As filed with the Securities and Exchange Commission on June 27, 1996
Registration No. 33-03401
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 2834 82-0429727
(State or other jurisdiction (Primary standard (I.R.S. Employer
of incorporation or industrial classification Identification No.)
organization) code number)
371 Bel Marin Keys
Novato, California 94949
(415) 382-6770
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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WILLIAM E. BLISS
President and Chief Executive Officer
371 Bel Marin Keys
Novato, California 94949
(415) 382-6770
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
C. KEVIN KELSO, ESQ.
Fenwick & West LLP
Two Palo Alto Square, Suite 800
Palo Alto, California 94306
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, 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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / x /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /_/ _____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /_/ _____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /_/
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Maximum Maximum
Title of Each Class of Amount Offering Aggregate Amount of
Securities to be Price Per Offering Registration
to be Registered Registered(1) Share(1) Price(1) Fee(2)
- --------------------------------------------------------------------------------
Common Stock, no par value 5,000,000 shares $6.56 $32,800,000 $11,311(2)
================================================================================
(1) Estimated solely for the purpose of calculating the amount of the
registration fee, pursuant to Rule 457(c) under the Securities Act, based on
the average of the high and low prices of the Common Stock as reported on
the Nasdaq SmallCap Market on May 3, 1996.
(2) Previously paid.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
CELLEGY PHARMACEUTICALS, INC.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM SB-2
ITEM NUMBER AND HEADING
IN FORM SB-2 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ----------------------------------- ----------------------
1. Front of Registration Statement and Outside
Front Cover of Prospectus ........................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus .................................... Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information and Risk Factors ............. Risk Factors; The Company
4. Use of Proceeds .................................. Not Applicable
5. Determination of Offering Price .................. Outside Front Cover Page
6. Dilution ......................................... Not Applicable
7. Selling Security Holders ......................... Selling Shareholders
8. Plan of Distribution ............................. Outside Front Cover Page;
Selling Shareholders;
Plan of Distribution
9. Legal Proceedings ................................ Business
10. Directors, Executive Officers, Promoters and
Control Persons .................................. Management
11. Security Ownership of Certain Beneficial
Owners and Management ............................ Principal Shareholders
12. Description of Securities ........................ Risk Factors; Description
of Capital Stock
13. Interest of Named Experts and Counsel............. Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ... Not Applicable
15. Organization Within Last Five Years .............. Not Applicable
16. Description of Business .......................... Risk Factors; Dividend
Policy; Business
17. Management's Discussion and Analysis or Plan
of Operation ..................................... Management's Discussion
and Analysis of Financial
Condition and Results of
Operations
18. Description of Property .......................... Business
19. Certain Relationships and Related Transactions ... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters .............................. Outside Front Cover Page;
Risk Factors; Dividend
Policy; Description of
Capital Stock
21. Executive Compensation ........................... Management
22. Financial Statements ............................. Financial Statements
23. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure ........... Not Applicable
<PAGE>
THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO COMPLETION
OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD, NOR MAY OFFERS TO BUY BE
ACCEPTED, PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED IN FINAL FORM. UNDER NO
CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION DATED JUNE 27, 1996
PROSPECTUS
5,000,000 SHARES OF COMMON STOCK
CELLEGY PHARMACEUTICALS, INC.
This prospectus ("Prospectus") covers the resale of certain shares (the
"Shares") of Common Stock, no par value per share (the "Common Stock"), of
Cellegy Pharmaceuticals, Inc. ("Cellegy" or the "Company") held or acquirable by
certain persons ("Selling Shareholders") named in this Prospectus. The Company
will not receive any of the proceeds from the sale of the Shares. The Shares
covered hereby include shares of Common Stock that are issuable upon conversion
of previously-issued shares of Series A Preferred Stock (the "Series A
Preferred") held by certain of the Selling Shareholders (the "Series A
Holders"), and up to an additional 1,000,000 shares of Common Stock that are
held by certain other Selling Shareholders or that are issuable upon exercise of
warrants to purchase Common Stock held by certain other Selling Shareholders.
See "Selling Shareholders" for information with respect to Shares held or
acquirable by the Selling Shareholders.
The number of Shares issuable upon conversion of the Series A Preferred
depends on several factors, including a fixed conversion ratio and a variable
conversion ratio and the date on which shares are converted. The variable
conversion ratio could result in a greater number of Shares being issued than
under the fixed conversion ratio. In order to have a sufficient number of Shares
registered upon conversion of Series A Preferred, this Prospectus covers a
larger number of Shares of Common Stock (4,000,000 Shares) than the Company
believes will actually be issued upon conversion of all of the Series A
Preferred. Except for the total number of shares to which this Prospectus
relates as set forth above, references in this Prospectus to the "number of
Shares covered by this Prospectus," or similar statements, and information in
this Prospectus regarding the number of Shares issuable to or held by the Series
A Holders and percentage information relating to the Shares or the outstanding
capital stock of the Company, are based upon the fixed conversion ratio set
forth in the instruments establishing the rights of the Series A Preferred and
assume that 1,150,251 Shares are issued upon conversion of all shares of Series
A Preferred. See "Selling Shareholders," "Plan of Distribution" and "Description
of Capital Stock."
The Shares offered hereby represent approximately 36% of the Company's
currently outstanding Common Stock (assuming conversion of all shares of Series
A Preferred and that the warrants held by the Selling Shareholders are
exercised). The Shares are being offered on a continuous basis pursuant to Rule
415 under the Securities Act of 1933, as amended (the "Securities Act"). No
underwriting discounts, commissions or expenses are payable or applicable in
connection with the sale of such shares by the Selling Shareholders. The Common
Stock of Cellegy is quoted on the Nasdaq SmallCap Market under the symbol
"CLGY." The Shares offered hereby will be sold from time to time at then
prevailing market prices, at prices relating to prevailing market prices or at
negotiated prices. On June 24, 1996, the closing price of the Common Stock on
the Nasdaq SmallCap Market was $8.25 per share. This Prospectus may be used by
the Selling Shareholders or by any broker-dealer who may participate in sales of
the Common Stock covered hereby.
SEE "RISK FACTORS" COMMENCING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN 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.
================================================================================
Price to Public Underwriting Proceeds to Proceeds to Selling
Discounts and Company (1) Shareholders (1)
Commissions
- --------------------------------------------------------------------------------
Per Share ....see text above none none see text above
- --------------------------------------------------------------------------------
Total ........see text above none none see text above
================================================================================
(1) The shares of Common Stock offered hereby will be sold from time to time at
the then prevailing market prices, at prices relating to prevailing market
prices or at negotiated prices. The Company will pay the expenses of
registration estimated at $94,000.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can also be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Company's Common Stock is listed on the Nasdaq SmallCap Market and
reports, proxy statements and other information concerning the Company may be
inspected at the offices of the Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20006-1500.
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the Shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits filed therewith. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected, without charge, at the offices of the Commission in Washington, D.C.,
and copies of all or any part of the Registration Statement may be obtained from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, upon the payment of the fees
prescribed by the Commission.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the Commission. The address of the Commission's World Wide
Web site is: http://www.sec.gov.
THE COMPANY
The principal executive offices of the Company are located at 371 Bel Marin
Keys, Suite 210, Novato, California 94949 and its telephone number is (415)
382-6770. In this Prospectus, the term "Cellegy" or "Company" refers to Cellegy
Pharmaceuticals, Inc., a California corporation, and subsidiaries, unless the
context otherwise requires.
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<PAGE>
RISK FACTORS
Investors should consider carefully the following factors, in addition to the
other information contained in this Prospectus, before purchasing the shares of
Common Stock offered hereby. Except for the historical information contained in
this Prospectus, this Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ in
material respects from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below. Investors should also refer to the Company's Annual
Reports on Form 10-KSB and Quarterly Reports on Form 10-QSB filed with the
Commission.
Early Stage of Product Development. Cellegy has not yet completed the
development of any products or sought regulatory approval for the marketing of
products and, accordingly, has not begun to market or generate revenues from the
commercialization of products. Development of products will require significant
additional research and development, including process development, extensive
clinical testing and market research. All of the Company's product development
efforts are based upon technologies and therapeutic approaches that have not
been widely tested or used. Moreover, the Company's beliefs regarding the
therapeutic and commercial potential for its potential products, including
without limitation its drug delivery and skin protectant products, are based on
preliminary assays or studies, and later studies may not support the Company's
current beliefs. In addition, results of the Company's tests and studies have
not been published in medical journals or reviewed by independent third parties
(other than the third parties that in some instances conducted the studies on
behalf of the Company), and as a result have not been subjected to the same
degree of scrutiny as results that have been published or subjected to review by
independent parties. To the Company's knowledge, no company has yet completed
human clinical trials for the regulatory approval process, or undertaken
successfully commercial manufacture, of products that are based on the Company's
proprietary technologies, and it is extremely difficult to predict whether or
when the Company's products will meet with regulatory approval, can be
manufactured successfully, or will be accepted in the marketplace.
As a result, the Company's potential products are subject to the risks of
failure inherent in the development of products based on new technologies. These
risks include the possibilities that the Company's therapeutic approaches will
not be successful, as was the case with an assay study conducted using Glylorin
for impetigo; that the results from future clinical trials may not correlate
with any safety or effectiveness results from prior clinical studies conducted
by the Company or others; that some or all of the Company's potential products
will not be successfully developed or will not be found to be safe and effective
by the United States Food and Drug Administration (the "FDA"), or otherwise will
fail to meet applicable regulatory standards or receive necessary regulatory
clearances; that the products, if safe and effective, will be difficult to
manufacture in commercial quantities at reasonable costs or will be uneconomical
to market; that proprietary rights of third parties will preclude the Company
from commercializing such products; or that third parties will market superior
or equivalent products. In addition, the failure of the Company's most advanced
clinical compound, Glylorin, to successfully complete its current phase III and
future clinical testing, including toxicology studies, could have a material
adverse effect on the Company. There can be no assurance the Company's research
and development activities will result in any commercially viable products.
The timetable for the completion of the various milestone events that must
occur in order for the Company's products to be approved and marketed is very
uncertain. Pharmaceutical research and development is frequently characterized
by scientific and regulatory delays and disappointments. Although the Company
may set target dates for the completion of various milestone events, the
uncertainties and risks in the Company's product development and testing efforts
mean that decisions on whether to invest in the Company should not assume that
the targets will be met.
The evaluation of animal and human clinical test results involves making
judgments about data and other information that often are not conclusive. Later
testing may show those judgments to have been erroneous. For example, the
Company's beliefs regarding the potential comparative therapeutic benefits of
its products compared to currently marketed products may be erroneous, or the
FDA may not agree with the Company's conclusions regarding such matters.
Furthermore, due to the independent and blind
4
<PAGE>
nature of certain human clinical testing, there will be extended periods during
the testing process when the Company will have only limited, or no, access to
information about the status or results of the tests. Other pharmaceutical
companies have believed that their products performed satisfactorily in early
tests, only to find their performance in later tests, including Phase III
clinical trials, to be inadequate or unsatisfactory, or that FDA Advisory
Committees have declined to recommend approval of the drugs, or that the FDA
itself refused approval, with the result that such companies' stock prices have
fallen precipitously.
Shares Eligible for Sale; Possible Effect on Stock Price. The Shares held by
or issuable to the Selling Shareholders represent approximately 36% of the
outstanding shares of Common Stock, calculated assuming the issuance of
1,150,251 shares of Common Stock upon conversion of all shares of Series A
Preferred and that all Shares issuable upon the exercise of warrants have been
issued and are outstanding. Especially since the Company's Common Stock has
historically had a low trading volume, sale of Shares in the open market could
have a material adverse effect on the market price of the Common Stock.
All persons who were shareholders of the Company before its initial public
offering in August 1995 ("IPO") and who owned more than 1% of the shares
outstanding after the IPO ("Pre-IPO Shareholders"), executed lock-up agreements
with the representatives (the "Representatives") of the underwriters in the IPO
that restrict the sale or disposition of such shares until August 17, 1996, or
such earlier date as the Representatives may agree. Under the terms of the
lock-up agreements, shareholders who each hold less than approximately .5% of
the outstanding shares are not subject to the lock-up restrictions, as long as
sales by all such persons in the aggregate do not exceed approximately 109,000
shares. Moreover, under the terms of the lock-up agreements, up to an additional
approximately 543,000 shares held by Pre-IPO Shareholders are not subject to the
lock-up restriction. The Representatives may consent to a waiver of the lock-up
restriction without prior public notice. Following the expiration of the lock-up
agreements, or such earlier date as the Representatives may agree, most of the
shares of Common Stock that were outstanding before the IPO will become eligible
for sale in the public market subject to compliance with Rule 144 or Rule 701,
and subject to any applicable state securities law restrictions on resale. In
addition, holders of the warrants issued in connection with the IPO (the "IPO
Warrants") will, after August 11, 1996, and subject to the satisfaction of
certain conditions, also be able to sell publicly the Common Stock issuable upon
exercise of the IPO Warrants.
Competition and Technological Change. The pharmaceutical industry is subject
to rapid and significant technological change. Competitors of the Company in the
United States and abroad are numerous and include, among others, major
pharmaceutical, chemical and biotechnology companies, specialized firms,
universities and other research institutions. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than any which are being developed by the Company or
that would render the Company's technology and potential products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience than the Company in preclinical testing and human clinical
trials of pharmaceutical products and in obtaining FDA and other regulatory
approvals of products for use in health care. There can be no assurance that the
Company's products under development will be able to compete successfully with
existing products or products under development by other companies, universities
and other institutions or that they will obtain regulatory approval in the
United States or elsewhere. See "Business--Competition."
Accumulated Deficit; Anticipated Losses. The Company had an accumulated net
loss of $11.0 million at March 31, 1996. The Company incurred net losses for the
fiscal years ended December 31, 1994 and 1995, and for the three months ended
March 31, 1995 and 1996, of $2,543,000, $2,152,000, $666,000 and $864,000,
respectively. The Company expects to incur substantial and increasing net losses
for at least the next several years, the amount of which is highly uncertain.
There can be no assurance that the Company will ever be able to generate product
revenues or achieve or sustain profitability. The Company will be required to
conduct significant research, development, testing and regulatory compliance
activities that, together with projected general and administrative expenses,
are expected to result in significant operating losses for at least the next
several years. The Company's ability to achieve profitability depends upon
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its ability to successfully complete, either alone or with others, development
of its potential products, successfully conduct clinical trials, obtain required
regulatory approvals, find appropriate third party manufacturers and market its
products or enter into license agreements on acceptable terms. In the event the
Company enters into any future license agreements, such license agreements may
adversely affect the Company's profit margins on its products.
Future Capital Needs; Uncertainty of Additional Funding. The Company's
operations to date have consumed substantial amounts of cash. The Company has no
current source of ongoing revenues or capital beyond existing cash. In order to
complete the research and development and other activities necessary to
commercialize its products, additional financing may be required. The Company's
capital requirements depend on numerous factors, including without limitation
the progress of its research and development programs, the progress of
preclinical and clinical testing, the time and costs involved in obtaining
regulatory approvals, the costs of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
research relationships, the ability of the Company to establish collaborative
arrangements, the development of commercialization activities and arrangements,
and the purchase of capital equipment.
In April 1996, the Company completed a private placement of 750 shares of
Series A Preferred Stock resulting in net proceeds of approximately $6.9
million. The Company believes that its existing resources will satisfy its cash
requirements for at least 24 months from the date of this Prospectus, based upon
the Company's current plan. At some future date thereafter, however, the Company
may require substantial additional capital to fund its operations, continue
research and development programs and preclinical and clinical testing of its
potential products and conduct its business. The Company may seek any required
additional funding through equity offerings, private financings and
collaborative or other arrangements with third parties. There can be no
assurance that additional funds will be available on acceptable terms. If
additional funds are raised by issuing equity securities, further substantial
dilution to existing shareholders may result. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one or
more of its research and development programs, or to obtain funds through
entering into arrangements with third parties that may require the Company to
relinquish rights to certain of its technologies or potential products that the
Company would not otherwise relinquish.
Limits on Secondary Trading; Liquidity of Trading Market. Under the blue sky
laws of most states, public sales of Common Stock and IPO Warrants by persons
other than the Company in "nonissuer transactions" must either be qualified
under applicable blue sky laws, or exempt from such qualification requirements.
Blue sky authorities in California or other states may impose other restrictions
on the secondary trading of Common Stock or IPO Warrants in those states. In
many states, secondary trading of the Common Stock or IPO Warrants is permitted
only by virtue of an exemption so long as information about the Company is
published in a recognized manual such as manuals published by Moody's Investor
Service or Standard & Poor's Corporation. As a result of these or other
restrictions that might be imposed, shareholders may be restricted or prohibited
from selling Common Stock or IPO Warrants in particular states as a result of
applicable blue sky laws. These restrictions may have the effect of reducing the
liquidity of the Common Stock or IPO Warrants and could adversely affect the
market price of the Common Stock or IPO Warrants.
The Common Stock and the IPO Warrants are listed on the Nasdaq SmallCap
Market. If the Company should be unable to maintain the standards for continued
quotation on the Nasdaq SmallCap Market, the Common Stock and the IPO Warrants
could be subject to removal from the Nasdaq SmallCap Market. Trading, if any, in
the Common Stock and the IPO Warrants would therefore be conducted in the
over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq SmallCap Market listing requirements or
in what are commonly referred to as the "pink sheets." As a result, an investor
would find it more difficult to dispose of, or to obtain accurate quotations as
to the price of, the Company's securities. In addition, depending on several
factors including the future market price of the Common Stock, the Company's
securities could become subject to the so-called "penny stock" rules that impose
additional sales practice and market making requirements on
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broker-dealers who sell and/or make a market in such securities, which could
affect the ability or willingness of broker-dealers to sell and/or make a market
in the Company's securities and the ability of purchasers of the Company's
securities to sell their securities in the secondary market.
Government Regulation and Product Approvals. The research, testing,
manufacture, labeling, distribution, marketing and advertising of products such
as the Company's products and its ongoing research and development activities
are subject to extensive regulation by governmental regulatory authorities in
the United States and other countries. The rigorous preclinical and clinical
testing requirements and regulatory approval process of the FDA in the United
States and of certain foreign regulatory authorities can take five to ten years
or more and require the expenditure of substantial resources. There can be no
assurance that the Company will be able to obtain the necessary approvals for
clinical testing or for the marketing of products. Moreover, additional
government regulations may be established that could prevent or delay regulatory
approval of the Company's products. Delays in obtaining regulatory approvals
could have a material adverse effect on the Company. Even if regulatory approval
of a product is granted, such approval may include significant limitations on
the indicated uses of the product or the manner in which or conditions under
which the product may be marketed. For example, even if the Company seeks FDA
approval of a non-cosmetic product for non-prescription consumer sales, the FDA
could instead require that the product be distributed by means of a prescription
before considering approval for distribution as a non-prescription product.
Prescription only approval, which the Company believes is common where a company
seeks approval for a product involving a new compound or a compound previously
approved for other uses, could delay for several years, or indefinitely,
distribution through the consumer (non-prescription) channel of the Company's
consumer products which are subject to premarket review and approval by the FDA.
Moreover, failure to comply with regulatory requirements could subject the
Company to regulatory or judicial enforcement actions, including, but not
limited to, product recalls or seizures, injunctions, civil penalties, criminal
prosecution, refusals to approve new products and withdrawal of existing
approvals, as well as potentially enhanced product liability exposure. Sales of
the Company's products outside the United States will be subject to regulatory
requirements governing clinical trials and marketing approval. These
requirements vary widely from country to country and could delay introduction of
the Company's products in those countries.
Patents and Proprietary Technology. The Company's success depends, in part,
on its ability to obtain patent protection for its products and methods, both in
the United States and in other countries. Several of the Company's products are
based on existing compounds with a history of use in humans but which are being
developed by the Company for new therapeutic use for skin diseases unrelated to
the systemic diseases for which the compounds were previously approved. The
Company cannot obtain composition patent claims on all formulations that include
these compounds, and will instead need to rely on patent claims, if any,
directed to use of the compound to treat certain conditions. The Company will
not be able to prevent a competitor from using that formulation or compound for
a different purpose. No assurance can be given that any additional patents will
be issued to the Company, that the protection of any patents that may be issued
in the future will be significant, or that current or future patents will be
held valid if subsequently challenged. There is a substantial backlog of patent
applications at the United States Patent and Trademark Office ("USPTP").
The patent position of companies engaged in businesses such as the Company's
business generally is uncertain and involves complex legal and factual
questions. Further, issued patents can later be held invalid by the patent
office issuing the patent or by a court. There can be no assurance that any
patent applications relating to the Company's products or methods will issue as
patents, or, if issued, that the patents will not be challenged, invalidated, or
circumvented or that the rights granted thereunder will provide a competitive
advantage to the Company. In addition, other entities may currently have, or may
obtain in the future, legally blocking proprietary rights, including patent
rights, in one or more products or methods under development or consideration by
the Company. These rights may prevent the Company from commercializing
technology, or may require the Company to obtain a license from the entity to
practice the technology. There can be no assurance that the Company will be able
to obtain any such licenses that may be required on commercially reasonable
terms, if at all, or that the patents underlying any such licenses will be valid
or enforceable. Moreover, the laws of certain foreign countries do not
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protect intellectual property rights relating to U.S. patents as extensively as
those rights are protected in the United States. As with other companies in the
pharmaceutical industry, the Company is subject to the risk that persons located
in such countries will engage in development, marketing or sales activities of
products that would infringe the Company's patent rights if such activities were
in the United States.
The agreement pursuant to which the Company has exclusive license rights to
certain barrier repair and drug delivery technology contains certain development
and performance milestones which the Company must satisfy in order to retain
such rights. The Company has been granted an extension on certain milestone
dates. See "Business--Principal License Agreements." While the Company currently
believes it will satisfy the milestones or be able to negotiate satisfactory
extensions, a loss of exclusive rights to such technology could have a material
adverse effect on the Company.
Limited Staff; Third Party Relationship. In view of the early stage of the
Company and its research and development programs, the Company has restricted
hiring to research and development scientists and a small administrative staff
and has made limited investments in marketing, product sales and regulatory
compliance resources. The Company has certain key academic collaborations
relating to the research, development and commercialization of its potential
products. Therefore, the Company may be dependent upon the subsequent success of
these outside parties in performing their responsibilities. In addition, the
Company may enter into additional arrangements with corporate and academic
collaborators and others to research, develop or commercialize potential
products. There can be no assurance that the Company will be able to establish
any such arrangements or that they will be successful. Failure to enter into any
such arrangements that in the future might be necessary could have a material
adverse effect on the Company's business.
Risk of Product Liability; Limited Product Liability Insurance; Environmental
Matters. The testing, marketing and sale of human health care products entails
an inherent risk of allegations of product liability, and there can be no
assurance that substantial product liability claims will not be asserted against
the Company. The Company has obtained limited amounts of insurance relating to
its clinical trials. There can be no assurance that the Company will be able to
obtain or maintain insurance on acceptable terms for its clinical and commercial
activities or that any insurance obtained will provide adequate protection
against potential liabilities. Moreover, the Company is subject to federal,
state and local laws and regulations governing the use, generation, manufacture,
storage, handling and disposal of certain materials and wastes. The Company's
research and development processes involve the limited, controlled use of
hazardous and radioactive materials. The Company believes its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, but the risk of accidental
contamination or injury to the Company's employees or others from these
materials cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result, and any such liability could
exceed the resources of the Company. Although the Company believes it is in
compliance in all material respects with applicable environmental laws and
regulations and currently does not expect to make material capital expenditures
for environmental control facilities in the near-term, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or that the operations,
business or assets of the Company may not be materially adversely affected by
current or future environmental laws or regulations.
Dependence Upon Key Employees and Consultants. The success of the Company is
dependent upon the efforts of its senior management team and key consultants,
including William E. Bliss, the Company's President and Chief Executive Officer,
Dr. Carl R. Thornfeldt, Vice President of Research and Development, Medical
Director and Chairman of the Board of Directors of the Company, and Dr. Peter M.
Elias, a director of and consultant to the Company and Co-Chairman of the
Company's Scientific Advisory Board. A change in the association of one or more
of these individuals with the Company could adversely affect the Company if
suitable replacement personnel could not be employed. The Company does not
currently maintain key man or (except with respect to Dr. Elias) life insurance
policies covering any of its personnel. The success of the Company also depends
upon its ability to continue to attract and retain qualified scientific and
technical personnel. There is intense competition for qualified personnel in the
areas of the Company's activities, and there can be no assurance that the
Company will be able to
8
<PAGE>
continue to attract and retain the qualified personnel necessary for the
development or expansion of its business. The failure to attract and retain such
personnel could adversely affect the Company's business. In addition, certain
members of the Company's management team, including Dr. Thornfeldt, are not
full-time employees of the Company. The Company believes that the time
commitments of the members of its management team have been appropriate given
the Company's developmental stage.
Anti-Takeover Provisions. Certain provisions of the Company's Amended and
Restated Articles of Incorporation, as well as the California General
Corporation Law, could discourage a third party from attempting to acquire, or
make it more difficult for a third party to acquire, control of the Company
without approval of the Company's Board of Directors. Such provisions could also
limit the price that certain investors might be willing to pay in the future for
shares of the Common Stock. Certain of such provisions allow the Board of
Directors to authorize the issuance of preferred stock with rights superior to
those of the Common Stock. The Company is also subject to the provisions of
Section 1203 of the California General Corporation Law which requires that a
fairness opinion be provided to the Company's shareholders in connection with
their consideration of any proposed "interested party" reorganization
transaction.
Volatility of Stock Price. The stock market has from time to time experienced
significant price and volume fluctuations that may be unrelated to the operating
performance of particular companies. In addition, the market price of the Common
Stock and the IPO Warrants, like the stock prices of many publicly-traded
pharmaceutical, chemical and biotechnology companies, may prove to be highly
volatile. Announcements of technological innovations or new commercial products
by the Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by the Company or its competitors,
regulatory developments in both the United States and foreign countries, public
concern as to the safety of pharmaceutical products, sales of a large number of
shares of Common Stock in the market, and economic and other external factors,
as well as period-to-period fluctuations in financial results, among other
factors, may have a significant impact on the market price of the Common Stock
and the IPO Warrants.
SELLING SHAREHOLDERS
The Selling Shareholders consist of (i) the Series A Holders, (ii) the
Selling Shareholders who acquired warrants (the "Bridge Warrants") in a bridge
financing transaction in February 1995 (the "Bridge Financing"), and (iii)
certain other holders of outstanding shares of Common Stock or warrants to
purchase Common Stock (the "Other Shareholders").
The registration statement of which this Prospectus is a part is being filed,
and the Shares offered hereby are included herein, pursuant to various
registration rights agreements entered into at various dates between the Company
and the Series A Holders, Bridge Investors, and Other Selling Shareholders
(collectively, the "Registration Rights Agreements"). Due to (i) the ability of
the Selling Shareholders to determine individually when and whether they will
sell any Shares under this Prospectus and (ii) the uncertainty as to how many of
the Bridge Warrants will be exercised and how many shares of Common Stock will
be issued upon conversion of shares of Series A Preferred, the Company is unable
to determine the exact number of Shares that will actually be sold pursuant to
this Prospectus.
THE SERIES A HOLDERS
The Selling Shareholders identified in the table below as "Series A Holders"
acquired an aggregate of 750 shares of Series A Preferred in a private placement
transaction (the "Series A Transaction") pursuant to Securities Subscription
Agreements dated as of April 18 and 19, 1996 (collectively, the "Subscription
Agreements"). Commencing July 3, 1996, the Series A Preferred is convertible
into Common Stock at the option of the Series A Holder. The number of shares of
Common Stock into which shares of Series A Preferred are convertible depends on
several factors, including the date on which the shares are converted and the
market price of the Common Stock at the time of conversion. See "Description of
Capital Stock--Series A Preferred." The figures in the table below representing
the number
9
<PAGE>
of shares of Common Stock beneficially owned and offered by the Series A Holders
make a number of assumptions concerning the applicable conversion ratio and the
date on which shares of Series A Preferred are converted. As described in
greater detail under "Description of Capital Stock--Series A Preferred," the
number of shares of Common Stock issuable upon conversion of Series A Preferred
is calculated in part on the basis of the lower of a fixed conversion price or a
variable conversion price. The variable conversion price depends primarily on
the market price of the Common Stock on the date of conversion. The fixed
conversion price is $6.6275 per share. Since the Series A Holders paid $10,000
per share of Series A Preferred, each share of Series A Preferred is, in
general, convertible into a number of shares determined by dividing $10,000 by
the applicable conversion price (plus the premium, as described below). If the
variable conversion price on the date of conversion is lower than the fixed
conversion price, then a greater number of shares will be issued. In addition, a
conversion premium of 8% per annum accrues from April 19, 1996 until the date of
conversion and will result in issuance of a certain number of additional shares
of Common Stock upon conversion of shares of Series A Preferred.
For the above reasons, it is not possible to set forth in the table the
maximum number of shares that could be acquired by the Series A Holders upon
conversion of Shares of Series A Preferred. The number of shares set forth in
the table is based on conversion of the Series A Preferred at the fixed
conversion price, with the 8% premium calculated assuming conversion of all
shares of Series A Preferred on July 3, 1996. Several factors, including whether
the market price of the Common Stock is lower than the fixed conversion price of
$6.6275 per share, could result in a greater number of shares being issued to
the Series A Holders than are reflected in the table below.
In connection with the Series A Transaction, the Company entered into a
registration rights agreement with the Series A Holders granting the Series A
Holders certain demand and piggyback registration rights. The registration
statement of which this Prospectus is a part is being filed pursuant to the
registration rights agreement with the Series A Holders.
THE BRIDGE INVESTORS
The Bridge Investors acquired the Bridge Warrants in the Bridge Financing in
February 1995. The Bridge Warrants include a warrant (the "Initial Warrant")
with an exercise price of $0.01 one cent per warrant. Upon exercise of an
Initial Warrant, a Bridge Investor is entitled to receive one share of Common
Stock and a warrant (the "Unit Warrant") to purchase one share of Common Stock
at an exercise price of $7.81 per share (in some cases, $5.19 per share). The
number of shares of Common Stock shown as beneficially owned and offered by
Bridge Investors in the table below assumes exercise of both the Initial
Warrants and the Unit Warrants.
Larry J. Wells, one of the Bridge Investors, is a director of the Company and
is the Chairman of the entity that acts as the manager of Sundance Venture
Partners, L.P., a shareholder of the Company. See "Principal Shareholders." Mr.
Wells is also a partner of Anacapa Venture Partners, one of the Bridge
Investors.
As a result of restrictions on transfers of the Shares held by the Bridge
Investors which were imposed by the California Department of Corporations as a
condition of granting a permit qualifying the issuance of securities in the
Bridge Financing transaction in February 1995, even though the Shares issuable
to the Bridge Investors are covered by this Prospectus, public resale of the
Shares by the Bridge Investors may be limited and subject to regulation by the
California Department of Corporations.
OTHER SELLING SHAREHOLDERS
The Other Selling Shareholders include Neutrogena Corporation, Broadmark
Capital Corporation ("Broadmark") and Swartz Investments, LLC ("Swartz").
Neutrogena, which is a subsidiary of Johnson & Johnson, is a party with the
Company to (i) a License Option Agreement dated April 16, 1992, (ii) a Metabolic
Moisturizer OTC License Agreement dated April 16, 1992 and (iii) a Patent
License Agreement effective June 1, 1994. In connection with the Company's IPO,
Neutrogena executed a lock-up agreement with the Company and the Representatives
of the Underwriters in the IPO, with terms substantially similar to the terms of
lock-up agreements executed by other shareholders of the Company.
10
<PAGE>
Neutrogena agreed not to sell shares of Common Stock without the consent of the
Representatives, until August 17, 1996, subject to certain exceptions (including
the shares registered hereby).
Broadmark Capital Corporation acted as placement agent in connection with the
Bridge Financing and received a placement agent's fee and warrants to purchase
35,497 shares of Common Stock in consideration of its services. At various times
before May 1, 1992, Broadmark also purchased shares of Common Stock and has
received warrants to purchase shares of Common Stock in consideration of
financial services provided to the Company.
In connection with it services as placement agent for the Series A
Transaction, Swartz received warrants to purchase up to 86,006 shares of Common
Stock at an exercise price of $7.23 per share, and received a placement agent's
fee of $570,000.
The following table and accompanying footnotes identify each Selling
Shareholder based upon information provided to the Company, set forth as of May
1, 1996, with respect to the Shares beneficially held by or acquirable by, as
the case may be, each Selling Shareholder and the shares of Common Stock
beneficially owned by the Selling Shareholders which are not covered by this
Prospectus. Except as described above, based on information supplied to the
Company, no Selling Shareholder has had any position, office or other material
relationship with the Company within the past three years. The percentage
figures reflected in the table assume conversion of all shares of Series A
Preferred into 1,150,251 shares of Common Stock, and exercise of all Bridge
Warrants held by the Bridge Investors into 774,416 shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY
PRIOR TO OFFERING SHARES BEING OWNED AFTER OFFERING
NAME NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
- ------------------------------------- ------------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
SERIES A PREFERRED HOLDERS
AG Super Fund International
Partners, L.P. ...................... 23,005 * 23,005 0 *
Banque Scandinave En Suisse ..........115,025 1.9 115,025 0 *
Cameron Capital Ltd .................. 76,683 1.3 76,683 0 *
Darissco Diversified Investments, Inc 23,005 * 23,005 0 *
Everest Capital International, Ltd ..154,900 2.6 154,900 0 *
Everest Capital Investments, Ltd. ... 75,150 1.3 75,150 0 *
GAM Arbitrage, Inc. .................. 46,010 * 46,010 0 *
GRACECHURCH and Co. .................. 76,683 1.3 76,683 0 *
KA Investments, LDC .................. 15,337 * 15,337 0 *
LAKE Management LDC .................. 61,348 1.0 61,348 0 *
Leonardo, L.P. .......................191,708 3.2 191,708 0 *
Raphael, L.P. ........................ 46,010 * 46,010 0 *
Richcourt $ Strategies, Inc. ......... 38,342 * 38,342 0 *
The Gifford Fund, Ltd. ............... 76,683 1.3 76,683 0 *
The Tail Wind Fund, Ltd. ............. 38,342 * 38,342 0 *
The OTATO Limited Partnership ....... 38,342 * 38,342 0 *
Trustees' IFM Pension Plan Limited. . 15,337 * 15,337 0 *
West Merchant Bank Nominees, Ltd. ... 38,341 * 38,341 0 *
BRIDGE INVESTORS
A. B. Laffer, Canto & Associates .... 6,400 * 6,400 0 *
Larry Adler, CPA ..................... 16,000 * 16,000 0 *
Anacapa Venture Partners ............. 16,000 * 16,000 0 *
Alan & Lois Bauer .................... 7,200 * 5,540 1,660 *
J. Thomas Bentley .................... 32,000 * 32,000 0 *
Peter Block .......................... 7,680 * 7,680 0 *
Dr. & Mrs. Robert Cancro ............. 8,000 * 8,000 0 *
Ken Chamberlin ....................... 32,000 * 32,000 0 *
Paul Escobosa ........................ 3,200 * 3,200 0 *
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY
PRIOR TO OFFERING SHARES BEING OWNED AFTER OFFERING
NAME NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
- ------------------------------------- ------------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Davis Fox ............................ 12,000 * 12,000 0 *
James Freitag ........................ 3,200 * 3,200 0 *
G & G Diagnostics LPI ................ 12,000 * 12,000 0 *
Michael Hubbard ...................... 7,200 * 7,200 0 *
Intervivos Charitable Remainder 8,000 * 8,000 0 *
Unitrust for the Stock's ............
Bernard Keiser ....................... 32,000 * 24,670 7,330 *
Anita Laken .......................... 16,000 * 16,000 0 *
Glenn Laken .......................... 16,000 * 16,000 0 *
Priscilla J. Ledbetter RevocableTrust 4,000 * 3,079 921 *
Chai Mann ............................ 12,000 * 12,000 0 *
Robert Paget ......................... 12,000 * 12,000 0 *
Paradigm Venture Investors, LLC ..... 160,000 2.7 160,000 0 *
Herbert L. Pruzan .................... 8,000 * 8,000 0 *
Barry Reder .......................... 3,200 * 3,200 0 *
Dr. David R. Rosencrantz ............. 9,600 * 7,395 2,205 *
Steven Safran ........................ 12,000 * 12,000 0 *
Seligmann, Dreiling, Beckerman
Pension Plan FBO Thomas
R. Dreiling ......................... 6,000 * 6,000 0 *
Dr. James C. Shaw .................... 12,000 * 12,000 0 *
Donald and Lucy Stoner ............... 24,000 * 24,000 0 *
Timothy Stoner ....................... 9,600 * 9,600 0 *
Dr. William M. Tucker ................ 16,000 * 16,000 0 *
United Mizrahi Bank .................. 160,000 2.7 160,000 0 *
Rory Veal ............................ 7,200 * 7,200 0 *
Westminster Associates Limited ...... 64,000 1.1 64,000 0 *
Jon D. Wheeler ....................... 12,000 * 12,000 0 *
Frank D. Woodard ..................... 3,200 * 3,200 0 *
Larry J. Wells ....................... 594,946(1) 10.0 4,736 590,210(1) 10.0
OTHER SELLING SHAREHOLDERS
Neutrogena Corporation ............... 475,560 8.0 102,203 373,757 6.3
Broadmark Capital Corporation ....... 60,780 1.0 35,497 25,283 *
Swartz Investments, LLC. ............. 86,006 1.5 86,006 0 *
</TABLE>
- ----------
* Less than 1%.
(1) Includes 569,617 shares and warrants to purchase 13,865 shares held by
Sundance Venture Partners, LP. Mr. Wells is Chairman of the entity that
acts as manager of Sundance.
PLAN OF DISTRIBUTION
The registration statement of which this Prospectus forms a part has been
filed pursuant to the Registration Rights Agreements. To the Company's
knowledge, as of the date hereof, no Selling Stockholder has entered into any
agreement, arrangement or understanding with any particular broker or market
maker with respect to the shares offered hereby, nor does the Company know the
identity of the brokers or market makers which will participate in the offering.
The Shares covered hereby may be offered and sold from time to time by the
Selling Shareholders. The Selling Shareholders will act independently of the
Company in making decisions with respect to the timing, manner and size of each
sale. Such sales may be made on the Nasdaq SmallCap Market or
12
<PAGE>
otherwise, at prices and on terms then prevailing or at prices related to the
then market price, or in negotiated transactions. The Shares may be sold by one
or more of the following methods: (a) a block trade in which the broker-dealer
engaged by the Selling Stockholder will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by the broker-dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
To the Company's knowledge, the Selling Shareholders have not, as of the date
hereof, entered into any arrangement with a broker-dealer for the sale of shares
through a block trade, special offering, or secondary distribution of a purchase
by a broker-dealer. In effecting sales, broker-dealers engaged by the Selling
Shareholders may arrange for other broker-dealers to participate. Broker-dealers
will receive commissions or discounts from the Selling Shareholders in amounts
to be negotiated.
In offering the Shares, the Selling Shareholders and any broker-dealers who
execute sales for the Selling Shareholders may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales, and any
profits realized by the Selling Shareholders and the compensation of such
broker-dealer may be deemed to be underwriting discounts and commissions.
Rule 10b-6 under the Exchange Act prohibits participants in a distribution
from bidding for or purchasing for an account in which the participant has a
beneficial interest, any of the securities that are the subject of the
distribution. Rule 10b-7 under the Exchange Act governs bids and purchases made
to stabilize the price of a security in connection with a distribution of the
security.
This offering will terminate as to each Selling Shareholder on the earlier of
(a) the date on which such Selling Shareholder's shares may be resold pursuant
to Rule 144 under the Securities Act; or (b) the date on which all Shares
offered hereby have been sold by the Selling Shareholders. There can be no
assurance that any of the Selling Shareholders will sell any or all of the
shares of Common Stock offered hereby.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future. Future cash dividends, if any, will be determined by the
Board of Directors, and will be based upon the Company's earnings, capital,
research and development requirements, financial condition and other factors
deemed relevant by the Board of Directors.
PRICE RANGE OF COMMON STOCK
The Common Stock has been traded on the Nasdaq SmallCap Market under the
Nasdaq symbol "CLGY" since the Company's initial public offering in August 1995.
Prior to August 1995, there was no established public trading market for the
Common Stock. The following table shows the high and low closing sales prices
set as reported on the Nasdaq SmallCap Market for the periods indicated.
1995
----------------
HIGH LOW
-------- -------
Third Quarter* ............................7 1/4 4 7/8
Fourth Quarter ............................6 1/4 4
1996
----------------
HIGH LOW
-------- -------
First Quarter ............................. 7 1/8 5
Second Quarter (through June 26, 1996) .... 9 1/8 5 1/2
- ----------
* Commencing August 17, 1995.
As of April 18, 1995, there were approximately 960 beneficial shareholders of
record.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company commenced operations in 1989 to engage in the research,
development and commercialization of proprietary products for the skin including
drug delivery products using the skin as the portal of entry, prescription
therapeutic products for skin disorders, and non-prescription over-the-counter
consumer products to repair and protect damaged skin. Since its inception, the
Company has engaged entirely in research and development, and pre-clinical and
clinical testing activities, and the Company intends to continue such activities
for the foreseeable future.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995
Revenues. The Company had licensing revenues from an affiliate in 1995 of
$1.0 million, but had no such revenues for 1994. Revenues in 1995 of $1.0
million were associated with the expiration in May 1995 of a Cellegy option to
reacquire rights to azelaic acid for prescription products that were originally
purchased by Neutrogena Corporation in 1994. See "Business--Principal License
Agreements." The Company does not currently generate any revenues from
operations, and there can be no assurances regarding when, or if, such revenues
will occur. The Company pursues corporate development agreements as
opportunities arise, which may involve contract revenues in the form of
development funding or milestone payments.
Research and Development Expenses. Research and development expenses
decreased by $286,000, from $1,511,000 in 1994 to $1,225,000 in 1995, due
primarily to a reduction in formulating (or product preparation) activity
associated with products entering the clinical phase. The Company expects that
its drug delivery research during 1996 will focus on the identification and
preclinical testing of two compounds using the Company's drug delivery methods.
Optimization and testing of a skin protectant product and an anti-wrinkling
product are also expected to continue during 1996 and 1997. The Company may
further develop its dodecylamine product, depending in part on whether a pending
research grant proposal is approved and funded. The Company's research and
development expenses are expected to increase significantly in the future as
preclinical and clinical trial activity increases.
General and Administrative Expenses. General and administrative expenses
increased by $279,000 from 1994 to 1995, due primarily to increased salaries and
financing costs. The Company's general and administrative expenses are expected
to increase in future periods due to costs associated with operating a public
company and to support potential product development into and through clinical
trials. The rate of increase is expected to be lower than for its research and
development spending.
Interest Expense. Interest expense of $752,000 for 1995 reflects the interest
and amortization of the discount on the notes issued in connection with the
Bridge Financing, see "Selling Shareholders," which were repaid in August 1995.
Interest expense was not significant in 1994.
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenues
The Company had contract development revenues of $15,000 for the three
months ended March 31, 1996 attributable to its license agreement with
Neutrogena Corporation. There were no revenues for the three months ended March
31, 1995. The Company does not anticipate receiving any significant revenues
for, at least, the next several quarters, and there can be no assurances
regarding when, if ever, the Company will receive any significant licensing or
other revenues.
Research and Development Expenses
Research and development expenses were $275,000 and $596,000 for the three
months ended March 31, 1995 and 1996, respectively. The increase for the first
three months of 1996 was due primarily to an increase in clinical trials related
to Glylorin. In January 1996, the Company commenced a Phase III study to
evaluate the efficacy and safety of Glylorin in the topical treatment of
ichthyosiform erthroderma. The Company expects that the study will be expanded
to approximately 20 medical centers across the U.S. over the next year. The
Company's research and development expenses are expected to
14
<PAGE>
increase in the future as Glylorin clinical trial activities increase and as
expenses associated with preclinical research on the Company's drug delivery
and consumer products increase.
General and Administrative Expenses
General and administrative expenses were $351,000 and $255,000 for the
three months ended March 31, 1996 and 1995, respectively. The increase for the
first three months of 1996 was primarily due to increased personnel and related
costs. The Company's general and administrative expenses are expected to
increase over the next several quarters in support of research and development,
and the Company's corporate partnering efforts.
Interest Income and Expense
The Company recognized $68,000 in interest income for the three months
ended March 31, 1996 compared to $7,000 in interest income for the same period
in 1995. The interest earned in the first quarter of 1996 was associated with
the investment of proceeds from the IPO. Interest income will increase during
the second quarter of 1996 with additional net proceeds from the Series A
Transaction. The Company incurred no interest expense for the three months ended
March 31, 1996 compared with $143,000 for the same period in 1995. The interest
expense in the first quarter of 1995 was associated with bridge notes previously
issued in the Bridge Financing.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses and negative cash flow from operations
each year since its inception. Through March 31, 1996, the Company had incurred
a cumulative net loss of approximately $11.0 million and had consumed cash from
operations of approximately $9.9 million. The Company has financed its
operations through March 31, 1996 to date primarily from sales of debt and
equity securities.
The Company's cash, cash equivalents and short-term investments were
approximately $0.4 million, $3.8 million and $2.7 million at December 31, 1994,
December 31, 1995 and March 31, 1996. The increase during 1995 of $3.4 million
was due primarily to the closing of the Company's initial public offering with
net proceeds of approximately $6.4 million in August 1995. The approximately
$1.1 million decrease during the first three months of 1996 was primarily due to
net cash used in operating activities.
The Company's future expenditures and capital requirements will depend on
numerous factors, primarily the progress of its research and development
programs, its preclinical and clinical testing, and the ability of the Company
to establish collaborative arrangements. The Company's cash needs are expected
to continue to increase significantly over at least the next two years to meet
the additional expenses the Company will incur as it expands its current
research and development programs, particularly in drug delivery, and increases
clinical trial activities relating primarily to Glylorin.
In the course of its development activities, the Company has incurred
significant losses and expects to incur substantial additional development
costs. As a result, the Company will require substantial additional funds to
fund operations, and the Company may seek private or public equity investments,
and possible future collaborative arrangements with third parties to meet such
needs. There is no assurance that such additional funds will be available for
the Company to finance its operations on acceptable terms, if at all.
Insufficient funding may require the Company to delay, reduce, or eliminate some
or all of its research and development activities, planned clinical trials, and
administrative programs. The Company believes that its existing resources will
satisfy its cash requirements for at least 24 months from the date of this
Prospectus based upon the Company's current plan.
As of December 31, 1995 the Company had federal and state income tax net
operating loss carryforwards of approximately $9.5 million and $4.7 million,
respectively, which expire between 2004 and 2010, and 1996 and 2000,
respectively. The Company also had federal and state research tax credit
carryforwards of approximately $197,000 and $92,000, respectively. The federal
credits expire between 2006 and 2010; the state credits do not expire.
Pursuant to the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of the Company's net operating loss and research and
development tax credit carryforwards may be limited, if a cumulative change of
ownership of more than 50% occurs within any three-year period.
15
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's business involves many risks and uncertainties
which could affect the Company's future financial position or results of
operations. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and in the Company's Annual Reports on Form 10-KSB and Quarterly
Reports on Form 10-QSB.
Cellegy is a pharmaceutical company which is engaged in the development of
proprietary drug delivery products and consumer and prescription products for
the skin. The Company was incorporated in California in 1989. In April 1992, the
Company entered into an agreement with Neutrogena Corporation pursuant to which
Neutrogena made a $5 million equity investment in the Company and licensed
certain of the Company's products, principally for consumer applications.
Neutrogena also acquired the rights to the Company's azelaic acid product for $1
million in 1994. In 1993, Dr. Carl Thornfeldt, co-founder and Chairman of the
Board of the Company, recruited Dr. Peter Elias to collaborate with Cellegy. Dr.
Elias is the Vice-Chairman of the Department of Dermatology at University of
California, San Francisco School of Medicine, and a director of the Company and
Co-Chairman of the Company's Scientific Advisory Board. In October 1993, the
Company entered into a license agreement with the University of California
providing for a license for skin barrier repair formulations developed by Dr.
Elias. In March 1994, the Company entered into a second license agreement for
technology relating to drug delivery by skin barrier disruption.
PRODUCT OPPORTUNITIES
Drug Delivery
Of all the prescription drugs in the United States, only seven are
currently approved by the FDA for transdermal delivery. A primary reason for the
relatively limited number of drugs approved by the FDA for transdermal delivery
is that current drug delivery systems have the inherent limitation of requiring
small molecular sized drugs to be delivered across the skin barrier and the high
potential of inducing varying degrees of skin inflammation.
Cellegy, in conjunction with the University of California, San Francisco
School of Medicine, is engaged in developing a technology that is intended to
overcome these inherent limitations. This technology selectively modulates the
skin's barrier, with the goals of opening the skin barrier wider and keeping it
open for a longer period of time (which may allow for the transdermal and
topical delivery of larger and/or water soluble therapeutic, nutritional and
cosmetic molecules), and reducing the potential for inducing skin inflammation,
which sometimes accompanies use of certain traditional drug delivery
technologies.
The Company believes that there are a number of independent, market driven
factors which may expand the worldwide transdermal drug delivery market. The
Company believes that transdermal drug products can improve the level of a
patient's compliance with instructions for taking medication, since transdermal
drug delivery offers a convenient, less frequent dosing regimen and a less
painful method of delivering the drug in comparison with injections and certain
other delivery methods. In addition, the Company believes that patent
expirations on currently marketed drugs have increased the interest of certain
pharmaceutical companies in developing transdermal drug delivery product forms
for their proprietary drugs.
Prescription Products
Cellegy seeks to capitalize on the premise that the skin changes
accompanying several of the most serious and most common skin diseases result
from three or all four of the following abnormal signs: scaling, skin infection,
inflammation and excessive cell multiplication (hyperproliferation). It has been
documented that the three largest dermatologic therapeutic classes of drugs
based on sales (corticosteroids, antimicrobials and retinoids) reverse only one
or two of these abnormal signs. This is one
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principal reason why many patients experience "rapid rebound" or recurrence of
disease symptoms in a relatively short period of time after termination of, or
even during, treatment.
In order to effectively treat diseased skin resulting from the abnormal
signs described above, the patients often require use of a combination of drugs.
Such combination therapy may result in significant inconvenience to the patient,
causing a decreased level of patient compliance that may be inadequate to
successfully treat the disease. There is also a concurrent increased risk of
side effects and increased costs. In contrast, a goal of the Company is to
develop multiple function therapeutic products to treat skin diseases by
reversing most or all of the abnormal signs. If the Company is successful in
these efforts, the Company believes its products may decrease or eliminate the
need for the current combination therapies in certain instances, thus
potentially providing a cost advantage in today's managed care environment.
Consumer Products
Cellegy researchers are developing two consumer products based on another
premise underlying its core technology, that repairing the skin barrier may
improve the skin's ability to protect against environmental and occupational
insults and thus may help prevent skin diseases and help alleviate conditions
such as photoaging and wrinkling.
CORE TECHNOLOGY--ALTERNATIVE UNDERSTANDING OF THE SKIN
Cellegy's core technology is based on two underlying premises: (1) the
outermost layer of the epidermis, the stratum corneum where the permeability
barrier resides, is metabolically active and plays a vital role in the skin's
response to insults and injuries; and (2) a single medication with multiple
mechanisms of action may result in improved and prolonged therapeutic response
in diseased skin manifesting multiple clinical symptoms of abnormality.
Until approximately 15 years ago, the stratum corneum was viewed as a dead
layer that played a passive role in skin functions and diseases. Thus, the prior
understanding was that skin diseases are initiated by signals (biologic response
modifiers) below the stratum corneum which lead to inflammation,
hyperproliferation and scaling. In this view, signals from an insult which
produced the abnormal signs of diseased skin either arrive to the dermis via the
blood or are generated in the dermis or pass through the stratum corneum and
epidermis without interacting with these layers. This view is an "inside-out"
perspective of the skin diseases.
Cellegy's products are based on research findings initially developed at
the Dermatology Research Unit ("DRU") at the University of California, San
Francisco that skin diseases can be triggered by external stimuli that damage
the stratum corneum barrier, releasing biologic response modifiers. These
findings support an alternative view, in which modifiers migrate internally to
activate those abnormal signs deeper in the epidermis and dermis. Cellegy's
"outside-in" perspective provides an alternative explanation to the traditional
"inside-out" view relating to the cause of skin diseases, such as psoriasis and
atopic dermatitis.
CELLEGY DRUG DELIVERY PRODUCTS--TECHNOLOGY AND DEVELOPMENT STATUS
Technology
In the process of seeking approaches to effectively repairing the skin
barrier, Cellegy scientists discovered a "biochemical enhancer technology." This
technology, utilizing the skin as a portal for entry, comprises a variety of
methods which manipulate the three key barrier lipids of the stratum corneum
membranes: cholesterol, ceramides and free fatty acids. The Company believes
that normal barrier function requires a specific critical ratio of all three
lipids, and that variations from this ratio result in predictable alterations in
barrier permeability.
Cellegy's technology utilizes several methods that are intended to deliver,
or enhance delivery of, therapeutic compounds into the skin (topical delivery)
or through the skin into the bloodstream (transdermal delivery). With the
Company's drug delivery methods, both water soluble or large lipid soluble
compounds, which are currently undeliverable by biophysical delivery methods,
may potentially be delivered to or through the skin rather than given by
injection, intravenous infusion, or by suppository.
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This technology may allow the Company to design a delivery system utilizing
several methods tailored specifically for therapeutic compounds or nutrients of
different chemical size, structure, solubility and behavior. Thus, the Company
believes that its methods may be capable of delivering into or through the skin
several compounds which are currently being developed by pharmaceutical,
biotechnology and cosmetic companies.
Cellegy has developed research data, including animal assays, on its drug
delivery technology including the testing of the following drugs: vasopressin,
luteinizing hormone releasing hormone (LHRH), thymidine dinucleotide, lidocaine,
cimetidine, hydrocortisone, and caffeine. The Company has not conducted any
human trials or studies regarding its drug delivery technology, and there can be
no assurance that research data, trials or studies relating to animals are
predictive of success in humans or that any human trials will be successful.
Development Status of Cellegy's Drug Delivery Program
The Company is currently focusing its research on three FDA-approved
systemic drugs for formulation with the Company's drug delivery methods.
Evaluation of these compounds is still in the early stages, and patent
applications have not been filed with respect to these products. One product
candidate, D500 (testosterone combined with Cellegy's transdermal drug delivery
system), includes a compound used in hormone replacement therapy to reverse
anemia and treat certain cancers. This compound is currently available in two
commercial patches.
CELLEGY THERAPEUTIC AND CONSUMER PRODUCTS--TECHNOLOGY AND DEVELOPMENT STATUS
Therapeutic Products in Development
Glylorin(TM)(T100). Data from preclinical and clinical studies conducted to
date suggest that this compound may inhibit the abnormal signs, as well as
itching and other symptoms, of ichthyosis, and may have the potential to:
o reverse stratum corneum barrier disruption and scaling by replenishing
key barrier membrane lipids;
o reverse inflammation by inhibiting function of the white blood cells
which invade the skin, causing inflammation;
o inhibit hyperproliferating epidermal cells themselves;
o kill a wide spectrum of bacteria, yeasts, and fungi that invade through
scaly skin and activate inflammation and hyperproliferation; and
o relieve itching and burning by reforming the barrier over exposed
nerves.
If Glylorin successfully inhibits these multiple signs and symptoms,
ichthyosis is expected to clear faster and more completely and stay clear
longer.
In January 1996, the Company commenced a Phase III study with Glylorin after
concluding three double-blind Phase II/III human studies on the use of Glylorin
to treat two types of congenital ichthyoses: congenital ichthyosiform
erythroderma and neutral lipid storage disease. Each of the three studies
appeared to show that Glylorin reduced the signs of the disease more than the
placebo, and that the differences between the active and placebo were
statistically significant. Ichthyoses is a family of related, debilitating skin
diseases characterized by a thick surface layer of scales that frequently
affects the entire body. Phase III is the last clinical testing of this product
before the submission of a new drug application ("NDA") to the FDA, assuming
acceptable results.
The FDA has granted orphan drug designation for Glylorin for congenital
primary ichthyoses, for which there is no approved prescription drug.
Dr. Thornfeldt has conducted open label clinical studies on patients who
did not respond to standard therapies regarding the use of Glylorin to treat
both seborrheic and atopic dermatitis, two of the most
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common types of dermatitis. An anti-microbiological assay tested on humans
studying Glylorin's ability to eradicate the bacteria which cause impetigo was
not sufficiently positive to pursue further clinical studies on impetigo.
Therapeutic Products in Research
Potentiated Dodecylamine (T220). The Company believes that this compound
may have the potential to be a new therapeutic compound for topical treatment of
acne. The Company has also conducted animal studies regarding the use of this
compound to treat impetigo. This compound has been formulated for additional
pharmacology and toxicology studies. In December 1995, the Company applied for a
Small Business Innovative Research grant for this product.
Topical Cyclosporine A (T300). Cyclosporine A is an FDA-approved systemic
immunosuppressant chemotherapeutic compound which is being formulated using
Cellegy's topical drug delivery technology. Several published studies suggest
that Cyclosporine A has the potential to treat several of the most common skin
diseases, including psoriasis, lichen planias and atopic dermatitis.
Cyclosporine A is known to be poorly absorbed into the skin when applied
topically. The Company believes a topically applied product delivered with more
effective drug delivery technology could reduce the incidence of adverse side
effects that occur when this compound is administered internally.
Consumer Products in Development
Cellegy's research to date, which is preliminary in nature, suggests that
moisturizing products utilizing Cellegy's barrier repair technology may not only
moisturize, but also may accelerate repair of the barrier, whether it is
disrupted by chemical or physical injury, skin disease or photoaging. The
rejuvenated barrier may tolerate a greater degree of environmental insults and
physical injuries, diminish the risk of allergic and irritant induced skin
inflammation and skin infections, and lessen the skin changes of photoaging. In
addition, Cellegy believes that if successful products are developed and are
regularly used as a preventive measure, they may decrease the frequency, extent,
and severity of psoriasis, dermatites, and related skin diseases, although there
can be no assurances that this will be the case.
Skin Protectant (C20). The Company is developing a new product that is
presently in late-phase development. This product comprises a specific
formulation of six different lipids. All six lipids are GRAS (generally regarded
as safe) ingredients, and function optimally at a specific ratio. Experimental
data in animal and in humans suggests that C20 may provide an early barrier
re-formation. To date, based on test data from in-house assays, C20 appears to
outperform certain commercial skin care products investigated in certain
designated measures such as moisturizing ability.
One class of compounds studied by the Company has demonstrated potential in
reversing wrinkles and reducing atrophy, fragility and irregular pigmentation
associated with the photoaging of skin. Based on the in vitro and in vivo
pharmacological properties of these compounds, C30 has been selected as the lead
candidate. Formulation activity focusing on incorporating C30 into a vehicle
which supplements the missing stratum corneum lipids observed in the aging skin
has been commenced.
MARKETING STRATEGY
Cellegy intends to collaborate with major pharmaceutical companies and
consumer companies utilizing licensing and joint venture agreements. Through
these agreements, Cellegy believes it may receive funding for research and
development as well as royalty streams from product sales.
If Cellegy successfully develops commercial products, it expects that most
such products will be sold into major market segments, which would require large
sales forces and significant marketing support. Cellegy intends to have
discussions with third parties that can provide the necessary support and
marketing resources. In the future, Cellegy may consider marketing some of its
products directly to targeted markets.
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PATENTS AND TRADE SECRETS
The Company has nine granted U.S. patents, several issued foreign patents
and many foreign patent applications for the use of certain compounds to treat
the most common and/or severe inflammatory dermatologic diseases including
dermatitis, psoriasis, rosacea and acne, as well as disorders such as various
ichthyoses, wrinkling and skin aging and premalignant actinic keratoses. Three
pending patent applications relate to technology or products licensed from the
University of California, San Francisco. At least two more patent applications
are being prepared for filing but are currently protected by disclosure
documents. Corresponding patent applications for most of the Company's issued
U.S. patents have been filed in many countries of importance to the Company
located in major world markets, including certain countries in Europe,
Australia, South Korea, Japan, Mexico and Canada.
The Company's policy is to protect its technology by, among other things,
filing patent applications for technology that it considers important to the
development of its business. The Company intends to file additional patent
applications, when appropriate, relating to its technology, improvements to its
technology and to specific products that it develops. There can be no assurance
that any additional patents will be issued, or, if issued, that they will be of
commercial benefit to the Company. In addition, there can be no assurance that
any patents issued to the Company or licensors to the Company will not be
infringed or circumvented by others. It is impossible to anticipate the breadth
or degree of protection that any such patents will afford, or whether the
Company can meaningfully protect its rights to its unpatented trade secrets.
It is the Company's policy to require its employees and consultants to
execute a confidentiality agreement upon the commencement of employment by or
consultancy to the Company. Each agreement provides that all confidential
information developed or made known to the employee or consultant during the
course of employment or consultancy will be kept confidential and not disclosed
to third parties except in specific circumstances and that all inventions
conceived by the employee or consultant shall be the exclusive property of the
Company. In addition, it is the Company's policy to require the collaborators
and potential collaborators to enter into confidentiality agreements. There can
be no assurance, however, that these agreements will provide meaningful
protection for the company's trade secrets.
PRINCIPAL LICENSE AGREEMENTS
The Company entered into a License Option Agreement dated April 16, 1992
(the "License Option Agreement") with Neutrogena as part of Neutrogena's
purchase of shares of the Company's Series C Preferred Stock (which converted
into Common Stock in connection with the IPO) on June 12, 1992. Also as part of
that stock purchase transaction, the Company entered into an Azelaic Acid OTC
License Agreement (the "Azelaic Acid Agreement") and a Metabolic Moisturizer OTC
License Agreement (the "Metabolic Moisturizer Agreement"), each dated April 16,
1992, with Neutrogena.
The License Option Agreement requires the Company to notify Neutrogena
about potential consumer or prescription products about which it becomes aware
and about potential consumer products for which the Company has applied to
switch from prescription to consumer status. Certain products and technologies,
including the Company's drug delivery products and technologies, Glylorin, and
products to be sold in the Japanese market, are excluded from the scope of the
License Option Agreement. The royalty-bearing agreement for consumer products
provides for a royalty of three percent of net sales for the first two years and
five percent of net sales thereafter, and for prescription products provides for
a royalty of five percent of net sales with a minimum royalty of $25,000. For
both consumer products and prescription products Neutrogena pays out-of-pocket
evaluation, development and marketing costs. As of the date of this Prospectus,
Neutrogena had not exercised its option to license any consumer or prescription
products about which it had been notified by the Company. The term of the
agreement is 15 years for consumer products and 10 years for prescription
products.
The Metabolic Moisturizer Agreement, which includes barrier repair
technology, and the Azelaic Acid Agreement each granted to Neutrogena an
exclusive, worldwide royalty-bearing license. The Metabolic Moisturizer
Agreement relates to the Company's barrier repair technology and contains the
same
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royalty and other material terms as the standard royalty-bearing license
agreement described above for consumer products. The Azelaic Acid Agreement was
terminated and replaced by a Patent License Agreement effective June 1, 1994
(the agreement as amended, the "Neutrogena Agreement") between the Company and
Neutrogena. Pursuant to the Neutrogena Agreement, Neutrogena paid the Company
$1.0 million for an exclusive, worldwide, royalty-free license for azelaic acid
for both prescription and consumer products. The Metabolic Moisturizer Agreement
and Neutrogena Agreement will terminate upon the earlier of (a) mutual consent
by the Company and Neutrogena or (b) material breach by a party, provided the
breaching party is given written notice of the breach and does not cure within
thirty days.
On October 26, 1993, the Company entered into a license agreement with the
University of California (the "Licensor") providing for an exclusive,
world-wide, royalty bearing license, subject to customary government rights, for
two use patents for Barrier Repair Formulations, the rights to which are jointly
held by the Licensor and the Company, in consideration of the issuance to the
Licensor of 9,513 shares of preferred stock (which converted into an equal
number of shares of Common Stock in connection with the IPO) and the payment by
the Company of an additional $20,000 licensing fee. The license agreement
requires the Company to pay royalties on net product sales equal to the greater
of $25,000 annually or 2% of net sales of consumer products, and 5% of net sales
of prescription products with a minimum of $25,000 annually. The Company has the
right to grant sublicenses to third parties. Pursuant to the license agreement,
the Company is required to submit progress reports related to development and
testing of all licensed products. If the Company fails to perform any of the
following, then the Licensor has the right to terminate the license agreement
upon 60 days written notice: (i) submit an application for regulatory approval
of a licensed product that is intended for sale only pursuant to prescription or
pharmacist's approval to the FDA or the equivalent foreign regulatory authority
of any three of Japan, Germany, France or the United Kingdom within two years of
the date of the agreement; (ii) by October 26, 1995, secure a marketing partner
or channel for national introduction of a licensed product; (iii) commence
commercial marketing of a licensed product within 12 months of receiving
approval of such licensed product in any county; or (iv) reasonably fill the
market demand for a licensed product in each country following commencement of
marketing in such country. The license agreement's term is until the longer of
(i) the expiration of the last to expire patent or (ii) 20 years from the date
of the agreement.
On March 4, 1994, the Company entered into a second exclusive, worldwide,
royalty bearing license agreement with the Licensor for two patents, the rights
to which are jointly held by the Licensor and Cellegy, for "Drug Delivery By
Skin Barrier Disruption," in consideration of the payment by the Company of a
$15,000 license fee, and a $10,000 annual maintenance fee payable each year
until the Company is commercially selling a licensed product. The license
requires the Company to pay royalties equal to 1% of net sales of licensed
consumer products and 2.5% of net sales of licensed prescription products, with
a minimum of $25,000 annually. The Company has the right to grant sublicenses to
third parties. The Company is required to provide written progress reports
related to development and testing of licensed products. If the Company fails to
perform any of the following, the Licensor has the right to terminate the
license agreement upon 60 days written notice: (i) within two years of the date
of the agreement, secure a marketing partner or channel for national
introduction of a licensed product to consumer markets; (ii) within three years
of the date of the agreement, submit an application for marketing approval of a
licensed product that is intended for sale only pursuant to prescription or
pharmacist's approval to the FDA or the equivalent foreign regulatory authority
of any three of Japan, Germany, France or the United Kingdom, in which case the
FDA application shall be made within five years; (iii) commence commercial
marketing of a licensed product within two years of receiving approval of such
licensed product in any country; (iv) market an OTC licensed product within
three years of the date of the agreement; or (v) reasonably fill the market
demand for a licensed product in each country following commencement of
marketing in such country. The license agreement's term is until the longer of
(i) the expiration of the last to expire patent or (ii) 20 years from the date
of the agreement.
The Company has negotiated an extension of certain terms, including the
performance criteria discussed above, through September 30, 1996, relating to
both of the above agreements. The Company believes that if further extensions
are required in order to satisfy one or more of these requirements, it
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will be able to negotiate an extension with the Licensor on satisfactory terms.
However, there can be no assurances that this will be the case. Failure to
negotiate satisfactory extensions, if required, could have a material adverse
affect on the Company.
In connection with the Bridge Financing transaction, see "Selling
Shareholders," the Company entered into exclusive marketing and distribution
agreements with three investors in the Bridge Financing who are otherwise
unaffiliated with the Company. The agreements grant the distributors the
exclusive right to sell, market and distribute Glylorin in (i) Australia, (ii)
Argentina, and (iii) Bolivia, Chile, Colombia, Ecuador, Peru, Paraguay, Uruguay
and Venezuela, respectively, for the maximum duration permitted by law. Each
distributor bears its own costs and expenses incurred in marketing, promoting,
and obtaining regulatory approvals for Glylorin.
In March 1996, the Company signed a Research Agreement with Yamanouchi
Europe B.V. relating to two of its skin protectant formulations, targeting the
prevention of occupationally-induced contact dermatitis. Under terms of the
agreement, Cellegy will supply Yamanouchi with study materials and Yamanouchi
will conduct tests in Europe, which are expected to be conducted during the
second quarter of 1996. After receipt of the final report from the study
conducted in Europe, Yamanouchi may exercise a right of first refusal to enter
into an agreement with Cellegy for the exclusive license of the products in all
European countries in which Yamanouchi markets its products.
In April 1996, the Company entered into a Research Agreement with Bausch &
Lomb, Inc. The Agreement involves laboratory and possibly human testing of two
of the Company's skin protectant formulations. This collaboration may result in
a licensing agreement, if results from initial research are successful.
COMPETITION
In the development and marketing of dermatologic drugs, skin care products
and delivery systems, Cellegy faces intense competition from large
pharmaceutical companies with established dermatology divisions, such as Glaxo
Wellcome plc, Ortho Pharmaceutical, Inc., a subsidiary of Johnson & Johnson,
Schering-Plough, Rhone-Poulenc Rorer Corp., Pharmacia & Upjohn, Inc. and
Westwood Pharmaceuticals, a subsidiary of Bristol-Myers Squibb Company. These
and other companies have substantially greater financial, technical, production,
marketing and regulatory experience and resources than Cellegy in developing and
commercializing drug and skin care products. The Company also competes with
universities developing drug delivery technologies and with several companies
which have been formed to develop unique delivery systems such as ALZA
Pharmaceuticals, Cygnus, Inc., Noven, Inc., Penederm, Inc., Macrochem, Inc., and
Theratech. In addition, these companies and academic and research institutions
compete with Cellegy in recruiting and retaining highly qualified scientific and
management personnel. Competition in the dermatology market is generally based
on performance characteristics and, to a lesser extent, price. There can be no
assurance that the Company's products under development will be able to compete
successfully with existing or new commercial products.
GOVERNMENT REGULATION
Overview of FDA Drug Approval Process. The following discussion summarizes
certain aspects of the process of developing, testing and seeking FDA approval
of a topical dermatologic drug. This overview should be read in connection with
the more detailed discussion appearing below.
The development path for a topical dermatologic drug involves formulation,
preclinical and clinical testing, and establishing a manufacturing source for
the product that satisfies the FDA's current good manufacturing practice ("GMP")
requirements. Preclinical testing involves studies in the laboratory and in
animal model systems to gain preliminary information on the drug's pharmacology
and toxicology and to identify any potential safety problems that would preclude
testing in people. Phase I protocols are then prepared to test the irritancy,
sensitization and/or phototoxicity potential of the product in humans. These
proposed protocols are submitted to the FDA along with the results of
preclinical evaluations, and chemistry and manufacturing information. The
information is submitted to the FDA in the form of an Investigational New Drug
Application ("IND"), which involves a 30-day waiting period before Phase I
clinical studies may begin unless the FDA approves the IND before then.
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If Phase I studies establish a reasonable safety profile, a Phase II
clinical study is conducted to evaluate effectiveness and to find the optimal
routes, dose and treatment schedule of the drug for the targeted disease. If the
outcome of the Phase II program is positive, Phase III clinical trials are
conducted in a larger patient population in an effort to definitely determine
safety and effectiveness. If the Phase III data warrant proceeding further, an
NDA containing comprehensive chemistry, manufacturing, formulation, preclinical
and clinical data, is submitted to the FDA for review and approval. The FDA may
require submission of additional information and resubmission of the NDA.
FDA Requirements for Drug Compounds. The preclinical and clinical testing,
manufacture, distribution, marketing and advertising of pharmaceutical compounds
are extensively and intensely regulated by government agencies, primarily the
FDA under the Federal Food, Drug and Cosmetic Act. The packaging and labeling of
all drug compounds are also subject to extensive FDA regulations.
Investigational New Drug Applications. During the initial product
development stage an IND for each drug is filed with the FDA in order to begin
human testing. An IND must include preclinical data showing the toxicity of the
product, from which the FDA makes a determination of the product's safety for
human testing. Preclinical studies can take several years to complete, and there
is no assurance that an IND based on such studies will ever become effective so
as to permit clinical testing to begin. A 30-day waiting period after the
receipt of each IND is required by the FDA prior to the commencement of initial
clinical testing, unless the FDA approves the IND before then. If the FDA has
not commented on or questioned the IND within this 30-day period, initial
clinical studies may begin, although companies often obtain affirmative FDA
approval before beginning such studies. If the FDA has comments or questions, it
places the studies on clinical hold and the questions must be answered to the
satisfaction of the FDA before initial clinical testing can begin. In addition,
the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If
the FDA imposes a clinical hold, clinical trials cannot recommence without prior
FDA authorization and then only under terms authorized by the FDA. In some
instances the IND process can result in substantial delay and expense.
Clinical trials to support NDAs are typically conducted in three sequential
phases, but the phases may overlap. In Phase I, the initial introduction of the
drug into healthy human subjects, the drug is tested for safety, dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to (i)
evaluate the effectiveness of the drug for specific, targeted indications, (ii)
determine dosage tolerance and optimal dosage and (iii) identify possible short
term adverse effects and safety risks. When a compound is found to have an
effect and to have an acceptable safety profile in Phase II evaluations, Phase
III trials are undertaken to further evaluate clinical effectiveness and to
further test for safety within an expanded patient population at geographically
dispersed clinical study sites. Phase III trials are usually designed to provide
the substantial evidence of effectiveness and the evidence of safety required to
obtain FDA approval for marketing. There can be no assurance that Phase I, Phase
II or Phase III testing will be completed successfully within any specified time
period, if at all, with respect to any of the Company's products subject to such
testing. The FDA closely monitors all three phases of clinical testing and may,
at its discretion, re-evaluate, alter, suspend (place on clinical hold), or
terminate the testing based on the data that have been accumulated to that point
and its assessment of the risk/benefit ratio to the patient.
New and Abbreviated New Drug Applications. After successful completion of
the required clinical testing, generally an NDA is submitted to the FDA
(assuming acceptable test results). FDA approval of the NDA (or, in the
alternative an Abbreviated New Drug Application ("ANDA"), as described below) is
required before marketing may begin in the United States. The NDA must include
the results of extensive clinical and other testing and the compilation of data
relating to the product's chemistry, pharmacology and manufacture, the cost of
all of which is substantial. The FDA reviews all NDAs submitted before it
accepts them for filing and may request additional information rather than
filing an NDA. In such an event, the NDA must be resubmitted with the additional
information and, again, is subject to review before filing. Once the FDA accepts
the NDA for filing, it is required to review the NDA within 180 days of the
filing. In the process of reviewing applications the FDA again may request that
additional information be submitted. The 180-day post-filing review period
begins anew when additional
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requested information is submitted. The effect of such request and subsequent
submission can significantly extend the time for the NDA review process.
Several of the Company's mid and late term products utilize its drug
delivery technology formulated with an active drug ingredient already approved
by the FDA. In connection with obtaining FDA approval of such product, which
requires an NDA, it is possible in certain instances that clinical and
preclinical testing requirements may not be as extensive. Limited additional
data about the safety or effectiveness of the proposed new drug formulation,
along with chemistry and manufacturing information and public information about
the active ingredient, may be satisfactory for product approval.
Once patent and other statutory protections covering a drug approved under
an NDA have expired or have been demonstrated not to apply, a generic equivalent
to that drug may be approved under an ANDA. An ANDA is ordinarily based upon
bioequivalence data that demonstrate that the rate and extent of absorption of
the active drug ingredient of the generic drug, usually measured in the blood
stream, is equivalent to that of the drug approved under an NDA. The
demonstration of bioequivalence and, therefore, ANDA approval, generally
requires less time than safety and efficacy studies and NDA approval.
Until an NDA or ANDA is actually approved, there can be no assurance that
the information requested and submitted will be considered adequate by the FDA
to justify approval. It is impossible to anticipate the amount of time that will
be required to obtain approval from the FDA to market any product.
Even if FDA approval is obtained, a marketed drug product and its
manufacturer are subject to continual review and inspection, and later discovery
of previously unknown problems with the product or manufacturer may result in
restrictions or sanctions on such product or manufacturer, including withdrawal
of the product from the market, and other enforcement actions. The FDA may also
require postmarketing testing and surveillance programs to continuously monitor
the drug's usage and effects. Side effects resulting from the use of drug
products may prevent or limit the further marketing of products.
OTC Monograph. Most over-the-counter drugs are marketed in the United
States without FDA prior approval under FDA regulations that permit such OTC
marketing if the FDA has issued an OTC monograph with respect to that drug
(including its indication(s)), and the product and its labeling comply with that
OTC monograph.
The Company believes that whether a particular skin protectant product is
covered by the FDA "skin protectant" OTC monograph will depend primarily on the
active ingredients, the kinds of claims made about the product and compliance
with applicable labeling requirements. The Company believes that its barrier
repair products and other potential consumer products described in this
Prospectus (other than potentially the skin protectant products) are not covered
by OTC monographs and therefore will be subject to prior review and approval by
the FDA as new drugs before they can be marketed. In addition, even if the
Company seeks FDA approval of a product for non-prescription consumer sales, the
FDA could instead require that the product be distributed first only by means of
a prescription. Such approval, which the Company believes is common where a
company seeks approval for a product involving a new compound or a compound
previously approved for other uses, could delay for several years, or
indefinitely, distribution of the Company's consumer products through the
consumer (non-prescription) channel.
Manufacturing. All manufacturing facilities, methods and controls used for
the manufacturing, processing, packing or holding of products for clinical use
or for sale must be operated in conformity with FDA's current good manufacturing
practice requirements. The Company intends to use contract manufacturers that
operate in conformance with these requirements to produce its compounds and
finished products in commercial quantities.
Foreign Regulation of Drug Compounds. Whether or not FDA approval has been
obtained, approval of a product by comparable regulatory authorities may be
necessary in foreign countries prior to the commencement of marketing of the
product in such countries. The approval procedure varies among
24
<PAGE>
countries, can involve additional testing, and the time required may differ from
that required for FDA approval. Although there are some procedures for unified
filings for certain European countries, in general each country has its own
procedures and requirements, many of which are time consuming and expensive.
Thus, there can be substantial delays in obtaining required approvals from both
the FDA and foreign regulatory authorities after the relevant applications are
filed. The Company expects to rely on corporate partners and licensees, along
with Company expertise, to obtain governmental approval in foreign countries of
drug formulations utilizing its compounds.
Cosmetics. Cosmetics do not require approval by the FDA for marketing in
the United States.
Orphan Drug Designation. Under the Orphan Drug Act, the FDA may grant
orphan drug designation to drugs intended to treat a "rare disease or
condition," which generally is a disease or condition that affects populations
of fewer than 200,000 individuals in the United States. Orphan drug designation
must be requested before submitting an NDA, and after the FDA grants orphan drug
designation, the generic identity of the therapeutic agent and its potential
orphans use are publicized by the FDA. Under current law, orphan drug
designation confers upon the first company to receive FDA approval to market
such designated drug United States marketing exclusivity for the designated drug
and indication for a period of seven years following approval of the NDA,
subject to certain limitations. Orphan drug designation does not convey any
advantage in, or shorten the duration of, the regulatory approval process.
Although obtaining FDA approval to market a product with an orphan drug
designation can be advantageous, there can be no assurance that the scope of
protection or the level of marketing exclusivity that is currently afforded by
orphan drug designation and marketing approval will remain in effect in the
future.
Other Government Regulation. The Company is subject to regulation under
federal and state law regarding, among other things, occupational safety, the
use and handling of radioisotopes, environmental protection, hazardous substance
control. In connection with its research and development activities and any
manufacturing of clinical trial materials in which the Company may engage, the
Company is subject to federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials and wastes.
Although the Company believes that it has complied with these laws and
regulations in all material respects and has not been required to take any
action to correct any noncompliance, there can be no assurance that the Company
will not be required to incur significant costs to comply with environmental and
health and safety regulations in the future. The Company's research and
development involves the controlled use of hazardous materials, chemicals, and
various radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
EMPLOYEES
As of March 31, 1996, the Company had nine full-time and three part-time
personnel. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are good.
FACILITIES
The Company's principal administrative facilities are located in Novato,
California, approximately 20 miles north of San Francisco, and consist of
approximately 5,390 square feet. The Company occupies this space under a lease
expiring May 31, 1997. The annual base rent payment (not including operating
expenses, insurance, property taxes and assessments) was initially set at
approximately $5,390 per month, and escalates over the term of the lease to
approximately $6,845 per month. The Company has the right to extend the term of
the lease for one additional five-year period, subject to certain terms and
conditions. The Company currently subleases approximately 1,360 square feet of
its facility in Novato.
The Company occupies 5,620 square feet of laboratory space in San Carlos,
California, for which it pays $8,992 monthly. Approximately 1,400 square feet
has been sublet to a third party. The Company has
25
<PAGE>
no plans to acquire the equipment or facilities necessary for manufacturing its
products. The Company has had minimal capital equipment purchases in the past
year. Laboratory equipment purchases, if material, over the next two years will
be funded by a capital lease agreement completed in April 1996. The Company will
be relocating its offices to a leased facility location closer to its
laboratories in San Carlos in the near term. The Company believes suitable
leased space will be available and can be acquired as needed. See Note 5 to the
Financial Statements appearing at the end of this Prospectus for further
information regarding the Company's lease obligations.
LITIGATION
The Company is currently not a party to any litigation.
26
<PAGE>
MANAGEMENT
<TABLE>
The executive officers, directors and other significant employees of the
Company are as follows:
<CAPTION>
NAME AGE POSITIONS
- ---------------------------- ----- ---------------------------------------------------
<S> <C> <C>
William E. Bliss ............59 President; Chief Executive Officer; and Director
Carl R. Thornfeldt, M.D. ...44 Vice President, Research and Development; Medical
Director; and Chairman of the Board
A. Richard Juelis ...........48 Vice President, Finance and Chief Financial Officer
Lionel N. Simon, Ph.D .......62 Vice President, Corporate Development
Michael L. Francoeur, Ph.D ..44 Vice President, Research and Development
Vivien H.W. Mak, Ph.D.(1)....39 Vice President, Cutaneous Research
Denis R. Burger, Ph.D.(2)(3) 52 Director
Peter M. Elias, M.D. ........54 Director
Tobi B. Klar, M.D. (2) .....41 Director
Larry J. Wells (3) ..........52 Director
SIGNIFICANT EMPLOYEES
Cynthia Selfridge ...........50 Director of Clinical Affairs
<FN>
- ----------
(1) Not an Executive Officer.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
</FN>
</TABLE>
Directors hold office until the next annual meeting of shareholders and
until their respective successors have been elected and qualified. Executive
officers are chosen by and serve at the discretion of the Board of Directors,
subject to any written employment agreements with the Company. Outside directors
are reimbursed for their travel expenses related to Board meetings and for a
portion of 1995 and for 1996 were entitled to receive $500 for each Board
meeting attended. This amount will be increased to $1,000 beginning in June
1996.
William E. Bliss. Mr. Bliss joined the Company in December 1995 as
President, Chief Executive Officer, and a director of the Company. From 1991 to
1995, he was President and Chief Operating Officer at Genta Incorporated, a
pharmaceutical company specializing in anti-sense drug delivery and dermatology.
From 1970 to 1990, he held executive positions with Rhone-Poulenc Rorer,
including Vice President, Business Development and President, Dermik
Laboratories, a leading dermatology company. Mr. Bliss received a B.S. from Penn
State University.
Carl R. Thornfeldt, M.D. Dr. Thornfeldt is a co-founder and chairman of the
Board of the Company, and is a physician, board certified in dermatology. He has
been Medical Director of the Company since inception and in addition became Vice
President, Research and Development in October 1994. Since 1983 Dr. Thornfeldt
has maintained a private dermatology practice and is an Assistant Clinical
Professor in Dermatology at the University of Oregon Health Sciences Center. Dr.
Thornfeldt received an M.D. from the University of Oregon and a B.S. from Oregon
State University.
A. Richard Juelis. Mr. Juelis became Vice President, Finance and Chief
Financial Officer in March 1996. He has worked with the Company since November
1994 as a financial consultant on a part-time basis. He also worked with other
health care and telecommunications companies during that period. From 1993 to
1994 he was Vice President, Finance and Chief Financial Officer for VIVUS, Inc.,
a drug delivery company. From 1990 to 1992 he was Vice President, Finance and
Chief Financial Officer at XOMA Corporation, a biotechnology company. He
received a B.S. in Chemistry from Fordham University and an M.B.A. from Columbia
University.
Lionel N. Simon, Ph.D. Dr. Simon joined the Company as Vice President,
Corporate Development, in April 1996. From 1989 to 1996, he was Vice President,
Licensing and Technology Acquisitions, at Genta Incorporated. He holds a B.S.
degree in Pharmacy and an M.S. and a Ph.D. degree in biochemistry from the
University of Illinois.
27
<PAGE>
Michael L. Francoeur, Ph.D. Dr. Francoeur became Vice President, Research
and Development, in May 1996, after joining the Company as a research consultant
in January 1996. From March 1994 until December 1995 he was Chairman of DeNovo,
Inc., a dermatology and biopharmaceutical company. From November 1992 until
March 1994 he was Senior Vice President at Pharmetrix Corporation, a drug
delivery company. From 1983 to 1992 he held various scientific and management
positions at Pfizer, Inc. Dr. Francoeur received a B.S. degree in Pharmacy, and
M.S. and Ph.D. degrees in Pharmaceutical Chemistry from the University of
Kansas.
Vivien H.W. Mak, Ph.D. Dr. Mak became Vice President, Cutaneous Research in
January 1996, after joining the Company as a research consultant in October
1995. During 1994 and 1995 she was Vice President, Research for DeNovo, Inc., a
dermatology and biopharmaceutical company. During 1993 she was Director of
Biopharmacuetical Sciences at Pharmetrix Corporation, a developer of drug
delivery systems. From 1989 to 1992 she held research scientist positions in The
Dermal Therapeutics Group of Pfizer, Inc. Dr. Mak received B.S. and M.S. degrees
in chemistry from Chun-Yuan University, Taiwan, and Baylor University,
respectively. She holds a Ph.D. in medicinal chemistry from Purdue University.
Denis R. Burger, Ph.D. Dr. Burger became a director in October 1995.
Currently, he is President and Chief Executive Officer of Antivirals Inc. and a
general partner of Sovereign Partners LLC. He is a director of the following
companies: SuperGen Inc., Cell Robotics International and Trinity Biotech, plc.
He was a co-founder of Epitope Inc. and was its chairman from 1981 to 1990. Dr.
Burger was also a research scientist and a professor of microbiology and
immunology at the Oregon Health Sciences University in Portland. He holds an
M.S. and a Ph.D. from the University of Arizona.
Peter M. Elias, M.D. Dr. Elias, a director and the Co-Chairman of the
Scientific Advisory Board, became a director in April 1995. He is currently the
Chief of both the Dermatology Service and the Dermatology Research Unit at the
Veteran's Administration Medical Center, and the Vice-Chairman, Department of
Dermatology, University of California, San Francisco. Dr. Elias received an M.D.
from University of California, San Francisco, and completed his residency at
Harvard University Medical Center.
Tobi B. Klar, M.D. Dr. Klar became a director of the Company in June 1995.
She is a physician board certified in dermatology. Since 1986, Dr. Klar has
maintained a private dermatology practice. She is co-chairperson of the
Department of Dermatology at New Rochelle Hospital Medical Center, New Rochelle,
New York, and is Associate Clinical Professor in dermatology at Albert Einstein
Hospital Center in New York City. She received an M.D. from State University of
New York and a B.A. from Brown University.
Larry J. Wells. Mr. Wells became a director of the Company in March 1989.
For the past five years, he has been a venture capitalist. He is the founder of
Sundance Venture Partners, L.P. ("Sundance"), a venture capital fund, and is the
Chairman of the entity that acts as the manager of Sundance. Mr. Wells is a
director of Identix, Inc. and Gateway Data Sciences.
SCIENTIFIC ADVISORY BOARD
The Company has established relationships with a group of scientific advisors
with expertise in the fields of dermatology, drug delivery and skin care. The
Company's scientific advisors consult with management and key scientific
employees of the Company to assist the Company in identifying scientific and
product development opportunities, to review the progress of the Company's
specific projects, and to recruit and evaluate the Company's scientific staff.
The nature, scope and frequency of consultations between the Company and each
scientific advisor varies depending upon the Company's current activities, the
need for specific assistance and the individual scientific advisor. Although the
Company expects to receive guidance from its scientific advisors, all of the
advisors have substantial commitments to third parties and are able to devote
only a small portion of their time to the business of the Company.
The Company pays certain of its scientific advisors consulting fees or
salaries and provides reimbursement for expenses incurred in connection with
service to the Company. In fiscal 1995, the Company paid consulting fees to Dr.
Elias of approximately $107,500 and granted options to purchase an aggregate of
14,920 shares of Common Stock for their services. The options have a weighted
average exercise price of $3.07 per share and became exercisable on the grant
date.
28
<PAGE>
The Company's scientific advisors and consultants include the following
persons:
Carl R. Thornfeldt, M.D. Dr. Thornfeldt is Co-Chairman of the Scientific
Advisory Board.
Peter M. Elias, M.D. Dr. Elias is Co-Chairman of the Scientific Advisory
Board.
Kenneth R. Feingold, M.D. Dr. Feingold is a physician at the VAMC, San
Francisco and is also a professor of Medicine and Dermatology at the UCSF School
of Medicine.
Roslyn Rivkah Isseroff, M.D. Dr. Isseroff is currently a professor and has
served as Chairman of the Department of Dermatology at the University of
California, Davis School of Medicine.
Joseph McGuire, M.D. Dr. McGuire is currently a professor of Dermatology
and Pediatrics at Stanford University Medical Center and a member of the
Dermatologic Drugs Advisory Committee of the Food and Drug Administration.
Mary L. Williams, M.D. Dr. Williams is currently an associate Professor at
the UCSF School of Medicine in the fields of dermatology and pediatrics.
Bruce U. Wintroub, M.D. Dr. Wintroub is currently Chairman of the
Department of Dermatology at the UCSF School of Medicine. He is also Associate
Dean at Mount Zion Medical Center of the UCSF School of Medicine.
Mitchell S. Wortzman, Ph.D. Dr. Wortzman is President of Neutrogena
Corporation's Dermatologics division and is responsible for all of Neutrogena's
sales, marketing and professional relations efforts directed towards the
dermatologic and medical community.
EXECUTIVE COMPENSATION
<TABLE>
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the year
ended December 31, 1995 by (i) each person who served as the Company's chief
executive officer during 1995, (ii) any other executive officers who were
serving as executive officers at the end of that year and whose total annual
salary and bonus in such year exceeded $100,000, of which there were none, and
(iii) any person who was an executive officer during a portion of 1995 whose
total annual salary and bonus exceeded $100,000, of which there were none
(together, the "Named Persons").
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- --------------
AWARDS
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- -------------------- ------ --------- ------- -------------- -------------- --------------
($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
William E. Bliss .. 1995 21,242 100,000(1) 226,333 --
President and Chief 1994 -- -- -- -- --
Executive Officer
Gerald T. Simmons .. 1995 151,848 -- -- 74,600 75,000(2)
President and Chief 1994 141,000 -- -- 1,108 --
Executive Officer
<FN>
- ----------
(1) Consists of Mr. Bliss' relocation compensation paid or accrued when he
joined the Company in December 1995.
(2) Consists of Mr. Simmons' accrued compensation at December 31, 1995. Mr.
Simmons was President and Chief Executive Officer of the Company through
November 1995, and is no longer an employee of the Company.
</FN>
</TABLE>
29
<PAGE>
The following table sets forth further information regarding option grants
pursuant to the Company's 1995 Equity Incentive Plan (the "1995 Plan") during
1995 to each of the Named Persons.
OPTION GRANTS IN 1995
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL 1995 PER SHARE ($) DATE
- ------------------- ------------ --------------- ------------- ----------------
William E. Bliss(2) 226,333 49.6% $4.38 December 8, 2005
Gerald T. Simmons . 74,600 16.4% $2.09 February 6, 2005
- ----------
(1) Options granted under the 1995 Plan in 1995 have generally been incentive
stock options that were granted at fair market value and that generally vest
over a four-year period so long as the individual is employed by the
Company. Options expire ten years from the date of grant.
(2) Of the shares subject to this option, 37,722 were exercisable at grant, and
75,444 will become exercisable at the earlier of the accomplishment of
certain milestones or after five years from the date of grant. The option
becomes exercisable with respect to the remaining 113,167 shares over four
years from the grant date if there has been no Employment Termination. The
option becomes exercisable in full upon an acquisition of the Company.
<TABLE>
The following table sets forth information with respect to the options
exercised during fiscal 1995 by the Named Persons.
AGGREGATE OPTION EXERCISES IN 1995 AND FISCAL YEAR-END VALUES
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1995 AT DECEMBER 31, 1995 ($)(1)
ACQUIRED VALUE ----------------------------- -----------------------------
NAME ON EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ -------------- ------------ ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
William E. Bliss ...... 0 0 37,722 188,611 $ 28,292 $141,458
Gerald T. Simmons ...... 0 0 33,745 33,745 $102,585 $102,585
<FN>
- ----------
(1) Based on the difference between the fair market value of the Common Stock at
December 31, 1995 ($5.13 per share) and the exercise price of options shown
in the table.
</FN>
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Mr. Bliss, President and Chief Executive Officer and the Company entered
into an employment agreement dated December 8, 1995. The agreement provides for
a base compensation of $265,000 per year. Either the Company or Mr. Bliss may
terminate the agreement at any time upon notice to the other party. The
agreement provides that, upon termination without cause, Mr. Bliss will be paid
twelve months severance and continuation of benefits during the period severance
payments are made. The agreement provides for payments of up to $100,000 to Mr.
Bliss for relocation costs. The agreement provides for granting of stock options
to acquire 226,333 shares of Common Stock.
Dr. Thornfeldt entered into an employment agreement, on January 22, 1996.
The agreement provides for payments of $9,000 per month as long as Dr.
Thornfeldt is devoting at least five business days per month to the affairs of
the Company. If, at any time, Dr. Thornfeldt devotes less than five business
days per month to the Company for two consecutive months, then commencing with
the next month his salary would be reduced to $6,000 per month. Reinstatement of
the $9,000 per month salary will then occur only after Dr. Thornfeldt has
recommended devoting five business days per month to the affairs of the
30
<PAGE>
Company. The agreement provides for the assignment to the Company, subject to
certain exclusions, of inventions of Dr. Thornfeldt during the term of the
agreement. The agreement provides that he may not engage in any activity that is
competitive with the business of the Company, including without limitation
acting as a consultant to any business that competes, directly or indirectly,
with the business of the Company. The agreement may be terminated before
expiration of its term upon certain events, including Dr. Thornfeldt's death, a
material breach of the agreement by the other party, or by Dr. Thornfeldt upon
prior notice in connection with a "reorganization" of the Company. Dr.
Thornfeldt continues to maintain a separate active dermatologic practice.
Dr. Peter M. Elias, a director and Co-Chairman of the Scientific Advisory
Board, entered into a consulting agreement with the Company dated April 2, 1992,
pursuant to which Dr. Elias agreed to provide consulting services in the fields
of dermatology, skin pharmacology and drug development not less than two days
per week. The agreement provides for consulting fees of approximately $150,000
per year. In September 1995 the agreement was amended to reduce the rate to
$75,000 per year. The agreement will expire in April 1997.
Mr. A. Richard Juelis became Vice President, Finance, Chief Financial
Officer and Secretary in March 1996 after consulting with the Company on a
part-time basis since November 1994. His agreement with the Company provides for
a base compensation of $150,000 per year, and for certain stock option grants.
Dr. Lionel N. Simon joined the Company as Vice President, Corporate
Development in April, 1996. His agreement with the Company provides for a base
compensation of $175,000 per year and for certain stock option grants.
Dr. Michael L. Francoeur joined the Company as Vice President, Research and
Development in April 1996. His agreement with the Company provides for a base
compensation of $175,000 per year and for certain stock option grants.
Dr. Vivien H.W. Mak became Vice President, Cutaneous Research in January
1996 after joining the Company initially as a consultant in October 1995. Her
agreement provides for a base compensation of $100,000 per year and for certain
stock option grants.
STOCK OPTION PLANS
On June 26, 1995 the Board of Directors adopted the 1995 Equity Incentive
Plan (the "1995 Plan") and 1995 Directors Stock Option Plan (the "Directors
Plan") to replace the Company's 1992 Stock Option Plan (the "1992 Plan").
The number of shares of Common Stock reserved for issuance under the 1995
Plan consists of 1,000,000 less any shares issued or issuable upon the exercise
of options under the 1992 Plan, including any shares covered by options that
terminate or expire without being exercised under the 1992 Plan. A total of
308,242 shares of Common Stock are issuable upon the exercise of outstanding
options under the 1992 Plan as of March 31, 1996. No more options will be
granted under the 1992 Plan.
The 1995 Plan provides for the award of options, which may either be
incentive stock options ("ISOs") within the meaning of Section 422A of the
Internal Revenue Code of 1986 (the "Code") or non-qualified options ("NQOs")
which are not subject to special tax treatment under the Code. The 1995 Plan
also provides for the award of stock bonuses and restricted stock. The 1995 Plan
is administered by the Board or a committee appointed by the Board (the
"Administrator"). Directors, officers and employees of, and consultants to, the
Company or any parent or subsidiary corporation selected by the Administrator
are eligible to receive options under the 1995 Plan.
The exercise price for ISOs cannot be less than the fair market value of
the stock subject to the option on the grant date and the exercise price of a
NQO may not be less than 85% of such value. Unless the Administrator determines
otherwise, options generally have a 10-year term (or five years in the case of
ISOs granted to a participant owning more than 10% of the total voting power of
the Company's stock). Unless the Administrator provides otherwise, options
terminate upon the termination of a participant's employment, except that the
participant may exercise an option to the extent it was exercisable on the date
of termination for a certain period of time after termination.
31
<PAGE>
Generally, awards must be exercised by cash payment to the Company of the
exercise price. However, the Administrator may allow a participant to pay all or
a portion of the exercise price by means of a promissory note, stock or other
lawful consideration. The 1995 Plan also allows the Administrator to provide for
withholding and employment taxes payable by a participant to the Company upon
exercise of an award by delivery of a promissory note or already-owned Common
Stock, or by withholding shares acquired upon exercise of the award.
Additionally, the Company may make cash grants or loans to participants relating
to the participant's withholding and employment tax obligations and the income
tax liability incurred by a participant upon exercise of an award.
Non-employee directors of the Company are eligible to participate in the
Directors Plan. A total of 100,000 shares of Common Stock are reserved for
issuance to eligible directors pursuant to the Directors Plan. The plan is
administered by the Administrator. On the date on which an eligible director is
elected a director (or, with respect to eligible directors on the date the plan
was adopted by the Board, the date of such adoption), the director is granted a
ten year non-qualified stock option (an "Initial Option") to acquire 20,000
shares. Thereafter, on the first business day after the Company's annual meeting
of shareholders, an eligible director will be granted a ten year option (an
"Annual Option") to acquire 1,000 shares. The exercise price of all such options
is the fair market value of the shares on the grant date. Initial Options
generally are exercisable immediately with respect to 25% of the shares subject
to the option, and become exercisable with respect to the remaining shares
subject to the option upon the first, second, third and fourth anniversaries of
the grant date; Initial Options granted before the closing of this offering will
become exercisable with respect to 25% of the shares subject to the option upon
the closing of this offering, and with respect to the remaining shares subject
to the option on each of the first, second, third and fourth anniversaries of
the grant date. Annual Options become exercisable with respect to 25% of the
shares subject to the option on each of the first, second, third and fourth
anniversaries of the grant date.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Articles provide that the liability of the Company's
directors shall be eliminated to the fullest extent permissible under California
law. In addition, the Company's charter documents permit the Company to provide
indemnification to the fullest extent permitted by law for expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding arising by reason of the fact that any person is
or was a director or officer of the Company, and the Company's bylaws contain
additional provisions regarding the circumstances under which such
indemnification may be provided.
The Company has entered into indemnification agreements with its officers
and directors containing provisions that are in some respects broader than the
specific indemnification provisions contained in the California Corporations
Code. The indemnification agreements may require the Company, among other
things, to indemnify such officers and directors against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms. At present, the Company is not aware
of any pending or threatened litigation or proceeding involving a director,
officer, employee or agent of the Company in which indemnification would be
required or permitted.
32
<PAGE>
CERTAIN TRANSACTIONS
Upon the hiring of Mr. Bliss, Mr. Simmons, who was President and Chief
Executive Officer of the Company, entered into an agreement with the Company
dated December 8, 1995, which provides for six months salary and continuation of
benefits. Mr. Simmons' stock options continued to vest through February 7, 1996,
and will be exercisable through November 31, 1996. Mr. Simmons will remain a
consultant to the Company through August 31, 1996, and a director through June
8, 1996.
Mr. Tavolacci, a former director of the Company, entered a loan agreement
with the Company in March 1996. The terms of the agreement include a
non-interest bearing loan of $80,000, payable to the Company on June 30, 1996.
The loan is secured by a pledge of 30,000 shares of Common Stock. Mr. Tavolacci
repaid the loan in full before its due date.
See also "Business--Employment and Consulting Agreements."
33
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of March 31, 1996, certain information
regarding the ownership of shares of Common Stock by (i) each person known to
the Company to be a beneficial owner of more than 5% of the outstanding shares
of Common Stock, (ii) each director, (iii) each of the Named Persons; and (iv)
all directors and executive officers as a group.
SHARES BENEFICIALLY
OWNED(1)
------------------------
NAME NUMBER PERCENT
- ------------------------------------------------------ -------------- ---------
Sundance Venture Partners, L.P. ....................... 583,482(2) 15.1%
10600 N. DeAnza Boulevard, Suite 215
Cupertino, California 95014
Carl R. Thornfeldt, M.D. .............................. 490,860(3) 12.5
371 Bel Marin Keys Boulevard, Suite 210
Novato, California 94949
Neutrogena Corporation ................................ 475,560 12.3
(Subsidiary of Johnson & Johnson)
5760 West 96th Street
Los Angeles, California 90045
Don Tavolacci ......................................... 352,452(4) 9.1
Sonoma Trading Company
19666 Eight Street East
Sonoma, CA 95476
Gerald T. Simmons ..................................... 192,872(5) 5.0
Emerging Company Resource
837 4th Avenue
Salt Lake City, UT 84103
Peter M. Elias, M.D. .................................. 105,644(6) 2.7
Larry J. Wells ........................................ 590,010(7) 15.2
10600 N. DeAnza Boulevard, Suite 215
Cupertino, California 95014
William E. Bliss ...................................... 56,583(8) 1.4
A. Richard Juelis ..................................... 34,689(9) *
Denis R. Burger, Ph.D. ................................ 5,000(10) *
Tobi Klar, M.D. ....................................... 3,730(11) *
All directors and executive officers
as a group (8 persons)................................. 1,479,988(12) 36.1
- ----------
* Less than one percent.
(1) Based upon information supplied by officers, directors and principal
shareholders. Beneficial ownership is determined in accordance with rules
of the Securities Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated, the persons named in
this table have sole voting and sole investing power with respect to all
shares shown as beneficially owned, subject to community property laws
where applicable. Unlike the table under the heading "Selling
Shareholders," the percentage figures shown in the above table do not treat
as outstanding any shares of Common Stock that may be issued upon
conversion of shares of Series A Preferred or upon exercise of outstanding
options or warrants, except as described in the next sentence. Shares of
Common Stock subject to an option that is currently exercisable or
exercisable within 60 days of March 31, 1996 are deemed to be outstanding
and to be beneficially owned by the person holding such option for the
purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Includes 13,865 shares issuable upon exercise of presently exercisable
common stock purchase warrants.
(3) Excludes 34,223 and 34,126 shares, respectively, held in trust for two
relatives of Dr. Thornfeldt and a total of 14,174 shares held by other
relatives with respect to which Dr. Thornfeldt has no voting
34
<PAGE>
control. Includes 60,105 shares subject to stock options exercisable before
May 31, 1996. Includes 30,000 shares held by a third party, over which Dr.
Thornfeldt has voting control.
(4) Includes 5,827 shares subject to stock options which become exercisable
before May 31, 1996. Excludes 30,000 subject to voting and investment
control by another party.
(5) Includes 15,387 shares subject to stock options exercisable before May 31,
1996.
(6) Includes 8,582 shares subject to stock options exercisable before May 31,
1996.
(7) Includes 569,617 shares and warrants to purchase 13,865 shares held by
Sundance. Mr. Wells is Chairman of the entity that acts as manager of
Sundance. Includes 4,936 shares issuable upon exercise of presently
exercisable common stock purchase warrants. Includes 6,528 shares subject
to stock options which become exercisable before May 31, 1996.
(8) Includes 56,583 shares subject to stock options exercisable before May 31,
1996.
(9) Includes 34,689 shares subject to stock options exercisable before May 31,
1996.
(10) Includes 5,000 shares subject to options exercisable before May 31, 1996.
(11) Includes 3,730 shares subject to stock options which become exercisable
before May 31, 1996.
(12) Includes 217,172 shares subject to stock options exercisable before May
31, 1996. Includes 583,482 shares and warrants held by Sundance, of which
Mr. Wells may be deemed a beneficial owner. Includes 4,936 shares issuable
upon exercise of presently exercisable common stock purchase warrants.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. As of May 1, 1996, there
were outstanding approximately 3,871,174 shares of Common Stock held of record
by approximately 960 shareholders, 1,100 authorized shares of Series A
Preferred, of which 750 shares were issued and outstanding (and convertible into
a minimum of 1,150,251 shares of Common Stock), and no other outstanding shares
of Preferred Stock. In the Company's IPO in August 1995, the Company sold
661,250 units ("Units"), each Unit consisting of two shares of Common Stock and
one warrant to purchase one share of Common Stock (the "IPO Warrants"). The
Units separated immediately and only the Common Stock and IPO Warrants trade on
the Nasdaq SmallCap Market.
COMMON STOCK
Subject to any preferences that may apply to any outstanding Preferred Stock,
the holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board may, from time to time, determine. Each shareholder is
entitled to one vote for each share of Common Stock held of record on all
matters submitted to a vote of shareholders. The Company's bylaws provide that
so long as the Company is a "listed company" as defined by applicable California
law, there will not be cumulative voting in connection with the election of
directors. The Company is not a listed company as so defined, and therefore
cumulative voting continues to apply in connection with the election of
directors. Holders of Common Stock have no preemptive rights or rights to
convert their Common Stock into any other securities under the Company's charter
documents. There are no redemption or sinking fund provisions applicable to the
Common Stock. Upon liquidation, dissolution or winding up of the Company, the
assets legally available for distribution to shareholders are distributable
ratably among the holders of the Common Stock outstanding at that time after
payment of liquidation preferences, if any, on any outstanding Preferred Stock
and payment of claims of creditors. All outstanding shares of Common stock are
fully paid and nonassessable.
35
<PAGE>
PREFERRED STOCK
GENERAL
The Company's Amended and Restated Articles of Incorporation, as amended (the
"Restated Articles") provide that the Company may issue shares of Preferred
Stock in one or more series. The Board of Directors is authorized to establish
from time to time the number of shares to be included in, and the designation
of, any such series, to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any wholly unissued series of
Preferred Stock, and to increase or decrease the number of shares of any such
series (but not below the number of shares of such series then outstanding)
without any further vote or action by the shareholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the shareholders. The
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power or other rights of the holders of Common Stock. The
Company has no present plans as of the date of the Prospectus to issue any
additional shares of Preferred Stock.
Series A Preferred
A total of 1,100 shares of Series A Preferred are authorized by the
Certificate of Determination (the "Certificate of Determination") establishing
the rights, preferences, privileges and restrictions granted to or imposed upon
the Series A Preferred. The following is a description of some of the material
terms of the Series A Preferred.
Voting. The holders of Series A Preferred have no voting power, except as
required by applicable California law, and no holder of Series A Preferred is
entitled to notification of any meeting of shareholders, except any meeting
regarding any major corporate events affecting the Company. In addition, the
Company must provide holders of Series A Preferred with prior notice of record
dates relating to certain kinds of corporate actions. To the extent that under
California law the holders of Series A Preferred are entitled to vote on a
matter with holders of Common Stock, voting together as one class, each share of
Series A Preferred is entitled to a number of votes equal to the number of
shares of Common Stock into which it is then convertible.
Dividends. The Series A Preferred is not entitled to any dividends.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, either voluntary or involuntary, each holder of
Series A Preferred is entitled to receive, immediately after any distributions
to securities identified as "Senior Securities" (if any) required by the
Company's charter documents, and in preference to any distribution to securities
identified as "Junior Securities" (which includes the Common Stock), an amount
per share equal to the sum of (i) the original Series A issue price ($10,000 per
share) for each outstanding share of Series A Preferred held by such holder and
(ii) an amount (such amount referred to as the "Premium") equal to 8% of the
original Series A issue price per annum for the period that has passed since the
date (the "Funds Delivery Date") that, in connection with the consummation of
the purchase of such shares of Series A Preferred from the Company by the
original holder of such shares, the escrow agent appointed in connection with
such purchase first had in its possession funds representing full payment for
such shares of Series A Preferred. If, after payment in full of the preferential
amount with respect to Senior Securities, the assets and funds available to be
distributed among the holders of Series A Preferred and holders of securities
identified as "Parity Securities" are insufficient to permit the payment to such
holders of the full preferential amounts, then the entire assets and funds of
the Company legally available for distribution shall be distributed among the
holders of the Series A Preferred and the Parity Securities, pro rata. All
remaining assets of the Company will then be distributed to holders of Junior
Securities. A sale, conveyance or disposition of all or substantially all of the
assets of the Company, or a transaction or series of related transactions in
which more than 50% of the voting power of the Company is disposed of, is not
treated as a liquidation.
36
<PAGE>
Conversion. Each holder of Series A Preferred is entitled, at any time
beginning July 3, 1995, to convert shares of Series A Preferred into that number
of shares of Common Stock calculated in accordance with the following formula
(the "Conversion Rate"), unless the holder elects to convert shares of Series A
Preferred held by such holder at the times and at the conversion rates set forth
in the Subscription Agreements:
(.08) (N/365) (10,000) + 10,000
-------------------------------
Conversion Price
where,
o N = the number of days between (i) the Funds Delivery Date for the shares
of Series A Preferred for which conversion is being elected, and (ii) the
applicable date of conversion, and
o Conversion Price = the lesser of (x) $6.6275 (the "Fixed Conversion
Price"), or (y) 85% times the average Closing Bid Price, as that term is
defined below, of the Common Stock for the five trading days immediately
preceding the Date of Conversion, as defined below (the "Variable Conversion
Price").
Any such conversion is subject to the Company's right of redemption
described below. The term "Closing Bid Price" means the closing bid price for
the Common Stock on the Nasdaq SmallCap Market, or if no longer traded on the
Nasdaq SmallCap Market, the closing bid price on the principal national
securities exchange or the National Market System on which the Common Stock is
so traded, and if not available, the mean of the high and low prices on the
principal national securities exchange or the National System on which the
Common Stock is so traded. The term "Last Closing Date" means April 19, 1996. If
a holder of Series A Preferred converts more than certain specified numbers of
shares before certain defined time periods, which end 135 days after the Last
Closing Date, then a lower number of shares of Common Stock are issuable under
the variable conversion price formula.
All Series A Preferred that has not previously been converted will convert
into Common Stock on April 19, 1998.
Right of First Refusal. The Series A Holders have a right of first refusal
to purchase the holder's pro rata share (based on the proportion that the number
of shares of Series A Preferred held by the holder bears to the number of shares
of Series A Preferred initially issued) with respect to certain future offerings
of Company securities for a period of 240 days after the Last Closing Date.
Anti-Dilution Provisions. The conversion price of the Series A Preferred is
subject to proportionate adjustments upon the occurrence of stock splits,
reverse stock splits, dividends, or similar transactions.
Adjustment Due to Merger, Consolidation, Etc. If, prior to the conversion
of all Series A Preferred, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, as a result of
which shares of Common Stock are changed into the same or a different number of
shares of the same or another class or classes of stock or securities of the
Company or another entity, then the holders of Series A Preferred shall
thereafter have the right to receive upon conversion of Series A Preferred, in
lieu of the shares of Common Stock issuable upon conversion, such stock and/or
securities which the holder would have been entitled to receive in such
transaction, had the Series A Preferred been converted immediately prior to such
transaction. Appropriate provisions will be made with respect to the rights and
interests of the holders of the Series A Preferred to the end that the
provisions of the Certificate of Determination (including, without limitation,
provisions for the adjustment of the Conversion Price and of the number of
shares issuable upon conversion of the Series A Preferred) shall thereafter be
applicable, as nearly as may be practicable, in relation to any securities
thereafter deliverable. The Company shall not effect any such transaction unless
(a) it first gives to the holders prior notice of the transaction, and (b) the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument these obligations.
Redemption by the Company. Upon receipt of a Notice of Conversion, the
Company may, in it sole discretion, redeem in whole or in part any Series A
Preferred submitted for conversion, immediately prior to and in lieu of
conversion ("Redemption Upon Receipt of Notice of Conversion"). If the Company
elects to redeem some, but not all, of the Series A Preferred submitted for
conversion, the Company shall
37
<PAGE>
redeem from among the Series A Preferred submitted by the various shareholders
for conversion on the applicable date, a pro rata amount from each such holder
so submitting Series A Preferred for conversion.
The redemption price per share of Series A Preferred is calculated in
accordance with the following formula ("Redemption Rate"): [[(.08)(N/365)
(10,000)] + 10,000] x Closing Price on Date of Conversion, divided by the
Conversion Price; where "N," "Date of Conversion" and "Conversion Price" have
the meanings described above. "Closing Price" means the closing price on the
Nasdaq Small Cap Market, the closing price on the principal national securities
exchange or the National Market System on which the Common Stock is so traded
and if not available, the mean of the high and low prices on the principal
national securities exchange or the National Market System on which the Common
Stock is so traded.
At any time, commencing nine months and one day after the Last Closing
Date, the Company has the right, in its sole discretion, to redeem ("Redemption
at Company's Election"), from time to time, any or all of the Series A
Preferred; provided that (i) the Company shall first provide 30 days' advance
written notice (which can be given beginning 30 days prior to the date which is
nine months and one day after the Last Closing Date), and (ii) that the Company
may only redeem Series A Preferred in increments having an aggregate Stated
Value (as defined below) of at least $1.5 million. If the Company elects to
redeem some, but not all, of the Series A Preferred, the Company shall redeem a
pro rata amount from each holder of the Series A Preferred.
The "Redemption Price at Company's Election" shall be calculated as a
percentage of Stated Value, as that term is defined below, of the Series A
Preferred redeemed, which percentage shall vary depending on the date of
Redemption at Company's Election, and shall be determined as follows:
Date of Redemption at Company's Election % of Stated Value
- ----------------------------------------- -----------------
9 months and 1 day to 12 months following Last Closing Date 140%
12 months and 1 day to 18 months following Last Closing Date 130%
18 months and 1 day to 24 months following Last Closing Date 125%
"Stated Value" means the Original Series A Issue Price of the shares of
Series A Preferred being redeemed, together with the accrued Premium.
Protective Provisions
So long as any shares of Series A Preferred are outstanding, the Company
shall not, without first obtaining the approval of the holders of a majority of
the then outstanding shares of Series A Preferred:
(a) alter or change the rights, preferences or privileges of the Series A
Preferred or any Senior Securities so as to materially and adversely affect
the Series A Preferred;
(b) create any new class or series of stock having a preference over the
Series A Preferred with respect to distributions, or increase the authorized
number of shares of Series A Preferred; or
(c) do any act or thing not authorized or contemplated by the Certificate
of Determination or in the agreements relating to the Series A Transaction
which would result in taxation of the holders of Series A Preferred under
Section 305 of the Code.
If holders of a majority of the then outstanding shares of Series A
Preferred agree to allow the Company to alter or change the rights, preferences
or privileges of the shares of the Series A Preferred so as to affect the Series
A Preferred, then the Company will deliver notice of such approved change to the
holders of Series A Preferred that did not agree to such alteration or change
(the "Dissenting Holders"). The Dissenting Holders shall have the right, for a
period of thirty (30) days after receipt of such notice, to convert, pursuant to
the terms of the Certificate of Determination as they exist prior to such
alteration or change, or continue to hold, their shares of Series A Preferred.
REGISTRATION RIGHTS
After the effectiveness of the registration statement of which this
Prospectus is a part, the holders of approximately 1,618,286 shares of Common
Stock (the "Registrable Shares") will have certain rights
38
<PAGE>
with respect to registration under the Act pursuant to the Company's Amended and
Restated Registration Rights Agreement dated as of April 16, 1992, as amended
(the "1992 Registration Agreement"). Under the terms of the 1992 Registration
Agreement, subject to certain exceptions, including the right of the Company to
defer a demand registration for a period of 120 days, the holders of at least
35% of the Registrable Shares may require on two occasions that the Company use
its best efforts to register for public resale all Registrable Shares requested
to be registered so long as at least 15% of the Registrable Shares are requested
to be registered. Subject to certain limitations in the 1992 Registration
Agreement, the holders of at least 35% of the outstanding Registrable Shares may
require, on a unlimited number of occasions, that the Company use its best
efforts to register on Form S-3 for public resale all Registrable Shares
requested to registered as long as the aggregate offering price to the public
exceeds $500,000. In addition, in the event the Company elects to register any
of its Common Stock under the Act, either for its own account or for the account
of any other shareholders, the Company is, subject to certain marketing and
other limitations, required to include in such registration the Registrable
Shares of holders requesting registration. The Company is required to bear all
registration expenses, other than underwriting discounts and selling
commissions, incurred in connection with the registration of Registrable Shares
in one demand registration, one Form S-3 registration and all Company
registrations. All underwriting discounts and selling commissions are to be
borne by the holders of the securities being registered. Subject to certain
limitations, registration rights may be transferred to an assignee or transferee
of Registrable Shares. The 1992 Registration Agreement may be amended only with
the written consent of the Company and the holders of two-thirds of the then
outstanding Registrable Shares.
The Representatives' Warrants provide certain rights with respect to the
registration under Securities Act of the 172,500 shares issuable upon exercise
thereof (including the warrants included therein). The Company has agreed that
not later than 45 days after the first anniversary after the date of the IPO it
will register the issuance of such shares upon the exercise of the
Representatives' Warrants (and, if necessary, their resale) so as to permit
their public resale without restriction.
These registration rights could result in substantial future expense to the
Company and could adversely affect the Company's ability to complete future
equity or debt financing. Furthermore, the registration and sale of Common Stock
of the Company held by or issuable to the holders of registration rights, or
even the potential of such sales, could have an adverse effect on the market
price of the securities offered hereby.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is First
Interstate Bank of California.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Two Palo Alto Square,
Suite 800, Palo Alto, California 94306.
EXPERTS
The consolidated financial statements of Cellegy Pharmaceuticals, Inc. at
December 31, 1995 and 1994, and for each of years in the two year period ended
December 31, 1995 and for the period from June 26, 1989 (inception) through
December 31, 1995 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young, LLP, independent auditors, as set forth in their
report thereon and appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cellegy Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Cellegy Pharmaceuticals,
Inc. (a development stage company) as of December 31, 1995 and 1994, and the
related statements of operations, shareholders' equity (deficit) and cash flows
for the years then ended, and for the period from June 26, 1989 (inception)
through December 31, 1995. 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 Cellegy Pharmaceuticals,
Inc. at December 31, 1995 and 1994 and the results of its operations and its
cash flows for the years then ended, and for the period from June 26, 1989
(inception) through December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Walnut Creek California
March 11, 1996
F-1
<PAGE>
<TABLE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<CAPTION>
DECEMBER 31
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 2,320,130 $ 380,422
Short-term investments ........................................... 1,500,000 21,681
Other current assets ............................................. 149,040 10,229
----------- -----------
Total current assets ............................................... 3,969,170 412,332
Property and equipment, net ........................................ 58,665 67,321
Deferred financing costs ........................................... -- 75,415
----------- -----------
$ 4,027,835 $ 555,068
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities ........................ $ 192,232 $ 342,045
Accrued compensation and related expenses ........................ 187,266 50,712
Deferred revenue ................................................. -- 1,000,000
Notes payable .................................................... -- 536,000
----------- -----------
Total current liabilities .......................................... 379,498 1,928,757
Shareholders' equity (deficit):
Convertible preferred stock, no par value; 5,000,000 shares
authorized:
Series A convertible preferred stock; no shares issued and
outstanding in 1995; 702,854 shares issued and outstanding
in 1994 ....................................................... -- 1,421,234
Series B convertible preferred stock; no shares issued and
outstanding in 1995; 12,750 issued and outstanding in 1994 .... -- 114,000
Series C convertible preferred stock; no shares issued and
outstanding in 1995; 477,081 shares issued and outstanding
in 1994 ....................................................... -- 4,978,505
Common stock, no par value; 20,000,000 shares authorized;
3,777,075 shares issued and outstanding in 1995; 1,198,449
shares issued and outstanding in 1994 .......................... 13,803,793 116,151
Deficit accumulated during the development stage ................. (10,155,456) (8,003,579)
----------- -----------
Total shareholders' equity (deficit) ............................... 3,648,337 (1,373,689)
----------- -----------
$ 4,027,835 $ 555,068
============ ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-2
<PAGE>
<TABLE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<CAPTION>
PERIOD FROM
JUNE 26, 1989
(INCEPTION)
YEAR ENDED DECEMBER 31 THROUGH
--------------------------- DECEMBER 31,
1995 1994 1995
------------ ------------ --------------
<S> <C> <C> <C>
Revenues:
Licensing revenue from affiliate ..... $ 1,000,000 $ -- $ 1,000,000
Contract revenue from affiliate ...... -- -- 130,373
------------ ------------ -------------
Total revenues ........................ 1,000,000 -- 1,130,373
Operating expenses:
Research and development ............. 1,224,841 1,510,478 6,410,221
General and administrative ........... 1,310,144 1,031,599 4,548,313
------------ ------------ -------------
Total operating expenses ............... 2,534,985 2,542,077 10,958,534
------------ ------------ -------------
Operating loss ......................... (1,534,985) (2,542,077) (9,828,161)
Interest expense ....................... (752,391) (4,755) (863,740)
Interest income and other, net ......... 135,499 3,333 536,445
------------ ------------ -------------
Net loss ............................... $ (2,151,877) $(2,543,499) $(10,155,456)
============ ============ =============
Pro forma net loss per share .......... $ (0.67) $ (0.76)
============ ============
Shares used in calculation of
pro forma net loss per share ......... 3,205,696 3,344,328
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<CAPTION>
SERIES A SERIES B SERIES C DEFICIT
CONVERTIBLE CONVERTIBLE CONVERTIBLE ACCUMULATED TOTAL '
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK DURING THE SHAREHOLDERS
---------------- --------------- --------------- -------------- DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE (DEFICIT)
------ ------ ------ ------ ------ ------ ------ ------ ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash,
through December 31, 1993 ........... -- $ -- -- $ -- -- $ -- 834,893 81,725 $ -- 81,725
Issuance of common stock for services
rendered through December 31, 1993... -- -- -- -- -- -- 269,116 24,261 -- 24,261
Issuance of common stock in
connection with merger with Pacific
Pharmaceuticals, Inc. in April 1992.. -- -- -- -- -- -- 97,062 8,750 -- 8,750
Issuance of Series A convertible
preferred stock for cash through
December 31, 1993 ................... 26,899 48,500 -- -- -- -- -- -- -- 48,500
Issuance of Series A convertible
preferred stock and warrants to
purchase 14,191 shares of Series
A convertible preferred stock
in exchange for convertible
promissory notes and accrued
interest, net of issuance
costs of $21,500, through
December 31, 1993 ................. 625,845 1,199,536 -- -- -- -- -- -- -- 1,199,536
Issuance of Series A convertible
preferred stock for services
rendered through December 31, 1993 .. 40,597 73,198 -- -- -- -- -- -- -- 73,198
Issuance of Series A convertible
preferred stock in exchange for
license agreement ................... 9,513 100,000 -- -- -- -- -- -- -- 100,000
Issuance of Series B convertible
preferred stock in exchange
for convertible promissory
notes, net of issuance
costs of $1,000 in 1992 ............. -- -- 12,750 114,000 -- -- -- -- -- 114,000
Issuance of Series C convertible
preferred stock for cash, net of
issuance costs of $37,500 through
December 31, 1993 ................... -- -- -- -- 477,081 4,978,505 -- -- -- 4,978,505
Repurchase of common shares in 1992 . -- -- -- -- -- -- (3,586) (324) -- (324)
Net loss for the period June 26, 1989
(inception) through December 31,
1993 ................................ -- -- -- -- -- -- -- -- (5,460,080) (5,460,080)
------- --------- ------ ------- ------- --------- --------- ------- ----------- ----------
Balances, December 31, 1993 .......... 702,854 1,421,234 12,750 114,000 477,081 4,978,505 1,197,485 114,412 (5,460,080) 1,168,071
<FN>
(Continued on following page)
</FN>
</TABLE>
F-4
<PAGE>
(Continued from previous page)
<TABLE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------ ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ - ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of options to purchase
common stock .................... -- -- -- -- -- -- 964 1,739
Net loss--1994 ................... -- -- -- -- -- -- -- --
-------- ---------- ------- -------- -------- ---------- --------- ----------
Balances, December 31, 1994 ..... 702,854 1,421,234 12,750 114,000 477,081 4,978,505 1,198,449 116,151
Exercise of options to purchase
common stock ................... -- -- -- -- -- -- 20,481 34,285
Issuance of warrants in connection
with notes payable financing .. -- -- -- -- -- -- -- 487,333
Conversion of preferred stock to
common stock in connection with
initial public offering ........ (702,854) (1,421,234) (12,750) (114,000) (477,081) (4,978,505) 1,192,685 6,513,739
Issuance of common stock in
connection with initial public
offering, net of issuance costs. -- -- -- -- -- -- 1,322,500 6,383,785
Issuance of common stock in
exchange for notes payable ..... -- -- -- -- -- -- 42,960 268,500
Net loss -- 1995 ................ -- -- -- -- -- -- -- --
-------- ---------- ------- -------- -------- ---------- --------- ----------
Balances, December 31, 1995 ..... -- -- -- -- -- -- 3,777,075 13,803,793
======== ========== ======= ======== ======== ========== ========= ==========
</TABLE>
DEFICIT
ACCUMULATED TOTAL
DURING THE SHAREHOLDERS'
DEVELOPMENT EQUITY
STAGE (DEFICIT)
----- ---------
Exercise of options to purchase
common stock ............................... -- 1,739
Net loss--1994 .............................. (2,543,499) (2,543,499)
---------- ----------
Balances, December 31, 1994 .................. (8,003,579) (1,373,689)
Exercise of options to purchase
common stock ............................... -- 34,285
Issuance of warrants in connection
with notes payable financing ............... -- 487,333
Conversion of preferred stock to
common stock in connection with
initial public offering .................... -- --
Issuance of common stock in
connection with initial public
offering, net of issuance costs............. -- 6,383,785
Issuance of common stock in
exchange for notes payable ................. -- 268,500
Net loss -- 1995 ............................. (2,151,877) (2,151,877)
---------- ----------
Balances, December 31, 1995 .................. (10,155,456) $ 3,648,337
=========== ============
See accompanying notes.
F-5
<PAGE>
<TABLE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<CAPTION>
PERIOD FROM
JUNE 26, 1989
(INCEPTION)
DECEMBER 31 THROUGH
------------------------------- DECEMBER 31,
1995 1994 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................................ $(2,151,877) $ (2,543,499) $(10,155,456)
Adjustments to reconcile net loss to net
cash used in operation activities:
Depreciation and amortization ..................................... 27,726 28,418 211,254
Loss on sale of property and equipment ............................. 3,724 -- 3,724
Amortization of discount on notes payable and
deferred financing costs.......................................... 562,748 4,755 567,503
Issuance of common shares for services ............................ -- -- 24,261
Issuance of Series A convertible preferred
stock for services rendered ...................................... -- -- 73,198
Issuance of Series A convertible preferred
stock for interest ............................................... -- -- 67,720
Issuance of Series A convertible preferred
stock for license agreement ...................................... -- -- 100,000
Changes in operating assets and liabilities:
Affiliate receivable .............................................. -- 29,264 --
Other current assets .............................................. (138,811) 45,401 (149,040)
Accounts payable and accrued liabilities .......................... (149,813) 245,136 192,232
Accrued compensation and related expenses ......................... 136,554 36,039 187,266
Deferred revenue .................................................. (1,000,000) 1,000,000 --
------------ ------------ ------------
Net cash used in operating activities ............................... (2,709,749) (1,154,486) (8,877,338)
INVESTING ACTIVITIES
Purchase of property and equipment .................................. (22,794) -- (164,893)
Purchases of short-term investments ................................. (1,500,000) -- (7,046,520)
Sales of short-term investments ..................................... 21,681 1,049,861 5,546,520
------------ ------------ ------------
Net cash provided by (used in) investing ............................ (1,501,113) 1,049,861 (1,664,893)
activities
<FN>
(Continued on following page)
</FN>
</TABLE>
F-6
<PAGE>
(Continued from previous page)
<TABLE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS -- (CONTINUED)
<CAPTION>
PERIOD FROM
JUNE 26, 1989
(INCEPTION)
DECEMBER 31 THROUGH
-------------------------------- DECEMBER 31,
1995 1994 1995
---- ---- ----
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from notes payable ...................................... $ 1,749,800 $ 536,000 $ 3,547,424
Repayment of notes payable ....................................... (2,017,300) -- (2,110,608)
Net proceeds from issuance of common stock ....................... 6,418,070 1,739 6,501,534
Repurchase of common stock ....................................... -- -- (324)
Issuance of Series A convertible preferred stock,
net of issuance costs ........................................... -- -- 27,000
Series B convertible preferred stock issuance
costs ........................................................... -- -- (1,000)
Issuance of Series C convertible preferred stock,
net of issuance costs ........................................... -- -- 4,978,505
Deferred financing costs ......................................... -- (80,170) (80,170)
------------ ------------ ------------
Net cash provided by financing activities ........................ 6,150,570 457,569 12,862,361
------------ ------------ ------------
Net increase in cash ............................................. 1,939,708 352,944 2,320,130
Cash, beginning of period ........................................ 380,422 27,478 --
------------ ------------ ------------
Cash, end of period .............................................. $ 2,320,130 $ 380,422 $ 2,320,130
============ ============ ============
Supplemental disclosure of noncash transactions:
Conversion of preferred stock to common stock ................... $ 6,513,739 $ -- $ 6,513,739
============ ============ ============
Issuance of common stock for notes payable ...................... $ 268,500 $ -- $ 268,500
============ ============ ============
Issuance of warrants in connection with notes
payable financing .............................................. $ 487,333 $ -- $ 487,333
============ ============ ============
Issuance of Series A convertible preferred stock,
for notes payable .............................................. $ -- $ -- $ 1,153,316
============ ============ ============
Issuance of Series B convertible preferred stock,
for notes payable .............................................. $ -- $ -- $ 115,000
============ ============ ============
Issuance of common stock for Pacific
Pharmaceuticals, Inc. .......................................... $ -- $ -- $ 8,750
============ ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-7
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company commenced operations in 1989 to engage in the research,
development, and commercialization of proprietary products for the skin
including transdermal drug delivery products, prescription therapeutic products
for skin disorders, and non-prescription over-the-counter consumer products to
repair and protect damaged skin. The Company is in the development stage. In
1992, the Company's name was changed from Dermatologic Research Corporation to
Cellegy Pharmaceuticals, Inc.
BASIS OF PRESENTATION
In the course of its development activities, the Company has incurred
significant losses and expects to incur substantial additional development
costs. As a result, the Company will require substantial additional funds to
fund operations, and the Company may seek private or public equity investments,
and possible future collaborative arrangements with third parties to meet such
needs. There is no assurance that such additional funds will be available for
the Company to finance its operations on acceptable terms, if at all.
Insufficient funding may require the Company to delay, reduce, or eliminate some
or all of its research and development activities, planned clinical trials, and
administrative programs.
USE OF ESTIMATES
The preparation of financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of short-term, highly liquid financial instruments
with maturities of three months or less from the date of purchase.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115). Under FAS 115, investments in marketable equity
securities and debt securities are reported at fair value. There was no
significant cumulative effect as of January 1, 1994 of adopting FAS 115.
DEFERRED FINANCING COSTS
Deferred financing costs relate to the notes payable financing discussed in
Note 4. Costs associated with the notes payable financing were amortized over
the maturity of the debt, using the interest method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful life of five years, using the
straight-line method.
STOCK-BASED COMPENSATION
The Company accounts for its stock option grants in accordance with APB
Opinion No 25, "Accounting for Stock Issued to Employees."
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares are excluded from the
computation as their effect is anti-dilutive, except that, pursuant to
Securities and Exchange Commission Staff Accounting Bulletins, common and
F-8
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
common equivalent shares issued (or stock option and warrant grants) at prices
below the public offering price during the twelve month period prior to the
initial public offering have been included in the calculation as if they were
outstanding for all periods through March 31, 1995, using the treasury stock
method. The net loss per share was $(0.86) and $(1.18) for the years ended
December 31, 1995 and 1994, respectively. Shares used in the net loss per share
calculation were 2,509,963 and 2,151,643 for the years ended December 31, 1995
and 1994, respectively.
The pro forma net loss per share presented in the statements of operations is
computed as described above and also gives effect for all periods presented to
the conversion of all outstanding shares of convertible preferred stock into
common stock upon the closing of the Company's initial public offering.
2. SHORT-TERM INVESTMENTS
At December 31, 1995, short-term investments consist of a U.S. government
obligation which matures in May 1996. At December 31, 1994, short-term
investments consist of investments in mutual funds which invest in short-term
debt securities. Short-term investments are recorded at amounts which
approximate fair market value. The gross realized gain and losses and the gross
unrealized gains and losses of these available for sale securities for the years
ended December 31, 1995 and 1994 were not material.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31
------------------------
1995 1994
---------- ----------
Furniture and fixtures ......... ... $ 41,702 $ 41,702
Office equipment ................... 39,142 43,453
Laboratory equipment ............... 65,310 53,334
Leasehold improvements ............. 3,610 3,610
--------- ---------
149,764 142,099
Less accumulated depreciation ...... (91,099) (74,778)
--------- ---------
$ 58,665 $ 67,321
========= =========
4. NOTES PAYABLE
In a December 1994 private placement, the Company issued $536,000 principal
amount of 10% convertible subordinated debentures and warrants to acquire
107,200 shares of common stock at an exercise price of $7.81. The value ascribed
to the warrants for financial statement purposes was not material.
In a February 1995 and June 1995 private placement, the Company issued
$1,749,800 principal amount of 10% convertible secured debentures ("Notes") and
warrants ("Warrants") to acquire units ("Units"), each Unit consisting of one
share of common stock and one common stock purchase warrant ("Unit Warrant"). In
connection with the February 1995 transaction, all investors who acquired notes
and warrants in December 1994 exchanged the securities acquired in December 1994
for an equal principal amount of Notes and Warrants on the same terms as the
other investors. The Warrants were valued by an outside valuation firm for
financial statement purposes at approximately $487,000 which amount was recorded
as an addition to common stock with a corresponding discount on the notes
payable. The discount was amortized using the interest method. The Notes were
convertible at the option of the noteholder into Units consisting of one share
of common stock and one warrant ("Conversion Warrant") to purchase one share of
common stock. The exercise price of the Warrants is $.01 per unit. The exercise
price of the Unit Warrants is $7.81 per share.
F-9
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On August 18, 1995, in connection with the close of the initial public
offering, the Company repaid Notes totaling approximately $2,017,000 and accrued
interest totaling approximately $100,000. Notes totaling $268,500 were converted
into 42,960 shares of common stock and warrants to acquire 42,960 shares of
common stock. The warrants are exercisable beginning February 1996 at an
exercise price of $5.19 per share and shall expire December 31, 1999.
5. LEASE COMMITMENTS
The Company leases its facilities under noncancelable operating leases. The
leases expire in May 1997. Future minimum lease payments, are as follows:
1996 ................... $150,971
1997 ................... 86,032
--------
$237,003
========
Rent expense was $67,959 and $72,764 for the years ended December 31, 1995
and 1994, respectively.
6. SHAREHOLDERS' EQUITY (DEFICIT)
INITIAL PUBLIC OFFERING
In August 1995, the Company completed an initial public offering of 661,250
units, with each unit consisting of two shares of common stock and one common
stock purchase warrant with an exercise price of $9.375 per share. The Company
received net proceeds of approximately $6.4 million. In connection with the
initial public offering, Series A, B, and C preferred stock converted into
1,192,685 shares of common stock.
In July 1995, the Company's Board of Directors also approved a .746-for-one
reverse stock split of issued and outstanding common and preferred shares and
commensurate adjustments of outstanding options and warrants (including purchase
prices and exercise prices). All share amounts in the accompanying financial
statements have been retroactively adjusted to reflect this reverse stock split.
The Company's authorized capital consists of 5,000,000 shares of undesignated
preferred stock and 20,000,000 shares of common stock.
F-10
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
WARRANTS
The Company has the following warrants outstanding to purchase common stock
at December 31, 1995:
NUMBER OF EXERCISE PRICE
SHARES PER SHARE DATE ISSUED EXERCISE PERIOD
- ---------- -------------- ----------- -------------------------------
28,056 $ 1.81 4/92-6/92 Through August 20, 1996
35,496 4.51 10/94 Through December 31, 1999
365,728 .01 2/95 February 1996-December 31, 1999
365,728 7.81 2/95 February 1996-December 31, 1999
44,604 9.02 3/95 Through December 31, 1999
42,960 5.19 8/95 February 1996-December 31, 1999
115,000 10.31 8/95 August 1996-August 2000
57,500 15.47 8/95 August 1996-August 2000
661,250 9.375 8/95 August 1996-August 2000
- ----------
1,716,322
Included above is warrants to acquire 661,250 shares of common stock at a price
of $9.375 per share which were issued in connection with the Company's initial
public offering. The warrants are exercisable at any time, unless previously
redeemed, from August 1996 to August 2000. The Company may redeem the warrants
until August 1996 only with the consent of the Representatives of the
Underwriters. Thereafter, the Company may redeem the warrants, in whole or in
part, at any time upon at least thirty days prior written notice to the warrant
holders at a price of $.05 per warrant, provided that the closing price of the
common stock has been at least $12.50 for at least 10 consecutive trading days
ending on a date within 30 days before the date of the notice of redemption. No
warrants have been redeemed through December 31, 1995.
STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan") that provides for the
issuance of incentive stock options and non-statutory stock options. The Plan
provides for the granting of options for the purchase of up to 700,000 shares of
the Company's common stock. Under the Plan, incentive stock options may be
granted at a price per share not less than the fair market value of common stock
on the date of grant. Nonqualified options may be granted at a price per share
not less than 85% of fair market value on the date of grant. Options are
exercisable to the extent vested. Vesting, as established by the Board of
Directors, generally occurs at a rate of 25% per year over four years from the
date of grant.
F-11
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Activity under the Plan is summarized as follows:
SHARES
UNDER PRICE RANGE
OPTION PER SHARE
------ -----------
Balance at December 31, 1993 ......... 131,942 $ 1.81
Granted .............................. 66,743 .45-4.50
Canceled ............................. (61,426) 1.81
Exercised ............................ (964) 1.81
-------- ---------
Balance at December 31, 1994 ......... 136,295 .45-4.50
Granted .............................. 619,382 2.09-6.66
Canceled ............................. (84,511) 1.81-4.50
Exercised ............................ (20,481) 0.50-1.81
-------- ---------
Balance at December 31, 1995 ......... 650,685 $.45-6.66
======== =========
At December 31, 1995, options to purchase 220,792 shares of common stock were
vested and exercisable at exercise prices ranging from $0.45 to $6.66 per share.
At December 31, 1995 options to purchase 26,181 shares of common stock were
available for future option grants under the Plan. At December 31, 1995, options
to purchase 75,444 shares of common stock at an exercise price of $4.38 per
share, vest in December 2000, but are subject to earlier vesting if certain
performance criteria are met.
DIRECTORS STOCK OPTION PLAN
In February 1995, the Company adopted the Directors' Stock Option Plan (the
"Plan"). The Company has reserved 100,000 shares of common stock for issuance
under the Plan. The Plan provides for the automatic annual grant of an option to
acquire 1,000 shares of common stock, to each non-employee then serving as a
director, at an exercise price equal to the fair value of the common stock on
the date of grant, commencing in 1996. The Plan also provides for the automatic
annual grant of an initial option ("Initial Option") to acquire 20,000 shares of
common stock, to each current and future non-employee director of the Company,
at an exercise price equal to the fair value of the common stock on the date of
grant. Vesting, as established by the Board of Directors, generally occurs over
four years from the date of grant, except that 25% of the shares subject to the
Initial Option generally become exercisable on the grant date. Pursuant to the
Plan, in October 1995, one non-employee director was granted an option to
purchase 20,000 shares of common stock at an exercise price of $5.00 per share.
7. LICENSE AGREEMENTS
The Company entered into a License Option Agreement date April 16, 1992 (the
"License Option Agreement"), with Neutrogena Corporation ("Neutrogena") as part
of Neutrogena's purchase of 475,560 shares of the Company's Series C preferred
stock for $5.0 million on June 12, 1992. Also as part of that stock purchase
transaction, the Company entered into an Azelaic Acid OTC License Agreement (the
"Azelaic Acid Agreement") and a Metabolic Moisturizer OTC License Agreement (the
"Metabolic Moisturizer Agreement"), each dated April 16, 1992, with Neutrogena.
The License Option Agreement requires the Company to notify Neutrogena about
potential consumer or prescription products about which it becomes aware and
about potential consumer products for which the Company has applied to switch
from prescription to consumer status. Certain products and technologies,
including the Company's drug delivery products and technologies, Glylorin and
products sold in the Japanese market, are excluded from the scope of the License
Option Agreement. After
F-12
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
notification, Neutrogena has a license option period and an "Evaluation License"
to investigate the potential product to determine whether to enter into an
agreed-upon form of royalty-bearing exclusive worldwide license with the Company
for the product. The royalty-bearing license for consumer products provides for
a royalty of 3% of net sales of the first two years and 5% of net sales
thereafter with a minimum annual royalty of $25,000. The royalty-bearing license
for prescription products provides for a royalty of 5% of net sales with a
minimum annual royalty of $25,000. Both royalty-bearing license agreements for
consumer products and prescription products provide for Neutrogena to pay
out-of-pocket evaluation, development and marketing costs for a product.
Revenues related to expenses eligible for reimbursement totaled $130,373 for the
period from inception to December 31, 1995. Neutrogena has not exercised its
option to license any consumer or prescription products about which it has been
notified by the Company. The terms of the agreement is 15 years for consumer
products and 10 years for prescription products.
The Metabolic Moisturizer Agreement and the Azelaic Acid Agreement each
granted to Neutrogena and an exclusive, worldwide royalty-bearing license. The
Metabolic Moisturizer Agreement relates to the Company's barrier repair
technology and contains the same royalty and other material terms as the
standard royalty-bearing license agreement described above for consumer
products.
The Azelaic Acid Agreement was terminated and replaced by a Patent License
Agreement effective June 1, 1994 (the "Neutrogena Agreement") between the
Company and Neutrogena. Pursuant to the Neutrogena Agreement, Neutrogena paid
the Company $1.0 million for an exclusive, worldwide, royalty- free license for
Azelaic Acid for both prescription and consumer products. The Company had an
option to limit this license to consumer products, and effectively reacquire
rights to prescription Azelaic Acid products by paying Neutrogena $1.0 million.
The $1.0 million paid by Neutrogena was recorded as deferred revenue and
concurrent with the option expiration, the Company recognized $1 million of
license revenue in the year ended December 31, 1995. The Neutrogena Agreement
requires Neutrogena to pay all out-of-pocket evaluation, development and
marketing costs, including Azelaic Acid patent prosecution costs, for consumer
and prescription Azelaic Acid products. Neutrogena was acquired by Johnson and
Johnson in 1994.
On March 4, 1994, the Company entered into a second exclusive, world-wide,
royalty-bearing license agreement with the Licensor for two patents for "Drug
Delivery By Skin Barrier Disruption", in consideration of the payment by the
Company of a $15,000 license fee, and a $10,000 annual maintenance fee payable
each year until the Company is commercially selling a licensed product. The
license requires the Company to pay royalties equal to 1% of net sales of
licensed consumer products and 2.5% of net sales of licensed prescription
products, with a minimum of $25,000 annually. The Company has the right to grant
sublicenses to third-parties. The Company is required to provide written
progress reports related to development and testing of licensed products. The
license is subject to termination by the Licensor if certain performance
criteria are not achieved.
8. RELATED PARTY TRANSACTIONS
The Company entered into consulting agreements with certain shareholders of
the Company. The total consulting fees paid to these shareholders was $129,000
and $201,000 for the years ended December 31, 1995 and 1994, respectively. One
of these consulting agreements requires a shareholder to provide consulting
services through April 1997 in exchange for monthly payments of approximately
$3,500. The agreement also provides that the Company reserve up to 97,062 shares
of common stock which may be issued to this individual, or other third parties
aiding in such consulting, at the sole discretion of the Company's Board of
Directors. Through December 31, 1995, no such shares have been granted.
F-13
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $9,461,000 and $4,716,000 for federal and state purposes,
respectively. The federal net operating loss carryforwards expire between the
years 2004 and 2010. The state net operating loss carryforwards expire between
the years 1996 and 2000. At December 31, 1995, the Company also has research and
development credit carryforwards of approximately $197,000 and $92,000 for
federal and state purposes, respectively. The federal credits expire between the
years 2006 and 2010. The state credits do not expire.
Pursuant to the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of the Company's net operating loss and research and
development tax credit carryforwards may be limited, if a cumulative change of
ownership of more than 50% occurs within any three-year period.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31,
---------------------------
1994 1995
------------- -------------
Deferred tax assets:
Net operating loss carryforwards ......... $ 2,236,000 $ 3,500,000
Deferred revenue .......................... 401,000 --
Credit carryforwards ...................... 247,000 258,000
Capitalized research and
development costs ........................ -- 139,000
Capital loss carryforwards ................ 36,000 39,000
Capitalized license fee ................... 48,000 50,000
Other ..................................... (38,000) 33,000
----------- -----------
Total deferred tax assets .................. 3,006,000 4,019,000
Valuation allowance ........................ (3,006,000) (3,980,000)
----------- -----------
Net deferred tax assets .................... -- 39,000
Deferred tax liabilities
Other .................................... -- 39,000
----------- -----------
Net deferred tax assets/(liabilities) ...... $ -- $ --
=========== ===========
F-14
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
MARCH 31, DEC. 31,
1996 1995
----------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 1,217 $ 2,320
Short-term investments .................................. 1,500 1,500
Other current assets .................................... 220 149
------- -------
Total current assets ................................... 2,937 3,969
Property and equipment, net ............................. 93 59
------- -------
Total assets ............................................ $ 3,030 $ 4,028
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............... $ 138 $ 192
Accrued compensation & related expenses ................. 72 188
------- -------
Total current liabilities .............................. 210 380
SHAREHOLDERS' EQUITY:
Common stock, no par value; 20,000,000 shares
authorized; 3,865,628 shares issued and outstanding
at March 31, 1996 and 3,777,075 shares issued
and outstanding at December 31, 1995 ................... 13,840 13,804
Deficit accumulated during the development stage ....... (11,020) (10,156)
------- -------
Total shareholders' equity ............................. 2,820 3,648
------- -------
Total liabilities and shareholders' equity ............. $ 3,030 $ 4,028
======= =======
See accompanying notes to condensed financial statements.
F-15
<PAGE>
<TABLE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED JUNE 26, 1989
MARCH 31, (INCEPTION) THROUGH
----------------------------- MARCH 31,
1996 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Licensing revenue ......................................... $ -- $ -- $ 1,000
Contract revenue from affiliate ........................... 15 -- 145
-------- -------- --------
Total Revenue ............................................. 15 -- 1,145
Operating expenses:
Research and development .................................. 596 275 7,006
General and administrative ................................ 351 255 4,900
-------- -------- --------
Total operating expenses .................................. 947 530 11,906
-------- -------- --------
Operating loss ............................................ (932) (530) (10,761)
Interest expense ........................................... -- (143) (863)
Interest income and other, net ............................. 68 7 604
-------- -------- --------
Net loss .................................................. $ (864) $ (666) $(11,020)
======== ======== ========
Pro forma net loss per share ............................... $ (0.23) $ (0.20)
-------- --------
Shares used in pro forma net loss per share calculation .... 3,836 3,332
======== ========
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
F-16
<PAGE>
<TABLE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED JUNE 26, 1989
MARCH 31, (INCEPTION) THROUGH
------------------------- MARCH 31,
1996 1995 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................................ $ (864) $ (666) $(11,020)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization .......................................... 8 5 219
Loss on sale of equipment .............................................. -- -- 4
Amortization of discount on notes payable and deferred
financing costs ....................................................... -- 104 568
Issuance of common shares for services ................................. -- -- 24
Issuance of Series A convertible preferred stock for interest,
license agreement and services rendered ............................... -- -- 240
Changes in operating assets and liabilities:
Other current assets ................................................... (71) (13) (220)
Accounts payable and accrued liabilities ............................... (54) (164) 138
Accrued compensation and related expenses .............................. (116) (32) 72
Other .................................................................. 34 -- 34
-------- -------- --------
Net cash used in operating activities .................................... (1,063) (766) (9,941)
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment ...................................... (42) -- (207)
Purchase of short-term investments ...................................... -- -- (7,047)
Sales of short term investments ......................................... -- 22 5,547
-------- -------- --------
Net cash flows provided by (used in) investing activities ............... (42) 22 (1,707)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable ............................................. $ -- $ 1,680 $ 3,548
Repayment of notes payable .............................................. -- -- (2,111)
Net proceeds from the issuance of common stock .......................... 2 -- 6,504
Issuance of Series A convertible preferred stock, net of
issuance costs ......................................................... -- -- 27
Issuance of Series B convertible preferred stock, net of
issuance costs ......................................................... -- -- (1)
Issuance of Series C convertible preferred stock, net of
issuance costs ......................................................... -- -- 4,978
Deferred financing costs ................................................ -- (151) (80)
-------- -------- --------
Net cash flows provided by (used in) financing activities ............... 2 1,529 12,865
-------- -------- --------
Net increase(decrease) in cash .......................................... (1,103) 785 1,217
Cash and cash equivalents at beginning of period ........................ 2,320 380 --
-------- -------- --------
Cash and cash equivalents at end of period .............................. $ 1,217 $ 1,165 $ 1,217
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS:
Conversion of preferred stock to common stock ........................... $ -- $ -- $ 6,514
Issuance of common stock for notes payable .............................. -- -- 268
======== ======== ========
Issuance of warrants in connection with notes payable financing ......... -- -- 487
======== ======== ========
Issuance of Series A convertible preferred stock for notes
payable ................................................................ -- -- 1,153
======== ======== ========
Issuance of Series B convertible preferred stock for notes
payable ................................................................ -- -- 115
======== ======== ========
Issuance of common stock for Pacific
Pharmaceuticals, Inc. .................................................. $ -- $ -- $ 9
======== ======== ========
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
F-17
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed balance sheets as of March 31, 1996 and
December 31, 1995, condensed statements of operations for the three months ended
March 31, 1996 and 1995, and the condensed statements of cash flows for the
three months ended March 31, 1996 and 1995 have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnote disclosures
required by generally accepted accounting principles for completed financial
statements. These condensed financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto appearing
elsewhere herein. In the opinion of management, the accompanying condensed
financial statements include all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation of the
financial position and results of operations for the periods presented.
Operating results for the period ended March 31, 1996 may not necessarily be
indicative of the results to be expected for any other interim period or for the
full year.
2. COMPUTATION OF PRO FORMA NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding, including the effect for
all periods presented of the conversion of all outstanding shares of convertible
preferred stock into common stock upon the closing of the Company's initial
public offering ("IPO") in August 1995. Common equivalent shares are excluded
from the computation because their effect is anti-dilutive, except that,
pursuant to certain Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares issued (or stock options and
warrant grants issued) at prices below the public offering price during the
twelve month period prior to the Company's IPO have been included in the
calculation as if they were outstanding for the period ending March 31, 1995
(using the treasury stock method and the IPO price).
3. SUBSEQUENT EVENTS
On April 19, 1996 the Company completed a $7,500,000 private placement of 750
shares of convertible Series A Preferred Stock ("Preferred Stock Financing").
Net proceeds after agents' commissions were approximately $6,855,000. The shares
are convertible, at the option of the holder, into Cellegy common stock. The
number of shares of common stock issuable on conversion of a share of Series A
Preferred Stock is calculated based on the lower of a fixed conversion price or
a variable conversion price depending primarily on the market price of the
commmon stock on the conversion date. The minimum number of shares which will be
issued on conversion of all the preferred stock is approximately 1,150,000
shares, which would occur if conversion takes place at the time the shares first
become convertible at the fixed conversion price of $6.6275 per share. If the
variable conversion price is lower than the fixed conversion price, a greater
number of shares will be issued upon conversion. Two years after issuance, the
remaining preferred shares are automatically converted into common stock. A
conversion premium accrues at the rate of 8 percent per annum and is payable on
conversion in shares of common stock. Finally, Cellegy has redemption rights
under certain circumstances.
In April 1996 Cellegy entered into a research agreement with Bausch & Lomb,
Inc., headquartered in Rochester, New York. The agreement involves laboratory
and possibly human testing of two of the Company's skin protectant formulations.
This collaboration may result in a licensing agreement, if results from initial
research are successful.
F-18
<PAGE>
===================================== ========================================
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE (GRAPHIC OMITTED)
HEREUNDER SHALL, UNDER ANY IMAGE: CELLEGY
CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
---------- 5,000,000 SHARES OF
COMMON STOCK
TABLE OF CONTENTS
PAGE
----
Available Information ..............3
The Company ........................3
Risk Factors .......................4
Selling Shareholders ...............9
Plan of Distribution ..............12
Dividend Policy ...................13
Price Range of the Common Stock ...13
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations .......................14
Business ..........................16 ----------
Management ........................27 PROSPECTUS
Certain Transactions ..............33 ----------
Principal Shareholders ............34
Description of Capital Stock ......35
Legal Matters .....................39
Experts ...........................39
Report of Independent Accountants F-1
Consolidated Financial Statements F-2
===================================== ========================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of Registrant's Restated Articles of Incorporation provides as
follows:
The Corporation is authorized to provide indemnification of its agents (as
defined in Section 317 of the California Corporations code) for breach of duty
to the Corporation and its shareholders through bylaw provisions or through
agreements with the agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code. Any repeal or modification of the foregoing provisions of
this Article VI by the shareholders of the Corporation shall not adversely
affect any right or protection of an agent of the Corporation existing at the
time of such repeal or modification.
Article V of the Bylaws of the Company provides as follows:
Section 5.01. INDEMNITY.
(a) The corporation shall have the full authority which may now exist or
which may hereafter be granted by the California General Corporation Law to
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an
action by or in the right of the corporation to procure a judgment in its
favor), by reason of the fact that such person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (an
"agent"), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, actually and reasonably incurred by such person
in connection with such action, suit or proceeding, if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe such
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.
(b) The corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that such person is or was an agent of the
corporation, against expenses actually and reasonably incurred by such person
in connection with the defense or settlement of such action if such person
acted in good faith, in a manner such person believed to be in the best
interests of the corporation and with such care, including reasonable
inquiry, as an ordinarily prudent person in a like position would use under
similar circumstances. No indemnification shall be made under this
subdivision (b):
(1) In respect of any claim, issue or matter to which such person was
adjudged liable to the corporation in the performance of such person's duty
to the corporation, unless and only to the extent that the court in which
such proceeding is or was pending shall determine upon application, that,
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for the expenses determined by such court;
(2) Of amounts paid in settling or otherwise disposing of a threatened or
pending action, with or without court approval; or
(3) Of expenses incurred in defending a threatened or pending action
which is settled or otherwise disposed of without court approval.
II-1
<PAGE>
(c) To the extent that an agent of a corporation has been successful on the
merits in defense of any proceeding referred to in subdivision (a) or (b) or
in defense of any claim, issue or matter therein, the agent shall be
indemnified against expenses actually and reasonably incurred by the agent in
connection therewith. Expenses incurred in defending any proceeding may be
advanced by the corporation prior to the final disposition of such proceeding
upon receipt of an undertaking by or on behalf of the agent to repay such
amount unless it shall be determined ultimately, in accordance with
subdivision (d), that the agent is entitled to be indemnified as authorized
by this Section 5.01.
(d) Except as provided in subdivision (c), any indemnification under this
section shall be made by the corporation only if authorized in the specific
case, upon a determination that indemnification of agent is proper in the
circumstances because the agent has met the applicable standard of conduct
set forth in subdivision (a) or (b), as the case may be, by:
(1) A majority vote of a quorum consisting of directors not parties to
such proceeding;
(2) Approval of the holders of a majority of the outstanding shares
entitled to vote; provided, however, that shares owned by the person to be
indemnified are not entitled to vote thereon; or
(3) The court in which such proceeding is or was pending, upon
application made by the corporation, the agent, the attorney or other
person rendering services in connection with the defense, whether or not
such application by the agent, attorney, or other person is opposed by the
corporation.
(e) The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was an agent of the corporation against any
liability asserted against and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify such person against such
liability under the provisions of this Section 5.01. In addition, nothing
contained in this Section 5.01 shall affect any right to indemnification to
which persons other than directors and officers of the corporation or its
subsidiaries may be entitled by contract or otherwise.
(f) As used in this Section 5.01, "corporation" shall include the resulting
corporation and any constituent corporation absorbed in a consolidation or
merger with the corporation which, if its separate existence had continued,
would have had power to indemnify its directors, officers, employees or
agents.
(g) No indemnification or advance shall be made under this Section 5.01,
except as provided in subdivision (c) or paragraph (3) of subdivision (d), in
any circumstance where it appears:
(1) That it would be inconsistent with a provision of corporation's
articles of incorporation, these bylaws, a resolution of the corporation's
shareholders or an agreement in effect at the time of the accrual of the
alleged cause of action asserted in the proceeding in which the expenses
were incurred or other amounts were paid, which prohibits or otherwise
limits indemnification; or
(2) That is would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
Section 204 of the California Corporations Code allows a corporation to
include in its articles of incorporation a provision which limits a director's
personal liability to the corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director, with certain exceptions. Article V
of registrant's Amended and Restated Articles of Incorporation provides as
follows: The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
II-2
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of Common Stock being registered hereby,
all of which will be paid by the Registrant. All amounts are estimates except
for the Securities and Exchange Commission registration fee.
Securities and Exchange Commission registration fee .. $11,311
Nasdaq SmallCap Market filing fee .................... 17,000
Accounting fees and expenses ......................... 4,500
Legal fees and expenses .............................. 51,689
Printing and miscellaneous ........................... 9,500
-------
Total ................................................ $94,000
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company was originally incorporated on June 26, 1989. For fiscal 1993,
1994, 1995 and the three months ended March 31, 1996, it has issued securities
in the following transactions without registration under the Securities Act.
1. During the past three years, the registrant has issued the securities set
forth below which were not registered under the Securities Act of 1993, as
amended (the "Act"). The share amounts (and conversion ratios, purchase and
option exercise prices) set forth below have been adjusted to give effect to
subsequent reverse stock splits.
From January 1, 1993 through the date of this registration statement, the
registrant issued options to purchase a total of 829,767 shares of Common Stock,
631,387 of which are outstanding at May 1, 1996, at exercise prices ranging from
$0.45 to $6.66 per share, to a limited number of employees and consultants. All
of such issuances were under the registrant's stock option plans. No
consideration was paid to the registrant by any recipient of any of the
foregoing options for the grant of any such options. As of the date of this
Prospectus, such options have been exercised to acquire a total of 29,785 shares
of Common Stock. The options were granted, and such shares issued, in reliance
on Section 4(2) of the Act and Section 3(b) of the Act and Rule 701 promulgated
thereunder.
2. Bridge Financing. On December 7, 1994, the Company issued $536,000
principal amount of Bridge Notes and Bridge Warrants to acquire 76,571 shares of
Common Stock in private placement transaction. Net proceeds were approximately
$455,000. The foregoing securities were issued in reliance upon Section 4(2) of
the Securities Act, based primarily upon the fact that the holders were small in
number, were sophisticated and were familiar with the business of the Company.
Investors in December 1994 transaction included the following persons and
entities: Alan & Lois Bauer; Peter Block; Seligmann, Dreiling, Beckermann
Pension Plan; Davis Fox; G&G Diagnostics LPI; Chai Mann; Herbert L. Pruzen; Dr.
James C. Shaw; Rory Veal; Jon D. Wheeler; Dr. & Mrs. Robert Cancro; Ken
Chamberlin; Priscilla J. Ledbetter Revocable Trust; Dr. David R. Rosencrantz;
Intervivos Charitable Remainder Unitrust for the Stock's; Donald and Lucy
Stoner; Timothy Stoner; William M. Tucker; and Michael Hubbard.
In February 1995, the Company issued an additional $1,679,800 principal
amount of Bridge Notes and Bridge Warrants to acquire 239,971 shares of Common
Stock in a private placement transaction. Net proceeds were approximately
$1,537.000. The foregoing securities were issued in reliance upon Section 4(2)
of the Securities Act, based primarily upon the fact that the holders were small
in number, were sophisticated and were familiar with the business of the
Company. Investors in the February 1995 transaction included the following
persons and entities: Westminster Associates Limited, pp; J. Thomas Bentley;
United Mizrahi Bank; Frank Woodward; James Freitag; Bernard Keiser; Anita Laken;
Glenn Laken; Steven Safran; Robert Paget; Larry Wells; Barry Reder; Paul
Escobosa; Larry Adler; and Paradigm Venture Investors, LLC.
In June 1995, the Company issued an additional $70,000 principal amount of
Bridge Notes and Bridge Warrants in a private placement transaction. Net
proceeds were approximately $64,400. The foregoing securities were issued in
reliance upon Section 4(2) of the Securities Act, primarily upon the fact that
the holders were small in number, were sophisticated and were familiar with the
business of the Company. Investors were Anacomp Venture Partners and A.B.
Laffer, V.A. Canto & Associates.
II-3
<PAGE>
3. Series A Preferred Stock Private Placement. In April 1996, the Company
issued 750 shares of Series A Preferred in a private placement transaction. Net
proceeds were approximately $6.9 million. The foregoing securities were issued
in reliance upon Regulation D promulgated under the Act, and upon Regulation S
promulgated by the Commission. Investors included the Selling Shareholders
identified as Series A Holders in the Prospectus included in this registration
statement.
<TABLE>
ITEM 27. EXHIBITS.
The following exhibits are filed herewith or incorporated by reference
herein:
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company. (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form SB-2 (Registration No. 33-93288
LA) declared effective on August 11, 1995 (the "SB-2"))
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit 3.3 to the SB-2)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the
SB-2)
4.2 Specimen Warrant Certificate. (Incorporated by reference to Exhibit 4.2 to the SB-2)
4.3 Form of Warrant Agreement Between the Company and First Interstate Bank of
California. (Incorporated by reference to Exhibit 4.3 to the SB-2)
4.4 Form of Representatives' Warrant Agreement. (Incorporated by reference to Exhibit 27.2 to
the SB-2)
4.5 Certificate of Determination, as amended, relating to the Series A
Preferred Stock. (Incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-QSB for the three months ended
March 31, 1996 (the "Q1 1996 Form 10-QSB")
4.6 Securities Subscription Agreement dated April 1996 relating to the Series A Preferred Stock.
(Incorporated by reference from Exhibit 4.2 to the Q1 1996 Form 10-QSB)
4.7 Registration Rights Agreement dated April 18, 1996 relating to the Series A Preferred Stock.
(Incorporated by reference to Exhibit 4.3 to the Q1 1996 Form 10-QSB)
5.01 Opinion of Fenwick & West LLP*
10.1 License Option Agreement, dated April 16, 1992, between the Company and Neutrogena.
(Incorporated by reference to Exhibit 10.1 to the SB-2)
10.2 Azelaic Acid Agreement, dated April 16, 1992, between the Company and Neutrogena.
(Incorporated by reference to Exhibit 10.2 to the SB-2)
10.3 Metabolic Moisturizer OTC License Agreement, dated April 16, 1992, between the
Company and Neutrogena. (Incorporated by reference to Exhibit 10.3 to the SB-2)
10.4 Patent License Agreement, effective June 1, 1994, between the Company and Neutrogena.
(Incorporated by reference to Exhibit 10.4 to the SB-2)
10.5 Barrier Repair Formulations License Agreement, dated October 26, 1993 between the Company
and the University of California. (Incorporated by reference to Exhibit 10.5 to the SB-2)
10.6 License Agreement, dated March 4, 1994, regarding Drug Delivery by Skin Barrier Disruption,
between the Company and University of California. (Incorporated by reference to Exhibit 10.6
to the SB-2)
10.7 Employment Agreement, dated as of January 21, 1996, between the Company and Dr. Carl
Thornfeldt. (Incorporated by reference to exhibits filed with the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995 (the "1995 Form 10-KSB"))
10.8 Founder's Agreement, dated April 2, 1992, between the Company and Dr. Peter M. Elias.
(Incorporated by reference to Exhibit 10.9 to the SB-2)
10.9 Consulting Agreement, dated April 2, 1992, between the Company and Dr. Peter M. Elias.
(Incorporated by reference to Exhibit 10.10 to the SB-2)
10.10 Amended and Restated Registration Rights Agreement dated April 10, 1992. (Incorporated by
reference to Exhibit 10.11 to the SB-2)
10.11 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10.12 to the SB-2)
10.12 Secured Debenture and Warrant Purchase Agreement dated as of February 10, 1995.
(Incorporated by reference to Exhibit 10.13 to the SB-2)
10.13 Amended and Restated Registration Rights Agreement dated as of February 10, 1995.
(Incorporated by reference to Exhibit 10.14 to the SB-2)
II-4
<PAGE>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.14 Warrant Agreement dated as of February 10, 1995. (Incorporated by reference to Exhibit
10.15 to the SB-2)
10.15 Agency Agreement dated as of February 10, 1995. (Incorporated by reference to Exhibit 10.16
to the SB-2)
10.16 Security Agreement dated as of February 10, 1995. (Incorporated by reference to Exhibit
10.17 to the SB-2)
10.17 1995 Equity Incentive Plan. (Incorporated by reference to exhibits filed with the SB-2)
10.18 1995 Directors Stock Option Plan. (Incorporated by reference to exhibits filed with the
SB-2)
10.19 Research and Development Agreement dated February 16, 1996, between the Company and
Yamanouchi Europe B.V. (Incorporated by reference to exhibits filed with the 1995 Form
10-KSB)
10.20 Standard Industrial Lease dated April 6, 1992, between the Company and H&R
Management. (Incorporated by reference to exhibits filed with the 1995 Form 10-KSB)
10.21 Employment Agreement dated December 6, 1995, between the Company and
William E. Bliss. (Incorporated by reference to exhibits filed with the 1995 Form 10-KSB)
11.1 Statement re: Computation of Pro Forma Net Loss Per Share.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney.*
<FN>
- ------------
* Previously filed.
</FN>
</TABLE>
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, 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 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
Securities Act and will be governed by the final adjudication of such issue.
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; (ii) to
reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table on the
effective registration statement; and (iii) to include any additional or
changed material information with respect to the plan of distribution;
provided, however, that (i) and (ii) do not apply if the information required
to be included in a post-effective amendment thereby is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of
the Exchange Act that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each post-effective amendment shall be deemed a new registration
statement relating to the securities offered therein, and the offering of the
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.
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 AUTHORIZED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NOVATO, STATE OF CALIFORNIA, ON JUNE 26, 1996.
CELLEGY PHARMACEUTICALS, INC.
By: /s/ WILLIAM E. BLISS
-------------------------------------
William E. Bliss
President and Chief Executive Officer
<TABLE>
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM E. BLISS* President, Chief Executive Officer and June 26, 1996
------------------------------- Director (Principal Executive Officer)
William E. Bliss
/s/ A. RICHARD JUELIS Chief Financial Officer and Secretary June 26, 1996
------------------------------- (Principal Financial and Accounting
A. Richard Juelis Officer)
/s/ CARL R. THORNFELDT, M.D.* Director June 26, 1996
-------------------------------
Carl R. Thornfeldt, M.D.
/s/ PETER ELIAS, M.D.* Director June 26, 1996
-------------------------------
Peter Elias, M.D.
Director June 26, 1996
-------------------------------
Tobi B. Klar, M.D.
/s/ LARRY J. WELLS* Director June 26, 1996
-------------------------------
Larry J. Wells
Director June 26, 1996
-------------------------------
Denis R. Burger, Ph.D.
By: /s/ A. Richard Juelis June 26, 1996
-----------------------------------
A. Richard Juelis, Attorney-in-fact
</TABLE>
II-6
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------- ----------- ----
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the Company. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form SB-2
(Registration No. 33-93288 LA) declared effective on August 11, 1995 (the "SB-2"))
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit 3.3 to the SB-2)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the
SB-2)
4.2 Specimen Warrant Certificate. (Incorporated by reference to Exhibit 4.2 to the SB-2)
4.3 Form of Warrant Agreement Between the Company and First Interstate Bank of
California. (Incorporated by reference to Exhibit 4.3 to the SB-2)
4.4 Form of Representatives' Warrant Agreement. (Incorporated by reference to Exhibit
27.2 to the SB-2)
4.5 Certificate of Determination, as amended, relating to the Series A
Preferred Stock. (Incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-QSB for the three months ended
March 31, 1996 (the "Q1 1996 Form 10-QSB")
4.6 Securities Subscription Agreement dated April 1996 relating to the Series A
Preferred Stock. (Incorporated by reference from Exhibit 4.2 to the Q1 1996 Form
10-QSB)
4.7 Registration Rights Agreement dated April 18, 1996 relating to the Series A
Preferred Stock. (Incorporated by reference to Exhibit 4.3 to the Q1 1996 Form
10-QSB)
5.01 Opinion of Fenwick & West LLP*
10.1 License Option Agreement, dated April 16, 1992, between the Company and Neutrogena.
(Incorporated by reference to Exhibit 10.1 to the SB-2)
10.2 Azelaic Acid Agreement, dated April 16, 1992, between the Company and Neutrogena.
(Incorporated by reference to Exhibit 10.2 to the SB-2)
10.3 Metabolic Moisturizer OTC License Agreement, dated April 16, 1992, between the
Company and Neutrogena. (Incorporated by reference to Exhibit 10.3 to the SB-2)
10.4 Patent License Agreement, effective June 1, 1994, between the Company and
Neutrogena. (Incorporated by reference to Exhibit 10.4 to the SB-2)
10.5 Barrier Repair Formulations License Agreement, dated October 26, 1993 between the
Company and the University of California. (Incorporated by reference to Exhibit 10.5
to the SB-2)
10.6 License Agreement, dated March 4, 1994, regarding Drug Delivery by Skin Barrier
Disruption, between the Company and University of California. (Incorporated by
reference to Exhibit 10.6 to the SB-2)
10.7 Employment Agreement, dated as of January 21, 1996, between the Company and Dr. Carl
Thornfeldt. (Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995 (the "1995 Form 10-KSB"))
10.8 Founder's Agreement, dated April 2, 1992, between the Company and Dr. Peter M.
Elias. (Incorporated by reference to Exhibit 10.9 to the SB-2)
10.9 Consulting Agreement, dated April 2, 1992, between the Company and Dr. Peter M.
Elias. (Incorporated by reference to Exhibit 10.10 to the SB-2)
10.10 Amended and Restated Registration Rights Agreement dated April 10, 1992.
(Incorporated by reference to Exhibit 10.11 to the SB-2)
10.11 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10.12 to the SB-2)
<PAGE>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------- ----------- ----
10.12 Secured Debenture and Warrant Purchase Agreement dated as of February 10, 1995.
(Incorporated by reference to Exhibit 10.13 to the SB-2)
10.13 Amended and Restated Registration Rights Agreement dated as of February 10, 1995.
(Incorporated by reference to Exhibit 10.14 to the SB-2)
10.14 Warrant Agreement dated as of February 10, 1995. (Incorporated by reference to
Exhibit 10.15 to the SB-2)
10.15 Agency Agreement dated as of February 10, 1995. (Incorporated by reference to
Exhibit 10.16 to the SB-2)
10.16 Security Agreement dated as of February 10, 1995. (Incorporated by reference to
Exhibit 10.17 to the SB-2)
10.17 1995 Equity Incentive Plan. (Incorporated by reference to exhibits filed with the
SB-2)
10.18 1995 Directors Stock Option Plan. (Incorporated by reference to exhibits filed with
the SB-2)
10.19 Research and Development Agreement dated February 16, 1996, between the Company and
Yamanouchi Europe B.V. (Incorporated by reference to exhibits filed with the 1995
Form 10-KSB)
10.20 Standard Industrial Lease dated April 6, 1992, between the Company and H&R
Management. (Incorporated by reference to exhibits filed with the 1995 Form 10-KSB)
10.21 Employment Agreement dated December 6, 1995, between the Company and
William E. Bliss. (Incorporated by reference to exhibits filed with the 1995 Form
10-KSB)
11.1 Statement re: Computation of Pro Forma Net Loss Per Share.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney.*
<FN>
- ------------
* Previously filed.
</FN>
</TABLE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 11, 1996 in the Registration Statement (Form
SB-2) and related Prospectus of Cellegy Pharmaceuticals, Inc. for the
registration of 5,000,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
------------------------
ERNST & YOUNG LLP
Walnut Creek, California
June 27, 1996
