-----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, QhZug1/xGhBL7KJaHqeJA7U09L3lIvYF+igLn3rwGfVPZNJWysOxsimqv2pAr6ba eCKmX5X3rlx5fzos8IcVlA== 0000950005-03-000552.txt : 20030508 0000950005-03-000552.hdr.sgml : 20030508 20030508171019 ACCESSION NUMBER: 0000950005-03-000552 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030508 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: 03688633 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 p17056_10-q.txt FORM 10-Q 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 March 31, 2003 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 April 30, 2003 was 19,892,965. CELLEGY PHARMACEUTICALS, INC. INDEX TO FORM 10-Q Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements ( Unaudited ) Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002 ............................ 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002, and the period from June 26, 1989 (inception) through March 31, 2003 (Unaudited) .................................................. 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002, and the period from June 26, 1989 (inception) through March 31, 2003 (Unaudited) .................................................. 5 Notes to Condensed Consolidated Financial Statements (Unaudited) ....................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................... 9 Item 3. Quantitative and Qualitative Disclosure of Market Risk ............ 11 Item 4. Controls and Procedures ........................................... 12 PART II OTHER INFORMATION Item 1. Legal Proceedings ................................................. 12 Item 2. Changes in Securities and Use of Proceeds ......................... 12 Item 3. Defaults Upon Senior Securities ................................... 12 Item 4. Submission of Matters to a Vote of Security Holders ............... 12 Item 5. Other Information ................................................. 12 Item 6. Exhibits and Reports on Form 8-K .................................. 13 Signature .................................................................. 14 Certifications ............................................................. 15 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)
March 31, 2003 December 31, 2002 -------------- ----------------- (Unaudited) ( Note 1 ) Assets Current assets: Cash and cash equivalents ...................................................... $ 11,526 $ 21,629 Short-term investments ......................................................... -- 2,002 Prepaid expenses and other current assets ...................................... 573 608 -------- -------- Total current assets ................................................................ 12,099 24,239 Restricted cash ..................................................................... 227 227 Property and equipment, net ......................................................... 2,004 2,616 Long-term investments ............................................................... 9,161 -- Goodwill ............................................................................ 814 814 Intangible assets related to acquisition, net of accumulated amortization of $1,065 and $983 as of March 31, 2003 and December 31, 2002, respectively ....... 301 383 Other assets ........................................................................ 100 100 -------- -------- Total assets ........................................................................ $ 24,706 $ 28,379 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities ....................................... $ 1,177 $ 2,005 Accrued compensation and related expenses ...................................... 129 123 Current portion of deferred revenue ............................................ 832 832 -------- -------- Total current liabilities ........................................................... 2,138 2,960 Other long term liabilities ......................................................... 718 717 Deferred revenue .................................................................... 13,960 14,168 Shareholders' equity: Common stock, no par value; 35,000,000 shares authorized: 19,891,746 and 19,652,356 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively ............................................ 97,322 96,835 Accumulated other comprehensive income ......................................... 12 11 Deficit accumulated during the development stage ............................... (89,444) (86,312) -------- -------- Total shareholders' equity .......................................................... 7,890 10,534 -------- -------- Total liabilities and shareholders' equity .......................................... $ 24,706 $ 28,379 ======== ========
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 March 31, (inception) to ---------------------------- March 31, 2003 2002 2003 -------- -------- --------- Revenues: Contract revenue (1) ........................................ $ 208 $ -- $ 2,905 Government grants ........................................... 13 -- 561 Product sales ............................................... 171 267 5,273 -------- -------- --------- Total revenues ................................................... 392 267 8,739 Costs and expenses: Cost of product sales ....................................... 34 71 1,355 Research and development .................................... 1,861 2,962 63,747 Selling, general and administrative ......................... 1,133 1,876 28,510 Acquired in-process technology .............................. -- -- 7,350 -------- -------- --------- Total costs and expenses ......................................... 3,028 4,909 100,962 -------- -------- --------- Operating loss ................................................... (2,636) (4,642) (92,223) Interest and other income ................................... 46 255 6,273 Interest and other expense .................................. (542) -- (2,046) -------- -------- --------- Net loss ......................................................... (3,132) (4,387) (87,996) Non-cash preferred dividends ..................................... -- -- 1,448 -------- -------- --------- Net loss applicable to common shareholders ....................... $ (3,132) $ (4,387) $ (89,444) ======== ======== ========= Basic and diluted net loss per common share ...................... $ (0.16) $ (0.25) ======== ======== Weighted average common shares used in computing basic and diluted net loss per share ................................... 19,852 17,303 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. (1) Includes revenue from related parties of $208,000 for the three months ended March 31, 2003. 4 Cellegy Pharmaceuticals, Inc. (a development stage company) Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands)
Period from June 26, 1989 Three Months Ended March 31, (inception) to --------------------------- March 31, 2003 2002 2003 -------- ------- -------- Operating activities Net loss ......................................................... $ (3,132) $(4,387) $(87,996) Other operating activities ....................................... (226) 421 31,527 -------- ------- -------- Net cash used in operating activities ............................ (3,358) (4,808) (56,469) Investing activities Purchases of property and equipment .............................. (56) (56) (4,894) Purchases of investments ......................................... (9,171) -- (97,061) Sales and maturities of investments .............................. 2,000 2,089 87,794 Proceeds from sale of property and equipment ..................... 16 -- 203 Cash used in acquisition of Vaxis and Quay ....................... -- -- (511) -------- ------- -------- Net cash provided by (used in) investing activities .............. (7,211) 2,033 (14,469) Financing activities Proceeds from notes payable ...................................... -- -- 8,047 Repayment of notes payable ....................................... -- -- (6,611) Proceeds from restricted cash .................................... -- -- 386 Other assets ..................................................... -- -- (614) Other long-term liabilities ...................................... -- 888 -- Net proceeds from issuance of common stock ....................... 466 26 69,578 Issuance of convertible preferred stock, net of issuance costs and deferred financing costs .................................. -- -- 11,678 -------- ------- -------- Net cash provided by financing activities ........................ 466 914 82,464 -------- ------- -------- Net (decrease) increase in cash and cash equivalents ............. (10,103) (1,861) 11,526 Cash and cash equivalents, beginning of period ................... 21,629 5,795 -- -------- ------- -------- Cash and cash equivalents, end of period ......................... $ 11,526 $ 3,934 $ 11,526 ======== ======= ========
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 (Unaudited) 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, 2002 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. Our condensed consolidated financial statements include the accounts of Cellegy Australia Pty Ltd ("Cellegy Australia") and Cellegy Canada, Inc. ("Cellegy Canada"). All intercompany transactions have been eliminated in consolidation. 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, 2002. Note 2. - Significant Accounting Policies Revenue Recognition and Research and Development Expenses Revenues related to cost reimbursement provisions under development contracts are recognized as the costs associated with the projects are incurred. Revenues related to milestones specified under development contracts are recognized as the milestones are achieved. The Company receives certain United States government grants that support the Company's research effort in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants. Revenues associated with these grants are recognized as costs under each grant are incurred. Revenues related to product sales are recognized upon shipment when title to goods has been transferred to the customer. There is no right of return for product sales. Up-front payments, such as the $15.0 million payment received from PDI, Inc. ("PDI") for the Fortigel(TM) (testosterone gel) 2% license, are recorded as deferred revenue at the time the cash is received. Amounts are recognized as revenue on a straight-line basis over the longer of the life of the contract or the service period. Royalties payable to Cellegy under the PDI License Agreement will be recognized as earned when the royalties are no longer refundable to PDI under certain minimum royalty terms defined in the agreement. Research and development costs are expensed as incurred. The type of costs included in research and development expenses include salaries and benefits, laboratory supplies, external research programs, clinical studies and allocated costs such as rent, supplies and utilities. Clinical trial expenses are payable to clinical sites and clinical research organizations. Expenses for both of these groups are accrued on a straight-line basis over the contracted period subject to adjustment for actual activity based on such factors as the number of subjects enrolled and number of subjects that have completed treatment for each trial. 6 Goodwill and Other Intangible Assets Goodwill that is related to the purchase of Quay Pharmaceuticals in June 2000, included in intangible assets, represents the excess purchase price over the fair value of net assets acquired which was being amortized over 10 years using the straight-line method. The carrying value of goodwill is based on management's current assessment of recoverability using objective and subjective factors. Effective January 1, 2002, the Company no longer amortized the remaining balance of goodwill of $814,400. We performed an impairment test of goodwill upon transition to FAS 142 on January 1, 2002, and no impairment was found for either period. We will continue to evaluate our goodwill for impairment on an annual basis each year and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. An impairment loss, if needed, would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted cash flows or other appropriate fair value methods. FAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We currently amortize our other intangible assets on a straight-line basis over their estimated useful lives ranging from three to five years. Amortization taken to date as of March 31, 2003 was approximately $1,065,000. Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board issued Statement No. 148 ("FAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure." FAS 148 amends FAS 123 "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of FAS 148 are effective for fiscal years ending after December 15, 2002. We have elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," to account for employee stock options. See below for the disclosures required by FAS 148. The Company has elected to follow APB 25 and related interpretations in accounting for its stock options since, as discussed below, the alternative fair market value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing stock options. Under APB 25, if the exercise price of the Company's stock options is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized related to employee or director grants. Pro forma information regarding net loss and net loss per common share is required by FAS 123, which requires that the information be determined as if the Company had accounted for its common stock options granted under the fair market value method. The fair market value of options granted has been estimated at the date of the grant using a Black-Scholes option pricing model. The Company valued its options using the following weighted average assumptions for the quarters ended March 31, 2003 and 2002: 2003 2002 ---- ---- Risk-free interest rate .............. 2.5% 4.5% Dividend yield ........................ 0% 0% Volatility ............................ 1.12 .70 Expected life of options in years ..... 4.2 4.3 The Black-Scholes option pricing model was developed for use in estimating the fair market value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions 7 can materially affect the fair market value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair market value of our stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the three months ended March 31, 2003 and 2002 is as follows (in thousands): Three months ended March 31, ---------------------------- 2003 2002 ------- ------- Net loss as reported ................................ $(3,132) $(4,387) Add: Stock-based employee compensation costs included in the determination of net loss, as reported ................................ 34 33 Deduct: Stock-based employee compensation costs that would have been included in the determination of net loss if the fair value method had been applied to all awards ...... (418) (419) ------- ------- Net loss, proforma .................................. $(3,516) $(4,773) Basic and diluted net loss per share, as reported ... $ (0.16) $ (0.25) Pro forma basic and diluted net loss per share ...... $ (0.18) $ (0.28) The effects of applying FAS 123 pro forma disclosures are not likely to be representative of the effects on reported net loss for future years. Note 3. - Comprehensive Loss Accumulated other comprehensive income presented on the accompanying balance sheet consists of the accumulated net unrealized gain or loss on available-for-sale investments and foreign currency translation adjustments. Total comprehensive loss for the three months ended March 31, 2003 was $3,132,000 compared with $4,413,000 for the three months ended March 31, 2002. Note 4. - Net Loss Per Share 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 as their effect is antidiultive. Note 5. - Segment Reporting The following table contains information regarding revenues and loss from operating each business segment for the three months ended March 31, 2003 and 2002 (in thousands): Three months ended March 31, ----------------------------- 2003 2002 ------- ------- Revenues: Pharmaceuticals $ 337 $ 36 Cosmeceuticals 55 231 ------- ------- $ 392 $ 267 ======= ======= Operating Loss Pharmaceuticals $(2,656) $(4,789) Cosmeceuticals 20 147 ------- ------- $(2,636) $(4,642) ======= ======= All company assets are related to the pharmaceutical segment. 8 Note 6. - Related Party Transacations In December 2002, the Company entered into an exclusive license agreement with PDI, Inc. ("PDI"), a public company, relating to the commercialization by PDI of Cellegy's Fortigel(TM) (testosterone gel) 2% gel product in North American markets. The agreement provides, among other things, an upfront payment of $15.0 million, a $10.0 million milestone payment on FDA approval of Fortigel and royalty payments to Cellegy of 20% to 30% of net sales by PDI. The $15.0 million upfront payment is being recognized on a straight-line basis over the 18 year term of the agreement. $832,000 of deferred revenue as of December 31, 2002 has been reclassified to short-term, since it will being recognized as revenue in 2003. The decision by Cellegy's Board to approve the PDI License Agreement was based on these superior financial terms compared with other alternative offers. Charles T. Saldarini, the Chief Executive Officer of PDI, is the son of Ronald J. Saldarini, Ph.D., a director of the Company. While the Board was aware of this relationship during its consideration of the agreement, Dr. Saldarini did participate, along with other directors, in Board discussions concerning the agreement and other alternative proposals, but did not participate in any negotiations regarding the terms of the agreement. The Board's approval of the agreement was unanimous and Dr. Saldarini has excused himself from all current and future discussions and resolutions relating to PDI. Note 7. - Fixed Assets During the first quarter of 2003, Cellegy recorded a non-operating expense of $542,000 associated with the reassessment of our South San Francisco facility sub-lease arrangement, primarily related to the write down of capitalized tenant improvements. This write down was associated with modifications made by our sub-tenant to a portion of the facility that the sub-tenant occupies. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This quarterly report contains forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, which reflect management's intentions, hopes, beliefs, expectations or predictions for the future. Investors are cautioned that these forward-looking statements are subject to numerous 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 review of our regulatory filings by the FDA and other regulatory authorities, particularly with regard to our Fortigel NDA; our need and ability to complete corporate partnerships; and uncertainties arising from pending litigation between PDI and Auxilium Pharmaceuticals which, depending on the outcome, could affect the marketing of Cellegy's Fortigel, delay product launch or reduce its commercial potential. There can be no assurance that Cellegy's products will be approved for marketing by regulatory authorities or will be successfully marketed following approval. We undertake no obligation to update or revise the forward-looking statements made herein, except as specifically required by law. For more information regarding the above, and other risk factors that may affect Cellegy's future results, investors should refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 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 for the treatment of anal fissures and hemorrhoids and two transdermal testosterone gel product candidates, Fortigel (previously called Tostrex(TM) gel), for the treatment of male hypogonadism, a condition that afflicts men generally above the age of forty, and Tostrelle(TM) gel, for the treatment of sexual dysfunction in menopausal women. Other pipeline product candidates include nitric oxide donors for the treatment of sexual dysfunction in females, Raynaud's Disease, Restless Leg Syndrome, and prostate and breast cancer. General In November 2001, we acquired a private Canadian based company, Vaxis Therapeutics, valued at $4.1 million. The purchase price 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 million of in-process research and development. 9 The intangibles of $350,000 are being amortized over five years and the in-process research and development was expensed in the fourth quarter of 2001. The purchase agreement provides for future earn-out payments over a period of seven years that are based on commercial sales of any products developed by Cellegy based on technologies acquired from Vaxis. Any contingent consideration paid in the future will be accounted for as a cost of earning the related revenues. The results of operations of the acquired company have been included in our consolidated financial statements since the acquisition date. In August 2001, Cellegy and Ventiv Health, Inc. signed a six year License Agreement to commercialize Cellegesic in the United States. Ventiv was to have delivered integrated marketing and sales solutions, provide pre-launch support, and recruit and train a sales force which would have been jointly managed by both companies. In September 2002, Cellegy and Ventiv terminated the Cellegesic agreement based on a delay in commercialization of Cellegesic due to our withdrawal of the Cellegesic NDA that was pending with the FDA. In November 2002, we completed a private placement of 2.2 million shares of our common stock resulting in approximately $5.5 million of gross proceeds to Cellegy. The financing was with a single investor, John M. Gregory, founder and former CEO of King Pharmaceuticals and currently managing partner of SJ Strategic Investments, LLC. In December 2002, Cellegy entered into an exclusive license agreement with PDI, Inc. to commercialize Fortigel in North American markets. Under the terms of the agreement, PDI's Pharmaceutical Products Group will be responsible for the marketing and sale of Fortigel utilizing its existing sales and marketing infrastructure. Cellegy received a payment of $15.0 million upon signing of the agreement and will receive a milestone payment and royalties assuming successful product launch. Cellegy will be responsible for supplying finished product to PDI through Cellegy's contract manufacturer. Results of Operations Revenues. Cellegy had revenues of $392,000 and $267,000 for the three months ended March 31, 2003 and 2002, respectively. During the first three months of 2003, revenues consisted of $208,000 in licensing revenue from PDI, our Fortigel licensee, $116,000 of Rectogesic(TM) (nitroglycerin ointment) product sales in Australia, $55,000 in product sales to Gryphon Development, the product development division of a major specialty retailer, and $13,000 in Canadian government grants. During the first three months of 2002, revenues consisted of $231,000 in product sales to Gryphon Development and $36,000 in Rectogesic product sales in Australia. The licensing revenue of $208,000 from PDI reflects the quarterly recognition, over the expected commercial life of Fortigel, of the $15,000,000 upfront payment received from PDI in December 2002. This amount will continue to be recorded as licensing revenue in subsequent quarters. Rectogesic sales in the first quarter of 2003 increased significantly compared with last year's first quarter, due to promotional and advertising programs initiated in Australia during this February and March. Research and Development Expenses. During the first quarter of 2003 and 2002, research and development expenses were $1,861,000 and $2,962,000, respectively. Higher operating expenses in last year's first quarter resulted primarily from the costs of completing Phase III clinical trials for Fortigel and Cellegesic. Clinical expenses are expected to increase during the next three quarters due to additional clinical personnel recently hired and the expected start of a new Phase III Cellegesic trial. We have now completed discussions with the FDA concerning the trial protocol, and intend to begin a confirmatory Phase III trial during the second quarter of 2003. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1,133,000 for the three months ended March 31, 2003, compared with $1,876,000 for the same period last year. Higher operating expenses in last year's first quarter were primarily due to pre-launch marketing costs for our Cellegesic product candidate. No additional marketing costs related to Cellegesic are anticipated until successful completion of the new Phase III trial. General and administrative expenses are expected to increase in support of greater clinical activity and to comply with additional accounting and public reporting requirements. Interest and Other Income (Expense), Net. Cellegy had a $496,000 expense in interest, and other income (expense), net for the three months ended March 31, 2003, compared with $255,000 of income for the same period last year. During the first quarter of 2003, we recorded a non-operating expense of $542,000 associated with the reassessment of our South San Francisco facility sub-lease arrangement, primarily related to the write down of capitalized tenant improvements. This write down was associated with modifications made by our sub-tenant to a portion of the facility that the sub-tenant 10 occupies. We do not expect any further adjustments to these assets in the foreseeable future. Net Loss. Net loss applicable to common shareholders was $3,132,000 or $0.16 per share for the three months ended March 31, 2003 based on 19,852,000 weighted average shares outstanding, compared with a net loss of $4,387,000 or $0.25 per share for the same period in the prior year based on 17,303,000 weighted average shares outstanding. Liquidity and Capital Resources We have experienced net losses from operations each year since our inception. Through March 31, 2003, we had incurred an accumulated deficit of $89.4 million and had consumed cash from operations of $56.5 million. Cash from equity financing transactions have 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 follow-on public offering in November 1997, $10.0 million in net proceeds from a private placement in July 1999, $11.6 million in net proceeds from a private placement in October 2000, $15.2 million in net proceeds from a private placement in June 2001 and $5.2 million in net proceeds from a private placement in November 2002. Our cash and investments were $20.9 million at March 31, 2003 compared with $23.9 million at December 31, 2002, including $227,000 of restricted cash at each date. The decrease in cash and investments of $3.0 million in 2003 was principally due to cash used to support operations. Our operations have used and will continue to use increased amounts of cash in future quarters. Future expenditures and capital requirements depend on numerous factors including, without limitation, the progress and focus of our research and development programs, the progress and results of pre-clinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, our ability to establish new collaborative arrangements, the purchase of capital equipment and working capital increases associated with the scale up and pre-launch manufacture of Fortigel. 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 any future equity funding may involve significant dilution to our shareholders. Insufficient funding may require us to delay, reduce or eliminate some or all of our research and development activities, planned clinical trials, administrative programs, personnel, outside services and facility costs. We believe that available cash resources and the interest thereon will be adequate to satisfy our capital needs through at least December 31, 2004. Factors That May Affect Future Operating Results This quarterly report contains forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, which reflect management's intentions, hopes, beliefs, expectations or predictions for the future. Investors are cautioned that these forward-looking statements are subject to numerous 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 review of our regulatory filings by the FDA and other regulatory authorities, particularly with regard to our Fortigel NDA; our need and ability to complete corporate partnerships; and uncertainties arising from pending litigation between PDI and Auxilium Pharmaceuticals which, depending on the outcome, could affect the marketing of Cellegy's Fortigel, delay product launch or reduce its commercial potential. There can be no assurance that Cellegy's products will be approved for marketing by regulatory authorities or will be successfully marketed following approval. We undertake no obligation to update or revise the statements made herein, except as specifically required by law. For more information regarding the above, and other risk factors that may affect Cellegy's future results, investors should refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 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 as of March 31, 2003 are classified as available-for-sale and 42% and 58% of our long-term investments will mature by the end of 2004 and 2005, respectively. We believe that potential near-term losses in future earnings, fair 11 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. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective. (b) Changes in Internal Controls There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. 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 None Item 5. Other Information The Board of Directors of the Company has adopted a Retention and Severance Plan, and the Company intends to enter into related agreements with Officers of the Company and other key employees as plan participants in the near future. Under the plan, if an executive's employment is terminated "upon a change of control," as that term is defined in the plan, the executive will receive a lump sum payment in an amount equal to one year of base salary and one year of his or her targeted bonus. In addition, the vesting and exercisability of outstanding but unvested options held by the executive will be accelerated in full so that the options are fully vested, and the executive will have 12 months after the date of termination to exercise the options. The executive will receive paid COBRA medical and health insurance coverage for 12 months. If the Company terminates an executive's employment, without cause (as that term is defined in the plan) in the absence of a change of control, the executive will receive his or her base salary for a period of 6 months, reduced by the amount of any compensation earned by the executive from other employment during that time. In addition, the executive will have 6 months from the date of termination to exercise options to the extent vested on the date of termination, and the executive will receive paid COBRA medical and health insurance coverage for 6 months. As a condition of receiving benefits under the plan, the Company may require the executive to sign a general release of claims in connection with the executive's employment termination. The Company has no agreements and currently is not involved in negotiations regarding a potential change of control transactions. 12 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 10.01 Retention and Severance Plan A Agreement of Plan Participation (b) Reports on Form 8-K On March 26, 2003, the company filed a Report on Form 8-K disclosing that the company had been advised that the U.S. Food and Drug Administration had extended the target date under the Prescription Drug User Fee Act for a decision on the approvabiliy of Cellegy's New Drug Application for Fortigel to July 3, 2003, and that such extension was to allow the FDA additional time to review data from a required study that Cellegy submitted in January 2003. On February 28, 2003, the company filed a Report on Form 8-K providing information concerning fourth quarter and year-end 2002 financial results. On January 3, 2003, the company filed a Report on Form 8-K disclosing that it had entered into an exclusive license agreement with PDI, Inc., relating to commercialization of the Fortigel product in North American markets. On January 13, 2003, the company filed a Report on Form 8-K disclosing that Mr. Julian Baker and his brother Dr. Felix Baker had resigned from Cellegy's board of directors. 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: May 8, 2003 /s/ K. Michael Forrest --------------------------------------- K. Michael Forrest Chairman, President and Chief Executive Officer Date: May 8, 2003 /s/ A. Richard Juelis --------------------------------------- A. Richard Juelis Vice President, Finance and Chief Financial Officer 14 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, K. Michael Forrest, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cellegy Pharmaceuticals, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 8, 2003 By: /s/ K. Michael Forrest ---------------------- Chairman, President and Chief Executive Officer 15 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, A. Richard Juelis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cellegy Pharmaceuticals, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Date: May 8, 2003 By: /s/ A. Richard Juelis --------------------------- Vice President, Finance and Chief Financial Officer 16 EX-10 3 p17056-ex10.txt RETENTION AND SERVICE PLAN Exhibit 10.01 CELLEGY PHARMACEUTICALS, INC. RETENTION AND SEVERANCE PLAN FOR EXECUTIVES 1. GENERAL 1.1 Purpose. The purpose of this Plan is to provide specified compensation and benefits to Executives in the event of a "Termination Upon Change of Control" or a "Termination in Absence of Change of Control" as defined under this Plan. 1.2 No Employment Agreement. This Plan does not obligate the Company to continue to employ an Executive for any specific period of time, or in any specific role or geographic location. Subject to the terms of any applicable written employment agreement between the Company and an Executive, the Executive's employment is on an at-will basis, the Company may assign an Executive to other duties, and either an Executive or the Company may terminate an Executive's employment at any time for any reason. 1.3 Defined Terms. Capitalized terms used in this Plan shall have the meanings set forth in Section 5, unless the context clearly requires a different meaning. 1.4 Federal and State Withholding. The Company may withhold from any and all payments of cash or other consideration to an Executive under this Plan, or from an Executive's salary or other compensation payments, any amounts that are required to be withheld under applicable federal, state and local tax or employment laws (including without limitation withholding and employment taxes), and descriptions of all amounts payable under this Plan shall be net of (and subject to reduction by) such withholdings. 2. TERMINATION UPON CHANGE OF CONTROL 2.1 Prior Obligations. In the event of an Executive's Termination Upon Change of Control, the Executive shall be entitled to the basic severance compensation described below. 2.1.1 Accrued Salary and Vacation. All salary and accrued vacation earned through the date of the Executive's termination of employment shall be paid upon termination of employment. 2.1.2 Accrued Bonus Payment. The Executive shall receive a lump sum payment of his or her target bonus for the Company's prior fiscal year to the extent that any such bonus was earned and is unpaid on the date of termination of employment. 2.1.3 Expense Reimbursement. Within ten (10) days of submission of proper expense reports by the Executive, the Company shall reimburse an Executive for all expenses incurred by the Executive, consistent with past practices, in connection with the business of the Company before the Executive's termination of employment. 2.1.4 Employee Benefits. The Executive shall receive the benefits, if any, under any 401(k) plan, nonqualified deferred compensation plan, employee stock purchase plan and other Company benefit plan to which the Executive may be entitled pursuant to the terms of such plans. 2.2 Executive Cash Severance Benefits. In the event of an Executive's Termination Upon Change of Control, an Executive shall be entitled to the additional executive severance benefits described below. 2.2.1 Cash Severance Payment. The Executive shall receive an amount equal to twelve (12) months of Base Salary and the annual target bonus at the 100% level for the year in which such termination occurred paid in a lump sum within thirty (30) days of Termination Upon Change of Control. If the Executive should die before all amounts payable to him or her have been paid, such unpaid amounts shall be paid to the Executive's designated beneficiary, if living, or otherwise to the personal representative of the Executive's estate. 2.3 Stock Option or Restricted Stock Acceleration; Period of Time After Termination To Exercise Options. 2.3.1 Exercisability of Options Following Termination Upon Change of Control. All outstanding stock options and any restricted stock awarded by the Company under the Company's 1995 Equity Incentive Plan to the Executive prior to the Change of Control shall have their vesting and exercisability accelerated in full to be 100% vested and exercisable from the date of such termination. The Executive will have twelve (12) months after the date of termination to exercise any outstanding stock options following Termination Upon a Change of Control, but in no event more than ten (10) years from the initial grant date of such stock options. 2.3.2 Acceleration Following Non-assumption Upon Change of Control. If there is a Change of Control transaction in which outstanding stock options granted (or restricted stock awards made) under the Company's 1995 Equity Incentive Plan before the transaction are not fully assumed by, or replaced by fully equivalent substitute options or restricted stock of, the Successor, then (1) all such unvested options and restricted stock shall have their vesting fully accelerated to be 100% vested and exercisable immediately prior to the effective date of the Change of Control and (2) the Company shall provide reasonable prior written notice to the Executive of (a) the date such unexercised options will terminate and (b) the period during which the Executive may exercise the fully vested options. 2 2.4 Extended Insurance Benefits; Coverage Under Another Plan. An Executive who elects coverage under the Consolidated Budget Reconciliation Act of 1985 ("COBRA") shall receive, by means of payment on behalf of the Executive of the applicable premiums, continued provision of the Company's health related and other standard employee insurance coverages as are in effect immediately prior to an Executive's Termination Upon Change of Control for a period of twelve (12) months following such Termination Upon Change of Control (with the Executive remaining responsible for such percentage of payments under such insurance as the Executive was responsible for contributing immediately before the employment termination). The date of the "qualifying event" for the Executive and any dependents shall be the date of employment termination of the Executive. Notwithstanding the preceding provisions of this subsection 2.4, in the event an Executive becomes covered as a primary insured (that is, not as a beneficiary under a spouse's or partner's plan) under another employer's group health plan during the period provided for herein, the Executive promptly shall inform the Company and the Company shall cease provision of continued group health insurance for the Executive and any dependents. 3. TERMINATION IN ABSENCE OF CHANGE OF CONTROL 3.1 Prior Obligations. In the event of an Executive's Termination in Absence of Change of Control, an Executive shall be entitled to the basic severance compensation described below. 3.1.1 Accrued Salary and Vacation. All salary and accrued vacation earned through the date of the Executive's termination of employment shall be paid upon termination of employment. 3.1.2 Accrued Bonus Payment. The Executive shall receive a lump sum payment of his or her target bonus for the Company's prior fiscal year to the extent that any such bonus was earned and is unpaid on the date of termination of employment. 3.1.3 Expense Reimbursement. Within ten (10) days of submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses incurred by the Executive, consistent with past practices, in connection with the business of the Company before the Executive's termination of employment. 3.1.4 Employee Benefits. The Executive shall receive the benefits, if any, under any 401(k) plan, nonqualified deferred compensation plan, employee stock purchase plan and other Company benefit plan to which the Executive may be entitled pursuant to the terms of such plans. 3 3.2 Continuation of Base Salary. In the event of the Executive's Termination in Absence of Change of Control, the Executive shall be entitled to receive the Executive's Base Salary for a period of six (6) months, payable over such six-month period in accordance with the Company's normal payroll practices (the "Continuation Payment"). If, at any time during the period that Continuation Payments are made, the Executive accepts employment with, or is otherwise engaged to provide services to, or receives compensation from, any other person, entity or organization, whether as an employee, consultant, advisor or similar capacity, then the amount of the Continuation Payments shall be reduced by the amount of compensation earned by the Executive in such capacity during such time. The Executive shall immediately notify the Company of any employment, engagement or compensation described in the preceding sentence. 3.3 Exercisability of Options Following Termination in Absence of Change of Control. All outstanding and unvested stock options and any restricted stock awarded granted under the Company's 1995 Equity Incentive Plan by the Company to the Executive prior to an Executive's Termination in Absence of Change of Control shall cease vesting as of the date of termination, but, in the case of stock options, shall continue to remain exercisable (but in no event shall be exercisable for more than ten (10) years from the initial grant date of such stock options) for a period of six (6) months from the date of employment termination. 3.4 Extended Insurance Benefits. 3.4.1 Benefit Continuation. An Executive who elects coverage under COBRA shall receive, by means of payment on behalf of the Executive of the applicable premiums, continued provision of the Company's health related and other standard employee insurance coverages as are in effect immediately prior to the Executive's Termination in Absence of Change of Control for a period of six (6) months following such Termination in Absence of Change of Control (with the Executive remaining responsible for such percentage of payments under such insurance as the Executive was responsible for contributing immediately before the employment termination). The date of the "qualifying event" for an Executive and any dependents shall be the date of employment termination of the Executive. 3.4.2 Coverage Under Another Plan. Notwithstanding the preceding provisions of this subsection 3.4, in the event an Executive becomes covered as a primary insured (that is, not as a beneficiary under a spouse's or partner's plan) under another employer's group health plan during the period provided for herein, the Executive promptly shall inform the Company and the Company shall cease provision of continued group health insurance for the Executive and any dependents. 4 4. FEDERAL EXCISE TAX UNDER SECTION 280G 4.1 Reimbursement of Excise Tax. If (1) any amounts payable to an Executive under this Plan are characterized as excess parachute payments pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), and (2) an Executive thereby would be subject to any United States federal excise tax due to that characterization, then the Executive may elect, in the Executive's sole discretion, to reduce the amounts payable under this Plan or to have any portion of applicable options or restricted stock not vest in order to avoid any "excess parachute payment" under Section 280G(b)(1) of the Code. 4.2 Determination by Independent Public Accountants. Unless the Company and an Executive otherwise agree in writing, any determination required under this Section 4 shall be made in writing by independent public accountants agreed to by the Company and an Executive (the "Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section 4, the Accountants may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make the required determinations. The Company shall bear all fees and expenses the Accountants may reasonably charge in connection with the services contemplated by this Section 4. 5. DEFINITIONS 5.1 Capitalized Terms Defined. Capitalized terms used in this Plan shall have the meanings set forth in this Section 5, unless the context clearly requires a different meaning. 5.2 "Base Salary" means the base salary of an Executive immediately preceding any Change of Control, or in the absence of Change of Control, immediately preceding an Executive's termination of employment. 5.3 "Cause" means: (a) Executive's willful and deliberate failure or a refusal (not resulting from Executive's incapacity due to physical or mental illness) to comply in any material respect with the legal or ethical policies, standards or regulations of the Company (including without limitation the Company's insider trading policy), or willful and deliberate failure to follow the lawful written directions of the Chief Executive Officer or the Board of Directors, provided that written notice in reasonable detail as to the alleged failure or refusal has been given to the Executive by the Chief Executive Officer or his authorized designate and, if the failure is capable of cure, the Executive has had a reasonable opportunity to cure such failure; 5 (b) the Executive's misconduct which is materially detrimental to the Company, or willful and deliberate failure or a refusal (not resulting from the Executive's incapacity due to physical or mental illness) in any material respect faithfully or diligently, to perform Executive's legal and ethical duties, determined by the Company in accordance with any written agreement between the Executive and the Company or the customary duties of the Executive's employment; provided that written notice, in reasonable detail as to the alleged failure or refusal, has been given to the Executive by the Chief Executive Officer or his authorized designate and, if the failure is capable of cure, the Executive has had a reasonable opportunity to cure such failure; (c) the Executive's deliberate concealment from the Board of any action by the Company in violation of any legal or ethical policy, standard or regulation set by the Company; (d) the Executive's deliberate failure to obtain Board approval for any Company act requiring Board approval; (e) any unprofessional, unethical or fraudulent conduct that is demonstrably injurious and materially discredits the Company or is materially detrimental to the reputation, character or standing of the Company; (f) dishonest conduct or deliberate attempt to do injury to the Company; (g) the Executive's material breach of any written employment agreement or invention assignment and confidentiality agreement between the Executive and the Company; or (h) commission of an unlawful or criminal act (serious in nature) which the Board of Directors or the Chief Executive Officer reasonably concludes would reflect adversely on the Company, or the Executive's conviction of a felony or other crime involving embezzlement, fraud or any offense involving the money or property of the Company. 5.4 "Change of Control" means: (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of (A) the outstanding shares of common stock of the Company or (B) the combined voting power of the Company's then-outstanding securities; 6 (b) the Company is party to a merger or consolidation, or series of related transactions, which results in the voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty (50%) percent of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (c) the sale or disposition of all or substantially all of the Company's assets (or consummation of any transaction, or series of related transactions, having similar effect); (d) the dissolution or liquidation of the Company; provided, however, that the dissolution or liquidation of the Company shall be deemed to be a Change of Control only if the Company has sufficient cash to pay all amounts it is obligated to pay to any federal, state or local taxing or other authority, all of its creditors and all amounts required to be paid to employees in respect of compensation or benefits, and only if the Board determines that treatment of such event as a Change of Control is consistent with its fiduciary duties; or (e) any transaction or series of related transactions that has the substantial effect of any one or more of the foregoing. 5.5 "Company" shall mean Cellegy Pharmaceuticals, Inc., and, following a Change of Control, any Successor. 5.6 "Executive" shall mean an executive of the Company whom the Company determines to be eligible to participate in the Plan and who has executed an Agreement of Plan Participation in the form set forth in Exhibit A hereto. 5.7 "Good Reason" means, upon or following a Change of Control, the occurrence of any of the following conditions, without an Executive's written consent: (a) assignment to an Executive of a title position, responsibilities or duties that are materially less than the title position, responsibilities and duties which the Executive occupied immediately preceding any termination of employment, except that following a Change of Control, a reduction in title position, responsibilities or duties solely by virtue of the Company being acquired and made part of a larger entity or operated as a subsidiary shall not constitute Good Reason; (b) a material reduction in an Executive's Base Salary, other than reductions made for all officers of the Company, a material reduction in the Executive's target bonus opportunity after the occurrence of a Change of Control compared to the amount of the target bonus opportunity in effect before the occurrence of the Change of Control, or a material reduction in employee benefits other than a reduction applicable to employees generally; 7 (c) the Company's requiring an Executive to be based at any office or location more than 40 miles from the office where the Executive was employed immediately preceding the Change of Control; or (d) any material breach by the Company of the terms of any written employment agreement between the Company and the Executive or of the terms of this Plan, which breach is not cured within twenty (20) days following written notice by the Executive to the Company of such breach, including but not limited to the failure by the Company to require a Successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform the Company's Change of Control obligations, as if no such succession had taken place. 5.8 "Disability" means that: (a) an Executive has been incapacitated by bodily injury, illness or disease so as to be prevented thereby from engaging in the performance of an Executive's duties; (b) such total incapacity shall have continued for a period of four consecutive months; and (c) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of an Executive's life. 5.9 "Successor" means the Company as defined above and any successor or assign to substantially all of its business and/or assets. 5.10 "Termination in Absence of Change of Control" means any termination of employment of an Executive by the Company without Cause (i) that occurs prior to the date that the Company first publicly announces it has reached a definitive agreement that would result in a Change of Control, (ii) that occurs after the Company announces that it has terminated any such definitive agreement and does not thereafter enter into discussions that lead to such a definitive agreement, or (iii) that occurs more than twelve (12) months following a Change of Control. Notwithstanding the foregoing, the term "Termination in Absence of Change of Control" shall not include any termination of the employment of an Executive (1) by the Company for Cause; (2) by the Company as a result of the Disability of an Executive; (3) as a result of the death of the Executive; or (4) as a result of the voluntary termination of employment by the Executive. 8 5.11 "Termination Upon Change of Control" means: (a) any termination of the employment of an Executive by the Company without Cause during the period commencing on or after the date that the Company first publicly announces a definitive agreement that would result in a Change of Control (even though still subject to approval by the Company's shareholders and other conditions and contingencies) and ending on the date which is twelve (12) months following a Change of Control; or (b) any resignation by an Executive for Good Reason where (i) such Good Reason occurs during the period commencing on or after the date that the Company first publicly announces a definitive agreement that would result in a Change of Control (even though still subject to approval by the Company's shareholders and other conditions and contingencies) and ending on the date which is twelve (12) months following the Change of Control, and (ii) such resignation occurs within six (6) months following the occurrence of such Good Reason. Notwithstanding the foregoing, the term "Termination Upon Change of Control" shall not include any termination of the employment of an Executive (1) by the Company for Cause; (2) by the Company as a result of the Disability of the Executive; (3) as a result of the death of the Executive; or (4) as a result of the voluntary termination of employment by the Executive for reasons other than Good Reason. 6. EXCLUSIVE REMEDY 6.1 No Other Benefits Payable. An Executive shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Sections 2, 3 and 4 have been provided to the Executive, except as expressly set forth in this Plan or, subject to the provisions of Sections 11 and 15, in a duly executed agreement between Company and the Executive entered into after the date of adoption of this Plan. 6.2 Release of Claims. The Company may condition payment of the cash severance in Sections 2, 3 and 4 of this Plan and the stock option acceleration described in Sections 2, 3 and 4 of this Plan upon the delivery by the Executive of a signed general release of claims in a form reasonably satisfactory to the Company and covering the Company, its parents and subsidiary entities, and its directors, officers and agents; provided, however, that an Executive shall not be required to release any rights an Executive may have to be indemnified by the Company. 7. PROPRIETARY AND CONFIDENTIAL INFORMATION The Company shall condition payment of the cash severance benefits described in this Plan upon an Executive's acknowledgment of his or her continuing obligation to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Executive and the Company. 9 8. NON-SOLICITATION; NON-COMPETITION 8.1 Agreement Not to Solicit. If Company performs its obligations to deliver the severance benefits set forth in Sections 2, 3 and 4 of the Plan, then for a period of one (1) year after an Executive's termination of employment, the Executive will not solicit, induce, or attempt to solicit or induce, the services or business of any employee (other than the Executive's administrative assistant), distributor, vendor, representative, business partner, customer, distributor, licensee, manufacturer, or customer of the Company to discontinue that person's or entity's relationship with or to the Company. 8.2 Transition Services. If Company performs its obligations to deliver the severance benefits set forth in Sections 3 and 4 of the Plan, then for a period of (i) one (1) year in the case of a Termination Upon a Change of Control, and (ii) six (6) months in the case of a Termination in the Absence of a Change of Control, after Executive's termination of employment: to the maximum extent enforceable by law, the Executive will provide reasonable transition services as requested by the Company. 8.3 Non-Competition. The Executive agrees that, in connection with a Change of Control transaction, to the extent permitted by applicable law, for a period of one year after the date of the Change of Control transaction, without the consent of the Board of Directors of the Company (or, if applicable, the acquiring of surviving corporation in such Change of Control transaction), which consent shall not be unreasonably withheld, the Executive shall not engage in (as defined below) or provide services to any business that is directly or indirectly competitive with the then-present or then-actively contemplated business of the Company, in any county, state, country or other jurisdiction in which the Company is then-doing business or is then-planning to do business. Each of the following activities shall, without limitation, be deemed to constitute engaging in business within the meaning of this Section: to engage in, work with, have an interest or concern in, advise, lend money to, guarantee the debts or obligations of, or permit one's name or any part thereof to be used in connection with, an enterprise or endeavor, either individually, in partnership, or in conjunction with any person or persons, firms, associations, companies, or corporations, whether as a principal, agent, shareholder, employee, officer, director, partner, consultant or in any other manner whatsoever; provided, however, that the Executive shall retain the right to invest in or have an interest in entities traded on any public market or offered by any national brokerage house, provided that said interest does not exceed five percent (5.0%) of the voting control of said entity. In addition, the Executive may make passive investments in privately held entities that are determined by the Board of Directors of the Company not to be competitors of Company. 10 9. ARBITRATION 9.1 Disputes Subject to Arbitration. Any claim, dispute or controversy arising out of this Plan, the interpretation, validity or enforceability of this Plan or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association; provided, however, that (1) the arbitrator shall have no authority to make any ruling or judgment that would confer any rights with respect to the trade secrets, confidential and proprietary information or other intellectual property of the Company upon an Executive or any third party; and (2) this arbitration provision shall not preclude the Company from seeking legal and equitable relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's intellectual property. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. 9.2 Site of Arbitration. The site of the arbitration proceeding shall be in San Francisco, California. 10. INTERPRETATION This Executive and the Company agree that this Plan shall be interpreted in accordance with and governed by the laws of the State of California as applied to contracts entered into and entirely to be performed within that state. 11. CONFLICT IN BENEFITS; NONCUMULATION OF BENEFITS 11.1 No Limitation of Regular Benefit Plans. Except as provided in Section 11.2 below, this Plan is not intended to and shall not affect, limit or terminate any plans, programs, or arrangements of the Company that are regularly made available to a significant number of employees or officers of the Company, including without limitation the Company's stock option plans; and this Plan is not intended to and shall not affect, limit or terminate any provisions contained in written option agreements entered into between the Company and the Executive before the date of adoption of this Plan. 11.2 Noncumulation of Cash Benefits. An Executive may not cumulate cash severance payments, stock options and restricted stock vesting under both this Plan and another plan or policy of the Company (except for such provisions, if any, relating to options or restricted stock under the Company's 1995 Equity Incentive Plan). If an Executive has any other binding written agreement with the Company which provides that upon a Change of Control or termination of employment the Executive shall receive Change of Control or termination benefits, then no benefits shall be received by the Executive under this Plan unless the Executive agrees in writing to waive his or her rights to such benefits, in which case this Plan shall supercede any such written agreement with respect to such benefits. 11 12. SUCCESSORS AND ASSIGNS 12.1 Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, to assume and agree to perform this Plan in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement shall be a material breach of this Plan. 12.2 No Assignment of Rights. The interest of an Executive in this Plan or in any distribution to be made under this Plan may not be assigned, pledged, alienated, anticipated, or otherwise encumbered (either at law or in equity) and shall not be subject to attachment, bankruptcy, garnishment, levy, execution, or other legal or equitable process. Any act in violation of this Section 12.2 shall be void. 12.3 Heirs and Representatives of an Executive. This Plan shall inure to the benefit of and be enforceable by an Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. 13. NOTICES For purposes of this Plan, notices and all other communications provided for in the Plan shall be in writing and shall be deemed to have been duly given (i) when delivered if delivered by means of personal delivery, (ii) one business day after deposit with a reputable national courier service for overnight delivery, with confirmation of receipt, (iii) one business day after transmission by telecopier with confirmation of receipt (and a copy delivered by mail), and (iv) three business days after deposit in the mail, if delivered by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Cellegy Pharmaceuticals, Inc. 349 Oyster Point Boulevard, Suite 200 South San Francisco, CA Sunnyvale, CA 94080 Attention: Chief Executive Officer and if to an Executive at the address specified by the Executive or, if no address is specified, to the last known address for the Executive as reflected in the Company's business records. Either party may provide the other with notices of change of address, which shall be effective upon receipt. 14. NO REPRESENTATIONS An Executive acknowledges that in entering into this Plan, the Executive is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Plan. 12 15. MODIFICATION AND AMENDMENT At any time after the Effective Date of this Plan and prior to the date thirty (30) days before the earlier of (1) the date that the Company first publicly announces it is conducting negotiations leading to a Change of Control, or (2) the date that the Company enters into a definitive agreement that would result in a Change of Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies), the Board of Directors of the Company shall have the right to amend, suspend or terminate this Plan at any time and for any reason. Notwithstanding the preceding sentence, however, no amendment or termination of this Plan shall reduce an Executive's rights or benefits under this Plan if the Executive was employed by the Company before the date the amendment is adopted or this Plan is terminated, as appropriate. 16. VALIDITY 16.1 Invalid Provisions. If any one or more of the provisions (or any part thereof) of this Plan shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 16.2 Execution by Company Executive Officer or Director. This Plan and any modifications or amendments shall require the approval of the Board of Directors of the Company. 17. EFFECTIVE DATE; TERM OF PLAN 17.1 Effective Date. The Effective Date of this Plan is the date this Plan is adopted by the Board of Directors. 17.2 Term of Plan. The term of the Plan shall continue until December 31, 2006. 13 Exhibit A CELLEGY PHARMACEUTICALS, INC. RETENTION AND SEVERANCE PLAN AGREEMENT OF PLAN PARTICIPATION This Agreement of Plan Participation ("Agreement") is made and entered into as of __________, 2003, by and between Cellegy Pharmaceuticals, Inc., a California corporation (the "Company"), and the executive named below (the "Executive"). Each capitalized term herein not otherwise defined shall have the meaning ascribed to it in the Cellegy Pharmaceuticals, Inc. Retention and Severance Plan For Executives, as amended (the "Plan"). RECITALS A. The Company has adopted the Plan to provide certain retention and severance benefits to certain executives of the Company under the circumstances provided in the Plan. B. The Company has determined that it is in the best interests of the Company to enter into this Agreement with Executive. AGREEMENT THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Participation in the Plan. Executive shall participate in the Plan, as amended, and receive the rights and benefits provided in the Plan and this Agreement pursuant to the terms and conditions thereof. 2. Termination Upon a Change of Control. As described in greater detail in the Plan, upon a Termination Upon Change of Control, Executive will receive (a) twelve (12) months Base Salary and the annual target bonus at the 100% level for the year in which the Termination Upon Change of Control occurred, payable in one lump sum amount under Section 2.2.1 of the Plan, and (b) twelve (12) months (or, if earlier, until the Executive becomes covered by another employer's health plan, as described in Section 2.4 of the Plan) of paid COBRA coverage; and all outstanding options and restricted stock held by Executive shall vest in full under Section 2.3.1 of the Plan, and Executive shall have twelve (12) months from the date of termination of employment within which to exercise such options. 3. Termination In Absence of Change of Control. As described in greater detail in the Plan, upon a Termination in Absence of Change of Control, Executive will receive (a) six (6) months of Base Salary continuation under Section 3.2 (subject to reduction as provided in Section 3.2 of the Plan), (b) six (6) months after the date of employment termination to exercise any outstanding stock options granted under the Company's 1995 Equity Incentive Plan, to the extent such options were vested and exercisable as of the date of termination, and (c) six (6) months (or, if earlier, until the Executive becomes covered by another employer's health plan, as described in Section 3.4 of the Plan) of paid COBRA coverage. 4. No Other Benefits. Executive agrees that by executing this Agreement and participating in the Plan, Executive waives and terminates his or her rights to any cash severance or option or restricted stock acceleration or continued vesting under any agreement with the Company other than this Agreement (whether written or oral) or as provided in the Plan, that provides that upon a change of control or termination of employment Executive would be entitled to receive any cash severance or acceleration or continued vesting of options. 5. Release of Claims. As provided in the Plan, Executive's right to receive the severance and other benefits described in this Agreement and in the Plan are conditioned on Executive executing and delivering to the Company a release of claims, substantially in the form of Appendix A attached hereto or such other form as the Company may reasonably require. 6. General; Miscellaneous. The other terms and provisions of the Plan are hereby incorporated by referenced as if set forth fully herein. This Agreement may be executed in one or more counterparts, each of which shall constitute an original but all of which taking together shall constitute one and the same agreement. Executive has read and understands, and agrees to be bound by, the terms and conditions of the Plan, as amended, and this Agreement. This Agreement (including the Plan) contains the entire understanding and agreement between the parties with respect to the subject matter of the Agreement and supersedes any and all prior agreements, negotiations and discussions between the Company and the Executive with respect to the subject matter hereof. Nothing in this Agreement or the Plan will be construed to limit or otherwise affect in any manner whatsoever the right or power of the Company to terminate Executive's employment or other relationship with the Company at any time, for any reason or no reason, with or without cause. No amendment or termination of the Plan shall reduce any of Executive's rights or benefits under the Plan or this Agreement. [Remainder of this page intentionally left blank] 2 FOR EXECUTIVES IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Plan Participation set forth above. CELLEGY PHARMACEUTICALS, INC. EXECUTIVE: By: ---------------------------------- ----------------------------------- Name: Name: Title: Date: 3 -----END PRIVACY-ENHANCED MESSAGE-----