-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VggQIIkMT+qZnmD8FObLsKLvhqYtjIye3L/L0OwL1u6DcIsPoEmNGi0zP5Fn+fFf PVwLTYRWmIMoeqRFFLjRAQ== 0000950005-02-000830.txt : 20020813 0000950005-02-000830.hdr.sgml : 20020813 20020813143636 ACCESSION NUMBER: 0000950005-02-000830 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELLEGY PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000887247 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 820429727 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26372 FILM NUMBER: 02729203 BUSINESS ADDRESS: STREET 1: 349 OYSTER POINT BLVD. STREET 2: SUITE 200 CITY: SO. SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 6506262200 MAIL ADDRESS: STREET 1: 349 OYSTER POINT BLVD. STREET 2: SUITE 200 CITY: SO. SAN FRANCISCO STATE: CA ZIP: 94080 10-Q 1 p15914_10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-26372 CELLEGY PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) California 82-0429727 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 349 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080 (Address of principal executive offices, including zip code) (650) 616-2200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's common stock at August 8, 2002 was 17,304,976. CELLEGY PHARMACEUTICALS, INC. INDEX TO FORM 10-Q
Page PART I FINANCIAL INFORMATION Item 1. Financial Statements ( Unaudited ) Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001................................................................... 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001, and the period from June 26, 1989 (inception) to June 30, 2002...................................... 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001, and the period from June 26, 1989 (inception) to June 30, 2002 .............................................. 5 Notes to Condensed Consolidated Financial Statements ...................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 8 Item 3. Quantitative and Qualitative Disclosure of Market Risk..................... 11 PART II OTHER INFORMATION Item 1. Legal Proceedings.......................................................... 11 Item 2. Changes in Securities and Use of Proceeds.................................. 11 Item 3. Defaults Upon Senior Securities............................................ 11 Item 4. Submission of Matters to a Vote of Security Holders........................ 11 Item 5. Other Information.......................................................... 12 Item 6. Exhibits and Reports on Form 8-K........................................... 12 Signatures........................................................................... 13
PART I - FINANCIAL INFORMATION Item 1. Financial Statements Cellegy Pharmaceuticals, Inc. (a development stage company) Condensed Consolidated Balance Sheets (Amounts in thousands, except share data)
June 30, 2002 December 31, 2001 ------------- ----------------- (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents ............................................................. $ 3,714 $ 5,795 Short-term investments ................................................................ 2,042 4,054 Prepaid expenses and other current assets ............................................. 398 837 --------- --------- Total current assets ........................................................................ 6,154 10,686 Restricted cash ............................................................................. 614 614 Property and equipment, net ................................................................. 2,682 2,468 Long-term investments ....................................................................... 2,000 6,727 Goodwill .................................................................................... 814 814 Intangible assets related to acquisition, net of accumulated amortization of $820 and $658 as of June 30, 2002 and December 31, 2001, respectively ....................... 546 708 Other assets ................................................................................ 350 350 --------- --------- Total assets ................................................................................ $ 13,160 $ 22,367 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities .............................................. $ 1,129 $ 1,893 Accrued compensation and related expenses ............................................. 202 145 --------- --------- Total current liabilities ................................................................... 1,331 2,038 Payable to Ventiv Integrated Solutions ...................................................... 1,478 -- Other long-term liabilities ................................................................. 508 485 Shareholders' equity: Common stock, no par value; 35,000,000 shares authorized: 17,304,976 and 17,295,274 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively ..................................................... 90,211 90,138 Accumulated other comprehensive income ................................................ 19 83 Deficit accumulated during the development stage ...................................... (80,387) (70,377) --------- --------- Total shareholders' equity .................................................................. 9,843 19,844 --------- --------- Total liabilities and shareholders' equity .................................................. $ 13,160 $ 22,367 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Cellegy Pharmaceuticals, Inc. (a development stage company) Condensed Consolidated Statements of Operations (Unaudited) (Amounts in thousands, except per share data) Period from June 26, 1989 Three Months Ended Six Months Ended (inception) to June 30, June 30, June 30, 2002 2001 2002 2001 2002 -------- -------- -------- -------- -------- Revenues: Licensing, milestone, and development funding ............ $ -- $ -- $ -- $ -- $ 2,697 Government grants ........................................ -- -- -- -- 502 Product sales ............................................ 150 53 417 94 4,164 -------- -------- -------- -------- -------- Total revenues ................................................. 150 53 417 94 7,363 Costs and expenses: Cost of product sales .................................... 15 6 86 10 1,037 Research and development ................................. 3,551 3,523 6,513 6,534 57,727 Selling, general and administrative .......................................... 2,337 1,028 4,213 2,348 24,774 Acquired in-process technology ........................... -- -- -- -- 7,350 -------- -------- -------- -------- -------- Total costs and expenses ....................................... 5,903 4,557 10,812 8,892 90,888 -------- -------- -------- -------- -------- Operating loss ................................................. (5,753) (4,504) (10,395) (8,798) (83,525) Interest income and other, net ........................... 129 348 385 865 4,587 -------- -------- -------- -------- -------- Net loss ....................................................... (5,624) (4,156) (10,010) (7,933) (78,938) Non-cash preferred dividends ................................... -- -- -- -- 1,449 -------- -------- -------- -------- -------- Net loss applicable to common shareholders ..................... $ (5,624) $ (4,156) $(10,010) $ (7,933) $(80,387) ======== ======== ======== ======== ======== Basic and diluted net loss per common share .................... $ (0.32) $ (0.29) $ (0.58) $ (0.56) ======== ======== ======== ======== Weighted average common shares used in computing basic and diluted net loss per share ........................... 17,313 14,578 17,304 14,205 ======== ======== ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements.
4 Cellegy Pharmaceuticals, Inc. (a development stage company) Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands)
Period from June 26, 1989 Six Months Ended June 30, (inception) to ------------------------ June 30, 2002 2001 2002 -------- -------- -------- Operating activities Net loss ..................................................... $(10,010) $ (7,933) $(78,938) Other operating activities ................................... 179 708 14,388 -------- -------- -------- Net cash used in operating activities ........................ (9,831) (7,225) (64,550) Investing activities Purchase of property and equipment ........................... (467) (20) (4,571) Purchases of investments ..................................... -- (10,686) (87,890) Sales and maturities of investments .......................... 6,739 9,500 83,826 Acquisition of Vaxis and Quay ................................ -- -- (511) -------- -------- -------- Net cash provided by (used in) investing activities .......... 6,272 (1,206) (9,146) Financing activities Proceeds from notes payable .................................. -- -- 8,047 Repayment of notes payable ................................... -- (882) (6,611) Other long-term liabilities .................................. 1,478 -- 864 Net proceeds from issuance of common stock ................... -- 15,365 63,432 Issuance of convertible preferred stock, net of issuance costs -- -- 11,758 Deferred financing costs ..................................... -- -- (80) -------- -------- -------- Net cash provided by financing activities .................... 1,478 14,483 77,410 -------- -------- -------- Net (decrease) increase in cash and cash equivalents ......... (2,081) 6,052 3,714 Cash and cash equivalents, beginning of period ............... $ 5,795 $ 8,838 $ -- -------- -------- -------- Cash and cash equivalents, end of period ..................... $ 3,714 $ 14,890 $ 3,714 ======== ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements.
5 Cellegy Pharmaceuticals, Inc. (a development stage company) Notes to Condensed Consolidated Financial Statements Note 1. - Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared by Cellegy in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of all periods presented. The results of Cellegy's operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year. The balance sheet at December 31, 2001 has been derived from the audited financial consolidated statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In fiscal year 2001, amortization expenses relating to the Quay acquisition have been reclassified from interest income, and other, net, to operating expenses. As a result, approximately $81,000 per quarter is now classified in selling, general and administrative operating expenses. For further information, refer to the financial statements and footnotes thereto included in Cellegy's Annual Report on Form 10-K for the year ended December 31, 2001. Note 2. - Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"). SFAS 141 establishes new standards for accounting and reporting for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also specifies the criteria for the recognition of intangible assets separately from goodwill. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which establishes new standards for goodwill and other intangible assets, including the elimination of goodwill amortization, to be replaced with the periodic evaluation of goodwill for impairment. SFAS 142 is effective for fiscal years beginning after December 15, 2001, but any goodwill and intangible assets resulting from a business combination after July 1, 2001 will be accounted for under SFAS 142. Goodwill from business combinations prior to July 1, 2001 will continue to be amortized prior to the adoption of SFAS 142. On January 1, 2002, following adoption of the new rules, goodwill of $814,000 will no longer be amortized but is subject to an impairment test at least annually. Separately identified and recognized intangible assets resulting from business combinations that met the new criteria for separate recognition of intangible assets will continue to be amortized over their useful lives. Total amortization expense for intangible assets will be $326,000 for 2002, $176,000 for 2003 and $69,000 each year, from 2004 through 2006. As noted above, in accordance with SFAS 141 and 142, we discontinued the amortization of goodwill on January 1, 2002 which resulted in a decrease in reported net loss of approximately $24,000 in the second quarter ended June 30, 2001, as compared with the accounting prior to the adoption of SFAS 141 and SFAS 142. We performed an impairment test of goodwill as of January 1, 2002, which did not result in an impairment charge at transition. We will continue to monitor the carrying value of our goodwill through the annual impairment tests. A reconciliation of previously reported net loss and net loss per share to amounts adjusted for the exclusion of goodwill amortization follows (in thousands, except per share amounts). 7
Three months ended June 30, Six months ended June 30, 2002 2001 2002 2001 Net loss applicable to common shareholders Reported net loss $ (5,624) $ (4,156) $ (10,010) $ (7,933) Add back: Goodwill amortization --- 24 --- 48 --------- --------- ----------- --------- Adjusted net loss $ (5,624) $ (4,132) $ (10,010) $ (7,885) ========= ========= =========== ========= Basic and diluted earnings per share Reported net loss $ (0.32) $ (0.29) $ (0.58) $ (0.56) Add back: --- --- --- --- --------- --------- ----------- --------- Adjusted net loss $ (0.32) $ (0.29) $ (0.58) $ (0.56) ========= ========= =========== =========
Note 3. - Principles of Consolidation Our condensed consolidated financial statements include the accounts of Cellegy Australia Pty Ltd ("Cellegy Australia") from June 14, 2000, the date of acquisition, and Cellegy Canada, Inc. ("Cellegy Canada") from November 14, 2001, the date of acquisition. Note 4. - Comprehensive Loss Accumulated other comprehensive income presented on the accompanying balance sheets consists of the accumulated net unrealized gain or loss on available-for-sale investments and foreign currency translation adjustments. Total comprehensive loss for the six months ended June 30, 2002 was $9,946,000 compared with $7,972,000 for the six months ended June 30, 2001. Total comprehensive loss for the three months ended June 30, 2002 and June 30, 2001 was $5,585,000 and $4,177,000, respectively. Note 5. - Net Loss Per Share Basic and diluted net loss per common share are presented in conformity with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), for all periods presented. In accordance with SFAS 128, basic and diluted net loss per common share has been computed using the weighted average number of shares of common stock outstanding during the period. Shares issuable under outstanding stock options and warrants have been excluded from the computations as their effect is antidilutive. Note 6. - Segment Reporting The following table contains information regarding revenues and loss from operating each business segment for the three and six months ended June 30, 2002 and 2001 (in thousands):
Three months ended June 30, Six months ended June 30, 2002 2001 2002 2001 Revenues: Pharmaceuticals $ 95 $ 53 $ 131 $ 94 Cosmeceuticals 55 --- 286 --- --------- --------- ----------- --------- $ 150 $ 53 $ 417 $ 94 ========= ========= =========== ========= Operating loss: Pharmaceuticals $ (5,787) $ (4,184) $ (10,576) $ (8,426) Cosmeceuticals 34 (320) 181 (372) --------- --------- ----------- --------- $ (5,753) $ (4,504) $ (10,395) $ (8,798) ========= ========= =========== =========
8 Substantially all of the company assets are related to the pharmaceutical segment. Note 7. - Long Term Liabilities In August 2001, Cellegy announced an agreement with Ventiv Integrated Solutions ("VIS"), a division of Ventiv Health Inc., to commercialize Cellegy's lead product, Cellegesic, in the United States. Under the agreement, VIS may provide integrated marketing and sales services, including training and recruiting a dedicated sales force which Cellegy and VIS will jointly manage. If Cellegesic is ultimately approved by the FDA, VIS may loan Cellegy up to $10 million for the initial commercialization of Cellegesic under a funding arrangement covering the first 18-24 months of the agreement. Under the agreement, Cellegy's repayment obligation to VIS at June 30, 2002, recorded as a long-term liability, is approximately $1,480,000. If the agreement is terminated, we will be required to repay VIS one-half of the $1,480,000 or $740,000 within forty-five days of the termination date. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q includes forward-looking statements that are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Investors should be aware that these forward-looking statements are subject to risks and uncertainties, known and unknown, which could cause actual results and developments to differ materially from those expressed or implied in such statements. Such risks and uncertainties relate to, among other factors: the completion and outcome of clinical trials; the outcome and timing of reviews by the FDA and other regulatory authorities; our need for further financing and ability to complete potential financings; and various uncertainties arising from the withdrawal of our New Drug Application relating to Cellegesic. There can be no assurance that Cellegy's products will be approved for marketing by regulatory authorities or will be successfully marketed following approval. You are cautioned not to place undue reliance on forward-looking statements and we undertake no obligation to update or revise statements made herein. Cellegy Pharmaceuticals, Inc., a specialty biopharmaceutical company incorporated in California in 1989, is engaged in the development of prescription drugs in the areas of gastroenterology, sexual dysfunction in men and women and women's health care. We are developing several prescription drug candidates, including Cellegesic(TM) (nitroglycerin ointment), for the treatment of anal fissures and hemorrhoids and two transdermal testosterone gel product candidates, Tostrex(TM), for the treatment of male hypogonadism, a condition that afflicts men, generally above the age of forty, and Tostrelle(TM), for the treatment of sexual dysfunction in menopausal women. Other pipeline products include nitric oxide donors for the treatment of sexual dysfunction in females, Raynaud's Disease, Restless Leg Syndrome, and prostate cancer. General In September 1998, we began initial shipments and product sales of C79 Intensive Moisturizing formulation to Gryphon Development Inc., the product development arm of a major specialty retailer. C79 is an ingredient in a line of healing hand creams sold at most of the specialty retailer's stores in the United States. In June 2000, we acquired all assets of Quay Pharmaceuticals Pty Ltd, an Australian pharmaceutical company producing Rectogesic(TM) (nitroglycerin ointment), a drug similar to Cellegesic. The acquired assets consisted of Quay's inventory, other tangible assets, and purchased technology. The aggregate value of the purchase price of $1,835,000 included 169,224 shares of our common stock paid to Quay with an estimated value of $977,000, warrants to purchase 171,146 shares of common stock with an estimated value of $489,000, and cash payments of $369,000. The purchase price was allocated to net tangible assets of $97,000, purchased technology of $770,000, and goodwill of $968,000 based on their estimated fair values on the acquisition date. Purchased technology is being amortized over three years. The operations in Australia are conducted by a wholly owned subsidiary, Cellegy Australia Pty Ltd. 9 In June 2001, Cellegy completed a private placement of 2.7 million shares of our common stock, resulting in $15.4 million of gross proceeds to Cellegy. Participants in the financing included current investors affiliated with the Baker/Tisch Investments and GMT Capital Corporation, as well as several new institutional investors. In November 2001, we acquired a private Canadian based company, Vaxis Therapeutics, valued at $4.1 million. The purchase was payable primarily in shares of Cellegy common stock. The purchase price was allocated to net tangible assets of $250,000, intangible assets of $350,000 and $3,507,000 of acquired in-process research and development. The intangibles of $350,000 are being amortized over five years and the acquired in-process research and development was expensed in the fourth quarter of 2001. The acquired in-process research and development was in an early stage of development such that, as of the acquisition date, technological feasibility had not been reached and no alternative use existed. The assumptions used in determining the purchase price allocation were based on an appropriate discount rate applied to expected cash flows. In April 2002, Cellegy announced the withdrawal of its Cellegesic New Drug Application ("NDA"). Cellegy and Ventiv Integrated Solutions ("VIS") have discontinued marketing spending and deferred marketing programs under their agreement, see note 7 to the financial statements above, at least until Cellegy receives feedback and recommendations from the FDA on its latest data submission, clarifies the regulatory status of Cellegesic and determines its future strategies for the product. If Cellegesic's approvability is delayed beyond a certain date and if the agreement is then terminated, Cellegy is obligated to repay VIS one-half of the amount previously borrowed under the agreement and one-half of the accumulated interest on the loan calculated using a ten percent interest rate. As of June 30, 2002, Cellegy had borrowed approximately $1,480,000 million under the agreement of which one-half or approximately $740,000 would be repaid within forty-five days of the termination date to VIS if the agreement is terminated. In June 2002, Cellegy filed an NDA for Tostrex for the treatment of male hypogonadism. The filing was subsequently accepted for review by the FDA in August, 2002. Critical Accounting Policies We believe there have been no significant changes in our critical accounting policies during the quarter ended June 30, 2002 when compared with what was previously disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2001. Results of Operations Revenues. Cellegy had revenues of $417,000 and $94,000 for the six months ended June 30, 2002 and 2001, respectively. During the six months ended June 30, 2002, revenues consisted of $286,000 in cosmeceutical product sales, primarily sales to Gryphon, the product development division of a major specialty retailer, and $131,000 in Rectogesic sales. For the first six months of last year, revenues consisted entirely of $94,000 in Rectogesic sales. Cellegy had revenues of $150,000 and $53,000 for the three months ended June 30, 2002 and 2001, respectively. During the three months ended June 30, 2002, revenues consisted of $95,000 in Rectogesic sales and $55,000 in cosmeceutical product sales. For the same period last year, all revenue consisted of Rectogesic sales in Australia. Ordering patterns from Gryphon are expected to continue to fluctuate in future quarters. As of the filing date of this quarterly report, we have not received an order from Gryphon for the third quarter of 2002. Research and Development Expenses. Research and development expenses were $6,513,000 for the six months ended June 30, 2002, compared with $6,534,000 for the same period last year. For the six months of 2002, compared with 2001, Cellegy incurred higher regulatory costs, including an FDA user fee associated with the Tostrex NDA filing, and additional operating expenses incurred in Cellegy Canada offset by a decrease in clinical activities due to the completion of the Tostrex and Cellegesic Phase III clinical trials which were on-going during the first six months in 2001. During the three months ended June 30, 2002 and 2001, research and development expenses were $3,551,000 and $3,523,000, respectively. Higher expenses for the three months ended June 30, 2002, compared with 2001 consisted of increases in internal and external regulatory expenses and operating activities in Cellegy Canada offset by a decrease in clinical expenses resulting from the completion of the Tostrex and Cellegesic Phase III clinical trials. If the FDA requires a further clinical trial as a condition for marketing approval of Cellegesic, expenses will likely increase during the fourth quarter of 2002 and the first half of 2003. 10 Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4,213,000 for the six months ended June 30, 2002, compared with $2,348,000 for the same period last year. For the three months ended June 30, 2002 and 2001, these expenses were $2,337,000 and $1,028,000, respectively. The significant increases for both periods were primarily due to pre-launch marketing expenses for Cellegesic. Marketing expenses decreased significantly at the end of April 2002 when the Cellegesic NDA was withdrawn. Cellegy will continue to minimize marketing expenses while it determines its future commercialization strategies for Cellegesic. Interest Income, and Other, Net. Cellegy earned $384,000 in interest income, and other, net for the six months ended June 30, 2002, compared with $865,000 for the same period last year. For the three months ended June 30, 2002 and 2001, interest income, and other, net, was $129,000 and $348,000, respectively. The decrease during both periods of 2002 was due primarily to lower rental income associated with the expiration of the sublease of a portion of Cellegy's corporate offices, as well as, lower average investment balances and lower interest rates on invested cash. We expect interest income to decrease in the second half of 2002 due to lower investment balances and lower interest rates. Net Loss. Net loss applicable to common shareholders was $10,010,000 or $0.58 per share based on 17,304,000 weighted average shares outstanding for the six months ended June 30, 2002, compared with a net loss applicable to common shareholders of $7,933,000 or $0.56 per share based on 14,205,000 weighted average shares outstanding for the same period in 2001. For the three months ended June 30, 2002, the net loss applicable to common shareholders was $5,624,000 or $0.32 per share based on 17,313,000 weighted average shares outstanding, compared with $4,156,000 or $0.29 per share based on 14,578,000 weighted average shares outstanding for the three months ended June 30, 2001. Liquidity and Capital Resources Cellegy has experienced net losses and negative cash flow from operations each year since its inception. Through June 30, 2002, we have incurred an accumulated deficit of $80.4 million and have consumed cash from operations of $64.6 million. Our equity financings included $6.4 million in net proceeds from our initial public offering in August 1995, $6.8 million in net proceeds from a preferred stock financing in April 1996, $3.8 million in net proceeds from a private placement of common stock in July 1997, $13.8 million in net proceeds from a secondary public offering of common stock in November 1997, $10.0 million in net proceeds from a private placement of common stock in July 1999, $11.6 million in net proceeds from a private placement in October 2000 and $15.4 million in gross proceeds from a private placement of common stock in June 2001. Our cash, cash equivalents and investments were $8.4 million at June 30, 2002, compared with $17.2 million at December 31, 2001, both periods included restricted cash of $614,000. The decrease in cash, cash equivalents and investments was principally due to cash used to support operations. Since inception, Cellegy has incurred significant losses and expects to incur substantial additional development costs. Our operations have and will continue to use significant amounts of cash. We have no current source of ongoing revenues or capital beyond existing cash and investments, current Rectogesic product sales in Australia and C79 sales to Gryphon. Our future expenditures and capital requirements depend on numerous factors including, without limitation, the outcome of future meetings with or correspondences from the FDA regarding Cellegesic, the future commercialization activities relating to Cellegesic and Tostrex, our decisions regarding future strategies for both products, the progress and focus of our research and development programs, the results of pre-clinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the costs of prosecuting, defending and enforcing any patent claims and other intellectual property rights, potential termination or restructuring of our marketing agreement with Ventiv, our ability to establish corporate partnership and availability of other financing. As a result of the above, we will require additional funds to finance operations and will seek private or public equity investments, corporate partnerships and other collaborative arrangements with third parties to meet such needs. There is no assurance that such funding will be available for us to finance our operations on acceptable terms, if at all, and future equity funding is likely to involve material dilution to our shareholders. On August 6, 2002. Cellegy announced that it had initiated several cost reduction programs, including the elimination or deferral of non-core research programs, a salary reduction for executives and certain other employees, and a reduction in force of nine employees, representing approximately 25% of our employees. These programs are expected to reduce monthly cash outflow (burn rate) by about 40% from the burn rate during second quarter of 2002, to an August 2002 burn rate of about $900,000 per month. Cellegy will take a one-time charge of about $175,000 in the third quarter of 2002 for severance and other payments related to the reduction in force. Insufficient 11 funding may require us to further delay, reduce or eliminate additional research and development activities, planned clinical trials, administrative programs and personnel, with a resulting material adverse effect on our business. We believe that available cash resources and the interest thereon will be adequate to satisfy our capital needs through at least December 31, 2002. If Cellegy's cash position is not increased during the remainder of 2002, we may be subject to a going concern opinion from our auditors. Factors That May Affect Future Operating Results This Quarterly Report on Form 10-Q includes forward-looking statements that are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Investors should be aware that these forward-looking statements are subject to risks and uncertainties, known and unknown, which could cause actual results and developments to differ materially from those expressed or implied in such statements. Such risks and uncertainties relate to, among other factors: the completion and outcome of clinical trials; the outcome and timing of planned regulatory filings and review by the FDA and other regulatory authorities; anticipated expenditures; our need for further financing, and our ability to complete such financings; the scope of our patent coverage; and various uncertainties arising from the withdrawal of our NDA relating to Cellegesic. There can be no assurance that we will re-submit an NDA for Cellegesic or that Cellegesic and Cellegy's other product candidates will be approved for marketing by regulatory authorities or will be successfully marketed following approval. You are cautioned not to place undue reliance on forward-looking statements and we undertake no obligation to update or revise statements made herein. The factors discussed in Cellegy's reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2001, in particular under the caption "Factors That May Affect Future Operating Results," should be carefully considered when evaluating our business and prospects. Item 3. Quantitative and Qualitative Disclosure Of Market Risk We invest our excess cash in short-term, investment grade, fixed income securities under an investment policy. All of our investments are classified as available-for-sale and 70% of our securities will mature by the end of 2002. We believe that potential near-term losses in future earnings, fair values or cash flows related to our investment portfolio will not be significant. There have been no significant changes to our quantitative and qualitative disclosures from our Form 10-K. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Shareholders, held on June 5, 2002, five matters were submitted to vote of the shareholders: (i) the election of directors; (ii) certain amendments to the Company's Amended and Restated Articles of Incorporation increasing the authorized number of shares of common stock by 10,000,000 shares from 25,000,000 to 35,000,000; (iii) certain amendments to the Company's 1995 Directors' Stock Option Plan (the "Directors' Plan") to increase by 100,000 shares to 350,000, the number of shares of common stock available for issuance pursuant to the Directors' Plan; (iv) certain amendments to the Company's 1995 Equity Incentive Plan (the "Plan") to increase by 1,400,000 shares to 4,850,000, the 12 number of shares of common stock available for issuance pursuant to the Plan; (v) the ratification of Ernst & Young as the Company's independent auditors for the 2002 fiscal year. (i) With respect to the election of directors, the following nominees (constituting all of the Company's nominees for election) were elected by the votes indicated: Nominee For Withheld ------- --- -------- Felix J. Baker, Ph.D. 13,854,214 352,327 Julian C. Baker 13,269,803 936,738 Jack L. Bowman 13,856,884 349,657 K. Michael Forrest 13,499,408 707,133 Tobi B. Klar, M.D. 13,863,484 343,057 Ronald J. Saldarini, Ph.D. 13,851,984 354,557 Alan A. Steigrod 13,860,484 346,057 Carl R. Thornfeldt, M.D. 13,863,084 343,457 Larry J. Wells 13,851,984 354,557 (ii) With respect to the amendment of the Company's Amended and Restated Articles of Incorporation, 13,879,605 shares voted in favor, 259,907 shares voted against, and 67,029 shares were withheld or not voted. (iii) With respect to the Company's 1995 Directors' Stock Option Plan, 8,225,980 shares voted in favor, 881,767 shares voted against, 26,515 shares were withheld and 5,072,279 shares were not voted. (iv) With respect to the Company's 1995 Equity Incentive Plan, 7,860,660 shares voted in favor, 1,248,287 shares voted against, 25,315 shares were withheld and 5,072,279 shares were not voted. (v) With respect to the ratification of Ernst & Young as the Company's independent auditors for the 2002 fiscal year, 14,146,316 shares voted in favor, 44,210 shares voted against and 16,015 shares were withheld. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description 3.1 Certificate of Amendment to Amended and Restated Articles of Incorporation of the Company 10.7 1995 Equity Incentive Plan 10.8 1995 Directors' Stock Option Plan (b) Reports on Form 8-K None. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CELLEGY PHARMACEUTICALS, INC. Date: August 13, 2002 /s/ K. Michael Forrest ------------------------------------- K. Michael Forrest Chairman, President and Chief Executive Officer Date: August 13, 2002 /s/ A. Richard Juelis ------------------------------------- A. Richard Juelis Vice President, Finance and Chief Financial Officer 14 EX-3.1(I) 3 p15914_ex3-1.txt AMENDED AND RESTATED ARTICLES OF INCORPORATION Exhibit 3.1 CELLEGY PHARMACEUTICALS, INC. CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION K. Michael Forrest and A. Richard Juelis certify that: 1. They are the Chief Executive Officer and the Secretary, respectively, of Cellegy Pharmaceuticals, Inc., a California corporation. 2. Article III of the Amended and Restated Articles of Incorporation of the corporation is amended to read in its entirety as follows: ARTICLE III The Corporation is authorized to issue two classes of stock which shall be designated common stock and preferred stock. The total number of shares of common stock that the Corporation is authorized to issue is 35,000,000, and the total number of shares of preferred stock that the Corporation is authorized to issue is 5,000,000. The Corporation may issue preferred stock from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in these Articles, to fix the number of shares of any series of preferred stock and to determine the designation of any such series and to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of preferred stock and, within the limits and restrictions stated in any resolution of the Corporation's Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series of preferred stock subsequent to the issuance of shares of that series. 3. The foregoing amendment to the Amended and Restated Articles of Incorporation has been duly approved by a majority of the Board of Directors of the corporation. 4. The amendment to the Amended and Restated Articles of Incorporation has been duly approved by the required vote of the shareholders of the corporation in accordance with Section 902 of the California Corporations Code. The only class or series of outstanding shares is Common Stock, and the total number of outstanding shares of Common Stock of the Corporation as of the record date for voting on the foregoing amendment was 17,304,976 shares. No shares of Series A Preferred Stock are outstanding. The number of shares voting in favor of the amendment equaled or exceeded the number required. The percentage vote required was more than 50% of the shares of Common Stock. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: July 30, 2002 /s/ K. Michael Forrest ------------------------------- K. Michael Forrest Chief Executive Officer /s/ A. Richard Juelis ------------------------------- A. Richard Juelis Secretary 2 EX-10.7 4 p15914_ex10-7.txt 1995 EQUITY INCENTIVE PLAN Exhibit 10.7 CELLEGY PHARMACEUTICALS, INC. 1995 EQUITY INCENTIVE PLAN As Adopted June 26, 1995 and Amended through June 6, 2002 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent, Subsidiaries and Affiliates, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 4,850,000 (giving effect to a reverse split of the Company's Common Stock effective at or before the closing of the Company's registered initial public offering of securities), less any shares which are issued, or are issuable upon exercise of options granted pursuant to the 1992 Stock Option Plan adopted by the Company (the "Prior Plan"). The pool of Shares issuable hereunder is comprised of any Shares not subject to an option granted pursuant to the Prior Plan plus any Shares issuable upon exercise of options granted pursuant to the Prior Plan that expire or become unexercisable for any reason without having been exercised in full. Upon the Effective Date (as defined below) of this Plan, no further stock options shall be granted pursuant to the Prior Plan. Options granted pursuant to the Prior Plan shall continue to be governed by the terms of the Prior Plan. Subject to Sections 2.2 and 18, Shares that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; or (c) are subject to an Award that otherwise terminates without Shares being issued; will again be available for grant and issuance in connection with future Awards under this Plan. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan. 2.2 Adjustment of Shares. In the event that the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants and advisors of the Company or any Parent, Subsidiary or Affiliate of the Company; provided such consultants and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No person will be eligible to receive more than 350,000 Shares in any calendar year under this Plan pursuant to the grant of Awards hereunder. A person may be granted more than one Award under this Plan. Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan 4. ADMINISTRATION. 4.1 Committee Authority. This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards (which need not be identical), including but not limited to, the time or times at which Options shall be exercisable and the extension or acceleration of any such provisions or limitations, based in each case on such factors as the Committee shall determine, in its sole discretion; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent, Subsidiary or Affiliate of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; (k) make all other determinations necessary or advisable for the administration of this Plan. 4.2 Committee Discretion. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. 4.3 Compliance with Code Section 162(m). If two or more members of the Board are Outside Directors, the Committee shall be comprised of at least two members of the Board, all of whom are Outside Directors. 4.4 Liability and Indemnification of the Committee. No member of the group constituting the Committee, or any employee of the Company to whom the Committee delegates certain administrative responsibilities, shall be liable for any act or omission on such member's or employee's own part, including but not limited to the exercise of any power or discretion given to such member, or employee as delegatee, under this Plan, except for those acts or omissions resulting from such member's or employee's own gross negligence or willful misconduct. The Company shall indemnify each present and future member of the group constituting the Committee and each present and future employee delegated administrative responsibilities by such Committee against, and each member of the group constituting the Committee or employee delegated administrative 2 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan responsibilities by such Committee shall be entitled without further act on his or her part to indemnity from the Company for, all expenses (including the amount of judgments or settlements approved by the Company and made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by such person in connection with or arising out of any action, suit or proceeding to the full extent permitted by law and by the Articles of Incorporation and Bylaws of the Company. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("Stock Option Agreement"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Unless otherwise established by the Committee with respect to any individual or group of individuals, an Option will become exercisable with respect to 25% of the Shares on the first anniversary of the Vesting Start Date (as defined below), with respect to an additional 25% of the Shares on the second anniversary of the Vesting Start Date, with respect to an additional 25% of the Shares on the third anniversary of the Vesting Start Date, with respect to an additional 25% of the Shares on the fourth anniversary of the Vesting Start Date. The Vesting Start Date is the date of grant, or such other date as the Committee determines in its discretion. The Committee may use its discretion to establish different vesting schedules with respect to any individual or group of individuals. No Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("Ten Percent Shareholder") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for the exercise of Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. Options granted to Insiders, however, may not be exercisable, in whole or in part, at any time prior to the six-month anniversary of the date of grant, unless the Committee determines that the foregoing provision is not necessary to comply with the provisions of Rule 16b-3 as promulgated under Section 16 of the Exchange Act or that such Rule is not applicable to the Plan or the Participant. 5.4 Exercise Price. The Exercise Price of an NQSO will be determined by the Committee when the Option is granted; provided, however, that if expressly required by one or more state securities authorities or laws as a condition of issuing Awards and Shares in compliance with the securities laws of such state, the exercise price of an NQSO shall not be less than 85% of the Fair Market Value of the Shares on the date of grant and the Exercise Price of any NQSO granted to a Ten Percent Shareholder shall not be less than 110% of the Fair Market Value of the Shares on the date of grant. The Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant and the Exercise Price of any ISO granted to a Ten Percent Shareholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of this Plan. 5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or 3 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than because of Participant's death or Disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter (but not less than six months) or longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or disability other than defined in Section 22(e)(3) of the Code, or (b) twelve (12) months after the Termination Date when the Termination is for Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options. 5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company or any Affiliate, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants effected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted under 4 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares will be subject, if any, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("Restricted Stock Purchase Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee. The Committee, however, may provide that, if required under Rule 16b-3 promulgated under Section 16 of the Exchange Act, Restricted Stock Awards granted to Insiders shall not become exercisable until six months and one day after the grant date and shall then be exercisable for 10 trading days at the Purchase Price specified by the Committee in accordance with Section 6.2. 6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Committee; provided, that if expressly required by any state securities authorities as a condition of the offer and sale of Shares subject to Restricted Stock Awards in compliance with the securities laws of such state, the Purchase Price will be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan. 6.3 Restrictions. Restricted Stock Awards will be subject to such restrictions (if any) as the Committee may impose. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or part, based on length of service, performance or such other factors or criteria as the Committee may determine. 7. STOCK BONUSES. 7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent, Subsidiary or Affiliate of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent, Subsidiary or Affiliate of the Company (provided that the Participant pays the Company the par value, if any, of the Shares awarded by such Stock Bonus in cash) pursuant to an Award Agreement (the "Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "Performance Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent, Subsidiary or Affiliate and/or individual performance factors or upon such other criteria as the Committee may determine. 7.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant and whether such Shares will be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will determine: (a) the nature, length and starting date of any period during which performance is to be measured 5 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan (the "Performance Period") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine. 7.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee determines otherwise. 8. PAYMENT FOR SHARE PURCHASES. 8.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; provided, further, that the portion of the Purchase Price equal to the par value of the Shares, if any, must be paid in cash; (d) by waiver of compensation due or accrued to the Participant for services rendered; provided, further, that the portion of the Purchase Price equal to the par value of the Shares, if any, must be paid in cash; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or 6 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan (2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 8.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. WITHHOLDING TAXES. 9.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 9.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by a Participant to have Shares withheld for this purpose will be made in writing in a form acceptable to the Committee and will be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, then except as provided below, the election will be irrevocable as to the particular Shares as to which the election is made; (c) all elections will be subject to the consent or disapproval of the Committee; (d) if the Participant is an Insider and if the Company is subject to Section 16(b) of the Exchange Act: (1) the election may not be made within six (6) months of the date of grant of the Award, except as otherwise permitted by SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A) the election to use stock withholding must be irrevocably made at least six (6) months prior to the Tax Date (although such election may be revoked at any time at least six (6) months prior to the Tax Date) or (B) the exercise of the Option or election to use stock withholding must be made in the ten (10) day period beginning on the third day following the release of the Company's quarterly or annual summary statement of sales or earnings; and (e) in the event that the Tax Date is deferred until six (6) months after the delivery of Shares under Section 83(b) of the Code, the Participant will receive the full number of Shares with respect to which the exercise occurs, but such Participant will be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 7 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan 10. PRIVILEGES OF STOCK OWNERSHIP. 10.1 Voting and Dividends. No Participant will have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's original Purchase Price pursuant to Section 12. 10.2 Financial Statements. If expressly required by any state securities authorities as a condition of the offer and issuance of Awards in compliance with the securities laws of such state, the Company shall provide to each Participant during the period such Participant holds an outstanding Award a copy of the financial statements of the Company as prepared either by the Company or independent certified public accountants of the Company. Such financial statements shall be delivered as soon as practicable following the end of the Company's fiscal year during the period Awards are outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 11. TRANSFERABILITY. Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Award Agreement provisions relating thereto. During the lifetime of the Participant an Award will be exercisable only by the Participant, and any elections with respect to an Award, may be made only by the Participant. 12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase a portion of or all Shares that are not "Vested" (as defined in the Stock Option Agreement) held by a Participant following such Participant's Termination at any time within ninety (90) days after the later of Participant's Termination Date and the date Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participant's original Purchase Price, provided, that the right to repurchase lapses at the rate of at least 20% per year over five (5) years from the date the Shares were purchased (or from the date of grant of options in the case of Shares obtained pursuant to a Stock Option Agreement and Stock Option Exercise Agreement), and if the right to repurchase is assignable, the assignee must pay the Company, upon assignment of the right to repurchase, cash equal to the excess of the Fair Market Value of the Shares over the original Purchase Price. 13. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares (other than Shares with respect to which consideration has been fully paid by the Participant (in forms other than by promissory notes) and received by the Company), together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full 8 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral or the Company's resort to any or all of such collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. Notwithstanding any other provision in this Plan, the Committee may not require deposit in escrow or retain in escrow evidence of unencumbered Shares for which consideration has been fully paid by the Participant (in a form other than by promissory notes) and received by the Company. 15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. Notwithstanding the foregoing, the Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree. The Committee may at any time cancel Options upon payment to each Participant in cash, with respect to each Option to the extent then exercisable, of any amount which, in the absolute discretion of the Committee, is determined to be equivalent to any excess of the market value (at the effective time of such event) of the consideration that such Participant would have received if the Option had been exercised before the effective time over the Exercise Price of the Option. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 18. CORPORATE TRANSACTIONS. 18.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the shareholders of the Company (other than any shareholder which merges (or which owns or controls another corporation which merges) with the Company in such merger) cease to own their shares or other equity interests in the Company, (d) the sale of substantially all of the assets of the Company, or (e) any other transaction which qualifies as a "corporate transaction" under Section 424(a) of the Code wherein the shareholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company from or by the shareholders of the Company), any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar 9 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan consideration to Participants as was provided to shareholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Options, as provided above, pursuant to a transaction described in this Subsection 18.1, such Options shall expire on such transaction at such time and on such conditions as the Board will determine. 18.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other "corporate transaction." 18.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective on the closing of the Company's registered initial public offering of securities (the "Effective Date"); provided, however, that if the Effective Date does not occur on or before December 31, 1995, this Plan and any Options granted hereunder will terminate as of December 31, 1995 having never become effective. This Plan shall be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Board may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial shareholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the shareholders of the Company; and (c) in the event that shareholder approval of such increase is not obtained within the time period provided herein, all Awards granted hereunder will be canceled, any Shares issued pursuant to any Award will be canceled, and any purchase of Shares hereunder will be rescinded. So long as the Company is subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of SEC Rule 16b-3 promulgated thereunder (or its successor), as amended, with respect to shareholder approval. 20. TERM OF PLAN. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of shareholder approval. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans or (if the Company is subject to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the Exchange Act or SEC Rule 16b-3 promulgated thereunder (or its successor), as amended, respectively. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the shareholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 10 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan 23. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. "Award" means any award under this Plan, including any Option, Restricted Stock or Stock Bonus. "Award Agreement" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the committee appointed by the Board to administer this Plan, or if no such committee is appointed, the Board. "Company" means Cellegy Pharmaceuticals, Inc. a corporation organized under the laws of the State of California, or any successor corporation. "Disability" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Price" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "Fair Market Value" means, as of any date, the value of a share of the Company's Common Stock determined by the Board in its sole discretion, exercised in good faith; provided, however, that if the Common Stock of the Company is quoted on the Small Cap Market of the National Association of Securities Dealers Automated Quotation System or is regularly quoted by a recognized securities dealer, and selling prices are reported, the Fair Market Value per share shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or by such dealer, for the date the value is to be determined (or if there are not sales for such date, then for the last preceding business day on which there were sales); provided, however, that if the Common Stock of the Company is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers Automated Quotation System, the Fair Market Value per share shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the largest such exchange) for the date the value is to be determined (or if there are not sales for such date, then for the last preceding business day on which there were sales), as reported in the Wall Street Journal or similar publication. "Insider" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "Option" means an award of an option to purchase Shares pursuant to Section 5. 11 Cellegy Pharmaceuticals, Inc. 1995 Equity Incentive Plan "Outside Directors" shall mean any director who is not (i) a current employee of the Company or any Parent, Subsidiary or Affiliate of the Company, (ii) a former employee of the Company or any Parent, Subsidiary or Affiliate of the Company who is receiving compensation for prior service (other than benefits under a tax-qualified pension plan), (iii) a current or former officer of the Company or any Parent, Subsidiary or Affiliate of the Company or (iv) currently receiving compensation for personal services in any capacity, other than as a director, from the Company or any Parent, Subsidiary or Affiliate of the Company; provided, however, that at such time as the term "Outside Director", as used in Section 162(m) is defined in regulations promulgated under Section 162(m) of the Code, "Outside Director" shall have the meaning set forth in such regulations, as amended from time to time and as interpreted by the Internal Revenue Service. "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under this Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Participant" means a person who receives an Award under this Plan. "Plan" means this Cellegy Pharmaceutical, Inc. 1995 Equity Incentive Plan, as amended from time to time. "Restricted Stock Award" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Shares" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security. "Stock Bonus" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Termination" or "Terminated" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, director, consultant or advisor to the Company or a Parent, Subsidiary or Affiliate of the Company, except in the case of sick leave, military leave, or any other leave of absence approved by the Committee, provided that such leave is for a period of not more than ninety (90) days, or reinstatement upon the expiration of such leave is guaranteed by contract or statute. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date"). 12 EX-10.8 5 p15914_ex10-8.txt 1995 DIRECTORS STOCK OPTION PLAN Exhibit 10.8 CELLEGY PHARMACEUTICALS, INC. 1995 DIRECTORS STOCK OPTION PLAN Amended through June 6, 2002 1. Purpose. This 1995 Directors Stock Option Plan (this "Plan") is established to provide equity incentives for nonemployee members of the Board of Directors of Cellegy Pharmaceuticals, Inc. (the "Company"), who are described in Section 6.1 below, by granting such persons options to purchase shares of stock of the Company. 2. Adoption and Shareholder Approval. After this Plan is adopted by the Board of Directors of the Company (the "Board"), this Plan will become effective on the closing of the Company's registered initial public offering of securities (the "Effective Date"); provided, however, that if the Effective Date does not occur on or before December 31, 1995, this Plan and any Options granted hereunder will terminate as of December 31, 1995 having never become effective. Upon the Effective Date of this Plan, no further stock options shall be granted pursuant to the 1992 Stock Option Plan of the Company (the "Prior Plan"). Options granted pursuant to the Prior Plan shall continue to be governed by the terms of the Prior Plan. This Plan shall be approved by the shareholders of the Company, consistent with applicable laws, within twelve (12) months after the date this Plan is adopted by the Board. Options ("Options") may be granted under this Plan after the Effective Date provided that, in the event that shareholder approval is not obtained within the time period provided herein, this Plan, and all Options granted hereunder, shall terminate. No Option that is issued as a result of any increase in the number of shares authorized to be issued under this Plan shall be exercised prior to the time such increase has been approved by the shareholders of the Company and all such Options granted pursuant to such increase shall similarly terminate if such shareholder approval is not obtained. So long as the Company is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") the Company will comply with the requirements of Rule 16b-3 with respect to shareholder approval. 3. Types of Options and Shares. Options granted under this Plan shall be nonqualified stock options ("NQSOs"). The shares of stock that may be purchased upon exercise of Options granted under this Plan (the "Shares") are shares of the Common Stock of the Company. 4. Number of Shares. The maximum number of Shares that may be issued pursuant to Options granted under this Plan (the "Maximum Number") is 350,000 Shares (giving effect to a reverse split of the Company's Common Stock effective at or before the closing of the Company's registered initial public offering of securities), subject to adjustment as provided in this Plan. If any Option is terminated for any reason without being exercised in whole or in part, the Shares thereby released from such Option shall be available for purchase under other Options subsequently granted under this Plan. At all times during the term of this Plan, the Company shall reserve and keep available such number of Shares as shall be required to satisfy the requirements of outstanding Options granted under this Plan; provided, however that if the aggregate number of Shares subject to outstanding Options granted under this Plan plus the aggregate number of Shares previously issued by the Company pursuant to the exercise of Options granted under this Plan equals or exceeds the Maximum Number of Shares, then notwithstanding anything herein to the contrary, no further Options may be granted under this Plan until the Maximum Number is increased or the aggregate number of Shares subject to outstanding Options granted under this Plan plus the aggregate number of Shares previously issued by the Company pursuant to the exercise of Options granted under this Plan is less than the Maximum Number. 5. Administration. This Plan shall be administered by the Board or by a committee of not less than two members of the Board appointed to administer this Plan (the "Committee"). As used in this Plan, references to the Committee shall mean either such Committee or the Board if no Committee has been established. The interpretation by the Committee of any of the provisions of this Plan or any Option granted under this Plan shall be Cellegy Pharmaceuticals, Inc. 1995 Directors Stock Option Plan final and binding upon the Company and all persons having an interest in any Option or any Shares purchased pursuant to an Option. 6. Eligibility and Award Formula. 6.1 Eligibility. Options may be granted only to directors of the Company who are not employees of the Company or any Parent, Subsidiary or Affiliate of the Company, as those terms are defined in Section 17 below. 6.2 Initial Grant. Each Optionee who after the Effective Date becomes a member of the Board will automatically be granted an Option for 30,000 Shares (the "Initial Grant"). Initial Grants shall be made on the first business day after the date such Optionee is first elected to the Board. 6.3 Succeeding Grants. On the first business day after each of the Company's annual meeting of shareholders, if the Optionee is still a member of the Board and has served continuously as a member of the Board for at least one year, the Optionee will automatically be granted an Option for 8,000 Shares (a "Succeeding Grant"). 7. Terms and Conditions of Options. Subject to the following and to Section 6 above: 7.1 Form of Option Grant. Each Option granted under this Plan shall be evidenced by a written Stock Option Grant ("Grant") in such form (which need not be the same for each Optionee) as the Committee shall from time to time approve, which Grant shall comply with and be subject to the terms and conditions of this Plan. 7.2 Vesting. Options granted under this Plan shall be exercisable as they vest. The date an Optionee receives an Initial Grant or a Succeeding Grant is referred to in this Plan as the "Start Date" for such Option. (a) Initial Grants. Each Initial Grant will vest as follows, so long as the Optionee continuously remains a director of the Company: (i) on the Start Date of the Initial Grant the Initial Grant will vest as to twenty-five percent (25%) of the Shares; (ii) with respect to the remaining 22,500 Shares: (a) on the first (1st) anniversary of the Initial Grant, the Initial Grant will vest as to an additional twenty-five percent (25%) of the remaining Shares; (b) on the second (2nd) anniversary of the Initial Grant, the Initial Grant will vest as to an additional twenty-five percent (25%) of the remaining Shares; (c) on the third (3rd) anniversary of the Initial Grant, the Initial Grant will vest as to an additional twenty-five percent (25%) of the remaining Shares; and (d) on the fourth (4th) anniversary of the Initial Grant, the Initial Grant will vest as to an additional twenty-five percent (25%) of the remaining Shares. (b) Succeeding Grants. Each Succeeding Grant will vest as to twenty-five percent (25%) of the Shares upon each of the first three (3) successive anniversaries of the Start Date for such Succeeding Grant, so long as the Optionee continuously remains a director of the Company. 7.3 Exercise Price. The exercise price of an Option shall be the Fair Market Value (as defined in Section 17.4) of the Shares, at the time that the Option is granted. 7.4 Termination of Option. Except as provided below in this Section, each Option shall expire ten (10) years after its Start Date (the "Expiration Date"). The Option shall cease to vest if the Optionee ceases to be a member of the Board. The date on which the Optionee ceases to be a member of the Board shall be referred to as the "Termination Date". An Option may be exercised after the Termination Date only as set forth below: (a) Termination Generally. If the Optionee ceases to be a member of the Board for any reason except death or disability (as described in 7.4(b) below), then each Option then held by such Optionee, to the extent (and only to the extent) that it would have been exercisable by the Optionee on the Termination Date, may be exercised by the Optionee within three (3) months after the Termination Date, but in no event later than the Expiration Date. 2 Cellegy Pharmaceuticals, Inc. 1995 Directors Stock Option Plan (b) Death or Disability. If the Optionee ceases to be a member of the Board because of the death of the Optionee or the temporary or permanent, partial or total disability of the Optionee as determined by the Board, then each Option then held by such Optionee, to the extent (and only to the extent) that it would have been exercisable by the Optionee on the Termination Date, may be exercised by the Optionee (or the Optionee's legal representative) within twelve (12) months after the Termination Date, but in no event later than the Expiration Date. 8. Exercise of Options. 8.1 Notice. Options may be exercised only by delivery to the Company of an exercise agreement in a form approved by the Committee stating the number of Shares being purchased, the restrictions imposed on the Shares and such representations and agreements regarding the Optionee's investment intent and access to information as may be required by the Company to comply with applicable securities laws, together with payment in full of the exercise price for the number of Shares being purchased. 8.2 Payment. Payment for the Shares purchased upon exercise of an Option may be made (a) in cash or by check; (b) by surrender of shares of Common Stock of the Company that have been owned by the Optionee for more than six (6) months (and which have been paid for within the meaning of Securities and Exchange Commission ("SEC") Rule 144 and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares) or were obtained by the Optionee in the open public market, having a Fair Market Value equal to the exercise price of the Option; (c) by waiver of compensation due or accrued to the Optionee for services rendered; (d) provided that a public market for the Company's stock exists, through a "same day sale" commitment from the Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the exercise price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; (e) provided that a public market for the Company's stock exists, through a "margin" commitment from the Optionee and a NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (f) by any combination of the foregoing. 8.3 Withholding Taxes. Prior to issuance of the Shares upon exercise of an Option, the Optionee shall pay or make adequate provision for any federal or state withholding obligations of the Company, if applicable. 8.4 Limitations on Exercise. Notwithstanding the exercise periods set forth in the Grant, exercise of an Option shall always be subject to the following limitations: (a) An Option shall not be exercisable until such time as this Plan (or, in the case of Options granted pursuant to an amendment increasing the number of shares that may be issued pursuant to this Plan, such amendment) has been approved by the shareholders of the Company in accordance with Section 15 hereof. (b) An Option shall not be exercisable unless such exercise is in compliance with the Securities Act of 1933, as amended (the "Securities Act") and all applicable state securities laws, as they are in effect on the date of exercise. (c) The Committee may specify a reasonable minimum number of Shares that may be purchased upon any exercise of an Option, provided that such minimum number will not prevent the Optionee from exercising the full number of Shares as to which the Option is then exercisable. 9. Nontransferability of Options. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or by the Optionee's guardian or legal representative, unless otherwise permitted by the Committee. No Option may be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. 3 Cellegy Pharmaceuticals, Inc. 1995 Directors Stock Option Plan 10. Privileges of Stock Ownership. No Optionee shall have any of the rights of a shareholder with respect to any Shares subject to an Option until the Option has been validly exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date of exercise, except as provided in this Plan. The Company shall provide to each Optionee a copy of the annual financial statements of the Company, at such time after the close of each fiscal year of the Company as they are released by the Company to its shareholders. 11. Adjustment of Option Shares. In the event that the number of outstanding shares of Common Stock of the Company is changed by a stock dividend, stock split, reverse stock split, combination, reclassification or similar change in the capital structure of the Company without consideration, the number of Shares available under this Plan and the number of Shares subject to outstanding Options and the exercise price per share of such outstanding Options shall be proportionately adjusted, subject to any required action by the Board or shareholders of the Company and compliance with applicable securities laws; provided, however, that no fractional shares shall be issued upon exercise of any Option and any resulting fractions of a Share shall be rounded up to the nearest whole Share. 12. No Obligation to Continue as Director. Nothing in this Plan or any Option granted under this Plan shall confer on any Optionee any right to continue as a director of the Company. 13. Compliance With Laws. The grant of Options and the issuance of Shares upon exercise of any Options shall be subject to and conditioned upon compliance with all applicable requirements of law, including without limitation compliance with the Securities Act, compliance with all other applicable state securities laws and compliance with the requirements of any stock exchange or national market system on which the Shares may be listed. The Company shall be under no obligation to register the Shares with the SEC or to effect compliance with the registration or qualification requirement of any state securities laws, stock exchange or national market system. 14. Acceleration of Options. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings), (c) a merger in which the Company is the surviving corporation but after which the shareholders of the Company (other than any shareholder which merges (or which owns or controls another corporation which merges) with the Company in such merger) cease to own their shares or other equity interests in the Company, (d) the sale of substantially all of the assets of the Company, or (e) any other transaction which qualifies as a "corporate transaction" under Section 424 of the Internal Revenue Code of 1986, as amended (the "Code") wherein the shareholders of the Company give up all of their equity interests in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company from or by the shareholders of the Company), the vesting of all options granted pursuant to this Plan will accelerate and the options will become exercisable in full prior to the consummation of such event at such times and on such conditions as the Committee determines, and if such options are not exercised prior to the consummation of the corporate transaction, they shall terminate in accordance with the provisions of this Plan. 15. Amendment or Termination of Plan. The Committee may at any time terminate or amend this Plan (but may not terminate or amend the terms of any outstanding option without the consent of the Optionee); provided, however, that the Committee shall not, without the approval of the shareholders of the Company, increase the total number of Shares available under this Plan (except by operation of the provisions of Sections 4 and 11 above) or change the class of persons eligible to receive Options. Further, the provisions in Sections 6 and 7 of this Plan shall not be amended more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act or the rules thereunder. In any case, no amendment of this Plan may adversely affect any then outstanding Options or any unexercised portions thereof without the written consent of the Optionee. 4 Cellegy Pharmaceuticals, Inc. 1995 Directors Stock Option Plan 16. Term of Plan. Options may be granted pursuant to this Plan from time to time within a period of ten (10) years from the date this Plan is adopted by the Board. 17. Certain Definitions. As used in this Plan, the following terms shall have the following meanings: 17.1 "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of the granting of the Option, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 17.2 "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 17.3 "Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. 17.4 "Fair Market Value" shall mean, as of any date, the value of a share of the Company's Common Stock determined by the Board in its sole discretion, exercised in good faith; provided, however, that if the Common Stock of the Company is quoted on the Small Cap Market of the National Association of Securities Dealers Automated Quotation System or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value per share shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or by such dealer for the date the value is to be determined (or if there are no quoted prices for the date of grant, then for the last preceding business day on which there were quoted prices); provided, however, that if the Common Stock of the Company is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers Automated Quotation System, the Fair Market Value per share shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the largest such exchange) for the date the value is to be determined (or if there are not sales for such date, then for the last preceding business day on which there were sales), as reported in the Wall Street Journal or similar publication. 5 -----END PRIVACY-ENHANCED MESSAGE-----