This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the merger and the other proposals being considered at the special meeting, you should read this entire proxy statement/prospectus carefully, including the materials attached as annexes, as well as other documents referred to or incorporated by reference herein. See “Where You Can Find More Information” beginning on page 352 of this proxy statement/prospectus. Page references are included in parentheses to direct you to a more detailed description of the topics presented in this summary.

 

Critical Therapeutics, Inc.
60 Westview Street
Lexington, Massachusetts 02421
(781) 402-5700

 

Critical Therapeutics is a biopharmaceutical company focused on developing and commercializing products for respiratory and inflammatory diseases. Critical Therapeutics owns worldwide rights to two marketed products: ZYFLO CR^® (zileuton) extended-release tablets, or ZYFLO CR, which the U.S. Food and Drug Administration, or FDA, approved in May 2007, and ZYFLO^® (zileuton tablets), or ZYFLO, which the FDA approved in 1996, for the prevention and chronic treatment of asthma in adults 12 years of age or older. Critical Therapeutics also is developing an injectable formulation of zileuton, or zileuton injection, for use in the hospital emergency department for the treatment of acute asthma attacks. In June 2008, Critical Therapeutics announced the results from its Phase II clinical trial with zileuton injection in patients with chronic, stable asthma. In addition, Critical Therapeutics is developing other product candidates directed toward the body’s inflammatory response. Critical Therapeutics has conducted preclinical work in its alpha-7 nicotinic acetylcholine receptor program, or alpha-7 program, for the treatment of severe acute inflammatory disease. Critical Therapeutics also has collaboration agreements with third parties for the development of monoclonal antibodies directed toward a cytokine called high mobility group box protein 1, or HMGB1, and a diagnostic directed toward measuring HMGB1 in the bloodstream. Both of these programs are in preclinical stages of development.

 

Cornerstone BioPharma Holdings, Inc.
2000 Regency Parkway, Suite 255
Cary, North Carolina 27518
(888) 466-6505

 

Cornerstone is a specialty pharmaceutical company focused on acquiring, developing and commercializing prescription products for the respiratory market. Cornerstone currently promotes four marketed products in the United States to respiratory-focused physicians and key retail pharmacies with its 50 person specialty sales force. Cornerstone also generates revenue from the sale of seven marketed product lines that include products that it does not promote.

 

Some of Cornerstone’s marketed products are approved by the FDA while others are marketed in the United States without an FDA-approved marketing application because they have been considered by Cornerstone to be identical, related or similar to products that have existed in the market without an FDA-approved marketing application, and which were thought not to require pre-market review and approval, or which were approved only on the basis of safety, at the time they entered the marketplace, subject to FDA enforcement policies established in connection with the FDA’s Drug Efficacy Study Implementation, or DESI, program. For a more complete discussion regarding FDA drug approval requirements, please see the section entitled “Risks Related to Cornerstone — Some of Cornerstone’s specialty pharmaceutical products are now being marketed without approved NDAs or ANDAs” beginning on page 70 of this proxy statement/prospectus and the section entitled “Cornerstone’s Business — Regulatory Matters” beginning on page 222 of this proxy statement/prospectus.

 

Cornerstone derives revenues from the following products as of September 15, 2008:

 

 

Cornerstone’s commercial strategy is to acquire non-promoted or underperforming branded pharmaceutical products and then maximize their potential value by promoting the products using its sales and marketing capabilities and applying various product life cycle management techniques. Cornerstone’s product development pipeline consists of three line extensions of SPECTRACEF and three other product candidates for the respiratory market, which consist of the following:

 

 

If the merger is consummated, Cornerstone and the transitory subsidiary, a wholly owned subsidiary of Critical Therapeutics, will merge, with Cornerstone surviving as a wholly owned subsidiary of Critical Therapeutics. A copy of the merger agreement is attached as Annex A to this proxy statement/prospectus. You are encouraged to read the merger agreement in its entirety because it is the legal document that governs the merger.

 

Critical Therapeutics and Cornerstone believe that the combined company resulting from the merger will have the following potential advantages:

 

 

Each of the boards of directors of Critical Therapeutics and Cornerstone also considered other reasons for the merger, as described herein.

 

Critical Therapeutics’ board of directors considered, among other things:

 

 

Cornerstone’s board of directors considered, among other things:

 

 

In connection with the merger, Critical Therapeutics’ board of directors received an opinion, dated May 1, 2008, from Critical Therapeutics’ financial advisor, Lazard Frères & Co. LLC, or Lazard, as to the fairness, from a financial point of view and as of the date of such opinion, to Critical Therapeutics of the exchange ratio provided for in the merger. The full text of Lazard’s opinion, which sets forth, among other things, the procedures followed, assumptions made, matters considered and qualifications and limitations on the review

undertaken by Lazard in connection with its opinion, is attached to this proxy statement/prospectus as Annex D and is incorporated by reference into this proxy statement/prospectus. Lazard’s opinion was addressed to Critical Therapeutics’ board of directors, was only one of many factors considered by Critical Therapeutics’ board of directors in its evaluation of the merger and only addresses the fairness of the exchange ratio from a financial point of view to Critical Therapeutics. Lazard’s opinion does not address the merits of the underlying decision by Critical Therapeutics to engage in the merger or related transactions or the relative merits of the merger or related transactions as compared to any other transaction or business strategy in which Critical Therapeutics might engage, and is not intended to, and does not, constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to the merger or any matter relating to the merger.

 

Merger Consideration (see page 137)

 

At the effective time of the merger, each share of Cornerstone’s common stock will be converted into and exchanged for the right to receive a number of shares of Critical Therapeutics’ common stock equal to the product of 2.3333 multiplied by the quotient of 43,479,198, which was the number of outstanding shares of Critical Therapeutics’ common stock on April 30, 2008, divided by the number of shares of Cornerstone’s common stock outstanding immediately prior to the effective time of the merger, assuming the exercise or conversion of all outstanding Cornerstone stock options and warrants, subject to adjustment for the reverse stock split of Critical Therapeutics’ common stock. The exact exchange ratio per share of Cornerstone’s common stock will be based in part on the number of shares of Cornerstone’s common stock outstanding or issuable pursuant to outstanding options and warrants immediately prior to the effective time of the merger and will not be calculated until that time.

 

Conditions to Completion of the Merger (see page 138)

 

Consummation of the merger is subject to a number of conditions, including among others, subject to specified exceptions, the following:

 

 

No Solicitation (see page 140)

 

Each of Cornerstone and Critical Therapeutics agreed that, subject to specified exceptions, Cornerstone and Critical Therapeutics will not, nor will either of them authorize or permit any of their or their respective subsidiaries’ subsidiaries or any of their or their subsidiaries’ respective officers, directors, investment bankers, attorneys, accountants or other advisors or representatives to, directly or indirectly:

 

 

Termination of the Merger Agreement (see page 147)

 

The merger agreement may be terminated at any time before the completion of the merger:

 

 

 

 

 

 

 

 

 

Termination Fees and Expenses (see page 148)

 

The merger agreement provides for the payment of a termination fee of $1.0 million by each of Critical Therapeutics and Cornerstone to the other party in specified circumstances in connection with the termination of the merger agreement. In addition, in specified circumstances in connection with termination of the merger agreement, Critical Therapeutics has agreed to reimburse Cornerstone for up to $150,000 in expenses, and Cornerstone has agreed to reimburse Critical Therapeutics for up to $100,000 in expenses.

 

In connection with the execution of the merger agreement, holders of approximately 81% of the shares of Cornerstone’s outstanding common stock have entered into agreements with Critical Therapeutics that provide, among other things, that the stockholders will vote in favor of adoption of the merger agreement and grant to Critical Therapeutics an irrevocable proxy to vote all of such stockholders’ shares of Cornerstone common stock in favor of adoption of the merger agreement and against any proposal made in opposition to, or in competition with, the proposal to adopt the merger agreement. In addition, these Cornerstone stockholders have agreed not to transfer or otherwise dispose of any shares of Critical Therapeutics’ common stock that they receive in the merger for 180 days after the effective time of the merger. Furthermore, Carolina Pharmaceuticals Ltd., or Carolina Pharmaceuticals, which is the holder of the Carolina Note, has entered into an agreement that provides, among other things, for the exchange or conversion of the outstanding principal amount of the Carolina Note into approximately 18% of the shares of Cornerstone’s common stock outstanding immediately prior to the effective time of the merger and for the same voting and lock-up provisions provided for pursuant to the agreements that Cornerstone’s other stockholders have entered into.

 

In connection with the execution of the merger agreement, funds managed by Healthcare Ventures and Advanced Technology Ventures, which, as of May 1, 2008, owned in the aggregate approximately 19% of Critical Therapeutics’ outstanding common stock, have entered into agreements with Cornerstone that provide, among other things, that the stockholders will vote in favor of the issuance of shares of Critical Therapeutics’ common stock in the merger and grant to Cornerstone an irrevocable proxy to vote such stockholders’ shares of Critical Therapeutics’ common stock in favor of the issuance of Critical Therapeutics’ common stock in the merger and against any proposal made in opposition to, or in competition with, the issuance of shares of Critical Therapeutics’ common stock in the merger.

 

Promptly following the effective time of the merger, the executive management team of the combined company is expected to be composed primarily of current Cornerstone executives, including the following individuals:

 

 

In addition, Scott B. Townsend, Critical Therapeutics’ General Counsel, Senior Vice President of Legal Affairs and Secretary, is expected to serve as General Counsel, Executive Vice President of Legal Affairs and Secretary of the combined company.

 

Pursuant to the merger agreement, promptly following the effective time of the merger, Critical Therapeutics has agreed to take all necessary actions to appoint Craig A. Collard, Cornerstone’s President and Chief Executive Officer and a member of Cornerstone’s board of directors, and Alastair McEwan, the Chairman of Cornerstone’s board of directors, to Critical Therapeutics’ board of directors. In addition, Critical Therapeutics has agreed to take all necessary actions to obtain the resignations of its current directors. Contemporaneously with the resignation of Critical Therapeutics’ current directors and the appointment of Craig A. Collard and Alastair McEwan to Critical Therapeutics’ board of directors, the size of Critical Therapeutics’ board of directors will be fixed at five directors and Christopher Codeanne, Michael Enright and Michael Heffernan will be appointed to fill the other vacancies on Critical Therapeutics’ board of directors, provided that such directors are independent under applicable NASDAQ requirements or SEC regulations. Following the effective time of the merger, Critical Therapeutics’ board of directors will remain divided into three classes, with one class being elected each year and members of each class holding office for a three-year term. Based on the foregoing, the members of each class of Critical Therapeutics’ board of directors will be as follows: Class I Director (term to expire at the 2011 annual meeting of stockholders): Craig A. Collard; Class II Directors (terms to expire at the 2009 annual meeting of stockholders): Christopher Codeanne and Michael Enright; and Class III Directors (terms to expire at the 2010 annual meeting of stockholders): Alastair McEwan and Michael Heffernan.

 

In considering the recommendation of Critical Therapeutics’ board of directors with respect to issuing shares of Critical Therapeutics’ common stock pursuant to the merger agreement and the other matters to be acted upon by Critical Therapeutics’ stockholders at the special meeting, Critical Therapeutics’ stockholders should be aware that members of the board of directors and executive officers of Critical Therapeutics have interests in the merger that may be different from, or in addition to, interests they may have as Critical Therapeutics’ stockholders.

 

For example, pursuant to the terms of employment agreements with Critical Therapeutics’ executive officers and a “change of control” cash bonus program established by Critical Therapeutics, upon the consummation of the merger, the executive officers of Critical Therapeutics are entitled to receive aggregate cash payments of approximately $305,000 and accelerated vesting of restricted stock with an aggregate value of approximately $16,978, assuming that the merger had been consummated on September 15, 2008. Assuming each executive officer of Critical Therapeutics is terminated other than for “cause” or terminates his employment for “good reason,” in each case as those terms are defined in his employment agreement, within specified periods before or after the consummation of the merger, then the executive officers of Critical Therapeutics would be entitled to receive aggregate cash payments of approximately $1,814,318, accelerated vesting of restricted stock with an aggregate value of approximately $33,956 and additional aggregate payments of approximately $88,150 for COBRA premiums for continued health and dental coverage, premiums for life insurance and disability insurance and outplacement services, assuming that the merger had been consummated on September 15, 2008. Although the executive officers and directors of Critical Therapeutics are entitled to accelerated vesting of unvested stock options in connection with the merger, all stock options subject to accelerated vesting have an exercise price that is greater than $0.22 per share, the closing market price of Critical Therapeutics’ common stock on September 15, 2008. Unvested stock options held by executive officers and directors of Critical Therapeutics that are subject to accelerated vesting have exercise prices ranging from $1.05 to $8.58 per share and a weighted average exercise price of $3.32 per share. Following the effective time of the merger, the executive management team of the combined company is expected to be composed primarily of current Cornerstone executives. It is not expected that any of the current executive officers or directors of Critical Therapeutics will continue his or her service with the combined company following the merger, other than Scott B. Townsend, Critical Therapeutics’ General Counsel, Senior Vice President of Legal Affairs and Secretary.

 

In anticipation of Mr. Townsend’s service to the combined company following the merger, on September 16, 2008, Critical Therapeutics entered into an amendment to the amended and restated employment agreement between Critical Therapeutics and Mr. Townsend. This amendment will be effective from the effective time of the merger to December 31, 2010 and will only become effective if the merger is consummated. Under the terms of this amendment, Mr. Townsend will serve as the General Counsel, Executive Vice President of Legal Affairs and Secretary of the combined company. The amendment provides for an increase in Mr. Townsend’s annual target cash bonus as a percentage of base salary from 30% to 35% and an actual annual cash bonus for Mr. Townsend for 2008 of not less than 35% of his base salary if he remains an employee in good standing through December 31, 2008. Mr. Townsend will continue to receive an annual base salary of $275,000. In connection with such amendment, Critical Therapeutics also entered into a restricted stock agreement with Mr. Townsend that provides for a restricted stock grant to Mr. Townsend on the first business day after the consummation of the merger of a number of shares of common stock representing one percent of the combined company’s outstanding equity, on a fully diluted basis but excluding an aggregate of 7,208,707 shares of Critical Therapeutics’ common stock underlying warrants issued in connection with a June 2005 private placement and an October 2006 registered offering, after giving effect to the reverse stock split and the merger, subject to the terms of such restricted stock agreement. The restricted stock agreement will only become effective if the merger is consummated. It is expected that approximately 1,489,789 shares will be issued to Mr. Townsend pursuant to the restricted stock agreement, subject to adjustment as a result of the reverse stock split. The amendment to Mr. Townsend’s amended and restated employment agreement also provides for additional potential future benefits to Mr. Townsend in connection with a termination of his employment by the combined company other than for cause or by Mr. Townsend for good reason.

 

Assuming that the merger had been consummated on September 15, 2008, the beneficial ownership and other equity interests of Mr. Townsend in the combined company immediately following the merger are expected to be as set forth below:

 

 

As of September 15, 2008, all directors and executive officers of Critical Therapeutics, together with their affiliates, beneficially owned approximately 23.2% of the shares of Critical Therapeutics’ common stock. The affirmative vote of the holders of a majority of the shares of Critical Therapeutics’ common stock present in person or represented by proxy and voting on such matter at the special meeting is required for approval of Proposal 1 and Proposal 4. The affirmative vote of holders of a majority of the outstanding shares of Critical Therapeutics’ common stock as of the record date for the special meeting is required for approval of Proposal 2 and Proposal 3.

 

Critical Therapeutics’ stockholders also should be aware that members of the board of directors and executive officers of Cornerstone have interests in the merger that may be different from, or in addition to, interests they may have as Cornerstone stockholders.

 

Cornerstone’s executive officers are expected to continue as executive officers of the combined company with initial annual base salaries following the merger that are identical to their respective annual base salaries with Cornerstone immediately prior to the merger. These individuals, their expected positions and annual base salaries with the combined company are as follows:

 

 

As of May 2, 2008, the date that holders of a majority of the shares of Cornerstone’s outstanding common stock acting by written consent without a meeting in accordance with Section 228 of the Delaware General Corporation Law and Cornerstone’s bylaws approved the merger agreement and the transactions contemplated thereby, Mr. Collard controlled, directly or indirectly, 54% of the outstanding shares of Cornerstone’s common stock, and Cornerstone’s executive officers and directors, and their affiliates, in the aggregate controlled, directly or indirectly, 68.3% of the outstanding shares of Cornerstone’s common stock.

 

Assuming that the merger had been consummated on September 15, 2008, Cornerstone’s executive officers and directors, and their affiliates, would beneficially own, in the aggregate, approximately 51% of the outstanding common stock of the combined company, including any shares of the common stock of the combined company issuable in the merger in exchange for shares of Cornerstone’s outstanding common stock to be issued to Carolina Pharmaceuticals upon the exchange or conversion prior to the merger of the outstanding principal amount under the Carolina Note into shares of Cornerstone’s common stock pursuant to the noteholder agreement between Carolina Pharmaceuticals and Critical Therapeutics. Additionally, Cornerstone’s executive officers and directors would hold certain options to acquire shares of the common stock of the combined company that are not considered beneficially owned because such options are not exercisable within sixty days of September 15, 2008. Assuming that the merger had been consummated on September 15, 2008 and assuming an exchange ratio of

2.448566, the beneficial ownership and other equity interests of Cornerstone’s executive officers and directors, and their affiliates, in the combined company immediately following the merger are expected to be as set forth below:

 

 

 

 

Carolina Pharmaceuticals, which is the holder of the Carolina Note, has entered into an agreement with Critical Therapeutics that provides, among other things, for the exchange or conversion prior to the merger of the outstanding principal amount of the Carolina Note into shares of Cornerstone’s common stock. Mr. Collard is the Chief Executive Officer and Chairman of the Board of Carolina Pharmaceuticals. In addition, Ms. Baldwin and Mr. Lutz are directors of Carolina Pharmaceuticals. As of September 15, 2008, the outstanding principal amount of the Carolina Note was approximately $9.0 million, which assuming an exchange ratio of 2.448566 would be converted into approximately 14,439,134 shares, or 11.5%, of the combined company’s outstanding common stock immediately following the consummation of the merger.

 

Each outstanding option to purchase shares of Cornerstone common stock, whether vested or unvested, and all stock option plans or other stock or equity-related plans of Cornerstone themselves, insofar as they relate to outstanding Cornerstone’s stock options, will be assumed by Critical Therapeutics and will become an option to acquire, on the same terms and conditions as were applicable under such Cornerstone’s stock option immediately prior to the effective time of the merger, such number of shares of Critical Therapeutics’ common stock as is equal to the number of shares of Cornerstone’s common stock subject to the unexercised portion of such Cornerstone stock option immediately prior to the effective time of the merger multiplied by the exchange ratio

(rounded down to the nearest whole share number), at an exercise price per share equal to the exercise price per share of such Cornerstone stock option immediately prior to the effective time of the merger divided by the exchange ratio (rounded up to the nearest whole cent). To the extent not exercised prior to the consummation of the merger, Cornerstone anticipates that there will be approximately 7,960,621 shares of Cornerstone’s common stock underlying outstanding stock options immediately prior to the effective time of the merger.

 

Each warrant to purchase shares of Cornerstone common stock outstanding immediately prior to the effective time of the merger will be assumed by Critical Therapeutics and will become a warrant to acquire, on the same terms and conditions as were applicable under such warrant, such number of shares of Critical Therapeutics’ common stock as is equal to the number of shares of Cornerstone’s common stock subject to the unexercised portion of such Cornerstone warrant immediately prior to the effective time of the merger multiplied by the exchange ratio (rounded down to the nearest whole share number), at an exercise price per share equal to the exercise price per share of such Cornerstone warrant immediately prior to the effective time of the merger divided by the exchange ratio (rounded up to the nearest whole cent). Cornerstone anticipates that warrants to purchase an aggregate of 1,326,903 shares of Cornerstone’s common stock underlying warrants outstanding as of September 15, 2008 will be exercised prior to the effective time of the merger. Following such exercises, Cornerstone anticipates that there will be 20,000 shares of Cornerstone’s common stock underlying outstanding warrants immediately prior to the effective time of the merger.

 

As of the effective time of the reverse stock split, Critical Therapeutics will adjust and proportionately decrease the number of shares of Critical Therapeutics’ common stock reserved for issuance upon exercise of, and adjust and proportionately increase the exercise price of, all options and warrants to acquire Critical Therapeutics’ common stock. In addition, as of the effective time of the reverse stock split, Critical Therapeutics will adjust and proportionately decrease the total number of shares of Critical Therapeutics’ common stock that may be the subject of future grants under Critical Therapeutics’ stock option plans. All stock options and warrants to acquire shares of Critical Therapeutics’ common stock that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger.

 

The merger has been structured to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, or the Code, and it is a closing condition to the merger that Critical Therapeutics and Cornerstone receive opinions of their respective counsel regarding such qualification. There will be no U.S. federal income tax consequences to Critical Therapeutics’ stockholders as a result of the merger. As a result of the merger’s qualification as a reorganization, Cornerstone’s stockholders will not recognize gain or loss for U.S. federal income tax purposes upon the exchange of shares of Cornerstone’s common stock for shares of Critical Therapeutics’ common stock, except with respect to cash received in lieu of fractional shares of Critical Therapeutics’ common stock.

 

Tax matters are very complicated, and the tax consequences of the merger to a particular stockholder will depend in part on such stockholder’s circumstances. Accordingly, you are urged to consult your own tax advisor for a full understanding of the tax consequences of the merger to you, including the applicability and effect of federal, state, local and foreign income and other tax laws.

 

Both Critical Therapeutics and Cornerstone are subject to various risks associated with their businesses and their industries, and the combined business will also be subject to those and other risks. In addition, the merger poses a number of risks to each company and its stockholders, including the following risks:

 

 

 

 

Neither Critical Therapeutics nor Cornerstone is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Critical Therapeutics must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Critical Therapeutics’ common stock in the merger, including the filing with the SEC of this proxy statement/prospectus. As of the date hereof, the registration statement has not become effective. Critical Therapeutics has filed an initial listing application with The NASDAQ Capital Market pursuant to NASDAQ’s “reverse merger” rules for the re-listing of Critical Therapeutics’ common stock in connection with the merger and to effect the initial listing of Critical Therapeutics’ common stock issuable in connection with the merger or upon exercise of Cornerstone’s outstanding stock options or warrants.

 

 

The merger will be treated by Critical Therapeutics as a reverse merger under the purchase method of accounting in accordance with U.S. generally accepted accounting principles, or GAAP. For accounting purposes, Cornerstone is considered to be acquiring Critical Therapeutics in this transaction.

 

 

Critical Therapeutics’ stockholders are not entitled to appraisal rights in connection with the merger or any of the proposals to be voted on at the special meeting.

 

Cornerstone’s stockholders are entitled to appraisal rights if they did not vote in favor of the merger agreement and they comply with the conditions established by Section 262 of the Delaware General Corporation Law.

 

It is a condition to the obligation of Critical Therapeutics and the transitory subsidiary to complete the merger that holders of not more than 5% of Cornerstone’s outstanding common stock exercise appraisal rights.

 

 

Both Critical Therapeutics and Cornerstone are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the Delaware General Corporation Law. If the merger is completed, Cornerstone’s stockholders will become stockholders of Critical Therapeutics, and their rights will be governed by the Delaware General Corporation Law, the certificate of incorporation of Critical Therapeutics and the bylaws of Critical Therapeutics. The rights of Critical Therapeutics’ stockholders contained in the certificate of incorporation and bylaws of Critical Therapeutics differ from the rights of Cornerstone’s stockholders under the certificate of incorporation and bylaws of Cornerstone.

 

 

On September 17, 2008, a purported shareholder class action lawsuit was filed by a single plaintiff against Critical Therapeutics and each of its directors in the Court of Chancery of The State of Delaware. The complaint alleges, among other things, that the defendants breached fiduciary duties of loyalty and good faith, including a fiduciary duty of candor, by failing to provide Critical Therapeutics’ stockholders with a proxy statement/prospectus adequate to enable them to cast an informed vote on the proposed merger, and by possibly failing to maximize stockholder value by entering into an agreement that effectively discourages competing offers. The complaint seeks, among other things, an order (i) enjoining the defendants from proceeding with or implementing the proposed merger on the terms and under the circumstances as they presently exist, (ii) invalidating the provisions of the proposed merger that purportedly improperly limit the effective exercise of the defendants’ continuing fiduciary duties; (iii) ordering defendants to explore alternatives and to negotiate in good faith with all bona fide interested parties; (iv) in the event the proposed merger is consummated, rescinding it and setting it aside or awarding rescissory damages; (v) awarding compensatory damages against defendants, jointly and severally; and (vi) awarding the plaintiff and the purported class their costs and fees.

 

The following tables present summary historical financial data for Critical Therapeutics and Cornerstone, summary unaudited pro forma condensed combined financial data for Critical Therapeutics and Cornerstone, and comparative historical and unaudited pro forma per share data for Critical Therapeutics and Cornerstone.

 

The statements of operations data for the years ended December 31, 2007, 2006 and 2005 and the balance sheet data as of December 31, 2007 and 2006 are derived from Critical Therapeutics’ audited consolidated financial statements, which are included in this proxy statement/prospectus beginning on page F-3. The statements of operations data for the six months ended June 30, 2008 and 2007 and the balance sheet data as of June 30, 2008 and 2007 are derived from Critical Therapeutics’ unaudited consolidated financial statements, which are included in this proxy statement/prospectus beginning on page F-36. The statements of operations data for the years ended December 31, 2004 and 2003 and the balance sheet data as of December 31, 2005, 2004 and 2003 are derived from Critical Therapeutics audited consolidated financial statements, which are not included in this proxy statement/prospectus. Historical results are not necessarily indicative of future results and results for any interim period are not necessarily indicative of results to be expected for a full fiscal year. You should read the notes to Critical Therapeutics’ consolidated financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net loss per share.

 

Effective January 1, 2006, Critical Therapeutics adopted SFAS 123(R), using the modified prospective method, which requires Critical Therapeutics to recognize compensation cost for granted, but unvested, awards, new awards and awards modified, repurchased, or cancelled after January 1, 2006 and granted after Critical Therapeutics became a public company. The amounts for prior periods do not include the impact of SFAS 123(R). In the notes to Critical Therapeutics’ consolidated financial statements, Critical Therapeutics has provided pro forma disclosures for the year ended December 31, 2005 in accordance with SFAS 123 since that period has not been retroactively adjusted to reflect the SFAS 123 pro forma amounts in the prior period financial statements.

 

 

The statements of operations data for the years ended December 31, 2007, 2006 and 2005 and the balance sheet data as of December 31, 2007 and 2006 are derived from Cornerstone’s audited consolidated financial statements, which are included in this proxy statement/prospectus beginning on page F-54. The statements of operations data for the six months ended June 30, 2008 and 2007 and the balance sheet data as of June 30, 2008 and 2007 are derived from Cornerstone’s unaudited consolidated financial statements, which are included in this proxy statement/prospectus beginning on page F-88. The statement of operations data for the period March 30, 2004 (date of inception) through December 31, 2004 and the balance sheet data as of December 31, 2005 and 2004 are derived from Cornerstone’s audited consolidated financial statements, which are not included in this proxy statement/prospectus. Historical results are not necessarily indicative of future results and results for any interim period are not necessarily indicative of results to be expected for a full fiscal year. You should read the notes to Cornerstone’s consolidated financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net loss per share.

 

Effective January 1, 2006, Cornerstone adopted SFAS 123(R), using the prospective method, which requires Cornerstone to recognize compensation cost for new awards and awards modified, repurchased or cancelled on or after January 1, 2006. The amounts for prior periods do not include the impact of SFAS 123(R). In the notes to Cornerstone’s consolidated financial statements, Cornerstone has provided pro forma disclosures for the year ended December 31, 2005 in accordance with SFAS 123 since that period has not been restated to conform to the 2007 and 2006 presentation.

 

 

The following unaudited pro forma condensed combined financial statements give effect to the merger of a wholly owned subsidiary of Critical Therapeutics and Cornerstone in a transaction to be accounted for as a purchase with Cornerstone treated as the acquirer even though Critical Therapeutics will be the issuer of common stock and surviving legal entity in the transaction (based in part on the fact that upon completion of the merger Critical Therapeutics’ stockholders will retain approximately 30% and the former Cornerstone stockholders will own approximately 70% of the outstanding shares of Critical Therapeutics, assuming the exchange or conversion prior to the merger of the outstanding principal amount of the Carolina Note into shares of Cornerstone’s common stock and after giving effect to shares issuable pursuant to Cornerstone’s outstanding options and warrants, but without giving effect to any shares issuable pursuant to Critical Therapeutics’ outstanding options and warrants). The unaudited pro forma condensed statements of operations are based on the individual historical consolidated statements of operations of Critical Therapeutics and Cornerstone and combine the results of operations of Critical Therapeutics and Cornerstone for the year ended December 31, 2007 and the six months ended June 30, 2008, giving effect to the combination as if it occurred on January 1, 2007, reflecting only pro forma adjustments expected to have a continuing impact on the combined results. The unaudited pro forma condensed balance sheet combines the historical consolidated balance sheets of Critical Therapeutics and Cornerstone as of June 30, 2008, giving effect to the combination as if it occurred on June 30, 2008, reflecting only pro forma adjustments expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information does not give effect to the proposed reverse stock split as it is currently unknown which ratio, if any, will be used.

 

These unaudited pro forma condensed combined financial statements are for informational purposes only. They do not purport to indicate the results that would have actually been obtained had the merger been completed on the assumed date or for the periods presented, or that may be realized in the future. To produce the unaudited pro forma financial information, Cornerstone, as the acquiring party, preliminarily allocated the purchase price using its best estimates of fair value. These estimates are based on the most recently available information. To the extent there are significant changes to Critical Therapeutics’ business, the assumptions and estimates herein could change significantly. Furthermore, the parties may have reorganization and restructuring expenses as well as potential operating efficiencies as a result of combining the companies. The pro forma financial information does not reflect these potential expenses and efficiencies. Upon completion of the merger, final valuations will be performed. The unaudited pro forma condensed combined financial statements should be read in conjunction with “Critical Therapeutics’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Cornerstone’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements, including related notes of Critical Therapeutics and Cornerstone, respectively, covering these periods, included in this proxy statement/prospectus. Please see the section entitled “Where You Can Find More Information” on page 352 of this proxy statement/prospectus for more information.

 

 

 

The following information does not give effect to the reverse stock split of Critical Therapeutics’ common stock described in Proposal 2.

 

The information below reflects the historical net loss and book value per share of Cornerstone’s common stock and the historical net loss and book value per share of Critical Therapeutics’ common stock in comparison with the unaudited pro forma net loss and book value per share after giving effect to the proposed merger of Critical Therapeutics with Cornerstone on a purchase basis.

 

You should read the tables below in conjunction with the audited and unaudited financial statements of Critical Therapeutics beginning on page F-3 of this proxy statement/prospectus and the audited and unaudited financial statements of Cornerstone commencing at page F-54 of this proxy statement/prospectus and the related notes and the unaudited pro forma condensed combined financial information and notes related to such financial statements included elsewhere in this proxy statement/prospectus. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have resulted if the merger had been completed as of the assumed dates or of the results that will be achieved in the future.

 

The selected unaudited pro forma condensed combined financial data as of and for the six months ended June 30, 2008 and for the year ended December 31, 2007 are derived from the unaudited pro forma condensed combined financial information beginning on page 328 of this proxy statement/prospectus and should be read in conjunction with that information. Please see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 327 of this proxy statement/prospectus.

 

CRITICAL THERAPEUTICS

 

CORNERSTONE

CORNERSTONE AND CRITICAL THERAPEUTICS

 

Critical Therapeutics’ common stock is listed on The NASDAQ Capital Market under the symbol “CRTX.” From July 2006 to June 2008, Critical Therapeutics’ common stock traded on the NASDAQ Global Market. Prior to July 2006, Critical Therapeutics’ common stock traded on The NASDAQ National Market. The following table sets forth, for the periods indicated, the high and low per share sales prices for Critical Therapeutics’ common stock as reported on NASDAQ. Cornerstone is a private company and its common stock is not publicly traded.

 

Critical Therapeutics Common Stock

 

 

On April 30, 2008, the last day prior to the public announcement of the proposed merger, the closing price per share of Critical Therapeutics’ common stock as reported on The NASDAQ Global Market was $0.62, for an aggregate market value of Critical Therapeutics of approximately $26,957,103. Accordingly, if the merger had been consummated on that day, the value attributable to the shares of Critical Therapeutics’ common stock issued to holders of Cornerstone’s common stock and issuable to holders of Cornerstone’s outstanding options and warrants in connection with the merger would have been approximately $62.9 million, based on approximately 101.5 million shares of Critical Therapeutics’ common stock issued or issuable to Cornerstone’s stockholders in the merger, multiplied by $0.62.

 

On          , 2008, the last practicable date before the printing of this proxy statement/prospectus, the closing price per share of Critical Therapeutics’ common stock as reported on The NASDAQ Capital Market was $     , for an aggregate market value of Critical Therapeutics of approximately $     . Accordingly, if the merger had been consummated on that day, the value attributable to the shares of Critical Therapeutics’ common stock issued to holders of Cornerstone’s common stock and issuable to holders of Cornerstone’s outstanding options and warrants in connection with the merger would have been approximately $     , based on approximately 101.5 million shares of Critical Therapeutics’ common stock issued or issuable to Cornerstone’s stockholders in the merger multiplied by $     .

 

Because the market price of Critical Therapeutics’ common stock is subject to fluctuation, the market value of the shares of Critical Therapeutics’ common stock that holders of Cornerstone’s common stock and

Cornerstone’s outstanding stock options and warrants will be entitled to receive in the merger may increase or decrease.

 

Following the consummation of the merger, and subject to successful application for initial listing with The NASDAQ Capital Market, Critical Therapeutics’ common stock will continue to be listed on The NASDAQ Capital Market. Although Critical Therapeutics’ common stock will continue with the trading symbol “CRTX”, it will trade under the combined company’s new name, “Cornerstone Therapeutics Inc.” There has never been, nor is there expected to be in the future, a public market for Cornerstone’s common stock.

 

As of          , 2008 Critical Therapeutics had approximately           stockholders of record.

 

Critical Therapeutics has never declared or paid cash dividends on its capital stock. Critical Therapeutics currently intends to retain earnings, if any, to finance the growth and development of its business, and does not expect to pay any cash dividends to its stockholders in the foreseeable future. Payment of future dividends, if any, will be at the discretion of Critical Therapeutics’ board of directors.