UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21022
SHAMAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
213 East Grand Avenue, South San Francisco, California 94080
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
650-952-7070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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
Number of shares of Common Stock, $.001 par value, outstanding
as of April 30, 1998: 17,861,362
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SHAMAN PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
March 31, 1998
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PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of March 31, 1998 3
(Unaudited) and December 31, 1997
Condensed Statements of Operations for the 4
three months ended March 31, 1998 and March
31, 1997 (unaudited)
Condensed Statements of Cash Flows for the 5
three months ended March 31, 1998 and March
31, 1997 (unaudited)
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosure About
Market Risk 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults in Senior Securities 25
Item 4. Submission of Matters to a Vote of Security 25
Holders
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
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SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C> <C>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,953,451 $ 11,340,702
Short-term investments 6,245,679 10,079,943
Amounts due from related parties 179,447 192,551
Prepaid expenses and other 704,558 553,507
current assets ------------- -------------
Total current assets 15,083,135 22,166,703
Property and equipment, net 3,597,846 3,972,140
Other assets 596,120 613,657
------------- -------------
Total assets $ 19,277,101 $ 26,752,500
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIT)
Current liabilities:
Accounts payable and other
accrued expenses $ 1,323,675 $ 925,701
Accrued clinical trial costs 2,509,731 1,689,659
Accrued professional fees 726,056 718,625
Accrued compensation 836,929 368,272
Advances - contract research 289,855 1,133,605
Current installments of long-term obligations 2,583,148 2,783,976
------------- -------------
Total current liabilities 8,269,394 7,619,838
Long-term obligations, excluding
current installments 3,840,075 4,017,979
Senior convertible notes 10,179,334 9,967,044
Stockholders' equity:
Series A preferred stock 400 400
Common stock 17,861 17,796
Additional paid-in capital 117,451,608 117,164,524
Deferred compensation and other
adjustments (82,663) (124,910)
Accumulated deficit (120,398,908) (111,910,171)
------------- -------------
Total stockholders' equity (net capital deficit) (3,011,702) 5,147,639
------------- -------------
Total liabilities and stockholders' equity
(net capital deficit) $ 19,277,101 $ 26,752,500
============= =============
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NOTE: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to condensed financial statements.
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SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-------------------------------
1998 1997
------------ ------------
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Revenue from collaborative agreements $ 875,000 $ 875,000
Operating expenses:
Research and development 7,513,098 6,015,368
General and administrative 1,276,111 991,099
------------ ------------
Total operating expenses 8,789,209 7,006,467
------------ ------------
Loss from operation (7,914,209) (6,131,467)
Other income (expense):
Interest income 232,368 251,112
Interest expense (806,896) (101,394)
------------ ------------
Net loss $ (8,488,737) $ (5,981,749)
============= =============
Net loss per share $ (0.48) $ (0.39)
============= =============
Shares used in calculation of
net loss per share 17,836,000 15,455,000
============= =============
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See Notes to condensed financial statements.
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SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Three Months Ended March 31,
--------------------------------
1998 1997
------------- -------------
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Operating activities:
Net loss $ (8,488,737) $ (5,981,749)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 650,912 557,663
Loss on disposal of fixed assets 26,593 --
Payment of interest in Common Stock 288,563 --
Changes in operating assets and liabilities:
Prepaid expenses, other current assets
and other assets (120,410) 119,630
Accounts payable, accrued expenses and
contract research advances 850,384 (1,066,941)
------------ ------------
Net cash used in operating activities (6,792,695) (6,371,397)
------------ ------------
Investing activities:
Purchases of short-term investments (1,999,049) (1,024,373)
Maturities of available-for-sale investments 4,959,136 --
Sales of available-for-sale investments 899,007 --
Capital expenditures (33,143) (210,057)
------------ ------------
Net cash provided (used in)by investing activities 3,825,951 (1,234,430)
------------ ------------
Financing activities:
Proceeds from issuance of Common Stock 12,225 8,112,127
Principal payments on long-term obligations (643,964) (544,694)
Proceeds from asset financing arrangements 211,232 --
------------ ------------
Net cash provided (used in) by financing activities (420,507) 7,567,433
------------ ------------
Net decrease in cash and cash equivalents (3,387,251) (38,394)
Cash and cash equivalents at beginning of period 11,340,702 16,051,251
------------ ------------
Cash and cash equivalents at end of period $ 7,953,451 $ 16,012,857
============ ============
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See Notes to condensed financial statements.
5
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SHAMAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Basis of Presentation
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops of novel pharmaceutical products for major human diseases by isolating
active compounds from tropical plants. The Company has three compounds in
clinical development: Provir, an oral product for the treatment of
Aids-associated and watery diarrhea in patients with AIDS and other watery
diarrhea indications; nikkomycin Z, an oral antifungal for the treatment of
systemic fungal infections; and SP-134101, an oral product for the treatment of
Type II diabetes. Shaman maintains an active Type II diabetes research program
which serves as the basis for its collaborations with Lipha s.a., a wholly-owned
subsidiary of Merck KGaA, Darmstadt, Germany ("Lipha/Merck"), and with Ono
Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire year.
This unaudited financial data should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K/A, for the fiscal year ended December 31, 1997, filed with
the Securities and Exchange Commission on May 11, 1998.
2. Loss per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. At March 31, 1998 and 1997, outstanding
stock options and other stock equivalents are antidilutive.
3. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, adoption in the quarter ended
March 31, 1998 did not have a material impact on the Company's net income or
stockholders' equity.
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In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for the
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of Statement 131, but does not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments and disclosures.
4. Subsequent Events
Senior Convertible Notes
In May 1998, persuant to the terms of the Senior Convertible Notes, a
principal amount of $1.9 million was converted into a total of 472,861 shares of
the Company's Common Stock. As a result of converting these notes, the Company's
Senior Convertible Notes' balance has been reduced from $10.2 million, as of
March 31, 1998, to $8.3 million. See "Liquidity and Capital Resources".
7
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SHAMAN PHARMACEUTICALS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops of novel pharmaceutical products for major human diseases by isolating
active compounds from tropical plants. The Company has three compounds in
clinical development: Provir, an oral product for the treatment of
Aids-associated and watery diarrhea in patients with AIDS and other watery
diarrhea indications; nikkomycin Z, an oral antifungal for the treatment of
systemic fungal infections; and SP-134101, an oral product for the treatment of
Type II diabetes. Shaman maintains an active Type II diabetes research program
which serves as the basis for its collaborations with Lipha s.a., a wholly-owned
subsidiary of Merck KGaA, Darmstadt, Germany ("Lipha/Merck"), and with Ono
Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.
The Company began operations in March 1990. To date, Shaman has not sold
any products and does not anticipate receiving product revenue in the near
future. The Company's accumulated deficit at March 31, 1998, was approximately
$120.4 million. Shaman expects to continue to incur substantial and increasing
losses over the next several years, due primarily to the expense of preclinical
studies, clinical trials and its ongoing research program. The Company expects
that losses will fluctuate from quarter to quarter and that such fluctuations
could be substantial. Shaman has financed its research, development and
administrative activities through various private and public equity financing,
collaborative agreements with pharmaceutical companies and, to a lesser extent,
through equipment and leasehold improvement lease financings.
Results of Operations for the Quarters Ended March 31, 1998 and 1997
The Company recorded collaborative revenues of $875,000 for each of the
quarters ended March 31, 1998 and 1997. Revenues for these three-month periods
resulted from the Company's on-going research funding from Ono and research
funding from Shaman's collaboration with Lipha/Merck. The Company expects that
revenues from collaborative agreements will continue to fluctuate in the future
as development of its various compounds proceeds and new product candidates are
partnered for development and commercialization.
The Company incurred research and development expenses of $7.5 million and
$6.0 million for the quarters ended March 31, 1998 and 1997, respectively. This
increase was primarily attributable to the Company's increased clinical
development activities with respect to Provir. Research and development expenses
are expected to increase in 1998 as the Company continues its clinical
development activities with respect to Provir, other products continue through
development, and the Company maintains its diabetes research program.
8
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General and administrative expenses were $1.3 million and $991,000 for the
quarters ended March 31, 1998 and 1997, respectively. This increase was
primarily attributable to increases in compensation and marketing research
related to late stage clinical products, as well as additional legal dispute
costs. The Company's expanded research and clinical activities are not expected
to require commensurate increases in general and administrative support and
expense.
Interest income was $232,000 and $251,000 for the quarters ended March 31,
1998 and 1997, respectively. Interest income decreased for the period ended
March 31, 1998, compared with the period ended March 31, 1997, due to lower
average cash and investment balances as the Company continues to fund its
operations. Interest expense was $807,000 and $101,000 for the quarters ended
March 31, 1998 and 1997, respectively. Interest expense increased for the period
ended March 31, 1998, compared with the period ended March 31, 1997 due to
higher average debt balance and amoritzation of the non-cash interest expense of
$266,000 in connection with certain debt financing.
Liquidity and Capital Resources
As of March 31, 1998, the Company's cash, cash equivalents, and investments
totaled approximately $14.2 million, compared with $21.4 million at December 31,
1997, with an average maturity of 2.3 months and 5.0 months, respectively. The
Company invests excess cash according to its investment policy that provides
guidelines with regard to liquidity, type of investment, credit ratings and
concentration limits.
In June 1997, the Company privately issued $10.4 million of senior
convertible notes (the "1997 Private Placement"). The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option. Initially, the notes are
convertible into Common Stock of the Company at 100% of the low trading price
during a designated time period prior to conversion provided that the conversion
price will not be less than $5.50 per share until November 7, 1997 (the "Fixed
Conversion Period"). Thereafter, the notes are convertible into Common Stock of
the Company at a 10% discount from the low trading price during a designated
time period prior to the conversion. The Company filed a registration statement
with the Securities and Exchange Commission (the "SEC") for the resale of shares
issued upon conversion of these notes, which registration statement was declared
effective on August 29, 1997. In November 1997, a principal amount of $220,666
was converted into 55,102 shares of the Company's Common Stock. In May 1998,
certain note holders converted a portion of their notes into the Company's
Common Stock. See "Notes to Condensed Financial Statements -- Note 4. Subsequent
Events".
In March 1998, the Company and the purchasers of the Notes entered into an
Amendment Agreement (the "Amendment Agreement") which extended the Fixed
Conversion Period to March 31, 1998. As consideration for entering into the
Amendment Agreement, the Company issued to the Selling Stockholders Warrants to
purchase an aggregate of 137,500 shares of Common Stock. The Warrants are
exercisable through March 18, 2001 at an exercise price of $7.50 per share. The
Company has filed a registration statement with the SEC for the resale of shares
issued
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upon exercise of the Warrants, which registration statement has not, as of the
date of filing this Quarterly Report been declared effective.
In May 1997, the Company obtained a $5.0 million, 36-month term loan to pay
off pre-existing debt, finance capital asset acquisitions and finance continued
research and clinical development of the Company's existing product candidates.
The loan carries an annual interest rate of 14.58% and is payable in equal
monthly installments over the term of the loan. The lender was granted an
exercise price of 10 year warrants to purchase 200,000 shares of the Company's
Common Stock at $6.25 per share. The Company has attributed a value of $648,000
to these warrants. This amount has been recorded as a discount on the related
debt and is being amortized as interest expense over the term of the loan.
In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to jointly develop Shaman's antihyperglycemic drugs.
Upon signing the collaboration, the Company received an annual research fee of
$1.5 million which was amortized to revenue over 12 months, as work was
performed. The Company also received approximately $3.0 million for 388,918
shares of Common Stock priced at $7.71 per Common share, representing a 20%
premium to the weighted average price of the Company's Stock at the time of
purchase. In exchange for development and marketing rights in all countries
except Japan, South Korea, and Taiwan (which are covered under an earlier
agreement between Shaman and Ono),
Lipha/Merck will provide up to $9.0 million in research payments and up to
$10.5 million in equity investments priced at a 20% premium to a multi-day
volume weighted average price of the Company's Common Stock at the time of
purchase. The agreement also provides for additional preclinical and clinical
milestone payments to the Company in excess of $10.0 million per compound for
each antihyperglycemic drug developed and commercialized. Lipha/Merck will bear
all pre-clinical, clinical, regulatory and other development expenses associated
with the compounds selected under the agreement. In addition, as products are
commercialized, Shaman will receive royalties on all product sales outside the
United States and up to 50% of the profits (if the Company exercises its
co-promotion rights) or royalties on all product sales in the United States.
Certain of the milestone payments will be credited against future royalty
payments, if any, due to the Company from sales of products developed pursuant
to the agreement.
In July 1996, the Company closed a private placement (the "1996 Private
Placement") pursuant to Regulation S under the Securities Act of 1933, as
amended, in which it received gross proceeds of $3.3 million for the sale of
400,000 shares of Series A Convertible Preferred Stock and for the issuance of a
six-year warrant to purchase 550,000 shares of the Company's Common Stock at an
exercise price of $10.18 per share. The Preferred Stock does not carry a
dividend obligation and will convert into Common Stock no later than July 23,
1999 at a price per share between $6.00 and $8.15, depending on the market value
of the Company's Common Stock during the period prior to conversion. Holders of
preferred shares are entitled to a liquidation preference of $8.15 per share. In
addition to the sale of Preferred Stock and the warrant, the Company has the
right, from time to time during the period beginning January 1997 and ending
July 2000, to sell up to 1,200,000 additional shares of Common Stock to the
investor at a formula price of 100% or 101% of a multi-day average of the
Company's Common Stock price at the time of sale. If the Company exercises this
right, the
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investor has the option to increase the shares purchased by up to an aggregate
of 527,500 shares.
The Company expects to incur substantial additional costs relating to the
continued preclinical and clinical testing of its products, regulatory
activities and research and development programs. The Company anticipates that
its cash, cash equivalents and investment balances of approximately $14.2
million at March 31, 1998, the collaborative revenue committed by Lipha/Merck,
Lipha/Merck's commitment to purchase additional equity and Shaman's additional
rights to sell Common Stock under the 1996 Private Placement will be adequate to
fund operations, including payments due under long-term obligations, through the
end of 1998. Milestone payments which may be received by the Company from Ono
and Lipha/Merck would extend the Company's capacity to finance its operations
beyond that time. However, there can be no assurance that these milestones will
be achieved, or that additional funding, if needed, will be available on
reasonable terms, or at all.
Future Outlook
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that Shaman is
still a relatively young company and has not yet completed a full cycle of
development, regulatory approval and commercialization for any of its product
candidates. The clinical and regulatory processes through which the Company's
products must proceed are complex, uncertain and costly, and no assurance can be
given regarding the timing of clinical or regulatory progress or that the
Company will be successful in commercializing any of its product candidates.
These development processes require substantial amounts of funding, and the
Company is dependent on corporate partners and the equity markets to finance
such efforts. Where access to funding is difficult, the Company's stockholders
may face significant dilution, and the ability of the Company to proceed with
its programs and plans may be significantly and adversely affected. Actions and
advances by competitors may also significantly affect the Company's prospects,
as may the existence of patents held by such competitors or potential
competitors. In addition, there can be no assurance that any plants required by
the Company will be indefinitely available or that any compounds derived from
the plant material will result in protected proprietary rights for the Company.
Item 3. Qualitative and Quantitative Disclosure About Market Risk.
Not Applicable.
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Risk Factors
This Form 10-Q contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in Form 10-K/A for
fiscal year ended December 31, 1997, filed with the Securities and Exchange
Commission on May 11, 1998.
Early Stage of Development; Technological Uncertainty. Shaman has not yet
completed the development of any products. Many of the Company's products will
require significant additional clinical testing and investment prior to
commercialization. Products for therapeutic use in human health care must be
evaluated in extensive human clinical trials to determine their safety and
efficacy as part of a lengthy process to obtain government approval. The
Company's Provir, nikkomycin Z and SP-134101 products are each in clinical
development. Positive results for any of these products in a clinical trial do
not necessarily assure that positive results will be obtained in future clinical
trials or that government approval to commercialize the products will be
obtained.
Clinical trials may be terminated at any time for many reasons, including
toxicity or adverse event reporting. There can be no assurance that any of the
Company's products will be successfully developed, enter into human clinical
trials, prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, obtain required regulatory approvals, be capable of being
produced in commercial quantities at reasonable costs or be successfully
marketed or that the Company will not encounter problems in clinical trials that
will cause the Company to delay or suspend product development. Failure of any
of the Company's products to be commercialized could have a material adverse
effect on the Company's business, financial condition and results of operations.
History of Operating Losses; Products Still in Development; Future
Profitability Uncertain. Shaman was incorporated in 1989 and has experienced
significant operating losses in each of its fiscal years since operations began.
As of March 31, 1998, the Company's accumulated deficit was approximately $120.4
million. The Company has not generated any product revenues and expects to incur
substantial operating losses over the next several years. All of Shaman's
products and compounds are in research and development, which require
substantial expenditures of funds. In order to generate revenues or profits, the
Company, alone or with others, must successfully develop, test, obtain
regulatory approval for and market its potential products. No assurance can be
given that Shaman's product development efforts will be successful, that
required regulatory approvals will be obtained, or that the products, if
developed and introduced, will be successfully marketed or will achieve market
acceptance.
Future Capital Needs; Uncertainty of Additional Funding. As of March 31,
1998, the Company had cash, cash equivalents and investment balances of
approximately
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$14.2 million. The Company will require substantial additional funds to
conduct the development and testing of its potential products and to manufacture
and market any products that may be developed. The Company's future capital
requirements will depend on numerous factors, including the progress of its
research and development programs, the progress of preclinical and clinical
testing, the time and costs involved in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in the Company's existing collaborative and licensing relationships, the
ability of the Company to establish additional collaborative relationships for
the manufacture and marketing of its potential products, and the purchase of
additional capital equipment. In addition, Note Purchase Agreements entered into
by the Company in connection with the 1997 Private Placement, provide that under
certain circumstances, which include a failure to meet applicable NASD listing
requirements, the Company would be required to redeem all or some portion of the
$8.3 million principal due thereunder, which redemption could significantly
accelerate the Company's cash expenditures and capital requirements beyond the
levels currently anticipated, and would materially and adversely affect the
Company's ability to conduct its business.
The Company will need to seek additional funding through public or private
equity or debt financings, collaborative arrangements or from other sources. If
additional funds are raised by issuing equity securities, significant dilution
to existing stockholders may result. In the event that additional funds are
obtained through collaborative agreements, such agreements may require the
company to relinquish rights to certain of its technologies, product candidates,
products or marketing territories that the Company would otherwise seek to
develop or commercialize itself. There can be no assurance that additional
financing will be available on acceptable terms or at all. If adequate funds are
not available, the Company is likely to be required to delay, scale back or
eliminate one or more of its research, discovery or development programs or
otherwise reduce its levels of expenditures, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
No Assurance of Successful Product Development. The Company's research and
development programs are at various stages of development, ranging from the
research stage to clinical trials. Substantial additional research and
development will be necessary in order for the Company to move additional
product candidates into clinical testing, and there can be no assurance that any
of the Company's research and development efforts on these or other potential
products, including Provir, nikkomycin Z, and SP-134101 will lead to development
of products that are shown to be safe and effective in clinical trials.
In addition, there can be no assurance that any such products will meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. Further, the Company's products may prove to have undesirable or
unintended side effects that may prevent or limit their commercial use. The
Company may find, at any stage of this complex product development process, that
products that appeared promising in
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preclinical studies or Phase I and Phase II clinical trials do not demonstrate
efficacy in larger-scale, Phase III clinical trials and do not receive
regulatory approvals. Accordingly, any product development program undertaken
by the Company may be curtailed, redirected, suspended or eliminated at any
time.
In addition, there can be no assurance that the Company's testing and
development schedules will be met. Any failure to meet such schedules could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's clinical trials may be delayed by many
factors, including, but not limited to: slower than anticipated patient
enrollment; difficulty in finding a sufficient number of patients fitting the
appropriate trial profile; difficulties in the acquisition of sufficient
supplies of clinical trial materials; or, failure to show efficacy in clinical
trials or adverse events occurring during the clinical trials. Completion of
testing, studies and trials may take several years, and the length of time
varies substantially with the type, complexity, novelty and intended use of the
product. In addition, data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. Delays or rejections may be encountered based upon many
factors, including changes in regulatory policy during the period of product
development and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertainties Associated with Clinical Trials. Shaman has conducted, and
plans to continue to conduct, extensive and costly clinical trials to assess the
safety and efficacy of its potential products. The rate of completion of the
Company's clinical trials is dependent upon, among other factors, the rate of
completion and approval of trial protocols, the availability of funds for trials
and the rate of patient enrollment. Patient enrollment is a function of many
factors, including the nature of the Company's clinical trial protocols,
existence of competing protocols, size of patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Delays in
patient enrollment will result in increased costs and delays, which could have a
material adverse effect on the Company's ability to complete clinical trials in
a timely fashion.
The Company cannot assure that patients enrolled in its clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the U.S. FDA
regulations applicable to such testing can result in delay, suspension or
cancellation of such testing, and/or refusal by the FDA to accept the results of
such testing. In addition, the FDA or the Company may suspend clinical trials at
any time if either of them concludes that any patients participating in any such
trial are being exposed to unacceptable health risks. Further, there can be no
assurance that human clinical testing will demonstrate that any current or
future product candidate is safe or effective or that data derived from any such
study will be suitable for submission to the FDA or other regulatory
authorities. Failure of the Company's clinical trials to demonstrate safety or
efficacy in humans could cause the delay, suspension, or termination of any
product program and could have a material adverse effect on the Company's
business, financial condition and results of operations.
14
<PAGE>
Dependence on Collaborative Relationships. The Company's research and
development efforts in its diabetes program and, to a lesser extent, in its
other programs, is dependent upon its arrangements with Lipha/Merck and Ono and
the compliance of such partners with the terms and conditions of such
collaborative agreements including, without limitation, providing funding for
research and development efforts and the achievement of milestones and assisting
the Company in its research and development efforts. These partners may develop
products that may compete with those of the Company. The amount and timing of
resources they allocate to these programs is not within the Company's control.
There can be no assurance that these partners will perform their obligations as
expected or that any significant revenues will ultimately be derived from such
agreements. The Company's agreement with Ono may be terminated in the event Ono
determines further development of compounds is not warranted, provided certain
other conditions are met. Termination of either agreement is subject to certain
surviving obligations. If one or more such partners elected to terminate their
relationships with the Company, or if the Company or its partners fail to
achieve targeted milestones, it could have a material adverse effect on the
Company's ability to fund such programs, or to develop any products on a
collaborative basis with such partners.
The Company licensed the use of nikkomycin Z from Bayer AG in June 1995.
Under the terms of this licensing agreement, the Company has paid Bayer an
initial milestone payment and may be required, upon the occurrence of certain
events, to make additional milestone payments and to pay royalties on any
commercialized products derived from nikkomycin Z. The failure of the Company to
pay these milestone payments or the termination of this license agreement could
cause the Company to forfeit its rights to utilized nikkomycin Z and could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company expects to seek additional collaborative agreements to
commercialize its other product candidates and will, in particular, need to rely
on such third party arrangements to commercialize its products outside the
United States. No assurance can be given that the Company will be successful in
negotiating or entering into such agreements on terms favorable to the Company
or at all, or that any such agreement, if entered into by the Company will be
successful. A failure to successfully enter into such agreements and sell
products thereunder would have a material adverse effect on the Company's
business, financial condition and results of operations.
Rapid Technological Change and Substantial Competition. The pharmaceutical
industry is subject to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology companies and universities is
intense. Many of these entities have significantly greater research and
development capabilities, as well as substantial marketing, manufacturing,
financial and managerial resources, and represent significant competition for
the Company. There can be no assurance that developments by others will not
render the Company's products or technologies noncompetitive or that the Company
will be able to keep pace with technological developments. Competitors have
developed or are in the process of developing technologies that are, or in the
future may be, the basis for competitive products. Some of these products may
have an entirely different approach or means of
15
<PAGE>
accomplishing the desired therapeutic effect than products developed by the
Company. These competing products may be more effective and less costly than the
products developed by the Company. In addition, other forms of medical treatment
may offer competition to the Company's products. The development of competing
compounds could have a material adverse effect on the Company's business,
financial condition or results of operations.
Government Regulation; No Assurance of Regulatory Approvals. All new
drugs, including the Company's products under development, are subject to
extensive and rigorous regulation by the federal government, principally the
FDA, and comparable agencies in state and local jurisdictions and in foreign
countries. These authorities impose substantial requirements upon the
preclinical and clinical testing, manufacturing and marketing of pharmaceutical
products. The steps required before a drug may be approved for marketing in the
United States generally include (i) preclinical laboratory and animal tests,
(ii) the submission to the FDA of an IND for human clinical testing, (iii)
adequate and well controlled human clinical trials to establish the safety and
efficacy of the drug, (iv) submission to the FDA of an NDA, and (v) satisfactory
completion of an FDA inspection of the manufacturing facility or facilities at
which the drug is made to assess compliance with GMP.
Lengthy and detailed preclinical and clinical testing, validation of
manufacturing and quality control processes, and other costly and time-consuming
procedures are required. Satisfaction of these requirements typically takes
several years and the time needed to satisfy them may vary substantially, based
on the type, complexity and novelty of the pharmaceutical product. The effect of
government regulation may be to delay or to prevent marketing of potential
products for a considerable period of time and to impose costly procedures upon
the Company's activities. There can be no assurance that the FDA or any other
regulatory agency will grant approval for any products developed by the Company
on a timely basis, or at all. Success in preclinical or early stage clinical
trials does not assure success in later stage clinical trials.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
If regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed. Further,
even if regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product, including
withdrawal of the product from the market. Any delay or failure in obtaining
regulatory approvals would have a material adverse effect on the Company's
business, financial condition and results of operation.
Among the conditions for FDA approval of a pharmaceutical product is the
requirement that the manufacturer's (either the Company's own or a third-party
manufacturer) quality control and manufacturing procedures conform to current
GMP, which must be followed at all times. The FDA strictly enforces GMP
requirements through periodic unannounced inspections. There can be no assurance
that the FDA will determine that the facilities and manufacturing procedures of
the Company or any third-party manufacturer of the Company's planned products
will conform to GMP requirements. Additionally, the Company or its third-party
16
<PAGE>
manufacturer must pass a pre-approval inspection of its manufacturing facilities
by the FDA before obtaining marketing approval. Failure to comply with
applicable regulatory requirements may result in penalties such as restrictions
on a product's marketing or withdrawal of a product from the market.
The FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States could result in new government regulations that
could have a material adverse effect on the Company's business. The Company is
unable to predict the likelihood of adverse governmental regulation that might
arise from future legislative or administrative action, either in the United
States or abroad.
The Company will also be subject to a variety of foreign regulations
governing clinical trials, registration and sales of its products. Regardless of
whether FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process varies from country to country and the
time needed to secure approval may be longer or shorter than that required for
FDA approval. Delays in the approval process or the failure to obtain such
foreign approvals would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Sources of Supply. The Company currently imports all of the
plant materials from which its products are derived from countries in South and
Latin America, Africa and Southeast Asia. To the extent that its products cannot
be economically synthesized or otherwise produced, the Company will continue to
be dependent upon a supply of raw plant material. The Company does not have
formal agreements in place with all of its suppliers. In addition, a continued
source of plant supply is subject to the risks inherent in international trade.
These risks include unexpected changes in regulatory requirements, exchange
rates, tariffs and barriers, difficulties in coordinating and managing foreign
operations, political instability and potentially adverse tax consequences.
Interruptions in supply or material increases in the cost of supply could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, tropical rain forests, and certain
irreplaceable plant resources therein, are currently threatened with
destruction. In the event portions of the rain forests are destroyed which
contain the source material from which Shaman's current or future products are
derived, such destruction could have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Manufacturing and Marketing Experience and Capacity. The Company
currently produces products only in quantities necessary for clinical trials and
does not have the staff or facilities necessary to manufacture products in
commercial quantities. As a result, the Company must rely on collaborative
partners or third-party manufacturing facilities, which may not be available on
commercially acceptable terms adequate for Shaman's long-term needs. If the
Company should encounter delays or difficulties in establishing relationships
with qualified manufacturers to produce, package and distribute its finished
products, clinical trials, regulatory filings, market introduction and
subsequent sales of such products could be adversely affected.
17
<PAGE>
Contract manufacturers must adhere to GMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program. Contract
manufacturing facilities must pass a pre-approval plant inspection before the
FDA will approve an NDA. Certain material manufacturing changes that occur after
approval are also subject to FDA review and clearance or approval. There can be
no assurance that the FDA or other regulatory agencies will approve the process
or the facilities by which any of the Company's products may be manufactured.
The Company's dependence on third parties for the manufacture of products may
adversely affect the Company's ability to develop and deliver products on a
timely and competitive basis. Should the Company be required to manufacture
products itself, the Company will be subject to the regulatory requirements
described above, to similar risks regarding delays or difficulties encountered
in manufacturing any such products and will require substantial additional
capital. There can be no assurance that the Company will be able to manufacture
any such products successfully or in a cost-effective manner.
The Company currently has no sales staff. To the extent that the Company
does not or is unable to enter into co-promotion agreements or to arrange for
third party distribution of its products, significant additional resources will
be required to develop a complete marketing and sales force. There can be no
assurance that the Company will be able to enter into collaborative agreements
or successfully establish a marketing and sales force.
Uncertainty Regarding Patents and Proprietary Rights; Current Legal
Proceedings Regarding Patents and Proprietary Rights. The Company's success will
depend in large part on its ability to obtain and maintain patents, protect
trade secrets and operate without infringing upon the proprietary rights of
others. Moreover, competitors may have filed patent applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to products or processes competitive with those of the Company. There can be no
assurance that the Company's patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any issued patents will provide the Company with adequate protection for its
inventions or will not be challenged by others, or that the patents of others
will not impair the ability of the Company to commercialize its products. The
patent position of firms in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office (the "PTO") or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents. There is considerable variation between countries as to the level of
protection afforded under patents and other proprietary rights. Such differences
may expose the Company to differing risks of commercialization in each foreign
country in which it may sell products. There can be no assurance that others
will not independently develop similar products, duplicate any of the Company's
products or design around any patents of the Company.
A number of pharmaceutical companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to the Company's business.
Some of these technologies, applications or patents may conflict with the
Company's technologies or
18
<PAGE>
patent applications. The European Patent Office, the French Patent Office, the
German Patent Office and the Australian Patent Office, have each granted a
patent containing broad claims to proanthocyanidin polymer compositions (and
methods of use of such compositions), which are similar to the Company's
specific proanthocyanidin polymer composition, to Leon Cariel and the Institut
des Substances Vegetales. The effective filing date of these patents is prior to
the effective filing date of the Company's foreign pending patent application in
Europe. Certain of the foreign patents have been granted in jurisdictions where
examination is not rigorous. The Company has instituted an Opposition in the
European Patent Office against granted European Patent No. 472531 owned by Leon
Cariel and Institut des Substances Vegetales. The Company believes that the
granted claims are invalid and intends to vigorously prosecute the Opposition.
There can be no assurance that the Company will be successful in having
the granted European patent revoked or the claims sufficiently narrowed so as
not to potentially cover the Company's proanthocyanidin polymer composition and
methods of use. There can be no assurance that Leon Cariel and the Institut des
Substances Vegetales will not assert claims relating to this patent against the
Company. There can be no assurance that the Company would be able to obtain a
license to this patent at all, or at reasonable cost, or be able to develop or
obtain alternative technology to use in Europe or elsewhere. The earlier
effective filing date of this patent could limit the scope of the patents, if
any, that the Company may be able to obtain or result in the denial of the
Company's patent applications in Europe or elsewhere.
In the United States, the PTO has rendered judgment in an Interference
declared between the Company's issued patent covering its specific
proanthocyanidin polymer composition and certain claims of U.S. application
corresponding to the granted European patent of Leon Cariel and the Institut des
Substances Vegetales by Daniel Jean and Leon Cariel. Judgment was awarded to the
Company. Since the period for appeal has passed, this judgment is now final.
Additionally, in connection with the Interference proceeding, the Company
has had an opportunity to review the claims and file history of the Daniel Jean
and Leon Cariel patent application which, under U.S. patent law, are kept
confidential. One broad claim, in particular, of the Daniel Jean and Leon Cariel
patent application, which was not involved in the Interference proceeding and
which has been indicated to be allowable, covers a large variety of
proanthocyanidin polymers. The Company believes that this broad claim is subject
to attack as invalid in view of prior art. Based on knowledge of the Company's
specific proanthocyanidin polymer composition, the Company believes that the
manufacture, use or sale of its specific proanthocyanidin polymer composition
would not constitute infringement of this broad claim, once it issues. There can
be no assurances, however, that the Company would prevail should an action for
infringement of such claim be commenced. In addition, if patents that cover the
Company's activities have been or are issued to other companies, there can be no
assurance that the Company would be able to obtain licenses to these patents at
a reasonable cost, or at all, or be able to develop or obtain alternative
technology.
If the Company does not obtain such licenses, it could encounter delays or
be precluded from introducing products to the market. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the
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Company or to protect trade secrets or know-how owned by the Company. Additional
interference proceedings may be declared or necessary to determine issues of
invention; such litigation and/or interference proceedings could result in
substantial cost to and diversion of effort by, and may have a material adverse
effect on, the Company. In addition, there can be no assurance that these
efforts by the Company will be successful.
The Company's competitive position is also dependent upon unpatented trade
secrets. All employees of the Company are bound by confidentiality agreements.
However, there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, that such trade secrets will not be
disclosed or that the Company can effectively protect its rights to unpatented
trade secrets. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes also may arise as to the rights in related or resulting
know-how and inventions.
Patent applications in the United States are generally maintained in
secrecy until patents are issued. Since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, Shaman cannot be certain that it was the first to discover
compositions covered by its pending patent applications or the first to file
patent applications on such compositions. There can be no assurance that the
Company's patent applications will result in issued patents or that any of its
issued patents will afford comprehensive protection against potential
infringement.
The Company is prosecuting its patent applications with the PTO but the
Company does not know whether any of its applications will result in the
issuance of any patents or, if any patents are issued, whether any issued patent
will provide significant proprietary protection or will be circumvented or
invalidated. During the course of patent prosecution, patent applications are
evaluated, inter alia, for utility, novelty, non-obviousness and enablement. The
PTO may require that the claims of an initially filed patent application be
amended if it is determined that the scope of the claims includes subject matter
that is not useful, novel, non-obvious or enabled.
Furthermore, in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights. In cases where
one party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may provoke an
interference proceeding in the PTO or such a proceeding may be declared by the
PTO. In general, in an interference proceeding, the PTO would review the
competing patents and/or patent applications to determine the validity of the
competing claims, including but not limited to determining priority of
invention. Any such determination would be subject to appeal in the appropriate
U.S. federal courts.
There can be no assurance that additional patents will be obtained by the
Company or that issued patents will provide a substantial protection or be of
commercial benefit to the Company. The issuance of a patent is not conclusive as
to its validity or enforceability, nor does it provide the patent holder with
freedom to operate without infringing the patent rights of others. A patent
could be challenged by
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<PAGE>
litigation and, if the outcome of such litigation were adverse to the patent
holder, competitors could be free to use the subject matter covered by the
patent, or the patent holder may license the technology to others in settlement
of such litigation. The invalidation of patents owned by or licensed to the
Company or non-approval of pending patent applications could create increased
competition, with potential adverse effects on the Company and its business
prospects. In addition, there can be no assurance that any applications of the
Company's technology will not infringe patents or proprietary rights of others
or that licenses that might be required as a result of such infringement for the
Company's processes or products would be available on commercially reasonable
terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others' proprietary rights. The Company may participate in
interference proceedings that may in the future be declared by the U.S. PTO,
which could result in substantial cost to the Company. There can be no assurance
that the outcome of any such litigation or interference proceedings will be
favorable to the Company or that the Company will be able to obtain licenses to
technology that it may require or that, if obtainable, such technology can be
licensed at a reasonable cost.
Year 2000 Compliance. The Company is in the process of assessing the
impact of year 2000 on its operations and systems, including those of its
suppliers and collaborators and other third parties. Management is in the
process of formalizing its assessment procedures and developing a plan to
address identified issues, if any. To date, the Company has evaluated its
financial and accounting systems and concluded that they are not and will not be
materially affected by the year 2000. The Company does not yet know the extent,
if any, of the impact of the year 2000 on its other systems and equipment or
those of third parties with which the Company does business. There can be no
assurance that third parties, such as suppliers, clinical research organizations
and collabortive parties, are using systems that are year 2000 compliant or will
address any year 2000 issues in a timely fashion, or at all. Any year 2000
compliance problems of either the Company, its suppliers, its clinical research
organizations, or its collaborative partners could have a material adverse
effect on the Company's business, operating results and financial conditions.
Uncertainty of Product Pricing, Reimbursement and Related Matters. The
Company's business may be materially adversely affected by the continuing
efforts of governmental and third party payers to contain or reduce the costs of
health care through various means. For example, in certain foreign markets, the
pricing or profitability of health care products is subject to government
control. In the United States, there have been, and the Company expects there
will continue to be, a number of federal and state proposals to implement
similar government control. While the Company cannot predict whether any such
legislative or regulatory proposals or reforms will be adopted, the announcement
of such proposals or reforms could have a material adverse effect on the
Company's ability to raise capital or form collaborations, and the adoption of
such proposals or reforms could have a material adverse effect on the Company's
business, financial condition or results of operations.
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<PAGE>
In addition, in both the United States and elsewhere, sales of health care
products are dependent in part on the availability of reimbursement from third
party payers, such as government and private insurance plans. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical products and services. If the Company succeeds in bringing one or
more products to the market, there can be no assurance that reimbursement from
third party payers will be available or will be sufficient to allow the Company
to sell its products on a competitive or profitable basis.
Possible Volatility of Stock Price. From time to time, the stock market
has experienced significant price and volume fluctuations that may be unrelated
to the operating performance of particular companies or industries. In addition,
the market price of the Company's Common Stock, like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, has been and
may continue to be highly volatile. Announcements of technological innovations,
regulatory matters or new commercial products by the Company or its competitors,
developments or disputes concerning patent or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by the Company or its competitors, regulatory developments in both
the United States and foreign countries, public concern as to the safety of
pharmaceutical products, and economic and other external factors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of Shaman's Common Stock.
Environmental Regulation. In connection with its research and development
activities and manufacturing of clinical trial materials, the Company is subject
to federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although the Company
believes that it has complied with these laws and regulations in all material
respects and has not been required to take any action to correct any
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future. The Company's research and development activities
involve the controlled use of hazardous materials, chemicals, viruses and
various radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and such liability could exceed the resources of the Company.
Anti-Takeover Effect of Delaware Law and Certain Charter and Bylaws
Provisions. Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. The
Company's Board of Directors has the authority to issue up to 600,000 additional
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions of those shares without any further vote or action
by the stockholders.
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The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to the Company could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met.
Product Liability Exposure; Limited Insurance Coverage. The Company's
business exposes it to potential product liability risks which are inherent in
the development, testing, manufacture, marketing and sale of pharmaceutical
products. Product liability insurance for the pharmaceutical industry generally,
which includes acts by third parties, including manufacturers of the Company's
product candidates, is expensive. There can be no assurance that the Company's
present product liability insurance coverage is adequate. Such existing coverage
will not be adequate as the Company further develops its products, and no
assurance can be given that adequate insurance coverage against all potential
claims will be available in sufficient amounts or at a reasonable cost. Certain
of the Company's development and manufacturing agreements contain insurance and
indemnification provisions to which the Company could be held accountable for
certain occurrences.
Limitation of Liability and Indemnification. The Company's Certificate of
Incorporation limits, to the maximum extent permitted by Delaware Law, the
personal liability of directors for monetary damages for breach of their
fiduciary duties as a director. The Company's Bylaws provide that the Company
shall indemnify its officers and directors and may indemnify its employees and
other agents to the fullest extent permitted by law. The Company has entered
into indemnification agreements with its officers and directors containing
provisions which are in some respects broader than the specific indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. The
Company currently maintains directors' and officers' insurance.
Section 145 of the Delaware Law provides that a corporation may indemnify
a director, officer, employee or agent made or threatened to be made a party to
an action by reason of the fact that he was a director, officer, employee or
agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred in connection with such action
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable
23
<PAGE>
cause to believe his conduct was unlawful. Delaware Law does not permit a
corporation to eliminate a director's duty of care, and the provisions of the
Company's Certificate of Incorporation have no effect on the availability of
equitable remedies, such as injunction or rescission, for a director's breach of
the duty of care.
Dependence on Key Personnel. The Company's ability to maintain its
competitive position depends in part upon the continued contributions of its key
senior management. The Company's future performance also depends on its ability
to attract and retain qualified management and scientific personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to continue to attract, assimilate or retain other highly qualified
technical and management personnel in the future. The loss of key personnel or
the failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
4.2 Form of Common Stock Purchase Warrant
10.65 Amendment Agreement
27 Financial Data Schedule
(b) No current reports on Form 8-K were filed during the
quarter ended March 31, 1998.
</TABLE>
25
<PAGE>
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.
Dated: May 15, 1998
Shaman Pharmaceuticals, Inc.
(Registrant)
/s/ Lisa A. Conte
__________________________
Lisa A. Conte
President, Chief Executive Officer and
Chief Financial Officer
(on behalf of the Company and as
principal executive officer & principal
financial and accounting officer)
26
<PAGE>
Exhibit 4.2
FORM OF
COMMON STOCK PURCHASE WARRANT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER SAID ACT.
No. W-___ Right to Purchase________shares of Common
Stock of Shaman Pharmaceuticals, Inc.
SHAMAN PHARMACEUTICALS, INC.
Common Stock Purchase Warrant
SHAMAN PHARMACEUTICALS, INC., a Delaware corporation (the "Company"),
hereby certifies that, for value received, _________________________________ or
registered assigns (the "Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company at any time or from time to time after the
date hereof, and before the Expiration Date (as hereinafter defined),
____________ fully paid and nonassessable shares of Common Stock at a purchase
price per share equal to the Purchase Price (as hereinafter defined). Such
number of shares of Common Stock and the Purchase Price are subject to
adjustment as provided in this Warrant.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
"Amendment Agreement" means the Amendment Agreement, dated as of
March 18, 1998, by and between the Company and the original Holder of this
Warrant.
"Business Day" means a day on which the New York Stock Exchange is
open for business for general trading of securities.
"Closing Sale Price" means the closing sale price of the Common Stock
on the principal securities market on which the Common Stock may at the
time be listed or, if there have been no sales on any such exchange on
such day, the average of the highest bid and lowest asked prices on the
principal securities market at the end of such day, or, if on such day the
Common Stock is not so listed, the average of the representative bid and
asked prices quoted in the Nasdaq System as of 4:00 p.m., New York City
time, or, if on such day the Common Stock is not quoted in the Nasdaq
System, the average of the highest bid and lowest asked price on such day
in the domestic over-the-counter market
<PAGE>
as reported by the National Quotation Bureau, Incorporated, or any similar
successor organization.
"Common Stock" includes the Company's Common Stock, par value $.001
per share, as authorized on the date hereof, and any other securities into
which or for which the Common Stock may be converted or exchanged pursuant
to a plan of recapitalization, reorganization, merger, amalgamation, sale
of assets or otherwise.
"Company" shall include Shaman Pharmaceuticals, Inc. and any
corporation that shall succeed to or assume the obligation of Shaman
Pharmaceuticals, Inc. hereunder in accordance with the terms hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" means 5:00 p.m., San Francisco, California time on
March 18, 2001.
"Other Securities" means any stock (other than the Common Stock) and
other securities of the Company or any other person (corporate or
otherwise) which the Holder at any time shall be entitled to receive, or
shall have received, on the exercise of this Warrant, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or
Other Securities pursuant to Section 4.
"Purchase Price" shall mean $7.50, subject to adjustment as provided
in this Warrant.
"Securities Act" means the Securities Act of 1933, as amended.
1. Exercise of Warrant.
1.1 Exercise. (a) This Warrant may be exercised by the Holder in full
or in part at any time or from time to time during the exercise period specified
in the first paragraph hereof until the Expiration Date by surrender of this
Warrant and the subscription form annexed hereto (duly executed by the Holder),
to the Company, and by making payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount obtained by multiplying
(a) the number of shares of Common Stock designated by the Holder in the
Subscription Form in the form attached hereto by (b) the Purchase Price then in
effect. On any partial exercise, the Company will forthwith issue and deliver to
or upon the order of the Holder a new Warrant or Warrants of like tenor, in the
name of the Holder or as the Holder (upon payment by the Holder of any
applicable transfer taxes) may request, providing in the aggregate on the face
or faces thereof for the purchase of the number of shares of Common Stock for
which such Warrant or Warrants may still be exercised.
(b) Notwithstanding any other provision of this Warrant, in no event
shall the Holder be entitled at any time to purchase a number of shares of
Common Stock on exercise of
2
<PAGE>
this Warrant in excess of that number of shares upon purchase of which the sum
of (1) the number of shares of Common Stock beneficially owned by the Holder and
any person whose beneficial ownership of shares of Common Stock would be
aggregated with the Holder's beneficial ownership of shares of Common Stock for
purposes of Section 13(d) of the Exchange Act and Regulation 13D-G thereunder
(each such person other than the Holder an "Aggregated Person" and all such
persons other than the Holder, collectively, the "Aggregated Persons") (other
than shares of Common Stock deemed beneficially owned through the ownership of
the unexercised portion of this Warrant and any of the Company's Senior
Subordinated Convertible Notes by the Holder and any Aggregated Persons) and (2)
the number of shares of Common Stock issuable upon exercise of the portion of
this Warrant with respect to which the determination in this sentence is being
made, would result in beneficial ownership by the Holder and all Aggregated
Persons of more than 4.9% of the outstanding shares of Common Stock. For
purposes of the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Exchange Act and Regulation
13D-G thereunder, except as otherwise provided in clause (1) of the immediately
preceding sentence. For purposes of the second preceding sentence, the Company
shall be entitled to rely, and shall be fully protected in relying, on any
statement or representation made by the Holder to the Company in connection with
a particular exercise of this Warrant, without any obligation on the part of the
Company to make any inquiry or investigation or to examine its records or the
records of any transfer agent for the shares of Common Stock.
1.2 Net Issuance. Notwithstanding anything to the contrary contained
in Section 1.1, the Holder may elect to exercise this Warrant in whole or in
part by receiving shares of Common Stock equal to the net issuance value (as
determined below) of this Warrant, or any part hereof, upon surrender of this
Warrant to the Company's transfer agent and registrar for the shares of Common
Stock together with the subscription form annexed hereto (duly executed by the
Holder), in which event the Company shall issue to the Holder a number of shares
of Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Common Stock to be
issued to the Holder
Y = the number of shares of Common Stock as to
which this Warrant is to be exercised
A = the current fair market value of one share of Common Stock
calculated as of the last trading day immediately preceding
the exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of one share of Common
Stock as of a specified date shall mean the arithmetic average of the Closing
Sale Price over a period of five consecutive Business Days consisting of the day
as of which the current fair market value of one
3
<PAGE>
share of Common Stock is being determined (or if such day is not a Business Day,
the Business Day next preceding such day) and the four consecutive Business Days
prior to such day. If on the date for which current fair market value is to be
determined the Common Stock is not listed on any securities exchange or quoted
in the Nasdaq System or the over-the-counter market, the current fair market
value of one share of Common Stock shall be the highest price per share which
the Company could then obtain from a willing buyer (not a current employee or
director) for Common Stock sold by the Company, from authorized but unissued
shares, as determined in good faith by the Board of Directors of the Company,
unless prior to such date the Company has become subject to a merger,
acquisition, amalgamation or consolidation pursuant to which the Company is not
the surviving party, in which case the current fair market value of one share of
Common Stock shall be deemed to be the value received by the holders of the
shares of Common Stock for each share pursuant to the Company's acquisition.
2. Delivery of Stock Certificates, etc., on Exercise. As soon as
practicable after the exercise of this Warrant, and in any event within three
Business Days thereafter, the Company at its expense (including the payment by
it of any applicable issue or stamp taxes) will cause to be issued in the name
of and delivered to the Holder, or as the Holder (upon payment by the Holder of
any applicable transfer taxes) may direct, a certificate or certificates for the
number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, in such
denominations as may be requested by the Holder, plus, in lieu of any fractional
share to which the Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current fair market value (as determined in
accordance with subsection 1.2) of one full share, together with any other stock
or other securities any property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Upon
exercise of this Warrant as provided herein, the Company's obligation to issue
and deliver the certificates for shares of Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the Holder to
enforce the same, any waiver or consent with respect to any provision thereof,
the recovery of any judgment against any person or any action to enforce the
same, any failure or delay in the enforcement of any other obligation of the
Company to the Holder, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder of any obligation to
the Company or any violation or alleged violation of law by the Holder or any
other person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with such
exercise; provided, however, that nothing herein shall limit or prejudice the
right of the Company to pursue any such claim in any other manner permitted by
applicable law. If the Company fails to issue and deliver the certificates for
the shares of Common Stock to the Holder pursuant to the first sentence of this
paragraph as and when required to do so, in addition to any other liabilities
the Company may have hereunder and under applicable law, the Company shall pay
or reimburse the Holder on demand for all out-of-pocket expenses including,
without limitation, fees and expenses of legal counsel, incurred by the Holder
as a result of such failure and in connection with enforcement by the Holder of
its rights under this Warrant.
3. Adjustment for Dividends in Other Stock, Property, etc.;
Reclassification, etc. In case at any time or from time to time, all the holders
of Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the
4
<PAGE>
determination of stockholders eligible to receive) shall have become entitled to
receive, without payment therefor,
(a) other or additional stock or other securities or
property (other than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely
out of earnings or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate
rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder, on the exercise hereof
as provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 3) which the Holder would hold on the
date of such exercise if on the date of the event listed in subdivisions (a)
through (c) the Holder had been the holder of record of the number of shares of
Common Stock called for on the face of this Warrant and had thereafter, during
the period from the date of the event listed in subdivisions (a) through (c) to
and including the date of such exercise, retained such shares and all such other
or additional stock and other securities and property (including cash in the
case referred to in subdivisions (b) and (c) of this Section 3) receivable by
the Holder as aforesaid during such period, giving effect to all adjustments
called for during such period by Section 4.
4. Exercise upon Reorganization, Consolidation, Merger, etc. In case
at any time or from time to time, the Company shall (a) effect a reorganization,
(b) consolidate or amalgamate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition of such reorganization,
consolidation, amalgamation, merger, sale or conveyance, the Company shall give
at least 30 days notice to the Holder of such pending transaction whereby the
Holder shall have the right to exercise this Warrant prior to any such
reorganization, consolidation, amalgamation, merger, sale or conveyance. Any
exercise of this Warrant pursuant to notice under this Section shall be
conditioned upon the closing of such reorganization, consolidation,
amalgamation, merger, sale or conveyance which is the subject of the notice and
the exercise of this Warrant shall not be deemed to have occurred until
immediately prior to the closing of such transaction.
5. Adjustment for Extraordinary Events. In the event that the Company
shall (i) issue additional shares of Common Stock as a dividend or other
distribution on outstanding shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock, or (iii) combine its outstanding shares
of Common Stock into a smaller number of shares of Common Stock, then, in each
such event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the Purchase Price in effect immediately prior
to such event by a fraction, the numerator of which shall be the number of
5
<PAGE>
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so obtained shall thereafter be
the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive event or
events described herein in this Section 5. The Holder shall thereafter, on the
exercise hereof as provided in Section 1, be entitled to receive that number of
shares of Common Stock determined by multiplying the number of shares of Common
Stock which would be issuable on such exercise immediately prior to such
issuance by a fraction of which (i) the numerator is the Purchase Price in
effect immediately prior to such issuance and (ii) the denominator is the
Purchase Price in effect on the date of such exercise.
6. Further Assurances. The Company will take all action that may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock, free from all taxes, liens and
charges with respect to the issue thereof, on the exercise of all or any portion
of this Warrant from time to time outstanding.
7. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend on, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any
other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company or any transfer of
all or substantially all of the assets of the Company to or consolidation,
amalgamation or merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, amalgamation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as of which the holders of record of shares of Common
Stock (or Other Securities) shall be entitled to exchange their shares of Common
Stock (or Other Securities) for securities or other property deliverable on such
reorganization, reclassification, recapitalization, transfer, consolidation,
amalgamation, merger, dissolution, liquidation or winding-up, and (iii) the
amount and character of any stock or other securities, or rights or options with
respect thereto, proposed to be issued or granted, the date of such proposed
issue or grant and the persons or class of persons to whom such proposed issue
or grant is to be offered or made. Such notice shall also state that the action
in question or the record date is subject to the effectiveness of a registration
statement under the Securities Act or a favorable vote of stockholders if either
is required. Such notice shall be mailed at least ten
6
<PAGE>
days prior to the date specified in such notice on which any such action is to
be taken or the record date, whichever is earlier.
8. Reservation of Shares, etc., Issuable on Exercise of Warrants. The
Company will at all times reserve and keep available out of its authorized but
unissued shares of capital stock, solely for issuance and delivery on the
exercise of this Warrant, a sufficient number of shares of Common Stock (or
Other Securities) to effect the full exercise of this Warrant and the exercise,
conversion or exchange of any other warrant or security of the Company
exercisable for, convertible into, exchangeable for or otherwise entitling the
holder to acquire shares of Common Stock (or Other Securities), and if at any
time the number of authorized but unissued shares of Common Stock (or Other
Securities) shall not be sufficient to effect such exercise, conversion or
exchange, the Company shall take such action as may be necessary to increase its
authorized but unissued shares of Common Stock (or Other Securities) to such
number as shall be sufficient for such purposes.
9. Transfer of Warrant. This Warrant shall inure to the benefit of
the successors to and assigns of the Holder. This Warrant and all rights
hereunder, in whole or in part, are registrable at the office or agency of the
Company referred to below by the Holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
10. Register of Warrants. The Company shall maintain, at the
principal office of the Company (or such other office as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner of such Warrant.
The Company shall be entitled to treat the person in whose name this Warrant is
so registered as the sole and absolute owner of this Warrant for all purposes.
11. Exchange of Warrant. This Warrant is exchangeable, upon the
surrender hereof by the Holder at the office or agency of the Company referred
to in Section 10, for one or more new Warrants of like tenor representing in the
aggregate the right to subscribe for and purchase the number of shares of Common
Stock which may be subscribed for and purchased hereunder, each of such new
Warrants to represent the right to subscribe for and purchase such number of
shares as shall be designated by the Holder at the time of such surrender.
12. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
13. Warrant Agent. The Company may, by written notice to the Holder,
appoint an agent having an office in the United States of America for the
purpose of exercising this Warrant pursuant to Section 1, exchanging this
Warrant pursuant to Section 11, and
7
<PAGE>
replacing this Warrant pursuant to Section 12, and thereafter any such exercise,
exchange or replacement, as the case may be, shall be made at such office by
such agent.
14. Remedies. The Company stipulates that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
15. No Rights or Liabilities as a Stockholder. This Warrant shall not
entitle the Holder to any voting rights or other rights as a stockholder of the
Company. No provision of this Warrant, in the absence of affirmative action by
the Holder to purchase shares of Common Stock, and no mere enumeration herein of
the rights or privileges of the Holder, shall give rise to any liability of the
Holder for the Purchase Price or as a stockholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.
16. Notices, etc. All notices and other communications from the
Company to the registered Holder shall be in writing and shall be mailed by
first class certified mail, postage prepaid, at such address as may have been
furnished to the Company in writing by the Holder or at the address shown for
the Holder on the register of Warrants referred to in Section 10.
17. Transfer Restrictions. By acceptance of this Warrant, the Holder
represents to the Company that (x) this Warrant is being acquired for the
Holder's own account and for the purpose of investment and not with a view to,
or for sale in connection with, the distribution hereof, nor with any present
intention of distributing or selling this Warrant and (y) the shares of Common
Stock (or Other Securities) issuable upon exercise of this Warrant will be
acquired only for the Holder's own account for investment and the Holder has no
intention of making any distribution, within the meaning of the Securities Act,
of such shares of Common Stock (or Other Securities) except in compliance with
the registration requirements of the Securities Act or pursuant to an exemption
therefrom. The Holder acknowledges and agrees that this Warrant and, except as
otherwise provided in the Amendment Agreement, the shares of Common Stock (or
Other Securities) issuable upon exercise of this Warrant (if any) have not been
(and at the time of acquisition by the Holder, will not have been or will not
be), registered under the Securities Act or under the securities laws of any
state, in reliance upon certain exemptive provisions of such statutes. The
Holder further recognizes and acknowledges that because this Warrant and, except
as provided in the Amendment Agreement, the shares of Common Stock (or Other
Securities) issuable upon exercise of this Warrant (if any) are unregistered,
they may not be eligible for resale, and may only be resold in the future
pursuant to an effective registration statement under the Securities Act and any
applicable state securities laws, or pursuant to a valid exemption from such
registration requirements. Unless the shares of Common Stock (or Other
Securities) issuable upon exercise of this Warrant have theretofore been
registered for resale under the Securities Act, the Company may require, as a
condition to the issuance of shares of Common Stock (or Other Securities) upon
the exercise of this Warrant (i) in the case of an exercise in accordance with
Section 1.1 hereof, a confirmation as of the date of exercise of the Holder's
representations pursuant to this Section 17, or (ii) in the case of an exercise
in accordance with Section 1.2 hereof, an opinion of counsel reasonably
satisfactory to
8
<PAGE>
the Company that the shares of Common Stock (or Other Securities) to be issued
upon such exercise may be issued without registration under the Securities Act.
18. Legend. Unless theretofore registered for resale under the
Securities Act, each certificate for shares of Common Stock (or Other
Securities) issued upon exercise of this Warrant shall bear the following
legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned in
the absence of an effective registration statement for the securities
under the Securities Act of 1933, as amended, or an opinion of counsel
that registration is not required under said Act.
19. Miscellaneous. This Warrant and any terms hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the internal laws of the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed on its behalf by one of its officers thereunto duly authorized.
Dated: SHAMAN PHARMACEUTICALS, INC.
By:
Title:
10
<PAGE>
FORM OF SUBSCRIPTION
SHAMAN PHARMACEUTICALS, INC.
(To be signed only on exercise of Warrant)
TO: SHAMAN PHARMACEUTICALS, INC.,
213 East Grand Avenue
South San Francisco, California 94080
Attention:
1. The undersigned Holder of the attached original, executed Warrant
hereby elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as defined in the Warrant, of Shaman
Pharmaceuticals, Inc., a Delaware corporation (the "Company").
2. The undersigned Holder (check one):
o (a) elects to pay the aggregate purchase price for such shares of Common
Stock (the "Exercise Shares")(i) by lawful money of the United States
or the enclosed certified or official bank check payable in United
States dollars to t he order of the Company in t he amount of
$___________, or (ii) by wire transfer of United States funds to
the account of the Company in the amount of $____________, which
transfer has been made before or simultaneously with the delivery of
this Form of Subscription pursuant to the instructions of the
Company;
or
o (b) elects to receive shares of Common Stock having a value equal to
the value of the Warrant calculated in accordance with Section 1.2 of
the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned or
in such other names as is specified below:
4. The undersigned Holder hereby represents to the Company that the
exercise of the Warrant elected hereby does not violate Section 1.1(b) of the
Warrant.
Name: _____________________________________
Address: _____________________________________
_____________________________________
11
<PAGE>
Dated:____________ ___, ____ ____________________________
(Signature must conform to name
of Holder as specified on the
face of the Warrant)
----------------------------
----------------------------
(Address)
12
<PAGE>
EXHIBIT 10.65
AMENDMENT AGREEMENT
THIS AMENDMENT AGREEMENT, dated as of March 18, 1998 (this
"Agreement"), by and between SHAMAN PHARMACEUTICALS, INC., a Delaware
corporation (the "Company"), and the undersigned holders of the Company's Senior
Subordinated Convertible Notes (each, a "Holder" and collectively, the
"Holders").
W I T N E S S E T H:
WHEREAS, the Company and each Holder are parties to a Note Purchase
Agreement, dated as of June 30, 1997 (each, a "Note Purchase Agreement"),
pursuant to which the Company issued to the respective Holder a Senior
Subordinated Convertible Note (each, a "Note" and collectively, the "Notes"),
the outstanding principal amounts of which are set forth on the signature pages
of this Agreement; and
WHEREAS, the Company and each Holder wish to amend such Holder's Note
upon the terms and subject to the conditions of this Agreement;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Amendments of Notes. On the Effective Date:
(a) the definition of the term "Conversion Price" in Section 7.1(b)
of each Note shall be amended by deleting the existing definition in its
entirety and substituting in lieu thereof the following:
"Conversion Price" means on any date the Computed Price for such
date; provided, however, that during the period from the Issuance Date to
and including March 31, 1998 in no event shall the Conversion Price be
less than $5.50 (subject to equitable adjustment from time to time on
terms reasonably acceptable to the Majority Holders for (i) stock splits,
(ii) stock dividends, (iii) combinations, (iv) capital reorganizations,
(v) issuance to all holders of Common Stock of rights or warrants to
purchase shares of Common Stock at a price per share less than the Trading
Price which would otherwise be applicable, (vi) the distribution by the
Company to all holders of Common Stock of evidences of indebtedness of the
Company or cash (other than regular quarterly cash dividends), (vii)
tender offers by the Company or any subsidiary of the Company or other
repurchases of shares of Common Stock in one or more transactions which,
individually or in the aggregate, result in the purchase of more than 10%
of the Common Stock outstanding and (viii) similar events relating to the
Common Stock, in each such case which occur on or after the Execution
Date) regardless of the Conversion Price otherwise determined in
accordance with the terms of this Note; provided further, however, that,
if at any time (x) an Event of Default shall have occurred or (y) at any
time on or after November 21, 1997 there shall occur any material adverse
change or any material adverse development in the business, properties,
operations, condition (financial or
<PAGE>
other), results of operations or prospects of the Company (provided that a
decline in the market price of the Company's Common Stock price shall not,
in and of itself, constitute such a material adverse change or material
adverse development under clause (y) above), then from and after the date
of occurrence of an event or change referred to in such clause (x) or
clause (y), the Conversion Price shall be determined without regard to the
first proviso to this definition.
(b) The definition of the term "Maximum Share Amount" in each Note
shall be amended by changing the respective figure therein for the Note
registered in the name of each Holder listed below to be as follows:
Name of Registered Holder New Maximum Share Amount
---------------------------- ------------------------
Delta Opportunity Fund, Ltd. 1,042,036
Diaz & Altschul Group, LLC 128,251
Nelson Partners 521,019
Olympus Securities, Ltd. 521,019
Omicron Partners, LP 804,548
OTATO Limited Partnership 192,376
Overbrook Fund I, LLC 128,251
; provided, however, that if the Nasdaq determines that the issuance of shares
of Common Stock upon exercise of the Warrants (as defined herein) need not be
integrated with the issuance of shares of Common Stock upon conversion of, and
in payment of interest on, the Notes for purposes of Rule 4460(i) of the Nasdaq
(or any successor, replacement or similar provision), then the definition of the
term Maximum Share Amount shall have the meaning originally provided in each
Note. Upon the request of any Holder, the Company shall seek such determination
from Nasdaq.
2. Warrants. (a) On the Effective Date, the Company shall issue to
each Holder Common Stock Purchase Warrants in the form attached hereto as
Exhibit A (the "Warrants"), entitling the holders thereof to purchase the
respective numbers of shares of Common Stock set forth opposite their names
below:
Holder Number
---------------------------- ------
Delta Opportunity Fund, Ltd. 43,900
Diaz & Altschul Group, LLC 5,403
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<PAGE>
Nelson Partners 21,950
Olympus Securities, Ltd. 21,950
Omicron Partners, LP 30,789
OTATO Limited Partnership 8,105
Overbrook Fund I, LLC 5,403
(b) On or before the Filing Date, the Company will file with the SEC
a Registration Statement on Form S-3 (the "Warrant Share Registration
Statement") relating to the resale by each Holder of the shares of Common Stock
issued or issuable upon exercise of the Warrants (the "Warrant Shares") and
shall thereafter use its best efforts to obtain SEC effectiveness of the Warrant
Share Registration Statement as promptly as possible after such filing. As used
herein, "Filing Date" means the earlier of (i) March 31, 1998 and (ii) the date
which is 15 Business Days after the date on which the arithmetic average of the
Market Price of the Common Stock for five consecutive Trading Days shall have
been at least equal to 90% of the Purchase Price (as defined in the Warrants) in
effect at such time. The Warrant Share Registration Statement shall otherwise be
subject in all respects to the provisions of Section 8 of each Holder's Note
Purchase Agreement as if the Warrant Share Registration Statement were the
Registration Statement.
(c) Nasdaq Listing. Promptly after the Effective Date, the Company
will file with Nasdaq an application or other document required by Nasdaq for
the listing of the Warrant Shares with Nasdaq and shall provide evidence of such
filing to each Holder.
3. Representations, Warranties, Covenants, Etc. of the Company.
The Company represents and warrants to each Holder that the following
matters are true and correct on the date of execution and delivery of this
Agreement and will be true and correct on the Effective Date, and the Company
covenants and agrees with each Holder as follows:
(a) Organization and Authority. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to (i) own, lease
and operate its properties and to carry on its business as described in the SEC
Reports and as currently conducted, and (ii) to execute, deliver and perform its
obligations under this Agreement, the Warrants and the other Transaction
Documents, and to consummate the transactions contemplated hereby and thereby.
(b) Concerning the Warrant Shares. The Warrant Shares have been duly
authorized and, when issued upon exercise of the Warrants, will be duly and
validly issued, fully paid and non-assessable and will not subject the holder
thereof to personal liability by reason of being such holder. The holders of
outstanding shares of capital stock of the Company are not entitled to
preemptive or other rights to subscribe for the Warrants or the Warrant Shares.
3
<PAGE>
The Company has duly reserved 137,500 shares of Common Stock as the Warrant
Shares, and such shares shall remain so reserved, and the Company shall from
time to time reserve such additional shares of Common Stock as shall be required
to be reserved pursuant to the Warrants, so long as the Warrants are
outstanding. The Common Stock is listed for trading on Nasdaq and no suspension
of trading in the Common Stock is in effect. The Company knows of no reason why
the Warrant Shares will not be eligible for listing on Nasdaq.
(c) Corporate Authorization. This Agreement, the Warrants and the
other Transaction Documents have been duly and validly authorized by the
Company; this Agreement has been duly executed and delivered by the Company and,
assuming due execution and delivery by each Holder, this Agreement is, and the
Warrants will be, when executed and delivered by the Company, valid and binding
obligations of the Company enforceable in accordance with their respective
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws now or hereafter in effect relating to or affecting creditors' rights
generally and general principles of equity, regardless of whether enforcement is
considered in a proceeding in equity or at law.
(d) Non-contravention. The execution and delivery of this Agreement
and the Warrants by the Company and the consummation by the Company of the
issuance of the Warrants and the Warrant Shares and the other transactions
contemplated by this Agreement and the Warrants do not and will not, with or
without the giving of notice or the lapse of time, or both, (i) result in any
violation of any provision of the certificate of incorporation or by-laws of the
Company, (ii) conflict with or result in a breach by the Company of any of the
terms or provisions of, or constitute a default under, or result in the
modification of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company pursuant to, any indenture, mortgage, deed of trust or other agreement
or instrument to which the Company is a party or by which the Company or any of
its properties or assets are bound or affected which would have a material
adverse effect on the business, properties, operations, condition (financial or
other), results of operations or prospects of the Company or (iii) violate or
contravene any applicable law, rule or regulation or any applicable decree,
judgment or order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any of its properties or assets which would have a material adverse
effect on the business, properties, operations, condition (financial or other),
results of operations or prospects of the Company or (iv) have any material
adverse effect on any permit, certification, registration, approval, consent,
license or franchise necessary for the Company to own or lease and operate any
of its properties and to conduct any of its business or the ability of the
Company to make use thereof.
(e) Approvals. No authorization, approval or consent of, or filing
with, any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the stockholders of the Company is
required to be obtained or made by the Company in connection with the execution,
delivery and performance of this Agreement and the Warrants and the issuance and
sale of the Warrants and the Warrant Shares as contemplated by this Agreement
and the terms of the Warrants, other than (1) listing of the Warrant Shares on
Nasdaq, (2) registration of the resale of the Warrant Shares under the 1933 Act
as contemplated by Section 2(b) and (3) as may be required under applicable
state securities or "blue sky" laws.
4
<PAGE>
4. Representations, Warranties, Covenants, Etc. of the Holders.
Each Holder severally and not jointly represents and severally and
not jointly warrants to, and covenants and agrees with, the Company as follows:
(a) Purchase for Investment; Circumstances of Offer. Such Holder is
acquiring the Warrants to be issued to such Holder for its own account for
investment and not with a view towards the public sale or distribution thereof;
any Warrant Shares acquired by such Holder will be acquired only for its own
account for investment; and such Holder has no intention of making any
distribution, within the meaning of the 1933 Act, of Warrant Shares except in
compliance with the registration requirements of the 1933 Act or pursuant to an
exemption therefrom;
(b) Accredited Investor. Such Holder is an "accredited investor" as
that term is defined in Rule 501 of Regulation D by reason of Rule 501(a)(3)
thereof;
(c) Reoffers and Resales. The Buyer will not, directly or indirectly,
offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to
buy, purchase or otherwise acquire or take a pledge of) any of such Holder's
Warrants or Warrant Shares unless registered under the 1933 Act and the rules
and regulations promulgated thereunder or pursuant to an exemption from
registration;
(d) Company Reliance. Such Holder understands that the Warrants to be
issued to such Holder are being offered and issued, the Warrant Shares issuable
upon exercise of such Warrants are being offered and, upon exercise of the
Warrants to be issued to such Holder, the Warrant Shares issued upon exercise of
such Warrants will be sold in reliance on one or more exemptions from the
registration requirements of the 1933 Act, including, without limitation,
Regulation D, and exemptions from state securities laws and that the Company is
relying upon the truth and accuracy of, and such Holder's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
such Holder set forth herein in order to determine the availability of such
exemptions and the eligibility of such Holder to acquire such Warrants and
Warrant Shares;
(e) Information Provided. Such Holder and its advisors have
requested, received and considered all information relating to the business,
properties, operations, condition (financial or other), results of operations
and prospects of the Company and information relating to the offer and issuance
of the Warrants to be issued to such Holder and the offer and, upon exercise of
such Warrants, sale of the Warrant Shares issuable upon exercise of such
Warrants deemed relevant by them; such Holder and its advisors have been
afforded the opportunity to ask questions of the Company concerning the terms of
such Warrants and Warrant Shares and the business, properties, operations,
condition (financial or other), results of operations and prospects of the
Company and have received satisfactory answers to any such inquiries; without
limiting the generality of the foregoing, such Holder has had the opportunity to
obtain and to review the SEC Reports; such Holder has, in connection with its
decision to acquire the Warrants to be issued to such Holder, relied solely upon
the SEC Reports, the representations, warranties,
5
<PAGE>
covenants and agreements of the Company set forth in this Agreement and to be
contained in the Warrants, as well as any investigation of the Company completed
by such Holder or its advisors; and such Holder understands that its investment
in the Securities involves a high degree of risk;
(f) Absence of Approvals. Such Holder understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Warrants to be
issued to such Holder;
(g) Agreement. Such Holder has all requisite power and authority,
corporate or otherwise, to execute, deliver and perform its obligations under
this Agreement and to consummate the transactions contemplated hereby; and this
Agreement has been duly and validly authorized, duly executed and delivered by
such Holder and, assuming due execution and delivery by the Company, is a valid
and binding agreement of such Holder enforceable in accordance with its terms,
except as the enforceability hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws now or
hereafter in effect relating to or affecting creditors' rights generally and
general principles of equity, regardless of whether enforcement is considered in
a proceeding in equity or at law; and
(h) Buyer Status. Such Holder is not a "broker" or "dealer" as those
terms are defined in the 1934 Act which is required to be registered with the
SEC pursuant to Section 15 of the 1934 Act.
5. Limitation on Certain Actions. During the period from the date of
this Agreement to March 31, 1998 the Company shall not offer, sell, contract to
sell or issue (or engage any person to assist the Company in taking any such
action) any equity securities or securities convertible into, exchangeable for,
or otherwise entitling the holder to acquire, any Common Stock at a price below
the market price of the Common Stock provided, however, that nothing in this
Section 5 shall prohibit the Company from offering, selling or issuing (or
engaging a person to assist the Company in taking such action) securities (x)
pursuant to compensation plans for employees, directors, officers, advisers or
consultants of the Company and in accordance with the terms of such plans as in
effect as of the date of this Agreement, (y) upon exercise of conversion,
exchange, purchase or similar rights issued, granted or given by the Company and
outstanding as of the date of this Agreement or (z) pursuant to a public
offering made directly by the Company on a basis similar to the offerings made
pursuant to the 1997 Registration Statements or underwritten on a firm
commitment basis and, in each case, registered under the 1933 Act; and provided
further, however, that nothing in this Section 5 shall prohibit the Company from
offering or engaging a person to assist the Company in offering equity
securities or securities convertible into, exchangeable for, or otherwise
entitling the holder to acquire, any Common Stock at a price below the market
price of the Common Stock in a single such transaction.
6. Effect of Amendment. From and after the Effective Date, (a) the
rights and obligations of the Company and each Holder with respect to such
Holder's Note set forth in such Holder's Note Purchase Agreement and Note and in
the Security Agreement, the Transfer Agent Agreement and all other agreements,
documents and instruments contemplated hereby and thereby (collectively, the
"Transaction Documents") shall apply with full force and effect to such
6
<PAGE>
Holder's Note as amended hereby and (b) the Transaction Documents shall be
deemed amended hereby such that all applicable references therein to such
Holder's Note shall refer to such Holder's Note as amended hereby.
7. Effectiveness of this Agreement. This Agreement shall become
effective on the date and time when the following shall have occurred (the
"Effective Date"):
(a) counterparts of this Agreement shall have been executed and
delivered by the Company and each Holder;
(b) the Company shall have issued to each Holder the number of
Warrants provided in Section 3 hereof;
(c) the conditions to the Company's obligations set forth in Section
7 shall have been satisfied or waived by theCompany; and
(d) the conditions to the obligations of the Holders set forth in
Section 8 shall have been satisfied or waived by the Holders.
8. Conditions to the Company's Obligation. The Company's obligations
under this Agreement are conditioned upon satisfaction of the following
conditions precedent on or before the Effective Date (any one or more of which
may be waived by the Company in its sole discretion):
(a) On the Effective Date, no legal action, suit or proceeding shall
be pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement; and
(b) The representations and warranties of each Holder contained in
this Agreement shall have been true and correct on the date of this Agreement
and shall be true and correct on the Effective Date as if given on and as of the
Effective Date (except for representations given as of a specific date which
representations shall be true and correct as of such date), and on or before the
Effective Date each Holder shall have performed all covenants and agreements of
such Holder contained herein required to be performed by such Holder on or
before the Effective Date.
9. Conditions to the Holder's Obligation. The several obligations of
the Holders under this Agreement are conditioned upon satisfaction of the
following conditions precedent for all Holders on or before the Effective Date
(any one or more of which may be waived by such Holder in its sole discretion):
(a) On the Effective Date, no legal action, suit or proceeding shall
be pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement;
7
<PAGE>
(b) The representations and warranties of the Company contained in
this Agreement shall have been true and correct on the date of this Agreement
and, except for the approvals referred to in clause (3) of Section 3(e), which
shall have been obtained, shall be true and correct on the Effective Date as if
given on and as of the Effective Date (except for representations given as of a
specific date which representations shall be true and correct as of such date),
and on or before the Effective Date the Company shall have performed all
covenants and agreements of the Company contained herein required to be
performed by the Company on or before the Effective Date; and
(c) No event which, (1) would constitute an Event of Default under
any Note or, with the giving of notice or the passage of time or both, would
constitute an Event of Default under any Note shall have occurred and be
continuing or (2) would constitute a Repurchase Event under any Note or, with
the giving of notice or the lapse of time, or both, would constitute a
Repurchase Event under any Note shall have occurred and be continuing.
10. Confirmation of Agreements. Except as amended by this Agreement,
the Notes and the other Transaction Documents shall remain in full force and
effect in accordance with their respective terms.
11. Miscellaneous.
(a) Capitalized terms used in this Agreement and defined herein
shall have the respective meanings provided herein. Capitalized terms
used in this Agreement and not otherwise defined in this Agreement shall have
the respective meanings provided in the Notes and, if not defined in the Notes,
the Note Purchase Agreements.
(b) This Agreement shall be construed and interpreted in accordance
with the laws of the State of New York.
(c) This Agreement may be executed in any number of counterparts and
by different parties hereto on separate counterparts, each of which counterparts
when so executed and delivered, shall be deemed to be an original and all of
which counterparts, taken together, shall constitute but one and the same
instrument. This Agreement may be executed and delivered by a party by a
telephone line facsimile transmission bearing a signature on behalf of such
party transmitted by such party to the other party.
(d) Section and paragraph headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
(e) Any provision of this Agreement that is prohibited, unenforceable
or not authorized in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition, unenforceability or
non-authorization without invalidating the remaining provisions hereof or
affecting the validity, enforceability or legality of such provision in any
other jurisdiction.
(f) No amendment or waiver of any provision of this Agreement shall
in any event be effective unless the same shall be in writing and signed by the
party to be charged with
8
<PAGE>
enforcement thereof and any such waiver shall be effective only in the specific
instance and for the specific purpose for which given. No failure on the part of
any party to exercise, and no delay in exercising, any right under this
Agreement shall operate as a waiver thereof by such party. No single or partial
exercise of any right under this Agreement shall preclude any other or further
exercise thereof or the exercise of any other right.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
SHAMAN PHARMACEUTICALS, INC.
By:/s/ Lisa A. Conte
________________________
Name: Lisa A. Conte
Title: President & CEO
$3,250,000.00 DELTA OPPORTUNITY FUND, LTD.
By:/s/ Keith R. Bish
________________________
Name: Keith R. Bish
Title: Director
$400,000.00 DIAZ & ALTSCHUL GROUP, LLC
By:/s/ Arthur G. Altschul, Jr.
________________________________
Name: Arthur G. Altschul, Jr.
Title:
$1,625,000.00 NELSON PARTNERS
By:/s/ Anne Dupuy
________________________
Name: Anne Dupuy
Title: Oficer
$1,625,000.00 OLYMPUS SECURITIES, LTD.
By:/s/ Anne Dupuy
________________________
Name: Anne Dupuy
Title: Director
10
<PAGE>
$2,279,334.06 OMICRON PARTNERS, LP
By:/s/ Anthony L.M. Inder Rieden
___________________________________
Name: Anthony L.M. Inder Rieden
Title: Director of General Partner
$ 600,000.00 OTATO LIMITED PARTNERSHIP
By:/s/ Richard M. Cayne
__________________________
Name: Richard M. Cayne
Title: General Counsel
$400,000.00 OVERBROOK FUND I, LLC
By:/s/ Arthur G. Altschul, Jr.
________________________________
Name: Arthur G. Altschul, Jr.
Title:
11
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
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0
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