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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NO. 0-21022
SHAMAN PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3095806
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
213 EAST GRAND AVENUE, SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 650-952-7070
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing sales price of the Common Stock on the
Nasdaq National Market on February 27, 1998 was $86,810,345.*
The number of shares of the Registrant's Common Stock outstanding was
17,856,477 as of February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the Company's 1998
Annual Meeting are incorporated herein by reference into Part III of this
Report.
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* Excludes 494,408 shares of the Registrant's Common Stock held by executive
officers, directors and affiliated parties at February 27, 1998. Exclusion of
such shares should not be construed to indicate that any such person possesses
the power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant or that such person is controlled by
or under common control with the Registrant.
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PART I
ITEM 1. BUSINESS
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties that are described more fully in "Item 1 -- Risk Factors."
While this outlook represents our current judgment on the future direction of
the business, these risks and uncertainties are only some of the factors that
may ultimately affect the success of Shaman Pharmaceuticals, Inc. Actual results
may differ materially from any future performance suggested in this report.
THE COMPANY
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops novel pharmaceutical products for the treatment of human diseases
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 will be quicker
and more likely to lead to safe and effective pharmaceuticals. Shaman has human
clinical trials underway for its three lead product candidates: Provir,
nikkomycin Z, and SP-134101. Shaman has completed Phase II trials showing
efficacy for Provir for the treatment of AIDS-associated and watery diarrhea. In
the first quarter of 1998, Provir is scheduled to enter a pivotal Phase III
trial for the treatment of diarrhea in patients with AIDS. This single study,
upon completion, is intended to serve as the basis for the submission of a New
Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA").
With success, Provir for diarrhea in patients with AIDS will become the first
product commercialized by Shaman. Two additional dose-optimizing Phase II trials
for Provir in watery diarrhea commenced in 1997. These trials are intended to be
completed in the first half of 1998 and, if successful, will lead to Phase III
trials.
Nikkomycin Z, an orally-active product for the treatment of endemic mycoses
and other systemic fungal infections, completed a Phase I trial in the UK in
1997, and the Company filed an Investigational New Drug application ("IND") in
the United States in December 1997. The Company intends to continue multi-dose
Phase I testing of this compound.
Shaman's research and preclinical development is principally focused on the
identification and optimization of compounds to treat Type II (adult onset or
non-insulin dependent) diabetes, an effort that has led to the identification of
21 chemically distinct, orally-active compounds which have demonstrated glucose
lowering effects in preclinical animal testing. In October 1997, Shaman filed an
IND for SP-134101, an oral product for the treatment of Type II diabetes. This
first product to emerge from the diabetes discovery program entered clinical
trials in January 1998. Significant funding, as well as milestone payments for
this program, are provided through collaborations with Lipha, s.a., a
wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany ("Lipha/Merck"), and
Ono Pharmaceutical Co., Ltd. ("Ono").
BACKGROUND
Shaman builds on the knowledge and expertise of ethnobotanist and physician
teams who work with traditional healers to identify effective treatments for 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, including 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
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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 STRATEGY
Shaman's strategy is to employ a drug discovery process focused on diseases
that:
O 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;
O 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
O allow the plant extract treatment to be confirmed in a whole animal model
and then purified to isolate the active compound.
Shaman believes this drug discovery process provides it with the
opportunity to:
O identify novel methods of treating diseases with therapeutic relevance;
O discover new chemical entities or new classes of compounds to treat
disease; and
O provide early confirmation of efficacy and safety.
Shaman intends to commercialize 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 markets through niche applications and/or co-
promotion.
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 INDICATION STATUS COMMERCIAL RIGHTS
------- ---------- ------ -----------------
<S> <C> <C> <C>
Provir AIDS-associated diarrhea Entering Phase III pivotal Shaman
study-Q1, 1998. Completed
a Phase II efficacy study
in Q4, 1997
Provir Watery diarrhea Commenced two Phase II Shaman
dosing trials in Q3 & Q4,
1997. Completed initial
Phase II efficacy studies
in 1996 &1997
Provir Pediatric diarrhea Formulation under Shaman
development
Nikkomycin Z Endemic mycoses Completed Phase I study in Shaman
Q2, 1997; multi-dose Phase
I study scheduled in 1998
Nikkomycin Z and Azoles Azole-resistant Candida Initiation pending Shaman
pre-clinical development
by Pfizer
SP-134101 Type II Diabetes Initiated Phase I study in Shaman
Q1, 1998
Oral antihyperglycemic Type II Diabetes Preclinical Ono; Lipha/Merck; and
compounds Shaman. Shaman receives
royalties on sales outside
the U.S. and profit
sharing in the U.S.
</TABLE>
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Provir
The Shaman-patented compound SP-303 is the active ingredient in Provir.
SP-303 is extracted from the latex of the Croton tree, which grows abundantly in
Latin America. This latex is used orally by many native cultures throughout
Latin America for a variety of medicinal purposes, including respiratory
infections and gastrointestinal problems. 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 Provir is not
systemically absorbed, which lessens the potential for drug interactions and
side effects.
Provir has demonstrated initial indications of activity for diarrhea in
patients with AIDS. Based upon successful Phase II study results released in
October 1997 in AIDS patients with diarrhea, Provir is scheduled to enter a
Phase III trial in this population during the first quarter of 1998. If
successful, this single study will serve as the basis for an NDA submission that
the Company is currently targeting for 1999.
Shaman has also completed Phase II trials showing preliminary efficacy for
Provir for the treatment of watery diarrhea. However, in October 1997, interim
results from one outpatient study in mild non-specific diarrhea did not show
significant efficacy and the trial was discontinued. To further determine
Provir's effect in other more severe diarrheas, two additional dose-optimization
Phase II trials in moderate-to-severe traveler's and inpatient acute watery
diarrhea are currently underway.
Diarrhea in Patients with AIDS/HIV
Diarrhea in patients with HIV and AIDS is a devastating syndrome which
afflicts between 20% and 60% of patients. Even given the success of protease
inhibitors and triple anti-HIV regimens in improving patient prognosis, the
problem of diarrhea continues and has emerged as a major medical and quality of
life problem as patients attempt to live a normal lifestyle. Unfortunately,
current symptomatic therapies provide either poor relief or bring with them the
burden of unacceptable side effects. Hence, this population faces a serious
unmet medical need. In the face of these problems, patients with chronic
diarrhea have been forced to alter their lifestyle to accommodate this
disruption in the activities of daily life.
Provir is currently being developed for the treatment of diarrhea in
patients with AIDS. A recently completed (October 1997) Phase II study enrolled
AIDS patients with chronic diarrhea. Patients were randomized to receive either
SP-303 500 mg or placebo given every six hours (q6h) for four days. Fifty-one
patients (26 received SP-303, 25 received placebo) were available to evaluate
drug efficacy. There were no significant differences between the treatment arms
with respect to any of the baseline demographic variables examined. Of the 51
fully evaluable patients, 48 (94.1%) had no identifiable pathogen isolated from
their screening stool sample (culture and microscopic examination).
Treatment with SP-303 was well tolerated with no imbalance between groups
in the occurrence of adverse events or in treatment-emergent laboratory
abnormalities, and all were considered mild in nature. At day four, the SP-303
treated group demonstrated a mean reduction from baseline stool weight of 451.3
grams per 24 hours as compared to 150.7 grams per 24 hours in the patients
receiving placebo. In addition, abnormal stool frequency decreased from a mean
of 5.2 per 24 hours at baseline to 2.2 per 24 hours in the Provir-treated group,
compared to 3.1 in the placebo group.
A longitudinal random regression analysis of the treatment effect over four
days indicated the patients treated with SP-303 experienced a statistically
significant reduction in stool weight (p=0.008) and in abnormal stool frequency
(p=0.039) when compared with placebo. The point-in-time analysis comparing
baseline to Day 4 of treatment yielded p-values of p=0.14 in mean reduction in
stool weight, and p=0.26 in mean reduction in abnormal stool frequency. The mean
maximal time between abnormal stools was greater in the SP-303 group (30.6
hours) as compared with patients who received placebo (24.6 hours, p=0.035). The
results of this study suggest that SP-303 is effective in reducing stool weight
and abnormal stool frequency in patients with AIDS and chronic or sub-acute
diarrhea.
A Phase III trial designed to confirm the Phase II results is planned to
begin in the first quarter of 1998. During the Phase III clinical trial, Provir
will be studied in a larger number of patients for a longer duration of therapy,
including outpatient experience. Agreement has been reached with the U.S. FDA on
the trial design,
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including endpoints, for this pivotal Phase III study, which, if successful, may
enable the company to file an NDA for this indication in 1999.
Based on these Phase II results and the Phase III plan, Shaman is actively
pursuing a commercialization partnership with other AIDS-focused companies for
this indication.
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, resulting in
fluid accumulation in the small intestine. This in turn leads to severe and, in
some cases, life threatening diarrhea. According to the 1995 data from the 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 U.S.
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 the 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 Provir treats watery diarrhea by
inhibiting 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
Provir does not affect the normal motility of the intestine and the lack of
absorption of Provir in the intestine contributes to its safety, its reduced
potential for drug interactions, and its specificity of action.
Shaman has conducted Phase I clinical trials for 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 Provir is safe and can be easily
tolerated in doses up to two grams per day for two days. The results also
indicated no significant adverse side effects of the drug.
In November 1996, the Company completed a Phase II trial in 75 patients to
determine the efficacy of 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 native Mexicans
suffering from diarrhea of unknown cause, or non-specific diarrhea.
In the Phase II study, 89% of the 75 patients treated with 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. 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. Of 25 patients with traveler's diarrhea receiving one or two
grams of Provir per day, effectiveness (measured as a combination of stool
frequency, stool consistency, and gastrointestinal symptoms) was demonstrated in
72% of patients over the course of the study. Within this patient group, the
mean time to last unformed stool, the most significant indicator of therapeutic
effect, was 58% less than historical controls would indicate. The patients
experiencing non-specific diarrhea of unknown etiology received either a one or
two gram dose per day for two days. In the group of 15 patients receiving the
one gram dose, all patients responded
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to therapy, and 87% returned to normal stool frequency after 24 hours of
treatment. In the group of 35 patients receiving the two gram dose, 34 patients
responded to therapy, and 80% returned to normal stool frequency after 24 hours
of treatment. The mean time to last unformed stool was reduced by 50% in the one
gram dose group and 32 percent in the two gram dose group compared to the
historical control in a cure study.
In October 1997, the Company determined from an interim analysis of another
Phase II outpatient study of 166 Mexican nationals with mild, non-specific
diarrhea that Provir provided no benefit over placebo after two days of
treatment. In this mild, non-specific diarrhea, it was difficult to show an
added benefit of Provir therapy during the short course of illness. Based on
these results, the Company suspended its study of mild, non-specific diarrhea
and is now focusing on moderate-to-severe diarrhea.
In the Third and Fourth quarters of 1997, Shaman initiated two
double-blind, randomized, placebo controlled Phase II studies of Provir designed
to determine the optimal effective dose level of Provir for the treatment of
moderate-to-severe watery diarrhea. These studies include an outpatient study of
travelers in Mexico and Jamaica, as well as an in-hospital study in Venezuela.
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.
In addition, there are over one billion episodes of pediatric diarrhea worldwide
annually and four million deaths associated with pediatric diarrhea per year
among children less than five years old in developing countries. 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.
Shaman is currently engaged in formulation development of Provir as a potential
treatment for pediatric diarrhea in preparation for initiating a clinical
development program.
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.
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"). 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.
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Nikkomycin Z is an orally active product for the treatment of endemic
mycoses and other systemic fungal infections. A single-dose Phase I trial in the
UK was completed in 1997. Shaman filed an IND in the United States to test
nikkomycin Z in December 1997 and intends to begin multi-dose Phase I testing in
1998.
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.
Virend
Shaman recently suspended a Phase II clinical trial of Virend, a topical
treatment for herpes, which was being studied in combination with oral acyclovir
in patients with AIDS. It was determined from an interim analysis that there
were no additional benefits to the use of Virend over the use of oral acyclovir
alone. Based on these results, the Company has suspended this program.
SP-134101
SP-134101 is a Shaman-patented, oral product for the treatment of Type II
diabetes. In October 1997, Shaman filed the IND for SP-134101, the first product
to emerge from the diabetes discovery effort. A Phase I trial for the compound
began in January 1998. In preclinical studies SP-134101 has been shown to lower
blood glucose, triglycerides, and blood pressure. SP-134101 appears to work by
increasing glucose uptake in the peripheral tissues and decreasing triglyceride
output from the liver.
DRUG DISCOVERY RESEARCH
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. 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).
Shaman is 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 21 orally-active compounds for which, to
date, 14 original U.S. patent applications have been filed (five of which have
been issued) and eleven international patent applications have been filed. These
compounds represent new classes and, potentially, new methods for treating Type
II diabetes.
The diabetes research and development program serves as the basis for
Shaman's collaboration with Lipha/Merck and Ono. Significant funding, as well as
milestone payments for this program, result from these collaborations. See
"Business -- Collaborative Relationships and License Agreements."
The Company filed an IND for its first diabetes compound, SP-134101, in
1997, and began a Phase I trial for the compound in January 1998.
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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 an equity
investment. The agreement also provides for additional preclinical and clinical
milestone payments to the Company in excess of $10.0 million per compound for
each antihyperglycemic drug developed and commercialized.
To date, Shaman has identified 21 proprietary, orally-active compounds
which show preclinical activity as treatments for Type II diabetes. Lipha/Merck
will bear all pre-clinical, clinical, regulatory and other development expenses
associated with the compounds selected under the agreement. In addition, as
products are commercialized, Shaman will receive royalties on all product sales
outside the United States and up to 50% of the profits (if the Company exercises
its co-promotion rights) or royalties on all product sales in the United States.
Certain of the milestone payments will be credited against future royalty
payments, if any, due to the Company from sales of products developed pursuant
to the agreement.
In 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 will screen 100 diabetes-specific plants per year in
vivo, isolate and identify active compounds, and participate in any medicinal
chemistry modification. In turn, Ono will provide 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 are for the countries of Japan, South Korea and Taiwan. Under the terms
of the Agreement, Ono will provide $7.0 million in collaborative research
funding and will pay preclinical and clinical milestone payments of $4.0 million
per compound for each antidiabetic drug that is 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 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 that the royalty will be payable with respect to either or both
of Provir and Virend. See "Legal Proceedings."
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. The Company has created an in-house facility
that operates under Good Manufacturing Practices ("GMP") and has conducted
pilot-scale manufacturing of SP-303. The Company has a sufficient quantity of
raw material for SP-303 and SP-303
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manufacturing capacity to complete currently planned clinical trials. In
addition, Shaman also expects to establish a second source manufacturing
facility to produce clinical and early commercial lots in 1998.
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. SP-134101 is being manufactured by a
contract manufacturer in compliance with GMP guidelines for the Company's
clinical trial programs.
MARKETING
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. Shaman is also evaluating the opportunity to retain certain
marketing rights to its products. At the present time, Shaman has no sales
staff. 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 plans
to aggressively prosecute 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; specifically, the
patent contains composition of matter claims related to SP-303 contained in the
Company's 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 Provir product.
The Company has five 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 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 eleven 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
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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."
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 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 12,000
kilograms of the SP-303 source plant per year from South and Central America,
pursuant to supply agreements with corporations working in those regions. The
SP-303 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 Provir.
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, the source plant can be sustainably harvested
because it grows spontaneously with minimal management. Shaman works with
communities and cooperatives in South and Latin America to harvest the SP-303
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 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, there can be no
assurance of a continual source of supply of these materials. See "Risk
Factors -- Dependence on Sources of Supply."
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
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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.
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 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.
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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. 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
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.
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.
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 plant biodiversity. The Conservancy focuses on
conserving plants that have been used traditionally for medicinal purposes.
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. The Conservancy is also
soliciting private donations to fund its operations and conservation efforts.
EMPLOYEES
As of February 27, 1998, the Company had 106 employees. Of these employees,
72 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 15 positions through the use of temporary staff and consultants.
Information regarding the Company's consulting arrangements, including those
with affiliated parties, is incorporated by reference from the information under
the caption "Executive Compensation and Other Information" in the Company's
Definitive Proxy Statement filed with the Commission in connection with its 1998
Annual Meeting of Stockholders.
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
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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 identify 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.
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.
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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
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.
RISK FACTORS
This Form 10-K/A contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form
10-K/A.
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
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investment prior to commercialization. Products for therapeutic use in human
health care must be evaluated in extensive human clinical trials to determine
their safety and efficacy as part of a lengthy process to obtain government
approval. The Company's Provir, nikkomycin Z and SP-134101 products are each in
clinical development. Positive results for any of these products in a clinical
trial do not necessarily assure that positive results will be obtained in future
clinical trials or that government approval to commercialize the products will
be obtained.
Clinical trials may be terminated at any time for many reasons, including
toxicity or adverse event reporting. There can be no assurance that any of the
Company's products will be successfully developed, enter into human clinical
trials, prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, obtain required regulatory approvals, be capable of being
produced in commercial quantities at reasonable costs or be successfully
marketed or that the Company will not encounter problems in clinical trials that
will cause the Company to delay or suspend product development. Failure of any
of the Company's products to be commercialized could have a material adverse
effect on the Company's business, financial condition and results of operations.
History of Operating Losses; Products Still in Development; Future
Profitability Uncertain. Shaman was incorporated in 1989 and has experienced
significant operating losses in each of its fiscal years since operations began
and incurred an operating loss of approximately $25.5 million for the year ended
December 31, 1997. As of December 31, 1997, the Company's accumulated deficit
was approximately $111.9 million. The Company has not generated any product
revenues and expects to incur substantial operating losses over the next several
years. All of Shaman's products and compounds are in research and development,
which require substantial expenditures of funds. In order to generate revenues
or profits, the Company, alone or with others, must successfully develop, test,
obtain regulatory approval for and market its potential products. No assurance
can be given that Shaman's product development efforts will be successful, that
required regulatory approvals will be obtained, or that the products, if
developed and introduced, will be successfully marketed or will achieve market
acceptance.
No Assurance of Successful Product Development. The Company's research and
development programs are at various stages of development, ranging from the
research stage to clinical trials. Substantial additional research and
development will be necessary in order for the Company to move additional
product candidates into clinical testing, and there can be no assurance that any
of the Company's research and development efforts on these or other potential
products, including Provir, nikkomycin Z, and SP-134101 will lead to development
of products that are shown to be safe and effective in clinical trials.
In addition, there can be no assurance that any such products will meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. Further, the Company's products may prove to have undesirable or
unintended side effects that may prevent or limit their commercial use. The
Company may find, at any stage of this complex product development process, that
products that appeared promising in preclinical studies or Phase I and Phase II
clinical trials do not demonstrate efficacy in larger-scale, Phase III clinical
trials and do not receive regulatory approvals. Accordingly, any product
development program undertaken by the Company may be curtailed, redirected,
suspended or eliminated at any time.
In addition, there can be no assurance that the Company's testing and
development schedules will be met. Any failure to meet such schedules could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's clinical trials may be delayed by many
factors, including, but not limited to: slower than anticipated patient
enrollment; difficulty in finding a sufficient number of patients fitting the
appropriate trial profile; difficulties in the acquisition of sufficient
supplies of clinical trial materials; or, failure to show efficacy in clinical
trials or adverse events occurring during the clinical trials. Completion of
testing, studies and trials may take several years, and the length of time
varies substantially with the type, complexity, novelty and intended use of the
product. In addition, data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. Delays or rejections may be encountered based upon many
factors, including
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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. See "Business -- Government Regulation."
Future Capital Needs; Uncertainty of Additional Funding. The Company will
require substantial additional funds to conduct the development and testing of
its potential products and to manufacture and market any products that may be
developed. The Company's future capital requirements will depend on numerous
factors, including the progress of its research and development programs, the
progress of preclinical and clinical testing, the time and costs involved in
obtaining regulatory approvals, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
collaborative and licensing relationships, the ability of the Company to
establish additional collaborative relationships for the manufacture and
marketing of its potential products, and the purchase of additional capital
equipment. In addition, Note Purchase Agreements entered into by the Company in
connection with the 1997 Private Placement, provide that under certain
circumstances, the Company would be required to redeem all or some portion of
the $10.4 million principal due thereunder, which redemption could significantly
accelerate the Company's cash expenditures and capital requirements beyond the
levels currently anticipated.
The Company intends to seek additional funding through public or private
equity or debt financings, collaborative arrangements or from other sources. The
Company may seek additional capital at any time that it deems market conditions
to be favorable. If additional funds are raised by issuing equity securities,
significant dilution to existing stockholders may result. In the event that
additional funds are obtained through collaborative agreements, such agreements
may require the company to relinquish rights to certain of its technologies,
product candidates, products or marketing territories that the Company would
otherwise seek to develop or commercialize itself. There can be no assurance
that additional financing will be available on acceptable terms or at all. If
adequate funds are not available, the Company may be required 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Uncertainties Associated with Clinical Trials. Shaman has conducted, and
plans to continue to conduct, extensive and costly clinical trials to assess the
safety and efficacy of its potential products. The rate of completion of the
Company's clinical trials is dependent upon, among other factors, the rate of
completion and approval of trial protocols, the availability of funds for trials
and the rate of patient enrollment. Patient enrollment is a function of many
factors, including the nature of the Company's clinical trial protocols,
existence of competing protocols, size of patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Delays in
patient enrollment will result in increased costs and delays, which could have a
material adverse effect on the Company's ability to complete clinical trials in
a timely fashion.
The Company cannot assure that patients enrolled in its clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the U.S. FDA
regulations applicable to such testing can result in delay, suspension or
cancellation of such testing, and/or refusal by the FDA to accept the results of
such testing. In addition, the FDA or the Company may suspend clinical trials at
any time if either of them concludes that any patients participating in any such
trial are being exposed to unacceptable health risks. Further, there can be no
assurance that human clinical testing will demonstrate that any current or
future product candidate is safe or effective or that data derived from any such
study will be suitable for submission to the FDA or other regulatory
authorities. Failure of the Company's clinical trials to demonstrate safety or
efficacy in humans could cause the delay, suspension, or termination of any
product program and could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Collaborative Relationships. The Company's research and
development efforts in its diabetes program and, to a lesser extent, in its
other programs, is dependent upon its arrangements with Lipha/Merck and Ono and
the compliance of such partners with the terms and conditions of such
collaborative agreements including, without limitation, providing funding for
research and development efforts
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and the achievement of milestones and assisting the Company in its research and
development efforts. These partners may develop products that may compete with
those of the Company. The amount and timing of resources they allocate to these
programs is not within the Company's control. There can be no assurance that
these partners will perform their obligations as expected or that any
significant revenues will ultimately be derived from such agreements. The
Company's agreement with Ono may be terminated in the event Ono determines
further development of compounds is not warranted, provided certain other
conditions are met. Termination of either agreement is subject to certain
surviving obligations. If one or more such partners elected to terminate their
relationships with the Company, or if the Company or its partners fail to
achieve targeted milestones, it could have a material adverse effect on the
Company's ability to fund such programs, or to develop any products on a
collaborative basis with such partners.
The Company licensed the use of nikkomycin Z from Bayer AG in June 1995.
Under the terms of this licensing agreement, the Company has paid Bayer an
initial milestone payment and may be required, upon the occurrence of certain
events, to make additional milestone payments and to pay royalties on any
commercialized products derived from nikkomycin Z. The failure of the Company to
pay these milestone payments or the termination of this license agreement could
cause the Company to forfeit its rights to utilize nikkomycin Z and could have a
material adverse effect on the Company's business financial condition and
results of operations.
The Company expects to seek additional collaborative agreements to
commercialize its other product candidates and will, in particular, need to rely
on such third party arrangements to commercialize its products outside the
United States. No assurance can be given that the Company will be successful in
negotiating or entering into such agreements on terms favorable to the Company
or at all, or that any such agreement, if entered into by the Company will be
successful. A failure to successfully enter into such agreements and sell
products thereunder would have a material adverse effect on the Company's
business, financial condition and results of operations.
Rapid Technological Change and Substantial Competition. The pharmaceutical
industry is subject to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology companies and universities is
intense. Many of these entities have significantly greater research and
development capabilities, as well as substantial marketing, manufacturing,
financial and managerial resources, and represent significant competition for
the Company. There can be no assurance that developments by others will not
render the Company's products or technologies noncompetitive or that the Company
will be able to keep pace with technological developments. Competitors have
developed or are in the process of developing technologies that are, or in the
future may be, the basis for competitive products. Some of these products may
have an entirely different approach or means of accomplishing the desired
therapeutic effect than products developed by the Company. These competing
products may be more effective and less costly than the products developed by
the Company. In addition, other forms of medical treatment may offer competition
to the Company's products. The development of competing compounds could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business -- Competition."
Government Regulation; No Assurance of Regulatory Approvals. All new drugs,
including the Company's products under development, are subject to extensive and
rigorous regulation by the federal government, principally the FDA, and
comparable agencies in state and local jurisdictions and in foreign countries.
These authorities impose substantial requirements upon the preclinical and
clinical testing, manufacturing and marketing of pharmaceutical products. The
steps required before a drug may be approved for marketing in the United States
generally include (i) preclinical laboratory and animal tests, (ii) the
submission to the FDA of an IND for human clinical testing, (iii) adequate and
well controlled human clinical trials to establish the safety and efficacy of
the drug, (iv) submission to the FDA of an NDA, and (v) satisfactory completion
of an FDA inspection of the manufacturing facility or facilities at which the
drug is made to assess compliance with GMP.
Lengthy and detailed preclinical and clinical testing, validation of
manufacturing and quality control processes, and other costly and time-consuming
procedures are required. Satisfaction of these requirements typically takes
several years and the time needed to satisfy them may vary substantially, based
on the type,
17
<PAGE> 18
complexity and novelty of the pharmaceutical product. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the Company's
activities. There can be no assurance that the FDA or any other regulatory
agency will grant approval for any products developed by the Company on a timely
basis, or at all. Success in preclinical or early stage clinical trials does not
assure success in later stage clinical trials.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
If regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed. Further,
even if regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product, including
withdrawal of the product from the market. Any delay or failure in obtaining
regulatory approvals would have a material adverse effect on the Company's
business, financial condition and results of operation.
Among the conditions for FDA approval of a pharmaceutical product is the
requirement that the manufacturer's (either the Company's own or a third-party
manufacturer) quality control and manufacturing procedures conform to current
GMP, which must be followed at all times. The FDA strictly enforces GMP
requirements through periodic unannounced inspections. There can be no assurance
that the FDA will determine that the facilities and manufacturing procedures of
the Company or any third-party manufacturer of the Company's planned products
will conform to GMP requirements. Additionally, the Company or its third-party
manufacturer must pass a pre-approval inspection of its manufacturing facilities
by the FDA before obtaining marketing approval. Failure to comply with
applicable regulatory requirements may result in penalties such as restrictions
on a product's marketing or withdrawal of a product from the market.
The FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States could result in new government regulations that
could have a material adverse effect on the Company's business. The Company is
unable to predict the likelihood of adverse governmental regulation that might
arise from future legislative or administrative action, either in the United
States or abroad. See "Business -- Government Regulation."
The Company will also be subject to a variety of foreign regulations
governing clinical trials, registration and sales of its products. Regardless of
whether FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process varies from country to country and the
time needed to secure approval may be longer or shorter than that required for
FDA approval. Delays in the approval process or the failure to obtain such
foreign approvals would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Sources of Supply. The Company currently imports all of the
plant materials from which its products are derived from countries in South and
Latin America, Africa and Southeast Asia. To the extent that its products cannot
be economically synthesized or otherwise produced, the Company will continue to
be dependent upon a supply of raw plant material. The Company does not have
formal agreements in place with all of its suppliers. In addition, a continued
source of plant supply is subject to the risks inherent in international trade.
These risks include unexpected changes in regulatory requirements, exchange
rates, tariffs and barriers, difficulties in coordinating and managing foreign
operations, political instability and potentially adverse tax consequences.
Interruptions in supply or material increases in the cost of supply could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, tropical rain forests, and certain
irreplaceable plant resources therein, are currently threatened with
destruction. In the event portions of the rain forests are destroyed which
contain the source material from which Shaman's current or future products are
derived, such destruction could have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Manufacturing and Marketing Experience and Capacity. The Company
currently produces products only in quantities necessary for clinical trials and
does not have the staff or facilities necessary to manufacture products in
commercial quantities. As a result, the Company must rely on collaborative
partners
18
<PAGE> 19
or third-party manufacturing facilities, which may not be available on
commercially acceptable terms adequate for Shaman's long-term needs. If the
Company should encounter delays or difficulties in establishing relationships
with qualified manufacturers to produce, package and distribute its finished
products, clinical trials, regulatory filings, market introduction and
subsequent sales of such products could be adversely affected.
Contract manufacturers must adhere to GMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program. Contract
manufacturing facilities must pass a pre-approval plant inspection before the
FDA will approve an NDA. Certain material manufacturing changes that occur after
approval are also subject to FDA review and clearance or approval. There can be
no assurance that the FDA or other regulatory agencies will approve the process
or the facilities by which any of the Company's products may be manufactured.
The Company's dependence on third parties for the manufacture of products may
adversely affect the Company's ability to develop and deliver products on a
timely and competitive basis. Should the Company be required to manufacture
products itself, the Company will be subject to the regulatory requirements
described above, to similar risks regarding delays or difficulties encountered
in manufacturing any such products and will require substantial additional
capital. There can be no assurance that the Company will be able to manufacture
any such products successfully or in a cost-effective manner.
The Company currently has no sales staff. To the extent that the Company
does not or is unable to enter into co-promotion agreements or to arrange for
third party distribution of its products, significant additional resources will
be required to develop a complete marketing and sales force. There can be no
assurance that the Company will be able to enter into collaborative agreements
or successfully establish a marketing and sales force.
Uncertainty Regarding Patents and Proprietary Rights; Current Legal
Proceedings Regarding Patents and Proprietary Rights. The Company's success will
depend in large part on its ability to obtain and maintain patents, protect
trade secrets and operate without infringing upon the proprietary rights of
others. Moreover, competitors may have filed patent applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to products or processes competitive with those of the Company. There can be no
assurance that the Company's patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any issued patents will provide the Company with adequate protection for its
inventions or will not be challenged by others, or that the patents of others
will not impair the ability of the Company to commercialize its products. The
patent position of firms in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office or the courts regarding the breadth of claims
allowed or the degree of protection afforded under pharmaceutical patents. There
is considerable variation between countries as to the level of protection
afforded under patents and other proprietary rights. Such differences may expose
the Company to differing risks of commercialization in each foreign country in
which it may sell products. There can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products
or design around any patents of the Company.
A number of pharmaceutical companies and research and academic institutions
have developed technologies, filed patent applications or received patents on
various technologies that may be related to the Company's business. Some of
these technologies, applications or patents may conflict with the Company's
technologies or patent applications. The European Patent Office, the French
Patent Office, the German Patent Office and the Australian Patent Office, have
each granted a patent containing broad claims to proanthocyanidin polymer
compositions (and methods of use of such compositions), which are similar to the
Company's specific proanthocyanidin polymer composition, to Leon Cariel and the
Institut des Substances Vegetales. The effective filing date of these patents is
prior to the effective filing date of the Company's foreign pending patent
application in Europe. Certain of the foreign patents have been granted in
jurisdictions where examination is not rigorous. The Company has instituted an
Opposition in the European Patent Office against granted European Patent No.
472531 owned by Leon Cariel and Institut des Substances Vegetales. The Company
believes that the granted claims are invalid and intends to vigorously prosecute
the Opposition.
19
<PAGE> 20
There can be no assurance that the Company will be successful in having the
granted European patent revoked or the claims sufficiently narrowed so as not to
potentially cover the Company's proanthocyanidin polymer composition and methods
of use. There can be no assurance that Leon Cariel and the Institut des
Substances Vegetales will not assert claims relating to this patent against the
Company. There can be no assurance that the Company would be able to obtain a
license to this patent at all, or at reasonable cost, or be able to develop or
obtain alternative technology to use in Europe or elsewhere. The earlier
effective filing date of this patent could limit the scope of the patents, if
any, that the Company may be able to obtain or result in the denial of the
Company's patent applications in Europe or elsewhere.
In the United States, the Patent and Trademark Office has rendered judgment
in an Interference declared between the Company's issued patent covering its
specific proanthocyanidin polymer composition and certain claims of U.S.
application corresponding to the granted European patent of Leon Cariel and the
Institut des Substances Vegetales by Daniel Jean and Leon Cariel. Judgment was
awarded to the Company. Since the period for appeal has passed, this judgment is
now final.
Additionally, in connection with the Interference proceeding, the Company
has had an opportunity to review the claims and file history of the Daniel Jean
and Leon Cariel patent application which, under U.S. patent law, are kept
confidential. One broad claim, in particular, of the Daniel Jean and Leon Cariel
patent application, which was not involved in the Interference proceeding and
which has been indicated to be allowable, covers a large variety of
proanthocyanidin polymers. The Company believes that this broad claim is subject
to attack as invalid in view of prior art. Based on knowledge of the Company's
specific proanthocyanidin polymer composition, the Company believes that the
manufacture, use or sale of its specific proanthocyanidin polymer composition
would not constitute infringement of this broad claim, once it issues. There can
be no assurances, however, that the Company would prevail should an action for
infringement of such claim be commenced. In addition, if patents that cover the
Company's activities have been or are issued to other companies, there can be no
assurance that the Company would be able to obtain licenses to these patents at
a reasonable cost, or at all, or be able to develop or obtain alternative
technology.
If the Company does not obtain such licenses, it could encounter delays or
be precluded from introducing products to the market. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the Company or to protect trade secrets or know-how owned by the
Company. Additional interference proceedings may be declared or necessary to
determine issues of invention; such litigation and/or interference proceedings
could result in substantial cost to and diversion of effort by, and may have a
material adverse effect on, the Company. In addition, there can be no assurance
that these efforts by the Company will be successful.
The Company's competitive position is also dependent upon unpatented trade
secrets. All employees of the Company are bound by confidentiality agreements.
However, there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, that such trade secrets will not be
disclosed or that the Company can effectively protect its rights to unpatented
trade secrets. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes also may arise as to the rights in related or resulting
know-how and inventions. See "Business -- Patents and Proprietary Rights."
Patent applications in the United States are generally maintained in
secrecy until patents are issued. Since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, Shaman cannot be certain that it was the first to discover
compositions covered by its pending patent applications or the first to file
patent applications on such compositions. There can be no assurance that the
Company's patent applications will result in issued patents or that any of its
issued patents will afford comprehensive protection against potential
infringement.
The Company is prosecuting its patent applications with the PTO but the
Company does not know whether any of its applications will result in the
issuance of any patents or, if any patents are issued, whether any issued patent
will provide significant proprietary protection or will be circumvented or
invalidated. During the course of patent prosecution, patent applications are
evaluated, inter alia, for utility, novelty, non-
20
<PAGE> 21
obviousness and enablement. The PTO may require that the claims of an initially
filed patent application be amended if it is determined that the scope of the
claims includes subject matter that is not useful, novel, non-obvious or
enabled.
Furthermore, in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights. In cases where
one party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may provoke an
interference proceeding in the PTO or such a proceeding may be declared by the
PTO. In general, in an interference proceeding, the PTO would review the
competing patents and/or patent applications to determine the validity of the
competing claims, including but not limited to determining priority of
invention. Any such determination would be subject to appeal in the appropriate
U.S. federal courts.
There can be no assurance that additional patents will be obtained by the
Company or that issued patents will provide a substantial protection or be of
commercial benefit to the Company. The issuance of a patent is not conclusive as
to its validity or enforceability, nor does it provide the patent holder with
freedom to operate without infringing the patent rights of others. A patent
could be challenged by litigation and, if the outcome of such litigation were
adverse to the patent holder, competitors could be free to use the subject
matter covered by the patent, or the patent holder may license the technology to
others in settlement of such litigation. The invalidation of patents owned by or
licensed to the Company or non-approval of pending patent applications could
create increased competition, with potential adverse effects on the Company and
its business prospects. In addition, there can be no assurance that any
applications of the Company's technology will not infringe patents or
proprietary rights of others or that licenses that might be required as a result
of such infringement for the Company's processes or products would be available
on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others' proprietary rights. The Company may participate in
interference proceedings that may in the future be declared by the U.S. Patent
and Trademark Office, which could result in substantial cost to the Company.
There can be no assurance that the outcome of any such litigation or
interference proceedings will be favorable to the Company or that the Company
will be able to obtain licenses to technology that it may require or that, if
obtainable, such technology can be licensed at a reasonable cost.
Year 2000 Compliance. The Company is in the process of assessing the impact
of year 2000 on its operations and systems, including those of its suppliers and
collaborators and other third parties. Management is in the process of
formalizing its assessment procedures and developing a plan to address
identified issues, if any. To date, the Company has evaluated its financial and
accounting systems and concluded that they are not and will not be materially
affected by the year 2000. The Company does not yet know the extent, if any, of
the impact of the year 2000 on its other systems and equipment or those of third
parties with which the Company does business. There can be no assurance that
third parties, such as suppliers, clinical research organizations and
collabortive parties, are using systems that are year 2000 compliant or will
address any year 2000 issues in a timely fashion, or at all. Any year 2000
compliance problems of either the Company, its suppliers, its clinical research
organizations, or its collaborative partners could have a material adverse
effect on the Company's business, operating results and financial conditions.
Uncertainty of Product Pricing, Reimbursement and Related Matters. The
Company's business may be materially adversely affected by the continuing
efforts of governmental and third party payers to contain or reduce the costs of
health care through various means. For example, in certain foreign markets, the
pricing or profitability of health care products is subject to government
control. In the United States, there have been, and the Company expects there
will continue to be, a number of federal and state proposals to implement
similar government control. While the Company cannot predict whether any such
legislative or regulatory proposals or reforms will be adopted, the announcement
of such proposals or reforms could have a material adverse effect on the
Company's ability to raise capital or form collaborations, and the adoption of
such proposals or reforms could have a material adverse effect on the Company's
business, financial condition or results of operations.
21
<PAGE> 22
In addition, in both the United States and elsewhere, sales of health care
products are dependent in part on the availability of reimbursement from third
party payers, such as government and private insurance plans. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical products and services. If the Company succeeds in bringing one or
more products to the market, there can be no assurance that reimbursement from
third party payers will be available or will be sufficient to allow the Company
to sell its products on a competitive or profitable basis.
Possible Volatility of Stock Price. From time to time, the stock market has
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies or industries. In addition,
the market price of the Company's Common Stock, like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, has been and
may continue to be highly volatile. Announcements of technological innovations,
regulatory matters or new commercial products by the Company or its competitors,
developments or disputes concerning patent or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by the Company or its competitors, regulatory developments in both
the United States and foreign countries, public concern as to the safety of
pharmaceutical products, and economic and other external factors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of Shaman's Common Stock. See "Part II -- Item 5:
Market for Registrant's Common Stock and Related Stockholder Matters."
Environmental Regulation. In connection with its research and development
activities and manufacturing of clinical trial materials, the Company is subject
to federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although the Company
believes that it has complied with these laws and regulations in all material
respects and has not been required to take any action to correct any
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future. The Company's research and development activities
involve the controlled use of hazardous materials, chemicals, viruses and
various radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and such liability could exceed the resources of the Company.
Anti-Takeover Effect of Delaware Law and Certain Charter and Bylaws
Provisions. Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. The
Company's Board of Directors has the authority to issue up to 600,000 additional
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions of those shares without any further vote or action
by the stockholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to the Company could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met.
Product Liability Exposure; Limited Insurance Coverage. The Company's
business exposes it to potential product liability risks which are inherent in
the development, testing, manufacture, marketing and sale of pharmaceutical
products. Product liability insurance for the pharmaceutical industry generally,
which
22
<PAGE> 23
includes acts by third parties, including manufacturers of the Company's product
candidates, is expensive. There can be no assurance that the Company's present
product liability insurance coverage is adequate. Such existing coverage will
not be adequate as the Company further develops its products, and no assurance
can be given that adequate insurance coverage against all potential claims will
be available in sufficient amounts or at a reasonable cost. Certain of the
Company's development and manufacturing agreements contain insurance and
indemnification provisions pursuant to which the Company could be held
accountable for certain occurrences.
Limitation of Liability and Indemnification. The Company's Certificate of
Incorporation limits, to the maximum extent permitted by Delaware Law, the
personal liability of directors for monetary damages for breach of their
fiduciary duties as a director. The Company's Bylaws provide that the Company
shall indemnify its officers and directors and may indemnify its employees and
other agents to the fullest extent permitted by law. The Company has entered
into indemnification agreements with its officers and directors containing
provisions which are in some respects broader than the specific indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. The
Company currently maintains directors' and officers' insurance.
Section 145 of the Delaware Law provides that a corporation may indemnify a
director, officer, employee or agent made or threatened to be made a party to an
action by reason of the fact that he was a director, officer, employee or agent
of the corporation or was serving at the request of the corporation against
expenses actually and reasonably incurred in connection with such action if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Delaware Law does not permit a corporation to eliminate a
director's duty of care, and the provisions of the Company's Certificate of
Incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.
Dependence on Key Personnel. The Company's ability to maintain its
competitive position depends in part upon the continued contributions of its key
senior management. The Company's future performance also depends on its ability
to attract and retain qualified management and scientific personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to continue to attract, assimilate or retain other highly qualified
technical and management personnel in the future. The loss of key personnel or
the failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's business, financial condition
and results of operations.
ITEM 2. PROPERTIES
Shaman's headquarters are located in South San Francisco, California. The
Company leases approximately 73,000 square feet for offices, laboratories, pilot
manufacturing and preclinical testing in three adjacent buildings. An additional
building with approximately 43,000 square feet becomes available to the Company
in late 1999. The lease on these spaces expires February 28, 2003, and the
Company has an option to renew the lease for two additional five-year periods.
The South San Francisco facility serves as the principal site for preclinical
research, clinical trial management, process development, quality assurance and
quality control, regulatory and other affairs. The Company believes that its
current facilities are suitable and adequate to meet its needs for the
foreseeable future. Shaman anticipates it will be able to expand its facilities
to nearby locations as the need develops. There can be no assurance however,
that such space will be available on favorable terms, if at all.
23
<PAGE> 24
ITEM 3. 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 Cossman 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."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders during the fourth
quarter of the fiscal year ended December 31, 1997.
24
<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 closing sale prices for the
Company's common stock for each quarter in the two most recent fiscal years, 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
</TABLE>
As of February 23, 1998, there were approximately 847 holders of record of
the Company's common stock. 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 amounts remain outstanding under such loan agreement. In
addition, the Certificate of Designation of Preferences of Series A Preferred
Stock of the Company requires that the Company pay equivalent per share
dividends to the holders of the Company's Series A Preferred Stock prior to the
payment of dividends to the holders of the Company's Common Stock.
25
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue from collaborative
agreements........................ $ 3,500 $ 3,406 $ 2,210 $ 1,360 $ 2,050
Operating expenses(1):
Research and development.......... 24,140 19,138 17,635 18,643 13,646
General and administrative........ 4,833 3,537 3,705 3,545 2,659
--------- -------- -------- -------- --------
Total operating expenses............. 28,973 22,675 21,340 22,188 16,305
--------- -------- -------- -------- --------
Loss from operations................. (25,473) (19,269) (19,130) (20,828) (14,255)
Interest income...................... 1,218 1,082 1,695 2,045 1,543
Interest expense (cash).............. (1,341) (603) (569) (698) (315)
Interest expense (non-cash).......... (3,692) -- -- -- --
--------- -------- -------- -------- --------
Net loss............................. $ (29,288) $(18,790) $(18,004) $(19,481) $(13,027)
========= ======== ======== ======== ========
Net loss per share(2)................ $ (1.72) $ (1.39) $ (1.37) $ (1.50) $ (1.30)
========= ======== ======== ======== ========
Shares used in calculation of net
loss per share(2)................. 17,010 13,496 13,161 12,986 10,036
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, and
investments....................... $ 21,421 $ 16,533 $ 26,665 $ 39,843 $ 57,333
Working capital...................... 14,547 9,641 22,850 33,422 36,711
Total assets......................... 26,753 22,377 33,810 49,673 67,229
Long-term obligations, including
current installments.............. 16,769 4,816 6,041 5,017 4,221
Accumulated deficit.................. (111,910) (82,622) (63,832) (45,828) (26,348)
Total stockholders' equity........... $ 5,148 $ 11,977 $ 24,205 $ 41,300 $ 60,436
</TABLE>
- ---------------
(1) Certain expenses 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.
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops novel pharmaceutical products for major human diseases by isolating
active compounds from tropical plants. The Company has three compounds in
clinical development: Provir, an oral product for the treatment of
AIDS-associated and watery diarrhea; nikkomycin Z, an oral antifungal for the
treatment of systemic fungal infections; and SP-134101, an oral product for the
treatment of Type II diabetes. Shaman maintains an active Type II diabetes
research program which serves as the basis for its collaborations with Lipha
s.a., a wholly owned subsidiary of Merck KGaA, Darmstadt, Germany
("Lipha/Merck"), and with Ono Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.
The Company began operations in March 1990. To date, Shaman has not sold
any products and does not anticipate receiving product revenue in the near
future. The Company's accumulated deficit at December 31, 1997, was
approximately $111.9 million. Shaman expects to continue to incur substantial
and increasing losses over the next several years, due primarily to the expense
of preclinical studies, clinical trials and its ongoing research program. The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations could be substantial. Shaman has financed its research, development
and administrative activities through various private and public equity
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 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 on-going research funding from Ono and research
funding from Shaman's collaboration with Lipha/Merck. Revenues for 1996 resulted
from the Company's on-going 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 the Company's increased
clinical development activities with respect to Provir of $3.8 million,
partially offset by reduced expenses for clinical development activities for
nikkomycin Z of $1.1 million, and to increased scientific salaries of $1.2
million. The increase in 1996 was primarily attributable to the Company's
clinical development activities for 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 Provir enters Phase III
clinical development for AIDS-associated diarrhea, 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
27
<PAGE> 28
increase in compensation and marketing research of $375,000 related to late
stage clinical products, as well as additional legal expenses of $631,000
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
carryforwards of approximately $102 million. The federal net operating loss
carryforwards 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 December 31, 1997, the Company's cash, cash equivalents, and
investments totaled approximately $21.4 million, compared with $16.5 million at
December 31, 1996. The net increase was primarily attributable to funds received
from the private placement of senior convertible notes in June 1997, registered
direct public offerings in January 1997 and April 1997, the secured loan entered
into in May 1997, and research funding from Shaman's collaboration with
Lipha/Merck and Ono.
In June 1997, the Company privately issued $10.4 million of senior
convertible notes ("The 1997 Private Placement"). The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option. Initially, the notes were
convertible into Common Stock of the Company at 100% of the low trading price
during a designated time period prior to conversion provided that the conversion
price will not be less than $5.50 per share. Starting in November 1997, 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,
with a floor of $5.50 through March 31, 1998, pursuant to a November 1997
understanding with the note holders to revise the terms of the note. In
connection with this understanding, the Company issued to the note holders
three-year warrants to purchase an aggregate of 137,500 shares of common stock
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 conversion of these
notes, which registration statement was declared effective on August 29, 1997.
Of the notes issued, $400,000 were issued to the placement agent as part of the
placement fee. The Company paid the placement agent an additional $300,000 in
cash. The placement fees and other offering costs have been capitalized in other
assets as deferred issuance costs and are being amortized to interest expense
over the life of the notes. The net proceeds totaled approximately $9.5 million
after the placement agent's fees and other offering expenses.
In May 1997, the Company obtained a $5.0 million, 36-month term loan to pay
off pre-existing debt, finance capital asset acquisitions and finance continued
research and clinical development of the Company's existing product candidates.
The loan carries an interest rate of 14.58% and is payable in equal monthly
installments over the term of the loan. The lender was granted ten-year warrants
to purchase 200,000 shares of
28
<PAGE> 29
the Company's Common Stock at $6.25 per share. The Company has attributed a
value of $648,000 to these warrants. This amount has been recorded as a discount
on the related debt and is being amortized as interest expense over the term of
the loan.
In April 1997, the Company sold 1,600,000 shares of Common Stock at $4.97
per share in a registered direct public offering, marketed solely by the
Company, which yielded gross proceeds of $7.95 million. The net proceeds of
approximately $7.8 million from this offering will be used for the continued
research and clinical development of the Company's existing product candidates.
In January 1997, the Company sold 2,000,000 shares of Common Stock in a
registered direct public offering for gross proceeds of $9.0 million. The net
proceeds of approximately $8.1 million from this offering will be used for the
continued research and clinical development of the Company's existing product
candidates.
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 is amortized to revenue over twelve months, as work is
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 stock at the time of purchase. In
exchange for development and marketing rights in all countries except Japan,
South Korea, and Taiwan (which are covered under an earlier agreement between
Shaman and Ono), Lipha/Merck will provide up to $9.0 million in research
payments and up to $10.5 million in equity investments priced at a 20% premium
to a multi-day volume weighted average price of the Company's common stock at
the time of purchase. The agreement also provides for additional preclinical and
clinical milestone payments to the Company in excess of $10.0 million per
compound for each antihyperglycemic drug developed and commercialized.
Lipha/Merck will bear all pre-clinical, clinical, regulatory and other
development expenses associated with the compounds selected under the agreement.
In addition, as products are commercialized, Shaman will receive royalties on
all product sales outside the United States and up to 50% of the profits (if the
Company exercises its co-promotion rights) or royalties on all product sales in
the United States. Certain of the milestone payments will be credited against
future royalty payments, if any, due to the Company from sales of products
developed pursuant to the agreement.
For the year ended December 31, 1997, Shaman recognized $1.5 million in
revenue from the Lipha/ Merck collaboration. Shaman also received $1.5 million
for 200,787 shares of Common Stock priced at $7.47 per share, representing a 20%
premium to the weighted average price of the Company's stock at the time of
purchase.
In July 1996, the Company closed a private placement (the "1996 Private
Placement") pursuant to Regulation S under the Securities Act of 1933, as
amended, in which it received gross proceeds of $3.3 million for the sale of
400,000 shares of Series A Convertible Preferred Stock and for the issuance of a
six-year warrant to purchase 550,000 shares of the Company's Common Stock at an
exercise price of $10.18 per share. The Preferred Stock does not carry a
dividend obligation and will convert into Common Stock no later than July 23,
1999 at a price per share between $6.00 and $8.15, depending on the market value
of the Company's Common Stock during the period prior to conversion. Holders of
preferred shares are entitled to a liquidation preference of $8.15 per share. In
addition to the sale of Preferred Stock and warrant, the Company has the right,
from time to time during the period beginning January 1997 and ending July 2000,
to sell up to 1,200,000 additional shares of Common Stock to the investor at a
formula price of 100% or 101% of a multi-day average of the Company's Common
Stock price at the time of sale. If the Company exercises this right, the
investor has the option to increase the shares purchased by up to an aggregate
of 527,500 shares. Pursuant to the terms of the 1997 Private Placement, the
Company may not exercise this right until late February 1998.
The Company expects to incur substantial additional costs relating to the
continued preclinical and clinical testing of its products, regulatory
activities and research and development programs. The Company anticipates that
its cash, cash equivalents and investment balances of approximately $21.4
million at December 31, 1997, the collaborative revenue committed by
Lipha/Merck, Lipha/Merck's commitment to purchase additional equity and Shaman's
additional rights to sell Common Stock under the 1996 Private
29
<PAGE> 30
Placement will be adequate to fund operations, including payments due under
long-term obligations, through the end of 1998. Milestone payments which may be
received by the Company from Ono and Lipha/Merck would extend the Company's
capacity to finance its operations beyond that time. However, there can be no
assurance that these milestones will be achieved, or that additional funding, if
needed, will be available on reasonable terms, or at all.
Long-term obligations increased $11.4 million in 1997 compared with 1996
primarily due to the issuance of $10.4 million senior convertible notes in June
1997 along with other various financing activities.
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.
FUTURE OUTLOOK
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that Shaman is
still a relatively young company and has not yet completed a full cycle of
development, regulatory approval and commercialization for any of its products.
The clinical and regulatory processes through which the Company's products must
proceed are complex, uncertain and costly, and no assurance can be given
regarding the timing of clinical or regulatory progress or that the Company will
be successful in commercializing any of its product candidates. These
development processes require substantial amounts of funding, and the Company is
dependent on corporate partners and the equity markets to finance such efforts.
Where access to funding is difficult, the Company's stockholders may face
significant dilution, and the ability of the Company to proceed with its
programs and plans may be significantly and adversely affected. Actions and
advances by competitors may also significantly affect the Company's prospects,
as may the existence of patents held by such competitors or potential
competitors. In addition, there can be no assurance that any plants required by
the Company will be indefinitely available or that any compounds derived from
the plant material will result in protected proprietary rights for the Company.
30
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Shaman Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Shaman Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shaman Pharmaceuticals, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 29, 1998
31
<PAGE> 32
SHAMAN PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,340,702 $ 16,051,251
Short-term investments.................................... 10,079,943 481,677
Amounts due from related parties.......................... 192,551 230,881
Prepaid expenses and other current assets................. 553,507 707,991
------------- ------------
Total current assets.............................. 22,166,703 17,471,800
------------- ------------
Property and equipment:
Laboratory equipment...................................... 6,211,182 5,571,406
Computer equipment and furniture.......................... 1,158,869 1,111,855
Leasehold improvements.................................... 7,351,827 7,125,235
------------- ------------
14,721,878 13,808,496
Less: accumulated depreciation and amortization........... 10,749,738 9,031,571
------------- ------------
3,972,140 4,776,925
Other assets................................................ 613,657 128,080
------------- ------------
Total assets...................................... $ 26,752,500 $ 22,376,805
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses............... $ 925,701 $ 1,445,616
Accrued clinical trial costs.............................. 1,689,659 1,233,014
Accrued professional fees................................. 718,625 689,216
Accrued compensation...................................... 368,272 332,738
Advances -- contract research............................. 1,133,605 1,883,605
Current installments of long-term obligations............. 2,783,976 2,246,795
------------- ------------
Total current liabilities......................... 7,619,838 7,830,984
Long-term obligations, excluding current installments....... 4,017,979 2,568,931
Senior convertible notes.................................... 9,967,044 --
Stockholders' equity:
Preferred stock, $0.001 par value; issuable in series;
1,000,000 shares authorized; 400,000 convertible shares
issued and outstanding at December 31, 1997 and 1996
(Liquidation preference at December 31, 1997 and
1996 -- $3,258,800).................................... 400 400
Common stock, $0.001 par value; 40,000,000 shares
authorized; 17,796,045 shares and 13,920,684 shares
issued and outstanding at December 31, 1997 and 1996,
respectively........................................... 17,796 13,921
Additional paid-in capital................................ 117,164,524 94,604,455
Deferred compensation and other adjustments............... (124,910) (20,250)
Accumulated deficit....................................... (111,910,171) (82,621,636)
------------- ------------
Total stockholders' equity........................ 5,147,639 11,976,890
------------- ------------
Total liabilities and stockholders' equity........ $ 26,752,500 $ 22,376,805
============= ============
</TABLE>
See accompanying notes to financial statements.
32
<PAGE> 33
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from collaborative agreements............ $ 3,500,000 $ 3,406,250 $ 2,210,147
Operating expenses:
Research and development....................... 24,140,246 19,138,190 17,634,898
General and administrative..................... 4,833,489 3,537,157 3,704,962
------------ ------------ ------------
Total operating expenses............... 28,973,735 22,675,347 21,339,860
------------ ------------ ------------
Loss from operations............................. (25,473,735) (19,269,097) (19,129,713)
Interest income.................................. 1,217,884 1,082,618 1,695,192
Interest expense (cash).......................... (1,340,544) (603,330) (568,985)
Interest expense (non-cash)...................... (3,692,140) -- --
------------ ------------ ------------
Net loss......................................... $(29,288,535) $(18,789,809) $(18,003,506)
============ ============ ============
Net loss per share............................... $ (1.72) $ (1.39) $ (1.37)
============ ============ ============
Shares used in calculation of net loss per
share.......................................... 17,010,000 13,496,000 13,161,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
33
<PAGE> 34
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
DEFERRED
CONVERTIBLE ADDITIONAL COMPENSATION TOTAL
PREFERRED COMMON PAID-IN AND OTHER ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENTS DEFICIT EQUITY
----------- ------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............... $ -- $13,019 $ 88,013,987 $(898,737) $ (45,828,321) $ 41,299,948
Issuance of 238,297 shares of common
stock upon the exercise of stock
options................................ -- 239 406,176 -- -- 406,415
Unrealized gain on available-for-sale
securities............................. -- -- -- 351,259 -- 351,259
Amortization and reversals of deferred
compensation........................... -- -- (249,237) 400,522 -- 151,285
Net loss................................. -- -- -- -- (18,003,506) (18,003,506)
---- ------- ------------ --------- ------------- ------------
Balance at December 31, 1995............... -- 13,258 88,170,926 (146,956) (63,831,827) 24,205,401
Issuance of 273,978 shares of common
stock upon the exercise of stock
options................................ -- 274 439,806 -- -- 440,080
Issuance of 400,000 shares of series A
convertible preferred stock............ 400 -- 3,057,823 -- -- 3,058,223
Issuance of 388,918 shares of common
stock in connection with Lipha/Merck
collaboration.......................... -- 389 2,971,833 -- -- 2,972,222
Unrealized loss on available-for-sale
securities............................. -- -- -- (26,458) -- (26,458)
Amortization and reversals of deferred
compensation........................... -- -- (35,933) 153,164 -- 117,231
Net loss................................. -- -- -- -- (18,789,809) (18,789,809)
---- ------- ------------ --------- ------------- ------------
Balance at December 31, 1996............... 400 13,921 94,604,455 (20,250) (82,621,636) 11,976,890
==== ======= ============ ========= ============= ============
Issuance of 19,472 shares of common stock
upon the exercise of stock options..... -- 19 64,137 -- -- 64,156
Issuance of 2,000,000 shares of common
stock in connection with a registered
direct public offering in January 1997,
net of issuance costs of $.93
million................................ -- 2,000 8,068,410 -- -- 8,070,410
Issuance of 1,600,000 shares of common
stock in connection with a registered
direct public offering in April 1997,
net of issuance costs of $.13
million................................ -- 1,600 7,822,654 -- -- 7,824,254
Issuance of 200,787 shares of common
stock in connection with Lipha/Merck
collaboration.......................... -- 201 1,492,338 -- -- 1,492,539
Issuance of 55,102 shares of common stock
upon conversion of senior convertible
notes in November 1997................. -- 55 223,108 -- -- 223,163
Unrealized loss on available-for-sale
securities............................. -- -- -- (9,720) -- (9,720)
Deferred compensation related to granting
of options to non-employees, net of
amortization and reversals............. -- -- 240,282 (94,940) -- 145,342
Value ascribed to warrants issued in
conjunction with secured loan.......... -- -- 648,000 -- -- 648,000
Value ascribed to in-the-money conversion
option of senior convertible notes..... -- -- 3,692,140 -- -- 3,692,140
Value ascribed to warrants issued in
conjunction with senior convertible
notes.................................. -- -- 309,000 -- -- 309,000
Net loss................................. -- -- -- -- (29,288,535) (29,288,535)
---- ------- ------------ --------- ------------- ------------
Balance at December 31, 1997............... $400 $17,796 $117,164,524 $(124,910) $(111,910,171) $ 5,147,639
==== ======= ============ ========= ============= ============
</TABLE>
See accompanying notes to financial statements.
34
<PAGE> 35
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss......................................... $(29,288,535) $(18,789,809) $(18,003,506)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 2,108,896 2,363,091 2,717,332
Interest expense on issuance of senior
convertible notes........................... 3,692,140 -- --
Changes in operating assets and liabilities:
Prepaid expenses, current assets and other
assets...................................... 628,198 (80,148) 531,303
Accounts payable, accrued professional fees,
accrued compensation, accrued clinical trial
costs and contract research advances........ (748,327) 2,021,220 206,079
------------ ------------ ------------
Net cash used in operating activities.............. (23,607,628) (14,485,646) (14,548,792)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of available-for-sale investments...... (14,562,627) (10,872,811) (20,007,947)
Maturities of available-for-sale investments..... 4,954,640 26,325,454 33,970,649
Sales of available-for-sale investments.......... -- 1,494,000 --
Capital expenditures............................. (913,382) (864,729) (411,592)
------------ ------------ ------------
Net cash provided by (used in) investing
activities....................................... (10,521,369) 16,081,914 13,551,110
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net... -- 3,058,223 --
Proceeds from issuance of common stock, net...... 17,446,683 3,412,302 406,415
Proceeds from issuance of long-term
obligations................................... 5,000,000 600,000 1,900,000
Proceeds from issuance of senior convertible
notes,
net........................................... 9,479,039 -- --
Principal payments on long-term obligations...... (2,936,297) (1,825,665) (875,192)
Proceeds from asset financing arrangements....... 429,023 -- --
------------ ------------ ------------
Net cash provided by financing activities.......... 29,418,448 5,244,860 1,431,223
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... (4,710,549) 6,841,128 433,541
Cash and cash equivalents at beginning of period... 16,051,251 9,210,123 8,776,582
------------ ------------ ------------
Cash and cash equivalents at end of period......... $ 11,340,702 $ 16,051,251 $ 9,210,123
============ ============ ============
SUPPLEMENTAL INFORMATION
Interest paid...................................... $ 538,891 $ 603,330 $ 634,131
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
35
<PAGE> 36
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops novel pharmaceutical products for major human diseases by isolating
active compounds from tropical plants. The Company has three compounds in
clinical development: Provir, an oral product for the treatment of
AIDS-associated and watery diarrhea; nikkomycin z, an oral antifungal for the
treatment of systemic fungal infections; and SP-134101, an oral product for the
treatment of Type II diabetes. Shaman maintains an active Type II diabetes
research program which serves as the basis for its collaborations with Lipha
s.a., a wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany
("Lipha/Merck"), and with Ono Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.
REVENUE RECOGNITION
Revenue under the Company's collaborative research agreements is recognized
ratably as costs are incurred by the Company in accordance with the performance
requirements of the agreements. Non-refundable payments that are not dependent
on future performance under collaborative agreements are recognized as revenue
when received. Payments received which are still subject to future performance
requirement are deferred until earned. Revenues from achievement of milestone
events are recognized when the funding party agrees that the scientific or
clinical results stipulated in the agreement have been met. Costs of contract
revenue approximate such revenue and are included in research and development
expenses.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists of independent research and
development costs and the costs associated with work performed under
collaborations. Research and development costs include direct and
research-related overhead expenses and are expensed as incurred.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which encourages, but
does not require, companies to record compensation expense for stock-based
employee compensation plans at fair value. The Company has elected to follow the
disclosure requirements of SFAS No. 123 for the year ended December 31, 1997,
1996 and 1995 and will continue to measure stock-based compensation to employees
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the disclosure requirements will have no effect on the
Company's financial position or results of operations. Note 7 contains a summary
of the pro forma effects to reported net loss and net loss per share for 1997,
1996 and 1995 as if the Company had elected to recognize compensation expense
based on the fair value of options granted as described by SFAS 123.
The Company grants stock options to employees and directors for a fixed
number of shares with an exercise price equal to the fair market value of shares
at the date of grant. The Company accounts for stock option grants to employees
and directors in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees and, accordingly, recognizes no compensation expense for the stock
option grants to employees and directors.
PER SHARE DATA
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which the Company adopted in the period ended
December 31, 1997. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options and other common stock equivalents
is
36
<PAGE> 37
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
excluded. The impact of Statement 128 results in no change to the Company's net
loss per share, as stock options and other common stock equivalents have been
excluded from the current computation as they are antidilutive.
Net loss per share is computed using the weighted average number of shares
of common stock outstanding.
CASH, CASH EQUIVALENTS, INVESTMENTS AND CONCENTRATION OF CREDIT RISK
The Company considers all highly liquid investments with remaining
maturities of three months or less at time of purchase to be cash equivalents.
Investments with maturities of less than one year from the balance sheet date
and with original maturities greater than 90 days are considered short-term
investments. Investments with maturities greater than one year from the balance
sheet date are considered long-term investments. Investments consist primarily
of commercial paper, investments in government securities, corporate bonds and
asset-backed securities. These investments typically bear minimal risk. This
diversification of risk is consistent with the Company's policy to maintain high
liquidity and ensure safety of principal. The Company maintains its cash, cash
equivalents and investments in accounts with several United States banks and
brokerage houses.
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such determination as of each balance
sheet date. As of December 31, 1997 and 1996, the Company has classified its
entire investment portfolio as available-for-sale. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax,
included in stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income or expense. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of equipment and
furniture is provided on a straight-line basis over the estimated useful lives
of the respective assets, which range from three (computer equipment and
furniture) to five (laboratory equipment) years. Equipment held under capital
leases is amortized using the straight-line method over the shorter of the lease
term or estimated useful life of the asset. Leasehold improvements are amortized
on a straight-line basis over the remaining life of the lease.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of," the Company records impairment losses on long-lived assets when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Based on the Company's estimate of future
undiscounted cash flows, the Company expects to recover the carrying amounts of
its long-lived assets. Nonetheless, it is reasonably possible that the
37
<PAGE> 38
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
estimate of undiscounted cash flows may change in the near term resulting in the
need to write-down those assets to fair value.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," which
require additional disclosures to be adopted beginning in the first quarter of
1998 and on December 31, 1998, respectively. Under SFAS 130, the Company is
required to display comprehensive income and its components as part of the
Company's full set of financial statements. SFAS 131 requires that the Company
report financial and descriptive information about its reportable operating
segments. The Company is evaluating the impact, if any, of SFAS 130 and SFAS 131
on its future financial statement disclosures, but does not believe the
additional disclosure will be material to the financial statements.
2. COLLABORATIVE RELATIONSHIPS
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 twelve months as the work was
performed. The Company also received approximately $3 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 stock at the time of purchase. In
exchange for development and marketing rights in all countries except Japan,
South Korea, and Taiwan (which are covered under an earlier agreement between
Shaman and Ono), Lipha/Merck will provide up to $9.0 million in research
payments and up to $10.5 million in equity investments priced at a 20% premium
to a multi-day volume weighted average price of the Company's common stock at
the time of purchase. The agreement also provides for additional preclinical and
clinical milestone payments to the Company in excess of $10.0 million per
compound for each antihyperglycemic drug developed and commercialized.
Lipha/Merck will bear all pre-clinical, clinical, regulatory and other
development expenses associated with the compounds selected under the agreement.
In addition, as products are commercialized, Shaman will receive royalties on
all product sales outside the United States and up to 50% of the profits (if the
Company exercises its co-promotion rights) or royalties on all product sales in
the United States. Certain of the milestone payments will be credited against
future royalty payments, if any, due to the Company from sales of products
developed pursuant to the agreement.
For the year ended December 31, 1997, Shaman recognized $1.5 million in
revenue from the Lipha/ Merck collaboration. Shaman also received $1.5 million
for 200,787 shares of Common Stock priced at $7.47 per share, representing a 20%
premium to the weighted average price of the Company's stock at the time of
purchase. Revenues from Lipha/Merck accounted for 43% and 12% of total revenues
earned in 1997 and 1996, respectively.
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
agreement, Shaman will screen 100 diabetes-specific plants per year in vivo,
isolate and identify active compounds, and participate in any medicinal
chemistry modification. In turn, Ono will provide Shaman with access to Ono's
preclinical and clinical development capabilities through proprietary in vitro
assays and medicinal chemistry effort. Ono's development and commercialization
rights are for the countries of Japan, South Korea and Taiwan. Under the terms
of the agreement, Ono will provide up to $7.0 million in
38
<PAGE> 39
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
collaborative research funding and will pay preclinical and clinical milestone
payments of $4.0 million per compound for each antidiabetic drug that is
commercialized. Of the $3.0 million received on signing the agreement, $1.0
million was an access and license fee recognized as revenue in 1995, and the
remaining $2.0 million was the annual research and development funding
recognized as revenue over the subsequent year. Shaman received an additional
$1.0 million payment (beyond the $7.0 million commitment) in December 1996 for
enhanced access rights to these compounds. For the year ended December 31, 1997,
Shaman recognized $2.0 million in revenue from the Ono collaboration. Revenues
from Ono accounted for 57% and 88% of total revenues earned in 1997 and 1996,
respectively.
Costs associated with revenue from these collaborations totaled $11.4
million and $11.6 million for the year ended December 31, 1997 and 1996,
respectively, and are included in research and development expenses in the
accompanying financial statements.
3. INVESTMENT SECURITIES
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and government
obligations.................................... $ 4,625 $ -- $(10) $ 4,615
U.S. corporate bonds............................. 3,000 -- 3,000
U.S. corporate commercial paper and other........ 10,810 -- (20) 10,790
------- ---- ---- -------
Total.................................. $18,435 $ -- $(30) $18,405
======= ==== ==== =======
</TABLE>
Above amounts are included in the balance sheet as follows:
<TABLE>
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 8,345 $ -- $(20) $ 8,325
Short-term investments........................... 10,090 -- (10) 10,080
------- ---- ---- -------
Total.................................. $18,435 $ -- $(30) $18,405
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and government
obligations.................................... $ 499 $ -- $(17) $ 482
U.S. corporate bonds............................. 2,218 -- -- 2,218
U.S. corporate commercial paper and other........ 12,830 -- (3) 12,827
------- ---- ---- -------
Total.................................. $15,547 $ -- $(20) $15,527
======= ==== ==== =======
</TABLE>
Above amounts are included in the balance sheet as follows:
<TABLE>
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $15,048 $ -- $ (3) $15,045
Short-term investments........................... 499 -- (17) 482
------- ---- ---- -------
Total.................................. $15,547 $ -- $(20) $15,527
======= ==== ==== =======
</TABLE>
The average remaining maturity of the portfolio was approximately four and
a half months as of December 31, 1997 and 1996, respectively.
39
<PAGE> 40
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
judgment is required in interpreting market data to develop the estimates of
fair value.
FAIR VALUE OF LONG-TERM OBLIGATIONS
The fair values of the Company's long-term obligations are estimated using
discounted cash flow analyses based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements. The carrying amounts
and fair values of long-term obligations consisted of the following at December
31, 1997:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
Leasehold improvements financings................. $2,093,435 $2,010,938
Equipment borrowings.............................. $ 401,555 $ 403,194
Secured Loan...................................... $4,190,105 $4,330,073
</TABLE>
The carrying value of the Company's term loan approximates its fair value
because the interest rates on the note takedowns are periodically reset.
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of secured and unsecured term loans, senior
convertible notes, secured borrowings used to acquire property and equipment,
capital lease arrangements and a leasehold improvement financing obligation.
In October 1995, the Company closed a $2.5 million unsecured term loan to
finance capital asset acquisitions and potential facilities expansion. The
Company failed to achieve certain financing and collaborative objectives by May
15, 1996 which resulted in an acceleration of principal. The acceleration
provisions required that principal amortization be shortened from 30 months to
24 months, with the first monthly payment due May 15, 1996. The unsecured term
loan was paid off in May 1997. Interest on each advance was charged at the
London Interbank Offered Rate ("LIBOR") plus 1.5% or prime plus 0.5%. The
interest rate on the loan was approximately 7.14% at May 1997 and 7.13% at
December 31, 1996.
In May 1997, the Company obtained a $5.0 million term loan to payoff
pre-existing debt, finance capital asset acquisitions and finance continued
research and clinical development. The loan is payable in thirty-six equal
monthly installments and the interest rate is 14.58%. The lender was granted
warrants to purchase 200,000 shares of the Company's Common Stock at $6.25 per
share, which are exercisable over a ten year period.
In June 1997, the Company privately issued $10.4 million of senior
convertible notes (The "1997 Private Placement"). The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option. Initially, the notes are
convertible into Common Stock of the Company at 100% of the low trading price
during a designated time period prior to conversion provided that the conversion
price will not be less than $5.50 per share. Starting in November 1997, 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,
with a floor of $5.50 through March 31, 1998, pursuant to a November 1997
understanding with the note holders to revise the terms of the note. In
connection with this understanding, the Company issued to the note holders
three-year warrrants to purchase an aggregate of 137,500 shares of common stock
at an exercise price of $7.50 per share. In November 1997, a principal amount of
$220,666 was converted into 55,102 shares of the Company's Common Stock.
Of the notes issued, $400,000 were issued to the placement agent as part of
the placement fee. The Company paid the placement agent an additional $300,000
in cash. The placement fees and other offering costs have been capitalized in
other assets as deferred issuance costs and are being amortized to interest
40
<PAGE> 41
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
expense over the life of the notes. The net proceeds totaled approximately $9.5
million after the placement agent's fees and other offering expenses.
The SEC has promulgated requirements for charges to be recognized by
companies which issue certain convertible notes that provide for a guaranteed
discount feature. In connection with the issuance of the notes, the Company
recognized a non-cash charge in the amount of $3,692,000 in the third quarter
ended September 30, 1997. This amount was calculated as required by the SEC.
Equipment borrowings totaled $401,555 and $1,183,335 at December 31, 1997
and 1996, respectively. The borrowings bear interest at rates ranging from 10.7%
to 12.75% at December 31, 1997 and 1996, respectively, are secured by the
equipment acquired, and are payable in monthly installments ranging from $10,000
to $156,000 through December 1998.
The Company has also acquired certain equipment and furniture pursuant to
capital lease arrangements. The gross amount of equipment and furniture and the
related accumulated amortization recorded under capital leases included in
property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
At December 31,
Equipment and furniture........................... $ 1,890,164 $ 1,461,141
Less accumulated amortization..................... (1,354,475) (1,194,475)
----------- -----------
$ 535,689 $ 266,666
=========== ===========
</TABLE>
Amortization of assets acquired under capital leases is included with
depreciation and amortization expense.
In connection with the facility lease described in Note 5, the Company
entered an agreement with the former tenant of the facility to acquire
approximately $1.5 million of tenant improvements by making annual payments to
the former tenant, including accrued interest, of $540,000 in 1998 through 2002.
At December 31, 1997, future payments on long-term obligations are as
follows:
<TABLE>
<CAPTION>
SENIOR LEASEHOLD
CONVERTIBLE SECURED EQUIPMENT CAPITAL IMPROVEMENT
NOTES LOAN BORROWINGS LEASES FINANCING TOTAL
----------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1998..................... $ -- $ 1,558,076 $ 401,555 $128,382 $ 540,000 $ 2,628,013
1999..................... -- 1,801,058 -- 128,382 540,000 2,469,440
2000..................... 10,179,334 830,971 -- 128,382 540,000 11,678,687
2001..................... -- -- -- 128,382 540,000 668,382
2002..................... -- -- -- -- 540,000 540,000
----------- ----------- --------- -------- ---------- -----------
Total minimum
payments..... 10,179,334 4,190,105 401,555 513,528 2,700,000 17,984,522
Less amount representing
interest (at rates
ranging from 10.7% to
14.6%)................. -- -- -- (84,506) (606,565) (691,071)
----------- ----------- --------- -------- ---------- -----------
10,179,334 4,190,105 401,555 429,022 2,093,435 17,293,451
Less current
installments........... -- (1,558,076) (401,555) (92,507) (540,000) (2,592,138)
----------- ----------- --------- -------- ---------- -----------
Long-term obligations,
excluding current
installments........... $10,179,334 $ 2,632,029 $ -- $336,515 $1,553,435 $14,701,313
</TABLE>
41
<PAGE> 42
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
In January 1993, the Company entered a noncancelable lease for a new
research and office facility in South San Francisco, California. The lease, as
amended in April 1994, provides for future lease payments totaling approximately
$7.7 million through 2003 and options to renew for a total of ten years. The
Company is required to pay operating costs, including property taxes, utilities,
insurance and maintenance.
At December 31, 1997, the minimum noncancelable future rental payments
under the Company's operating leases are:
<TABLE>
<S> <C>
1998..................................................... $1,187,000
1999..................................................... 1,292,000
2000..................................................... 1,497,000
2001..................................................... 1,497,000
2002..................................................... 1,497,000
Thereafter............................................... 762,000
</TABLE>
Rent expense for each of the three years ended December 31, 1997, 1996 and
1995 was approximately $1,154,000, $1,348,000, and $1,004,000, respectively.
The Company is involved in a litigation and disputes which are incidental
to its business. While it is not possible to predict or determine the outcome of
such litigation and disputes, or to provide an estimate of the losses, if any,
that may arise, the Company believes the costs associated with all of these
actions will not have a material effect on the Company's consolidated financial
position or liquidity, but could possibly be material to the consolidated
results of operations. Further, product liability claims may be asserted in the
future relative to events not known to management at the present time. The
Company has insurance coverage which management believes is adequate to protect
against such product liability losses as could materially affect the Company's
financial position.
6. CONTRACTUAL AGREEMENTS
The Company has entered into license, clinical trial and supply agreements
with universities, research organizations and commercial companies. Certain of
these agreements require payments of royalties on future sales of resulting
products and may subject the Company to minimum annual payments to its contract
partners. In addition, the Company signed an agreement in 1995 which could
result in the payment of milestone installments if certain development
objectives are achieved. To date, payments under these agreements have not been
significant and, at December 31, 1997, related noncancelable commitments are
immaterial.
7. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock
(400,000 shares of which are issued and outstanding). The Company's Board of
Directors may set the rights and privileges of any preferred stock issued.
In July 1996, the Company closed a private placement pursuant to Regulation
S under the Securities Act of 1933, as amended, in which it received gross
proceeds of $3.3 million for 400,000 shares of Series A convertible preferred
stock ("preferred stock") and a six-year warrant to purchase 550,000 shares of
the Company's common stock at an exercise price of $10.184 per share. The
Preferred Stock does not carry a dividend obligation and will convert into
common stock no later than July 23, 1999 at a price per share between $6.00 and
$8.147, depending on the market value of the Company's common stock during the
period
42
<PAGE> 43
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
prior to conversion. Holders of preferred shares are entitled to a liquidation
preference of $8.147 per share and have voting rights equivalent to the number
of common shares into which their preferred shares could then be converted. In
addition to the sale of Preferred Stock and warrant, the Company has the right,
from time to time during the period beginning January 1997 and ending July 2000,
to sell up to 1,200,000 additional shares of common stock to the investor at a
formula price of 100% or 101% of a multi-day average of the Company's common
stock price at the time of sale. If the Company exercises this right, the
investor has the option to increase the shares purchased by up to an aggregate
of 527,500 shares.
COMMON STOCK
In December 1992, the Company adopted the 1992 Stock Option Plan ("the
Plan") as the successor plan to the Company's 1990 Stock Option Plan. The Plan
will terminate on the earlier of December 31, 2002 or the date on which all
shares available for issuance under the Plan have been issued or canceled. The
Plan provides for two separate components: the Discretionary Option Grant
Program and the Automatic Option Grant Program.
Under the Discretionary Option Grant Program, options granted may either be
incentive options or non-statutory options. Incentive options may be granted to
employees at a price not less than the fair market value of the Company's common
stock on the grant date. Non-statutory options may be granted at a price
determined by the plan administrator. Each option granted is exercisable as
determined by the plan administrator, with a term not to exceed ten years. The
Plan also allows for the granting of options with repurchase rights and stock
appreciation rights at the discretion of the plan administrator.
Under the Automatic Option Grant Program, each individual who becomes a
non-employee board member on or after the effective date of the Plan is
automatically granted a non-statutory stock option to purchase 20,000 shares of
common stock. Further, each non-employee board member who has served as a member
for at least six months prior to the annual stockholders' meeting is
automatically granted an annual non-statutory stock option to purchase not more
than 7,500 nor less than 5,000 shares of common stock, depending on a
calculation based on the average selling price of the common stock. The exercise
price of each option granted is the fair value of the common stock on the date
of grant. These options have a ten-year term and vest over 24 months.
Both programs provide for automatic acceleration of the exercise period in
the event of certain corporate transactions, including a merger, asset sale or
change in control of the Company. The Plan was amended in 1997 to increase the
shares authorized for issuance by additional 700,000 shares.
The 1990 Stock Option Plan provided for the granting of incentive and
non-statutory stock options. Both types of options were immediately exercisable
and expire ten years from the date of grant. Vesting of optioned shares was
determined by the board of directors and generally occurred over a two- to
four-year period from the date of grant. At December 31, 1997, all options to
purchase common stock issued under this plan were vested.
43
<PAGE> 44
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER PRICE PER EXERCISE FAIR VALUE
OF SHARES SHARE PRICE AT GRANT DATE
--------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.................... 1,809,065 $ .06 - 13.25 $4.40
Granted at fair value......................... 847,928 5.88 - 8.13 6.75 $3.85
Exercised..................................... (273,978) .06 - 7.86 1.61
Forfeited..................................... (281,039) .24 - 13.25 6.12
--------- ------------- -----
Balance at December 31, 1996.................... 2,101,976 .06 - 13.25 5.48
Granted at fair value......................... 951,400 4.13 - 6.81 5.41 $3.46
Exercised..................................... (19,472) .24 - 5.88 3.29
Forfeited..................................... (242,299) 3.50 - 13.25 6.40
--------- ------------- -----
Balance at December 31, 1997.................... 2,791,605 $ .06 - 13.25 $5.40
========= ============= =====
</TABLE>
At December 31, 1997, 1,310,036 shares under options were exercisable at a
weighted average exercise price of $5.25 per share (968,235 shares at $5.10 per
share at December 31, 1996).
The following table summarizes information regarding stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
SHARES UNDER OPTIONS EXERCISABLE
WEIGHTED AT DECEMBER 31, 1997
AVERAGE WEIGHTED --------------------------------
OPTION SHARES REMAINING AVERAGE WEIGHTED
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 LIFE (YEARS) PRICE NUMBER EXERCISE PRICE
- --------------- ----------------- ------------ -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
$0.06 - $ 3.63 684,820 6.20 $ 2.71 517,558 $ 2.46
4.13 - 5.25 605,394 8.53 5.07 127,627 5.20
5.38 - 6.06 735,288 8.89 5.68 243,280 5.59
6.38 - 7.50 571,028 8.01 6.88 235,492 6.91
7.86 - 13.25 195,075 5.86 10.41 186,079 10.52
- -------------- --------- ---- ------ --------- ------
$0.06 - $13.25 2,791,605 7.76 $ 5.39 1,310,036 $ 5.25
============== ========= ==== ====== ========= ======
</TABLE>
For certain options issued during the years ended December 31, 1993 and
1994, the Company recorded deferred compensation for the difference between the
exercise price and the fair market value of the Company's common stock at the
date of grant. For certain additional options issued during the years ended
December 31, 1996 and 1997 to non-employees, the Company recorded deferred
compensation expense for the fair value of the options at the date of grant.
Deferred compensation is amortized to expense on a straight-line basis over the
vesting period of the options.
PRO FORMA INFORMATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options granted subsequent to
44
<PAGE> 45
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model. The following are the weighted-average assumptions for 1997, 1996
and 1995, respectively: risk-free interest rates of 6.27%, 5.73%, and 6.94%; no
dividends paid; volatility factors of the expected market price of the Company's
common stock of .75 and a weighted-average expected life of the options of 5.0,
3.85, and 3.91 years. The effects of applying FAS 123 for recognizing
compensation expense and providing pro forma disclosures in 1997 and 1996 are
not likely to be representative of the effects on reported net income in future
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro-forma net loss over the options' vesting periods.
The Company's pro forma information follows (in thousands except for net loss
per share information):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss
Historical....................................... $(29,289) $(18,790) $(18,004)
Pro forma........................................ $(31,101) $(20,280) $(18,731)
Net loss per share
Historical....................................... $ (1.72) $ (1.39) $ (1.37)
Pro forma........................................ $ (1.83) $ (1.50) $ (1.42)
</TABLE>
RESERVED SHARES
At December 31, 1997, 4,560,284 shares of common stock were reserved for
conversion of outstanding preferred stock and for issuance upon exercise of
outstanding options, warrants and options available for future grant.
WARRANTS
A summary of warrants outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE TERM
DESCRIPTION WARRANTS PRICE IN YEARS EXPIRATION
----------- --------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Lease financing arrangements.................... 91,705 $2.40 - $10.83 5 - 7 1998
Series A convertible preferred stock............ 400,000 $10.184 6 2002
Secured term loan............................... 200,000 $ 6.25 10 2007
Senior convertible notes........................ 137,500 $ 7.50 3 2000
-------
979,205
=======
</TABLE>
In connection with obtaining long term debt financing in May 1997, the
Company issued warrants to purchase a total of 200,000 shares of common stock
(see Note 4). These warrants were determined to have a total value of $648,000
based on the Black Scholes option pricing model. Such value has been recognized
as a reduction to the related debt and is being amortized to interest expense
over the term of such debt.
45
<PAGE> 46
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In connection with an amendment to the conversion terms of senior
convertible notes in November 1997, the Company agreed to issue warrants to
purchase a total of 137,500 shares of common stock at an exercise price of $7.50
per share (see Note 4). These warrants were determined to have a total value of
$309,000 based on the Black Scholes option pricing model. Such value has been
recognized as a reduction to the related convertible notes and is being
amortized to interest expense over the extended conversion term.
8. TAXES
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $102 million. The net operating loss and credit
carryforwards will expire at various dates beginning in 2004 through 2012, if
not sooner utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of December 31, 1997, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $ 35,200,000 $ 26,600,000 $ 20,600,000
Research credits (expiring in
2004 - 2012)............................ 2,800,000 2,300,000 1,900,000
Capitalized research and development
costs................................... 4,700,000 3,700,000 2,900,000
Other...................................... 400,000 400,000 100,000
------------ ------------ ------------
Total deferred tax assets.......... 43,100,000 33,000,000 25,500,000
Valuation allowance for deferred tax
assets.................................. (43,100,000) (33,000,000) (25,500,000)
------------ ------------ ------------
Net deferred tax asset..................... $ -- $ -- $ --
============ ============ ============
</TABLE>
The net valuation allowance increased by $6.7 million during the year ended
December 31, 1995.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
46
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item 10 concerning the directors and
executive officers of the Company is incorporated by reference from the
information under the captions "Proposal One -- Election of
Directors -- Information With Respect to Nominees" and "Executive Compensation
and Other Information -- Directors and Executive Officers" in the Company's
Definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with the Company's 1998 Annual Meeting of
Stockholders (the "Proxy Statement").
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this Item 10 as to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference from
the information under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from
the information under the caption "Executive Compensation and Other Information"
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference from
the information under the caption "Security Ownership of Management and Certain
Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1996, the Company loaned to Dr. Atul S. Khandwala, the Company's
Senior Vice President, Development and Chief Regulatory Officer, the principal
amount of $268,000 in connection with the purchase of his residence in the Bay
Area. The loan bears interest at the minimum rate imputed by the Internal
Revenue Service per annum. Subject to Dr. Khandwala's continued employment, the
loan will be forgiven in a series of annual installments over the term of the
loan. The Company forgave $106,399 and $82,217 of such indebtedness in fiscal
years 1996 and 1997, respectively.
In April 1994, the Company loaned to Dr. Steven R. King, the Company's
Senior Vice President, Ethnobotany and Conservation, the principal amount of
$20,000 in connection with the purchase of his residence in the Bay Area. Such
loan was forgiven in 1995 as a bonus of achievement of milestones in 1994.
Each of the foregoing loans were a result of arms length negotiations with
the individuals involved.
Additional information required by this Item 13 is incorporated by
reference from the information under the caption "Executive Compensation and
Other Information -- Certain Relationships and Related Transactions" in the
Proxy Statement.
47
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following Financial Statements together with the Report of Independent
Auditors are filed as part of this Form 10-K/A under Item 8 above:
Report of Independent Auditors
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for each of the years ended December 31, 1997,
1996 and 1995
Statements of Stockholders' Equity for each of the years ended December
31, 1997, 1996 and 1995
Statements of Cash Flows for each of the years ended December 31, 1997,
1996 and 1995
Notes to Financial Statements
(a) (2) Financial Statement Schedules
No financial statement schedules are included because they are not
required or the required information is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K
A current Report on Form 8-K was filed on November 19, 1997 containing
information required by Item 5, Other Events.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
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.
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.
10.1(1)(14) 1990 Stock Option Plan, as amended.
10.2(1)(14) 401(k) Plan.
10.3(1)(14) Form of Stock Purchase Agreement.
10.4(1) Form of Confidentiality Agreement-Employees & Consultants.
10.5(1) Form of Confidentiality Agreement-Strategic Planning.
10.6(1) Form of Indemnification Agreement.
10.7(1)(14) Form of Employment 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.
10.11(1) Letter Agreements dated December 8, 1989, May 30, 1990, June
21, 1990, August 24, 1990 and July 22, 1991, between Shaman
and National Institute of Allergy and Infectious Diseases.
10.12(1)(13) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(14) Stock Purchase Agreement dated June 15, 1990, between Shaman
and Lisa A. Conte.
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
10.14(1) Master Equipment Lease Agreement dated September 28, 1990,
between Shaman and MMC/GATX Partnership No. I, with related
schedules.
10.15(1) Series B Preferred Stock Warrants dated September 28, 1990
and June 28, 1991, issued to MMC/GATX Partnership No. I.
10.16(1)(13) License Agreement dated December 5, 1990, as amended January
19, 1992, between Shaman and the University of British
Columbia.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.18(1) Master Equipment Lease Agreement dated April 22, 1991,
between Shaman and Industrial Way I Limited Partnership.
10.19(1)(13) Contract Services Agreement dated May 23, 1991, February 1,
1992, February 4, 1992, September 23, 1992 and October 30,
1992, between Shaman and New Drug Services, Inc.
10.20(1)(13) License Agreement dated September 25, 1991, between Shaman
and Inverni della Beffa SpA.
10.21 Reserved.
10.22(1)(13) Master Clinical Trial Agreement dated September 30, 1991
between Shaman and International Drug Registration, Inc.
10.23(1) Series D Preferred Stock Warrant dated February 3, 1992,
issued to MMC/ GATX Partnership No. I.
10.24(1)(13) Supply Agreement dated June 1, 1992.
10.25(1)(13) Supply Agreement dated June 1, 1992.
10.26(2) Screening Agreement dated August 31, 1992, as amended June
2, 1993, between Shaman and Merck Research Laboratories.
10.27(1)(13) Agreement dated October 16, 1992, between Shaman and
International Medical Technical Consultants, Inc.
10.28(5)(13) Research Agreement dated October 21, 1992, as amended April
27, 1994, between Shaman and Eli Lilly and Company.
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.
10.32(2)(13) Letter Agreement dated March 1, 1993, between Shaman and
Lederle-Praxis Biologicals, Division of American Cynamide
Corporation.
10.33(4) Contract Service Agreements dated May 10, 1993, between
Shaman and R.C. Benson & Sons, Inc.
10.34(4)(13) Clinical Trial Agreement dated July 21, 1993, between Shaman
and the University of Rochester.
10.35(4)(13) Letter Agreement dated August 24, 1993, between Shaman and
University of Michigan.
10.36(4)(13) Laboratory Services Agreement dated September 1, 1993,
between Shaman and Hazelton Washington, Inc.
10.37(4) Loan and Security Agreement dated September 27, 1993,
between Shaman and Household Commercial of California.
</TABLE>
49
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
10.38(4) Master Equipment Lease Agreement dated September 30, 1993,
between Shaman and MMC/GATX Partnership No. I, with related
schedules.
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)(13) Joint Research and Product Development Agreement, dated May
24, 1995, by and between Ono Pharmaceutical Co., Ltd. and
Registrant.
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)(13) License Agreement, dated June 8, 1995, by and between Bayer
AG and Registrant.
10.43(7)(13) Development Agreement, dated January 11, 1996, by and
between Abbott Laboratories and Registrant.
10.44(7) Loan Agreement, dated October 20, 1995, by and between The
Daiwa Bank, Limited and Registrant.
10.45(7) Assignment and Assumption, dated February 2, 1996, between
The Daiwa Bank, Limited and The Sumitomo Bank, Limited.
10.46(8) Letter dated March 29, 1996 from The Sumitomo Bank, Limited
to the Registrant amending the Loan Agreement dated October
20, 1995.
10.47(9)(13) Subscription Agreement dated July 25, 1996 by and between
the Registrant and Fletcher International Limited.
10.48(10)(13) 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)(13) Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a.
and the Registrant.
10.50(11)(14) Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as
Amended and Restated on February 14, 1997).
10.51(3)(14) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(14) Form of Addendum to Stock Option Agreement (Special Tax
Elections).
10.53(3)(14) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.54(11)(14) 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)(13) 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.
10.58(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.
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
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** Master Lease Agreement, dated September 15, 1997, between
Shaman and Transamerica Business Credit Corporation, with
related schedules.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of Attorney (included under the caption "Signatures").
27* Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
(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) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993.
(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) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994.
(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) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(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) Confidential treatment has been granted with respect to certain portions of
these agreements.
(14) Management contract or compensation plan.
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May , 1998 SHAMAN PHARMACEUTICALS, INC.
By: /s/ LISA A. CONTE
------------------------------------
Lisa A. Conte
President, Chief Executive Officer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LISA A. CONTE President, Chief Executive May , 1998
- --------------------------------------------------- Officer, Chief Financial
Lisa A. Conte Officer and Director (principal
executive and financial
officer)
* Director May , 1998
- ---------------------------------------------------
Adrian D.P. Bellamy
* Director May , 1998
- ---------------------------------------------------
Herbert H. McDade, Jr.
* Chairman of the Board May , 1998
- ---------------------------------------------------
G. Kirk Raab
* Director May , 1998
- ---------------------------------------------------
M. David Titus
* Director May , 1998
- ---------------------------------------------------
John A. Young
*By: /s/ LISA A. CONTE
- ---------------------------------------------------
Lisa A. Conte
(Attorney in fact)
</TABLE>
52
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
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.
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.
10.1(1)(14) 1990 Stock Option Plan, as amended.
10.2(1)(14) 401(k) Plan.
10.3(1)(14) Form of Stock Purchase Agreement.
10.4(1) Form of Confidentiality Agreement-Employees & Consultants.
10.5(1) Form of Confidentiality Agreement-Strategic Planning.
10.6(1) Form of Indemnification Agreement.
10.7(1)(14) Form of Employment 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.
10.11(1) Letter Agreements dated December 8, 1989, May 30, 1990, June
21, 1990, August 24, 1990 and July 22, 1991, between Shaman
and National Institute of Allergy and Infectious Diseases.
10.12(1)(13) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(14) Stock Purchase Agreement dated June 15, 1990, between Shaman
and Lisa A. Conte.
10.14(1) Master Equipment Lease Agreement dated September 28, 1990,
between Shaman and MMC/GATX Partnership No. I, with related
schedules.
10.15(1) Series B Preferred Stock Warrants dated September 28, 1990
and June 28, 1991, issued to MMC/GATX Partnership No. I.
10.16(1)(13) License Agreement dated December 5, 1990, as amended January
19, 1992, between Shaman and the University of British
Columbia.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.18(1) Master Equipment Lease Agreement dated April 22, 1991,
between Shaman and Industrial Way I Limited Partnership.
10.19(1)(13) Contract Services Agreement dated May 23, 1991, February 1,
1992, February 4, 1992, September 23, 1992 and October 30,
1992, between Shaman and New Drug Services, Inc.
10.20(1)(13) License Agreement dated September 25, 1991, between Shaman
and Inverni della Beffa SpA.
10.21 Reserved.
10.22(1)(13) Master Clinical Trial Agreement dated September 30, 1991
between Shaman and International Drug Registration, Inc.
10.23(1) Series D Preferred Stock Warrant dated February 3, 1992,
issued to MMC/ GATX Partnership No. I.
10.24(1)(13) Supply Agreement dated June 1, 1992.
10.25(1)(13) Supply Agreement dated June 1, 1992.
10.26(2) Screening Agreement dated August 31, 1992, as amended June
2, 1993, between Shaman and Merck Research Laboratories.
10.27(1)(13) Agreement dated October 16, 1992, between Shaman and
International Medical Technical Consultants, Inc.
10.28(5)(13) Research Agreement dated October 21, 1992, as amended April
27, 1994, between Shaman and Eli Lilly and Company.
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.
10.32(2)(13) Letter Agreement dated March 1, 1993, between Shaman and
Lederle-Praxis Biologicals, Division of American Cynamide
Corporation.
10.33(4) Contract Service Agreements dated May 10, 1993, between
Shaman and R.C. Benson & Sons, Inc.
10.34(4)(13) Clinical Trial Agreement dated July 21, 1993, between Shaman
and the University of Rochester.
10.35(4)(13) Letter Agreement dated August 24, 1993, between Shaman and
University of Michigan.
10.36(4)(13) Laboratory Services Agreement dated September 1, 1993,
between Shaman and Hazelton Washington, Inc.
10.37(4) Loan and Security Agreement dated September 27, 1993,
between Shaman and Household Commercial of California.
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
10.38(4) Master Equipment Lease Agreement dated September 30, 1993,
between Shaman and MMC/GATX Partnership No. I, with related
schedules.
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)(13) Joint Research and Product Development Agreement, dated May
24, 1995, by and between Ono Pharmaceutical Co., Ltd. and
Registrant.
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)(13) License Agreement, dated June 8, 1995, by and between Bayer
AG and Registrant.
10.43(7)(13) Development Agreement, dated January 11, 1996, by and
between Abbott Laboratories and Registrant.
10.44(7) Loan Agreement, dated October 20, 1995, by and between The
Daiwa Bank, Limited and Registrant.
10.45(7) Assignment and Assumption, dated February 2, 1996, between
The Daiwa Bank, Limited and The Sumitomo Bank, Limited.
10.46(8) Letter dated March 29, 1996 from The Sumitomo Bank, Limited
to the Registrant amending the Loan Agreement dated October
20, 1995.
10.47(9)(13) Subscription Agreement dated July 25, 1996 by and between
the Registrant and Fletcher International Limited.
10.48(10)(13) 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)(13) Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a.
and the Registrant.
10.50(11)(14) Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as
Amended and Restated on February 14, 1997).
10.51(3)(14) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(14) Form of Addendum to Stock Option Agreement (Special Tax
Elections).
10.53(3)(14) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.54(11)(14) 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)(13) 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.
10.58(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.
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
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** Master Lease Agreement, dated September 15, 1997, between
Shaman and Transamerica Business Credit Corporation, with
related schedules.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of Attorney (included under the caption "Signatures").
27* Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
(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) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993.
(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) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994.
(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) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(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) Confidential treatment has been granted with respect to certain portions of
these agreements.
(14) Management contract or compensation plan.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-66450, 33-93938, No. 333-09169 and No. 333-30365) pertaining to
the 1992 Stock Option Plan of Shaman Pharmaceuticals, Inc. of our report dated
January 29, 1998, with respect to the financial statements of Shaman
Pharmaceuticals, Inc. included in the Annual Report (Form 10-K/A) for the year
ended December 31, 1997.
ERNST & YOUNG LLP
Palo Alto, California
May 6, 1998
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