<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1998
REGISTRATION NO. 333-59053
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-2
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SHAMAN PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3095806
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
213 EAST GRAND AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080-4812
(650) 952-7070
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
LISA A. CONTE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SHAMAN PHARMACEUTICALS, INC.
213 EAST GRAND AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080-4812
(650) 952-7070
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
COPIES TO:
<TABLE>
<S> <C>
J. STEPHAN DOLEZALEK, ESQ. A. JOHN MURPHY, ESQ.
BROBECK, PHLEGER & HARRISON LLP SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
TWO EMBARCADERO PLACE, 2200 GENG ROAD SEVENTEENTH FLOOR, FOUR EMBARCADERO CENTER
PALO ALTO, CALIFORNIA 94301-0913 SAN FRANCISCO, CALIFORNIA 94111-4106
(650) 424-0160 (415) 434-9100
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than Securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE OFFERING PRICE (1) FEE(3)
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Series C Convertible Preferred Stock, $.001
par value................................. 200,000 $100 $20,000,000 $5,900
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Common Stock, $.001 par value............... 6,201,551(2) -- -- --
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</TABLE>
(1) Represents (i) the maximum number of shares of Series C Convertible
Preferred Stock being sold pursuant to this offering, and (ii) a number of
additional shares of Common Stock as may from time to time become issuable
upon conversion of such preferred stock or by reason of stock splits, stock
dividends and other similar transactions and is set forth solely for the
purpose of calculating the registration fee in accordance with Rule 457(c)
of the Securities Act of 1933, as amended.
(2) The number of shares of Common Stock to be registered is estimated using the
price of $3.225 per share, which was 85% of the average closing prices of
the Common Stock reported by The Nasdaq Stock Market for the 10 trading days
from July 10, 1998 to July 23, 1998.
(3) Includes a fee of $4,720 previously paid and $1,180 paid pursuant to this
Amendment No. 2.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 30, 1998
MINIMUM OFFERING 150,000 SHARES
MAXIMUM OFFERING 200,000 SHARES
SERIES C CONVERTIBLE PREFERRED STOCK
This Prospectus relates to the offer and sale by Shaman Pharmaceuticals,
Inc. (the "Company") of (i) a minimum of 150,000 (the "Minimum") and a maximum
of 200,000 (the "Maximum") shares (the "Shares") of Series C Convertible
Preferred Stock, par value $0.001 per share (the "Series C Preferred Stock");
and (ii) in accordance with Rule 416 under the Securities Act of 1933, as
amended (the "Securities Act"), an indeterminate number of shares of the
Company's Common Stock, par value $0.001 per share (the "Common Stock"), as may
be issuable upon conversion of the Series C Preferred Stock or as a result of
stock splits, stock dividends and other similar transactions. Investor funds
will be placed in an escrow account, and no funds will be released to the
Company until the Company receives and accepts subscriptions for a minimum of
150,000 Shares.
Each share of Series C Preferred Stock shall be entitled to receive
cumulative dividends paid semi-annually on May 31 and November 30 of each year
to the holders of record of such shares on March 31 and September 30 of such
year (the "Dividends") as follows: (i) a stock-on-stock dividend of $10.00 per
annum, paid in arrears, in shares of Common Stock (valued at 85% of the average
closing price of the Common Stock for the 10 trading day period ending three
trading days prior to the date on which the dividend is paid); plus (ii) a cash
amount equaling 0.00005% of the Company's United States net sales, if any, for
the preceding two calendar quarters of its SP-303/Provir(TM) product for the
treatment of diarrhea (equivalent to a 7.5% royalty for the Minimum and a 10%
royalty for the Maximum of the aggregate shares of Series C Preferred Stock)
less $5.00 (the value of the semi-annual stock dividend). If, under Delaware
law, the Company is unable to pay the cash amount of the Dividends, then the
cash portion of the Dividends shall be payable in shares of Common Stock (valued
at 85% of the average closing price of the Common Stock for the 10 day trading
period ending three days prior to the date on which the dividend is paid). Each
Share shall be convertible, at any time at least 12 months after the original
issuance date thereof at the election of each holder, and automatically on the
fourth anniversary of the date on which any shares of Series C Preferred Stock
were first issued, into the greater of (i) 16.6667 shares of Common Stock or
(ii) such number of shares of Common Stock as equals $100 divided by 85% of the
average closing price of the Common Stock reported by the Nasdaq Stock Market
for the 10 trading day period ending three trading days prior to the date of
conversion.
The Common Stock of the Company is traded on The Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol "SHMN." On July 27, 1998, the last
sale price for the Common Stock as quoted on The Nasdaq National Market was
$3.4375 per share.
Prior to this offering, there has been no public market for the Series C
Preferred Stock. The public offering price is expected to be $100 per share. See
"Plan of Distribution" for a discussion of the factors in determining the
initial public offering price. The Company initially filed an application to
list the Shares on The Nasdaq SmallCap Market. The application, however, was
denied by the Nasdaq staff. The placement agent, Dakin Securities Corporation,
has applied for inclusion of the Series C Preferred Stock on the NASD OTC
Bulletin Board under the symbol "SHMNX." The OTC Bulletin Board System is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. In the event the Shares are not included
on the OTC Bulletin Board, quotes for the Shares may be included in the "pink
sheets" for the over-the-counter market. See "Risk Factors -- No Assurance of
Public Trading Market for Preferred Stock."
------------------------
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share..................... $ 100.00 $ 6.00 $ 94.00
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Total Minimum................. $ 15,000,000 $ 900,000 $ 14,100,000
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Total Maximum................. $ 20,000,000 $ 1,200,000 $ 18,800,000
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</TABLE>
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(1) The Company has granted Dakin Securities Corporation (the "Placement Agent")
the exclusive right to sell the Series C Preferred Stock on a "best efforts"
basis. The commissions set forth in the table above assume that the
Placement Agent will receive a commission equal to six percent of the
aggregate sales price of all the Series C Preferred Stock sold in the
offering. The Placement Agent is entitled to a commission of three percent,
rather than six percent, in certain circumstances. The Company has also
agreed to reimburse the Placement Agent for certain expenses incurred in
connection with the offering and to indemnify the Placement Agent against
certain liabilities, including liabilities under the Securities Act. See
"Plan of Distribution."
(2) Before deducting expenses estimated at $275,000, which are payable by the
Company.
------------------------
It is expected that delivery of the Series C Preferred Stock will be made
in San Francisco, California on or about , 1998.
DAKIN SECURITIES CORPORATION
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THE DATE OF THIS PROSPECTUS IS JULY , 1998
<PAGE> 3
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements incorporated by reference herein. An
investment in the shares of Series C Preferred Stock offered hereby involves a
high degree of risk. Prospective investors should consider carefully the factors
identified under "Risk Factors." Except as otherwise specified, the information
in this Prospectus gives effect to the Company's agreement, upon the
consummation of this offering, not to issue shares of its Series B Preferred
Stock pursuant to certain Series B Preferred Stock Purchase Agreements, dated
June 10, 1998, by and among the Company and certain investors.
THE COMPANY
Shaman discovers and develops novel pharmaceutical products for the
treatment of human diseases and their symptoms through the isolation and
optimization of active compounds found in tropical plants. The Company believes
that by focusing on drugs extracted from plants with a history of medicinal use,
its drug discovery efforts may be quicker and more likely to lead to safe and
effective pharmaceuticals. Shaman has three product candidates in clinical
development -- SP-303/Provir, nikkomycin Z and SP-134101. These product
candidates target five indications. Of these product candidates, the most
advanced, SP-303/Provir, entered into a Phase III human clinical trial in March
1998 for the treatment of diarrhea in people with AIDS. In May 1998, the U.S.
Food and Drug Administration ("FDA") formally notified the Company that
SP-303/Provir had been granted "fast track product" designation. Earlier in
1998, the FDA also advised the Company that upon its completion, data from
Shaman's single Phase III study along with corroborative information from a
previously completed Phase II trial may serve as the basis for the submission of
a New Drug Application ("NDA"). In the Phase II trial, SP-303/Provir was shown
to provide a significant treatment effect for diarrhea in people with AIDS. If
the results of the current trial, which is currently over 75% enrolled, are
positive, the Company expects to file an NDA for commercial approval of
SP-303/Provir in early 1999. With a fast track designation from the FDA for the
indication of diarrhea in people with AIDS, the Company is preparing for
potential product launch in the second half of 1999 and intends to retain U.S.
marketing rights to this product. The Company intends to out-license marketing
rights for Europe and other parts of the world.
SP-303/Provir has shown an ability to inhibit a primary mechanism in watery
diarrhea, and is also being evaluated in human clinical trials for watery
diarrhea indications other than diarrhea in people with AIDS. In July 1998, the
Company completed two separate Phase II dose optimization studies of
SP-303/Provir in acute watery diarrhea from two different populations. Both
studies were double-blind, randomized, placebo-controlled. Positive,
statistically significant results in the reduction of time to last unformed
stool ("TLUS") over 48 hours, the key efficacy end point, were achieved in each
study. These studies also showed SP-303/ Provir to be well tolerated. The
Company also intends to advance SP-303/Provir in clinical development for a
third indication, pediatric diarrhea. Shaman is currently engaged in formulation
development and in planning the ongoing clinical development program for this
indication. SP-303/Provir has now been tested in over 700 patients, including
over 170 people with AIDS, with no significant drug-related effects.
Nikkomycin Z is an orally-active anti-fungal compound. The Company believes
that nikkomycin Z has the potential to treat endemic mycoses and other systemic
fungal infections. In 1997 Shaman completed a Phase I trial in the United
Kingdom, with results showing that the drug appeared to be safe when orally
administered. The Company filed an Investigational New Drug application ("IND")
in the United States in December 1997.
Shaman's third compound in clinical development, SP-134101, is an oral
product for the treatment of Type II (adult onset or non-insulin dependent)
diabetes. In animal models, the compound has demonstrated the ability to lower
glucose and triglycerides and have a beneficial effect on blood pressure. The
compound appears to work by increasing glucose uptake in the peripheral tissues
and decreasing triglyceride output from the liver. From a discovery research
effort that led to the identification of 26 chemically distinct, orally-active
compounds that demonstrated glucose lowering effects in preclinical animal
testing, SP-134101 was Shaman's first proprietary product candidate from its
diabetes program to enter clinical trials in January 1998. Significant funding
for the Company's diabetes discovery research program has been and is being
provided through a collaboration with Lipha, s.a., a wholly-owned subsidiary of
Merck KGaA, Darmstadt, Germany
3
<PAGE> 5
("Lipha/Merck"), and has been previously provided through a collaboration with
Ono Pharmaceutical Co., Ltd. ("Ono"). Both Lipha/Merck and Ono will make
milestone payments to Shaman on any product candidates resulting from their
respective collaborations. Lipha/Merck and Ono have no commercialization rights
to SP-134101 and no milestone payments are due to the Company on the development
and commercialization of this compound.
Shaman Pharmaceuticals, Inc. was incorporated in California in May 1989,
began operations in March 1990 and reincorporated in Delaware in January 1993.
The Company's principal executive offices are located at 213 East Grand Avenue,
South San Francisco, California, 94080-4812, and its telephone number is (650)
952-7070.
SP-303/Provir(TM) and the Company's stylized logo are trademarks of the
Company. Shaman Pharmaceuticals(R) and Virend(R) are registered U.S. trademarks
of the Company.
4
<PAGE> 6
THE OFFERING
SERIES C CONVERTIBLE PREFERRED
STOCK OFFERED(1).............. Minimum: 150,000 shares at $100 per share
Maximum: 200,000 shares at $100 per share
PREFERRED STOCK OUTSTANDING
AFTER THE OFFERING............ Minimum: 550,000 shares
Maximum: 600,000 shares
COMMON STOCK OUTSTANDING AFTER
THE OFFERING(2)............. 18,980,862 shares
USE OF PROCEEDS............... Research, development, clinical testing,
regulatory activities and pre-commercialization
activities for SP-303/Provir
NASDAQ NATIONAL MARKET
SYMBOL........................ SHMN
- ---------------
(1) Investor funds will be deposited into an interest bearing escrow account
maintained with U.S. Bank Trust N.A. The escrow provides that funds may be
released from escrow only upon the satisfaction of certain conditions,
including the deposit of $15,000,000 in the escrow account by August ,
1998; provided, however the Company may extend such date for up to an
additional 30 days. Interest on deposited funds will accrue at a rate of 10%
per annum from the date such funds are placed into the escrow account.
(2) Based on shares outstanding as of July 24, 1998. Excludes (i) 2,952,629
shares of Common Stock issuable upon the exercise of options outstanding
under the Company's stock option plan; (ii) 1,261,024 shares issuable upon
exercise of outstanding warrants; (iii) 400,000 shares issuable upon the
conversion of Series A Preferred Stock; (iv) an estimate of 4,651,163 to
6,201,551 shares issuable upon the conversion of reserved but unissued
Series C Preferred Stock; and (v) approximately 2,234,953 shares issuable
upon conversion of senior convertible notes.
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
1997 1996 1995 1998 1997
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<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue from collaborative
agreements.......................... $ 3,500 $ 3,406 $ 2,210 $ 875 $ 875
Operating expenses:
Research and development............ 24,140 19,138 17,635 7,513 6,015
General and administrative.......... 4,833 3,537 3,705 1,276 991
-------- -------- -------- ------- -------
Total operating expenses.... 28,973 22,675 21,340 8,789 7,006
-------- -------- -------- ------- -------
Loss from operations.................. (25,473) (19,269) (19,130) (7,914) (6,131)
Interest income....................... 1,218 1,082 1,695 232 251
Interest expense (cash)............... (1,341) (603) (569) (807) (101)
Interest expense (non-cash)........... (3,692) -- -- -- --
-------- -------- -------- ------- -------
Net loss.............................. $(29,288) $(18,790) $(18,004) $(8,489) $(5,981)
======== ======== ======== ======= =======
Net loss per share(1)................. $ (1.72) $ (1.39) $ (1.37) $ (0.48) $ (0.39)
======== ======== ======== ======= =======
Shares used in calculation of net loss
per share(1)........................ 17,010 13,496 13,161 17,836 15,455
======== ======== ======== ======= =======
Ratio of earnings to combined fixed
charges and preferred stock
dividends(2)........................ -- -- -- -- --
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
DECEMBER 31, 1997 ACTUAL AS ADJUSTED
----------------- --------- ------------------------
MINIMUM(3) MAXIMUM(4)
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<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short
term investments................... $ 21,421 $ 14,199 $ 28,024 $ 32,724
Working capital...................... 14,547 6,814 20,639 25,339
Total assets......................... 26,753 19,277 33,102 37,802
Long-term obligations, including
current installments............... 6,802 6,423 6,423 6,423
Senior convertible notes............. 9,967 10,179 10,179 10,179
Accumulated deficit.................. (111,910) (120,399) (120,399) (120,399)
Total stockholders' equity (net
capital deficiency)................ 5,148 (3,012) 10,813 15,513
</TABLE>
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(1) Net loss per share is based on the weighted average number of common shares
outstanding during the period.
(2) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends (i) earnings consist of operating loss plus
fixed charges and preferred stock dividends and (ii) fixed charges consist
of interest expense incurred, plus the portion of rent expense under
operating leases deemed by the Company to be representative of the interest
factor. For the years ended December 31, 1997, 1996 and 1995 and for the
three-month periods ended March 31, 1998 and 1997, the Company's historical
earnings were insufficient to cover fixed charges by $29.3 million, $18.8
million, $18.0 million, $8.5 million and $6.0 million, respectively.
(3) Adjusted to reflect the sale by the Company of 150,000 shares of Series C
Preferred Stock at the public offering price of $100 per share and the
application of the net proceeds therefrom of approximately $13.8 million.
See "Use of Proceeds" and "Capitalization."
(4) Adjusted to reflect the sale by the Company of 200,000 shares of Series C
Preferred Stock at the public offering price of $100 per share and the
application of the net proceeds therefrom of approximately $18.5 million.
See "Use of Proceeds" and "Capitalization."
6
<PAGE> 8
RISK FACTORS
The shares offered hereby involve a high degree of risk. The following risk
factors should be considered carefully in addition to the other information
contained or incorporated by reference in this Prospectus before purchasing the
shares of Series C Preferred Stock offered hereby. In addition to the historical
information contained herein, the discussion in this Prospectus may contain
certain forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
discussed in this Prospectus. Factors that could cause or contribute to such
differences include those discussed below as well as those cautionary statements
and other factors set forth elsewhere herein.
Risk Regarding Failure to Meet Continued Listing Requirements. On June 10,
1998 the Company received correspondence from The Nasdaq National Market
("Nasdaq") stating that they had found that the Company no longer met the
$4,000,000 net tangible asset requirement for continued listing on The Nasdaq
National Market. As of March 31, 1998, the Company had a net capital deficiency
of ($3,011,702). On July 15, 1998 the Company requested a formal hearing to
determine the Company's compliance with the Nasdaq listing requirements. The
hearing date has been scheduled for September 3, 1998. The Company believes it
is in compliance with all other listing requirements. However, absent additional
financing, the receipt of license fees or milestone payments from corporate
partnerships or the conversion of outstanding convertible notes, there can be no
assurance that the Company will satisfy the Nasdaq National Market listing
requirements at or after the time of such hearing. If the Company fails to
satisfy The Nasdaq National Market that it meets such requirements, the Common
Stock will no longer be traded on The Nasdaq National Market, and the Company
would need to seek listing on the American Stock Exchange. If traded on the
American Stock Exchange, the Company's Common Stock may be subject to reduced
liquidity and reduced analyst coverage, the Company's ability to raise capital
in the future may be inhibited and the Company's business, financial condition
and results of operations could be materially adversely affected.
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 of capital 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 SP-303/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.
The Company incurred an operating loss of approximately $8.5 million for the
three months ended March 31, 1998 and additional losses of $3.0 million in April
1998 and $2.7 million in May 1998. The loss in April was a result of the
Company's incurring research and development expenses of approximately $2.8
million, general and administrative expenses of approximately $364,000 and
interest expense net of interest income of approximately $151,000. These
expenses were partially offset by revenues of approximately $292,000 for the
month. The loss in May was a result of the Company's incurring research and
development expenses of approximately $2.4 million, general and administrative
expenses of approximately $525,000 and interest expense net of interest income
of approximately $142,000. These expenses were partially offset by revenues of
approximately $433,000 for the month. As of May 31, 1998, the Company's
accumulated deficit
7
<PAGE> 9
was approximately $126.1 million. The Company has not generated any product
revenues to date. All of Shaman's products and compounds are still in the
research and development stage, which requires 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 June 30,
1998, the Company had cash, cash equivalents and investment balances of
approximately $5.2 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, senior convertible note purchase
agreements entered into by the Company in connection with a private placement
completed in 1997, provide that under certain circumstances the Company would be
required to redeem all or some portion of the principal balance remaining ($6.5
million at July 24, 1998), 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 sources will be available on acceptable terms or at all. If adequate
funds are not available, the Company will need to delay, scale back or eliminate
one or more of its research, discovery or development programs, which could have
a material adverse effect on the Company's business, 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 or to complete clinical testing of
current product candidates, and there can be no assurance that any of the
Company's research and development efforts on these or other potential products,
including SP-303/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 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.
Uncertainties Associated with Clinical Trials. Shaman has conducted, and
plans to continue conducting, 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,
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<PAGE> 10
existence of competing protocols, size of patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Any delay 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.
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.
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 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, including
SP-303/Provir, nikkomycin Z and SP-134101, and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Collaborative Relationships. The Company's research and
development efforts in its diabetes program and, to a lesser extent, in its
other programs, have been dependent upon its arrangements with Lipha/Merck and
Ono and their funding for research and development efforts thereunder. Because
research and development funding from Ono has ended, the Company must in the
future rely on continued funding from Lipha/Merck or milestone payments from
products developed by either Ono or Lipha/Merck, if any, or must seek new
collaborations to provide further funding for its diabetes program. There can be
no assurance that such further funding will be obtained or that any significant
revenues will ultimately be derived from any of the Company's collaborations.
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, including
SP-303/Provir, 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 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
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<PAGE> 11
competition to the Company's products. The development of competing compounds
could have a material adverse effect on the Company's business, financial
condition and 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, as well as
comparable agencies in state and local jurisdictions and in foreign countries.
These authorities, in particular the FDA, 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 Good
Manufacturing Practices ("GMP").
Lengthy and detailed preclinical and clinical testing, validation of
manufacturing and quality control processes, and other costly and time-consuming
procedures are required for approval of a new drug. 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 operations.
Among the conditions for FDA approval of a pharmaceutical product is the
requirement that the manufacturer's (either the Company itself or any
third-party manufacturer) quality controls and manufacturing procedures conform
to 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
conform to GMP requirements. Additionally, the Company or its third-party
manufacturers must pass a pre-approval inspection of their manufacturing
facilities by the FDA before the Company can obtain 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.
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Dependence on Sources of Supply. The Company currently imports all of the
plant materials from which its products are derived from countries in Latin and
South 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. If the Company or its third
party manufacturers should encounter delays or difficulties in producing,
packaging and distributing the Company's finished products, clinical trials,
regulatory filings, market introduction and subsequent sales of such products
could be adversely affected.
Contract manufacturers must conform 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 inspection of their
manufacturing facilities 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 required to build or purchase a manufacturing facility, 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. There can be no assurance that
the Company will be able to successfully establish a marketing and sales force.
To the extent that the Company does not or is unable to successfully establish a
complete marketing and sales force, there can be no assurance that the Company
will achieve a successful product entry into the marketplace. Such failure would
have a material adverse effect on the Company's business, financial condition
and results of operations.
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, others 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 companies 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 ("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
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<PAGE> 13
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 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 (which covers the active
pharmaceutical ingredient in SP-303/Provir), 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 Daniel Jean, 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 (the
"Interference") declared between the Company's issued patent covering its
specific proanthocyanidin polymer composition and certain claims of a 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 on July 14, 1997. 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 Company or to protect trade secrets or know-how owned by the
Company. Additional interference proceedings may be declared or become necessary
to determine issues of invention; such litigation and/or interference
proceedings could result in substantial cost to and diversion of effort by the
Company and may have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that such efforts by the Company will be successful.
The Company's competitive position is also dependent upon unpatented trade
secrets. All employees of the Company have entered into confidentiality
agreements. However, there can be no assurance that others will not
independently develop substantially equivalent 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
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<PAGE> 14
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 presently prosecuting 13 patent applications with the PTO,
but the Company does not know whether any of these 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 the 16 U.S. patents issued to date will provide 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 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 on
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, on a voluntary or
involuntary basis, participate in interference proceedings that may in the
future be declared by the PTO, which could result in substantial costs 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. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field and cannot distinguish 21st century dates from 20th century dates. These
date code fields will need to distinguish 21st century dates from 20th century
dates and, as a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with such "Year 2000"
requirements.
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
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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 collaborative 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 experienced by the Company, its suppliers, its clinical
research organizations, or its collaborative partners could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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 and results of operations.
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.
No Prior Public Market for Series C Preferred Stock; Possible Volatility of
Stock Price. Before this offering, there has been no public market for the
Series C Preferred Stock, and there can be no assurance that an active trading
market will develop as a result of the offering or, if a trading market does
develop, that it will be sustained or that the shares of Series C Preferred
Stock can be resold at or above the assumed public offering price. The market
price of the Common Stock and Series C Preferred Stock, like the stock prices of
many publicly traded biotechnology and smaller pharmaceutical companies, may 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 the Common Stock or Series C Preferred Stock.
No Assurance of Public Trading Market for Preferred Stock. An application
for inclusion on the OTC Bulletin Board has been filed by the Placement Agent.
The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter market
which provides significantly less liquidity than The Nasdaq Stock Market, and
quotes for stocks included on the OTC Bulletin Board are not typically listed in
the financial sections of newspapers as are those for The Nasdaq Stock Market.
Therefore, prices for securities traded solely on the OTC Bulletin Board may be
difficult to obtain and purchasers of the Series C Preferred Stock may be unable
to resell the Series C Preferred Stock at or near the original offering price or
at any price. In the event the Series C Preferred Stock is not included on the
OTC Bulletin Board, quotes for the Series C Preferred Stock may be included in
the "pink sheets" for the over-the-counter market. There can be no assurance
that a regular trading market for the Series C Preferred Stock will develop
after this offering or that, if developed, it will be sustained.
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
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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. The Company has
secured insurance to mitigate such expense, however, any such liability could
exceed the insurance coverage and resources of the Company. Such liability could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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 Common Stock or Series C
Preferred Stock. At June 30, 1998 the Company's Board of Directors had the
authority to issue up to 400,000 additional shares of Preferred Stock (after
giving effect to the issuance of 200,000 shares of Series C Preferred Stock) and
to determine the price, rights, preferences, privileges and restrictions of
those shares without any further vote or action by the stockholders.
The rights of the holders of Common Stock and Series C Preferred 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 with voting rights, 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. Other than the Series C Preferred
Stock, the Company has no present plans to issue shares of Preferred Stock with
voting rights. 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
is expensive. There can be no assurance that the Company's present product
liability insurance coverage, which includes coverage for acts by third parties,
including manufacturers of the Company's product candidates, 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 pursuant to which the Company could be
held accountable for certain occurrences. Such liability could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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, directors, employees and agents to the full extent
permitted by the general corporation law of Delaware. 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.
15
<PAGE> 17
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 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.
Dilution. The biopharmaceutical industry is capital intensive. In this
regard the Company has entered into a number of financings, many of which have
included securities that are convertible into shares of Common Stock. Dilution
may occur upon the exercise of outstanding options and warrants and upon
conversion of senior convertible notes, the Series A Preferred Stock, the Series
C Preferred Stock and, if issued, the Series B Preferred Stock. Stockholders may
also suffer additional dilution if the Company exercises its right to put
additional shares of its Common Stock to Fletcher International Limited,
pursuant to its agreements with such investor, as more fully set forth in
Exhibit 10.47 to the Registration Statement, of which this Prospectus forms a
part. See "Description of Capital Stock."
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.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of a minimum of 150,000
shares and a maximum of 200,000 shares of Series C Preferred Stock offered
hereby are estimated to be $13.8 million and $18.5 million, respectively, after
deducting the placement agent discount and commissions and estimated offering
expenses.
The Company anticipates that the proceeds of this offering, together with
the Company's current working capital and committed revenue from corporate
collaborations will be adequate to fund the clinical development of
SP-303/Provir for diarrhea in people with AIDS through an NDA filing, diabetes
research and compound development, clinical testing and related regulatory
activities for other indications for SP-303/ Provir, nikkomycin Z and SP-134101
and pre-commercialization activities for SP-303/Provir through at least March
31, 1999. In addition, the Company has acquired certain rights to sell
additional shares of Common Stock at specified intervals and subject to certain
conditions. See "Description of Capital Stock." Because the exercise of such
rights would be dilutive, the Company intends to utilize the proceeds of this
offering prior to seeking to access this source of capital.
The amounts and timing of the Company's expenditures may vary significantly
depending upon numerous factors, including the progress of Shaman's research and
development programs, the results of clinical studies, the timing of regulatory
approvals, the status of competitive products and the availability of
alternative financing, including agreements with other companies relating to the
development and marketing of the Company's products.
Pending application of the proceeds as described above, the Company plans
to invest the net proceeds of the offering in United States government
securities, other investment grade debt securities and other short-term
investments. Based on its current operating plan, the Company anticipates that
its existing capital resources and committed funding, along with the proceeds of
this offering and the interest thereon, will be adequate to satisfy its capital
needs through at least the first quarter of 1999. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
17
<PAGE> 19
PRICE RANGE OF COMMON STOCK
Prior to this offering, there has been no public market for the Series C
Preferred Stock. The public offering price is expected to be $100 per share.
The Company's Common Stock trades on The Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol SHMN. The Company's Common Stock began
trading on January 26, 1993.
Set forth below is the range of high and low bid prices for the Company's
Common Stock for each quarter in the two most recent fiscal years, and for the
first three quarters of 1998 (through July 27, 1998) as regularly quoted in The
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
Q1 FY 96............................................. $7.32 $5.13
Q2 FY 96............................................. 9.00 6.13
Q3 FY 96............................................. 8.63 5.75
Q4 FY 96............................................. 7.38 5.38
Q1 FY 97............................................. 6.25 3.88
Q2 FY 97............................................. 6.19 4.69
Q3 FY 97............................................. 7.00 5.12
Q4 FY 97............................................. 7.06 4.25
Q1 FY 98............................................. 5.63 4.00
Q2 FY 98............................................. 5.38 3.00
Q3 FY 98 (through July 27, 1998)..................... 4.13 3.25
</TABLE>
The Company has received correspondence from The Nasdaq National Market
regarding the Company's failure to comply with The Nasdaq National Market's
continued listing requirements. See "Risk Factors -- Nasdaq National Market
Listing Requirements."
DIVIDEND POLICY
Each share of Series C Preferred Stock shall be entitled to receive
cumulative dividends paid semi-annually on May 31 and November 30 of each year
to the holders of record of such shares on March 31 and September 30 of such
year as follows: (i) a stock-on-stock dividend of $10.00 per annum, paid in
arrears, in shares of Common Stock (valued at 85% of the average closing price
of the Common Stock for the 10 trading day period ending three trading days
prior to the date on which the dividend is paid); plus (ii) a cash amount
equaling 0.00005% of the Company's United States net sales, if any, for the
preceding two calendar quarters of its SP-303/Provir product for the treatment
of diarrhea (equivalent to a 7.5% royalty for the Minimum and a 10% royalty for
the Maximum of the aggregate shares of Series C Preferred Stock) less $5.00 (the
value of the semi-annual stock dividend).
No dividends have been paid on the Common Stock since the Company's
inception, and the Company does not anticipate paying any dividends in the
foreseeable future. The terms of the Company's loan agreement with MMC/GATX
Partnership No. 1 restrict the payment of dividends on any equity security so
long as any amount remains outstanding under such loan agreement. However,
MMC/GATX has waived such requirements with respect to the payment of dividends
on the Series C Preferred Stock. In addition, the Certificate of Designation of
Preferences of Series A Preferred Stock and the Certificate of Designation of
Preferences of Series C Preferred Stock require that the Company pay equivalent
per share dividends to the holders of the Company's Series A Preferred Stock and
Series C Preferred Stock, respectively, prior to the payment of dividends to the
holders of the Company's Common Stock.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1998 and as adjusted to reflect the sale of a minimum of 150,000
and a maximum of 200,000 shares of Series C Preferred Stock offered hereby at
the public offering price of $100 per share and after deducting the placement
agent discount and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
AS ADJUSTED
------------------------
ACTUAL MINIMUM(1) MAXIMUM(2)
--------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt and capital lease obligations, including
current portion.......................................... $ 16,602 $ 16,602 $ 16,602
Stockholders' equity
Preferred Stock, $.001 par value per share, 1,000,000
shares authorized(3);
Series A Preferred Stock, 400,000 shares designated;
400,000 shares issued and outstanding, actual and as
adjusted............................................ -- -- --
Series C Preferred Stock, 200,000 shares authorized
for designation; 150,000 shares (minimum) and
200,000 shares (maximum) issued and outstanding, as
adjusted............................................ -- -- --
Common Stock, $.001 par value per share, 40,000,000
shares authorized; 17,861,143 shares issued and
outstanding, actual and as adjusted................... 18 18 18
Additional paid-in capital............................... 117,452 131,277 135,977
Deferred compensation and other adjustments.............. (83) (83) (83)
Accumulated deficit...................................... (120,399) (120,399) (120,399)
--------- --------- ---------
Total stockholders' equity....................... (3,012) 10,813 15,513
--------- --------- ---------
Total capitalization............................. $ 13,590 $ 27,415 $ 32,115
========= ========= =========
</TABLE>
- ---------------
(1) Adjusted to reflect the sale of 150,000 shares of Series C Preferred Stock
at the public offering price of $100 per share and the application of the
net proceeds therefrom of approximately $13.8 million. See "Use of
Proceeds."
(2) Adjusted to reflect the sale of 200,000 shares of Series C Preferred Stock
at the public offering price of $100 per share and the application of the
net proceeds therefrom of approximately $18.5 million. See "Use of
Proceeds."
(3) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
19
<PAGE> 21
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------------
1997 1996 1995 1994 1993 1998 1997
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue from collaborative agreements......... $ 3,500 $ 3,406 $ 2,210 $ 1,360 $ 2,050 $ 875 $ 875
Operating expenses (1):
Research and development.................... 24,140 19,138 17,635 18,643 13,646 7,513 6,015
General and administrative.................. 4,833 3,537 3,705 3,545 2,659 1,276 991
-------- -------- -------- -------- -------- ------- -------
Total operating expenses........................ 28,973 22,675 21,340 22,188 16,305 8,789 7,006
-------- -------- -------- -------- -------- ------- -------
Loss from operations............................ (25,473) (19,269) (19,130) (20,828) (14,255) (7,914) (6,131)
Interest income................................. 1,218 1,082 1,695 2,045 1,543 232 251
Interest expense (cash)......................... (1,341) (603) (569) (698) (315) (807) (101)
Interest expense (non-cash)..................... (3,692) - - - - - -
-------- -------- -------- -------- -------- ------- -------
Net loss........................................ $(29,288) $(18,790) $(18,004) $(19,481) $(13,027) $(8,489) $(5,981)
======== ======== ======== ======== ======== ======= =======
Net loss per share (2).......................... $ (1.72) $ (1.39) $ (1.37) $ (1.50) $ (1.30) $ (0.48) $ (0.39)
======== ======== ======== ======== ======== ======= =======
Shares used in calculation of net loss per share
(2)........................................... 17,010 13,496 13,161 12,986 10,036 17,836 15,455
======== ======== ======== ======== ======== ======= =======
Ratio of earnings to combined fixed charges and
preferred stock dividends(3).................. -- -- -- -- -- -- --
======== ======== ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
----------------------------------------------------- -----------------------------------
1997 1996 1995 1994 1993 ACTUAL AS ADJUSTED
--------- -------- -------- -------- -------- --------- -----------------------
MINIMUM(4) MAXIMUM(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and
short-term investments....... $ 21,421 $ 16,533 $ 26,665 $ 39,843 $ 57,333 $ 14,199 $ 28,024 $ 32,724
Working capital................ 14,547 9,641 22,850 33,422 36,711 6,814 20,639 25,339
Total assets................... 26,753 22,377 33,810 49,673 67,229 19,277 33,102 37,802
Long-term obligations,
including current
installments................. 6,802 4,816 6,041 5,017 4,221 6,423 6,423 6,423
Senior Convertible Notes....... 9,967 -- -- -- -- 10,179 10,179 10,179
Accumulated deficit............ (111,910) (82,622) (63,832) (45,828) (26,348) (120,399) (120,399) (120,399)
Total stockholders' equity (net
capital deficiency).......... $ 5,148 $ 11,977 $ 24,205 $ 41,300 $ 60,436 $ (3,012) $ 10,813 $ 15,513
</TABLE>
- ---------------
(1) Certain expenses in 1994 have been reclassified to conform to 1997
presentation.
(2) Net loss per share is based on the weighted average number of common shares
outstanding during the period and, for periods prior to the Company's
initial public offering in January 1993, certain common equivalent shares.
The Company has not paid any dividends on its capital stock since its
inception.
(3) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends (i) earnings consist of operating loss plus
fixed charges and preferred stock dividends and (ii) fixed charges consist
of interest expense incurred, plus the portion of rent expense under
operating leases deemed by the Company to be representative of the interest
factor. For the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and
for the three-month periods ended March 31, 1998 and 1997, the Company's
historical earnings were insufficient to cover fixed charges by $29.3
million, $18.8 million, $18.0 million, $19.5 million, $13.0 million, $8.5
million and $6.0 million, respectively.
(4) Adjusted to reflect the sale of 150,000 shares of Series C Preferred Stock
at the public offering price of $100 per share and the application of the
net proceeds therefrom of approximately $13.8 million. See "Use of Proceeds"
and "Capitalization".
(5) Adjusted to reflect the sale of 200,000 shares of Series C Preferred Stock
at the public offering price of $100 per share and the application of the
net proceeds therefrom of approximately $18.5 million. See "Use of Proceeds"
and "Capitalization."
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Shaman discovers and develops novel pharmaceutical products for major human
diseases and their symptoms through the isolation and optimization of active
compounds found in tropical plants with a history of medicinal use. The Company
has human clinical trials underway for its three leading product candidates --
SP-303/Provir, an oral product for the treatment of diarrhea in people with AIDS
and watery diarrhea; 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 collaboration with Lipha/Merck.
The Company began operations in March 1990. To date, Shaman has not sold
any products. Assuming favorable completion of the Phase III clinical trial
(which is over 75% enrolled) and a fast track approval from the FDA, the Company
expects to achieve its first commercial product launch in the second half of
1999. The Company's accumulated deficit at March 31, 1998, was approximately
$120.4 million. Since its inception, Shaman has financed its research,
development and administrative activities through various private and public
equity financings, loans and debt financings, and 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 research funding from Ono and from Shaman's ongoing 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. In May 1998, the Company's collaborative
agreement with Ono, and the ongoing research and development funding received
pursuant thereto, expired under the original terms of the agreement and was not
renewed. Under the original terms of the agreement, Ono will continue to provide
milestone payments and royalties to Shaman on any resulting products they
develop from compounds identified during the three-year term of the agreement.
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 SP-303/Provir. Research and development
expenses are expected to increase in 1998 as the Company continues its clinical
development activities with respect to SP-303/Provir, other products continue
through development, and the Company maintains its diabetes research program.
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 amortization of the non-cash interest expense of
$266,000 in connection with certain debt financing.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The Company recorded collaborative revenues of $3.5 million, $3.4 million,
and $2.2 million for 1997, 1996, and 1995, respectively. Revenues for 1997
resulted from the Company's research funding from Ono and research funding from
Shaman's on-going collaboration with Lipha/Merck. Revenues for 1996 resulted
from
21
<PAGE> 23
the Company's research funding from Ono, an additional $1.0 million payment from
Ono for enhanced rights to Shaman's antidiabetic compounds, and research
payments and access fees from Shaman's collaboration with Lipha/Merck. Revenues
in 1995 resulted solely from the Company's relationship with Ono, and included a
one-time access fee associated with the May 1995 commencement of the
collaboration. The Company expects that revenues from collaborative agreements
will continue to fluctuate in the future as development of its various compounds
proceeds and new products are partnered for development and commercialization.
The Company incurred research and development expenses of $24.1 million,
$19.1 million, and $17.6 million for 1997, 1996, and 1995, respectively. These
expenses include salaries for scientific personnel, clinical development costs,
laboratory supplies, patent protection and consulting fees, travel, plant
collections, facilities expenses and other expenditures relating to research and
product development. Research and development expenses increased $5.0 million in
1997 compared with 1996, and increased $1.5 million in 1996 compared with 1995.
The increase in 1997 was primarily attributable to costs of $3.8 million
associated with the Company's increased clinical development activities with
respect to SP-303/Provir, partially offset by reduced expenses of $1.1 million
for clinical development activities for nikkomycin Z, and to increased
scientific salaries of $1.2 million. The increase in 1996 was primarily
attributable to the Company's clinical development activities for SP-303/Provir,
as well as additional research and development activities with respect to
nikkomycin Z, partially offset by reduced expenses for clinical development
activities for Virend. Research and development expenses are expected to
increase in 1998 as SP-303/Provir enters and proceeds with Phase III clinical
development for diarrhea in people with AIDS, other products continue through
development and the Company actively maintains its diabetes research program.
General and administrative expenses were $4.8 million, $3.5 million and
$3.7 million for 1997, 1996 and 1995, respectively. These expenses include
administrative salaries, consulting, legal, travel and other operating expenses.
General and administrative expenses increased $1.3 million in 1997 compared to
1996, and decreased $0.2 million in 1996 compared to 1995. The increase in 1997
was primarily attributable to an increase in compensation and marketing research
of $388,000 related to late stage clinical products, as well as an increase in
legal expenses of $631,000 over 1996 primarily related to certain disputes
related to the Company's intellectual property rights. The Company's expanded
research and clinical activities in 1998 are not expected to require
commensurate increases in general and administrative support.
Interest income was $1.2 million, $1.1 million and $1.7 million for 1997,
1996 and 1995, respectively. Interest income increased $100,000 in 1997 compared
with 1996 and decreased $600,000 in 1996 compared with 1995. Interest income
fluctuations have been consistent with changes in average cash and investment
balances with which the Company substantially funded its operations in 1997,
1996 and 1995. The balances of cash, cash equivalents and investments were $21.4
million, $16.5 million and $26.7 million at December 31, 1997, 1996 and 1995,
respectively.
Interest expense was $5.0 million, $603,000 and $569,000 for 1997, 1996 and
1995, respectively. Interest expense increased in 1997 compared with 1996
principally due to a $3.7 million non-cash interest charge related to the
issuance of senior convertible notes in June 1997, as well as the interest
expense related to the Company's secured debt financing in May 1997. Interest
expense increased in 1996 compared with 1995 as the Company absorbed a full
year's expense on its unsecured term loan. The Company's general policy is to
finance capital equipment and tenant improvements on a long-term basis, and
interest expense in the future will be dependent in part on the Company's
capacity to finance its future equipment needs.
At December 31, 1997, the Company had federal net operating loss carry
forwards of approximately $102 million. The federal net operating loss carry
forwards will expire at various dates beginning in 2004 through 2012, if not
sooner utilized. Utilization of the net operating losses and credits is subject
to a substantial annual limitation due to the "change in ownership" provisions
of the Internal Revenue Code of 1986, as amended. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's cash, cash equivalents, and investments
totaled approximately $5.2 million, compared with $21.4 million at December 31,
1997. The Company invests excess cash according to
22
<PAGE> 24
its investment policy that provides guidelines with regard to liquidity, type of
investment, credit ratings and concentration limits.
In June 1998, the Company entered into Stock Purchase Agreements (the
"Stock Agreements") with certain of its stockholders (the "Buyers") pursuant to
which the Company acquired the right to sell to the Buyers, subject to certain
conditions and in one or two tranches closing no later than February 28, 1999,
up to an aggregate of 7,000 shares of the Company's Series B Custom Convertible
Preferred Stock (the "Series B Preferred Stock") for an aggregate purchase price
of $7,000,000. The Stock Agreements became effective on June 22, 1998 (the
"Effective Date") but will be terminated upon the closing of this offering. See
"Description of Capital Stock."
As consideration for entering into the Stock Agreements, the Company issued
to the Buyers on the Effective Date warrants (the "June Warrants") to purchase
an aggregate of 350,000 shares of Common Stock. The June Warrants are
exercisable for a period of five years after the Effective Date at an exercise
price per share equal to 115% of the average trading price of the Common Stock
during specified measurement periods. The June Warrants provide for adjustment
of the number of shares of Common Stock issuable upon exercise thereof,
including upon the distribution of certain dividends or upon the division or
combination of the Company's Common Stock. The Company filed a registration
statement with the Securities and Exchange Commission (the "SEC") for the resale
of shares issued upon exercise of the June Warrants, which registration
statement was declared effective on July 10, 1998.
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. 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 SEC for the resale of shares issued upon
conversion of these notes, which registration statement was declared effective
on August 29, 1997. As of July 24, 1998, a total principal amount of $3.9
million of the notes had been converted into an aggregate of 1,138,540 shares of
Common Stock.
In March 1998, the Company and the purchasers of the notes entered into an
Amendment Agreement (the "Amendment Agreement") in order to avoid conversion of
the notes at a price that would be unduly dilutive to the Company's existing
stockholders. As consideration for entering into the Amendment Agreement, the
Company issued to the purchasers of the notes warrants (the "March Warrants") to
purchase an aggregate of 137,500 shares of Common Stock. The March Warrants are
exercisable through March 18, 2001 at an exercise price of $7.50 per share. The
Company filed a registration statement with the SEC for the resale of shares
issued upon exercise of the March Warrants, which registration statement was
declared effective on July 10, 1998.
In May 1997, the Company obtained a $5.0 million loan, which amortizes over
36 months 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 10-year warrants to purchase 200,000 shares of the Company's Common
Stock at an exercise price of $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 share, representing a 20% premium to
the weighted average price of the Company's Common 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
23
<PAGE> 25
$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. As of July 10, 1998, the
Company has received an aggregate of $7.5 million under the agreement. A balance
of $12 million in committed capital remains under 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, with one investor in which it received gross proceeds of $3.3 million
for the sale of 400,000 shares of Series A 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 Series A 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 Series A Preferred Stock are entitled to a liquidation
preference of $8.15 per share. In addition to the sale of Series A Preferred
Stock and the warrant, the Company has the right, from time to time during the
period beginning January 1997 and ending July 2000, subject to certain
conditions, including continued listing of the Common Stock on any national
exchange 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 investor has the option to increase the number of shares it purchases
by up to an aggregate of 527,500 shares.
Over the next year and potentially longer depending on clinical results and
regulatory reviews, 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, the
collaborative revenue committed by Lipha/Merck, Lipha/Merck's commitment to
purchase additional equity and either (i) the proceeds of this offering or (ii)
Shaman's additional rights to sell Common Stock under the 1996 Private
Placement, will be adequate to fund operations through the filing of an NDA on
SP-303/Provir for the fast track indication of diarrhea in people with AIDS, at
least through the first quarter of 1999. 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, nor that additional funding,
if needed, will be available on reasonable terms, or at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
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 collaborative 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.
24
<PAGE> 26
BUSINESS
Shaman discovers and develops novel pharmaceutical products for the
treatment of human diseases and their symptoms through the isolation and
optimization of active compounds found in tropical plants. The Company believes
that by focusing on drugs extracted from plants with a long history of medicinal
use, its drug discovery efforts may be quicker and more likely to lead to safe
and effective pharmaceuticals. Shaman has three product candidates in clinical
development -- SP-303/Provir, nikkomycin Z, and SP-134101. These products target
five indications. Of these product candidates, the most advanced, SP-303/Provir,
entered into a Phase III human clinical trial in March 1998 for the treatment of
diarrhea in people with AIDS. In May 1998, the FDA formally notified the Company
that SP303/Provir had been granted "fast track product" designation by the FDA.
Earlier in 1998, the FDA also advised the Company that upon completion, data
from Shaman's single Phase III study along with corroborative information from a
previously completed Phase II trial may serve as the basis for the submission of
an NDA. In the Phase II trial, SP-303/Provir was shown to provide a significant
treatment effect for diarrhea in people with AIDS. If the results of the current
trial (which is currently over 75% enrolled) are positive, the Company expects
to file an NDA for commercial approval of SP303/Provir in early 1999. With a
fast track designation from the FDA for the indication of diarrhea in people
with AIDS the Company is preparing for potential product launch in the second
half of 1999 and intends to retain U.S. marketing rights to this product. In
addition, in July 1998 the Company announced positive results from two
confirming Phase II studies for SP-303/Provir in acute watery diarrhea. The
Company intends to out-license marketing rights for Europe and other parts of
the world.
BACKGROUND
Shaman builds on the knowledge and expertise of ethnobotanist and physician
teams who work with traditional healers to identify effective treatments in the
therapeutic areas targeted by the Company. These teams gather comparative data
on traditional medicinal uses of plants from geographically diverse tropical
areas and prioritize plant drug candidates based on common use among cultures
and other factors. The prioritization process includes cross-checking
field-derived information against the results of literature searches as to
chemical constituents, previously discovered biological activity and other
reported medicinal uses. Shaman isolates and identifies the active compounds
from plant extracts by testing for activity in whole animal models at each step
of its purification process. The Company's natural product chemists use
chromatography, spectroscopy, nuclear magnetic resonance ("NMR") and other
proven technologies to identify and isolate compounds and structures. Because
these compounds reflect the previously untapped plant diversity of the rain
forests, they have, to date, also exhibited significant diversity of chemical
structure. In addition, the Company's whole animal screening approach provides
the opportunity to discover novel methods of treatment for diseases in which the
underlying mechanism of action of a disease is complicated and not well
understood.
THE SHAMAN BUSINESS STRATEGY
Shaman's current operational priority is to complete the Phase III trial
(which is over 75% enrolled) and prepare for the continued clinical development
and preparation for commercialization of its first potential product,
SP-303/Provir, for the fast track indication of diarrhea in people with AIDS.
Assuming favorable completion of the Phase III clinical trial and a fast track
approval from the FDA, the Company expects to file an NDA for commercial
approval of SP-303/Provir in early 1999 and is preparing for potential product
launch in the second half of 1999. The Company intends to retain U.S. marketing
rights to this product.
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<PAGE> 27
CLINICAL AND RESEARCH PROGRAMS
Shaman has established and is continuing to build a portfolio of product
candidates. The following table describes the major therapeutic areas in which
the Company is conducting its product development and research:
<TABLE>
<CAPTION>
PRODUCT CANDIDATE INDICATION STATUS COMMERCIAL RIGHTS
----------------- ---------- ------ -----------------
<S> <C> <C> <C>
SP-303/Provir AIDS-associated diarrhea in Ongoing Phase III study Shaman
people with AIDS initiated Q1, 1998.
Completed a Phase II
efficacy study in Q4,
1997.
SP-303/Provir Watery diarrhea Completed two Phase II Shaman
dosing trials in Q3,
1998. Completed Phase II
efficacy studies in 1996
and 1997.
SP-303/Provir Pediatric diarrhea Formulation under Shaman
development.
Nikkomycin Z Endemic mycoses Completed Phase I study Shaman
in Q2, 1997.
Nikkomycin Z and Azoles Azole-resistant Candida Initiation pending pre- Shaman
clinical development by
Pfizer.
SP-134101 Type II Diabetes Initiated Phase I study Shaman
in Q1, 1998.
Oral antihyperglycemic Type II Diabetes Preclinical. Ono; Lipha/Merck; and
compounds Shaman. Shaman to receive
royalties on sales outside
the U.S. and profit sharing
in the U.S.
</TABLE>
SP-303/Provir
The Shaman-patented compound SP-303 is the active ingredient in
SP-303/Provir. SP-303 is extracted from the latex of the Croton tree, which
grows abundantly in Latin America. Latex extractions are used orally by many
native cultures throughout Latin America for a variety of medicinal purposes,
including gastrointestinal problems as well as respiratory infections.
SP-303/Provir is an oral drug that acts as a specific inhibitor of fluid
loss via an antisecretory mechanism to treat diarrhea. In clinical trials, the
Company determined that SP-303/Provir is not detectable in plasma, a critical
advantage in that it reduces the potential for interactions with other drugs and
minimizes side effects.
SP-303/Provir demonstrated a significant treatment effect for diarrhea in
people with AIDS in results from a Phase II study released in October 1997. A
Phase III study in this population was initiated in March 1998. The FDA has
advised Shaman that, if successful, the Company may submit data from this single
Phase III study, along with the corroborative data from Phase II, as the basis
for an NDA submission expected in early 1999.
In July 1998, SP-303/Provir also demonstrated a significant treatment
effect in two separate Phase II studies in acute watery diarrhea.
Diarrhea in People with AIDS/HIV
Diarrhea in people with HIV and AIDS is a devastating syndrome which
afflicts between 20% and 80% of patients. In the developed world, there are
currently estimated to be 728,000 people with AIDS, 223,000 of whom are in the
United States alone. Between 650,000 and 900,000 individuals in the United
States are believed to be infected with HIV. Sources indicate that, of the
combined groups in the United States, approximately 50% suffer with diarrhea at
any given time. Although protease inhibitors and highly active antiretroviral
therapy ("HAART") have improved the patient prognosis for AIDS, the problem of
diarrhea persists, and in many cases is drug-related, representing a serious
unmet medical need.
26
<PAGE> 28
ANTI-HIV THERAPIES
REPORT OF DIARRHEA SIDE-EFFECT INCIDENCE
<TABLE>
<CAPTION>
PRODUCT MANUFACTURER PACKAGE INSERT
------- ------------ --------------
<S> <C> <C>
Crixivan (Indinavir) Merck 4.6%
Viracept (Nelfinavir) Agouron 14% - 32%
Norvir (Ritinovir) Abbott Laboratories 12.8%
Invirase (Saquinavir) Roche 3% - 4.9%
Epivir (3TC)
(Lamivudine) Glaxo Wellcome 18%
Zerit (D4T) (Stavudine) Bristol Meyers-Squibb 50%
</TABLE>
In fact, diarrhea in people with AIDS not only compromises the health and
quality of life of individuals attempting to live a normal lifestyle; diarrhea
has been shown to dramatically increase the cost of their medical care.
Furthermore, patients with chronic diarrhea are forced to restrict their daily
activities to accommodate the disruptions caused by this condition because
current symptomatic therapies provide either poor relief or undesirable
side-effects.
The Company believes that a treatment which reduces the frequency and
volume of diarrhea in people with AIDS and at the same time creates positive new
impacts on their health and quality of life as well as the cost of their care
represents a large, focused market opportunity. Shaman believes that with an
in-house sales force, it has the potential to create a larger market opportunity
in the United States than would be available if SP-303/Provir were outlicensed
to a pharmaceutical partner. In addition, a decision to retain U.S. marketing
rights represents an opportunity to generate larger profit margins on the
commercialized product to the extent the product can be sold by the Company's
own dedicated sales force as opposed to royalties collected from that of a
pharmaceutical partner. For both of these reasons, Shaman has decided to develop
an internal sales force to detail those physicians who specialize in AIDS in the
United States. The Company intends, however, to out-license marketing rights for
SP-303/Provir in Europe and other parts of the world. See "Risk
Factors -- Limited Manufacturing and Marketing Experience and Capacity."
Shaman believes that the competitive promotional response will be limited
in this discrete market because current oral anti-diarrheals have no indication
in this patient population and because, for the most part, they are older,
generic products. Furthermore, since SP-303/Provir is a natural product, with
the potential to dramatically improve the everyday lifestyle activities of
chronic diarrhea sufferers in the AIDS population, the Company believes that
physicians and patients alike will be in a position to decide to use the
medication without having to consider the potential of compromising other
therapies or treatment regimens already in place. See "Risk Factors -- Rapid
Technological Change and Substantial Competition."
SP-303/Provir is currently being evaluated for the treatment of diarrhea in
people with AIDS in a Phase III human clinical trial (which is over 75%
enrolled) that began in late March 1998. This double-blind, placebo-controlled
study is planned to include approximately 320 patients at more than 20 sites
throughout the United States. The study includes both an in-patient and an
out-patient phase for a total of four weeks of treatment. The primary endpoint
for this study is a reduction in stool weight, data for which is collected
during the in-patient phase of the study.
A Phase II study, which was completed in October 1997, and the data
therefrom was presented at the 12th World AIDS Conference in Geneva, Switzerland
in July 1998, demonstrated a significant treatment effect for chronic diarrhea
in people with AIDS. The results of the study suggested that SP-303/Provir is
effective in reducing stool weight and abnormal stool frequency in people with
AIDS and chronic or sub-acute diarrhea. In addition, treatment with
SP-303/Provir was well tolerated with no imbalance between treated and placebo
groups in the occurrence of adverse events.
Assuming favorable Phase III clinical results, the Company is preparing to
file an NDA for this indication of SP-303/Provir in early 1999, and, with fast
track designation from the FDA, is preparing for potential product launch in the
second half of 1999.
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<PAGE> 29
Watery Diarrhea
Shaman has completed Phase II trials showing preliminary efficacy for
SP-303/Provir for the treatment of watery diarrhea.
Watery diarrhea is often caused by infectious agents such as V. cholerae
and E. coli. These agents secrete toxins that adhere to the intestinal wall and
cause increased secretion of chloride ions from intestinal cells, and in fluid
accumulation in the small intestine. This, in turn, leads to severe and, in some
cases, life-threatening diarrhea. According to 1995 data from IMS America, Ltd.
("IMS"), the leading pharmaceutical marketing data firm, over 26 million
prescriptions are written annually for watery diarrhea. Moreover, approximately
67 million over-the-counter product units are sold in the United States alone.
Current primary treatments for watery diarrhea do not address the
dehydration or fluid loss caused by the illness. Watery diarrhea is typically
treated with one of two treatment regimens: antibiotics or antimotility agents.
Antibiotics kill bacteria, while antimotility agents reduce diarrhea frequency
by inhibiting peristaltic action (natural muscular contraction of the intestinal
tract). For mild to moderate cases of watery diarrhea, the use of antibiotics is
discouraged by the World Health Organization ("WHO") and the Centers for Disease
Control ("CDC"). Bacteria can, in many cases, build up a resistance to
antibiotics, and antibiotics can reduce the body's ability to build natural
immunities to disease and, therefore, increase the likelihood of reinfection.
While antimotility agents are effective in reducing the severity of watery
diarrhea, they often cause severe constipation. In addition, because of reduced
motility in the intestine, the bacteria are often not eliminated and remain in
the gut. When the treatment is stopped, the patient often experiences rebound
diarrhea. Moreover, these agents are not recommended in children and the elderly
because of the risk of prolonging the illness.
Preclinical studies indicate that SP-303/Provir inhibits the secretion of
chloride ions from intestinal cells, specifically countering fluid loss, a
fundamental mechanism causing diarrhea. Based on its mechanism of action and
results of initial clinical testing, it appears that SP-303/Provir does not
affect the normal motility of the intestine. Furthermore, the lack of detection
of SP-303/Provir in plasma contributes to its safety, its reduced potential for
drug interactions, and its specificity of action.
The Company believes that the market opportunity for a treatment of
traveler's diarrhea, one of several watery diarrhea indications, is significant.
More than 35 million individuals travel annually to countries that present the
risk of traveler's diarrhea. While several therapies are popularly prescribed to
minimize the effects of a diarrheal episode, market research indicates that
sufferers are seeking greater relief.
In July 1998, the Company completed two separate Phase II dose optimization
studies of SP-303/Provir in acute watery diarrhea patients from two different
populations. Both studies were double-blind, randomized, placebo-controlled.
The first study further validated SP-303/Provir's ability to treat
traveler's diarrhea in Americans travelling in Jamaica and Mexico. The study
involved 184 patients treated for two days on an outpatient basis with either
placebo or one of three SP-303/Provir doses given four times per day: 125mg,
250mg or 500mg. In the key efficacy endpoint, time to last unformed stool
("TLUS") over 48 hours (the standard for measurement in acute watery diarrhea
studies), all doses reached a highly statistically significant (p#0.01) result
versus placebo. The study showed SP-303/Provir to be well tolerated. More than
35 million individuals travel annually to countries that present the risk of
traveler's diarrhea.
The second study evaluated SP-303/Provir in Venezuelan nationals who
locally contracted acute watery diarrhea. A total of 140 patients were enrolled
in the trial, which took place in a hospital setting. SP-303/ Provir treatment
with 125mg four times per day for two days resulted in statistically significant
earlier resolution of diarrhea as compared to placebo, as measured by TLUS over
48 hours. Results for patients treated with 250mg and 500mg doses did not
achieve statistical significance. This study also showed SP-303/ Provir to be
well tolerated.
The effectiveness of SP-303/Provir in mild non-specific diarrhea was the
subject of an out-patient study also in 1997. After an analysis of interim
results, the study was discontinued. The Company has suspended its out-patient
study design of mild, non-specific diarrhea and is now focusing on
moderate-to-severe diarrhea.
28
<PAGE> 30
In November 1996, the Company completed a Phase II pilot trial in 75
patients to determine the efficacy of SP-303/Provir in the treatment of
traveler's and non-specific diarrhea. This open-label Phase II study was
conducted by Dr. Herbert DuPont, a world recognized expert in travel medicine,
of the University of Texas at Houston and Baylor College of Medicine. It
included American subjects who suffered from diarrhea upon traveling to Mexico
as well as Mexican nationals suffering from diarrhea of unknown cause, or
non-specific diarrhea.
In the pilot study, 89% of the 75 patients treated with SP-303/Provir
responded favorably (returned to normal bowel function) after 48 hours of
treatment, with over 60% of those patients returning to normal after just 24
hours. These preliminary data were especially encouraging in light of the fact
that traveler's diarrhea left untreated usually lasts five to seven days.
Non-specific diarrhea usually lasts three to four days. Of the 71 patients
available for follow up, none of the patients experienced worsening of the
diarrhea illness once resolution of the disease began. In addition, no
significant adverse reactions were reported.
Shaman conducted Phase I clinical trials for SP-303/Provir in more than 150
adults, children and infants as young as three months of age, in both single and
multiple doses. These trials demonstrated that SP-303/Provir is safe and
indicated no significant adverse side effects of the drug.
The FDA now allows dissemination of information on unapproved and new uses
for currently marketed drugs. Information can now be distributed to physicians
and other healthcare professionals as long as the information has been
pre-cleared by the FDA, is not false and misleading, and has been designated an
unapproved use.
Nosocomial Diarrhea
Nosocomial diarrhea, which is acquired during a patient's hospital stay, is
another prevalent form of acute diarrhea. Approximately five percent to ten
percent of overall patients admitted to hospitals acquire nosocomial diarrhea.
Approximately 40% of adults in the intensive care unit ("ICU") of a hospital
procure nosocomial diarrhea, and 50% of children procure nosocomial diarrhea in
the ICU. Pending the results of the two Phase II acute watery diarrheal studies,
Shaman intends to evaluate SP-303/Provir for the indication of nosocomial
diarrhea.
Diarrhea as a Result of Pharmaceutical Side-Effects
According to the 1998 Physicians Desk Reference, 82% of the top 100 selling
pharmaceuticals indicate diarrhea as a common side effect. Sixteen percent of
such pharmaceutical package inserts identify diarrhea as one of the top three
side effects, and 10% of such pharmaceuticals list diarrhea as the number one
side effect associated with that product.
Pediatric Diarrhea
According to the Journal of Pediatrics, in the United States alone, over 30
million episodes of diarrhea occur annually in children under five years of age.
Of these, approximately 35% seek medical care. In addition, there are over one
billion episodes of pediatric diarrhea worldwide annually and in developing
countries, more than four million deaths associated with pediatric diarrhea per
year among children less than five years old. In the United States, the average
episode for children under the age of five is 1.8 per year, per child. Current
recommended therapies for pediatric diarrhea are designed to replace water and
electrolytes. Antimotility agents are contraindicated in children less than two
years of age and not recommended for treatment of diarrhea in children of any
age. In the vast majority of diarrheal illnesses in the United States,
particularly those in children, the use of antibiotics is not recommended.
Currently, there is no FDA-approved product for this indication available on the
market for children under the age of five.
Shaman is currently engaged in formulation development of SP-303/Provir as
a potential treatment for pediatric diarrhea in preparation for initiating a
clinical development program.
29
<PAGE> 31
Nikkomycin Z
Nikkomycin Z was licensed in 1995 from Bayer AG. See
"Business -- Collaborative Relationships and License Agreements." Nikkomycin Z
is an orally administered product designed for the treatment of endemic mycoses
and other systemic fungal infections. Nikkomycin Z is novel in its mechanism of
action against fungal infections. Preclinical studies of nikkomycin Z indicate
that it is fungicidal and could prove superior to current treatments. By
inhibiting chitin synthetase, which is found in the cell walls of most fungi,
but not in mammalian cells, nikkomycin Z inhibits cell wall synthesis,
ultimately causing fungal cells to expand and burst. The lack of chitin in
mammalian cells should prevent similar damage to normal cells in tissues
affected by these fungal infections. A single-dose Phase I trial in the United
Kingdom was completed in 1997.
Endemic mycoses are systemic fungal infections concentrated in the
southwest, central and northeast regions of the United States. There are three
basic forms of endemic mycoses: coccidiomycosis (valley fever), histoplasmosis
and blastomycosis ("cocci," "histo" and "blasto," respectively). The infecting
organisms are found in soil. When the soil is disturbed (such as during crop
planting or harvesting), the fungi become airborne and may be inhaled into the
lungs. Once infected, otherwise healthy individuals will experience mild
flu-like symptoms but may never be diagnosed with the disease. In more severe
cases, however, the fungus spreads systemically and results in disseminated
fungal infections. It is estimated that approximately 240,000 persons per year
in the United States show clinical symptoms of endemic mycoses. The Company
believes that the annual market for treatment of endemic mycoses in the United
States is approximately $150 million.
Currently, two classes of drugs are commonly prescribed for the treatment
of endemic mycoses: azoles, which are fungistatic (inhibit the growth of the
fungus, but do not kill it) and polyenes (including amphotericin B), which are
fungicidal (kill the fungus). However, often these drugs cannot be tolerated in
high enough doses to kill the fungi.
Candidiasis is a fungal infection that can result in serious systemic
disease. Approximately 265,000 patients worldwide are treated annually for
systemic candidiasis. Nikkomycin Z has also been shown to be capable of
interacting in a synergistic fashion with a number of known antifungal
compounds, including fluconazole (Diflucan) and itraconazole (Sporonox), the two
largest selling antifungals in the world. Based on this synergistic activity,
the Company plans to supply nikkomycin Z to Pfizer Corporation for a combination
study that tests nikkomycin Z in combination with fluconazole in treating
azole-resistant esophageal candidiasis. The estimated annual total market of
antifungal agent sales for systemic fungal infections is approximately $2.0
billion.
SP-134101
SP-134101 is a Shaman-patented, oral product for the treatment of Type II
diabetes. In January 1998, Shaman initiated a Phase I human clinical trial for
SP-134101, the first product to emerge from the Company's diabetes discovery
effort. In preclinical studies SP-134101 has been shown to lower blood glucose,
triglycerides, and blood pressure, in vivo. SP-134101 appears to work by
increasing glucose uptake in the peripheral tissues and decreasing triglyceride
output from the liver.
DRUG DISCOVERY RESEARCH
Research Strategy
Shaman's research strategy is to employ a drug discovery process focused on
diseases that:
- appear to result from multiple and, in many cases, unknown causes and
therefore, may not be amenable to a targeted in vitro drug discovery
process;
- occur in the rain forests and are readily recognized and treated by
traditional healers (e.g., foot ulcers, sweet urine, poor eyesight and
fungal infections are often predictive of Type II diabetes); and
- allow the plant extract treatment to be confirmed in a whole animal
model and then purified to isolate the active compound.
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<PAGE> 32
Shaman believes this drug discovery process provides it with the
opportunity to:
- identify novel methods of treating diseases with therapeutic
relevance;
- discover new chemical entities or new classes of compounds to treat
disease; and
- provide early confirmation of efficacy and safety.
Shaman intends to commercialize the majority of its products through
licensing arrangements when safety and efficacy have been demonstrated in
humans. Shaman intends to out-license broad applications of its products
worldwide while retaining the opportunity to directly access specific market
opportunities.
Diabetes
Type II diabetes is a chronic disease in which the tissues of the body are
resistant to the actions of insulin (a hormone produced by the pancreas), and
the pancreas cannot secrete enough insulin to overcome this resistance. When
this happens, the ability of insulin to carry out its normal action on the
liver, muscle and adipose tissues is lost, the result is increased blood glucose
and associated symptoms. This disease is the result of multiple causes, many of
which are undefined at the molecular level.
Shaman has focused on the development of oral antihyperglycemic (blood
glucose lowering) agents for the treatment of Type II diabetes. The program
involves in vivo screening of plants by oral administration in animal models,
followed by the fractionation of active extracts, the isolation and
identification of active compounds, and the capability to profile and prioritize
promising candidates for clinical development. In just over 24 months of this
program, the Company has identified 26 orally-active compounds for which, to
date, 17 original U.S. patent applications have been filed (eight of which have
been issued) and 11 international patent applications have been filed. These
compounds represent new classes and, potentially, new methods for treating Type
II diabetes.
In the United States alone, approximately 625,000 new cases of Type II
diabetes are diagnosed each year, and it is estimated that there will be over 18
million cases by the year 2002 (over five percent of the population). Worldwide,
diabetes is estimated to affect approximately 135 million people; by the year
2025, growth in the diabetic population is expected to rise to 300 million,
according to The World Health Report, 1997. In developed countries, the number
of diabetic patients is projected to grow by at least 40%. By contrast, in
developing countries, the growth will be far more dramatic, approaching 170%.
This so-called "epidemic" is thought to be the result of longer life
expectancies coupled with unhealthy diets, sedentary lifestyles and tendencies
to be overweight.
Chronic diabetes sufferers, those who have Type II disease, represent 90%
to 95% of the total diabetic population. Tied closely to their condition are
serious health complications such as heart disease, stroke, hypertension,
blindness and kidney failure. Despite the magnitude of the population and the
extent of its healthcare impacts, there is widespread agreement that better
drugs are needed.
By selecting plants with a history of use in traditional cultures, Shaman
is tapping a highly focused yet diverse source of materials to screen for
antidiabetic activity. From these materials, extracts are evaluated for activity
in animal models, a process by which active compounds can be identified to serve
as leads for development or for synthetic modifications that will result in new
leads.
The diabetes research and development program serves as the basis for
Shaman's collaboration with Lipha/Merck. Significant funding, as well as
milestone payments for this program, result from this collaboration as well as
potential royalty and milestone payments from previous collaboration with Ono.
See "Business -- Collaborative Relationships and License Agreements."
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<PAGE> 33
COLLABORATIVE RELATIONSHIPS AND LICENSE AGREEMENTS
In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to develop jointly Shaman's antihyperglycemic drugs.
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. Of the $4.5 million received on signing the agreement,
$1.5 million was an up-front research payment and $3.0 million was structured as
an equity investment. The agreement also provides for additional preclinical and
clinical milestone payments (certain of which clinical milestones are creditable
against future royalty payments) to the Company in excess of $10.0 million per
compound for each antihyperglycemic drug developed and commercialized. As of
July 24, 1998, the Company has received an aggregate of $7.5 million under the
agreement. A balance of $12.0 million in committed capital remains under the
agreement.
Lipha/Merck will bear all pre-clinical, clinical, regulatory and other
development expenses associated with the compounds selected by Lipha/Merck under
the agreement. In addition, as products are commercialized by Lipha/Merck,
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,
which does not require any clinical development cost reimbursement) 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. To date, Shaman has
identified 26 proprietary, orally-active compounds which show preclinical
activity as treatments for Type II diabetes.
In May 1995, the Company entered into a collaborative agreement with Ono
providing for, among other things, three years of funding for the research and
development of compounds for the treatment of Type II diabetes. Under the terms
of the agreement, Shaman screened 100 diabetes-specific plants per year in vivo,
isolated and identified active compounds, and participate in any medicinal
chemistry modification. In turn, Ono provided Shaman with access to Ono's
preclinical and clinical development capabilities through proprietary in vitro
assays and medicinal chemistry efforts. Ono's development and commercialization
rights were for the countries of Japan, South Korea and Taiwan. Under the terms
of the agreement, Ono provided $7.0 million in collaborative research funding
and agreed to pay preclinical and clinical milestone payments of $4.0 million
per compound for each antidiabetic drug that may be selected and commercialized.
Of the $3.0 million received on signing the agreement, $1.0 million was an
up-front research payment. Shaman received an additional $1.0 million payment
(beyond the $7.0 million commitment) in December 1996 for enhanced access rights
to these compounds. In May 1998, the Company's collaborative agreement with Ono
expired under the original terms of the agreement and was not renewed. Although
the on-going research funding period under such agreement has expired, Ono
continues to have contractual obligations to the Company for the potential
payment of milestones and royalties. There can be no assurance that such
milestones will be attained or that the Company will receive any future
milestone payments or royalties from Ono.
In June 1995, the Company licensed several patents from Bayer AG relating
to the use of nikkomycin Z and the composition and use of nikkomycin Z in
combination with other antifungal compounds for the development of antifungal
agents. Under the terms of the agreement, the Company has paid Bayer AG 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 the agreement.
In February 1990, the Company entered into a license agreement with Dr.
Michael Tempesta. There currently exists a dispute with Dr. Tempesta over the
scope and coverage, if any, of the license. The maximum royalty claimed by Dr.
Tempesta is two percent on net sales of a certain antiviral agent. In November
1996, a demand for arbitration was filed by the Company to address a claim made
by Dr. Tempesta. See "Legal Proceedings."
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<PAGE> 34
As the Company continues its product development and commercialization, it
intends to enter into additional corporate alliances which may include licenses
and/or marketing rights to selected products and markets.
MANUFACTURING
Shaman intends to conduct both pilot-scale and commercial manufacturing of
its future products either in-house, with collaborative partners, or through
contract manufacturing facilities. In April 1998, Shaman hired a senior
executive to direct manufacturing activities for the Company's products. The
Company has created an in-house facility that operates under GMP and has
conducted pilot-scale manufacturing of SP-303/Provir. The Company has a
sufficient quantity of raw material for SP-303/Provir and SP-303/Provir
manufacturing capacity to complete currently planned clinical trials and prepare
for the commercial launch of SP-303/Provir. In addition, Shaman has established
a second source manufacturing facility to produce registration and early
commercial lots.
In January 1996, the Company entered into an agreement with Abbott
Laboratories ("Abbott") for the production of nikkomycin Z. Abbott has developed
processes and manufactured nikkomycin Z in compliance with GMP guidelines for
the Company's clinical trial programs. The Company is currently seeking other
sources and methodologies to produce nikkomycin Z. Separately, SP-134101 is
being manufactured by a contract manufacturer in compliance with GMP guidelines
for the Company's clinical trial programs. See "Risk Factors -- Limited
Manufacturing and Marketing Experience and Capacity."
MARKETING
The Company intends to retain U.S. marketing rights to its SP-303/Provir
product for diarrhea in people with AIDS. In July 1997, Shaman hired a senior
executive to direct commercial development, including sales and marketing. The
Company's general strategy is to develop corporate alliances with larger
pharmaceutical companies for certain of its programs in order to take advantage
of such companies' abilities to reach broad-based markets. At the present time,
Shaman has no sales staff. However, assuming a successful conclusion of the
ongoing Phase III study of SP-303/Provir, the Company intends to begin planning
for commercialization of the product by hiring an internal U.S. detail force.
See "Business -- Collaborative Relationships and License Agreements" and "Risk
Factors -- Limited Manufacturing and Marketing Experience and Capacity."
PATENTS AND PROPRIETARY TECHNOLOGY
Proprietary protection for the Company's product candidates, processes and
know-how is important to the Company's business. The Company's policy is to file
patent applications to protect technology, inventions and improvements that are
considered commercially important to the development of its business. The
Company also relies upon trade secrets, know-how and continuing technological
innovation to develop and maintain its competitive position. The Company
aggressively prosecutes and defend its patents and proprietary technology.
The Company has been issued a U.S. patent related to its specific
proanthocyanidin polymer compositions designated SP-303/Provir; specifically,
the patent contains composition of matter claims related to SP-303/Provir
contained in the Company's SP-303/Provir product.
The Company has also filed foreign applications corresponding to its issued
U.S. patents relating to its proanthocyanidin polymer composition. The Company
has been granted patents in Australia, Mexico and New Zealand and has patent
applications pending in Canada, Europe, Japan, the Republic of Korea and
Singapore.
The Company has also recently filed a U.S. patent application directed to
new formulations and methods of using its specific proanthocyanidin polymer
composition for treatment of watery diarrhea. These formulations are contained
in the Company's SP-303/Provir product.
The Company has eight issued U.S. patents relating to compositions and
methods for treating Type II diabetes, as well as reducing hyperglycemia
associated with other etiologies. The Company also has nine
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additional U.S. patent applications still pending which relate to compositions
and methods for treating Type II diabetes, as well as reducing hyperglycemia
associated with other etiologies. The Company has filed 11 foreign applications,
i.e., international applications under the Patent Cooperation Treaty designating
a number of foreign countries, as well as applications in Taiwan, corresponding
to a number of the U.S. applications and plans to file additional corresponding
foreign applications within the relevant convention periods.
The Company also has one pending U.S. patent application and a
corresponding international patent application designating a number of foreign
countries relating to methods for administering and sustained release
formulations for anti-fungal agents like nikkomycin Z. The methods and
compositions are useful for treatment of fungal infections, particularly
candidiasis, the most frequently encountered life-threatening mycoses. The
Company has licensed several patents from Bayer AG relating to the use of
nikkomycin Z and the composition and use of nikkomycin Z in combination with
other antifungal compounds for the development of antifungal agents.
There can be no assurance that the Company's pending patent applications
will result in patents being issued or that, if issued, patents will afford
protection against competitors with similar technology; nor can there be any
assurance that others will not obtain patents that the Company would need to
license or circumvent. See "Risk Factors -- Uncertainty Regarding Patents and
Proprietary Rights; Current Legal Proceedings Regarding Patents and Proprietary
Rights"
RAW MATERIALS SUPPLY
The Company imports all of the plant material it screens from foreign
countries, particularly from countries in Latin and South America, Southeast
Asia and Africa. Shaman's relationships with botanical organizations in tropical
regions have enabled the Company to set up large-scale supply arrangements for
the raw material from which some of its lead products are derived. For example,
the plant material required for SP-303/Provir is found in at least seven Latin
and South American countries and can be harvested in a sustainable manner where
work forces already exist. Presently, Shaman is harvesting approximately 200,000
kilograms of the SP-303/Provir source plant per year from Latin and South
America, pursuant to supply agreements with corporations working in that region.
The SP-303/Provir source plant occurs naturally in these areas and, after
harvesting, can be regenerated to maturity in seven years. Shaman is currently
engaged in setting up market-scale, long-term acquisition of quantities of
material adequate to meet projected commercial demands for the launch and sale
of SP-303/Provir. See "Risk Factors -- Dependence on Sources of Supply."
Shaman requires that all large-scale plant collections be conducted in a
sustainable manner, which could include replanting in areas of intensive wild
harvesting. In the case of SP-303/Provir, the source plant can be sustainably
harvested because it grows spontaneously with minimal management. Shaman works
with communities and cooperatives in Latin and South America to harvest the
SP-303/Provir source plant and other source plants in a regenerable manner.
These communities and cooperatives, many of which receive support from national
and international government agencies, are experienced in the sustainable
harvest of other tropical forest products, including natural rubber, nuts and
fruits. Company policy also requires that each source plant targeted for
large-scale compound isolation must have multi-country sources of supply or be
economically synthesizable. This policy reduces the risks associated with using
foreign suppliers, such as political or economic instability.
Shaman has entered into supply agreements with companies working in Central
and South America pursuant to which they will supply certain quantities of
Shaman's commercial requirements of the raw material used to produce
SP-303/Provir from their countries. These companies work with cooperatives of
indigenous peoples to supply source plants to Shaman, to transfer material
information to Shaman relating to improvements in the collection and harvesting
of the raw material, and to improve sustainable harvesting techniques in order
to create a model of sustainable production in tropical forests. Although the
Company has developed multi-country sources of supply for its key plant
materials and has entered into long-term supply agreements for the source
material for SP-303/Provir, there can be no assurance of a continual source of
supply of these materials. See "Risk Factors -- Dependence on Sources of
Supply."
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Shaman continues to expand its supply agreements with the private sector
and indigenous groups in multiple countries. This represents the culmination of
long term relationship building with indigenous federations, communities,
regional and governmental organizations. New supply business partners are also
being identified and contracted to meet our projected material requirements. As
part of its commitment to sustainable harvesting, Shaman has supplied financial
and educational support for long-term large scale reforestation, undertaken with
government, community and private sector involvement in Colombia, Peru and
Ecuador. More than 200,000 trees have been reforested in three countries to date
and 400,000 additional trees are in the process of reforestation through a
program run by the governments of these countries in conjunction with Shaman's
collaborators.
When it is economically advantageous and technically feasible to synthesize
a compound rather than extract it from raw plant material, the Company will
utilize large-scale chemical synthesis to obtain a sufficient supply of such
compound in order to satisfy its commercial requirements. However, there can be
no assurance that the Company will be successful in synthesizing any such
products.
COMPETITION
Competition in the pharmaceutical industry is extremely intense. The
principal factors upon which such competition is based include therapeutic
efficacy, side-effect profile, ease of use, safety, physician acceptance,
patient compliance, marketing, distribution and price. Many treatments for
infectious and metabolic diseases exist and additional therapeutics are under
development, including other naturally-sourced pharmaceuticals. To the extent
these therapeutics address the disease indications on which the Company has
focused, they may represent significant competition. Many pharmaceutical
companies have significantly greater research and development capabilities, as
well as substantially greater marketing, financial and human resources than the
Company. In addition, many of these competitors have significantly greater
experience than the Company in undertaking preclinical testing and human
clinical trials of new pharmaceutical products and obtaining regulatory
approvals of such products. These companies may represent significant long-term
competition for the Company.
There can be no assurance that developments by other pharmaceutical
companies will not render Shaman's products or technologies obsolete or
noncompetitive, or that the Company will be able to keep pace with technological
developments of its competitors. Many of the Company's 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 accomplishing the desired
therapeutic effect than products being developed by the Company. These competing
products may be more effective and less costly than the products developed by
Shaman.
Nonetheless, with respect to SP-303/Provir, Shaman believes that the
competitive promotional response will be limited in this discrete market because
current oral anti-diarrheals have no indication in this patient population and
because, for the most part, they are older, generic products. Furthermore, since
SP-303/Provir is a natural product, with the potential to dramatically improve
the everyday lifestyle activities of chronic diarrhea sufferers in the AIDS
population, the Company believes that physicians and patients alike will be in a
position to decide to use the medication without having to consider the
potential of compromising other therapies or treatment regimens already in
place. See "Risk Factors -- Rapid Technological Change and Substantial
Competition."
GOVERNMENT REGULATION
The research and development, manufacture and marketing of Shaman's
products are subject to substantial regulation by the FDA in the United States
and by comparable authorities in other countries. These national agencies and
other federal, state and local entities regulate, among other things, research
and development activities and the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products.
The process required by the FDA before the Company's products may be
marketed in the United States generally involves the following: (i) preclinical
laboratory and animal tests; (ii) submission to the FDA of an
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<PAGE> 37
IND, which must become effective before human clinical testing may commence;
(iii) adequate and well-controlled human clinical trials to establish the safety
and efficacy of the proposed drug for its intended indications; (iv) the
submission to the FDA of an NDA; (v) satisfactory completion of an FDA
inspection of the manufacturing facilities at which the product is made to
assess compliance with GMP. The testing and approval process requires
substantial time, effort and financial resources.
Preclinical tests include laboratory evaluation of the product as well as
animal studies to assess the potential safety and efficacy of the product. The
results of the preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of the IND, which must become
effective before human clinical trials may commence. The IND will automatically
become effective 30 days after receipt by the FDA, unless the FDA before that
time raises concerns or questions about the conduct of the trials as outlined in
the IND. In such cases the IND sponsor and the FDA must resolve any outstanding
concerns before clinical trials can proceed. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials.
Clinical trials involve the administration of the investigational products
to healthy volunteers or patients under the supervision of a qualified principal
investigator. Further, each clinical study must be reviewed and approved by an
independent Institutional Review Board ("IRB") at each institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases which
may overlap. Phase I usually involves the initial introduction of the drug into
healthy human subjects where the product is tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited patient population to (i) determine the efficacy of the product for
specific targeted indications, (ii) determine dose tolerance and optimal dose
and (iii) identify possible adverse effects and safety risks. When Phase II
evaluations demonstrate that the product is effective and has an acceptable
safety profile, Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety in an expanded patient population at
geographically-dispersed clinical study sites. The FDA or the sponsor may
suspend clinical trials at any point in this process for a variety of reasons,
including either party's belief that clinical subjects are being exposed to an
unacceptable health risk.
Occasionally, the FDA will require Phase IV "Post-Marketing Trials" which
are conducted after FDA clearance to gain additional experience from the
treatment of patients in the intended therapeutic area. Other Phase IV
commitments might be additional toxicology or pharmacology studies.
After completion of the required testing, generally an NDA is submitted.
FDA approval of the NDA is required before marketing may begin in the United
States. The NDA must include the results of extensive clinical and other testing
and the compilation of data relating to the product's chemistry, pharmacology
and manufacture, the cost of all of which is substantial. The FDA reviews all
NDAs submitted before it accepts them for filing and may request additional
information rather than accept an NDA for filing. In such an event, the NDA must
be resubmitted with the additional information and, again, is subject to review
before filing. Once the submission is accepted for filing, the FDA begins an
in-depth review of the NDA. Under the Federal Food, Drug and Cosmetic Act, the
FDA has 180 days in which to review the NDA and respond to the applicant. The
review is often extended by mutual agreements of the sponsor and the FDA, or a
major amendment to the submission.
As part of the Modernization Act of 1997, the FDA has created a fast track
designation. For products that receive this designation, the FDA is expected to
take such actions as are appropriate to expedite the development and review of
an application for marketing approval of the product. SP-303/Provir has received
a fact track designation for the indication of diarrhea in people with AIDS.
The FDA may refer the application to the appropriate advisory committee for
review, evaluation and a recommendation as to whether the application should be
approved. The FDA is not bound by the recommendation of an advisory committee,
but generally follows the committee's recommendation. If evaluations of the NDA
and the manufacturing facilities are favorable, the FDA may issue either an
approval
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letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of an NDA. When and if those
conditions have been met to the FDA's satisfaction, the FDA will issue an
approval letter, authorizing commercial marketing of the drug for certain
indications. If the FDA's evaluation of the NDA submission or manufacturing
facilities is not favorable, the FDA may refuse to approve the NDA or issue a
not approvable letter.
The FDA now allows dissemination of information on unapproved and new uses
for currently marketed drugs. Information can now be distributed to physicians
and other healthcare professionals as long as the information has been
pre-cleared by the FDA, is not false and misleading, and has been designated an
unapproved use.
Each drug product manufacturing establishment that supplies drugs to the
U.S. market must be registered with, and be approved by, the FDA prior to
commencing commercial production, and is subject to biennial inspections by the
FDA for GMP compliance after an NDA has been approved. In addition, drug product
manufacturing establishments located in California also must be licensed by the
State of California. See "Risk Factors -- Government Regulations; No Assurance
of Regulatory Approvals."
The Company will also be subject to a variety of foreign regulations
governing clinical trials, registrations and sales of its products. Whether or
not FDA approval has been 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.
THE HEALING FOREST CONSERVANCY
In January 1990, Shaman formed The Healing Forest Conservancy, a California
not-for-profit public benefit corporation (the "Conservancy"), which is
dedicated to maintaining global biocultural diversity. The Conservancy focuses
on conserving plants that have been used traditionally for medicinal purposes
and conserving the knowledge of cultures that utilize them. Shaman has donated
13,333 shares of Common Stock to the Conservancy's endowment fund. The Company
also plans to donate additional funds when it has achieved profits from product
sales, if any, to provide benefits to indigenous peoples in the countries where
Shaman's source plants are obtained.
LEGAL PROCEEDINGS
The Company has initiated arbitration against Dr. Michael Tempesta with
respect to a February 1990 license agreement. See "Business -- Collaborative
Relationships and License Agreements."
Ms. Jacqueline Cossmon, the Company's former Vice President of investor and
public relations filed a complaint against the Company with the Superior Court
of the State of California, County of San Mateo on December 31, 1997 for
wrongful termination and seeking monetary damages. The complaint alleges in
substance that Cossmon was wrongfully terminated for a disagreement with
management. The Company denies any wrongdoing with respect to Ms. Cossmon and
intends to vigorously defend this action.
With the exception of the patent opposition proceeding in Europe,
arbitration against Dr. Tempesta and Ms. Cossmon's action, the Company is not
party to any other material legal proceedings. See "Risk Factors -- Uncertainty
Regarding Patents and Proprietary Rights; Current Legal Proceedings Regarding
Patents and Proprietary Rights."
EMPLOYEES
As of July 24, 1998, the Company had 110 employees. Of these employees, 88
are dedicated to research, development, quality assurance and quality control,
regulatory affairs and preclinical testing. Thirty-four of the Company's
full-time employees hold a Ph.D. or M.D. In addition, the Company currently
fills 17 positions through the use of temporary staff and consultants.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
executive officers, directors and key employees of the Company as of July 24,
1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lisa A. Conte 39 Director, President and Chief Executive Officer
Atul S. Khandwala, Ph.D. 55 Senior Vice President, Development and Chief Regulatory
Officer
Steven R. King, Ph.D. 40 Senior Vice President, Ethnobotany and Conservation
James E. Pennington, M.D. 55 Senior Vice President, Clinical Research and Chief Medical
Officer
Gerald M. Reaven, M.D. 69 Senior Vice President, Research
John Chow 46 Vice President, Product Development and Manufacturing
Stephanie C. Diaz 33 Vice President, Chief Financial Officer
J.D. Haldeman 33 Vice President, Commercial Development
Laurie Peltier 46 Vice President, Project Coordination
G. Kirk Raab 62 Chairman of the Board
Adrian D.P. Bellamy 56 Director
Jeffrey Berg 50 Director
Herbert H. McDade, Jr. 71 Director
M. David Titus 41 Director
</TABLE>
Lisa A. Conte founded the Company in May 1989 and currently serves as the
Company's President and Chief Executive Officer and as Director. From 1987 to
1989, Ms. Conte was Vice President at Technology Funding, Inc., a venture
capital firm, where she was responsible for the analysis and management of
healthcare industry investments. From 1985 to 1987, she conducted risk and
strategy audits for venture capital portfolio companies at Strategic Decisions
Group, a management consulting firm. Ms. Conte received an A.B. in Biochemistry
from Dartmouth College, an M.S. in Physiology/Pharmacology from the University
of California, San Diego and an M.B.A. from The Amos Tuck School, Dartmouth
College.
Atul S. Khandwala, Ph.D. joined Shaman in March 1996 and currently serves
as Senior Vice President, Development and Chief Regulatory Officer. From August
1995 to February 1996, Dr. Khandwala served as Vice President for Ethical
Product Development at Block Drug Company. Prior to joining Block Drug Company,
from 1986 to August 1995, Dr. Khandwala held various positions, the last being
Executive Vice President, with Chemex Pharmaceuticals, Inc. From 1976 to 1986,
Dr. Khandwala held various positions with Revlon Health Care Group Research and
Development Division. Dr. Khandwala received a B.Sc. in Chemistry from Gujarat
University in India and a Ph.D. in Pharmaceutical Chemistry from the University
of Wisconsin.
Steven R. King, Ph.D. joined Shaman in March 1990. He currently serves as
Senior Vice President, Ethnobotany and Conservation and is responsible for
coordinating the Company's Scientific Strategy Team. From 1989 to 1990, Dr. King
was the chief botanist for Latin America at Arlington, Virginia's Nature
Conservancy. He worked in 1988 as Research Associate for the Committee on
Managing Global Genetic Resources at the National Academy of Sciences, and was a
Doctoral Fellow from 1983 to 1988 at The New York Botanical Garden's Institute
of Economic Botany. Dr. King received a B.A. in Human Ecology from the College
of the Atlantic and M.S. and Ph.D. degrees in Biology from City University of
New York.
James E. Pennington, M.D. joined Shaman in September 1997 as Senior Vice
President, Clinical Research and Chief Medical Officer. Prior to joining the
Company, from September 1986 to September 1997, Dr. Pennington worked at Bayer
Corp., where he served as Vice President, Clinical Research from February 1994
to September 1997 and as Director, Clinical Research from September 1986 to
February 1994. Prior to joining Bayer Corp., Dr. Pennington served on the
medical faculty of Harvard Medical School, from July 1975 to August 1986, with
the academic title of Associate Professor of Medicine. Dr. Pennington has
published
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over 100 articles and was the editor of a textbook on respiratory infections.
Dr. Pennington received his B.A. and M.D. from the University of Oregon.
Gerald M. Reaven, M.D. joined Shaman as a consultant in February 1995 and
became an employee in July 1995. He currently serves as Senior Vice President,
Research. Dr. Reaven came to Shaman from the Stanford University School of
Medicine where he served as a faculty member since 1960 and a Professor of
Medicine since 1970. Over the last 20 years, Dr. Reaven served as head of the
Division of Endocrinology and Metabolic Diseases, Division of Gerontology and
director of the General Clinical Research Center. Dr. Reaven also served as head
of the Division of Endocrinology, Gerontology and Metabolism at Stanford
University School of Medicine, and Director of the Geriatric Research, Education
and Clinical Center, at the Palo Alto Veterans Affairs Medical Center. Dr.
Reaven received his A.B., B.S. and M.D. from the University of Chicago.
John Chow joined Shaman in April 1998 as Vice President of Product
Development and Manufacturing. Prior to joining the Company, from December 1997
to April 1998, Dr. Chow served as Director, Product and Technology Evaluation at
Bristol-Myers Squibb Company, where he performed technical due diligence toward
the acquisition and licensing of various dosage forms and technologies and
reviewed and approved new product specifications. Prior to holding this
position, from July 1980 to December 1997, Dr. Chow held other positions, also
with Bristol-Myers Squibb Company, where he was responsible for developing
strategies for manufacturing consolidation, facilitating technology transfers of
new and existing products, and directing technical operations of an
international plant. Dr. Chow received a B.S. in Pharmacy from Washington State
University, a Ph.D. in Pharmaceutical Chemistry from Ohio State University and
an M.B.A. in Pharmaceutical/Chemical Studies from Fairleigh Dickinson
University.
Stephanie C. Diaz joined Shaman in June 1998 as Vice President, Chief
Financial Officer. Prior to joining the Company, from December 1997 to June
1998, Ms. Diaz held the position of Director of Finance with Hyseq, Inc., a
genomics company. From January 1993 to December 1997, Ms. Diaz was the
Controller and later the Director of Finance for Martek Biosciences Corporation
("Martek"), where she managed the financial and investor relations functions of
the Company, actively participated in public and private financing activities,
managed certain business development efforts and worked closely with Martek's
manufacturing and marketing teams to initiate production and commercialization
of a new product. Ms. Diaz holds a B.A. in international relations from Stanford
University and an M.B.A. from Georgetown University.
J.D. Haldeman joined Shaman in July 1997 as Vice President, Commercial
Development. Prior to joining the Company, from April 1988 to June 1997, Ms.
Haldeman served in various positions at Warner-Lambert/Parke-Davis
Pharmaceuticals ("Warner-Lambert"), most recently as Senior Director,
Cardiovascular Marketing from October 1995 to June 1997. Prior to that, she
served as Director, Customer Marketing -- West Business Unit; Product Manager,
Epilepsy Team; Associate Product Manager, Global Cardiovascular Product
Planning; and Sales Specialist for Warner-Lambert. Ms. Haldeman received her
B.A. from Brigham Young University and her Masters of Management from the J.L.
Kellogg Graduate School of Management, Northwestern University.
Laurie Peltier joined Shaman in June 1997 as Vice President, Project
Coordination. Prior to joining the Company, from June 1992 to May 1997, Ms.
Peltier served as Senior Director, Project Management at Amylin Pharmaceuticals,
Inc. Prior to that, she served as Director, Development at Quintiles Inc., a
contract research organization, from May 1990 to May 1992. Ms. Peltier served in
various positions in biostatics clinical operations at Syntex Corporation from
May 1979 through April 1990. Ms. Peltier received a B.S. in Psychology from the
University of Michigan, Flint, an M.A. in Psychology and an M.S. in Statistics
from Northern Illinois University and an M.B.A. from Golden Gate University.
G. Kirk Raab became a director of the Company in January 1992 and Chairman
of the Board in September 1995. Mr. Raab was President, Chief Executive Officer
and director of Genentech, Inc. ("Genentech") from February 1990 to July 1995
and President, Chief Operating Officer and director from February 1985 to
January 1990. Before joining Genentech, Mr. Raab was associated with Abbott
Laboratories, serving as President, Chief Operating Officer and director. Mr.
Raab holds a B.A. in Political Science from Colgate University, where he
currently serves as a trustee. Mr. Raab is also Chairman of the
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<PAGE> 41
Board of Connectics, Inc. and Oxford GlycoSciences (UK) Ltd. and a director of
LXR Biotechnology, Inc., Bridge Medical, Inc., Accumetrics, Inc. and Applied
Imaging Corporation,
Adrian D.P. Bellamy became a director of the Company in October 1997. Since
April 1995, Mr. Bellamy has served as Chairman and a director of each of Airport
Group International Holdings LLC and Gucci Group N.V. From September 1983 to
April 1995, Mr. Bellamy served as Chairman of the Board of Directors and Chief
Executive Officer of DFS Group Limited, a specialty retailer. He received a B.A.
in Communications and an M.B.A. from the University of South Africa. Mr. Bellamy
is a director of The Body Shop, Inc., The Body Shop International PLC, The Gap,
Inc., Paragon Trade Brands, Inc. and Williams-Sonoma, Inc.
Jeffrey Berg became a director of the Company in June 1998. Mr. Berg has
been the Chairman and Chief Executive Officer of International Creative
Management, Inc. since 1985. Mr. Berg, one of the leading agents in the
entertainment industry, has been in the entertainment industry for over 25
years. Mr. Berg received a B.A. from the University of California at Berkeley
and a Master of Liberal Arts from the University of Southern California. He
served as Co-Chair of the California Information Technology Council and is a
director of each of Oracle Corporation and Excite, Inc.
Herbert H. McDade, Jr. became a director of the Company in October 1991. He
has served as Chairman of the Board and Chief Executive Officer of Chemex,
Pharmaceuticals, Inc. ("Chemex") since February 1989 and as Chief Executive
Officer from February 1989 through January 1996, when Chemex merged with Access
Pharmaceutical Corporation ("Access") and the combined entity changed its name
to Access. From October 1986 to January 1988, Mr. McDade was Chairman, President
and Chief Executive Officer of Armour Pharmaceuticals, Inc., after previously
serving as President, International Health Care Division of the Revlon Health
Care Group. Mr. McDade holds a B.S. in Biology from the University of Notre Dame
and a B.P.H. in Theology and Philosophy from Laval University. He is Chairman of
the Board of Access and a director of Cytrx, Inc., Discovery Ltd. and several
privately held companies.
Mr. David Titus became a director of the Company in April 1990. Mr. Titus
is currently a General Partner of Windward Ventures Management, L.P., a venture
capital firm, which he founded in November 1997. Prior to founding Windward
Ventures Management, L.P., Mr. Titus was Managing Director of Windward Ventures,
a venture capital consulting and investment firm, which he founded in 1993. From
May 1986 to December 1992, he served in various capacities at Technology
Funding, Inc., a venture capital firm, including Group Vice President,
Technology Funding, Inc., and General Partner of Technology Funding Limited.
Prior to joining Technology Funding, Inc. in May 1986, Mr. Titus was a founder
and Senior Vice President of the Technology Division of Silicon Valley Bank. Mr.
Titus earned a B.A. in Economics from the University of California, Santa
Barbara. He is a director of several privately held companies.
SCIENTIFIC STRATEGY TEAM
Shaman's Scientific Strategy Team ("SST") consists of an interdisciplinary
group of ethnobotanists, scientists, pharmacologists, physicians, pharmacists
and Company personnel. Several members of the SST who are actively working in
the field have agreed to exclusively advise the Company in connection with
medical and ethnobotanical matters and to refrain from consulting with other
pharmaceutical companies on all ethnobotanical matters. Some members may have
collaborative relationships with other pharmaceutical firms for random
collection of plants on a contract basis.
The principal criteria used in selecting members of the SST are breadth of
the scientific discipline, recognized scientific excellence in their fields, and
ability to contribute to the team evaluation process. The Company relies on the
SST to assist in the identification of plant candidates for Shaman's botanical
screening process and to evaluate the information obtained about these
candidates, both in the field and in literature. SST members who are not
employees of the Company are compensated with stock options for their general
contributions throughout the year, and are paid $1,000 per day for participation
at the SST meetings, which occur approximately every 12 months. Shaman also pays
SST members for any additional consulting services and field expeditions
conducted on behalf of the Company.
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The SST includes the following members:
Edward F. Anderson, Ph.D. is a Senior Research Botanist at the Desert
Botanical Gardens in Phoenix, Arizona. Formerly, he was a Professor of Biology
at the Whitman College in Walla Walla, Washington. Dr. Anderson received a B.A.
in Biology from Pomona College in California and an M.A. and a Ph.D. in Botany
from Claremont Graduate School and Rancho Santa Ana Botanic Garden,
respectively.
Paul S. Auerbach, M.D. is Chief Operating Officer of MedAmerica in Oakland,
California. Dr. Auerbach was formerly Chief, Division of Emergency Medicine at
Stanford University Hospital in Stanford, California. Dr. Auerbach earned an
A.B. in Religion from Duke University, an M.D. from Duke University School of
Medicine, and was a Sloan fellow, M.S.M. at Stanford University Graduate School
of Business.
Michael J. Balick, Ph.D. is Director of the Institute of Economic Botany at
The New York Botanical Garden. Dr. Balick holds a B.S. in Agriculture and Plant
Science from the University of Delaware and both an A.M. and a Ph.D. in Biology
from Harvard University.
Baruch S. Blumberg, M.D., Ph.D. is Associate Director of Clinical Research
at the Fox Chase Cancer Center in Philadelphia and the first American dean of a
college at Oxford University. Dr. Blumberg became a Nobel laureate in 1976 for
his discovery of the hepatitis B antigen. He received a B.S. from Union College
in New York, an M.D. from the College of Physicians and Surgeons at Columbia
University and a Ph.D. in Biochemistry from Oxford University.
Anthony Conte is a retired pharmacist and former proprietor of the Gilliar
Drug Company, Inc. Mr. Conte has 30 years of experience in commercializing
pharmaceuticals. He received a B.S. in Pharmacy from Long Island University,
Brooklyn College of Pharmacy and an M.S. in Pharmaceutical Chemistry from
Columbia University. Mr. Conte is the father of Ms. Conte, President, Chief
Executive Officer and a director of Shaman.
James A. Duke, Ph.D. is a recently retired research scientist at the
Agricultural Research Service of the United States Department of Agriculture.
Dr. Duke earned his A.B., B.S. and Ph.D. in Botany from the University of North
Carolina.
Elaine Elisabetsky, Ph.D. is a research fellow of the Brazilian Research
Council, Associate Professor at the Universidade Federal do Rio Grande do Sul
and a board member of the International Society of Ethnopharmacology. Dr.
Elisabetsky holds a B.S. in Biomedical Sciences from the Escola de Medicina in
Sao Paulo, Brazil, a Ph.D. in Pharmacology from the Departmento de Farmacologia
e Bioquimica, Escola Paulista de Medicina in Brazil, and has received
post-doctorate training in ethnobotany and ethnopharmacology from The New York
Botanical Garden.
Norman R. Farnsworth, Ph.D. is Research Professor of Pharmacognosy and
Director of the Program for Collaborative Research in the Pharmaceutical
Sciences at the College of Pharmacy, University of Illinois at Chicago. Dr.
Farnsworth received a B.S. and an M.S. in Pharmacy from the Massachusetts
College of Pharmacy and a Ph.D. in Pharmacognosy from the University of
Pittsburgh.
Maurice M. Iwu, Ph.D. is founder and director of BioResources Development
Conservation Programme and Professor of Pharmacognosy and Medicinal Chemistry at
the University of Nigeria, Nsukka. Dr. Iwu earned a Ph.D. in Pharmacognosy from
the University of Bradford, England.
Charles F. Limbach, M.D. is a practitioner of family medicine in Salinas,
California. Dr. Limbach earned a B.A. in Biology from the University of Michigan
and an M.D. from Michigan State University.
Koji Nakanishi, Ph.D. is Centennial Professor of Chemistry at Columbia
University and formerly Director of the Suntory Institute for Bioorganic
Research in Osaka, Japan. Dr. Nakanishi was the recipient of the 1990 Japan
Academy Prize and the Imperial Prize, the highest Japanese honor a scholar can
receive. He received a B.S. and a Ph.D. in Chemistry from Nagoya University in
Japan.
Mark J. Plotkin, Ph.D. is Executive Director of Ethnobiology and
Conservation Team and previously served as Director of Plant Conservation at the
World Wildlife Fund. He also serves as a Research Associate of Ethnobotanical
Conservation at the Botanical Museum at Harvard University and Secretary of the
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<PAGE> 43
Ethnobotany Specialist Group, Species Survival for the International Union for
the Conservation of Nature. Dr. Plotkin received an A.B. from Harvard University
Extension, an M.F.S. in Wildlife Ecology from Yale School of Forestry and
Environmental Studies, and a Ph.D. in Biological Conservation from Tufts
University.
Nathaniel Quansah, Ph.D. is an independent ethnobotanical researcher. Dr.
Quansah obtained a B.S. from the University of Cape Coast, Ghana and a Ph.D. in
Botany from Goldsmith's College, University of London.
Robert F. Raffauf, Ph.D. is Professor Emeritus at Northeastern University's
College of Pharmacy. He holds a B.S. in Chemistry/Biology from the College of
the City of New York, an M.A. in Chemistry from Columbia University and a Ph.D.
in Organic/Analytical Chemistry from the University of Minnesota.
Richard E. Schultes, Ph.D. is Professor Emeritus at Harvard University. Dr.
Schultes has spent 40 years studying the traditional uses of the higher plants
and fungi of the Colombian Amazon. He has been the recipient of numerous awards,
including the Gold Medal of the World Wildlife Fund. Dr. Schultes holds an A.B.,
an A.M. and a Ph.D. from Harvard University.
Charles G. Smith, Ph.D. has been a consultant to start-up businesses, major
pharmaceutical companies and venture capital firms since 1986. Most recently, he
served as Vice President of Research and Development at Revlon Healthcare Group.
Dr. Smith received a B.S. in Chemistry from Illinois Institute of Technology, an
M.S. in Biochemistry from Purdue University, and a Ph.D. in Biochemistry from
the University of Wisconsin.
D. Doel Soejarto, Ph.D. is Professor of Pharmacognosy for the Department of
Medicinal Chemistry and Pharmacognosy and for the Program for Collaborative
Research in the Pharmaceutical Sciences at the University of Illinois at
Chicago. Dr. Soejarto holds a B.S. in Biology from the College of Tjiawi, Java,
an A.M. in Biology/Botany from Harvard University and a Ph.D. in Biology from
Harvard University.
Hildebert K.M. Wagner, Ph.D. is Professor of Pharmacognosy in the Institut
Fur Pharmazeutische Biologie at the Ludwig Maximilians University in Munich,
Germany. Dr. Wagner also serves as co-director of the Institute of
Pharmaceutical Biology at the University of Munich. He earned his Ph.D. in
Pharmacognosy at the University of Munich.
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<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, par value $0.001 per
share, and 1,000,000 shares of Preferred Stock, par value $0.001 per share.
COMMON STOCK
As of July 24, 1998, there were 18,980,862 shares of Common Stock
outstanding held of record by approximately 868 stockholders. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Subject to preferential rights
with respect to any outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution, sale or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preferential rights and have no rights to
convert their Common Stock into any other securities. Holders of Common Stock
have no preemptive or subscription rights and there are no redemption or
conversion rights with respect to such shares. The outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
offering will be, fully paid and nonassessible.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to the authorized
number of shares of Preferred Stock in one or more series, to designate the
number of shares constituting any series, and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, redemption price or
prices and liquidation preferences of such series. The issuance of Preferred
Stock may have the effect of delaying, deferring, or preventing a change in
control of the Company without further action by the stockholders. The issuance
of Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control. As of July 24, 1998 there were 400,000 shares of authorized Series A
Preferred Stock, all of which shares were issued and outstanding. Shares of
Series B Preferred Stock were proposed to be authorized and issued but will not
be so authorized or issued if this offering is completed. Upon the completion of
this offering, there will be a minimum of 150,000 and a maximum of 200,000
shares of authorized Series C Preferred Stock, all of which will be issued and
outstanding.
Series A Preferred Stock
As of July 24, 1998, there were 400,000 shares of Series A Preferred Stock
(the "Series A Preferred Stock") outstanding held of record by one stockholder.
Voting. Each holder of Series A Preferred Stock is entitled to a number of
votes equal to the number of shares of Common Stock into which the shares of
Series A Preferred Stock held by such stockholder are convertible and has voting
rights and powers equal to those of the Common Stock, except as otherwise
expressly provided or as required by law.
Dividends. Subject to preferential rights with respect to any series of
preferred stock which may from time to time come into existence, holders of
Series A Preferred Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor. Any
dividends declared on the Series A Preferred Stock are not cumulative.
Liquidation Preference. In the event of a liquidation, dissolution, sale or
winding up of the Company, holders of Series A Preferred Stock are entitled to
receive $8.15 per share (as adjusted for any stock dividends, combinations or
splits with respect to such shares) plus all accrued or declared but unpaid
dividends. If the assets and funds of the Company legally available for
distribution to the holders of the Series A Preferred Stock are insufficient to
permit payment of the full preferential amount, then holders of the Series A
Preferred
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<PAGE> 45
Stock are entitled to share ratably the entire amount of such assets or funds
legally available for distribution. After payment of the liquidation preference,
the remaining assets and funds of the Company legally available for distribution
shall be divided ratably among the holders of Common Stock.
Conversion. Each share of Series A Preferred Stock is convertible into one
share of Common Stock, as adjusted for any stock dividends, combinations or
splits with respect to such shares, at any time at the option of the holder;
provided, however, that the minimum number of shares which may be converted at
any one time is 75,000 shares, or such lesser number of shares as are then
outstanding. Each share of Series A Preferred Stock shall automatically convert
into Common Stock on the earlier to occur of: (i) immediately in the event that
at any time prior to July 23, 1999, the closing sale price of the Company's
Common Stock (as listed on The Nasdaq National Market) has for a period of 60
consecutive trading days exceeded $8.15 per share, at which time each share of
Series A Preferred Stock will automatically convert into one share of Common
Stock, as appropriately adjusted for any stock dividends, combinations or
splits; or (ii) July 23, 1999, at which time each share of Series A Preferred
Stock will automatically convert into such number of shares of Common Stock as
equals $8.15 divided by the weighted-average closing sale price for the 60
consecutive trading days ending two days prior to July 23, 1999, but in no event
shall a share of Series A Preferred Stock be convertible into more than 1.3578
shares of Common Stock, in each case as appropriately adjusted for any stock
dividends, combinations or splits with respect to such shares of Common Stock.
Redemption. The Series A Preferred Stock is not redeemable.
Priority. The Series A Preferred Stock ranks senior to the Common Stock and
junior to the Series C Preferred Stock, if issued, as to dividends,
distributions and distribution of assets upon liquidation, dissolution or
winding up of the Company.
Series C Preferred Stock
As of the completion of this offering, there will be between 150,000 and
200,000 shares of Series C Preferred Stock outstanding.
Voting. The holders of the Series C Preferred Stock are entitled (i) during
the first year after the issuance thereof to one vote for each six shares held;
and (ii) thereafter, to one vote for each share of Common Stock into which such
share of Series C Preferred Stock is convertible on the record date for the
matter to be voted on.
Dividends. Each share of Series C Preferred Stock shall be entitled to
receive cumulative dividends paid semi-annually on May 31 and November 30 of
each year to the holders of record of such shares on March 31 and September 30
of such year as follows: (i) a stock-on-stock dividend of $10.00 per annum, paid
in arrears, in shares of Common Stock (valued at 85% of the average closing
price of the Common Stock for the 10 trading day period ending three trading
days prior to the date on which the dividend is paid); plus (ii) a cash amount
equaling 0.00005% of the Company's United States net sales, if any, for the
preceding two calendar quarters of its SP-303/Provir product for the treatment
of diarrhea (equivalent to a 7.5% royalty for the Minimum and a 10% royalty for
the Maximum of the aggregate shares of Series C Preferred Stock) less $5.00 (the
value of the semi-annual stock dividend). If under Delaware law, the Company is
unable to pay the cash amount of the above described dividend, then the cash
portion shall be payable in shares of Common Stock (valued at 85% of the average
closing price of the Common Stock for the 10 day trading period ending three
days prior to the date on which the dividend is paid).
Liquidation Preference. In the event of a liquidation, dissolution, sale or
winding up of the Company, holders of the Series C Preferred Stock shall be
entitled to receive, prior and in preference to the holders of the Common Stock
and the Series A Preferred Stock, but subordinate to the holders of the Series B
Preferred Stock, an amount equal to $100 per share, plus any accrued and unpaid
dividends.
Conversion. Each share of Series C Convertible Preferred Stock shall be
convertible, at any time at least 12 months after the original issuance date
thereof at the election of each holder, and automatically on the fourth
anniversary of the date on which any shares of Series C Preferred Stock were
first issued, into the greater of (i) 16.6667 shares of Common Stock or (ii)
such number of shares of Common Stock as equals
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<PAGE> 46
$100 divided by 85% of the average closing price of the Common Stock for the 10
trading day period ending three trading days prior to the date of conversion.
Redemption. The Series C Preferred Stock is not redeemable.
Priority. The Series C Preferred Stock ranks senior to the Common Stock and
Series A Preferred Stock, but junior to the Series B Preferred Stock, as to
dividends, distributions and distribution of assets upon liquidation,
dissolution or winding up of the Company.
WARRANTS
As of July 24, 1998, there were outstanding warrants to purchase an
aggregate of 1,261,024 shares of Common Stock at a weighted average exercise
price of $7.79 per share.
In September 1993, the Company issued, in connection with equipment lease
financings, warrants to purchase 23,524 shares of Common Stock at prices ranging
from $10.50 to $10.83 per share. These warrants expire September 1998.
In March 1998, the Company issued to certain investors the March Warrants
to purchase an aggregate of 137,500 shares of Common Stock. The March 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 upon exercise of the March Warrants, which registration statement
was declared effective on July 10, 1998.
In June 1998, the Company issued to certain investors the June Warrants to
purchase an aggregate of 350,000 shares of Common Stock. The June Warrants are
exercisable through June 22, 2003 at an exercise price per share equal to 115%
of the average trading price of the Common Stock during specified measurement
periods. The June Warrants provide for adjustment of the number of shares of
Common Stock issuable upon exercise thereof, including upon the distribution of
certain dividends, upon the Company's reorganization, reclassification or
merger, or upon the division or combination of the Company's Common Stock. The
Company has filed a registration statement with the SEC for the resale of shares
issued upon exercise of the June Warrants, which registration statement was
declared effective on July 10, 1998.
As long as any of the foregoing warrants remain unexercised and
outstanding, the holders thereof will have the opportunity to profit from an
increase in the market price of the Common Stock, if any, without assuming the
risk of ownership.
REGISTRATION RIGHTS
The Company has granted to one investor certain demand and "piggyback"
rights to register shares of Common Stock currently owned or in the future
acquired by such investor pursuant to a stock purchase agreement between the
Company and such investor.
PLAN OF DISTRIBUTION
GENERAL
The Company is offering for sale on a "best efforts" basis a minimum of
150,000 (the "Minimum Offering Amount"), and a maximum of 200,000 (the "Maximum
Offering Amount") shares of Series C Preferred Stock. There is no minimum number
of shares that investors must purchase.
ESCROW
All funds received from investors and accepted by the Company will be
deposited into an escrow account with U.S. Bank Trust N.A. The escrow will
provide that funds may be released from escrow only upon the satisfaction of
certain conditions, including the deposit of the Minimum Offering Amount in the
escrow account on or before August , 1998; provided, however, that the Company
may extend such date for up to
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<PAGE> 47
an additional 30 days (the release of the escrowed funds under such conditions
being the "Initial Closing"). In the event that additional funds are raised
subsequent to the Initial Closing, one or more later closings may be held until
the Maximum Offering Amount is sold or until the termination of the offering as
provided below.
The offering will terminate upon the first to occur of: (a) the failure of
the Company to meet the conditions of the Initial Closing; (b) the sale of the
Maximum Offering Amount of Shares; or (c) the expiration of 30 days after the
Initial Closing; provided, however, that the Company may extend such 30-day
period for up to an additional 30 days.
If the offering does not achieve the Minimum Offering Amount within the
time period specified above, any subscription funds received in connection with
the offering will be promptly returned with interest thereon at the rate of 10%
per annum from the date such funds were deposited into escrow. If an investor's
subscription is rejected by the Company, such investor's funds will be promptly
returned without interest.
PLACEMENT AGENT
The Company and the Placement Agent have entered into an agreement (the
"Placement Agent Agreement") pursuant to which the Placement Agent has agreed to
use its best efforts to sell for the Company a minimum of $15 million, and a
maximum of $20 million, aggregate principal amount of Shares.
The Placement Agent Agreement provides that the Placement Agent and the
Company will promptly remit the purchase price of the Shares upon receipt
thereof and acceptance by the Company (not later than noon of the next business
day following receipt) to a segregated bank escrow account, at U.S. Bank Trust
N.A., in trust for the respective purchasers of the Shares pending closing under
the Placement Agent Agreement. The Placement Agent and the Company will provide
wire transfer instructions, as necessary. See " -- Subscription Procedures"
below.
The Company has agreed to pay the Placement Agent a commission equal to six
percent of the proceeds received from investors in the offering; provided,
however, that the Company will only pay a commission in an amount equal to three
percent of the proceeds received from investors introduced to the Placement
Agent by the Company. The Company has also agreed to reimburse the Placement
Agent for expenses incurred in connection with such offering, including up to an
aggregate of $50,000 for legal counsel to the Placement Agent.
The Company has agreed to indemnify the Placement Agent against certain
liabilities, including liabilities under the Securities Act, to contribute to
payments that the Placement Agent may be required to make in respect thereof.
SUBSCRIPTION PROCEDURES
Any person interested in purchasing the Shares should complete and execute
a Subscription Agreement and send the Subscription Agreement, together with a
money order, bank draft or check made payable to "U.S. Bank Trust N.A. as Escrow
Agent for Escrow No. " for the amount of its subscription to Dakin
Securities Corporation, Attn: Syndicate Desk, Dakin Securities Corporation, 505
Sansome Street, San Francisco, California 94111. The Placement Agent and the
Company will provide wire transfer instructions, as necessary. No Subscription
Agreement will be effective until accepted by the Company.
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LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Palo Alto, California. Sheppard,
Mullin, Richter & Hampton LLP, San Francisco, California, is acting as counsel
for the Placement Agent in connection with certain legal matters relating to the
shares of Series C Preferred Stock offered hereby.
EXPERTS
The financial statements of the Company appearing in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1997 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such financial statements
are incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-2 (the "Registration Statement") filed by the Company with the SEC under
the Securities Act omits certain of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Series C Preferred Stock offered hereby, reference is hereby made to such
Registration Statement, exhibits and schedules. Statements contained in this
Prospectus regarding the contents of any contract or other document are not
necessarily complete; with respect to each such contract or document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. A copy of the
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities of the SEC described
below, and copies of such material may be obtained from such office upon payment
of the fees prescribed by the SEC.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information filed by the Company with
the SEC can be inspected and copied at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and the following regional offices of the Commission:
New York Regional Office, Seven World Trade Center, 13th Floor, New York, New
York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of prescribed rates.
Furthermore, the SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Such Web site is located at
http://www.sec.gov. In addition, reports, proxy statements and other information
concerning the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company (File
No. 0-21022) with the Commission are hereby incorporated herein by reference:
(a) the Company's Annual Report on Form 10-K for the year ended December 31,
1997, as amended on Form 10K/A on each of May 4, May 11 and May 28, 1998; (b)
the Company's quarterly report on Form 10-Q for the quarter ended March 31,
1998, as amended on Form 10-Q/A on each of May 28 and July 9, 1998; (c) the
Company's Definitive Proxy Statement dated April 15, 1998, filed in connection
with the Company's 1998 Annual Meeting of Stockholders; and (d) the description
of the Company's Common Stock contained in its Registration Statement on Form
8-A, as
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amended, filed with the SEC on December 18, 1992, including any amendments or
reports filed for the purpose of updating such description.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the filing
of a post-effective amendment that indicates that all securities offered hereby
have been sold or that deregisters all securities remaining unsold, shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement contained in a
document incorporated by reference herein shall be deemed modified or superseded
for purposes of this Prospectus to the extent that a statement contained or
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the information that has been or may be incorporated by reference
in this Prospectus, other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference into such documents). Such requests
should be directed to Shaman Pharmaceuticals, Inc., 213 East Grand Avenue, South
San Francisco, California 94080-4812, telephone (650) 952-7070, facsimile (650)
873-8367, Attn: Corporate Communications.
This Prospectus is accompanied by a copy of the Company's 1997 Annual
Report on Form 10-K/A, together with any amendments thereto, filed with the SEC
for each subsequent fiscal year of the Company during the duration of this
Offering and by a copy of the Company's Proxy Statement used for the
solicitation of stockholders for each subsequent annual meeting of stockholders
held during the duration of this offering.
The Company shall deliver without charge to each person to whom this
Prospectus is delivered a copy of the Company's latest Form 10-Q filed with the
SEC with respect to the most recent fiscal quarter which ends after the end of
the latest fiscal year of the Company for which the Company has delivered the
1997 Annual Report as described above. The Company shall also provide without
charge a copy of each Form 8-K, if any, filed with the SEC since the end of the
latest fiscal year of the Company for which the audited financial statements
were included in the latest Form 10-K/A filed with the SEC.
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- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF SERIES C PREFERRED STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 17
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Capitalization........................ 19
Selected Financial Data............... 20
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........... 21
Business.............................. 25
Management............................ 38
Description of Capital Stock.......... 43
Plan of Distribution.................. 45
Legal Matters......................... 47
Experts............................... 47
Available Information................. 47
Incorporation of Certain Documents by
Reference........................... 47
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
MINIMUM OFFERING 150,000 SHARES
MAXIMUM OFFERING 200,000 SHARES
[LOGO]
SERIES C CONVERTIBLE
PREFERRED STOCK
---------------------
PROSPECTUS
---------------------
JULY , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 51
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby. All amounts are estimated except the Securities and
Exchange Commission registration fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 5,900
Nasdaq listing fee.......................................... 6,000
Accounting fees and expenses................................ 50,000
Legal fees and expenses..................................... 125,000
Printing and engraving fees................................. 50,000
Miscellaneous fees and expenses............................. 38,100
--------
Total............................................. $275,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, 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 cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any such
person serving in any such capacity who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor, against expenses
actually and reasonably incurred in connection with the defense or settlement of
such action or suit 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
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
such other court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Registrant's Restated Certificate of Incorporation provides that the
Registrant's directors shall not be liable to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except to the
extent that exculpation from liabilities is not permitted under the DGCL as in
effect at the time
II-1
<PAGE> 52
such liability is determined. The Registrant has entered into indemnification
agreements with all of its officers and directors, as permitted by the DGCL.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Placement Agent Agreement by and between the
Registrant and Dakin Securities Corporation.
1.2 Form of Escrow Agreement by and between the Registrant and
Silicon Valley Bank.
3.1(12) Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on June 3, 1997.
3.2(9) Amended and Restated By-Laws, as amended March 29, 1996.
3.3(14) Form of Certificate of Designations of Series B Custom
Convertible Preferred Stock.
3.4 Certificate of Designation of Preferences of Series C
Preferred Stock.
4.1(9) Certificate of Designation of Preferences of Series A
Preferred Stock of the Registrant, as filed with the
Delaware Secretary of State on July 27, 1996.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1(1)(16) 1990 Stock Option Plan, as amended.
10.2(1)(16) 401(k) Plan.
10.3(1)(16) Form of Stock Purchase Agreement.
10.6(1) Form of Indemnification Agreement.
10.8(1) Form of Agreement with Scientific Strategy Team Members.
10.9(1) Form of Proprietary Information and Inventions
Agreement-Employees.
10.10(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.12(1)(15) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(15) Stock Purchase Agreement dated June 15, 1990, between Shaman
and Lisa A. Conte.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.24(1)(15) Supply Agreement dated June 1, 1992.
10.29(1) Registration Rights Agreement dated October 22, 1992, as
amended December 14, 1992, between Shaman and certain
holders of preferred stock of Shaman.
10.30(1) Industrial Lease Agreement dated January 1, 1993, between
Shaman and Grand/ Roebling Investment Company.
10.31(1) Three Party Agreement dated as of January 1, 1993, by and
among Berlex Laboratories, Inc., Shaman and Grand/Roebling
Investment Company.
10.37(4) Loan and Security Agreement dated September 27, 1993,
between Shaman and Household Commercial of California.
10.39(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.40(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.41(6)(15) Joint Research and Product Development Agreement, dated May
24, 1995, by and between Ono Pharmaceutical Co., Ltd. and
Registrant.
</TABLE>
II-2
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.41(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint
Research and Product Development Agreement by and between
Ono Pharmaceutical Co., Ltd. and Registrant.
10.42(6)(15) License Agreement, dated June 8, 1995, by and between Bayer
AG and Registrant.
10.43(7)(15) Development Agreement, dated January 11, 1996, by and
between Abbott Laboratories and Registrant.
10.47(9)(15) Subscription Agreement dated July 25, 1996 by and between
the Registrant and Fletcher International Limited.
10.48(10)(15) Joint Research and Product Development and Commercialization
Agreement dated September 23, 1996, by and between Lipha,
Lyonnaise Industrielle Pharmaceutique s.a. and the
Registrant.
10.49(10)(15) Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a.
and the Registrant.
10.50(11)(16) Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as
Amended and Restated on February 14, 1997).
10.51(3)(16) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(16) Form of Addendum to Stock Option Agreement (Special Tax
Elections).
10.53(3)(16) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.54(11)(16) Form of Non-Employee Director Automatic Stock Option
Agreement.
10.55(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.56(12)(15) Amended and Restated Masopracol License Agreement, dated as
of April 1997, by and between Access Pharmaceuticals, Inc.
and the Registrant.
10.57(12) Loan and Security Agreement, dated as of May 7, 1997,
between MMC/GATX Partnership I and Registrant.
10.57A(12) Amendment No. 1 to Loan and Security Agreement, dated as of
June 30, 1997, by and between Registrant and MMC/GATX
Partnership No. I.
10.57B Waiver letter dated July 16, 1998, executed by Shaman
Pharmaceuticals, Inc. and approved by MMC/GATX Partnership
No. I as to the payment of dividends on the Series C
Preferred Stock.
10.58(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
10.59(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.60(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX
Partnership No. I and Registrant.
10.61(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.62(12) Amended Engagement Agreement, dated June 30, 1997, by and
between Registrant and Diaz & Altschul Capital, LLC.
10.63(12) Form of Note Purchase Agreement, dated as of June 30, 1997,
by and between Registrant and certain investors.
10.64(13) Master Lease Agreement, dated September 15, 1997, between
Registrant and Transamerica Business Credit Corporation.
10.65(13) Amendment to Note Purchase Agreement, dated as of June 30,
1997, by and between Registrant and Certain investors.
</TABLE>
II-3
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.66(14) Amendment Agreement, dated as of March 18, 1998, by and
between the Registrant and certain investors.
10.67(14) Form of Common Stock Purchase Warrant, dated as of March 18,
1998, issued to certain investors.
10.69(14) Second Amendment Agreement, dated as of June 10, 1998, by
and between the Registrant and certain investors.
12.1 Statement Regarding Computation of Ratios.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in the
opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included under the caption "Signatures").
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.
(2) Intentionally omitted.
(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.
(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(5) Intentionally omitted.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
(8) Intentionally omitted.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.
(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.
(12) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-31843.
(13) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-49025.
(15) Confidential treatment has been granted with respect to certain portions of
these agreements.
(16) Management contract or compensation plan.
(b) FINANCIAL STATEMENT SCHEDULES
None.
II-4
<PAGE> 55
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement; provided, however, that (i) and (ii) do not apply
if the Registration Statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by (i)
and (ii) is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of South San Francisco, State of California, on the
29th day of July, 1998.
SHAMAN PHARMACEUTICALS, INC.
By: /s/ LISA A. CONTE
------------------------------------
Lisa A. Conte
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ LISA A. CONTE Director, President, and Chief July 29, 1998
- -------------------------------------------------------- Executive Officer (Principal
Lisa A. Conte Executive Officer)
* Chief Financial Officer (Chief July 29, 1998
- -------------------------------------------------------- Financial and Accounting
Stephanie C. Diaz Officer)
* Chairman of the Board July 29, 1998
- --------------------------------------------------------
G. Kirk Raab
Director July , 1998
- --------------------------------------------------------
Adrian D.P. Bellamy
Director July , 1998
- --------------------------------------------------------
Jeffrey Berg
* Director July 29, 1998
- --------------------------------------------------------
Herbert H. McDade, Jr.
* Director July 29, 1998
- --------------------------------------------------------
M. David Titus
*By: /s/ LISA A. CONTE
---------------------------------------------------
Lisa A. Conte
(Attorney-in-Fact)
</TABLE>
II-6
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<S> <C> <C>
1.1 Form of Placement Agent Agreement by and between the
Registrant and Dakin Securities Corporation.
1.2 Form of Escrow Agreement by and between the Registrant and
Silicon Valley Bank.
3.1(12) Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on June 3, 1997.
3.2(9) Amended and Restated By-Laws, as amended March 29, 1996.
3.3(14) Form of Certificate of Designations of Series B Custom
Convertible Preferred Stock.
3.4 Certificate of Designation of Preferences of Series C
Preferred Stock.
4.1(9) Certificate of Designation of Preferences of Series A
Preferred Stock of the Registrant, as filed with the
Delaware Secretary of State on July 27, 1996.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1(1)(16) 1990 Stock Option Plan, as amended.
10.2(1)(16) 401(k) Plan.
10.3(1)(16) Form of Stock Purchase Agreement.
10.6(1) Form of Indemnification Agreement.
10.8(1) Form of Agreement with Scientific Strategy Team Members.
10.9(1) Form of Proprietary Information and Inventions
Agreement-Employees.
10.10(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.12(1)(15) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(15) Stock Purchase Agreement dated June 15, 1990, between Shaman
and Lisa A. Conte.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.24(1)(15) Supply Agreement dated June 1, 1992.
10.29(1) Registration Rights Agreement dated October 22, 1992, as
amended December 14, 1992, between Shaman and certain
holders of preferred stock of Shaman.
10.30(1) Industrial Lease Agreement dated January 1, 1993, between
Shaman and Grand/Roebling Investment Company.
10.31(1) Three Party Agreement dated as of January 1, 1993, by and
among Berlex Laboratories, Inc., Shaman and Grand/Roebling
Investment Company.
10.37(4) Loan and Security Agreement dated September 27, 1993,
between Shaman and Household Commercial of California.
10.39(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.40(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.41(6)(15) Joint Research and Product Development Agreement, dated May
24, 1995, by and between Ono Pharmaceutical Co., Ltd. and
Registrant.
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<S> <C> <C>
10.41(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint
Research and Product Development Agreement by and between
Ono Pharmaceutical Co., Ltd. and Registrant.
10.42(6)(15) License Agreement, dated June 8, 1995, by and between Bayer
AG and Registrant.
10.43(7)(15) Development Agreement, dated January 11, 1996, by and
between Abbott Laboratories and Registrant.
10.47(9)(15) Subscription Agreement dated July 25, 1996 by and between
the Registrant and Fletcher International Limited.
10.48(10)(15) Joint Research and Product Development and Commercialization
Agreement dated September 23, 1996, by and between Lipha,
Lyonnaise Industrielle Pharmaceutique s.a. and the
Registrant.
10.49(10)(15) Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a.
and the Registrant.
10.50(11)(16) Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as
Amended and Restated on February 14, 1997).
10.51(3)(16) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(16) Form of Addendum to Stock Option Agreement (Special Tax
Elections).
10.53(3)(16) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.54(11)(16) Form of Non-Employee Director Automatic Stock Option
Agreement.
10.55(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.56(12)(15) Amended and Restated Masopracol License Agreement, dated as
of April , 1997, by and between Access Pharmaceuticals,
Inc. and the Registrant.
10.57(12) Loan and Security Agreement, dated as of May 7, 1997,
between MMC/GATX Partnership I and Registrant.
10.57A(12) Amendment No. 1 to Loan and Security Agreement, dated as of
June 30, 1997, by and between Registrant and MMC/GATX
Partnership No. I.
10.57B Waiver letter executed by Shaman Pharmaceuticals, Inc. and
approved by MMC/GATX Partnership No. I as to the payment of
dividends on the Series C Preferred Stock.
10.58(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
10.59(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.60(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX
Partnership No. I and Registrant.
10.61(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.62(12) Amended Engagement Agreement, dated June 30, 1997, by and
between Registrant and Diaz & Altschul Capital, LLC.
10.63(12) Form of Note Purchase Agreement, dated as of June 30, 1997,
by and between Registrant and certain investors.
10.64(13) Master Lease Agreement, dated September 15, 1997, between
Registrant and Transamerica Business Credit Corporation.
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<S> <C> <C>
10.65(13) Amendment to Note Purchase Agreement, dated as of June 30,
1997, by and between Registrant and Certain investors.
10.66(14) Amendment Agreement, dated as of March 18, 1998, by and
between the Registrant and certain investors.
10.67(14) Form of Common Stock Purchase Warrant, dated as of March 18,
1998, issued to certain investors.
10.69(14) Second Amendment Agreement, dated as of June 10, 1998, by
and between the Registrant and certain investors.
12.1 Statement Regarding Computation of Ratios.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in the
opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included under the caption "Signatures").
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.
(2) Intentionally omitted.
(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.
(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(5) Intentionally omitted.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
(8) Intentionally omitted.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.
(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.
(12) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-31843.
(13) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-49025.
(15) Confidential treatment has been granted with respect to certain portions of
these agreements.
(16) Management contract or compensation plan.
<PAGE> 1
EXHIBIT 1.1
150,000 Shares*
SHAMAN PHARMACEUTICALS, INC.
Series C Convertible Preferred Stock
($.001 Par Value)
PLACEMENT AGENT AGREEMENT
July __, 1998
DAKIN SECURITIES CORPORATION
505 Sansome Street
San Francisco, California 94111
Ladies and Gentlemen:
Shaman Pharmaceuticals, Inc., a Delaware corporation (the "Company"),
pursuant to the terms and conditions set forth below, hereby engages Dakin
Securities Corporation (the "Placement Agent") to undertake to use its "best
efforts" to offer and sell (the "Offering") shares of the Company's Series C
Convertible Preferred Stock, par value $0.001 per share (the "Shares"), at a
purchase price of $100.00 per Share. The minimum number of Shares to be sold
hereunder shall be 150,000 Shares (the "Minimum Number of Shares"), and the
maximum number of Shares to be sold hereunder shall be 200,000 Shares (the
"Maximum Number of Shares").
1. Representations and Warranties of the Company. The Company hereby
represents and warrants as follows:
(a) A registration statement on Form S-2 (File No. 333-59053) with
respect to the Shares has been carefully prepared and filed by the Company
in conformity with the requirements of the Act of 1933, as amended, (the
"Act") and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder. Copies of
such registration statement, including any amendments thereto, the
preliminary prospectuses (meeting the Requirements of Rule 430A of the
Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore
been delivered by the Company to you. Such registration statement, herein
referred to as the
- --------
* The Company may offer to sell up to 200,000 shares of its Series C
Convertible Preferred Stock ($0.001 Par Value).
<PAGE> 2
Dakin Securities Corporation
July ___, 1998
Page 2
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has been declared effective by the Commission
under the Act and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The form of prospectus
first filed by the Company with the Commission pursuant to its Rule 424(b)
and Rule 430A is herein referred to as the "Prospectus." Each preliminary
prospectus included in the Registration Statement prior to the time it
becomes effective is herein referred to as a "Preliminary Prospectus." Any
reference herein to any Preliminary Prospectus or the Prospectus shall be
deemed to refer to and include any supplements or amendments thereto filed
with the Commission after the date of filing of the Prospectus under Rules
424(b) and 430A, and prior to the termination of the offering of the Shares
by the Placement Agent.
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and conduct its
business as described in the Registration Statement except, where such
failure would not have a material adverse effect on the business,
operations or financial condition of the Company; the Company is duly
qualified to transact business in all jurisdictions in which the conduct of
its business requires such qualification except where the failure to be so
qualified would not have a material adverse effect on the business,
operations or financial condition of the Company; and, except as described
in the Registration Statement or the Prospectus, no options, warrants or
other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in the Subsidiaries are outstanding.
(c) The Shares and the shares of the Company's Common Stock issuable
upon conversion of the Shares have been duly and validly authorized and,
when issued and delivered upon conversion thereof, will be validly issued,
fully paid and nonassessable. A sufficient number of shares of the
Company's Common Stock has been reserved for issuance upon conversion of
the Shares. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Shares, or the
underlying shares of the Company's Common Stock issuable upon conversion of
the Shares.
(d) The Shares conform with the statements concerning them in the
Registration Statement.
<PAGE> 3
Dakin Securities Corporation
July ___, 1998
Page 3
(e) The Commission has not issued an order preventing or suspending
the use of any Preliminary Prospectus relating to the proposed offering of
the Shares nor instituted proceedings for that purpose. The Registration
Statement contains and the Prospectus and any amendments or supplements
thereto will contain all statements which are required to be stated therein
by, and in all respects conform or will conform, as the case may be, to the
requirements of, the Act and the Rules and Regulations. Neither the
Registration Statement nor any amendment thereto, and neither the
Prospectus nor any supplement thereto, contains or will contain, as the
case may be, any untrue statement of a material fact or omits or will omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes
no representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with written information
furnished to the Company by or on behalf of the Placement Agent or any
Selected Dealer, specifically for use in the preparation thereof.
(f) Since the respective dates as of which information is given in the
Registration Statement, there has not been any material adverse change in
the business, properties, financial condition or results of operations of
the Company, whether or not arising from transactions in the ordinary
course of business, other than as set forth in the Registration Statement,
and since such dates, the Company has not entered into any material
transaction not referred to in the Registration Statement.
(g) The authorized, issued and outstanding capitalization of the
Company as of March 31, 1998 is as set forth in the section entitled
"Capitalization" in the Registration Statement, and the Company is not a
party to or bound by any instrument, agreement or other arrangement
providing for the Company to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement and as described in
the Registration Statement. Except as described in the Registration
Statement or the Prospectus, since March 31, 1998, the Company has not
issued any shares of capital stock or rights, warrants or options to
acquire shares of its capital stock, other than options granted to or
shares issued pursuant to the exercise of outstanding options held by
employees, consultants or directors of, or service providers to,
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Dakin Securities Corporation
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Page 4
the Company. The outstanding shares of the Company's Common Stock (the
"Outstanding Shares") have been duly authorized and are validly issued,
fully paid and nonassessable. The Outstanding Shares have been issued in
compliance with all applicable securities laws.
(h) This Agreement has been duly authorized, executed and delivered by
the Company and, assuming the due authorization, execution and delivery by
the Placement Agent, constitutes a valid and legally binding agreement of
the Company enforceable against the Company in accordance with its terms,
except as enforceability may be limited by general equitable principles, or
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditors rights generally, and except as rights to indemnity or
contribution for liabilities arising under the Act may be limited by
applicable law.
(i) The Company is not, and with the giving of notice or lapse of time
will not be, in violation of or in default under, nor will the execution or
delivery of this Agreement, or the issuance and sale of the Shares or the
consummation of the transactions contemplated hereby, result in a violation
of or constitute a default under, the certificate of incorporation, bylaws
or other governing documents of the Company or any agreement to which the
Company is a party or by which it is bound, or to which any of its
properties is subject, except where such violation or default has been
waived or would not have a material adverse effect on the business
condition of the Company. The performance by the Company of its obligations
hereunder will not violate any law, rule, administrative regulation or
decree of any court, or any governmental agency or body having jurisdiction
over the Company, or any of its properties, or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or
asset of the Company, except where such violation or lien, charge, claim or
encumbrance would not have a material adverse effect on the business
condition of the Company. No consent, approval, authorization or order of
any court, governmental agency or body, or other third party, is required
in connection with the issuance of the Shares or the shares of Common Stock
issuable upon the conversion of the Shares and the consummation of the
transactions contemplated by this Agreement, except as has been obtained or
as such as may be required under applicable state or foreign securities
laws and the rules and regulations of the National Association of
Securities Dealers, Inc.
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Dakin Securities Corporation
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(j) The Company owns, or has valid rights to use, all items of real
and personal property which are material to the business of the Company,
free and clear of all liens, encumbrances and claims which materially
interfere with the business, properties, financial condition or results of
operations of the Company.
(k) Except as described in the Registration Statement or the
Prospectus, the Company has no knowledge of any material infringement by it
of any trademark, trade name, service mark, service name, copyright,
license, patent, trade secret or other similar right of others
(collectively, the "Intellectual Property Rights"), and, except as
described in the Registration Statement, the Company has not received any
notice of any claim made relating to such Intellectual Property Rights
against the Company which is reasonably likely to have a material adverse
effect on the condition, business, or results of operations of the Company.
(l) Except as described in the Registration Statement or the
Prospectus, there is no litigation or governmental proceeding to which the
Company is a party or which any property of the Company is subject or which
is pending, or to the knowledge of the Company, contemplated against the
Company which is reasonably likely to result in any material adverse change
in the business, properties, financial condition, or results of operations
of the Company.
(m) The Company has not been advised, nor has it reason to believe it
is in violation of any applicable law, statute, ordinance, rule,
regulation, order or decree of any court, governmental body or regulatory
authority or administrative agency having jurisdiction over the Company or
any of the property or assets of the Company (including, without
limitation, any such law, statute, ordinance, rule, regulation, order or
decree with respect to environmental protection or the release, handling,
treatment, storage or disposal of hazardous substances or toxic wastes)
which violation, individually or in the aggregate, would have a material
adverse effect on the general affairs, business, financial condition,
stockholders equity, or results of operations of the Company. Neither the
Company nor any of its officers or directors have taken any action relating
directly to the Offering which would constitute a material violation of
federal, foreign or, to its knowledge, state securities laws or
regulations.
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(n) Neither the execution of this Agreement nor the consummation of
the transactions contemplated hereby will result in the Company owing a fee
or a commission to anyone other than the Placement Agent.
(o) The Company has filed all material federal, state and foreign
income and franchise tax returns or extensions for filing thereof required
to be filed as of the date hereof, and has paid or accrued all taxes shown
as due thereon; and the Company has no knowledge of any tax deficiency
which has been or might be asserted or threatened against the Company which
would materially and adversely affect the business, operations or
properties of the Company.
(p) All material transactions between the Company and the officers,
directors and beneficial holders of five percent or more of the Outstanding
Shares of the Company have been accurately disclosed in the Registration
Statement and the terms of each such transaction are fair to the Company
and no less favorable to the Company than the terms that could have been
obtained from unrelated parties, except as disclosed in the Registration
Statement.
(q) The Company maintains insurance of the type and in the amount
which it deems adequate for its business, including, but not limited to,
general liability insurance and insurance covering all material interests
in real and personal property owned or leased by the Company against theft,
damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect.
(r) The Company has not distributed and during the Offering Period (as
such term is defined below) will not distribute any offering material in
connection with the offer and sale of the Shares other than the
Registration Statement and any other materials permitted by state Blue Sky
laws and delivered to the Placement Agent in advance.
2. Appointment of Placement Agent; Offer and Sale of the Shares.
(a) The Company hereby appoints you as the exclusive Placement Agent
to offer and sell the Shares on the terms and conditions set forth herein.
Your
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Dakin Securities Corporation
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Page 7
appointment as Placement Agent hereunder shall terminate upon the
completion or termination of the Offering, as more fully described below.
As Placement Agent, you shall offer and sell the Shares for the
Company upon the terms and conditions set forth in the Registration
Statement (as such term is defined below).
For purposes of this Agreement, the Offering will be deemed to have
commenced upon delivery to you of copies of the Registration Statement and
will terminate upon the first to occur (the "Termination Date") of: (i) the
failure of the Company to meet the conditions of the Initial Closing (as
such term is defined below); (ii) the sale of the Maximum Number of Shares;
or (iii) August __, 1998; provided, however, that the Company and the
Placement Agent may mutually agree to extend the Offering up to an
additional 30 days. The period beginning the date on which the Offering was
deemed to have commenced and ending on the Termination Date shall be
referred to herein as the Offering Period.
Subject to the performance by the Company of all of its material
obligations to be performed hereunder and to the completeness and accuracy
of all representations and warranties of the Company contained herein, you
hereby accept such agency and agree on the terms and conditions herein set
forth: (i) in your sole discretion to form and manage a group of securities
broker-dealers (the "Selected Dealers") selected by you, each of which
shall be a member of the National Association of Securities Dealers, Inc.,
and to cause each Selected Dealer to enter into a Selected Dealer Agreement
in a customary form; and (ii) in conjunction with such Selected Dealers, if
any, to use your best efforts during the Offering Period to find
subscribers for the Shares. In carrying out the transactions contemplated
by this Agreement, you have observed and will observe and comply with: (A)
all applicable securities laws, regulations, rules and ordinances in any
jurisdiction in which the Shares may be offered, sold or delivered; and (B)
all applicable regulations and rules of the National Association of
Securities Dealers, Inc.; provided, however, that except as specifically
provided in this Agreement and except for information as may be provided by
you without prior review and approval by the Company, you assume no
responsibility for the accuracy or completeness of the information
contained in the Registration Statement or provided to subscribers in
connection with their investment decisions.
<PAGE> 8
Dakin Securities Corporation
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Subject to earlier termination as provided herein, your agency
hereunder shall continue until the termination of the Offering Period. In
the event that the Offering is commenced and subscriptions for at least the
Minimum Number of Shares are not received and accepted by the Company on or
before August __, 1998, which date may be extended by the Company and the
Placement Agent up to an additional 30 days, all funds received from
subscribers shall be returned in full, with interest actually earned
thereon, and your agency and this Agreement shall terminate without
obligations on your part or on the part of the Company, except as provided
in Section 9 of this Agreement.
(b) Each subscriber for Shares will be required to complete and
execute a Purchase Agreement in the form attached hereto as Exhibit B (the
"Purchase Agreement"). Each Purchase Agreement must be accompanied by
payment in full for the Shares subscribed for. All payments for Shares in
the form of a check, draft or money order must be made payable to U.S. Bank
Trust N.A./Account No. 180121167365, and all payments for Shares in the
form of a wire transfer must be made in accordance with the wire transfer
instructions attached to the Escrow Agreement (as such term is defined
below), until otherwise directed by the Placement Agent.
(c) Except as otherwise agreed in writing by you and the Company, all
funds for subscriptions for Shares received by the Placement Agent or any
Selected Dealer shall be deposited in an escrow account maintained with
U.S. Bank Trust N.A. (the "Escrow Agent") and held by the Escrow Agent upon
the terms and conditions of the Escrow Agreement dated July __, 1998, among
the Company, the Escrow Agent and the Placement Agent (the "Escrow
Agreement"). Except as otherwise agreed in writing by you and the Company,
you will transmit to the Escrow Agent for deposit in the escrow account all
subscribers' payments for Shares payable as provided in Section 2(b) above
by noon P.D.T. on the next business day after your receipt thereof. You
agree that any subscriber's payment received by you which is payable other
than as provided in Section 2(b) above will be returned by you directly to
the subscriber not later than the end of the next business day following
your receipt thereof with instructions as to the proper party to whom said
payment should be made.
(d) All sales of Shares are conditioned upon the receipt and
acceptance by the Company of subscriptions for the Minimum Number of Shares
on or before August __, 1998, which date may be extended by mutual
agreement of the Company and the Placement Agent up to an additional 30
days. Subject to the
<PAGE> 9
Dakin Securities Corporation
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Page 9
satisfaction of the foregoing, and the other terms and conditions of this
Agreement, as soon as practicable after notice from the Escrow Agent to the
Company and you that it has funds deposited in the escrow account which
have cleared the collection process representing the proceeds from the sale
of at least the Minimum Number of Shares, unless delayed by agreement of
the Company and you, delivery of the Shares (as described in Section 2(f)
hereof) against payment thereof or (Initial Closing) shall take place at
the offices of Sheppard, Mullin, Richter & Hampton LLP, Four Embarcadero
Center, San Francisco, California (or such other place as may be designated
by agreement between the Company and you) at 10:00 a.m., local time (the
"Initial Closing Date"). On the Initial Closing Date, the Shares will be
issued and delivered (as described in Section 2(f) hereof) by the Company
for distribution to the purchasers thereof against payment of the purchase
price by the Escrow Agent by wire transfer in same day funds, payable to
the order of the Company. Interest earned on subscription funds while in
the escrow account shall also be remitted to the Company by the Escrow
Agent on the Initial Closing Date.
(e) Subject to the terms and conditions of this Agreement, following
the Initial Closing Date (if less than the Maximum Number of Shares were
issued on such date), periodically at such dates and times as agreed to by
the Company and you, additional closings (Additional Closing Dates) shall
be held at the offices of Sheppard, Mullin, Richter & Hampton LLP, Four
Embarcadero Center, San Francisco, California, at which delivery of the
Shares (as described in Section 2(f) hereof) will be issued against payment
therefor, all as provided in Section 2(d) above. (The Initial Closing Date
and the Additional Closing Dates may be referred to individually as a
"Closing Date" or collectively as the "Closing Dates".)
(f) All actions to be taken on a Closing Date shall be deemed to take
place simultaneously and no actions shall be deemed complete, no payment
deemed made and no document or certificate deemed delivered until all
actions are complete, all payments made and all documents and certificates
have been delivered, including all actions, payments and deliveries
required by any other section of this Agreement to be made on a Closing
Date. For purposes of this Agreement, certificates for Shares shall be
deemed delivered upon confirmation by the Company's transfer agent that
such certificates shall be mailed via courier to the purchasers of Shares
in accordance with the Purchase Agreement.
(g) The Company acknowledges that it has retained the Placement Agent
in connection with the Offering and that, in such capacity, only personnel
<PAGE> 10
Dakin Securities Corporation
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employed by the Placement Agent and such other personnel as are assigned
for the specific purposes of services contemplated by this Agreement to be
performed by the Placement Agent will be involved in providing the services
described herein.
3. Information Furnished by the Placement Agent. The information set forth
in the Registration Statement under the caption "Plan of Distribution" (insofar
as such information relates to the Placement Agent) constitutes the only
information furnished by you to the Company for inclusion in the Registration
Statement, and you warrant to the Company that the statements made therein do
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4. Further Agreements of the Company. The Company covenants and agrees as
follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) of the Rules and Regulations a Prospectus containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations; and (ii) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Placement Agent shall not
previously have been advised and furnished with a copy or to which the
Placement Agent shall have reasonably and in good faith objected in writing
or which is not in compliance with the Rules and Regulations.
(b) The Company will advise the Placement Agent promptly of any
request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, or of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus or
of the institution of any proceedings for that purpose, and the Company
will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) The Company will deliver to, or upon the order of, the Placement
Agent, from time to time, as many copies of any Preliminary Prospectus as
the Placement Agent may reasonably request. The Company will
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Dakin Securities Corporation
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Page 11
deliver to, or upon the order of, the Placement Agent during the period
when delivery of a Prospectus is required under the Act, as many any copies
of the Prospectus in final form, or as thereafter amended or supplemented,
as the Placement Agent may reasonably request. The Company will deliver to
the Placement Agent at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Placement Agent or
Selected Dealers such number of copies of the Registration Statement, but
without exhibits, and of all amendments thereto, as the Placement Agent may
reasonably request.
(d) If during the period in which a prospectus is required by law to
be delivered by the Placement Agent or Selected Dealer any event shall
occur as a result of which, in the judgment of the Company or in the
opinion of counsel for the Placement Agent, it becomes necessary to amend
or supplement the Prospectus in order to make the statements therein, in
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if, to the Company's knowledge, it is
or becomes necessary at any time to amend or supplement the Prospectus to
comply with any law, the Company promptly will prepare and file with the
Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with law.
(e) The Company will, for a period of four years from the Closing
Date, deliver to the Placement Agent copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended. The Company will deliver
to the Placement Agent similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which
are not consolidated in the Company's financial statements.
(f) The Company will pay its expenses in connection with this Offering
and the transactions contemplated herein, including, but not limited to:
the costs of preparing and printing the Registration Statement, Preliminary
Prospectus, Prospectus and the stock certificates; all expenses incident to
the
<PAGE> 12
Dakin Securities Corporation
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issuance and delivery of the Shares; fees and expenses of legal counsel and
independent accountants for the Company; the cost and expenses in
connection with Blue Sky or other securities filings, including filings
with the Commission and the National Association of Securities Dealers,
Inc.; and the Placement Agent's legal fees up to a maximum of $50,000.
(g) The Placement Agent will pay all costs and expenses incurred by it
in connection with the Offering; provided, however, that the Company will
on each Closing Date, reimburse the Placement Agent for its unreimbursed
actual itemized out-of-pocket expenses incurred in connection with the
Offering through such Closing Date.
(h) In consideration for the services rendered to the Company in
connection with the Offering, the Company will pay to you, on the Initial
Closing Date, and each Additional Closing Date, a commission in an amount
equal to six percent (6%) of the aggregate sales proceeds of all Shares
sold at such Closing Date; provided, however, that the Company will only be
obligated to pay a commission in an amount equal to three percent (3%) of
the aggregate sales proceeds received from investors introduced to the
Placement Agent by the Company. The $30,000 retainer that has previously
been paid by the Company to you shall be subtracted from the amount due to
you at the Initial Closing.
(i) In the event the Offering terminates or is terminated prior to the
Initial Closing Date, the Placement Agent shall be entitled to receive
reimbursement only for its actual itemized out-of-pocket expenses incurred
in connection with the Offering. After deducting any such expenses, the
Placement Agent shall return to the Company any remaining funds from the
$30,000 retainer.
(j) The Company will apply the net proceeds from the sale of the
Shares in a manner consistent with the Registration Statement.
(k) During the Offering Period, the Company will maintain appropriate
arrangements with the Escrow Agent for depositing funds received from
subscribers for the Shares, as more fully described in Section 2 hereof.
The Company will use its best efforts to cause the Escrow Agent to make
appropriate refunds of such funds in the event that such refunds are
required to
<PAGE> 13
Dakin Securities Corporation
July ___, 1998
Page 13
be made in accordance with the Offering as described in the Registration
Statement.
(l) The Company will comply with all registration, filing and
reporting requirements which may from time to time be applicable to the
Company under the Act, any applicable Blue Sky laws, the rules and
regulations of the National Association of Securities Dealers, Inc., and
any other applicable securities laws.
(m) The Company will use commercially reasonable efforts to perform
all things required or necessary to be done and performed under this
Agreement by the Company prior to the Closing Date and to satisfy all
conditions precedent to delivery of the Shares.
5. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless the Placement Agent
and each Selected Dealer and their respective employees, officers and
directors and each person (including each partner or officer thereof) who
controls the Placement Agent or a Selected Dealer within the meaning of
Section 15 of the Act from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any
of them may become subject under the Act, the Exchange Act, any applicable
Blue Sky laws or the common law or otherwise, and shall reimburse the
Placement Agent and each Selected Dealer and their respective employees and
controlling persons for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of
counsel) incurred by the respective indemnified parties in connection with
defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding which
may be brought against, the respective indemnified parties, in each case
arising out of or based upon: (i) any breach by the Company of any of the
representations, warranties or agreements of the Company contained in this
Agreement; (ii) acts or omissions of the Company or its agents or employees
in connection with the transactions contemplated hereunder (except to the
extent that such losses, claims, damages, liabilities or expenses are found
in a final judgment by a court of competent jurisdiction to have resulted
from the willful misconduct or negligence of the Placement Agent or any
other party entitled to indemnification under this Section 5(a)); or (iii)
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the omission or alleged omission
to
<PAGE> 14
Dakin Securities Corporation
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state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the indemnity agreements of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished to the Company
by or on behalf of the Placement Agent and any Selected Dealer for use in
the Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or Supplement thereto. The indemnity agreements of the
Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 1 hereof shall remain
operative and in full force and effect regardless of any investigation made
by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Shares.
(b) The Placement Agent shall indemnify and hold harmless the Company,
each of its directors and officers, and each person (including each partner
or officer thereof) who controls the Company within the meaning of Section
15 of the Act, from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Act, the Exchange Act, any applicable
Blue Sky laws or the common law or otherwise, and shall reimburse each of
them for any legal or other expenses (including, except as otherwise
hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection
with any investigation or inquiry of, or other proceeding which may be
brought against, the respective indemnified parties, in each case arising
out of or based upon: (i) the Placement Agent's use of the Registration
Statement other than for purposes of consummating the transactions
contemplated by this Agreement; (ii) the Placement Agent's release of the
Registration Statement without the prior approval of the Company; (iii) the
willful misconduct or gross negligence of the Placement Agent; and (iv) any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, in each case to the extent, but only to the extent, that such
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Placement Agent
specifically for use in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or Supplement thereto. The
indemnity agreement of the Placement Agent contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
<PAGE> 15
Dakin Securities Corporation
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investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Shares.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 5 shall, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon
its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in
such paragraphs, promptly give written notice (the "Notice") of such
service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related
and was prejudiced by the failure to give the Notice, but the omission so
to notify such indemnifying party or parties of any such service or
notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for
contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in
the defense of any action, suit or proceeding against, or investigation or
inquiry of, an indemnified party. Any indemnifying party shall be entitled,
if it so elects within a reasonable time after receipt of the Notice by
giving written notice (the "Notice of Defense") to the indemnified party,
to assume (alone or in conjunction with any other indemnifying party or
parties) the entire defense of such action, suit, investigation, inquiry or
proceeding, in which event such defense shall be conducted, at the expense
of the indemnifying party or parties, by counsel chosen by such
indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that: (i) if the
indemnified party or parties reasonably determine that there is reasonably
likely to be a conflict between the positions of the indemnifying party or
parties and of the indemnified party or parties in conducting the defense
of such action, suit, investigation, inquiry or proceeding or that there
may be legal defenses available to such indemnified party or parties
different from or in addition to those available to the indemnifying party
or parties that could not reasonably be pursued by the use of the same
counsel, then counsel for the indemnified party or parties shall be
entitled to conduct the defense to the extent reasonably determined by such
counsel to be necessary to protect the interests of the indemnified party
or parties; and (ii) in any event, the indemnified party or parties shall
be entitled to have counsel chosen by such indemnified party or parties
participate in, but not conduct, the defense. If, within a
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Dakin Securities Corporation
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reasonable time after receipt of the Notice, an indemnifying party gives a
Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a)
through (c) of this Section 5 for any legal or other expenses subsequently
incurred by the indemnified party or parties in connection with the defense
of the action, suit, investigation, inquiry or proceeding, except that: (A)
the indemnifying party or parties shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in
clause (i) of the proviso to the preceding sentence; and (B) the
indemnifying party or parties shall bear such other expense as it or they
have authorized to be incurred by the indemnified party or parties. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or parties shall be responsible for
any legal or other expenses incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding.
(d) If the indemnification provided for in this Section 5 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 5, then each indemnifying party shall,
in lieu of indemnifying such indemnified party, contribute to the amount
paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in paragraph (a) or (b) of this
Section 5 in such proportion as is appropriate to reflect not only the
relative benefits received by each indemnifying party from the Offering,
but also the relative fault of each indemnifying party in connection with
such losses, claims, damages or liabilities, or actions in respect thereof,
as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Placement Agent shall be deemed to
be in the same respective proportion as the total net proceeds from the
Offering received by the Company and the total commission received by the
Placement Agent bear to the aggregate offering price of the Shares.
Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by each indemnifying party and the parties relative
intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro
rata allocation or by any other method of allocation which does not take
into account the equitable considerations referred to in the first sentence
of this paragraph (d). The amount paid
<PAGE> 17
Dakin Securities Corporation
July ___, 1998
Page 17
by an indemnified party as a result of the losses, claims, damages or
liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection
with investigation, preparing to defend or defending against any action or
claim which is the subject of this paragraph (d). No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
Each party entitled to contribution shall upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, promptly give
written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in paragraph (c) of this Section
5).
(e) An indemnifying party shall not be liable for any settlement of
any action, suit, proceeding or claim effected without its written consent,
which consent shall not be unreasonably withheld. Neither the Company nor
the Placement Agent will, without the prior written consent of the other,
which consent will not be unreasonably withheld, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification has been
sought hereunder unless such settlement, compromise or consent includes an
unconditional release of the other party and any person who controls such
party within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act from all liability arising out of such claim, action, suit or
proceeding.
6. Termination. This Agreement and your appointment as Placement Agent in
connection with the Offering may be terminated by you at any time upon notice to
the Company or by the Company at any time upon notice to you. Such appointment
shall terminate automatically when the Offering Period has ended.
Notwithstanding the foregoing, if either you or the Company terminates this
Agreement, Sections 4(e), 4(f), 4(g), 4(h), 4(i), 5, 9, 10, 11, 12 and 13 hereof
shall remain in full force and effect; provided, however, that if this Agreement
is terminated prior to the Initial Closing, Section 4(i) shall be of no further
force or effect.
<PAGE> 18
Dakin Securities Corporation
July ___, 1998
Page 18
7. Conditions of Closing and Placement Agents Obligations. The release of
funds by the Escrow Agent and your obligation to act as Placement Agent in
connection with the Offering shall be subject to the accuracy as of each Closing
Date of the representations and warranties of the Company in this Agreement, to
the performance by the Company of its obligations in this Agreement and to the
following conditions:
(a) (i) The Shares shall have been qualified for sale in applicable
states of the United States, or an exemption from qualification shall have
been perfected or available; (ii) no stop order suspending such
qualification or prohibiting the use of the Registration Statement or
purporting to prevent the offer and sale of the Shares shall have been
issued, and no proceedings thereof or shall be pending or to the best
knowledge of the Company, threatened, by any governmental body or
authority; and (iii) the National Association of Securities Dealers, Inc.
shall have approved the terms and conditions of the Offering.
(b) On the Initial Closing Date, the Minimum Number of Shares shall
have been subscribed for and accepted by the Company in accordance with the
Registration Statement. On the Initial Closing Date, the Company and the
Placement Agent shall have delivered joint instructions to the Escrow Agent
which direct the Escrow Agent to release such funds to the Company.
(c) At each Closing Date, you shall have received such certificates,
in form and substance satisfactory to you and your counsel, as you may have
requested, from such officers of the Company as you may reasonably request,
as to: (i) the absence of any material misstatement or omission in the
statements in the Registration Statement; (ii) the absence of any material
adverse change in the business, management, financial position,
stockholders equity, or results of operations of the Company and its
subsidiaries (considered as a whole) since the date of the Registration
Statement; (iii) the accuracy as of such Closing Date of the
representations and warranties of the Company contained in Section 1 of
this Agreement; (iv) the performance by the Company of its obligations
required in this Agreement to be performed at or prior to such Closing
Date; (v) the fulfillment by the Company of the conditions to your
obligations contained in this Agreement; and (vi) such other matters as you
may reasonably request.
<PAGE> 19
Dakin Securities Corporation
July ___, 1998
Page 19
(d) At each Closing Date, there shall be addressed and delivered to
you, dated as of such Closing Date, opinions of Brobeck, Phleger & Harrison
LLP (with respect to matters involving the laws of the United States) and
Pennie & Edmonds LLP (with respect to matters involving the laws of
Intellectual Property Rights), counsel for the Company, substantially in
the forms attached hereto as Exhibits D-1 and D-2, respectively.
(e) You shall have received such opinion or opinions of Sheppard,
Mullin, Richter & Hampton LLP, counsel for you, with respect to such
matters as you may reasonably request; and the Company shall have furnished
to such counsel such documents as they may reasonably request for the
purpose of enabling them to pass upon such matters.
(f) (i) Since the date of the latest audited financial statements
included in the Registration Statement, neither the Company nor any of its
subsidiaries shall have sustained any loss or interference with its
business from fire, explosion, flood, earthquake or other calamity, whether
or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Registration Statement, and which interferes materially
with the conduct of the Company's business and operations; (ii) since the
respective date as of which information is given in the Registration
Statement, there shall not have been any material adverse change in the
general affairs, business, management, financial position, stockholders
equity, or results of operations of the Company and its subsidiaries,
otherwise than as set forth or contemplated in the Registration Statement;
and (iii) there must not have occurred any event that makes untrue or
incorrect in any material respect any statement or information contained in
the Registration Statement or that is not reflected in the Registration
Statement but should be reflected in it in order to make the statements or
information in it not misleading in any material respect.
(g) Subsequent to the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or The Nasdaq National
Market, or the fixing of maximum ranges for prices of securities on the New
York Stock Exchange or by order of the Commission or any other governmental
authority having jurisdiction; or (ii) the engagement by the United States
in hostilities which have resulted in the declaration, on or after the date
hereof, of
<PAGE> 20
Dakin Securities Corporation
July ___, 1998
Page 20
a national emergency or war, if the effect of any such event specified in
this clause (ii) in your commercially reasonable judgment is so material
and adverse as to make it impracticable or inadvisable to proceed with the
Offering or the delivery of the Shares on the terms and in the manner
contemplated in this Agreement and in the Registration Statement.
8. Effective Date of Agreement. This Agreement shall become effective
at the time this Agreement is fully executed by both parties.
9. Reimbursement of Certain Expenses. In addition to the Company's
obligations under Section 4(f) of this Agreement, the Company and the Placement
Agent agree to reimburse each other on a quarterly basis for all reasonable
legal and other expenses incurred in connection with investigating or defending
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) or (b) of Section 5 of this Agreement,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the obligations under this Section 9 and the possibility that
such payments might later be held to be improper; provided, however, that: (i)
to the extent any such payment is ultimately held to be improper, the persons
receiving such payments shall promptly refund them; and (ii) such persons shall
provide to the Company or the Placement Agent, as the case may be, upon request,
reasonable assurances of their ability to effect any refund, when and if due.
10. Persons Entitled to Benefit of Agreement. This Agreement shall inure to
the benefit of the Company, the Placement Agent and the Selected Dealers, if
any, and their respective employees, controlling persons, directors, officers,
personal representatives, successors and assigns. Nothing in this Agreement is
intended or shall be construed to give to any other person, firm or corporation
(including, without limitation, any subscriber or potential subscriber) any
legal or equitable remedy or claim under or in respect of this Agreement or any
provision herein contained.
11. Notices. All communications hereunder will be in writing and, except as
otherwise expressly provided herein, if sent to the Placement Agent, will be
mailed, delivered or telecopied and confirmed to you at Dakin Securities
Corporation, 505 Sansome Street, San Francisco, CA 94111, Attention: John H.
Dakin, Fax: (415) 288-2200, with a copy to Sheppard, Mullin, Richter & Hampton
LLP, Four Embarcadero Center, Seventeenth Floor, San Francisco, CA 94111,
Attention: A. John
<PAGE> 21
Dakin Securities Corporation
July ___, 1998
Page 21
Murphy, Jr., Esq., Fax: (415) 434-3947, or if to the Company, at Shaman
Pharmaceuticals, Inc. 213 East Grand Avenue, South San Francisco, CA 94080-4812,
Attention: Lisa A. Conte and Stephanie C. Diaz, Fax: (650) 873-8367, with a copy
to Brobeck, Phleger & Harrison LLP , Two Embarcadero Place, 2200 Geng Road, Palo
Alto, CA 94303-0913, Attention: J. Stephan Dolezalek, Esq., Fax: (650) 496-
2736.
12. Confidential Information. The Placement Agent will treat all
information which it receives from the Company in a confidential manner (other
than information that is or becomes publicly available other than as a result of
the wrongful or unlawful disclosure by the Placement Agent or its agents) and
will use the same degree of care to prevent inappropriate dissemination of such
information as it would employ in the protection and preservation of
confidential information about its own business. The Placement Agent will not:
(i) use any such confidential information other than in connection with the
Offering; and (ii) except as required by applicable law, regulation or legal
process, disclose to any third party any information received from the Company
which is confidential and is not publicly available. The Placement Agent further
agrees that monetary damages would not be an adequate remedy for breach of the
covenants contained in this paragraph and that the Company will be entitled to
injunctive relief for any such breach. If this Agreement is terminated, the
Placement Agent, upon written request of the Company, will return to the Company
all confidential information concerning the Company received by the Placement
Agent.
13. Miscellaneous. The representations and warranties contained in this
Agreement shall remain in full force and effect regardless of: (a) any
investigation made by or on behalf of the Placement Agent or controlling person
thereof, or by or on behalf of the Company or their respective directors or
officers; and (b) delivery and payment for the Shares.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California, without regard to conflict of law principles.
In the event any of the parties to this Agreement resorts to legal action
against the other in connection with this Agreement, such action shall only be
<PAGE> 22
Dakin Securities Corporation
July ___, 1998
Page 22
instituted and maintained in the courts of the City and County of San Francisco,
California; provided, however, that the Company may enforce its rights under
Section 12 hereof with respect to persons other than employees, officers and
directors of the Placement Agent in any court of competent jurisdiction. The
prevailing party shall be entitled to receive reimbursement from the
nonprevailing party for all reasonable attorneys fees and other costs incurred
in connection with such action.
<PAGE> 23
Dakin Securities Corporation
July ___, 1998
Page 23
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the Placement Agent in accordance with its terms.
Very truly yours,
SHAMAN PHARMACEUTICALS, INC.
By:
--------------------------------------------
Name: Lisa A. Conte
Title: President and Chief Executive Officer
The foregoing Agreement is accepted
as of the date first above written.
DAKIN SECURITIES CORPORATION
By:
--------------------------------------------
Name: John H. Dakin
Title: Chairman
<PAGE> 1
EXHIBIT 1.2
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of July __, 1998, is entered into by
and among Shaman Pharmaceuticals, Inc., a Delaware corporation (the "Company"),
Dakin Securities Corporation (the "Placement Agent") and U.S. Bank Trust N.A., a
national banking institution incorporated under the laws of the United States of
America (the "Escrow Agent").
WHEREAS, the Company proposes to sell a minimum of 150,000 shares
(the "Minimum Number of Shares"), up to a maximum of 200,000 shares (the
"Maximum Number of Shares") of Series C Convertible Preferred Stock, $0.001 par
value per share (the "Shares"), all as described in the Company's Registration
Statement on Form S-2 (which, together with all amendments or supplements
thereto is referred to herein as the "Registration Statement");
WHEREAS, the Shares are being offered to investors by the Placement
Agent, pursuant to a Registration Statement filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and pursuant
to registration or exemptions from registration under state securities laws;
WHEREAS, the offering of the Shares will terminate on or before
August __, 1998 (as such date may be extended by the Company and the Placement
Agent for up to an additional 30 days) (the "Closing Date"); and
WHEREAS, with respect to all subscription payments received from
subscribers, the Company desires to establish an escrow account with the Escrow
Agent at the office of its Escrow Administration, One California Street, 4th
Floor, San Francisco, California 94111, and the Escrow Agent has agreed to
establish and maintain such an account on the terms and conditions set forth in
this Agreement.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt of which is
hereby acknowledged, it is agreed as follows:
1. Establishment of Escrow. The Escrow Agent hereby agrees to
receive and disburse the proceeds from the offering of the Shares and any
interest earned thereon in accordance herewith.
2. Deposit of Escrowed Property. The Placement Agent shall from time
to time cause to be wired to or deposited with the Escrow Agent funds or checks
of the subscribers delivered in payment for Shares (the "Escrowed Property").
Such Escrowed Property shall be wired to or deposited with the Escrow Agent not
later than 12:00 noon on the date following the date on which it is received by
the Placement Agent. Any wire transfers sent and any checks delivered to the
Escrow Agent shall be made in accordance with the instructions set forth in
Exhibit A attached hereto. Any checks delivered to the Escrow Agent pursuant to
the terms hereof shall be made payable to or endorsed to the order of U.S. Bank
Trust N.A. The Escrow Agent upon receipt of such checks shall present such
checks for payment to the drawee-bank under such checks. The parties hereto
acknowledge that any check delivered to the Escrow Agent will take two days to
clear the drawee bank, and no funds shall be available for
<PAGE> 2
withdrawal until such time as any such check has cleared the drawee bank. Any
checks not honored by the drawee-bank thereunder after the first presentment for
payment shall be returned to the Company in the same manner notices are
delivered pursuant to Section 6. Upon receipt of funds or checks from the
Placement Agent, the Escrow Agent shall credit such funds and the amount of such
checks to an interest-bearing account (the "Escrow Account") held by the Escrow
Agent. If following the credit of the amount of any check to the Escrow Account
such check is dishonored, the Escrow Agent, if such dishonored check amount
shall have been invested pursuant to Section 3, shall liquidate to the extent of
such dishonored check amount such investments and debit the Escrow Account for
the amount of such dishonored check plus, if any, the amount of interest and
other income earned with respect to any investment of such dishonored check
amount.
3. Investment of Escrowed Property. The Escrow Agent on the second
business day ("business day" defined for purposes of this Escrow Agreement as
any day which is not a Saturday, a Sunday or a day on which banks or trust
companies in the City of San Francisco are authorized or obligated by law,
regulation or executive order to remain closed) succeeding (unless such deposit
is made in federal or other immediately available or "same day" funds, in which
case, on the business day next succeeding) the credit of any Subscription
Payment to the Escrow Account pursuant to Section 3 and until release of such
proceeds in accordance with the terms hereof, shall place such proceeds in a
U.S. Bank Money Market Account (the "Fund"), pursuant to Rule 15c2-4 promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. The Escrow Agent shall in no event be liable for any loss
resulting from any change in interest rates applicable to proceeds invested
pursuant to this Section. Interest on proceeds invested pursuant to this Section
shall accrue from the date of investment of such proceeds until the termination
of such investment pursuant to the terms hereof and shall be paid as set forth
in Section 6.
4. List of Subscribers. The Placement Agent shall furnish or cause
to be furnished to the Escrow Agent, at the time of each deposit of funds or
checks pursuant to Section 2, a list, substantially in the form of Exhibit B
hereto, containing the name of, the address of, the number of Shares subscribed
for by, the subscription amount delivered to the Escrow Agent on behalf of, and
the social security or taxpayer identification number, if applicable, of, each
subscriber whose funds are being deposited, and to which is attached a completed
W-9 form (or, in the case of any subscriber who is not a United States citizen
or resident, a W-8 form) for each listed subscriber. The Escrow Agent shall
notify the Placement Agent and the Company of any discrepancy between the
subscription amounts set forth on any list delivered pursuant to this Section 4
and the subscription amounts received by the Escrow Agent. The Escrow Agent is
authorized to revise such list to reflect the actual subscription amounts
received and the release of any subscription amounts pursuant to Section 5.
5. Disbursement of Funds.
(a) Initial Closing of Offering. If the Escrow Agent has
received, on or before August ___, 1998 (as such date may be extended by the
Company and the Placement Agent for up to an additional 30 days by written
notice to the Escrow Agent) (the "Initial Closing Date"): (i) Subscription
Payments for not less than the Minimum Number of Shares, (ii) the Company's
written acceptance of Subscribers who have submitted Subscription Payments with
2
<PAGE> 3
respect to not less than the Minimum Number of Shares, and (iii) written
instructions from an authorized officer of the Company and the Placement Agent
stating that all conditions of the Offering have been fulfilled, substantially
in the form attached hereto as Exhibit D (the "Closing Notice"), the Escrow
Agent shall disburse all Subscription Payments plus all interest accrued thereon
in immediately available funds (by wire transfer or such other reasonable method
of payment as requested by the Company) to the bank designated on the Closing
Notice for the account of the Company. The date on which such disbursement is
made is hereinafter referred to as the Initial Closing. The Initial Closing Date
shall not be earlier than the clearance of any funds received by the Escrow
Agent.
(b) Additional Closings. In the event that additional funds
are raised subsequent to the Initial Closing, one or more later closings may be
held until the termination of this Agreement as provided below. The Escrow Agent
shall release these additional funds to the designated bank from time to time
upon receipt of written instructions from an authorized officer of the Company
and the Placement Agent. Any additional closing date shall not be earlier than
the clearance of any funds received by the Escrow Agent relating to such
closing.
(c) Distribution at Each Closing. The Escrow Agent, after
receipt of such Closing Notice and the clearance of all funds received by the
Escrow Agent:
(i) on or prior to the Closing Date identified in such
Closing Notice, shall liquidate any investments that shall have been made
pursuant to Section 3 to the extent of the subscription amount to be
distributed pursuant to the immediately succeeding clause (ii);
(ii) on such Closing Date, pay to the Company and the
Placement Agent, in federal or other immediately available funds and
otherwise in the manner specified by the Company in such Closing Notice,
an amount equal to the aggregate of the subscription amounts paid by the
subscribers identified in such Closing Notice for the Shares to be sold on
such Closing Date as set forth on the list hold by the Escrow Agent
pursuant to Section 4; and
(iii) promptly after the fourth business day of the month
immediately following the month in which the investments made pursuant to
Section 3 were terminated pursuant to such Closing Notice, shall send, in
the manner set forth in paragraph (d) of this Section 5, a check to the
order of each subscriber identified in such Closing Notice in the amount
of interest and other income earned and not yet paid with respect to any
investment of such subscriber's funds distributed on such Closing Date. At
the time of such transfer, the Escrow Agent shall identify in writing to
the Company and the Placement Agent the amount of the interest earned for
the account of each subscriber and the date such subscription was
received.
(d) Termination of the Offering/Refund of Subscription
Payments. If the Escrow Agent has not received on or before the Initial Closing
Date Subscription Payments for the Minimum Number of Shares and shall have
received a notice, substantially in the form of Exhibit C hereto (an "Offering
Termination Notice"), from the Company, then the Escrow Agent shall release all
Subscription Payments (with interest actually earned thereon), to each
Subscriber
3
<PAGE> 4
at the address given by each Subscriber in such Subscriber's Purchase Agreement
and the Escrow Agent shall notify the Company and the Placement Agent of its
release of the Subscription Payments. All disbursements by the Escrow Agent
pursuant to this Section shall be made on the Escrow Agent's usual escrow checks
and shall be mailed by first class United States Postal Services mail, postage
pre-paid, as soon as practicable but not later than the third business day after
the Termination Date. The Company will provide all interest calculations to the
Escrow Agent, based on the interest rate for the Fund provided by the Escrow
Agent.
(e) Rejection of Subscriptions. If the Escrow Agent shall
receive, prior to receipt of the Closing Notice, written instructions from an
authorized officer of the Company and the Placement Agent, substantially in the
form attached hereto as Exhibit E hereto (a "Subscription Termination Notice"),
requesting the Escrow Agent to refund to one or more Subscribers such
Subscriber's Subscription Payment, then the Escrow Agent shall release such
Subscriber's Subscription Payment (together with interest actually accrued
thereon), to such Subscriber, at the address given by such Subscriber in such
Subscriber's Purchase Agreement. All disbursements by the Escrow Agent pursuant
to this Section shall be made in accordance with Section 5(d) above.
(f) On a date following the transfer of any interest earned
for the account of each subscriber pursuant to Section 5(a), (b), (c) or (d),
but not later than January 31, 1999, the Escrow Agent shall provide each
subscriber with tax form 1099 setting forth the amount of such interest.
(g) For the purposes of this Section 5, any check that the
Escrow Agent shall be required to send to any subscriber shall be sent to such
subscriber by first class mail, postage prepaid, at such subscriber's address
furnished to the Escrow Agent pursuant to Section 4.
6. Termination Date. This Agreement will terminate upon the first to
occur of (the "Termination Date"): (a) the failure of the Company to meet the
conditions of the Initial Closing as provided above; (b) the sale of the Maximum
Number of Shares; (c) thirty days from the Initial Closing Date; provided,
however, that the Company and the Placement Agent may extend the Offering for up
to an additional 30 days by written notice to the Escrow Agent; or (d) the date
on which written notice of termination executed by the Placement Agent and an
authorized officer of the Company is provided to the Escrow Agent and any funds
held by the Escrow Agent pursuant to this Agreement are distributed by the
Escrow Agent in accordance with the terms hereof.
7. Notices. Any notice or other communication required or permitted
to be given hereunder shall be in writing and shall be (a) delivered by hand or
(b) sent by mail, registered or certified, with proper postage prepaid, and
addressed as follows:
if to the Company, to:
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, California 94080
Attention: Lisa A. Conte
4
<PAGE> 5
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, California 94303
Attention: J. Stephan Dolezalek, Esq.
if to the Placement Agent, to:
Dakin Securities Corporation
505 Sansome Street
San Francisco, CA 94111
Attention: Mr. John H. Dakin
with a copy to:
Sheppard, Mullin, Richter & Hampton LLP
Four Embarcadero Center, Suite 1700
San Francisco, California 94111
Attention: A. John Murphy, Esq.
if to the Escrow Agent, to:
U.S. Bank Trust N.A.
Escrow Administration
One California Street, 4th Floor
San Francisco, California 94111
Attention: Carol Andreacchi
or to such other address as the person to whom notice is to be given may have
previously furnished to the others in the above referenced manner. All such
notices and communications, if mailed, shall be effective when deposited in the
mails, except that notices and communications to the Escrow Agent and notices of
changes of address shall not be effective until received.
8. Concerning the Escrow Agent. To induce the Escrow Agent to act
hereunder, it is further agreed by the Company and Placement Agent that:
(a) The Escrow Agent shall not be under any duty to give the
Escrowed Property held by it hereunder any greater degree of care than it gives
its own similar property and shall not be required to invest any funds hold
hereunder except as directed in this Escrow Agreement. Uninvested funds held
hereunder shall not earn or accrue interest.
(b) This Escrow Agreement expressly sets forth all the duties
of the Escrow Agent with respect to any and all matters pertinent hereto. No
implied duties or obligations shall be read into this Escrow Agreement against
the Escrow Agent. The Escrow Agent shall not be bound by the provisions of any
agreement among the other parties hereto except this Escrow Agreement.
5
<PAGE> 6
(c) The Escrow Agent shall not be liable, except for its own
negligence or willful misconduct, and, except with respect to claims based upon
such negligence or willful misconduct that are successfully asserted against the
Escrow Agent, the other parties hereto shall jointly and severally indemnify and
hold harmless the Escrow Agent (and any successor Escrow Agent) from and against
any and all losses, liabilities, claims, actions, damages and expenses,
including reasonable attorneys, fees and disbursements, arising out of and in
connection with this Escrow Agreement. Without limiting the foregoing, the
Escrow Agent shall in no event be liable in connection with its investment or
reinvestment of any cash held by it hereunder in good faith, in accordance with
the terms hereof, including without limitation any liability for any delays (not
resulting from gross negligence or willful misconduct) in the investment or
reinvestment of the Escrowed Property, or any loss of interest incident to any
such delays.
(d) The Escrow Agent shall be entitled to rely upon any order,
judgment, certification, demand, notice, instrument or other writing delivered
to it hereunder without being required to determine the authenticity or the
correctness of any fact stated therein or the propriety or validity of the
service thereof. The Escrow Agent may act in reliance upon any instrument or
signature believed by it in good faith to be genuine and may assume, if in good
faith, that any person purporting to give notice or receipt or advice or make
any statement or execute any document in connection with the provisions hereof
has been duly authorized to do so.
(e) The Escrow Agent may act pursuant to the advice of counsel
with respect to any matter relating to this Escrow Agreement and shall not be
liable for any action taken or omitted in good faith and in accordance with such
advice.
(f) The Escrow Agent does not have any interest in the
Escrowed Property deposited hereunder but is serving as escrow holder only. Any
payments of income from the Escrow Account shall be subject to withholding
regulations then in force with respect to United States taxes. The parties
hereto will provide the Escrow Agent with appropriate W-9 forms for taxpayer
identification number certification or non-resident alien certifications.
This paragraph (f) and paragraph (c) of this Section 8 shall survive
notwithstanding any termination of this Escrow Agreement or the resignation of
the Escrow Agent.
(g) The Escrow Agent makes no representation as to the
validity, value, genuineness or the collectibility of any security or other
documents or instrument held by or delivered to it.
(h) The Escrow Agent shall not be called upon to advise any
party as to the wisdom in selling or retaining or taking or refraining from any
action with respect to any securities or other property deposited hereunder.
(i) The Escrow Agent (and any successor escrow agent) at any
time may be discharged from its duties and obligations hereunder by the delivery
to it of notice of termination signed by both the Company and the Placement
Agent or at any time may resign by giving written notice to such effect to the
Company and the Placement Agent. Upon any such termination or resignation, the
Escrow Agent shall deliver the Escrowed Property to any successor escrow agent
jointly designated by the other parties hereto in writing, or to any court
6
<PAGE> 7
of competent jurisdiction if no such successor escrow agent is agreed upon,
whereupon the Escrow Agent shall be discharged of and from any and all further
obligations arising in connection with this Escrow Agreement. The termination or
resignation of the Escrow Agent shall take effect on the earlier of (i) the
appointment of a successor (including a court of competent Jurisdiction) or (ii)
the day that is 30 days after the date of delivery: (A) to the Escrow Agent of
the other parties' notice of termination or (B) to the other parties hereto of
the Escrow Agent's written notice of resignation. If at that time the Escrow
Agent has not received a designation of a successor escrow agent, the Escrow
Agent's sole responsibility after that time shall be to keep the Escrowed
Property safe until receipt of a designation of successor escrow agent or a
joint written disposition instruction by the other parties hereto or any
enforceable order of a court of competent jurisdiction.
(j) The Escrow Agent shall have no responsibility for the
contents of any writing of any third party contemplated herein as a means to
resolve disputes and may rely without any liability upon the contents thereof.
(k) In the event of any disagreement among or between the
other parties hereto and/or the subscribers of the Shares resulting in adverse
claims or demands being made in connection with the Escrowed Property, or in the
event that the Escrow Agent in good faith is in doubt as to what action it
should take hereunder, the Escrow Agent shall be entitled to retain the Escrowed
Property until the Escrow Agent shall have received (i) a final and
non-appealable order of a court of competent jurisdiction directing delivery of
the Escrowed Property or (ii) a written agreement executed by the other parties
hereto and consented to by the subscribers directing delivery of the Escrowed
Property, in which event the Escrow Agent shall disburse the Escrowed Property
in accordance with such order or agreement. Any court order referred to in (i)
above shall be accompanied by a legal opinion by counsel for the presenting
party satisfactory to the Escrow Agent to the effect that said court order is
final and non-appealable. The Escrow Agent shall act on such court order and
legal opinion without further question.
(l) As consideration for its agreement to act as Escrow Agent
as herein described, the other parties hereto, jointly and severally, agree to
pay the Escrow Agent fees determined in accordance with the terms set forth on
Exhibit F hereto (made a part of this Escrow Agreement as if herein set forth).
In addition, the other parties hereto, jointly and severally, agree to reimburse
the Escrow Agent for all reasonable expenses, disbursements and advances
incurred or made by the Escrow Agent in performance of its duties hereunder
(including reasonable fees, expenses and disbursements of its Counsel).
(m) The other parties hereto irrevocably (i) submit to the
jurisdiction of any California State or federal court sitting in the City of San
Francisco in any action or proceeding arising out of or relating to this Escrow
Agreement, (ii) agree that all claims with respect to such action or proceeding
shall be heard and determined in such California State or federal court and
(iii) waive, to the fullest extent possible, the defense of an inconvenient
forum. The other parties hereby consent to and grant any such court jurisdiction
over the persons of such parties and over the subject matter of any such dispute
and agree that delivery or mailing of process or other papers in connection with
any such action or proceeding in the manner provided hereinabove, or in such
other manner as may be permitted by law, shall be valid and sufficient service
thereof.
7
<PAGE> 8
(n) No printed or other matter in any language (including,
without limitation, the Registration Statement, notices, reports and promotional
material) which mentions the Escrow Agent's name or the rights, powers, or
duties of the Escrow Agent shall be issued by the other parties hereto or on
such parties' behalf unless the Escrow Agent shall first have given its specific
written consent thereto. The Escrow Agent hereby consents to the use of its name
and the reference to the escrow arrangement in the Registration Statement.
9. Miscellaneous.
(a) This Escrow Agreement shall be binding upon and inure
solely to the benefit of the parties hereto and their respective successors and
assigns, heirs, administrators and representatives, and the subscribers of the
Shares, and shall not be enforceable by or inure to the benefit of any other
third party except as provided in paragraph (i) of Section 8 with respect to the
termination of, or resignation by, the Escrow Agent. No party may assign any of
its rights or obligations under this Escrow Agreement without the written
consent of the other parties.
(b) This Escrow Agreement shall be construed in accordance
with and governed by the internal law of the State of California (without
reference to its rules as to conflicts of law).
(c) This Escrow Agreement may only be modified by a writing
signed by all of the parties hereto and consented to by the subscribers of the
Shares adversely affected by such modifications. No waiver hereunder shall be
effective unless in a writing signed by the party to be charged.
(d) This Escrow Agreement shall terminate upon the payment
pursuant to Section 5 of all amounts held in the Escrow Account.
(e) The section headings herein are for convenience only and
shall not affect the construction thereof. unless otherwise indicated,
references to Sections are to Sections contained herein.
(f) This Escrow Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
[remainder of page intentionally blank]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be executed as of the day and year first above written.
SHAMAN PHARMACEUTICALS, INC.
By:
--------------------------------------------
Name:
Title:
DAKIN SECURITIES CORPORATION
By:
--------------------------------------------
Name:
Title:
U.S. BANK TRUST N.A.
By:
--------------------------------------------
Name:
Title:
[SIGNATURE PAGE TO ESCROW AGREEMENT]
<PAGE> 10
EXHIBIT A
Transfer Instructions
A-1
<PAGE> 11
EXHIBIT B
SUMMARY OF CASH RECEIVED
NEW PARTICIPANT DEPOSIT
Date: ______________________
Deposit Date: List Number: ______________________
Investment Date: Page ___ of ___
Batch Number: Approved By: ______________________
JOB#: ______________________
For Bank use only
Title: ________________
<TABLE>
<CAPTION>
NUMBER OF TAX ID NO./
NAME DEPOSIT SHARES ADDRESS SOC. SEC. NO.
- --------------------- ---------- --------- --------------- -------------
<S> <C> <C> <C> <C>
- --------------------- ---------- --------- --------------- -------------
- --------------------- ---------- --------- --------------- -------------
- --------------------- ---------- --------- --------------- -------------
- --------------------- ---------- --------- --------------- -------------
</TABLE>
B-1
<PAGE> 12
EXHIBIT C
Form of Offering Termination Notice
U.S. Bank Trust N.A.
Escrow Administration
One California Street, 4th Floor
San Francisco, CA 94111
Attention: Carol Andreacchi
Dear Ms. Andreacchi:
Pursuant to Section 5(d) of the Escrow Agreement dated as of July
__, 1998 (the "Escrow Agreement") among Shaman Pharmaceuticals, Inc. (the
"Company"), Dakin Securities Corporation and you, the Company hereby notifies
you of the termination of the offering of the Shares (as that term is defined in
the Escrow Agreement) and directs you to make payments to subscribers as
provided for in Section 5(d) of the Escrow Agreement.
Very truly yours,
SHAMAN PHARMACEUTICALS, INC.
By:
--------------------------------------
Name:
Title:
C-1
<PAGE> 13
EXHIBIT D
Form of Closing Notice
____________ __, 1998
U.S. Bank Trust N.A.
Escrow Administration
One California Street, 4th Floor
San Francisco, CA 94111
Attention: Carol Andreacchi
Dear Ms. Andreacchi:
Pursuant to Section 5(a) of the Escrow Agreement dated as of July
__, 1998 (the "Escrow Agreement") among Shaman Pharmaceuticals, Inc. (the
"Company"), Dakin Securities Corporation and you, the Company hereby certifies
that it has received subscriptions for the Shares (as that term is defined in
the Escrow Agreement) and the Company will sell and deliver Shares to the
subscribers thereof at a closing to be held on August __, 1998 (the "Closing
Date"). The names of the subscribers concerned, the number of Shares subscribed
for by each of such subscribers and the related subscription amounts are set
forth on Schedule I annexed hereto.
We hereby request that the aggregate subscription amount be paid to
the Placement Agent and us as follows:
1. To the Company, $________;
2. To Dakin Securities Corporation, $____________; and
3. To the Escrow Agent, $____________.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, and all of which together shall
constitute one and the same instrument.
Very truly yours,
SHAMAN PHARMACEUTICALS, INC.
By:
--------------------------------------
Name:
Title:
DAKIN SECURITIES CORPORATION
By:
--------------------------------------
Name:
Title:
D-1
<PAGE> 14
EXHIBIT E - SCHEDULE I
SCHEDULE I
<TABLE>
<CAPTION>
NAME OF SUBSCRIBER NUMBER OF SHARES SUBSCRIPTION AMOUNT
- ------------------ ---------------- -------------------
<S> <C> <C>
</TABLE>
<PAGE> 15
EXHIBIT E
Form of Subscription Termination Notice
U.S. Bank Trust N.A.
Escrow Administration
One California Street, 4th Floor
San Francisco, CA 94111
Attention: Carol Andreacchi
Dear Ms. Andreacchi:
Pursuant to Section 5(e) of the Escrow Agreement dated as of July
__, 1998 (the "Escrow Agreement") among Shaman Pharmaceuticals, Inc. (the
"Company"), Dakin Securities Corporation and you, the Company hereby notifies
you that the following subscription(s) have been rejected:
<TABLE>
<CAPTION>
AMOUNT OF SUBSCRIBED AMOUNT OF
NAME OF SUBSCRIBERS SHARES REJECTED REJECTED SUBSCRIPTION
------------------- -------------------- ----------------------
<S> <C> <C>
$ $
</TABLE>
Very truly yours,
SHAMAN PHARMACEUTICALS, INC.
By:
--------------------------------------
Name:
Title:
E-1
<PAGE> 16
EXHIBIT F
F-1
<PAGE> 1
EXHIBIT 3.4
SHAMAN PHARMACEUTICALS, INC.
CERTIFICATE OF DESIGNATION
OF PREFERENCES OF
SERIES C CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
--------------
Shaman Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"),
in accordance with the provisions of Section 103 of the General Corporation Law
of the State of Delaware DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of the
Corporation (the "Board of Directors" or the "Board") by paragraph (B) of
Article IV of the Corporation's Amended and Restated Certificate of
Incorporation (the "Certificate"), the Board of Directors of the Corporation on
July ___, 1998 adopted the following resolutions creating a series of preferred
stock designated as "Series C Convertible Preferred Stock":
WHEREAS, the Certificate provides for a class of shares known as Preferred
Stock, issuable from time to time in one or more series; and
WHEREAS, the Board of Directors of the Corporation is authorized by the
Certificate to determine the powers, rights, preferences, qualifications,
limitations and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock, to fix the number of shares constituting any such
series, and to determine the designation thereof, or any of them;
WHEREAS, the Board of Directors of the Corporation desires, pursuant to its
authority as aforesaid, to determine and fix the powers, rights, preferences,
qualifications, limitations and restrictions relating to series of Preferred
Stock and the number of shares constituting, and the designation of, each such
series:
NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority vested in
the Board of Directors of the Corporation in accordance with the provisions of
the Certificate, the Board of Directors does hereby create a series of Preferred
Stock, par value $0.001 per share (hereinafter called the "Preferred Stock"), of
the Corporation, and the Board of Directors hereby fixes and determines the
designation of, the number of shares constituting, and the rights, preferences,
privileges and restrictions relating to, such series of Preferred Stock as
follows:
<PAGE> 2
SERIES C CONVERTIBLE PREFERRED STOCK
SECTION 1. CERTAIN DEFINED TERMS. (a) All the agreements or instruments
defined in this Certificate of Designation shall mean such agreements or
instruments as the same may from time to time be supplemented or amended or the
terms thereof waived or modified to the extent permitted by, and in accordance
with, the terms thereof and of this Certificate of Designation.
(b) The following terms shall have the following meanings (such meanings to
be equally applicable to both the singular and plural forms of the terms
defined):
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or under common control with the subject Person. For purposes of
the term "Affiliate," the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in the City of San Francisco are authorized or required
by law to remain closed.
"Common Stock" means the Common Stock, $0.001 par value per share, of the
Corporation or any shares of capital stock into which such stock shall be
changed or reclassified after the Initial Issuance Date.
"Conversion Date" means (i) the date on which a conversion notice is
actually received by the Transfer Agent, whether by mail, courier, personal
service, telephone line facsimile transmission or other means, in case of a
conversion of shares of Series C Preferred Stock pursuant to Section 7(a) or
(ii) the fourth anniversary of the Initial Issuance Date, in the case of a
conversion of shares of Series C Preferred Stock pursuant to Section 7(b).
"Conversion Price" means an amount equal to 85% of the average Closing
Price of the Common Stock for the ten Trading Day period ending three Trading
Days prior to the Conversion Date.
"Initial Issuance Date" means the first date of original issuance of any
shares of Series C Preferred Stock.
"Nasdaq" means The Nasdaq National Market or The Nasdaq SmallCap Market,
whichever system lists the Common Stock.
2
<PAGE> 3
"Person" means an individual, partnership, corporation, limited liability
company, trust, incorporated organization, unincorporated association, joint
stock company, government, governmental agency or political subdivision.
"Series A Preferred Stock" shall mean the Company's Series A Preferred
Stock, par value $0.001 per share.
"Series B Preferred Stock" shall mean the Company's Series B Custom
Convertible Preferred Stock, par value $0.001 per share.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) Nasdaq or (z) such other securities market, which at the time
constitutes the principal securities market for the Common Stock, is open for
general trading of securities.
"Transfer Agent" means Boston EquiServe Limited Partnership, as Servicing
Agent for BankBoston, N.A., or its duly appointed successor who shall be serving
as transfer agent and registrar for the Common Stock and who shall have been
authorized by the Corporation to act as conversion agent for the Series C
Preferred Stock.
SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series C Convertible Preferred Stock", and the number of shares
constituting the Series C Preferred Stock shall be 200,000.
SECTION 3. RANK. The shares of Series C Preferred Stock shall rank junior
to the Series B Preferred Stock but senior to the Series A Preferred Stock and
the Common Stock and any shares of any other series of Preferred Stock or any
shares of any other class of preferred stock of the Corporation, now or
hereafter issued, as to payment of dividends and distribution of assets upon
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of Series C
Preferred Stock shall be entitled to receive, when, as, and if declared by the
Board of Directors out of funds legally available for such purpose, dividends
paid semi-annually on May 31 and November 30 of each year to the holders of
record of such shares on March 31 and September 30 of such year as follows: (i)
a stock-on-stock dividend of $10.00 per annum, paid in arrears, in shares of
Common Stock (valued at 85% of the average closing price of the Common Stock for
the ten Trading Day period ending three Trading Days prior to the date on which
the dividend is paid); plus (ii) a cash amount equaling 0.00005% of the
Company's United States net sales, if any, for the preceding two calendar
quarters of its SP-303/Provir product for the treatment of diarrhea less $5.00
(the value of the semi-annual stock dividend). Dividends on the shares of Series
C Preferred Stock shall be cumulative. If under Delaware law, the Company is
unable to pay the cash amount of the dividends, then this portion of the
dividends shall be payable in shares of Common Stock (valued at 85% of the
average closing price of the Common Stock for the ten Trading Day period ending
three Trading Days prior to the date on which the dividend is paid).
SECTION 5. LIQUIDATION PREFERENCE.
(A) In the event of a liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, the holders of Series C Preferred
Stock shall be
3
<PAGE> 4
entitled to receive, prior and in preference to any distribution to the holders
of the Series A Preferred Stock or Common Stock, out of the assets of the
Corporation, whether such assets constitute stated capital or surplus of any
nature, an amount per share of Series C Preferred Stock equal to $100.00 plus
any accrued and unpaid dividends, and no more. In the event that the assets of
the Corporation are insufficient to make the foregoing distribution, then the
entire assets of the Corporation available for distribution shall be distributed
ratably among the holders of the Series C Preferred Stock and any stock on
parity with the Series C Preferred Stock with respect to liquidation rights in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
liquidation price of the shares of the Series C Preferred Stock and any stock on
parity with the Series C Preferred Stock with respect to liquidation rights, the
holders of such shares shall not be entitled to any further participation in any
distribution of assets by the Corporation.
(B) For purposes of this Section 5, (i) any acquisition of the Corporation
by means of merger or other form of corporate reorganization in which
outstanding shares of the Corporation are exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring corporation or
its subsidiary (other than a mere reincorporation transaction) or (ii) a sale of
all or substantially all of the assets of the Corporation or (iii) any other
transaction or series of related transactions by the Corporation in which in
excess of 50% of the Corporation's voting power is transferred, shall be treated
as a liquidation, dissolution or winding up of the Corporation and shall entitle
the holders of Series C Preferred Stock to receive at the closing thereof the
amount as specified in Section 5(a) above.
SECTION 6. REDEMPTION. The Series C Preferred Stock is not redeemable.
SECTION 7. CONVERSION.
(A) CONVERSION AT OPTION OF HOLDER. Commencing twelve (12) months after the
Initial Issuance Date, the holders of the Series C Preferred Stock may convert
at any time all or from time to time any part of their outstanding shares of
Series C Preferred Stock into that number of fully paid and nonassessable shares
of Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) as equals the greater of (i) 16.6667 shares of Common Stock or (ii) such
number of shares of Common Stock as equals $100.00 divided by the Conversion
Price on the applicable Conversion Date.
(B) MANDATORY CONVERSION. Each share of Series C Preferred Stock shall
automatically converted, on the fourth anniversary of the Initial Issuance Date,
into that number of fully paid and nonassessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) as equals
the greater of (i) 16.6667 shares of Common Stock or (ii) such number of shares
of Common Stock as equals $100.00 divided by the Conversion Price on the
applicable Conversion Date.
(C) MECHANICS OF CONVERSION. Before any holder of Series C Preferred Stock
shall be entitled to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Transfer
4
<PAGE> 5
Agent, and shall give written notice by mail, postage prepaid, or by facsimile,
confirmed by mail, to the Transfer Agent at its principal corporate office, of
the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. This Corporation shall, as soon as practicable thereafter, issue and
deliver or cause to be issued and delivered to such holder of the Series C
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
Series A Preferred Stock to be converted, or in the case of automatic conversion
pursuant to Section 7(b), on the Conversion Date, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date.
(D) ADJUSTMENTS TO CONVERSION RATIO FOR STOCK DIVIDENDS AND FOR
COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this Corporation
at any time or from time to time after the purchase date of the Series C
Preferred shall declare or pay, without consideration, any dividend on the
Common Stock payable in Common Stock or in any right to acquire Common Stock for
no consideration, or shall effect a subdivision of the outstanding shares of
Common Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the number of
shares of Common Stock into which the Series C Preferred Stock can or shall be
converted, to the extent such number is determined under either Section 7(a)(i)
or Section 7(b)(i), shall be proportionately decreased or increased, as
appropriate. In the event that this Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
(E) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common
Stock issuable upon conversion of the Series C Preferred Stock shall be changed
into the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares provided for in Section 7(d) above
or a merger or other reorganization referred to in Section 5(b) above), the
number of shares of such other class or classes of stock into which the Series C
Preferred Stock shall be convertible shall, concurrently with the effectiveness
of such reorganization or reclassification, be proportionately adjusted so that
the Series C Preferred Stock shall be convertible into, in lieu of the number of
shares of Common Stock which the holders would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock equivalent
to the number of shares of Common Stock that would have been subject to receipt
by the holders upon conversion of the Series C Preferred Stock immediately
before that change.
5
<PAGE> 6
(F) NO IMPAIRMENT. This Corporation will not, by amendment of its
Certificate or through any reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by this Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 7 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series C Preferred Stock against impairment.
(G) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of the Series
C Preferred Stock, but, in lieu of any fraction of a share of Common Stock which
would otherwise be issuable in respect of the aggregate number of shares of
Series C Preferred Stock surrendered for conversion at one time by the same
holder, the Corporation shall pay in cash to such holder at the time of issuance
of shares of Common Stock in connection with such conversion an amount equal to
the product of (i) an amount equal to the average closing price of a share of
Common Stock for the 10 Trading Day period ending three Trading Days prior to
the Conversion Date times (ii) such fraction of a share of Common Stock. Whether
or not fractional shares are issuable upon such conversion shall be determined
on the basis of the total number of Series C Preferred Stock the holder is at
the time converting into Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of the
number of shares of Common Stock into which the Series C Preferred Stock can be
converted pursuant to this Section 7, this Corporation, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and, upon the written request at any time of any holder of Series C
Preferred Stock, prepare and furnish to such holder of Series C Preferred Stock
a certificate setting forth (A) such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based, (B) the
conversion ratio at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of the Series C Preferred Stock.
(H) NOTICES OF RECORD DATE. In the event of any taking by this Corporation
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 (other
than a cash dividend) or other distribution, 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, this Corporation shall
mail to each holder of Series C Preferred Stock, at least twenty (20) days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
6
<PAGE> 7
(I) RESERVATION OF STOCK ISSUABLE UPON CONVERSION AND UPON ISSUANCE OF
STOCK-FOR-STOCK DIVIDENDS. This Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock solely for
the purpose of (i) effecting the conversion of the Series C Preferred Stock and
(ii) of effecting the issuance of any shares of Common Stock issuable upon any
stock-for-stock dividend declared on the Series C Preferred Stock, such number
of its shares of Common Stock as shall from time to time be sufficient to (a)
effect the conversion of all outstanding shares of the Series C Preferred Stock
and (b) to effect the issuance of any shares of Common Stock issuable upon any
stock-for-stock dividend declared on the Series C Preferred Stock, and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to (x) effect the conversion of all the then outstanding Series C
Preferred Stock or (y) to effect the issuance of any shares of Common Stock
issuable upon any stock-for-stock dividend declared on the Series C Preferred
Stock, than in addition to such other remedies as shall be available to the
holder of such Series C Preferred Stock, this Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
(J) NOTICES. Any notice required by the provisions of this Section 7 to be
given to the holders of Series C Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of this Corporation.
SECTION 8. VOTING RIGHTS. Except as otherwise required by law or expressly
provided herein, each share of Series C Preferred Stock shall have voting rights
and powers equal to the voting rights and powers of the Common Stock (except as
otherwise expressly provided herein or as required by law, voting together with
the Common Stock as a single class) and shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation.
Fractional votes shall not, however, be permitted and any fractional voting
rights resulting from the above formula (after aggregating all shares into which
shares of Series C Preferred Stock held by each holder could be converted) shall
be rounded to the nearest whole number (with one-half being rounded upward).
Each share of Series C Preferred Stock shall be entitled (i) during the first
year after the issuance thereof to one vote for each six shares held and (ii)
thereafter, to one vote for each share of Common Stock into which such share of
Series C Preferred Stock is convertible on the record date for the matter to be
voted upon.
SECTION 9. REPLACEMENT OF CERTIFICATES. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series C
Preferred Stock and (1) in the case of loss, theft or destruction, of indemnity
from the record holder of the certificate for such shares of Series C Preferred
Stock reasonably satisfactory in form to the Corporation (and without the
requirement to post any bond or other security) or (2) in the case of
mutilation, upon surrender and cancellation of the certificate for such shares
of Series C Preferred Stock, the Corporation will execute and deliver to such
holder a new certificate for such shares of Series C Preferred Stock without
charge to such holder.
SECTION 10. STATUS OF CONVERTED OR REPURCHASED STOCK. In the event any
Series C Preferred Stock shall be converted pursuant to Section 7 hereof or
acquired by the Corporation, the shares so converted or acquired shall be
promptly canceled after the conversion thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new
7
<PAGE> 8
series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors, subject to the conditions and restrictions on issuance set
forth herein.
* * *
RESOLVED FURTHER, that the Chairman of the Board, the Chief Executive
Officer, the President or any Vice President, and the Secretary, the Chief
Financial Officer, the Treasurer, or any Assistant Secretary or Assistant
Treasurer of this Corporation are each authorized to execute, verify, and file a
Certificate of Designation of Preferences in accordance with Delaware law.
8
<PAGE> 9
IN WITNESS WHEREOF, Shaman Pharmaceuticals, Inc. has caused this
certificate to be signed by one of its officers thereunto duly authorized as of
the ___ day of ____________, 1998.
SHAMAN PHARMACEUTICALS, INC.
By:
----------------------------------
Name:
Title:
9
<PAGE> 1
EXHIBIT 5.1
[Letterhead of Brobeck, Phleger & Harrison LLP]
July 27, 1998
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, CA 94080
Ladies and Gentlemen:
We have acted as counsel to Shaman Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), in connection with the registration of up to Two
Hundred Thousand (200,000) shares of the Company's Common Stock (the "Shares"),
as described in the Company's Registration Statement on Form S-2 filed with the
Securities and Exchange Commission on July 14, 1998 under the Securities Act of
1933, as amended (the "Registration Statement").
This opinion is being furnished in accordance with the requirements
of Item 16 of Form S-2 and Item 601(b)(5)(i) of Regulation S-K.
We have examined originals or copies of (i) the Amended and Restated
Certificate of Incorporation of the Company; (ii) the Bylaws of the Company;
(iii) the Certificate of Designation of Series C Convertible Preferred Stock,
(iv) certain resolutions of the Board of Directors of the Company; and (v) such
other documents and records as we have deemed necessary and relevant for the
purposes hereof. In addition, we have relied on certificates of officers of the
Company and certificates of public officials as to certain matters of fact
relating to this opinion and have made such investigations of law as we have
deemed necessary and relevant as a basis hereof.
We have assumed the genuineness of all signatures, the authenticity
of all documents, certificates and records submitted to us as originals, the
conformity to authentic original documents, certificates and records of all such
documentation submitted to us as copies and the truthfulness of all statements
of facts contained therein. Based on the foregoing and subject to the
limitations set forth herein and having due regard for such legal considerations
as we deem relevant, we are of the opinion that the Shares, when issued and sold
in the manner described in the Registration Statement, will be validly issued,
fully paid and nonassessable shares of the Common Stock.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
<PAGE> 2
The foregoing opinion is based on and limited to the General
Corporation Law of the State of Delaware and the relevant federal laws of the
United States, and we express no opinion with respect to the laws of any other
jurisdiction.
This opinion letter is rendered as of the date first written above
and we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 10.57B
[SHAMAN PHARMACEUTICALS, INC. LETTERHEAD]
July 16, 1998
Ms. Robin Barnato
Director of Corporate Finance
GATX Capital
Four Embarcadero Center
Suite 2200
San Francisco, CA 94111
Dear Ms. Barnato:
Shaman Pharmaceuticals, Inc. has filed a Registration Statement seeking to
raise $16 million of new equity capital. As part of this offering, investors
will receive a royalty on certain product sales in the form of a dividend. A
copy of the Registration Statement is attached.
Pursuant to the Loan and Security Agreement between Shaman Pharmaceuticals,
Inc. (the "Borrower") and MMC/GATX Partnership No. I (the "Partnership") dated
May 7, 1997, any payment of dividends requires the approval of MMC/GATX. By this
letter, we are formally requesting approval from MMC/GATX for payment of the
dividends on the proposed Series C Preferred Stock financing. Should MMC/GATX
approve such payment of dividends, please sign and return one copy of the letter
of my attention.
Thank you for your consideration.
Sincerely,
/s/ Lisa A. Conte
--------------------------------
Lisa A. Conte
President and CEO
Approval:
/s/ Brent R. Lindberg
- ----------------------------
By: Brent R.. Lindberg
Title: Vice President
Date: 27 July 1998
cc: Jim Mitchell, Meier Mitchell & Co.
<PAGE> 1
EXHIBIT 12.1
SHAMAN PHARMACEUTICALS, INC.
STATEMENT REGARDING COMPUTATION OF RATIOS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------------------------------- ---------------------
1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest expense 4,694 155 25 0 0 735 26
Portion of rental expense
representative of interest 453 583 644 804 415 102 104
--------- --------- --------- -------- --------- --------- ---------
Fixed charges 5,147 738 669 804 415 837 130
EARNINGS:
Loss from continuing operations (29,288) (18,790) (18,004) (19,481) (13,027) (8,489) (5,981)
Interest 4,694 155 25 0 0 735 26
Portion of rental expense
representative of interest 453 583 644 804 415 102 104
--------- --------- --------- -------- --------- --------- ---------
Earnings (24,141) (18,052) (17,335) (18,677) (12,612) (7,652) (5,851)
Ratio of earnings to fixed
charges and preferred
stock dividends(1) -- -- -- -- -- -- --
========= ======== ======== ======== ======== ========= ========
</TABLE>
(1) For the years ended December 31, 1997, 1996, 1995, 1994 and 1993, the
Company's historical earnings were insufficient to cover fixed charges by
$29.3 million, $18.8 million, $18.0 million, $19.5 million and $13.0
million, respectively. For the three months ended March 31, 1998 and 1997,
the Company's historical earnings were insufficient to cover fixed charges
by $8.5 million and $6.0 million, respectively.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-2) and related prospectus of Shaman
Pharmaceuticals, Inc. for the registration of 150,000 shares to 200,000 shares
of its Series C Preferred Stock and to the incorporation by reference therein of
our report dated January 29, 1998, with respect to the financial statements of
Shaman Pharmaceuticals, Inc. included in its Annual Report (Form 10-K/A) for the
year ended December 31, 1997, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
July 27, 1998
Palo Alto, California
