the Average Stock Price if the Average Stock
Price is less than or equal to $2.10 per share. The applicable conversion rate
is subject to adjustment at the rate of six percent per annum based on the
length of the period from issuance of the Series A Preferred Stock until the
applicable conversion. Provided the effective conversion price for a given
conversion is equal to or greater than $2.75 per share, the holder of the Series
A Preferred Stock may purchase up to the same number of shares of Common Stock
as such holder is acquiring upon such conversion of Series A Preferred Stock, at
such effective price. Any election to exercise this right to purchase additional
shares must be made at the time of conversion of the related Series A Preferred
Stock and is forfeited to the extent that it is not fully exercised at such
time. Holders of the Series A Preferred Stock have a liquidation preference,
after payment of full liquidation preference to holders of the 9% Preferred
Stock and Series B Preferred Stock, of an amount equal to $10,000 per share plus
six percent per annum or portion thereof that such share is outstanding. The
holder may elect to redeem the Series A Preferred Stock under certain
circumstances, such as the delisting of the Company's Common Stock from Nasdaq,
at prices up to 125% of the liquidation preference. Any shares of Series A
Preferred Stock that remain outstanding three years from the date of issuance
automatically convert into Common Stock at the then applicable rate of
conversion.
The Restated Certificate of Incorporation of the Company authorizes the issuance
of 5,000,000 shares of Preferred Stock, of which 549,100 shares remain
undesignated. The Board of Directors, within the limitations and restrictions
contained in the Restated Certificate of Incorporation and without further
action by the Company's stockholders, has the authority to issue this
undesignated Preferred Stock from time to time in one or more series and to fix
the number of shares and the relative rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and any other
preferences, special rights and qualifications of any such series. If shares of
Preferred Stock with voting rights are issued, such issuance could affect the
voting rights of the holders of the Company's Common Stock by increasing the
number of outstanding shares entitled to vote and by the creation of class or
series voting rights. In addition, any further issuance of Preferred Stock
could, under certain circumstances, have the effect of delaying or preventing a
change in control of the Company and may adversely affect the rights of holders
of Common Stock. Other than the shares of 9% Preferred Stock, Series B Preferred
Stock and Series A Preferred Stock, there are no shares of Preferred Stock
currently issued and outstanding and the Company has no present plans to issue
any additional shares of Preferred Stock or to establish or designate any new
series of Preferred Stock.
Transfer Agent and Warrant Agent
American Stock Transfer and Trust Company, 40 Wall Street, New York, New York,
10005 serves as Transfer Agent for the Common Stock, 9% Preferred Stock and
Series B Preferred Stock of the Company.
32
<PAGE>
SELLING STOCKHOLDERS
The Shares are to be offered by and for the respective accounts of the Selling
Stockholders. The number of Shares which each Selling Stockholder may offer is
as follows:
<TABLE>
<CAPTION>
Shares offered
Owned Before Offering (1) pursuant Owned After Offering
--------------------- to this --------------------
Selling Stockholder Shares Percent Prospectus Shares Percent
- ------------------------------------- -------- ------- -------------- ------ -------
<S> <C> <C> <C> <C> <C>
Nelson Partners 150,000 1.5 1,078,238 (2) 0 0
Olympus Securities, Ltd. 150,000 1.5 1,078,238 (2) 0 0
Heracles Fund 100,000 1.0 415,601 (2) 0 0
Themis Partners L.P. 100,000 1.0 387,754 (2) 0 0
MichaelAngelo, L.P. 30,000 * 215,648 (2) 0 0
Raphael, L.P. 30,000 * 215,648 (2) 0 0
Angelo, Gordon & Co. L.P. 22,500 * 161,736 (2) 0 0
GAM Arbitrage Investments, Inc. 22,500 * 161,736 (2) 0 0
AG Super Fund, L.P. 15,000 * 107,824 (2) 0 0
AG Super Fund International
Partners, L.P. 15,000 * 107,824 (2) 0 0
AG Long Term Super Fund, L.P. 15,000 * 107,824 (2) 0 0
Bronnum, Dwight B. 1,500 * 1,500 0 0
Bury, Lance T. 5,000 * 5,000 0 0
Enigma Investments 3,451 * 3,451 0 0
Hale, Joseph H. 13,274 * 13,274 0 0
Hathorn, P. Bradford 5,000 * 5,000 0 0
Hopkins, Robert L. 1,500 * 1,500 0 0
Kendrick Family Partnership L.P. 32,987 * 32,987 0 0
Krusen, Charles 8,496 * 8,496 0 0
Peteler, David K. 2,000 * 2,000 0 0
Swartz Family Partnership, L.P. 32,987 * 32,987 0 0
Vector Securities International, Inc. 305,499(3) 3.1 305,499 0 0
Promethean Investment Group, L.L.C. 150,000(4) 1.5 150,000 0 0
</TABLE>
_______________
* Less than one percent
(1) Represents shares of Common Stock that may be acquired upon exercise of
warrants.
(2) Together these investors hold, in the aggregate, 365 shares of Series A
Preferred Stock and warrants to purchase 650,000 shares of Common Stock.
The Series A Preferred Stock is convertible into Common Stock at conversion
prices that may vary and, at conversion prices greater than or equal to
$2.75 per share of Common Stock, gives rise to a right to purchase
additional shares of Common Stock at the effective conversion price. See
"Description of Securities -- Preferred Stock." In order to provide for the
effects of possible future declines in the market value of the Company's
Common Stock, the number of shares owned before the offering and the number
of shares offered pursuant to the Prospectus in the table above have been
adjusted upward by approximately 25% from the number of shares that would
apply were all of the shares of Series A Preferred Stock converted into
shares of Common Stock as of February 18, 1998. The amounts listed above
include shares issuable upon conversion of Series A Preferred Stock and
exercise of the warrants, but do not include any shares issuable upon
exercise of the right to purchase additional shares. Depending on the date
of conversion, the then current sales price of the Common Stock and whether
any additional purchase rights are exercised, the exact number of shares of
Common Stock issued upon conversion may increase or decrease from the
amounts listed above. See "Risk Factors -- Shares Eligible for Future Sale;
Dilution; Control" and "Description of Securities -- Preferred Stock."
(3) Vector Securities International, Inc. acts as an advisor to the Company on
corporate partnering matters. See "Certain Transactions."
33
<PAGE>
(4) Acquired upon transfer of warrants originally issued to holders of the
Series A Preferred Stock.
PLAN OF DISTRIBUTION
The Company has been advised by each Selling Stockholder that the Selling
Stockholder may sell its Shares from time to time in transactions on Nasdaq in
negotiated transactions, by writing options on the Shares or by a combination of
these methods, at fixed prices that may be changed, at market prices at the time
of sale, at prices related to market prices or at negotiated prices. The Selling
Stockholders may effect these transactions by selling the Shares to or through
broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
the Shares for whom the broker-dealer may act as an agent or to whom they may
sell the Shares as a principal, or both. The compensation to a particular
broker-dealer may be in excess of customary commissions.
The Selling Stockholders and broker-dealers who act in connection with the sale
of the Shares may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions received by such broker-dealers and profits
on any resale of the Shares as a principal may be deemed to be underwriting
discounts and commissions under the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport
Beach, California.
EXPERTS
The financial statements of Cortex Pharmaceuticals, Inc. as of June 30, 1997 and
1996, for each of the two years in the period ended June 30, 1997, and for the
period from inception (February 10, 1987) through June 30, 1997, appearing in
this Prospectus and Amendment to Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets -- As of December 31, 1997 (unaudited), June 30, 1997 and
June 30, 1996........................................................... F-3
Statements of Operations -- For the six-month periods ended December 31,
1997 and 1996 (unaudited), the period from inception (February 10, 1987)
through December 31, 1997 (unaudited), the years ended June 30, 1997 and
1996, and the period from inception (February 10, 1987) through June 30,
1997.................................................................... F-4
Statements of Stockholders' Equity -- For the period from inception
(February 10, 1987) through December 31, 1997 (unaudited as to the
six-month period ended December 31, 1997................................ F-5
Statements of Cash Flows -- For the six-month periods ended December 31,
1997 and 1996 (unaudited), the period from inception (February 10, 1987)
through December 31, 1997 (unaudited), the years ended June 30, 1997 and
1996, and the period from inception (February 10, 1987) through June 30,
1997.................................................................... F-10
Notes to Financial Statements............................................. F-11
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Cortex Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Cortex Pharmaceuticals, Inc.
(a development stage enterprise) as of June 30, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended June 30, 1997 and for the period from inception
(February 10, 1987) through June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cortex Pharmaceuticals, Inc. (a
development stage enterprise) at June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the two years in the period ended June
30, 1997 and for the period from inception (February 10, 1987) through June 30,
1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
July 17, 1997
F-2
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30, June 30,
1997 1997 1996
_____________________________________________________________________________________________
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,937,748 $ 7,568,803 $ 4,091,550
U.S. Government securities -- available for sale 1,772,218 -- --
Other current assets 82,869 71,530 88,427
------------ ------------ ------------
Total current assets 4,792,835 7,640,333 4,179,977
Furniture, equipment and leasehold improvements, net 678,878 669,844 807,601
Other 23,130 23,130 26,342
------------ ------------ ------------
$ 5,494,843 $ 8,333,307 $ 5,013,920
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 271,645 $ 501,603 $ 217,332
Accrued dividends 25,200 74,250 64,350
Accrued wages, salaries and related expenses 47,432 58,683 40,145
Current portion of note payable to Alkermes, Inc. 200,000 -- --
Current obligations under capital lease -- 1,499 8,501
------------ ------------ ------------
Total current liabilities 544,277 636,035 330,328
Obligations under capital leases -- -- 1,499
Note payable to Alkermes, Inc. 921,853 1,092,265 1,037,330
Redeemable preferred stock:
Series A convertible preferred stock, $0.001
par value; $10,000 per share liquidation
preference; shares authorized: 400; shares
issued and outstanding: 365 (December 31,
1997) and 400 (June 30, 1997) 3,592,257 3,936,720 --
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: 35,000 (December 31, 1997) and
110,000 (June 30, 1997 and June 30, 1996) 35,000 110,000 110,000
Series B convertible preferred stock, $0.001 par
value; $0.6667 per share liquidation preference;
shares authorized: 3,200,000; shares issued and
outstanding: 150,000 86,810 86,810 86,810
Series C convertible preferred stock, $0.001 par
value; $25,000 per share liquidation preference;
shares authorized: 160; shares issued and
outstanding: 35 (June 30, 1996) -- -- 752,476
Common stock, $0.001 par value; shares authorized:
20,000,000; shares issued and outstanding:
9,573,067 (December 31, 1997), 9,394,249 (June 30,
1997) and 7,495,576 (June 30, 1996) 9,573 9,394 7,496
Additional paid-in capital 35,113,156 34,643,526 28,047,279
Unrealized gain on available for sale
U.S. Government securities 941 -- --
Deficit accumulated during the development stage (34,809,024) (32,181,443) (25,359,298)
------------ ------------ ------------
Total stockholders' equity 436,456 2,668,287 3,644,763
------------ ------------ ------------
$ 5,494,843 $ 8,333,307 $ 5,013,920
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
(Unaudited) inception inception
Six months ended (February 10, (February 10,
December 31, 1987) through Years ended June 30, 1987) through
-------------------------- December 31, -------------------------- June 30,
1997 1996 1997 1997 1996 1997
_______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Research and license revenue $ 50,000 $ -- $ 3,650,000 $ -- $ -- $ 3,600,000
Grant revenue -- -- 94,717 -- -- 94,717
----------- ----------- ------------ ----------- ----------- ------------
Total revenues 50,000 -- 3,744,717 -- -- 3,694,717
----------- ----------- ------------ ----------- ----------- ------------
Operating expenses:
Research and development 1,972,569 1,662,473 24,317,965 3,376,284 2,677,577 22,345,396
General and administrative 845,136 904,105 12,605,015 1,709,320 1,643,732 11,759,879
Settlement with Alkermes,
Inc. -- -- 1,227,977 -- -- 1,227,977
----------- ----------- ------------ ----------- ----------- ------------
Total operating expenses 2,817,705 2,566,578 38,150,957 5,085,604 4,321,309 35,333,252
----------- ----------- ------------ ----------- ----------- ------------
Loss from operations (2,767,705) (2,566,578) (34,406,240) (5,085,604) (4,321,309) (31,638,535)
Interest income, net 140,124 64,078 1,629,055 155,624 163,062 1,488,931
----------- ----------- ------------ ----------- ----------- ------------
Net loss before preferred
stock accretion and dividends $(2,627,581) $(2,502,500) $(32,777,185) $(4,929,980) $(4,158,247) $(30,149,604)
----------- ----------- ------------ ----------- ----------- ------------
Preferred stock accretion
and dividends:
Accretion of and dividends
on 9% Cumulative
Convertible Preferred Stock 1,575 4,950 606,349 9,900 9,900 604,774
Imputed dividends for
Series D Convertible
Preferred Stock -- 221,137 879,672 879,672 -- 879,672
Imputed dividends for
Series A Convertible
Preferred Stock -- -- 1,012,493 1,012,493 -- 1,012,493
----------- ----------- ------------ ----------- ----------- ------------
Net loss applicable to common
stock $(2,629,156) $(2,728,587) $(35,275,699) $(6,832,045) $(4,168,147) $(32,646,543)
=========== =========== ============ =========== =========== ============
Weighted average common shares
outstanding 9,467,345 7,653,682 8,252,047 6,532,884
=========== =========== =========== ===========
Net loss per share $ (0.28) $ (0.36) $ (0.83) $ (0.64)
=========== =========== =========== ===========
</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 Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in Deferred
stock stock stock stock stock capital compensation
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 10, 1987
(date of inception) $-- $ -- $-- $-- $ -- $ -- $ --
Sale of 1,420,000 shares of common
stock, $0.005 per share -- -- -- -- 1,420 5,680 --
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 (291,938)
Amortization of deferred compensation -- -- -- -- -- -- 90,016
9% preferred stock dividends -- -- -- -- -- (85,653) --
9% preferred stock accretion -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
--- ---------- --- --- ------ ---------- ---------
Balance, June 30, 1991 $-- $1,841,108 $-- $-- $2,633 $6,836,041 $(201,922)
--- ---------- --- --- ------ ---------- ---------
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Government development
securities stage Total
_____________________________________________________________________________________
<S> <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 -- -- 38,146
Amortization of deferred compensation -- -- 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 $-- $(6,504,980) $ 1,972,880
--- ----------- -----------
</TABLE>
Continued . . .
F-5
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in Deferred
stock stock stock stock stock capital compensation
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1991 $-- $1,841,108 $-- $-- $2,633 $ 6,836,041 $(201,922)
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 (19,375)
Forfeiture of compensatory stock options -- -- -- -- -- (146,182) 146,182
Amortization of deferred compensation -- -- -- -- -- -- 58,567
9% preferred stock dividends -- -- -- -- -- (68,906) --
9% preferred stock accretion -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
--- ---------- --- --- ------ ----------- ---------
Balance, June 30, 1992 -- 958,532 -- -- 3,047 9,473,384 (16,548)
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 (280,000)
Amortization of deferred compensation -- -- -- -- -- -- 36,897
9% preferred stock dividends -- -- -- -- -- (53,028) --
9% preferred stock accretion -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
--- ---------- --- --- ------ ----------- ---------
Balance, June 30, 1993 $-- $ 332,774 $-- $-- $3,210 $10,720,659 $(259,651)
--- ---------- --- --- ------ ----------- ---------
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Government development
securities stage Total
____________________________________________________________________________________
<S> <C> <C> <C>
Balance, June 30, 1991 $-- $(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 -- -- 5,157
Forfeiture of compensatory stock options -- -- --
Amortization of deferred compensation -- -- 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 -- (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 -- -- 70,000
Amortization of deferred compensation -- -- 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 $-- $(9,960,528) $ 1,136,464
--- ----------- -----------
</TABLE>
Continued . . .
F-6
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in Deferred
stock stock stock stock stock capital compensation
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $ -- $332,774 $-- $-- $3,210 $10,720,659 $(259,651)
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 -- -- -- -- -- -- 58,200
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 (201,451)
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 -- -- -- -- -- -- 56,092
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 $(145,359)
-------- -------- --- --- ------ ----------- ---------
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Government development
securities stage Total
______________________________________________________________________________________
<S> <C> <C> <C>
Balance, June 30, 1993 $ -- $ (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
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 (163,562) (14,365,519) 9,297,881
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
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 $(18,606) $(21,201,051) $ 3,272,696
-------- ------------ -----------
</TABLE>
Continued . . .
F-7
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in Deferred
stock stock stock stock stock capital compensation
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $6,085 $23,957,790 $(145,359)
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 1,133,037 shares
of common stock -- -- (2,687,414) -- 1,133 2,686,281 --
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 -- -- -- -- 206 774,049 --
Amortization of deferred compensation -- -- -- -- -- -- 42,109
Reversal of unamortized deferred
compensation upon resignation of Chief
Executive Officer -- -- -- -- -- (103,250) 103,250
9% preferred stock dividends -- -- -- -- -- (9,900) --
Decrease in unrealized loss on available
for sale U.S. Government securities -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
--------- --------- ----------- ----------- ------ ----------- ---------
Balance, June 30, 1996 110,000 86,810 752,476 -- 7,496 28,047,279 --
Series A preferred stock imputed
dividends -- -- -- -- -- 1,012,493 --
Sale of 400 shares of Series D
convertible preferred stock, $10,000
per share, net of expenses -- -- -- 3,719,636 -- -- --
Series D preferred stock imputed
dividends -- -- -- -- -- 879,672 --
Conversion of 35 shares of Series C
convertible preferred stock into
384,574 shares of common stock -- -- (752,476) -- 384 752,092 --
Conversion of 400 shares of Series D
convertible preferred stock into
1,433,437 shares of common stock -- -- -- (3,719,636) 1,433 3,718,203 --
Issuance of 50,000 shares of common
stock upon exercise of warrant -- -- -- -- 50 149,950 --
Issuance of 30,662 shares of common
stock upon exercise of stock options -- -- -- -- 31 93,737 --
9% preferred stock dividends -- -- -- -- -- (9,900) --
Net loss -- -- -- -- -- -- --
--------- --------- ----------- ----------- ------ ----------- ---------
Balance, June 30, 1997 $ 110,000 $ 86,810 $ -- $ -- $9,394 $34,643,526 $ --
========= ========= =========== =========== ====== =========== =========
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Government development
securities stage Total
_____________________________________________________________________________________
<S> <C> <C> <C>
Balance, June 30, 1995 $(145,359) $(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 1,133,037 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 -- -- 774,255
Amortization of deferred compensation 42,109 -- 42,109
Reversal of unamortized deferred
compensation upon resignation of Chief
Executive Officer 103,250 -- --
9% preferred stock dividends -- -- (9,900)
Decrease in unrealized loss on available
for sale U.S. Government securities -- -- 18,606
Net loss -- (4,158,247) (4,158,247)
--------- ------------ -----------
Balance, June 30, 1996 -- (25,359,298) 3,644,763
Series A preferred stock imputed
dividends -- (1,012,493) --
Sale of 400 shares of Series D
convertible preferred stock, $10,000
per share, net of expenses -- -- 3,719,636
Series D preferred stock imputed
dividends -- (879,672) --
Conversion of 35 shares of Series C
convertible preferred stock into
384,574 shares of common stock -- -- --
Conversion of 400 shares of Series D
convertible preferred stock into
1,433,437 shares of common stock -- -- --
Issuance of 50,000 shares of common
stock upon exercise of warrant -- -- 150,000
Issuance of 30,662 shares of common
stock upon exercise of stock options -- -- 93,768
9% preferred stock dividends -- -- (9,900)
Net loss -- (4,929,980) (4,929,980)
--------- ------------ -----------
Balance, June 30, 1997 $ -- $(32,181,443) $ 2,668,287
========= ============ ===========
</TABLE>
Continued . . .
F-8
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in Deferred
stock stock stock stock stock capital compensation
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $110,000 $86,810 $-- $-- $9,394 $34,643,526 $--
Conversion of 75,000 shares of 9%
preferred stock into 9,999 shares of
common stock (unaudited) (75,000) -- -- -- 10 74,990 --
Conversion of 35 shares of Series A
preferred stock into 168,809 shares of
common stock (unaudited) -- -- -- -- 169 345,590 --
Adjustment of accrued dividends for
conversion of 9% preferred stock
(unaudited) -- -- -- -- -- 50,625 --
9% preferred stock dividends (unaudited) -- -- -- -- -- (1,575) --
Unrealized gain on available for sale
U.S. Government securities (unaudited) -- -- -- -- -- -- --
Net loss (unaudited) -- -- -- -- -- -- --
-------- ------- --- --- ------ ----------- ---
Balance, December 31, 1997 (unaudited) $ 35,000 $86,810 $-- $-- $9,573 $35,113,156 $--
======== ======= === === ====== =========== ===
<CAPTION>
Unrealized gain Deficit
on available accumulated
for sale U.S. during the
Government development
securities stage Total
______________________________________________________________________________________
<S> <C> <C> <C>
Balance, June 30, 1997 $-- $(32,181,443) $ 2,668,287
Conversion of 75,000 shares of 9%
preferred stock into 9,999 shares of
common stock (unaudited) -- -- --
Conversion of 35 shares of Series A
preferred stock into 168,809 shares of
common stock (unaudited) -- -- 345,759
Adjustment of accrued dividends for
conversion of 9% preferred stock
(unaudited) -- -- 50,625
9% preferred stock dividends (unaudited) -- -- (1,575)
Unrealized gain on available for sale
U.S. Government securities (unaudited) 941 -- 941
Net loss (unaudited) -- (2,627,581) (2,627,581)
---- ------------ -----------
Balance, December 31, 1997 (unaudited) $941 $(34,809,024) $ 436,456
==== ============ ===========
</TABLE>
See accompanying notes.
F-9
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
(Unaudited) inception inception
Six months ended (February 10, (February 10,
December 31, 1987) through Years ended June 30, 1987) through
------------------------- December 31, -------------------------- June 30,
1997 1996 1997 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,627,581) $(2,502,500) $(32,777,185) $(4,929,980) $ (4,158,247) $(30,149,604)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 96,602 101,993 1,403,683 198,059 230,224 1,307,081
Settlement with Alkermes, Inc. -- -- 1,227,977 -- -- 1,227,977
Changes in operating assets/liabilities:
Accounts payable and accrued expenses (241,209) 59,813 319,077 302,809 (155,335) 560,286
Accrued interest on U.S. Govt.
securities (30,238) (9,335) (192,767) (12,673) (130,759) (161,393)
Other current assets (11,339) (30,910) (82,869) 16,897 3,785 (71,530)
Interest receivable from former officer -- -- (19,274) -- -- (19,274)
Realized loss on sale of U.S. Govt.
securities -- -- 54,317 -- 1,270 54,317
Stock option compensation expense -- -- 555,809 -- 42,109 555,809
Stock issued for services -- -- 28,750 -- -- 28,750
Reduction in note receivable from former
officer--compensation expense -- -- 22,600 -- -- 22,600
Other 29,588 27,561 129,842 54,935 37,330 100,254
----------- ----------- ------------ ----------- ------------ ------------
Net cash used in operating activities (2,784,177) (2,353,378) (29,330,040) (4,369,953) (4,129,623) (26,544,727)
----------- ----------- ------------ ----------- ------------ ------------
Cash flows from investing activities:
U.S. Government securities--available for sale
Purchases (1,739,743) (937,327) (38,823,486) (937,327) (19,298,746) (37,083,743)
Sales -- -- 37,190,820 950,000 23,136,197 37,190,820
Purchase of fixed assets (105,636) (4,086) (2,054,037) (61,054) (108,807) (1,948,401)
Sale of fixed assets -- -- 10,988 752 2,777 10,988
Decrease (increase) in--
Other assets -- 3,212 (39,870) 3,212 (3,212) (39,870)
Note receivable from former officer -- -- (100,000) -- -- (100,000)
----------- ----------- ------------ ----------- ------------ ------------
Net cash provided by (used in) investing
activities (1,845,379) (938,201) (3,815,585) (44,417) 3,728,209 (1,970,206)
----------- ----------- ------------ ----------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of 9% preferred stock -- -- 1,076,588 -- -- 1,076,588
Redemption of 9% preferred stock -- -- (63,750) -- -- (63,750)
Payment of 9% preferred stock dividends -- -- (110,250) -- -- (110,250)
Proceeds from issuance of Series B convertible
preferred stock -- -- 1,841,108 -- -- 1,841,108
Proceeds from issuance of Series C convertible
preferred stock -- -- 3,576,543 -- 3,576,543 3,576,543
Proceeds from issuance of Series D convertible
preferred stock -- 923,130 3,719,636 3,719,636 -- 3,719,636
Proceeds from issuance of Series A convertible
preferred stock -- -- 3,936,720 3,936,720 -- 3,936,720
Proceeds from issuance of common stock -- 58,929 21,922,418 243,768 774,255 21,921,282
Proceeds from subordinated convertible note -- -- 208,333 -- -- 208,333
Principal payments on capitalized leases (1,499) (4,148) (23,973) (8,501) (7,714) (22,474)
----------- ----------- ------------ ----------- ------------ ------------
Net cash provided by (used in) financing
activities (1,499) 977,911 36,083,373 7,891,623 4,343,084 36,083,736
----------- ----------- ------------ ----------- ------------ ------------
Increase (decrease) in cash and cash
equivalents (4,631,055) (2,313,668) 2,937,748 3,477,253 3,941,670 7,568,803
Cash and cash equivalents, beginning of period 7,568,803 4,091,550 -- 4,091,550 149,880 --
----------- ----------- ----------- ----------- ------------ ------------
Cash and cash equivalents, end of period $ 2,937,748 $ 1,777,882 $ 2,937,748 $ 7,568,803 $ 4,091,550 $ 7,568,803
=========== =========== =========== =========== ============ ============
</TABLE>
See accompanying notes.
F-10
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Period from inception (February 10, 1987) through December 31, 1997
All information as of December 31, 1997, for the six-month periods ended
December 31, 1997 and 1996, and for the period from inception (February 10,
1987) through December 31, 1997 is unaudited. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six-month
period ended December 31, 1997 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 1998.
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 early clinical development activities.
Basis of Presentation; Development Stage Enterprise -- From inception through
December 31, 1997, the Company has generated only modest operating revenues and
has incurred losses aggregating $32,777,185. Successful completion of the
Company's development program and its transition, ultimately, to attaining
profitable operations is dependent upon obtaining additional financing adequate
to fulfill its research and development activities, and achieving a level of
revenue adequate to support the Company's cost structure. There is no assurance
that the Company will be successful in these areas. To supplement its existing
resources, the Company is likely to raise additional capital through the sale of
debt or equity. There is no assurance that such funds will be available on
favorable terms, or at all and if additional funds are raised by issuing equity
securities, dilution to existing stockholders is likely to result.
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. Competition for corporate partnering arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
companies attempting to arrive at such arrangements. Accordingly, although the
Company is presently engaged in discussions with a number of candidate
companies, there is 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.
Cash Equivalents -- The Company considers all highly liquid short-term
investments with maturities of less than three months when acquired to be cash
equivalents.
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.
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 reverse split.
Net Loss per Share -- Net loss per share is computed based on the weighted
average number of common shares outstanding and includes preferred stock
dividends. 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. For purposes of computing net loss per share, preferred
stock dividends include dividends that actually accrued and `imputed dividends'
for preferred stock issued with a nondetachable beneficial conversion feature
near the date
F-11
<PAGE>
of issuance. Imputed dividend represents the aggregate difference between the
conversion price and the fair market value of the common stock as of the date of
issuance of the preferred stock, without regard to the actual date upon which
the preferred stock may be converted.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All net loss per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
Stock-Based Compensation -- The Company has elected to follow Accounting
Principles Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25),
in accounting for its employee stock options because the alternative fair value
accounting provided under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. According to APB 25, no compensation expense is recognized since the
exercise price of the Company's stock options generally equals the market price
of the underlying stock on the date of grant.
Research and Development Costs -- All costs related to research and development
activities are treated as expenses in the period incurred.
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.
Reclassifications -- Certain previously reported amounts have been reclassified
to conform with the June 30, 1997 presentation.
Note 2 -- Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
(Unaudited)
December 31, 1997 June 30, 1997 June 30, 1996
-----------------------------------------------
<S> <C> <C> <C>
Laboratory equipment $ 1,092,461 $ 1,017,461 $ 990,329
Leasehold improvements 622,036 620,716 619,566
Furniture and equipment 112,251 90,689 89,773
Computers and software 230,784 223,030 193,372
----------- ----------- -----------
2,057,532 1,951,896 1,893,040
Accumulated depreciation (1,378,654) (1,282,052) (1,085,439)
----------- ----------- -----------
$ 678,878 $ 669,844 $ 807,601
=========== =========== ===========
</TABLE>
Note 3 -- Redeemable Preferred Stock
In May 1997, the Board of Directors designated 400 shares of a newly created
series of preferred stock, the Series A Convertible Preferred Stock ("Series A
Preferred"). Series A Preferred at December 31, 1997 and June 30, 1997 consisted
of 365 and 400 shares, respectively, of 400 shares issued in a two-tranche
private placement during June 1997. The Series A Preferred is convertible at an
effective conversion price derived from the lowest of the dollar volume weighted
average trading prices of the Company's common stock for each of the five
trading days immediately preceding the conversion date ("Average Stock Price").
The effective conversion price will be equal to 80% of the Average Stock Price
if the Average Stock Price is greater than $2.50 per share; $2.00 per share if
the Average Stock Price is less than $2.50 but greater than $2.10 per share; or
95% of the Average Stock Price if the Average Stock Price is less than or equal
to $2.10 per share. The conversion rate is subject to adjustment at the rate of
six percent per annum based on the length of the period from issuance of the
Series A Preferred until its conversion. Provided the effective conversion price
for a given conversion is equal to or greater than $2.75 per share, the holder
of the Series A Preferred may purchase up to the same number of common shares as
the holder is acquiring upon such conversion at the effective conversion price.
Any election to exercise this right to purchase additional shares must be made
at the time of conversion of the related Series A Preferred, and the right is
forfeited
F-12
<PAGE>
to the extent that it is not fully exercised at such time. Holders of the Series
A Preferred are entitled to a liquidation preference, after payment of full
liquidation preference to holders of the 9% Preferred and Series B Preferred, of
an amount equal to $10,000 per share, plus $600 per share for each year that
such share is outstanding. The Series A Preferred holders may elect to redeem
their shares under certain circumstances, such as the delisting of the Company's
common stock from Nasdaq, at prices up to 125% of the liquidation preference.
The Series A Preferred automatically converts into common stock on the third
anniversary from the date of issuance of such shares. Imputed dividends of
$1,012,493 related to the private placement have been recorded and included in
the computation of net loss per share (Note 1).
Note 4 -- Stockholders' Equity
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"); 500 shares have been designated as Series D Convertible
Preferred Stock (non-voting, "Series D Preferred"); 400 shares have been
designated as Series A Convertible Preferred Stock (non-voting, "Series A
Preferred"); and 549,100 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 December 31, 1997, June 30,
1997 and June 30, 1996 consisted of 35,000, 110,000 and 110,000 shares,
respectively, of an original 1,250,000 shares of 9% Preferred issued in a 1988
private placement. Each share of 9% Preferred is convertible into approximately
0.1333 shares of common stock at an effective conversion price of $7.50 per
share of common stock, subject to adjustment under certain circumstances, such
as stock splits or stock dividends. Cash dividends on the 9% Preferred accrue
semi-annually on June 15th and December 15th at the rate of $0.09 per share per
annum. In order to conserve capital for operations, the Company has elected not
to distribute the dividends that have accrued from June 15, 1990. Upon
conversion of 9% Preferred, accrued and unpaid dividends are credited to
additional paid-in capital. Accrued and unpaid dividends as of December 31,
1997, June 30, 1997 and June 30, 1996 were $25,200, $74,250, and $64,350,
respectively. 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 December 31, 1997, June 30, 1997 and
June 30, 1996 consisted of 150,000 shares 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. 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. During the year ended June 30, 1997, all outstanding
shares of Series C Preferred were converted into common stock in accordance with
a formula that was indexed to the average bid price of the Company's common
shares.
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"). An aggregate of 400 shares of Series D Preferred were issued in a
three-tranche private placement initiated in October 1996 and completed in
February 1997. Each share of Series D Preferred was convertible into common
stock at an effective per share conversion price that was the lower of (i) 110%
of the average closing bid price for the five trading days immediately preceding
the closing date ($2.9425, $4.52375 and $4.63375 for the first, second and third
tranches, respectively) or (ii) that price that was 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. As of June 30, 1997, the Series D Preferred had all been
converted
F-13
<PAGE>
into an aggregate of 1,433,437 shares of the Company's common stock at
effective conversion prices ranging from $2.06 to $3.35 per share of common
stock. Imputed dividends aggregating $879,672 were recorded in connection with
the three tranches, and have been included in the computation of net loss per
share (Note 1).
Common Stock and Common Stock Purchase Warrants
In connection with the December 1995 private placement of 160 shares of Series C
Preferred Stock, the Company issued 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.
In connection with the June 1997 private placement of 400 shares of Series A
Preferred Stock, the Company issued to the eleven participating institutional
investors four-year non-redeemable warrants to purchase an aggregate of 800,000
shares of common stock at a price of $3.08 per share, subject to adjustment
under certain circumstances.
As of December 31, 1997, the Company had reserved an aggregate of 4,667 shares
of common stock for issuance upon conversion of the outstanding 9% Preferred
Stock; 14,717 shares for issuance upon conversion of the Series B Preferred
Stock; 2,594,264 shares for issuance upon conversion of the Series A Preferred
Stock; 1,211,694 shares for issuance upon exercise of warrants; and 1,052,136
shares for issuance upon exercise of outstanding stock options.
In connection with the restructuring of the note payable to Alkermes, Inc. (Note
5), subsequent to December 31, 1997 the Company agreed to issue to Alkermes a
five-year warrant to purchase 75,000 share of common stock at an exercise price
of $1.547 per share, representing the average of the high and low sale prices of
Cortex common stock as of the date of the restructuring.
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 700,000
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. As of December 31, 1997 and June 30,
1997, options to purchase an aggregate of 489,062 and 530,662 shares of common
stock, respectively, were outstanding under this plan, and an additional 89,654
and 48,054 shares of common stock, respectively, were reserved for future option
grants.
Consultant Plan -- The Company's 1989 Special Nonqualified Stock Option and
Stock Purchase Plan provides for the granting by the Company of options and
rights to purchase up to an aggregate of 400,000 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. As of December 31, 1997 and June 30, 1997, options to
purchase an aggregate of 332,407 and 337,407 shares of common stock,
respectively, were outstanding under this plan, and an additional 14,026 and
9,026 shares of common stock, respectively, were reserved for future option
grants.
Executive Stock Plan -- In connection with his 1991 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. As of December 31,
1997 and June 30, 1997, 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.
F-14
<PAGE>
1996 Stock Incentive Plan -- The Company's 1996 Stock Incentive Plan ("1996
Plan") provides for the granting of options and rights to purchase up to an
aggregate of 939,312 shares of the Company's authorized but unissued common
stock (subject to adjustment under certain circumstances, such as stock splits,
recapitalizations and reorganizations) to qualified employees, officers,
directors, consultants and other service providers. No further options will be
granted under the Company's earlier stock option and stock purchase plans. The
exercise price of nonqualified stock options and the purchase price of stock
offered under the 1996 Plan, which terminates October 25, 2006, must be at least
85% of the fair market value of the common stock of 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 6,000 shares of common stock on the date of each Annual
Meeting of Stockholders. Non-employee directors who serve on the Board of
Directors to oversee an investment in the Company receive options to purchase
7,500 shares of common stock upon commencement of service as a director and
additional options to purchase 3,000 shares of common stock on the date of each
Annual Meeting of Stockholders. These nonqualified options have an exercise
price equal to 100% of the fair market value of the common stock on the date of
grant, have a ten-year term and vest in equal increments of 33-1/3% on the
anniversary dates of the dates of grant. As of December 31, 1997 and June 30,
1997, options to purchase an aggregate of 203,903 and 91,110 shares of common
stock, respectively, were outstanding under the 1996 Plan, and an additional
735,409 and 522,022 shares of common stock, respectively, were reserved for
future option grants.
As of December 31, 1997 and June 30, 1997, options to purchase an aggregate of
607,369 and 529,438 shares of common stock, respectively, were exercisable under
the Company's stock option plans. During the years ended June 30, 1997 and 1996
and the period from inception (February 10, 1987) through June 30, 1997, 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. Stock option compensation
expense related to these transactions, aggregating $0, $0, $555,809, $0, $42,109
and $555,809 for the six-month periods ended December 31, 1997 and 1996, and the
period from inception (February 10, 1987) through December 31, 1997, the years
ended June 30, 1997 and 1996 and the period from inception (February 10, 1987)
through June 30, 1997, respectively, has been recorded in the accompanying
statements of operations.
Stock option transactions under the Company's stock option plans for each of the
two years in the period ended June 30, 1997 and the six-month period December
31, 1997 ended are summarized below:
<TABLE>
<CAPTION>
Weighted average
Number exercise price
of shares per share
------------- ----------------
<S> <C> <C>
Outstanding as of June 30, 1995 828,868 $ 4.03
Granted 409,101 4.80
Exercised (205,878) 3.77
Forfeited (136,160) 3.77
------------ ------
Outstanding as of June 30, 1996 895,931 $ 4.39
Granted 143,117 3.30
Exercised (30,662) 3.06
Forfeited (39,207) 4.85
------------ ------
Outstanding as of June 30, 1997 969,179 $ 4.25
======
Granted (Unaudited) 114,993 2.59
Exercised (Unaudited) 0 --
Forfeited (Unaudited) (48,800) 5.63
------------ ------
Outstanding as of December 31, 1997 (Unaudited) 1,035,372 $ 4.00
============ ======
Available for future grant (Unaudited) 1,047,960
============
</TABLE>
F-15
<PAGE>
Pro-Forma Information -- The Company has elected to continue accounting for its
employee stock options in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25,
because the exercise price of the Company's employee stock options is equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net loss and net loss per share is required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and has been determined as if the Company had
accounted for its employee stock plans under the fair value method. The fair
value was estimated at the date of grant using the Black-Scholes option pricing
model and the following assumptions for the years ended June 30, 1997 and 1996,
respectively: risk-free interest rates of 5.7% to 6.1% and 5.9% to 6.5%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 100% and 94%; and a weighted average life of 0.5 to
4.2 years and 1.3 to 5.2 years. The estimated weighted average fair value of
options granted during the years ended June 30, 1997 and 1996 was $1.95 and
$2.48, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized as expense over the vesting period of the options, resulting in the
following pro forma information for the years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
June 30,
1997 1996
---------- -----------
<S> <C> <C>
Pro forma net loss $5,436,435 $4,413,447
Pro forma net loss per share $ (0.89) $ (0.68)
</TABLE>
The results above are not necessarily indicative of the effects of SFAS 123 on
reported net income or loss for future periods as these amounts reflect the
related expense for only two years of stock option vesting.
Information regarding stock options outstanding at June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- --------------------------------------------------
Weighted
Number average Weighted Number Weighted
Range of outstanding remaining average exercisable average
exercise prices at June 30, 1997 contractual life exercise price at June 30, 1997 exercise price
- ------------------------ ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$1.56 - 3.13 452,526 7.42 years $2.87 234,673 $2.85
3.25 - 5.63 399,319 8.63 years 4.77 196,915 4.39
5.75 - 10.94 117,334 5.12 years 7.79 97,850 7.90
---------------- ----------------
969,179 529,438
================ ================
</TABLE>
Note 5 -- Agreement with Alkermes, Inc.; Legal Proceedings
In January 1992, the Company entered into an agreement with Alkermes, Inc.
("Alkermes") for the development, clinical testing and commercialization of the
Company's calpain inhibitor products, which was subsequently
F-16
<PAGE>
amended in October 1992 (the "Alkermes Agreement"). In connection with the
Alkermes Agreement, the Company granted 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. The Company received an aggregate of $3,100,000 in
research payments under the Alkermes Agreement 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 alleging that the Company had breached the Alkermes Agreement by
developing calpain inhibitors for cerebral vasospasm. In October 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. 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. Subsequent to December 31, 1997, the terms of the note were
restructured. The new terms include a principal payment of $200,000 upon signing
of the restructuring agreement, with the balance of the note and accrued
interest due October 5, 1999 or upon consummation of a corporate partnership
between Cortex and a larger pharmaceutical company, whichever is earlier. In
connection with the restructuring, the Company agreed to issued to Alkermes a
five-year warrant to purchase 75,000 shares of common stock at an exercise price
of $1.547 per share, representing the average of the high and low sale prices of
Cortex common stock as of the date of the restructuring.
Note 6 -- 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 six-
month periods ended December 31, 1997 and 1996, the period from inception
(February 10, 1987) through December 31, 1997, the years ended June 30, 1997 and
1996 and the period from inception (February 10, 1987) through June 30, 1997 was
$122,000, $104,000, $1,761,000, $215,000, $193,000 and $1,639,000, respectively.
Commitments under the lease for the years ending June 30, 1998 and 1999 are
$243,000 and $229,000, respectively.
As of June 30, 1997, the Company was obligated to two executive officers under
employment agreements expiring through May 1998 that involve annual salary
payments aggregating $341,113 and that provide for bonuses under certain
circumstances. Additionally, in the event that the Company commercializes a
compound developed by or under the supervision of one of its senior scientific
employees, 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. As of June 30, 1997, the Company was
committed under scientific consulting and external research agreements to annual
payments aggregating approximately $889,000.
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 year
ending June 30, 1998. Thereafter, minimum annual royalties are $105,000 for the
remaining life of the patents covering the subject technologies. The agreements
also commit the Company to pay up to an additional $912,500 upon achieving
certain clinical testing and regulatory approval milestones, as well as a
portion of certain remuneration received by the Company in connection with
sublicensing agreements that the Company may enter into.
Note 7 -- Related Party Transactions
During the years ended June 30, 1997 and 1996, and the period from inception
(February 10, 1987) through June 30, 1997, the Company paid or accrued
scientific and other consulting fees to stockholders aggregating $88,000,
$87,160 and $1,018,557, respectively. Under certain circumstances, the Company
is obligated 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.
F-17
<PAGE>
In July 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 certain of the Company's 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 12,895 shares of common stock at an
exercise price of $6.01 per share, as adjusted and subject to further adjustment
under certain circumstances.
In connection with its services as placement agent in the 1993 private placement
of 2,750,000 shares of common stock, 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 5), this warrant was
canceled and reissued as a new warrant to purchase 252,000 shares of the
Company's common stock at $5.00 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 in November 1994, Vector was paid a retainer of $50,000 and
was issued a six-year non-redeemable warrant to purchase 40,604 shares of the
Company's common stock at $4.31 per share, subject to adjustment under certain
circumstances. Warrants to purchase 5,800 shares of the Company's common stock
vested immediately, and warrants to purchase 17,402 shares of the Company's
common stock vest upon the consummation of each strategic alliance when and as
secured by Vector. In January 1995, in connection with an expansion of its
financial advisory assistance to include additional programs, 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. This
warrant was exercised in February 1997. 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 8 -- 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, 1997, the Company had
federal and California tax net operating loss carryforwards of approximately
$27,969,000 and $4,333,000, 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
California tax loss carryforwards began expiring in 1997, while the federal
carryforwards begin expiring in 2004. The Company also has federal and
California research and development tax credit carryforwards totaling $828,000
and $261,000, respectively, which begin expiring in 2004.
Utilization of the net operating loss 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. If there should be
future changes of ownership, these annual limitations for utilization of net
operating loss and tax credit carryforwards may become more restrictive.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net
operating loss carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within any three-year period since the last ownership
change.
Significant components of the Company's deferred tax assets as of June 30, 1997
and June 30, 1996 are shown below. The valuation allowance related to deferred
tax assets is $13,024,000 and $10,847,000 for the years ended June 30, 1997 and
1996, respectively. The increase in the valuation allowance for the year ended
June 30, 1997 of $2,177,000 is primarily due to additional reserves required for
new deferred tax assets.
F-18
<PAGE>
Deferred tax assets:
<TABLE>
<CAPTION>
June 30,
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $ 9,892,000 $ 8,285,000
Capital loss carryforwards 23,000 23,000
Research and development credits 1,089,000 817,000
Capitalized research and development costs 1,467,000 1,244,000
Settlement with Alkermes, Inc. 468,000 433,000
Depreciation 41,000 24,000
Other-net 44,000 21,000
------------ ------------
Net deferred tax assets 13,024,000 10,847,000
------------ ------------
Valuation allowance for deferred tax assets (13,024,000) (10,847,000)
------------ ------------
Total deferred tax assets $ -- $ --
============ ============
</TABLE>
F-19
<PAGE>
No person has been authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Selling
Stockholders. This Prospectus does not constitute any offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person or by anyone in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
************************
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 8
Price Range of Common Stock............................................... 8
Dividend Policy........................................................... 9
Capitalization............................................................ 9
Selected Financial Data................................................... 10
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 12
Business.................................................................. 15
Management................................................................ 23
Certain Transactions...................................................... 28
Principal Stockholders.................................................... 29
Description of Securities................................................. 30
Selling Stockholders...................................................... 33
Plan of Distribution...................................................... 34
Legal Matters............................................................. 34
Experts................................................................... 34
Index to Financial Statements............................................. F-1
Report of Independent Auditors............................................ F-2
Financial Statements...................................................... F-3
</TABLE>
4,599,765 SHARES
CORTEX PHARMACEUTICALS, INC.
COMMON STOCK
************************
PROSPECTUS
************************
_____________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law makes provision for the
indemnification of officers and directors in terms sufficiently broad as to
include indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Act"). The Restated Certificate of Incorporation of the Company
provides that the Company shall indemnify officers and directors to the fullest
extent permitted by statute.
In addition, as permitted by Section 102(b)(7) of the Delaware Corporation Law,
the Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be liable to the Company or its stockholders
for monetary damages for breach of the director's fiduciary duty of care.
However, as provided by Delaware law, such limitation of liability will not act
to limit liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for any acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) arising
under the provision of the Delaware General Corporation Law relating to unlawful
distributions, or (iv) for any transaction from which the director derived an
improper benefit.
The Company has entered into indemnification agreements with each of its
directors and officers, which provide for the indemnification of directors and
officers of the Company against any and all expenses, judgements, fines,
penalties and amounts paid in settlement, to the fullest extent permitted by
law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses of this offering
(excluding commissions), none of which expenses are being paid by the security
holders. All of the amounts shown are estimates except the Securities and
Exchange Commission registration fee.
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
SEC Registration Fee $ 4,095
Accounting Fees and Expenses 15,000
Legal Fees and Expenses 20,000
Miscellaneous 25,000
-------
$64,095
=======
</TABLE>
Item 26. Recent Sales of Unregistered Securities
The following consists of information relating to unregistered securities sold
by the Company during the past three years.
1. On December 8, 1995, the Company sold an aggregate of 160 shares of Series
C Preferred Stock to 12 overseas investors for gross proceeds of
$4,000,000.
2. On December 8, 1995, the Company issued a warrant to purchase 106,195
shares of Common Stock to Swartz Investments, Inc. in connection with their
assistance with the foregoing placement.
3. On October 15, 1996, the Company sold 100 shares of Series D Preferred
Stock to one accredited investor for gross proceeds of $1,000,000.
4. On January 9, 1997, the Company sold 150 shares of Series D Preferred Stock
to one accredited investor for gross proceeds of $1,500,000.
II-1
<PAGE>
5. On February 12, 1997, the Company sold 150 shares of Series D Preferred
Stock to one accredited investor for gross proceeds of $1,500,000.
6. On June 5, 1997, the Company sold 200 shares of Series A Preferred Stock
and issued warrants to purchase 400,000 shares of Common Stock to eleven
accredited investors for gross proceeds of $2,000,000.
7. On June 30, 1997, the Company sold 200 shares of Series A Preferred Stock
and issued warrants to purchase 400,000 shares of Common Stock to eleven
accredited investors for gross proceeds of $2,000,000.
8. In February 1998, the Company issued a warrant to purchase 75,000 shares of
Common Stock to Alkermes, Inc. in connection with the restructuring of a
promissory note.
The foregoing sales of securities described in paragraphs 2 through 8 above were
made in reliance upon the exemption from the registration provisions of the
Securities Act of 1933 set forth in Section 4(2) thereof as transactions by an
issuer not involving any public offering. The Company has reason to believe that
all of the foregoing purchasers were familiar with or had access to information
concerning the operations and financial condition of the Company, and each of
the purchasers acquiring securities in exchange for cash consideration
represented that it was acquiring the shares for investment and not with a view
to the distribution thereof. At the time of issuance, all of the foregoing
shares of Common Stock were deemed to be restricted securities for purposes of
the Securities Act of 1933 and the certificates representing such securities
bear legends to that effect. The foregoing sale of securities described in
paragraph 1 above was made pursuant to Regulation S under the Securities Act of
1933.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation dated April 11, 1989, as amended
by Certificate of Amendment on June 27, 1989, by Certificate of
Designation filed April 29, 1991, by Certificate of Correction filed
May 1, 1991, by Certificate of Amendment of Certificate of Designation
filed June 13, 1991, by Certificate of Amendment of Certificate of
Incorporation filed November 12, 1992, by Certificate of Amendment of
Restated Certificate of Incorporation filed January 11, 1995, by
Certificate of Designation filed December 8, 1995, by Certificate of
Designation filed October 15, 1996, and by Certificate of Designation
filed June 4, 1997, incorporated by reference to the same numbered
Exhibit to the Company's Registration Statement on Form SB-2, No. 333-
29493, filed June 18, 1997.
3.2 By-Laws of the Company, as adopted March 4, 1987, and amended through
October 8, 1996, incorporated by reference to the Company's Annual
Report on Form 10-KSB filed October 15, 1996.
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation, Counsel to the Registrant, incorporated by reference to
the same numbered Exhibit to the Company's Registration Statement on
Form SB-2, No. 333-29493, filed June 18, 1997.
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
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
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.
10.31 License Agreement dated June 25, 1993 between the Company and the
Regents of the University of California, incorporated by reference to
the Company's Amendment of Annual Report on Form 10-KSB/A filed
November 26, 1993. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to the
Company's application requesting confidential treatment under Rule 24b-
2 of the Securities Exchange Act of 1934).
10.34 Warrant for the Purchase of shares of common stock dated July 23, 1993
issued to Vector Securities International, Inc., incorporated by
reference to Exhibit 10.34 of the Company's Annual Report on Form 10-
KSB filed October 13, 1993.
10.36 Amended and Restated Employment Agreement between the Company and D.
Scott Hagen, dated September 1, 1993, incorporated by reference to
Exhibit 10.36 of the Company's Annual Report on Form 10-KSB filed
October 13, 1993.
10.36.1 Amendment No. 1, dated January 1, 1995, to the Amended and Restated
Employment Agreement between the Company and D. Scott Hagen, dated
September 1, 1993, incorporated by reference to the same numbered
Exhibit to the Company's Quarterly Report on Form 10-QSB filed April
28, 1995.
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 13, 1993, incorporated by
reference to Exhibit 4.9 of the Company's Registration Statement on
Form S-8 filed January 28, 1994.
10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 13, 1993, incorporated by reference to Exhibit
4.8 of the Company's Registration Statement on Form S-8 filed January
28, 1994.
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's Registration
Statement on Form S-8 filed January 28, 1994.
10.44 Lease Agreement, dated January 31, 1994, for the Company's facilities
in Irvine, California, incorporated by reference to Exhibit 10.44 of
the Company's Quarterly Report on Form 10-QSB filed May 16, 1994.
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 15, 1994, incorporated by
reference to Exhibit 4.10 of the Company's Registration Statement on
Form S-8 filed February 8, 1995.
10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 15, 1994, incorporated by reference to Exhibit
4.9 of the Company's Registration Statement on Form S-8 filed February
8, 1995.
10.47 Amendment to Executive Stock Plan adopted September 9, 1994,
incorporated by reference to the same numbered Exhibit to the Company's
Annual Report on Form 10-KSB filed October 13, 1995.
10.48 Amendment to the Non-Employee Director Formula Grant Plan, adopted
December 15, 1994, incorporated by reference to the same numbered
Exhibit to the Company's Annual Report on Form 10-KSB filed October 13,
1995.*
10.49 Settlement Agreement between the Company and Alkermes, Inc., dated
October 5, 1995, incorporated by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-KSB filed October 13, 1995.
(Portions of this Exhibit are omitted and were filed separately with
the Secretary of the Commission pursuant to the Company's Application
requesting confidential treatment under Rule 406 of the Securities Act
of 1933).
10.50 Form of Subscription Agreement entered into with each purchaser of
Series C Preferred Stock, incorporated by reference to Exhibit 4.1 of
the Company's Current Report on Form 8-K filed December 22, 1995.
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued to
Swartz Investments, Inc., incorporated by reference to Exhibit 4.3 of
the Company's Current Report on Form 8-K filed December 22, 1995.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued to
Vector Securities International, Inc., incorporated by reference to the
same numbered Exhibit to the Company's Pre-Effective Amendment No. 1
to Post Effective Amendment No. 2 to Registration Statement on Form SB-
2, No. 33-71894, filed January 26, 1996.
10.54 Warrant dated January 20, 1995, to purchase 50,000 shares issued to
Vector Securities International, Inc., incorporated by reference to the
same numbered Exhibit to the Company's Pre-Effective Amendment No. 1 to
Post Effective Amendment No. 2 to Registration Statement on Form SB-2,
No. 33-71894, filed January 26, 1996.
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares issued to
Vector Securities International, Inc., incorporated by reference to the
same numbered Exhibit to the Company's Pre-Effective Amendment No. 1 to
Post Effective Amendment No. 2 to Registration Statement on Form SB-2,
No. 33-71894, filed January 26, 1996.
10.56 Employment Agreement dated May 15, 1996, between the Company and
Vincent F. Simmon, Ph.D., incorporated by reference to the same
numbered Exhibit to the Company's Current Report on Form 8-K filed June
4, 1996.
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 12, 1995, incorporated by
reference to Exhibit 4.11 of the Company's Registration Statement on
Form S-8 filed September 13, 1996.
10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 12, 1995, incorporated by reference to Exhibit
4.10 of the Company's Registration Statement on Form S-8 filed
September 13, 1996.
10.59 Securities Subscription Agreement for Series D Preferred Stock dated
October 15, 1996, between the Company and Ashline Ltd., incorporated by
reference to the same numbered Exhibit to the Company's Quarterly
Report on Form 10-QSB filed November 12, 1996.
10.60 1996 Stock Incentive Plan, incorporated by reference to the same
numbered Exhibit to the Company's Quarterly Report on Form 10-QSB filed
November 12, 1996.
10.61 Form of Subscription Agreement with each purchaser of Series A
Preferred Stock, incorporated by reference to the same numbered Exhibit
to the Company's Registration Statement on Form SB-2, No. 333-29493,
filed June 18, 1997.
10.62 Form of Warrant issued to each purchaser of Series A Preferred Stock,
incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form SB-2, No. 333-29493, filed June 18,
1997.
10.63 Registration Rights Agreement with holders of Series A Preferred Stock,
incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form SB-2, No. 333-29493, filed June 18,
1997.
21 Subsidiaries of the Registrant, incorporated by reference to the same
numbered Exhibit to the Company's Registration Statement on Form SB-2,
No. 333-29493, filed June 18, 1997.
23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney (included on Signature page).
27 Financial Data Schedule.
</TABLE>
- ------------------
* 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.
II-4
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
Registrant will treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective; and will treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irvine, State of California, on the 23rd day of
February, 1998.
CORTEX PHARMACEUTICALS, INC.
By: /s/ VINCENT F. SIMMON, PH.D.
------------------------------------
Vincent F. Simmon, Ph.D.
President and Chief Executive Officer
We, the undersigned directors and officers of Cortex Pharmaceuticals, Inc., do
hereby constitute and appoint Vincent F. Simmon, Ph.D. and D. Scott Hagen, or
either of them, our true and lawful attorneys and agents, to do any and all acts
and things in our name and behalf in our capacities as directors and officers
and to execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may deem
necessary or advisable to enable said corporation to comply with the Securities
Act of 1933, as amended, and any rules, regulations, and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and attorney to
sign for us or any of us in our names and in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto or any related
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended; and we do hereby ratify and
confirm all that the said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Director February 23, 1998
- -------------------------
Robert F. Allnutt
/s/ Charles J. Casamento Director February 23, 1998
- -------------------------
Charles J. Casamento
* Director February 23, 1998
- -------------------------
Carl W. Cotman, Ph.D.
* Director February 23, 1998
- -------------------------
Michael G. Grey
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C> <C>
/s/ D. Scott Hagen Vice President, Chief Financial February 23, 1998
- ---------------------------- Financial Officer and Secretary
D. Scott Hagen
(Principal Financial and
Accounting Officer)
* Chairman of the Board February 23, 1998
- ---------------------------- and Director
Harvey S. Sadow, Ph.D.
/s/ Vincent F. Simmon, Ph.D. President and Chief February 23, 1998
- ---------------------------- Executive Officer, Director
Vincent F. Simmon, Ph.D. (Principal Executive Officer)
* Director February 23, 1998
- ----------------------------
Davis L. Temple, Jr., Ph.D.
/s/ D. Scott Hagen
- -----------------------------
* D. Scott Hagen,
Attorney-in-fact
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation dated April 11, 1989, as amended
by Certificate of Amendment on June 27, 1989, by Certificate of
Designation filed April 29, 1991, by Certificate of Correction filed
May 1, 1991, by Certificate of Amendment of Certificate of Designation
filed June 13, 1991, by Certificate of Amendment of Certificate of
Incorporation filed November 12, 1992, by Certificate of Amendment of
Restated Certificate of Incorporation filed January 11, 1995, by
Certificate of Designation filed December 8, 1995, by Certificate of
Designation filed October 15, 1996, and by Certificate of Designation
filed June 4, 1997, incorporated by reference to the same numbered
Exhibit to the Company's Registration Statement on Form SB-2, No. 333-
29493, filed June 18, 1997.
3.2 By-Laws of the Company, as adopted March 4, 1987, and amended through
October 8, 1996, incorporated by reference to the Company's Annual
Report on Form 10-KSB filed October 15, 1996.
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation, Counsel to the Registrant, incorporated by reference to
the same numbered Exhibit to the Company's Registration Statement on
Form SB-2, No. 333-29493, filed June 18, 1997.
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.
10.31 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
</TABLE>
EXH-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------------------------------------------------------------------------------
<C> <S>
issued to Vector Securities International, Inc., incorporated by
reference to Exhibit 10.34 of the Company's Annual Report on Form 10-
KSB filed October 13, 1993.
10.36 Amended and Restated Employment Agreement between the Company and D.
Scott Hagen, dated September 1, 1993, incorporated by reference to
Exhibit 10.36 of the Company's Annual Report on Form 10-KSB filed
October 13, 1993.
10.36.1 Amendment No. 1, dated January 1, 1995, to the Amended and Restated
Employment Agreement between the Company and D. Scott Hagen, dated
September 1, 1993, incorporated by reference to the same numbered
Exhibit to the Company's Quarterly Report on Form 10-QSB filed April
28, 1995.
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 13, 1993, incorporated by
reference to Exhibit 4.9 of the Company's Registration Statement on
Form S-8 filed January 28, 1994.
10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 13, 1993, incorporated by reference to Exhibit
4.8 of the Company's Registration Statement on Form S-8 filed January
28, 1994.
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's Registration
Statement on Form S-8 filed January 28, 1994.
10.44 Lease Agreement, dated January 31, 1994, for the Company's facilities
in Irvine, California, incorporated by reference to Exhibit 10.44 of
the Company's Quarterly Report on Form 10-QSB filed May 16, 1994.
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 15, 1994, incorporated by
reference to Exhibit 4.10 of the Company's Registration Statement on
Form S-8 filed February 8, 1995.
10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 15, 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.
</TABLE>
EXH-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------------------------------------------------------------------------------
<C> <S>
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued to
Swartz Investments, Inc., incorporated by reference to Exhibit 4.3 of
the Company's Current Report on Form 8-K filed December 22, 1995.
10.52 Registration Rights Agreement dated December 8, 1995, entered
into with purchasers of Series C Preferred Stock and Swartz
Investments, Inc., incorporated by reference to Exhibit 4.2 of
the Company's Current Report on Form 8-K filed December 22, 1995.
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued to
Vector Securities International, Inc., incorporated by reference to the
same numbered Exhibit to the Company's Pre-Effective Amendment No. 1
to Post Effective Amendment No. 2 to Registration Statement on Form SB-
2, No. 33-71894, filed January 26, 1996.
10.54 Warrant dated January 20, 1995, to purchase 50,000 shares issued to
Vector Securities International, Inc., incorporated by reference to the
same numbered Exhibit to the Company's Pre-Effective Amendment No. 1 to
Post Effective Amendment No. 2 to Registration Statement on Form SB-2,
No. 33-71894, filed January 26, 1996.
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares issued to
Vector Securities International, Inc., incorporated by reference to the
same numbered Exhibit to the Company's Pre-Effective Amendment No. 1 to
Post Effective Amendment No. 2 to Registration Statement on Form SB-2,
No. 33-71894, filed January 26, 1996.
10.56 Employment Agreement dated May 15, 1996, between the Company and
Vincent F. Simmon, Ph.D., incorporated by reference to the same
numbered Exhibit to the Company's Current Report on Form 8-K filed June
4, 1996.
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 12, 1995, incorporated by
reference to Exhibit 4.11 of the Company's Registration Statement on
Form S-8 filed September 13, 1996.
10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 12, 1995, incorporated by reference to Exhibit
4.10 of the Company's Registration Statement on Form S-8 filed
September 13, 1996.
10.59 Securities Subscription Agreement for Series D Preferred Stock dated
October 15, 1996, between the Company and Ashline Ltd., incorporated by
reference to the same numbered Exhibit to the Company's Quarterly
Report on Form 10-QSB filed November 12, 1996.
10.60 1996 Stock Incentive Plan, incorporated by reference to the same
numbered Exhibit to the Company's Quarterly Report on Form 10-QSB filed
November 12, 1996.
10.61 Form of Subscription Agreement with each purchaser of Series A
Preferred Stock, incorporated by reference to the same numbered Exhibit
to the Company's Registration Statement on Form SB-2, No. 333-29493,
filed June 18, 1997.
10.62 Form of Warrant issued to each purchaser of Series A Preferred Stock,
incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form SB-2, No. 333-29493, filed June 18,
1997.
10.63 Registration Rights Agreement with holders of Series A Preferred Stock,
incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form SB-2, No. 333-29493, filed June 18,
1997.
21 Subsidiaries of the Registrant, incorporated by reference to the same
numbered Exhibit to the Company's Registration Statement on Form SB-2,
No. 333-29493, filed June 18, 1997.
23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney (included on Signature page).
27 Financial Data Schedule.
</TABLE>
- ------------------
EXH-3
<PAGE>
* 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.
EXH-4
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated July 17, 1997 in the
Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 and
related Prospectus of Cortex Pharmaceuticals, Inc. for the Registration of
4,599,765 shares of its common stock.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
San Diego, California
February 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1997 AND THE RELATED STATEMENTS OF OPERATIONS AND CASH
FLOWS FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,937,748
<SECURITIES> 1,772,218
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,792,835
<PP&E> 2,057,532
<DEPRECIATION> 1,378,654
<TOTAL-ASSETS> 5,494,843
<CURRENT-LIABILITIES> 544,277
<BONDS> 921,853<F1>
3,592,257
121,810
<COMMON> 9,573
<OTHER-SE> 305,073
<TOTAL-LIABILITY-AND-EQUITY> 5,494,843
<SALES> 0
<TOTAL-REVENUES> 50,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,817,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,606
<INCOME-PRETAX> (2,627,581)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,627,581)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,627,581)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
<FN>
<F1> PROMISSORY NOTE PAYABLE TO ALKERMES, INC.
</FN>
</TABLE>
