As filed with the Securities and Exchange Commission on January 12, 2009

Registration 333-155322

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-4

 

128 Grandview Rd.

Boyertown, PA 19512

(215) 529-6084

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Richard C.Williams

Interim Chief Executive Officer

Cellegy Pharmaceuticals, Inc.

128 Grandview Road

Boyertown, PA 19512

(215) 529-6084

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

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THE CELLEGY BOARD OF DIRECTORS HAS DETERMINED THAT IT IS ADVISABLE AND IN THE BEST INTERESTS OF CELLEGY AND ITS STOCKHOLDERS TO AMEND CELLEGY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT, IN CONNECTION WITH AND IMMEDIATELY BEFORE THE CLOSING OF THE MERGER WITH ADAMIS, AS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND HAS APPROVED SUCH PROPOSAL. THE CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY STOCKHOLDERS VOTE “FOR” CELLEGY PROPOSAL NO. 2 TO AMEND ITS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION.

 

THE CELLEGY BOARD OF DIRECTORS HAS DETERMINED THAT IT IS ADVISABLE AND IN THE BEST INTERESTS OF CELLEGY AND ITS STOCKHOLDERS TO APPROVE THE 2009 EQUITY INCENTIVE PLAN, CONDITIONED UPON THE CLOSING OF THE MERGER WITH ADAMIS, AND HAS APPROVED SUCH PROPOSAL. THE CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY STOCKHOLDERS VOTE “FOR” CELLEGY PROPOSAL NO. 5 TO ADOPT THE 2009 EQUITY INCENTIVE PLAN, CONTINGENT ON THE CLOSING OF THE ADAMIS MERGER TRANSACTION.

 

THE CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF EACH OF THE NAMED NOMINEES IN CELLEGY PROPOSAL NO. 6, AS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.

 

THE CELLEGY BOARD OF DIRECTORS HAS DETERMINED THAT ADJOURNING THE CELLEGY ANNUAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF THE CELLEGY PROPOSALS OUTLINED ABOVE IS ADVISABLE AND IN THE BEST INTERESTS OF CELLEGY AND ITS STOCKHOLDERS AND HAS APPROVED SUCH PROPOSAL. THE CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY STOCKHOLDERS VOTE “FOR” CELLEGY PROPOSAL NO. 7 TO ADJOURN THE CELLEGY ANNUAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF THE CELLEGY PROPOSALS OUTLINED ABOVE.

 

Record Date and Voting Power

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To vote in person, come to the Cellegy annual meeting and Cellegy will give you a ballot when you arrive.

 

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To vote using the proxy card, simply mark, sign and date your proxy card and return it promptly in the postage-paid envelope provided. If you return your signed proxy card to Cellegy before the Cellegy annual meeting, Cellegy will vote your shares as you direct.

 

All properly executed Cellegy proxies that are not revoked will be voted at the Cellegy annual meeting and at any adjournments or postponements of the Cellegy annual meeting in accordance with the instructions contained in the proxy. If a holder of Cellegy common stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” Cellegy Proposal No. 1 to approve the issuance of shares of Cellegy common stock to Adamis stockholders pursuant to the merger, “FOR” Cellegy Proposal No. 2 to effect the reverse stock split as described in this proxy statement/prospectus, “FOR” Cellegy Proposal No. 3 to amend Cellegy’s amended and restated certificate of incorporation to change the corporate name effective upon the closing of the merger with Adamis, “FOR” Cellegy Proposal No. 4 to amend Cellegy’s amended and restated certificate of incorporation to increase the number of authorized shares of capital stock effective upon the closing of the merger with Adamis, “FOR” Proposal No. 5 to approve the 2009 Equity Incentive Plan, conditioned upon the closing of the Adamis merger, “FOR” Cellegy Proposal No. 6 to elect the five nominees to the Cellegy board of directors, and “FOR” Cellegy Proposal No. 7 to adjourn the Cellegy annual meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the Cellegy proposals outlined above in accordance with the recommendation of the Cellegy board of directors.

 

A Cellegy stockholder of record as of the applicable record date described above who has submitted a proxy may revoke it at any time before it is voted at the Cellegy annual meeting by executing and returning a proxy bearing a later date, filing written notice of revocation with the Secretary of Cellegy stating that the proxy is revoked or attending the Cellegy annual meeting and voting in person.

 

Required Vote

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Solicitation of Proxies

THE SPECIAL MEETING OF ADAMIS STOCKHOLDERS

 

Date, Time and Place

THE ADAMIS BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE BEST INTERESTS OF ADAMIS AND ITS STOCKHOLDERS AND HAS APPROVED THE MERGER AND THE MERGER AGREEMENT. THE ADAMIS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ADAMIS STOCKHOLDERS VOTE “FOR” ADAMIS PROPOSAL NO. 1 TO APPROVE AND ADOPT THE MERGER AGREEMENT.

 

THE MERGER

Management  contacted three companies and gave substantive review to three additional companies concerning their interest in discussions regarding a merger transaction or sale of assets transaction. Possible candidates with businesses in different industries were reviewed, although the board’s preference was a transaction with a privately-held biopharmaceutical or healthcare company having a modest valuation, as the board believed this would provide a better fit with Cellegy’s existing business and would provide Cellegy’s existing stockholders a better opportunity for future appreciation and to obtain a higher percentage ownership interest in the combined company. The companies that Cellegy contacted were in the pharmaceutical or healthcare business.   Management was aware of these companies through its general knowledge of the pharmaceutical and healthcare industries. Management did not have specific size criteria.  Based on the healthcare industry’s dynamics, management believed that strategic fit was an important factor in realizing value for the stockholders. Also significant, but of less importance, was that a candidate have some existing sales and was not just in the research and development stage. The board believed that the most attractive merger candidate would have revenues from an existing product line as well as products in development, as this would increase the likelihood of securing additional funding for continued product development after completion of the merger. One candidate contacted was a private company with business activities in the healthcare area. The company had several products in the marketplace generating approximately $12 million of revenues as well as a drug product candidate relating to Type II diabetes that was in a late stage clinical trial. Mr. Williams met with the chief executive officer of the candidate on March 6, 2007 to discuss the candidate’s business and the possibility of a merger transaction. At a meeting of the board of directors held on March 13, 2007, management and the board reviewed the candidate’s business. The board also discussed general strategic alternatives for Cellegy, including continuing as an independent company and seeking additional funding, sale of other assets of the company, seeking to license to third parties portions of those assets to reduce overhead, liquidation of the company, filing for bankruptcy, and pursuing a business combination transaction. The board believed that a merger transaction was the preferred alternative , since a merger would involve the acquisition of both the assets and liabilities of the company, would avoid possible time, expense, and uncertainty and delays in resolving any outstanding claims, liabilities or obligations, that would be involved in a bankruptcy or a liquidation of the company following an asset sale, and would give the stockholders the opportunity to participate as stockholders in the business of an acquiring company.  The board authorized management to pursue the candidate in more depth. The parties held several telephonic conference calls and individual calls during March through June 2007 with the candidate regarding a possible merger transaction involving all stock an no cash consideration and with the Cellegy stockholders owning a small percentage of the combined company, and which would have required a need for substantial additional capital after the closing to support current and future business activities. Management informally apprised the board of progress and the discussions held. Counsel for Cellegy and counsel for the candidate had a number of communications in April and May 2007 regarding possible transaction structures and various legal issues concerning a possible transaction. Cellegy management undertook due diligence review of the candidate concerning its business, and Cellegy’s chief financial officer conducted an on-site visit in the second half of May 2007. In mid-June 2007, the third party’s management ceased communications with Cellegy and efforts to restart discussions were not successful. Cellegy subsequently learned that the principal shareholders of the third party candidate company had decided to d issolve their relationship, and that the remaining principal shareholder had decided to fund and operate the candidate as a private company.

 

Another private pharmaceutical company that expressed an interest in acquiring Cellegy’s women’s healthcare products was contacted in June 2007 to determine if the third party continued to have interest and whether or not such party had access to funds to complete a transaction. The party expressed interest in discussing an all-stock merger transaction with Cellegy and indicated that it was in the process of arranging financing to purchase a prescription drug product line from a third party company that would complement Cellegy’s remaining programs. Following discussions between Mr. Williams and the chief executive officer of the third party in June and early July 2007 concerning due diligence and possible legal and accounting issues relating to a merger transaction, at a meeting of the Cellegy board held on July 9, 2007, the board authorized management to continue discussions with the third party, as well as to continue consideration of other alternatives. In the second half of July, the third party indicated to Mr. Williams that financing was not feasible without terms relating to the post-merger combined company that Cellegy’s management deemed unacceptable, including use of Cellegy’s cash as security for a debt financing, discontinuance of any clinical trials on Savvy and various strict default conditions. The board, which had been informed of discussions and progress with the party, concurred that the party was not an ideal candidate. Discussions were terminated in the second half of July 2007.

In the next two weeks, discussions were begun with Adamis. Adamis was introduced to Mr. Williams by one of the company’s directors, John Q. Adams, Sr., who knew of Adamis through his other business activities including serving as a director of or consultant to various private companies. During July 2007, Mr. Williams held several conversations with Dr. Dennis Carlo, the chief executive officer of Adamis, David Marguglio, a vice president of Adamis, and Rand Mulford, who at the time was a vice president of Adamis, Rob Caso held conversations with Rob Hopkins, the chief financial officer of Adamis, and Rand Mulford,  and other preliminary due diligence efforts were undertaken. At a meeting of the audit committee of the board held on July 30, 2007 at which all directors were present except for Dr. Klar, Mr. Williams updated the board concerning the business and intended business of Adamis and discussions with Adamis regarding a possible merger transaction. Mr. Williams apprised Dr. Klar by telephone after the meeting of the update and discussion. Management informed the directors that Adamis was in the process of negotiating a transaction to acquire International Laboratories Inc., referred to as International Labs or INL, an independent contract packager of pharmaceutical products located in Florida providing thermoform packaging, bottling and packaging services, and that reaching agreement on that transaction was expected to proceed in parallel with discussions concerning the possible merger transaction with Cellegy. The board again reviewed options for the company and directed management to continue discussions concerning the merger alternative. Cellegy’s board authorized management to proceed with discussions with Adamis because, among other things, Adamis had existing pharmaceutical products being sold in the marketplace and intellectual property relating to a number of potential product candidates in significant markets. Cellegy and Adamis also believed that the acquisition of INL, while not part of the core business of Adamis, had the potential to generate a revenue stream to help support future operating expenses and development efforts.

On August 3, 2007, Adamis delivered a draft of a term sheet to Cellegy describing a framework for discussions regarding a possible merger transaction, and the parties held a conference call to discuss the term sheet. The term sheet contemplated a merger transaction and a reverse stock split of the Cellegy common stock in which Cellegy equity holders, on a fully-diluted basis, would hold approximately 10% of the fully-diluted equity of the combined company, and that before the closing Adamis would acquire INL.  Adamis also delivered to Cellegy certain due diligence background materials including a confidential private placement memorandum dated August 2006 that included information concerning Adamis’ business, products and product candidates and estimates concerning certain  possible future product sales and financial performance outcomes, and internal management estimates of possible future financial measures including revenues and profitability outcomes.  This material was provided for due diligence purposes, was not audited or reviewed by Adamis’ auditors, had not been updated since the date of its preparation, and was not prepared for the purpose of disclosure to Cellegy. The parties exchanged drafts of terms sheets concerning a possible merger transaction through early August 2007, the terms of which were consistent in material respects with the initial term sheet. The parties continued discussions in the first half of August concerning issues relating to the structure, valuation, timing and terms of a possible transaction, and due diligence continued.

On August 10, 2007, Weintraub Genshlea Chediak, Cellegy’s regular outside counsel for several years, distributed a first draft of a merger agreement to counsel for Adamis , Cooley Godward Kronish LLP, which was Adamis’ regular outside counsel and had been retained in December 2007 . On August 16, 2007, the parties held a telephone call with counsel for both companies present to discuss the draft agreement and business, accounting and legal issues relating to a possible transaction .  Mr. Williams and Mr. Caso participated in the call for Cellegy and Dr. Carlo, Mr. Marguglio, Mr. Mulford and Mr. Hopkins participated in the call for Adamis.  The terms of a possible merger transaction that were discussed on the call were consistent in all material respects with the terms outlined in the initial term sheet.  Following the call, Cellegy management updated the board concerning the status of discussions and issues relating to a merger transaction, including the intent to structure a transaction so as to be tax-free to the shareholders of both companies, the filing of a registration statement and proxy statement with the SEC concerning the transaction, the need for Adamis to complete the audit of its financial statements before a registration statement was filed, and the mechanics of the reverse stock split contemplated by the transaction.

Throughout August and September 2007, legal counsel for Cellegy and Adamis periodically communicated concerning due diligence and transaction issues, Mr. Caso and Mr. Hopkins held telephone conversations and exchanged documents to discuss various accounting and financial reporting aspects of a possible transaction, and revised drafts of the merger agreement were exchanged.

The parties and counsel had another conference call on September 8, 2007 to discuss the draft of the merger agreement and related accounting and legal issues. Mr. Williams and Mr. Caso participated in the call for Cellegy and Dr. Carlo, Mr. Marguglio, Mr. Mulford and Mr. Hopkins participated in the call for Adamis.  The parties discussed the status of due diligence, the status of Adamis’ discussions concerning the acquisition of INL, and certain issues concerning the draft of the merger agreement including whether the number of shares that Cellegy stockholders would hold after the transaction would be subject to reduction depending on the amount of cash that Cellegy held at or near the closing date of the merger, and whether Adamis’ obligation to close the merger would be subject to Adamis having adequate financing as of the closing date.  Mr. Williams indicated that Cellegy did not favor a financing closing condition. Discussions between Mr. Williams, Dr. Carlo, Mr. Marguglio and Mr. Mulford, and between Mr. Caso and Mr. Hopkins, continued throughout September, and Mr. Williams updated the board informally concerning the fact that due diligence was progressing, that the transaction appeared to be moving forward, the discussions with Adamis concerning a financing closing condition and possible reduction in the number of shares to be held by Cellegy stockholders based on Cellegy’s cash at the closing date, and that Adamis appeared to be moving forward in its acquisition of INL.

On September 10, 2007, Robert Caso, Cellegy’s chief financial officer, visited the International Laboratories facility in Tampa, Florida and discussed business and financial issues relating to a possible transaction and to International Laboratories’ future business plans with Mr. Aloi and Mr. Hopkins. Mr. Caso also toured the plant and current packing operations and discussed expansion plans. On September 18, 2007, David Marguglio, a vice president of Adamis, visited Cellegy’s offices in Quakertown, Pennsylvania, met with Mr. Caso and reviewed business and legal due diligence issues and various company agreements and due diligence materials.

Discussions continued during September 2007 concerning finance, due diligence and accounting issues relating to a possible transaction and concerning the proposed International Laboratories acquisition transaction. In the last week of September, Dr. Carlo informed Mr. Williams that certain issues had arisen concerning the International Laboratories acquisition transaction, including the need to obtain the consent from a creditor of International Laboratories that held a secured promissory note in the principal amount of approximately $500,000. The notes were secured by collateral consisting of most of the outstanding shares of International Laboratories. Adamis indicated to Cellegy that it was negotiating with the creditor concerning the circumstances under which the creditor would be willing to release its security interest in the shares so as to permit Adamis to acquire International Laboratories. Adamis indicated that it did not presently have the funds to pay the note in full in connection acquisition of International Laboratories and to fund likely short-term capital needs of International Labs. Cellegy management discussed with Adamis the possibility that Cellegy would buy the note from its current holder for cash. Adamis indicated that it was engaged in discussions with two potential investors that had expressed an interest in injecting funds into Adamis by a debt instrument or direct equity, but that due diligence would take several weeks. Adamis indicated that an investment from one of these two potential investors was preferable to Cellegy’s assumption of the International Labs note.

During the later part of November 2007, several discussions were held between Dr. Carlo of Adamis and Mr. Williams regarding the percentage of the combined company that Cellegy stockholders would hold post-merger. Adamis had earlier indicated that it would consider an ownership range for Cellegy stockholders of between 5% and 10%. A revised proposal was submitted by Dr. Carlo to Mr. Williams on November 30, 2007, proposing in part that Cellegy lend $1 million to Adamis. After consultation with directors and reviewing the cash needs of Cellegy during the time before completion of the proposed merger, Cellegy concluded that a loan of $1 million would leave Cellegy with insufficient cash to address unforeseen delays in completion of the transaction or other unforeseen expenses. On December 3, 2007, Mr. Williams responded to Adamis and proposed a secured loan of $500,000 at the time of signing the merger agreement, with repayment if the merger did not take place by a specific date. The loan would be converted into a number of shares equal to approximately 5% of the then-outstanding equity of Adamis, effective at the closing of the merger, and Cellegy stockholders would be entitled to receive additional shares based upon the amount of Cellegy’s net current assets, determined based on dividing the amount of net current assets by $0.50. In subsequent negotiations held in December 2007, Adamis proposed that the note would not be secured, that the note would convert into shares of Adamis stock at the closing of the merger (which would be cancelled), and that the ratio of the reverse stock split would provide that the Cellegy shareholders would hold 2,500,000 shares of common stock, plus possible additional amounts depending on the amount of Cellegy’s net current assets.

Effective December 31, 2007, Adamis completed the acquisition of International Laboratories. Beginning the week of January 14, 2008, the parties discussed several principal transaction issues and negotiated concerning the merger agreement and ancillary documents. Following negotiations, Adamis agreed that there would not be a closing condition based on its having adequate funding, and the parties agreed that, as reflected in the terms of the final merger agreement, the number of shares that Cellegy stockholders would hold following the merger and reverse stock split would depend in part on the amount of Cellegy’s net working capital. In connection with negotiations concerning several transaction issues and terms, Adamis agreed that the base number of shares to be held by the Cellegy stockholders immediately after the merger, which would be determined by the ratio of the reverse stock split of the Cellegy common stock, would be increased to 3,000,000 shares. In early February 2008, revised drafts of the principal transaction documents , reflecting the material terms of the transaction, were exchanged between the parties.

 

 

February 12, 2008 Board Meeting

 

On February 12, 2008, the Cellegy board held a meeting, with Cellegy’s legal counsel present. In connection with that meeting, drafts of the merger agreement and principal ancillary agreements, including the voting agreements and the unsecured promissory note relating to the $500,000 loan to Adamis, were circulated to the directors. Mr. Caso and Mr. Williams summarized Cellegy’s current and expected cash position and the status of consideration of various alternatives. Mr. Williams updated the board on negotiations with Adamis, including acquisition of International Labs and the terms of the recent Adamis debt financing relating to that acquisition. Mr. Williams and outside counsel for Cellegy summarized the proposed terms of the transaction with Adamis, including the percentage ownership of the combined company that Cellegy stockholders would own, the proposed reverse stock split of the Cellegy common stock before the merger and the determination of the reverse stock split ratio, the representations, warranties, covenants, closing conditions and indemnity provisions of the merger agreement and other material terms. Mr. Williams and Mr. Caso presented financial information and analysis regarding Adamis , including a summary, based on information provided by Adamis, of estimated future revenues, expenses and income; an excerpt from a private placement memorandum of Adamis , which had been updated in certain respects from the memorandum previously provided to Cellegy,  providing an overview of Adamis’ current and anticipated business; a summary of the proposed transaction prepared by Mr. Caso ; and a summary of the financial analysis described below . The board discussed the terms of the proposed transaction, various strategic alternatives to the merger transaction and management’s financial analysis of the transaction. Following review, the board approved the merger agreement and related proposals and transactions.

 

 

Cellegy did not obtain any independent appraisal of the assets or liabilities (contingent or otherwise) of Cellegy or Adamis. Cellegy assumed that the merger would be completed in a timely manner and in accordance with the terms of the merger agreement without any limitations, restrictions, conditions, amendments or modifications, regulatory or otherwise, that collectively would have a material effect on Cellegy or Adamis. Cellegy management relied upon the representations of Adamis in the merger agreement and assumed, without independent verification, that financial statements and financial information provided to Cellegy were reasonably prepared, and that there was no material change in the assets, financial condition and business prospects of Cellegy and Adamis since the date of the most recent Adamis financial information made available to Cellegy.

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Following the board meeting, the merger agreement and ancillary documents were finalized. The changes made to the merger agreement and other ancillary agreements during this time were not substantive and did not alter the consideration to be received by Adamis stockholders or any other material term from the version of the merger agreement, voting agreement and promissory note circulated to the Adamis directors in connection with the February 12, 2008, meeting of the board of directors. The merger agreement and ancillary documents were executed and delivered by the parties on February 12, 2008.

 

Developments After the Date of the Merger Agreement Regarding International Laboratories

 

In early April 2008, Adamis decided to dispose of the International Labs subsidiary. Historically, INL’s largest customers were generic drug manufacturers that produce drugs in bulk and rely on independent contractors to package the products, usually in blister packs or bottles, for delivery to their customers. In mid-April 2008, a third party entity contacted Adamis and indicated its interest in pursuing discussions to acquire International Labs. After negotiations between Adamis and the third party during April through July 2008, the parties entered into a definitive purchase agreement and on July 18, 2008, Adamis sold all of the outstanding shares of INL to the third party, for a purchase price of approximately $2.7 million, of which $500,000 was held in escrow as described below. In addition, the purchaser agreed to pay approximately $10.5 million of liabilities of INL, including approximately $4.3 million payable to Adamis. Proceeds to Adamis, including repayment to Adamis by INL of amounts previously advanced by Adamis to INL, were approximately $6.8 million. At or shortly after the closing of the transaction, Adamis used approximately $3.8 million of the proceeds to pay certain Adamis obligations, including approximately $2.2 million of Adamis debt incurred in connection with its original purchase of INL. Up to $500,000 is potentially payable to Adamis after the expiration of a six-month escrow/holdback period, with the precise amount depending on whether any indemnity claims are asserted during that period by the purchaser of INL and how any such claims are resolved. Adamis agreed to indemnify the purchaser against losses arising out of breaches or inaccuracies of representations and warranties made by Adamis or INL in the purchase agreement, failure of INL or Adamis to perform their covenants or agreements set forth in the purchase agreement, and liabilities of INL relating to periods before the closing date of the transaction. Adamis’ indemnification obligations expire as follows: 18 months after the closing date for most representations and warranties; and 15 days after the expiration of the relevant statute of limitations in the case of Adamis’ representation concerning INL’s compliance, to Adamis’ knowledge, in all material respects with applicable laws, The purchase agreement does not include any specific time period within which claims for indemnity must be asserted for breaches of certain basic representations concerning due organization of INL, capitalization of INL, authorization for INL to enter into the purchase agreement and enforceability of the purchase agreement against INL and Adamis, and Adamis’ title to the shares sold to the purchaser. In connection with the transaction, the former stockholders of INL from whom Adamis had acquired the business agreed to return to Adamis eight million of the shares of Adamis common stock that Adamis previously issued to them and held in escrow as part of the purchase price paid by Adamis to acquire INL. In deciding to sell INL, Adamis’ management and board of directors took into account several factors, including (i) the significant amounts of additional cash that would be necessary to invest in INL in order to purchase additional machinery and equipment and to prepare to perform its obligations under its various agreements with third parties as well as prepare for future growth in its business, (ii) uncertainties surrounding INL’s ability to purchase the machinery necessary to support its anticipated increased level of operations, (iii) the limited cash resources that Adamis had available to invest in the INL operations, (iv) the uncertainties surrounding INL’s levels of future revenues and profitability, (v) the benefits to Adamis from receipt of the net cash proceeds from sale of INL and the elimination of liabilities and obligations relating to INL, and (vi) the benefit to Adamis and its stockholders from the reduction in the number of outstanding Adamis shares resulting from the return of eight million of the Adamis shares from the former stockholders of INL.

During the discussions between Adamis and the third party, Adamis kept Cellegy informed concerning the discussions and the terms of the proposed sale, and Cellegy concurred in the proposed sale. Cellegy’s management and board of directors concluded that the sale of INL on the terms agreed to by Adamis did not materially alter Cellegy’s analysis of the potential benefits of the transaction to Cellegy’s stockholders. Cellegy management and board reviewed an analysis of the proposed sale by Adamis of INL, and concluded that the sale of INL was not likely to materially impact the relative valuations of Cellegy and Adamis or the board’s conclusions regarding the relative percentage share ownership in the post-merger combined company of the respective Cellegy and Adamis stockholders.

Reasons for the Merger

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the results of efforts made by Cellegy management to solicit indications of interest from third parties regarding a potential business combination or other alternative transactions;

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the future prospects for Cellegy’s business, and the costs of attempting to continue as an independent company;

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the terms and conditions of the merger agreement, including the following related factors:

 

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the percentage of the combined company that the Cellegy stockholders will receive in the transaction , which was expected to be in the range of about 7%, or somewhat higher or lower than 7%, of the outstanding shares of the combined company, which the Cellegy board believed was consistent in material respects with the valuation analysis of the two companies that was presented to the board;

 

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the limited number and nature of the conditions to Adamis’ obligation to consummate the merger;

 

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Cellegy’s rights under the merger agreement to consider certain unsolicited acquisition proposals under certain circumstances should Cellegy receive a superior proposal;

 

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the conclusion of Cellegy’s board of directors that the potential termination fee of $150,000, and the circumstances when such fee may be payable, were reasonable;

 

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the no-solicitation provisions governing Adamis’ ability to engage in negotiations with, provide any confidential information or data to, and otherwise have discussions with, any person relating to an alternative acquisition proposal; and

 

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the belief that the terms of the merger agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable under the circumstances;

 

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Cellegy’s understanding of Adamis’ business, including its product candidates, Adamis’ experienced management team, and the prospects for value creation for Cellegy stockholders in connection with the merger;

 

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the likelihood that the merger would be consummated, including the likelihood that the merger will receive all necessary approvals;

 

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the opportunity for Cellegy’s stockholders to participate in the long-term value of Adamis’ product candidate development programs as a result of the merger;

 

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the possibility that the combined entity would be able to take advantage of the potential benefits resulting from the combination of Cellegy’s public company infrastructure and Adamis’ experienced management team; and

 

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the Cellegy board of directors’ consideration of strategic alternatives to the merger, including engaging in a merger transaction with another company or undertaking a bankruptcy or liquidation of Cellegy.

 

 

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the risks related to Adamis and the combined company as described in the risk factors section set forth elsewhere in this joint proxy statement/prospectus, including the risk that the combined company will not be successful in developing commercial products, the risk that the combined company will not be able to secure funding for such development on commercially reasonable terms or at all, and the risk that revenues from Adamis’ future products and services will be less than expected;

 

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the $150,000 termination fee payable to Adamis upon the occurrence of certain events and the potential effect of such termination fee in deterring other potential acquirers from proposing an alternative transaction that may be more advantageous to Cellegy stockholders;

 

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the risks, challenges and costs inherent in combining the operations of the two companies and the substantial expenses to be incurred in connection with the merger, including the possibility that delays or difficulties could adversely affect the combined company’s operating results and preclude the achievement of some of the benefits anticipated from the merger;

 

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the possible volatility of the trading price of Cellegy’s common stock resulting from the merger announcement;

 

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the risk that the merger might not be consummated in a timely manner or at all;

 

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the fact that the prospects for the Adamis’ products and product candidates involve uncertainty;

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the $500,000 loan from Cellegy to Adamis would reduce Cellegy’s available cash during the pendency of the merger transaction, and Cellegy would be subject to the risk of nonpayment by Adamis of the Adamis note upon the maturity date of the Adamis note if the merger was not completed; and

 

The board also discussed potential alternatives to the transaction, including attempting to remain as an independent company and secure additional funding, attempting to secure a strategic partner, pursuing a voluntary bankruptcy filing, pursuing a voluntary dissolution proceeding, and continuing to pursue an alternative business combination transaction with a third party other than Adamis. The board noted that no third party had expressed a willingness to continue funding the company as an independent company, and that no third party entity had expressed an interest in a strategic partner relationship. The board concluded that Cellegy could not be viable as an independent entity without obtaining significant additional funding, which was not likely to be available.

The board reviewed the issues likely to be involved with pursuing a voluntary dissolution or bankruptcy and concluded that those alternatives would not be in the best interests of the stockholders and were not likely to provide superior value. The board concluded that a voluntary bankruptcy filing would likely result in less value to Cellegy’s stockholders, and potentially to creditors, than the proposed transaction with Adamis in light of, among other factors, the significant legal and other costs involved in preparing and pursuing a bankruptcy filing, the uncertainty concerning the ability to fund Cellegy’s operations during a bankruptcy proceeding, the ongoing operating and legal expenses during the pendency of a bankruptcy proceeding, the adverse effect that a bankruptcy filing could have on Cellegy’s stock price, the possible assertion of contingent claims in the proceeding and the possible delay in resolving those claims, the uncertain outcome of resolution of issues with creditors and stockholders in those proceedings, the likelihood that any party seeking to acquire Cellegy as part of a bankruptcy proceeding would offer less than the consideration proposed to be paid by Adamis, the possible time periods involved in winding up Cellegy’s operations as part of a bankruptcy proceeding and delay in distribution of any remaining funds to Cellegy’s stockholders, the range of amounts likely to be available to stockholders upon completion of such proceedings, the fact that one or more current employees might terminate their employment, making it more difficult to operate during the bankruptcy proceeding, and other factors. The board concluded that it was unlikely to attract a superior merger offer than the proposed transaction with Adamis, and that attempting to continue looking for other transactions would involve additional time and expense with no reasonable prospect of a superior result for the stockholders. The board noted that Cellegy had engaged in discussions with a number of potential business combination partners, that a business combination with Adamis presented an attractive opportunity for the Cellegy stockholders to benefit from the anticipated appreciation in the value of the combined company’s business, that third parties with whom Cellegy previously had discussions had elected not to pursue further discussions concerning a merger transaction, and that Cellegy’s declining cash balances made further pursuit of a different business combination transaction an unattractive alternative compared to the opportunity with Adamis.

After evaluating the proposed transaction with Adamis and taking into account all of the factors previously discussed and considered by the board, the board unanimously approved the merger transaction with Adamis and authorized management to negotiate and enter into definitive agreements on terms consistent in material respects with the terms presented to the board. In making its determination, the board considered the percentage of the combined company that would be held by Cellegy stockholders, the existing business and future business prospects of Adamis, the overall structure of the transaction, the fact that a merger transaction would result in Adamis assuming all existing obligations of Cellegy as opposed to an asset sale structure where Cellegy would remain responsible for obligations after the closing, the terms of the merger agreement and the factors and considerations described above.
 

The foregoing information and factors considered by Cellegy’s board of directors are not intended to be exhaustive but are believed to include all of the material factors considered by Cellegy’s board of directors. The Cellegy board of directors viewed its recommendation to approve the merger transaction as being based upon its business judgment in light of Cellegy’s financial position and the totality of the information presented and considered, and the overall effect of the transaction on the stockholders of Cellegy compared to other alternatives.   In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, Cellegy’s board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of Cellegy’s board of directors may have given different weight to different factors. Cellegy’s board of directors conducted an overall analysis of the factors described above, including discussions with, and questioning of, Cellegy’s management and Cellegy’s legal advisors, and considered the factors overall to be favorable to, and to support, its determination.

 

Interests of Cellegy’s Board of Directors and Executive Officers in the Proposed Transaction . The Cellegy board was aware that certain of Cellegy’s directors and executive officers may have interests in the proposed transaction that are different from, or in addition to, the interests of Cellegy’s stockholders generally, and that these interests may present them with actual or potential conflicts of interest. Richard C. Williams, Robert B. Rothermel and John Q. Adams, Sr., who currently are directors of Cellegy, are expected to continue to serve on the board of directors of the combined company following the consummation of the merger and upon the closing of the merger will each receive new outside director stock option grants to purchase 50,000 shares of common stock.  Following the merger, they will be eligible to receive cash outside director fee compensation pursuant to the combined company’s director compensation policies.  Cellegy will not be required to pay severance, change in control or similar payments to any director or executive officer in connection with the proposed merger transaction.

 

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The Adamis board considered a number of factors in reaching its decision, without assigning any specific or relative weight to such factors. The material factors considered included:

 

·

information concerning the business, operations, net worth, liabilities, cash assets and needs, and future business prospects of Adamis and Cellegy, both individually and on a combined basis;

 

·

the belief that by combining operations, the combined company would have better opportunities for future growth than Adamis would have on its own;

 

·

the current and prospective economic and competitive environments facing Adamis as a stand-alone company;

 

·

the fact that the holders of Adamis capital stock would own a substantial majority of the outstanding capital stock of the combined company;

 

·

the belief that the merger would provide Adamis with additional management and financial resources, including immediate cash;

 

·

the opportunity for Adamis’ stockholders to benefit from potential appreciation in the value of the combined company’s common stock;

 

·

the potential impact of the merger and becoming a public company on Adamis’ ability to raise additional capital; and

 

·

the expectation that the merger would be accomplished on a tax-free basis for United States federal income tax purposes for United States taxpayers, except for taxes payable on cash received by Adamis stockholders in lieu of fractional shares.

 

In addition to considering the factors outlined above, the Adamis board of directors considered the following factors in reaching its conclusion to approve the merger and to recommend that the Adamis stockholders approve the merger agreement, all of which it viewed as supporting its decision to approve the business combination with Cellegy:

 

·

the results of the due diligence review of Cellegy’s business and operations by Adamis’ management confirmed that the assets and liabilities of Cellegy were substantially as represented by Cellegy management;

 

·

the terms and conditions of the merger agreement, including the following related factors:

 

·

the number of the shares of the combined company that the Adamis stockholders will receive in the transaction;

 

·

the nature of the conditions to Cellegy’s obligation to consummate the merger and the limited risk of non-satisfaction of such conditions;

 

·

the limited number and nature of the conditions to Adamis’ obligation to consummate the merger;

 

·

the conclusion of Adamis’ board of directors that the potential termination fee of $150,000, and the circumstances in which such fee may be payable, were reasonable;

 

·

the no-solicitation provisions governing Cellegy’s ability to engage in negotiations with, provide any confidential information or data to, and otherwise have discussions with, any person relating to an alternative acquisition proposal; and

 

·

the belief that the terms of the merger agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable under the circumstances;

 

·

the voting agreements entered into by stockholders of Cellegy holding approximately 41% of the outstanding capital stock of Cellegy as of February 12, 2008, pursuant to which those stockholders agreed, solely in their capacities as Cellegy stockholders, to vote all of their shares of Cellegy capital stock in favor of the merger transaction;

·

the likelihood that the merger will be consummated, including the likelihood that the merger will receive all necessary approvals;

 

·

the possibility that the combined entity would be able to take advantage of the potential benefits resulting from the combination of Cellegy’s public company infrastructure and Adamis’ management team; and

 

·

the Adamis board of directors’ consideration of strategic alternatives to the merger, including engaging in a business transaction with another company.

 

The Adamis board also considered a number of risks and potentially negative factors in its deliberations concerning the merger, including the risk factors described elsewhere in this joint proxy statement/prospectus, and in particular:

 

·

the fact that Adamis’ stockholders will not receive the full benefit of any future growth in the value of their equity that Adamis may have achieved as an independent company;

 

·

the risks associated with the existing operations of Cellegy;

 

·

the limitations on Adamis, as set forth in the merger agreement, from engaging in discussions and negotiations with any party other than Cellegy concerning a business combination involving Adamis;

 

 

·

the possibility that Cellegy might have less than expected net working capital at the closing of the merger;

 

·

the risk that the potential benefits of the merger may not be realized;

 

·

the risks, challenges and costs inherent in combining the operations of the two companies and the substantial expenses to be incurred in connection with the merger, including the possibility that delays or difficulties could adversely affect the combined company’s operating results and preclude the achievement of some of the benefits anticipated from the merger;

 

·

the possible volatility, at least in the short term, of the trading price of Cellegy’s common stock following the merger;

 

·

the risk of diverting management’s attention from other strategic priorities to implement merger integration efforts;

 

·

the risk that the merger might not be consummated in a timely manner or at all and the potential adverse effect of the public announcement of the merger on Adamis’ reputation;

 

·

the risk to Adamis’ business, operations and financial results in the event that the merger is not consummated; and

 

·

various other risks associated with the combined company and the merger, including those described in the section entitled “Risk Factors” in this joint proxy statement/prospectus.

 

The board of directors of Adamis determined that the merger is preferable to the other alternatives that might be available to Adamis, such as remain independent and attempting to grow internally through equity or debt financings, or engaging in a transaction with another party. The Adamis board made that determination because it believes that the merger will unite two companies with complementary needs, assets and board members, thereby creating a combined company with greater capital strength and profitability potential than Adamis possesses on a stand-alone basis.

 

For the reasons set forth above, the board of directors of Adamis recommended that holders of Adamis capital stock vote to approve the merger agreement, the merger contemplated thereby, and the related transactions.

Interests of Cellegy’s Directors and Executive Officers in the Merger

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