As filed with the Securities and Exchange Commission on June 27, 1996
                                                  Registration No. 33-03401
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   ----------
                                 AMENDMENT NO. 1
                                       TO
                                    FORM SB-2
                             REGISTRATION STATEMENT
                                      Under
                           THE SECURITIES ACT OF 1933
                                   ----------
                          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)
                                  ----------
                               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)
                                  ----------
                                  Copies to:
                             C. KEVIN KELSO, ESQ.
                              Fenwick & West LLP
                       Two Palo Alto Square, Suite 800
                         Palo Alto, California 94306
                                  ----------
 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
================================================================================
                                               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.
                                    ----------
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.
================================================================================

                        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



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.



                            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.

                                        3



                                 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




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

                                        5




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

                                        6




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

                                        7



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


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



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



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. 

SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY PRIOR TO OFFERING SHARES BEING OWNED AFTER OFFERING NAME NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1) - ------------------------------------- ------------- ---------- -------------- ------------- ---------- 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 *
11
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY PRIOR TO OFFERING SHARES BEING OWNED AFTER OFFERING NAME NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1) - ------------------------------------- ------------- ---------- -------------- ------------- ---------- 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 *
- ---------- * 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 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 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 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 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 16 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. 17 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 18 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. 19 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 20 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 21 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. 22 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 23 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 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 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 MANAGEMENT The executive officers, directors and other significant employees of the Company are as follows:
NAME AGE POSITIONS - ---------------------------- ----- --------------------------------------------------- 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 - ---------- (1) Not an Executive Officer. (2) Member of the Compensation Committee. (3) Member of the Audit Committee.
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 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 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 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 $100,000, of which there were none (together, the "Named Persons"). SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION --------------------------------------- -------------- AWARDS SECURITIES NAME AND OTHER ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION - -------------------- ------ --------- ------- -------------- -------------- -------------- ($) ($) ($) (#) ($) William E. Bliss .. 1995 21,242 100,000(1) 226,333 -- President and Chief 1994 -- -- -- -- -- Executive Officer Gerald T. Simmons .. 1995 151,848 -- -- 74,600 75,000(2) President and Chief 1994 141,000 -- -- 1,108 -- Executive Officer - ---------- (1) Consists of Mr. Bliss' relocation compensation paid or accrued when he joined the Company in December 1995. (2) Consists of Mr. Simmons' accrued compensation at December 31, 1995. Mr. Simmons was President and Chief Executive Officer of the Company through November 1995, and is no longer an employee of the Company.
29 The following table sets forth further information regarding option grants pursuant to the Company's 1995 Equity Incentive Plan (the "1995 Plan") during 1995 to each of the Named Persons. OPTION GRANTS IN 1995 INDIVIDUAL GRANTS ----------------------------------------------------------- NUMBER OF PERCENTAGE OF SECURITIES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES IN PRICE EXPIRATION NAME GRANTED(1) FISCAL 1995 PER SHARE ($) DATE - ------------------- ------------ --------------- ------------- ---------------- William E. Bliss(2) 226,333 49.6% $4.38 December 8, 2005 Gerald T. Simmons . 74,600 16.4% $2.09 February 6, 2005 - ---------- (1) Options granted under the 1995 Plan in 1995 have generally been incentive stock options that were granted at fair market value and that generally vest over a four-year period so long as the individual is employed by the Company. Options expire ten years from the date of grant. (2) Of the shares subject to this option, 37,722 were exercisable at grant, and 75,444 will become exercisable at the earlier of the accomplishment of certain milestones or after five years from the date of grant. The option becomes exercisable with respect to the remaining 113,167 shares over four years from the grant date if there has been no Employment Termination. The option becomes exercisable in full upon an acquisition of the Company. The following table sets forth information with respect to the options exercised during fiscal 1995 by the Named Persons. AGGREGATE OPTION EXERCISES IN 1995 AND FISCAL YEAR-END VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS/SARS AT IN-THE-MONEY OPTIONS SHARES DECEMBER 31, 1995 AT DECEMBER 31, 1995 ($)(1) ACQUIRED VALUE ----------------------------- ----------------------------- NAME ON EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------ -------------- ------------ ------------- --------------- ------------- --------------- 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 - ---------- (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.
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 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 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 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 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 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 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 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 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 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 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 CELLEGY PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
DECEMBER 31 --------------------------- 1995 1994 ------------ ------------ 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 ============ =========== See accompanying notes.
F-2 CELLEGY PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
PERIOD FROM JUNE 26, 1989 (INCEPTION) YEAR ENDED DECEMBER 31 THROUGH --------------------------- DECEMBER 31, 1995 1994 1995 ------------ ------------ -------------- 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 ============ ============ See accompanying notes.
F-3 CELLEGY PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
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) ------ ------ ------ ------ ------ ------ ------ ------ ----- --------- 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 (Continued on following page)
F-4 (Continued from previous page) CELLEGY PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
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 ------ ------ ------ ------ ------ - ----- ------ ------ 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 ======== ========== ======= ======== ======== ========== ========= ==========
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 CELLEGY PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
PERIOD FROM JUNE 26, 1989 (INCEPTION) DECEMBER 31 THROUGH ------------------------------- DECEMBER 31, 1995 1994 1995 ---- ---- ---- 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 (Continued on following page)
F-6 (Continued from previous page) CELLEGY PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS -- (CONTINUED)
PERIOD FROM JUNE 26, 1989 (INCEPTION) DECEMBER 31 THROUGH -------------------------------- DECEMBER 31, 1995 1994 1995 ---- ---- ---- 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 ============ ============ ============ See accompanying notes.
F-7 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 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 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 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 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 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 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 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 CELLEGY PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM THREE MONTHS ENDED JUNE 26, 1989 MARCH 31, (INCEPTION) THROUGH ----------------------------- MARCH 31, 1996 1995 1996 -------- -------- -------- 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 ======== ======== See accompanying notes to condensed financial statements.
F-16 CELLEGY PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS)
PERIOD FROM THREE MONTHS ENDED JUNE 26, 1989 MARCH 31, (INCEPTION) THROUGH ------------------------- MARCH 31, 1996 1995 1996 ---- ---- ---- 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 ======== ======== ======== See accompanying notes to condensed financial statements.
F-17 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 ===================================== ======================================== 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 ===================================== ======================================== 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 (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 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 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. ITEM 27. EXHIBITS. The following exhibits are filed herewith or incorporated by reference herein:
EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 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 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.* - ------------ * Previously filed.
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 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 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.
SIGNATURE TITLE DATE --------- ----- ---- /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
II-6 EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION NO. - ------- ----------- ---- 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) 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.* - ------------ * Previously filed.


                                                                    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