SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-21022
Shaman Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
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)
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
OTC Bulletin Board on February 26, 1999 was $0.343.*
The number of shares of the Registrant's Common Stock outstanding was
33,277,402 as of February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement to be filed with the
Commission pursuant to Regulation 14A in connection with the Company's 1999
Annual Meeting are incorporated herein by reference into Part III of this
Report.
- - ----------
* Excludes 629,060 shares of the Registrant's Common Stock held by executive
officers, directors and affiliated parties at February 26, 1999. 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.
<PAGE>
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 "Risk Factors." While this
outlook represents our judgment on the current and 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.
BUSINESS
Overview
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") is focused on the
discovery, development, and marketing of novel, proprietary botanical dietary
supplements derived from tropical plant sources. Until December 1998, the
Company was solely focused on developing pharmaceuticals products derived from
tropical plant sources. As a result of the U.S. Food and Drug Administration
("FDA") response to its leading pharmaceutical product candidate and
insufficient resources to continue the costly process of pharmaceutical
development, the Company restructured its business to focus on the development
and marketing of dietary supplements. As a result, the Company now has available
for out-licensing its pipeline of novel pharmaceutical product candidates for
major human diseases developed by isolating active compounds from tropical
plants with a history of medicinal use.
Background
Pharmaceuticals
The worldwide market for pharmaceuticals continues to grow at a rapid
pace. Much of this growth is driven by new product development, including novel
compounds and formulations. Technological advances in the pharmaceutical
industry are rapid and substantial, and competition is intense among
pharmaceutical and biotechnology companies and universities to develop and
introduce new products.
Pharmaceutical companies, both large and small, are looking for innovative
products available for in-license to enhance their existing product portfolios.
Products that have an entirely different approach or means of accomplishing the
desired therapeutic effect than products currently available are particularly in
demand. In addition, companies are looking to develop or in-license products
that may be more effective and/or less costly than those currently available, or
those that could offer an alternative to other, more invasive forms of medical
treatment.
Botanicals
In 1997, the U.S. dietary supplement market was $12.9 billion. Of this,
nearly $4.0 billion were herbal or botanical dietary supplements ("BDSs"). In
1998, this number was projected to reach $5.0 billion, with a compounded yearly
growth rate of 15% to 25%. In 1997, 24% of U.S. households reported using BDSs.
The growth of this market has been led by consumers who are interested in
alternative, non-pharmaceutical options for treating symptoms, fulfilling unmet
dietary needs, and optimizing health, either as an alternative to, or in
conjunction with, more conventional medical approaches. The Company believes
that the use of these products will continue to expand based upon the aging of
the population, increasing scientific evidence and acceptance by the
conventional medical establishment, and the recent entrance of powerful consumer
companies which provide greater product confidence, while growing the base of
consumer users.
Based upon market forces, the Company believes that room exists for
significant continuing growth of the dietary supplement market and expects the
two key drivers of market growth to be (1) growth in the number and breadth of
consumers utilizing these products; and (2) continuing effective product
innovation to fuel both trial and repurchase.
2
<PAGE>
Growth in the number and breadth of consumers utilizing these products has
already begun, and is based in part upon the entrance of the large consumer
healthcare companies into the BDS market. These companies have increased the
visibility of BDSs, placing them not only in local health food stores but also
in neighborhood grocery stores, drug stores, and mass merchandisers.
Additionally, these companies are spending on large direct-to-consumer
advertising campaigns, placing advertisements during primetime television and in
mainstream newspapers and magazines. Consumer surveys show this has resulted in
a broader base of consumers being educated about, trying and utilizing dietary
supplements.
Simultaneous with the broadening of the consumer base, the BDS market has
grown partially as a result of the media highlighting new products. For example,
in 1997, ABC's 20/20, The New York Times and Newsweek carried a series of
stories about St. John's wort, increasing trial and usage dramatically.
Interestingly, while the month-on-month growth of St. John's wort has now
slowed, this initial increase in sales has been maintained throughout the
industry. These new product "bursts" have fueled episodic but sustained market
growth by driving new purchases, and in the process, the repurchase of other
products once the consumer is at the point of purchase. Hence, the industry's
view is that the media and consumers are looking for continuing effective
product innovation--for the next St. John's wort--to fuel both trial and
repurchase. Products with a proprietary position have proven to be particularly
successful in the past.
Finally, as more consumers have entered the dietary supplement market,
they have also begun to demand better quality, more consistency and
standardization of products, and scientific evidence regarding the safety and
efficacy of products. Increased demand has also strained the supply of natural
plant material for some popular products. Not all companies in the industry have
proven capable of meeting these consumer demands.
Strategy
Pharmaceuticals
To date, Shaman Pharmaceuticals has been primarily focused on discovering
and developing novel pharmaceutical products for major human diseases by
isolating and optimizing active compounds found in tropical plants with a
history of medicinal use. The Company has conducted human clinical trials with
its three lead product candidates -- SP-303/Provir (Phase III/II), nikkomycin Z
(Phase I) and SP-134101 (Phase I) -- targeting five indications. Due to
unforeseen delays and costs necessary to complete additional trials for its lead
compound, SP-303/Provir for the treatment of diarrhea in people with AIDS, the
Company has chosen to discontinue all pharmaceutical development, manufacturing
and marketing activities. See "Business--Product Candidates--Pharmaceuticals."
The Company now intends to sell or outlicense worldwide marketing rights to its
pharmaceutical assets. The Company now plans to focus its efforts on its
Botanicals division.
Botanicals
The concept for Shaman's Botanicals division was developed in 1998, and it
has become the focus of Shaman's operations in 1999. The purpose of the
Botanicals business is to discover, develop and market novel, proprietary
botanical dietary supplements derived from tropical plant sources. The unique
positioning of Shaman's Botanicals business stems from significant financial
investment, more than 10 years of extensive field research by its teams of
ethnobotanists and physicians, and pharmaceutical-level chemical
standardization, biological and clinical testing. In the last decade, Shaman has
amassed a large body of information on the health benefits of thousands of
tropical plant species that have a history of human use and has organized this
into an extensive relational database. This database includes over 2,600
tropical plants, many of which have not been introduced or fully developed in
the U.S. dietary supplement market. Shaman has identified plants with a
documented ethnomedical history of use in its library and database of botanicals
for use in key market categories with significant commercial potential. Because
many of these plants reflect the previously untapped plant diversity of the rain
forests, many represent novel botanical products that have the opportunity to
attain a strong, proprietary market position.
3
<PAGE>
Shaman has the opportunity to differentiate its product candidates in
consumers' minds relative to those of Shaman's competitors. Key points of
differentiation include:
1) Novel plants/products for unmet needs;
2) Documented, first-hand field experience with traditional use;
3) Rainforest-based plants and products (most plants currently come from
temperate areas);
4) Shaman's commitment to conservation and reciprocity;
5) Sustainable sourcing and supply;
6) Quality manufactured, standardized products; and
7) Science-backed, clinically-tested products.
Shaman's marketing strategy for dietary supplements involves a step-wise
product introduction and distribution approach. First, Shaman plans to launch by
themselves their first product, SB-300, a product to promote normal bowel
function, to the HIV/AIDS Community through Internet and direct response
marketing. Next, Shaman plans to partner and possibly co-brand with first-rate,
quality partners in the two key growth channels of distribution: mass market and
multi-level (or network) marketing. Finally, building on the expected growing
recognition of the Shaman brand name (built by product introduction particularly
in the mass market), Shaman plans to broaden its Internet presence beyond the
HIV/AIDS niche to include a full line of Shaman botanicals, and will also
explore niche retail opportunities. Shaman currently does not intend to target
the traditional health food channel.
Product Discovery and Development Process
Shaman builds on the knowledge and expertise of ethnobotanist and
physician teams who work with traditional healers to identify effective
treatments in the therapeutic areas targeted by the Company. These teams gather
comparative data on traditional medicinal and health uses of plants from
geographically diverse tropical areas and prioritize plant candidates based on
common use among cultures and other factors. The prioritization process includes
cross-checking field-derived information against the results of literature
searches as to chemical constituents, previously discovered biological activity
and other reported medicinal uses. This process is integral to both Shaman's
pharmaceutical and dietary supplement discovery and development programs.
Pharmaceuticals
The Company believed that by focusing on drugs extracted from plants with
a long history of medicinal use, its drug discovery efforts would be quicker and
more likely to lead to safe and effective pharmaceuticals.
Shaman's strategy was to employ a drug discovery process focused on
diseases that:
-- appear to result from multiple and, in many cases, unknown causes
and therefore may not be amenable to a targeted in vitro drug
discovery process;
-- occur in the rain forests and are readily recognized and treated
by traditional healers (e.g., foot ulcers, sweet urine, poor
eyesight and fungal infections are often predictive of Type II
diabetes); and
-- allow the plant extract treatment to be confirmed in a whole
animal model and then purified to isolate the active compound.
Shaman believed this drug discovery process provided it with the
opportunity to:
-- identify novel methods of treating diseases with therapeutic
relevance;
-- discover new chemical entities or new classes of compounds to
treat disease; and
-- provide early confirmation of efficacy and safety.
4
<PAGE>
Through its process, the Company had significant success in identifying
and developing pharmaceutical candidates, particularly through the preclinical
and early clinical stages. These efforts have produced a portfolio of product
candidates for outlicense.
Botanicals
Shaman was able to initiate its Botanicals business by further exploring
the botanical library and pipeline it has developed over the past 10 years. In
the last decade, Shaman has amassed a large body of information on the healing
benefits of thousands of tropical plant species that have a history of human use
and has organized this into an extensive relational database. This database
includes over 2,600 tropical plants, many of which have not been introduced or
fully developed in the U.S. dietary supplement market. Currently, most dietary
supplements come from plants from temperate regions. Shaman has identified
plants with a documented ethnomedical history of use in its library and database
of botanicals for use in key market categories with significant commercial
potential.
Shaman intends to differentiate itself within the BDS marketplace by
backing novel products and promotion with quality research, development and
manufacturing, a carry-over from its pharmaceutical culture and skill base.
Given consumer demand for quality and the relative lack of specific regulatory
standards in the dietary supplement industry, Shaman intends to set its own
standard for quality and product standardization for its botanicals products.
The Company will develop chemical markers and standardization processes for all
its products, including safety verification and where appropriate, human
clinical testing of potential products. Once completed, published clinical data
can be utilized for educational purposes with consumers and retailers seeking
more information about our products. These elements, along with unique
formulations, and existing and future patents, should add to the proprietary
position of Shaman's products.
Product Candidates
Pharmaceuticals
The Company has conducted human clinical trials with its three lead
product candidates -- SP-303/Provir (Phase III/II), nikkomycin Z (Phase I), and
SP-134101 (Phase I) -- targeting five indications.
Of these, the most advanced, SP-303/Provir, was being developed for an
initial indication for the treatment of diarrhea in people with AIDS. In
December 1998, the Company completed a positive Phase III human clinical trial
of SP-303/Provir for the AIDS indication. These results came at the end of a
two-year history of positive communication and collaboration with the FDA,
during which time the product had been granted "fast track" designation, and the
FDA had advised the Company that upon completion, data from its single Phase III
study, along with corroborative information from a previously completed positive
Phase II trial, could serve as the basis for the submission of a New Drug
Application ("NDA"). However, subsequent advice from the FDA in January 1999
indicated that additional studies and/or data may be necessary for a successful
filing. This advice led the Company to believe it did not have adequate data for
a successful NDA package in 1999. Given the time delay and additional investment
necessary to complete additional trials, the Company determined it could not
meet these requirements.
The Company now intends to outlicense worldwide marketing rights to
SP-303/Provir. Further, it has discontinued all pharmaceutical development,
manufacturing and marketing activities and plans to outlicense or sell all of
its pharmaceutical assets.
The following table describes the major therapeutic areas in which the
Company has had active product development and research. Efforts will be made to
outlicense all of these pharmaceutical programs:
5
<PAGE>
<TABLE>
<CAPTION>
Product Indication Status Commercial Rights
- - ------- ---------- ------ -----------------
<S> <C> <C> <C>
Provir AIDS-associated Completed Phase III Shaman
diarrhea study in Q4, 1998.
Completed a Phase II
efficacy study in Q4, 1997
Provir Watery diarrhea Completed two Phase II Shaman
efficacy trials in Q3,
1998. Completed
initial Phase II
efficacy studies in
1996 & 1997
Provir Pediatric Formulation to be Shaman
diarrhea developed
Nikkomycin Z Endemic mycoses Completed Phase I study Shaman
in Q2, 1997.
Nikkomycin Z Azole-resistant Initiation of clinical Shaman
and Azoles Candida program pending pre-
clinical development
by Pfizer
SP-134101 Type II Diabetes Completed Phase I study Shaman
in Q1, 1998
Oral Type II Diabetes Preclinical, Ono; Lipha/Merck;
antihyperglycemic 29 compounds and Shaman. Shaman
compounds receives royalties
on sales outside
the U.S. and
profit sharing in
the U.S.
</TABLE>
SP-303/Provir
The Shaman-patented compound SP-303 is the active ingredient in
SP-303/Provir. SP-303 is extracted from the latex of the Croton lechleri tree,
which grows abundantly in Latin America. Croton latex extractions are used
orally by many native cultures throughout Latin America for a variety of
medicinal purposes, including gastrointestinal problems as well as respiratory
infections.
Preclinical studies indicate that SP-303/Provir inhibits the secretion of
chloride ions from intestinal cells, specifically countering fluid loss, a
fundamental mechanism causing diarrhea. Based on its mechanism of action and
results of initial clinical testing, it appears that SP-303/Provir does not
affect the normal motility of the intestine. In clinical trials, the Company
determined that SP-303/Provir is not appreciably absorbed, a critical advantage
in that it reduces the potential for interactions with other drugs and minimizes
side effects.
Diarrhea in People with AIDS/HIV
SP-303/Provir demonstrated positive results in a Phase III human clinical
trial for the treatment of diarrhea in people with AIDS, which was completed in
December 1998. This double-blind, randomized, placebo-controlled study was
divided into two treatment phases: an inpatient phase of six days and an
outpatient phase of three weeks. During the inpatient phase, 400 patients were
enrolled, and patients were randomized to treatment for six days with either
placebo or one of three SP-303 doses/formulations given four times per day:
250mg tablets or 500mg tablets or 500mg beads. Responders in the inpatient phase
were allowed to continue on their same regimen during the outpatient phase. In
the primary efficacy endpoint, reduction in total daily stool weight during the
inpatient phase, the 500mg tablet group achieved a favorable result versus
placebo by two different methods of intent-to-treat statistical analysis. An
analysis of
6
<PAGE>
the reduction from baseline to the end of treatment yielded a value of p=0.075.
A random regression analysis (which measures rate of reduction over the course
of treatment), yielded a value of p=0.033. Other doses/formulations did not
produce a meaningful change during the inpatient phase. In the outpatient phase,
the 500mg tablet group saw a sustained effect and the drug was well tolerated
throughout the study. The study includes both an in-patient and an out-patient
phase for a total of four weeks of treatment. The primary endpoint for this
study is a reduction in stool weight, data for which is collected during the
in-patient phase of the study.
A Phase II study, which was completed in October 1997, and data therefrom
presented at the 12th World AIDS Conference in Geneva, Switzerland in July 1998,
demonstrated a significant treatment effect for chronic diarrhea in people with
AIDS. The results of the study suggested that SP-303/Provir is effective in
reducing stool weight and abnormal stool frequency in people with AIDS and
diarrhea. In addition, treatment with SP-303/Provir was well tolerated with no
imbalance between treated and placebo groups in the occurrence of adverse
events.
Watery Diarrhea
In July 1998, the Company completed two separate Phase II dose
optimization studies of SP-303/Provir in acute watery diarrhea patients from two
different populations. Both studies were double-blind, randomized,
placebo-controlled.
The first study further validated SP-303/Provir's ability to treat
traveler's diarrhea in Americans travelling in Jamaica and Mexico. The study
involved 184 patients treated for two days on an outpatient basis with either
placebo or one of three SP-303/Provir doses given four times per day: 125mg,
250mg or 500mg. In the key efficacy endpoint, time to last unformed stool
("TLUS") over 48 hours (the standard for measurement in acute watery diarrhea
studies), all doses reached a highly statistically significant (p=0.01) result
versus placebo. The study showed SP-303/Provir to be well tolerated. More than
35 million individuals travel annually to countries that present the risk of
traveler's diarrhea.
The second study evaluated SP-303/Provir in Venezuelan nationals who
locally contracted acute watery diarrhea. A total of 140 patients were enrolled
in the trial, which took place in a hospital setting. SP-303/Provir treatment
with 125mg four times per day for two days resulted in statistically significant
earlier resolution of diarrhea as compared to placebo, as measured by TLUS over
48 hours. Results for patients treated with 250mg and 500mg doses did not
achieve statistical significance. This study also showed SP-303/Provir to be
well tolerated.
Nikkomycin Z
Nikkomycin Z was licensed in 1995 from Bayer AG. See "Business--Customers
and Partners--Pharmaceuticals." Nikkomycin Z is an orally administered product
candidate designed for the treatment of endemic mycoses and other systemic
fungal infections. Nikkomycin Z is novel in its mechanism of action against
fungal infections. Preclinical studies of nikkomycin Z indicate that it is
fungicidal and could prove superior to current treatments. By inhibiting chitin
synthetase, which is found in the cell walls of most fungi, but not in mammalian
cells, nikkomycin Z inhibits cell wall synthesis, ultimately causing fungal
cells to expand and burst. The lack of chitin in mammalian cells should prevent
similar damage to normal cells in tissues affected by these fungal infections. A
single-dose Phase I trial in the United Kingdom was completed in 1997.
SP-134101
SP-134101 is a Shaman oral product candidate for the treatment of Type II
diabetes. It is covered by an allowed patent application for methods of use. In
January 1998, Shaman completed a Phase I human clinical trial for SP-134101, the
first product to emerge from the Company's diabetes discovery effort. In
preclinical studies, SP-134101 has been shown to lower blood glucose,
triglycerides, and blood pressure, in vivo. SP-134101 appears to work by
increasing glucose uptake in the peripheral tissues and decreasing triglyceride
output from the liver.
7
<PAGE>
Diabetes Discovery
Shaman focused on the development of oral antihyperglycemic (blood glucose
lowering) agents for the treatment of Type II diabetes. Since the start of this
program, the Company identified 29 orally-active compounds for which, to date,
19 original U.S. patent applications have been filed (10 of which have been
issued) and 11 international patent applications have been filed. These
compounds represent new classes and, potentially, new methods for treating Type
II diabetes.
The diabetes research and development program served as the basis for
Shaman's collaborations with Lipha S.A., a wholly-owned subsidiary of Merck
KgaA, Darmstadt, Germany ("Lipha/Merck") and Ono Pharmaceutical Co. Ltd. of
Osaka Japan ("Ono"). See "Business--Customers and Partners--Pharmaceuticals."
Botanicals
Shaman has strategically identified multiple areas of dietary supplement
product interest and has identified specific priority product candidates focused
on the overlap of: (1) key market categories with significant commercial
potential, (2) the needs of an aging demographic in the U.S. population, (3)
areas where quick, symptomatic relief could be observed, and (4) areas where the
Company has first-hand ethnomedical experience and where sustainable supply
exists. Some of these proposed product areas include gastrointestinal relief,
energy boosters, sexual function aids, antioxidants, sleeping aids, calming
agents and weight management.
Shaman expects that its first dietary supplement product will be SB-300,
for promoting normal bowel function. SB-300 is an extract of Croton lechleri, a
plant used by indigenous people for relief of gastrointestinal symptoms, and
contains a chemical marker, SP-303, a patented, clinically proven antidiarrheal.
SB-300 also has a patented formulation. Shaman plans to market this product
themselves initially to the HIV/AIDS Community through the direct response and
Internet channels. The Company is also exploring other products appropriate for
use by the HIV/AIDS consumer which could be sold on its website, including some
products currently available on the market, as well as future applications of
our own novel, proprietary products.
In addition to SB-300, Shaman's two near-term product lines are the
"Croton Line," which currently includes four product candidates, and the
"EthnoEssentials Line" which includes multiple product candidates culled from
the Company's ethnomedical library.
The Croton Line is currently a series of four product candidates, all of
which are derived from the Croton lechleri tree that grows abundantly in South
America. Drawing from knowledge of traditional uses, the material from different
parts of the tree will serve as the basis for the Company's products. This
concept of basing a line of products on a single plant with multiple known
traditional uses has been a successful model in the natural products sector,
including product lines based on hemp and the tea tree. Shaman expects that its
Croton Line of products could include:
* GI-300, an oral dietary supplement to promote normal bowel function
made from a portion of the latex or sap of the tree that includes a
compound with clinically proven antidiarrheal activity;
* IBS-400, an oral dietary supplement that helps support normal stomach
and bowel function and includes a clinically proven antidiarrheal
component along with three other recognized products clinically proven
to relieve common symptoms of irritable bowel syndrome in a unique
patented formulation;
* Cold Sore-CL, a topical cold sore product made from a broader cut of
the latex (a by-product of making GI-300 and IBS-400) that includes two
active compounds, one with clinically-tested anti-herpes activity and
another with documented wound healing effects;
* AntiOx-CL, an oral dietary supplement made from bark remaining after
extracting the latex and which includes recognized antioxidant
compounds.
In addition to the attractive single plant theme of the Croton Line, it is
also a compelling conservation story. Nearly every part of the plant can be
efficiently utilized in the production process.
8
<PAGE>
The EthnoEssentials Line is expected to initially be a series of six
products, with additional products from the botanical library expected to
follow. The common denominators in the line will the products' tropical
rainforest origins, history of traditional use and first-hand ethnomedical
validation, and the sustainably harvested, responsible sourcing of their raw
material. According to Shaman's research in the botanicals industry, the Company
believes there are currently no other product lines in the U.S. based solely on
rainforest and ethnomedical roots. Shaman therefore should be able to create a
novel space in the market, similar to what has previously been done by product
lines focused on Chinese herbs or Ayurvedic botanicals.
The EthnoEssentials Line of products is expected to include:
* Ethno-Energy, a dietary supplement to promote and maintain energy;
* Ethno-Ox, a dietary supplement with antioxidant properties;
* Ethno-Calm, a dietary supplement to promote and maintain a sense
of well-being;
* Ethno-Rest, a dietary supplement to promote restful sleep;
* Ethno-Fit, a dietary supplement to maintain weight; and
* Ethno-Vigor, a dietary supplement to promote vigor and performance,
for both males and females.
The EthnoEssentials Line could feature packaging that includes stories and
pictures relating to the traditional origins of the products, including
geography, tribes, and folklore. In addition to the attractive rainforest and
traditional use themes of this line, the EthnoEssentials Line can feature
packaging and labeling highlighting Shaman's commitment to reciprocity of the
cultures and peoples with which it works, as well as its attitude towards
conservation and sustainable harvesting. The Company can further highlight the
Healing Forest Conservancy, a non-profit organization supported by Shaman and
dedicated to maintaining biological and cultural diversity in rainforest areas.
See "Business--Community Commitment--The Healing Forest Conservancy."
Highlighting a company's commitment to causes has been successful in other
consumer products models, such as Ben & Jerry's Homemade Inc.'s "1% for Peace,"
a commitment to give one percent of profits to organizations supporting
disarmament.
Another potential product opportunity is a proprietary, enhanced
formulation of one of the world's leading phytomedicines. All of these potential
products are based on plant material on the grand-fathered old dietary
ingredient ("ODI") list, allowing for immediate product introduction without a
need for regulatory application or approval. See "Business--Government
Regulation--Botanicals."
The Company believes its current and prior research and development
efforts would allow it to introduce up to ten products, including human clinical
testing, within the first two years of its Botanicals operations. All of these
product areas offer significant opportunity for growth.
Sales and Marketing
Pharmaceuticals
The Company intends to sell or outlicense worldwide marketing rights to
its pharmaceutical assets. See "Risk Factors--Pharmaceuticals Risk
Factors--Dependence on Collaborative Relationships."
Botanicals
Shaman's marketing strategy for dietary supplements involves a step-wise
product introduction and distribution approach. Shaman first plans to launch by
themselves SB-300 to the HIV/AIDS Community through Internet and direct response
marketing. Next, Shaman plans to partner and possibly co-brand with first-rate,
quality partners in the two key growth channels of distribution: mass market and
multi-level (or network) marketing. Finally, building on the expected growing
recognition of the Shaman brand name (built by product introduction particularly
in the mass market), Shaman plans to broaden its Internet presence beyond the
HIV/AIDS niche to include a full line of Shaman botanicals, and will also
explore niche retail opportunities. Shaman currently does not intend to target
the traditional health food channel.
9
<PAGE>
With respect to promotion, Shaman anticipates it will be responsible for
the cost of promotion only in the Internet/direct response channel. It behooves
Shaman, both in terms of cost and expertise, to allow partners in other channels
to be responsible for promotion. One of the key points of negotiation in
outlicensing to other channels is expected to be a commitment to a sufficient
level of promotional support for Shaman's products, including prominent use of
the Shaman brand name.
Customers and Partners
Pharmaceuticals
The Company continues to pursue discussions for the outlicensing of its
pharmaceutical assets.
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 agreed to provide up to $9.0 million in research
payments and up to $10.5 million in equity investments priced at a 20% premium
to a multi-day volume weighted average price of the Company's Common Stock at
the time of purchase. Of the $4.5 million received on signing the agreement,
$1.5 million was an up-front research payment and $3.0 million was structured as
an equity investment. The agreement also provided for additional preclinical and
clinical milestone payments (certain of which clinical milestones are creditable
against future royalty payments) to the Company in excess of $10.0 million per
compound for each antihyperglycemic drug developed and commercialized.
Lipha/Merck was to bear all preclinical, clinical, regulatory and other
development expenses associated with the compounds selected by Lipha/Merck under
the agreement. In addition, as products were commercialized by Lipha/Merck,
Shaman would receive royalties on all product sales outside the United States
and up to 50% of the profits (if the Company was to exercise its co-promotion
rights, which does not require any clinical development cost reimbursement) or
royalties on all product sales in the United States. Certain of the milestone
payments will be credited against future royalty payments, if any, due to the
Company from sales of products developed pursuant to the agreement.
On December 2, 1998, the Company renegotiated the terms of the existing
agreement with Lipha/Merck. Under the new terms, the Company forgave $6.0
million in aggregate payments due over the remaining term of the original
agreement in exchange for a one-time up-front payment of an aggregate of $2.0
million, consisting of a $1.0 million research payment (which remains recorded
as deferred revenue that the Company has not yet earned) and a $1.0 million
equity investment.
The Company is currently in negotiations with Lipha/Merck for the
discontinuation of their research agreement. Lipha/Merck will make no further
research payments, and unless the Company was to conduct further internal
development efforts, it is not clear whether there would be any continuation of
payment for development costs, milestone and royalty payments, for the compounds
that have already been discovered if any of these product candidates continue
into development and clinical trials, or commercialization, based on
Lipha/Merck's efforts. The Company and Lipha/Merck are in discussions regarding
the dissolution of this relationship.
In May 1995, the Company entered into a collaborative agreement with Ono
providing for, among other things, three years of funding for the research and
development of compounds for the treatment of Type II diabetes. Under the terms
of the agreement, Shaman screened 100 diabetes-specific plants per year in vivo,
isolated and identified active compounds, and participated in any medicinal
chemistry modification. In turn, Ono provided Shaman with access to Ono's
preclinical and clinical development capabilities through proprietary in vitro
assays and medicinal chemistry efforts. Ono's development and commercialization
rights were for the countries of Japan, South Korea and Taiwan. Under the terms
of the agreement, Ono provided $7.0 million in collaborative research funding
and agreed to pay preclinical and clinical milestone payments of $4.0 million
per compound for each antidiabetic drug that may be selected and commercialized.
Of the $3.0 million received on signing the agreement, $1.0 million was an
up-front research
10
<PAGE>
payment. Shaman received an additional $1.0 million payment (beyond the $7.0
million commitment) in December 1996 for enhanced access rights to these
compounds. In May 1998, the Company's collaborative agreement with Ono expired
under the original terms of the agreement and was not renewed. Although the
on-going research funding period under such agreement has expired, Ono continues
to have contractual obligations to the Company for the potential payment of
milestones and royalties. There can be no assurance that such milestones will be
attained or that the Company will receive any future milestone payments or
royalties from Ono.
In June 1995, the Company licensed several patents from Bayer AG relating
to the use of nikkomycin Z and the composition and use of nikkomycin Z in
combination with other antifungal compounds for the development of antifungal
agents. Under the terms of the agreement, the Company has paid Bayer AG an
initial milestone payment and may be required, upon the occurrence of certain
events, to make additional milestone payments and to pay royalties on any
commercialized products derived from the agreement. In order to outlicense
nikkomycin Z, further negotiation with Bayer would be required.
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 by
Dr. Tempesta that the royalty will be payable with respect to either or both of
Provir and Virend. See "Legal Proceedings."
Botanicals
The customer base for dietary supplements in the United States is growing.
In recent consumer surveys, 25% to 30% of consumers report having utilized a
BDS, and 36% report moderate to heavy use of alternative medicine.
Shaman believes that its Botanicals business has two key near-term
customers: consumers, initially targeted in the HIV/AIDS Community, who could
purchase its first product, SB-300, for normalizing bowel function, and mass
market and multi-level companies that are interested in licensing or partnering
with Shaman for the marketing of its products.
Potential SB-300 Customers
Diarrhea in people with HIV and AIDS is a devastating syndrome. In 1997 in
the United States, there were an estimated 225,000 people with AIDS. In 1997,
between 650,000 and 900,000 individuals in the United States were believed to be
infected with HIV. While fewer people are dying of AIDS, new cases of AIDS and
HIV are still increasing and people are now living longer with both AIDS and
HIV. Sources indicate that, of the combined HIV and AIDS population in the
United States, approximately 20% to 40% suffer with diarrhea at any given time,
with an average duration of 90 days per year. Although protease inhibitors and
highly active antiretroviral therapy have improved the prognosis for people
living with HIV and AIDS the problem of diarrhea persists, and in many cases is
drug-related, representing a serious unmet medical need.
Diarrhea in people with AIDS and HIV not only compromises the health and
quality of life of individuals attempting to live a normal lifestyle but also
has been shown to dramatically increase the cost of these individuals' medical
care. Furthermore, people with chronic diarrhea are forced to restrict their
daily activities to accommodate the disruptions caused by this condition because
current symptomatic therapies provide either poor relief or undesirable
side-effects.
The Company believes that a product that normalizes bowel function while
positively impacting health, quality of life and/or the cost of care represents
a focused, large, and untapped market opportunity. Shaman believes that the
competitive promotional response will be limited in this discrete market because
currently neither any specific dietary supplements nor any over-the-counter
antidiarrheals have targeted promotion to this population, likely because they
have no indication or studies in this patient population. Further, Shaman hopes
eventually to build a niche market position by catering specifically to the
needs of the HIV/AIDS Community with eventually a full product line.
11
<PAGE>
Potential Partners
Shaman is actively engaged in partnering discussions with top tier
companies in both the mass market and multi-level dietary supplement arenas. No
agreements have been reached or entered into to date.
Potential Partners: Mass Market
The entrance of large healthcare and consumer products companies into the
dietary supplement industry has fueled the expanded placement of BDSs beyond
local health food stores, and into neighborhood grocery stores, drug stores and
mass merchandisers. To promote this placement, these companies are spending huge
sums on advertising and promotion relative to previous marketing budgets for
dietary supplements that rarely topped $1 million. For example, in 1998,
American Home Products Corporation spent an estimated $12 million on its
Centrum(R) line, Bayer Corporation spent an estimated $35 million on its
One-A-Day(R) line of eight products, and Warner-Lambert Company spent an
estimated $15 million on its Quanterra(R) line of two products. Large
expenditures like these would have been unwise historically because sales of
single products or even lines of products rarely passed the single-digit million
mark. However, industry analysts now report much higher sales figures. For
example, American Home Products, Bayer and Warner-Lambert are forecasting
combined first year sales of over $100 million for their botanical lines,
largely a result of significant promotion. Through increased promotional
budgets, companies such as these are educating more consumers about the benefits
of herbal and botanical products, thereby increasing trial and repurchase. If
these trends continue, the growth of the BDS market could far surpass growth in
the past.
The Company believes that another key driver of continued growth will be
the introduction of new BDS products. Introduction of new products has in the
past not only brought new consumers into the market but also fueled the
repurchase of other existing botanicals. The large healthcare and consumer
products companies are currently tapping into the commonly known commodity
botanical products, primarily of European origin. Once growth of these products
is maximized, novel proprietary products will be needed, and Shaman believes it
is uniquely positioned to meet this need in certain market areas.
Shaman plans to partner with mass market companies in order to expand the
advertising and promotion of its BDS products. Such a partnership would combine
the benefits of Shaman's new products with the partner's ability to generate
large advertising and public relations campaigns for its new product lines
similar to those created for existing consumer product lines. In addition,
Shaman could pursue a licensing arrangement, such as that completed between
PharmaPrint, Inc. and American Home Products, in which Shaman could co-brand a
product or product line with a partner.
Potential Partners: Multi-Level
Multi-level marketing, or "MLM," is a system of network marketing
comprised of two components: one-on-one selling and yearly sales conventions.
Distributors, usually individuals looking for a home-based business or the
opportunity to supplement their regular income, sell products to friends and
relatives. Distributors are incentivized to sign-up their friends as
distributors, and they receive in return an incentive for all the sales in their
network. Hence, the impact is that of an ever-growing customer base that is
somewhat captive and more predisposed to purchase than the broad consumer
public. In addition, this type of selling makes product stories very important,
as distributors need to believe in the products they are selling to friends.
The primary form of promotion in the MLM channel, beyond one-on-one
selling, is the yearly sales convention. Each year, all distributors are brought
together for a multi-million dollar sales convention. On-stage presentations are
given on four to five key new products, or a product line, being launched in the
coming year. The history of the products, testimonials and their uses are
discussed. Then, distributors are sent back to their homes for another year of
selling. During the year, incentives may be given for reaching certain sales
quotas on a particular product or product line.
Dietary supplements have been a mainstay of the MLM industry. However,
botanicals are a newer player on the scene. Some multi-level firms such as AmWay
Corporation, with its NutriLite line, and Nu Skin Enterprises, Inc. have
embraced the commonly used commodity botanicals. However, it is new products
that fuel the growth in MLM.
12
<PAGE>
Shaman's products lend themselves to this market for several reasons.
Shaman has truly novel products--the lifeblood of this channel. Further, the
origins of Shaman's products are unique and lend themselves to the type of
interesting selling stories required for peer-to-peer selling. These would make
for entertaining sales convention presentations, featuring famous ethnobotanists
and the rainforest. Additionally, Shaman's reciprocity and conservation policies
are further material for story-based selling.
Competition
Pharmaceuticals
The outlicense of pharmaceuticals is a competitive enterprise. Although
many companies consider licensing opportunities, they often investigate multiple
opportunities before settling on a select few. While Shaman is subject to this
competition, the Company has had significant interest in its products based upon
their novelty, safety, efficacy, and advanced stages of development. The Company
is actively seeking to outlicense its products and has multiple on-going
discussions. To date, these discussions have not resulted in any out-licensing
agreements. See "Risk Factors--Pharmaceuticals Risk Factors--Dependence on
Collaborative Relationships."
Botanicals
Competition in the BDS market differs by channel of distribution.
Historically, competition within the health food channel was fragmented and made
up of over 200 small, mostly privately held companies. More recently, several
large consumer healthcare companies have opened up the mass-market channel,
including American Home Products with its Centrum Herbal brand, Bayer's
introduction of botanical ingredients in their One-A-Day line, and
Warner-Lambert's introduction of their Quanterra brand. Overall, the entrance of
these companies is expected to broaden consumer acceptance of botanical products
and grow the total BDS market, with mass market becoming the largest,
fastest-growing channel. In order to enter this key channel, Shaman intends to
partner with a company with extensive experience. The Company believes that a
partner in this channel will value the quality and scientific rigor behind
Shaman's products.
In the multi-level marketing channel, key players include Shaklee
Corporation, Nu Skin Enterprises, Inc., USANA, Inc. and Rexall Showcase
International. Again, Shaman intends to partner with a top-tier company in this
channel. The Company believes that partners in this channel will appreciate the
novel products Shaman has to offer and the compelling stories of their
rainforest and traditional use origins.
The Internet channel does not currently have an established leader in the
dietary supplement market, although several sites do exist, including
AllHerb.com and Greentree.com. The emerging "drugstore " sites such as
Drugstore.com and PlanetRx.com also carry some dietary supplements. Shaman
intends to start its own site within this channel, with the unique attraction of
it own, novel products available on the site, particularly targeting the
HIV/AIDS Community. Shaman has reserved the internet domain name
"ShamanBotanicals.com." If appropriate, Shaman may also consider partnerships in
this channel.
Government Regulation
Pharmaceuticals
The research and development, manufacture and marketing of Shaman's
pharmaceutical 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.
13
<PAGE>
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 and
acceptance by 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 Good Manufacturing Practice ("GMP"). The testing and
approval process requires substantial time, effort and financial resources.
Shaman's botanical products are not subject to this regulatory process.
Botanicals
"Botanical dietary supplement" ("BDS") is a specific term meaning "an herb
or other botanical or a concentrate, constituent, extract or combination of any
botanical that is intended for ingestion as a tablet, capsule, or in liquid form
and is not represented for use as a conventional food or as a sole item of a
meal or the diet and is labeled as a dietary supplement." This definition comes
from the 1994 Dietary Supplement Health and Education Act ("DSHEA"), which
specifically outlines how botanical products are to be regulated and treated.
Some commonly known commodity BDS products include: ginseng, gingko biloba, St.
John's Wort, and echinacea. This statutory definition also differentiates BDSs,
vitamins, minerals, from conventional foods or food additives. Under the law,
botanicals can be sold as dietary supplements with claims as to their effect on
the structure or function of the human body, providing Shaman has adequate
documentation for the claim. BDSs are under the purview of the FDA. However,
some BDS products require no review or approval to enter the market (see ODIs
below), while others need only submit safety data prior to marketing (see NDIs
below). Hence, the oversight by the FDA in the BDS industry is much less
rigorous than in the pharmaceutical industry, allowing for much faster market
introduction.
One of the unique provisions of DSHEA is the distinction between new
dietary ingredients ("NDI") and old dietary ingredients ("ODI"), which had a
history of being marketed in the United States prior to DSHEA. ODIs have been
"grand-fathered" under the law, allowing them to be commercialized without
further FDA review. The Shaman pipeline includes more than 400 botanical
candidates that are ODIs, including several near-term product candidates, and
numerous NDI candidates.
Patents and Proprietary Rights
Proprietary protection for the Company's product candidates, processes and
know-how is important to the Company's business. The Company's policy is to file
patent applications to protect technology, inventions and improvements that are
considered commercially important to the development of its business. The
Company also relies upon trade secrets, know-how and continuing technological
innovation to develop and maintain its competitive position. The Company
aggressively prosecutes and defends its patents and proprietary technology.
Shaman has 20 U.S. patents issued to date. In addition, Shaman currently
has 12 U.S. patent applications pending with the U.S. Patent and Trademark
Office ("PTO") and multiple applications filed under the Patent Cooperation
Treaty. The Company does not know whether any of these applications will result
in the issuance of any patents or, if any patents are issued, whether any issued
patent will provide significant proprietary protection or will be circumvented
or invalidated.
The Company has been issued a U.S. patent related to its specific
proanthocyanidin polymer compositions designated SP-303/Provir. Specifically,
the patent contains composition of matter claims related to SP-303/Provir
contained in the Company's SP-303/Provir product. The Company has also filed
foreign applications corresponding to its issued U.S. patents relating to its
proanthocyanidin polymer composition. The Company has been granted patents in
Australia, Mexico and New Zealand and has patent applications pending in Canada,
Europe, Japan, the Republic of Korea and Singapore.
14
<PAGE>
The Company has also filed a U.S. patent application directed to new
formulations and methods of using its specific proanthocyanidin polymer
composition for treatment of watery diarrhea. These formulations are contained
in the Company's SP-303/Provir product.
The Company has 10 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 eight additional U.S.
patent applications pending that relate to compositions and methods for treating
Type II diabetes, as well as reducing hyperglycemia associated with other
etiologies. The Company has filed 11 foreign applications, i.e., international
applications under the Patent Cooperation Treaty designating a number of foreign
countries, as well as applications in Taiwan, corresponding to eleven U.S.
applications and plans to file additional corresponding foreign applications
within the relevant convention periods.
The Company also has one issued U.S. patent and corresponding
international patent applications in a number of foreign countries relating to
methods for administering and sustained release formulations for anti-fungal
agents like nikkomycin Z. The methods and compositions are useful for treatment
of fungal infections, particularly candidiasis, the most frequently encountered
life-threatening mycoses. The Company has licensed several patents from Bayer AG
relating to the use of nikkomycin Z and the composition and use of nikkomycin Z
in combination with other antifungal compounds for the development of antifungal
agents.
There can be no assurance that the Company's pending patent applications
will result in patents being issued or that, if issued, patents will afford
protection against competitors with similar technology; nor can there be any
assurance that others will not obtain patents that the Company would need to
license or circumvent. See "Risk Factors--Pharmaceutical Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights; Current Legal
Proceedings Regarding Patents and Proprietary Rights."
Community Commitment
The Healing Forest Conservancy
In January 1990, Shaman formed The Healing Forest Conservancy, a
California not-for-profit public benefit corporation (the "Conservancy"), which
is dedicated to maintaining global biocultural diversity. The Conservancy
focuses on conserving plants that have been used traditionally for medicinal and
health purposes and conserving the knowledge of cultures that utilize them.
Shaman has donated 13,333 shares of Common Stock to the Conservancy's endowment
fund. The Company also plans to donate additional funds when it has achieved
profits from product sales, if any, to provide benefits to indigenous peoples in
the countries where Shaman's source plants are obtained.
The Shaman HIV Investment Trust
In 1998, Shaman made a commitment to create the Shaman HIV Investment
Trust, which provides funding for charitable causes within the HIV/AIDS
Community, including services, education and research. Shaman has committed to
the Trust a royalty on the first five years of U.S. product net sales of SB-300.
The Trust will be administered independently by a committee of HIV/AIDS
Community leaders.
Employees
On February 1, 1999, the Company announced it would immediately cease
operations in its pharmaceuticals business and would downsize by approximately
60 people, or 65% of its workforce. As of February 26, 1999, the Company had 30
employees. Of these employees, five are dedicated to closing down some of the
Company's pharmaceutical operations and will remain employed only until such
activities are accomplished. The remaining employees are expected to remain at
Shaman and will primarily focus their activities on the Botanicals business.
15
<PAGE>
Item 2. Risk Factors
This Form 10-K 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. Our 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.
General Risk Factors
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 our fiscal years since then. We incurred a net loss of
approximately $36.8 million for the year ended December 31, 1998 and an
additional non-cash expense of $1.7 million incurred in connection with the
Series C Convertible Preferred Stock offering in August 1998 and Series D
Convertible Preferred Stock in December 1998. As of December 31, 1998, our
accumulated deficit was approximately $150.4 million. We have not generated any
product sales to date.
Our pharmaceutical product candidates and compounds are still in the
research and development stage and we have ceased all our pharmaceutical
operations. In order to generate revenues or profits, we must outlicense these
product candidates, or, with other third parties, successfully develop, test,
obtain regulatory approval for and market them. It is possible that our
out-licensing or product development efforts may not be successful, and that we
or our licensees may not obtain required regulatory approvals. Even if our
product candidates are developed and introduced, they may not be successfully
marketed or may not achieve market acceptance. In addition, as licensor, we may
receive a less substantial royalty revenue than had we commercialized the
products ourselves.
Our botanical dietary supplement products are likewise in the development
stage. In order to generate revenues or profits, we must successfully develop
and market these products. Even if our products are developed and introduced,
they may not be successfully marketed or may not achieve market acceptance.
DELISTING FROM THE NASDAQ NATIONAL MARKET
On February 1, 1999, Nasdaq informed us that our Common Stock was delisted
from The Nasdaq National Market and moved to the OTC Bulletin Board effective
February 2, 1999. Although our securities are included on the OTC Bulletin
Board, there can be no assurance that a regular trading market for the
securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain. In the event the
securities are not included on the OTC Bulletin Board, quotes for the securities
may be included in the "pink sheets" for the over-the-counter market.
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that is not traded on a
national securities exchange or Nasdaq and that has a market price of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. If our securities that are currently included on the OTC
Bulletin Board are trading at less than $5.00 per security at any time, our
securities may become subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally, such investors have
assets in excess of $1,000,000 or an individual annual income exceeding
$200,000, or, together with the investor's spouse, a joint income of $300,000).
For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require, among other things, the
16
<PAGE>
delivery, prior to the transaction, of a risk disclosure document mandated by
the SEC relating to the penny stock market and the risks associated therewith.
The broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the penny stock rules may restrict
the ability of broker-dealers to sell our securities and may affect the ability
of stockholders to sell our securities in the secondary market.
CONTINUING FUTURE CAPITAL NEEDS; UNCERTAINTY OF SOURCES OF ADDITIONAL FUNDING
As of December 31, 1998, we had cash, cash equivalents and short-term
investment balances of approximately $9.2 million. Unless we are successful in
our efforts to sell or outlicense the clinical research program, our cash
resources will be substantially used in satisfying our existing liabilities, and
hence, we will be unable to fund the operations of our Botanicals business.
In addition, the delisting of our Common Stock from The Nasdaq National
Market constituted an Optional Redemption Event (as defined in our Certificate
of Designation of Series D Preferred Stock) for our Series D Preferred Stock. In
connection therewith, on February 4, 1999, we issued a Control Notice (as
defined in our Certificate of Designation of Series D Preferred Stock) that
prevented the redemption of the Series D Preferred Stock. This Control Notice
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange. Delivery of the Control Notice had the effect of
increasing the annual dividend to $180 per share and adjusting the conversion
price of the Series D Preferred Stock to 80% of the amount the conversion price
would otherwise be without regard to any adjustments under the Certificate of
Designation of Series D Preferred Stock.
We will need to obtain additional funding through public or private equity
or debt financings, collaborative arrangements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If additional funds are raised by issuing equity
securities, current stockholders may experience significant dilution. If
additional funds are obtained through collaborative agreements, we may be
required to relinquish rights to certain of our technologies, product
candidates, products or marketing territories that we would otherwise seek to
develop or commercialize ourselves. Additional financing sources may not be
available on acceptable terms, if at all. If adequate funds are not available,
significant reductions in spending and the delay, scaling back or elimination of
one or more of our research, development, or commercialization programs may be
necessary which would have a material adverse effect on our business, financial
condition and results of operations.
DILUTION
The biopharmaceutical industry is capital intensive. In this regard we
have entered into a number of financings, many of which have included securities
that are convertible into shares of Common Stock. Dilution may occur upon the
exercise of outstanding options and warrants and upon conversion of the Series A
Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock.
Should our stock again be listed on any national stock exchange market,
stockholders may also suffer additional dilution if we exercise our right to
sell additional shares of our Common Stock to Fletcher International Limited,
pursuant to our agreements with such investor.
POSSIBLE VOLATILITY OF STOCK PRICE
From time to time, the stock market experiences significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies or industries. Thus, the market price of our Common Stock,
like the stock prices of many publicly traded smaller companies, has been and
may continue to be highly volatile. Announcements of technological innovations,
regulatory matters or new commercial products by us or our competitors,
developments or disputes concerning patent or proprietary rights, publicity
regarding actual or potential product results relating to products under
development by us or our competitors, regulatory developments in both the United
States and foreign countries, public concern as to the safety of pharmaceutical
or dietary supplement products, and economic and
17
<PAGE>
other external factors, as well as period-to-period fluctuations in financial
results, may have a significant impact on the market price of our Common Stock.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of our Certificate of Incorporation and Bylaws make it
more difficult for a third party to acquire, and discourages a third party from
attempting to acquire, control of Shaman. These provisions could limit the price
that certain investors might be willing to pay in the future for shares of the
Common Stock. At December 31, 1998, our Board of Directors had the authority to
issue up to 393,715 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. Issuance of Preferred Stock with voting rights, while
providing desirable flexibility for possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire a majority
of the outstanding voting stock. For example, holders of Series A, Series C and
Series D Preferred Stock currently have preferred rights on any liquidation of
Shaman. We may in the future issue shares of Preferred Stock with voting
rights. Certain provisions of Delaware law applicable to us could also delay or
make more difficult a merger, tender offer or proxy contest involving Shaman,
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.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Shaman'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. Our Bylaws provide
that we will indemnify our officers, directors, employees and agents to the full
extent permitted by the general corporation law of Delaware. We have entered
into indemnification agreements with our 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
us, 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. We currently maintain
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 our 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.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
Our business exposes us to potential product liability risks that are
inherent in the development, testing, manufacture, marketing and sale of
pharmaceutical and dietary supplement products. Product liability insurance for
the pharmaceutical and dietary supplement industries generally is expensive. Our
present product liability insurance coverage, which includes coverage for acts
by third parties, including manufacturers of our product candidates, may not be
adequate under all circumstances. Existing coverage will not be adequate as we
further develop our products, and we do not know that adequate insurance
coverage against all potential claims will be available in sufficient amounts or
at a reasonable cost. Some of our development and manufacturing agreements
contain insurance and indemnification
18
<PAGE>
provisions pursuant to which we could be held accountable for certain
occurrences. Such liability could have a material adverse effect on our
business, financial condition and results of operations.
ENVIRONMENTAL REGULATION
In connection with our research and development activities and
manufacturing of materials, Shaman 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 we believe we comply with these laws and
regulations in all material respects and have not been required to take any
action to correct any noncompliance, we may be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. Our research, development, and manufacturing activities involve the
controlled use of hazardous materials and chemicals. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, we cannot eliminate
the risk of accidental contamination or injury from these materials completely.
In the event of such an accident, we could be held liable for any resulting
damages. Although we have secured insurance to mitigate such expense, any such
liability could exceed our insurance coverage and resources. Such liability
could have a material adverse effect on our business, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL
Our ability to maintain our competitive position depends in part upon the
continued contributions of our key senior management. Our future performance
also depends on our ability to attract and retain qualified management and
scientific personnel. Competition for such personnel is intense, and we may be
unable 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 our business, financial condition and results
of operations.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Based on recent assessments, we have determined that we will be required
to certify portions of our software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. We presently believe that
with modifications or replacements of existing software and certain hardware,
the Year 2000 issue can be mitigated. We believe that such modification and
replacements are not significant, and should such modification and replacements
be delayed there would be no material impact on our operations.
We are approximately 85% complete with the assessment of all internal
systems that could be significantly affected by the Year 2000. To date, cost
estimates for upgrades for those systems not in compliance total approximately
$200,000. After the assessment phase is completed, we will have to purchase,
install and test the upgrades to ensure they meet internal Year 2000 compliance.
We expect to complete our internal Year 2000 readiness program in the third
quarter of 1999. We are in the process of asking our significant suppliers and
subcontractors that do not share information systems with us (external agents)
whether their systems are Year 2000 compliant. To date, we are not aware of any
external agent with a Year 2000 Issue that would materially impact our results
of operations, liquidity, or capital resources. However, we have no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolutions to process in a timely fashion
could materially impact us.
We currently have no contingency plans in place in the event we do not
complete all phases of the Year 2000 program. We plan to evaluate the status of
completion in second quarter of 1999 and determine whether such a plan is
necessary.
19
<PAGE>
Pharmaceuticals Risk Factors
DEPENDENCE ON COLLABORATIVE RELATIONSHIPS
We expect to seek collaborative agreements to develop and commercialize
our pharmaceutical product candidates. We may not be successful in negotiating
or entering into such agreements on terms favorable to us or at all, and any
agreement, if entered into, may be unsuccessful.
The research and development efforts in our diabetes program and, to a
lesser extent, in our other programs, have been dependent upon arrangements with
Lipha/Merck and Ono and their funding for research and development efforts
thereunder. Research funding from Ono has concluded. We are currently in
negotiations with Lipha/Merck for the discontinuation of their research
agreement. Lipha/Merck will make no further research payments, and unless we
were to conduct further internal development efforts, it is not clear whether
there would be any continuation of payment for development costs, milestone and
royalty payments, for the compounds that have already been discovered if any of
these product candidates continue into development and clinical trials, or
commercialization, based on Lipha/Merck's efforts. Shaman and Lipha/Merck are in
discussions regarding the dissolution of this relationship.
However, we cannot assure our current or future stockholders that we will
ultimately derive any significant revenues from any of our existing or future
collaborations or will not incur a loss in connection with the termination of
existing collaborations.
RISKS DUE TO THE EARLY STAGE OF DEVELOPMENT OF PRODUCTS AND TECHNOLOGICAL
UNCERTAINTY
We have not yet completed the development of any pharmaceutical product
candidates. Many of our product candidates still require significant additional
clinical testing and investment of capital before they can be commercialized.
Products for therapeutic use in human health care must be evaluated in extensive
human clinical trials to determine their safety and efficacy. These clinical
trials are part of a lengthy process necessary to obtain government approval.
Our SP-303/Provir, nikkomycin Z and SP-134101 product candidates have each
successfully completed some clinical development. However, positive results for
any of these products in clinical trials to date do not necessarily assure that
positive results will be obtained in future clinical trials or that government
approval to commercialize these product candidates will be obtained.
It is possible that our product candidates may not be successfully
outlicensed, developed, enter into human clinical trials, prove to be safe and
effective in clinical trials, meet applicable regulatory standards, obtain
required regulatory approvals, be capable of being produced in commercial
quantities at reasonable costs, be successfully marketed or may encounter
problems in clinical trials that will cause us to delay or suspend product
development. Therefore, we cannot assure our current or future stockholders that
we will ultimately derive any significant revenue from the outlicense of any of
our product candidates.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS; CURRENT LEGAL
PROCEEDINGS REGARDING PATENTS AND PROPRIETARY RIGHTS
Our success in outlicensing our pharmaceutical assets depends in large
part on our ability to obtain and maintain patents, protect trade secrets and
operate without infringing upon the proprietary rights of others. Moreover,
others may have filed patent applications, may have been issued patents or may
obtain additional patents and proprietary rights relating to competitive
products or processes. Our patent applications may not be approved, we may be
unable to develop additional proprietary products that are patentable, issued
patents may not provide us with adequate protection for our inventions or they
may be challenged by others, or the patents of others may impair our ability to
commercialize our products. The patent position of companies in the
pharmaceutical industry generally is highly uncertain, involves complex legal
and factual questions, and has recently been the subject of much litigation. No
consistent policy has emerged from the U.S. Patent and Trademark Office, or PTO,
or the courts regarding the breadth of claims allowed or the degree of
protection afforded under pharmaceutical patents. There is considerable
variation between countries as to the
20
<PAGE>
level of protection afforded under patents and other proprietary rights. Such
differences may expose Shaman to differing risks of commercialization in each
foreign country in which we may sell products. Others may independently develop
similar products, duplicate any of our products or design around any of our
patents.
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 our business. Some of
these technologies, applications or patents may conflict with our 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 our specific
proanthocyanidin polymer composition (which covers the active pharmaceutical
ingredient in SP-303/Provir), to Leon Cariel and the Institut des Substances
Vegetales. The effective filing date of these patents is prior to the effective
filing date of our foreign pending patent application in Europe. Certain of the
foreign patents have been granted in jurisdictions where examination is not
rigorous. Shaman has instituted an Opposition in the European Patent Office
against granted European Patent No. 472531 owned by Leon Cariel and Institut des
Substances Vegetales. We believe that the granted claims are invalid and intend
to vigorously prosecute the Opposition.
We may be unsuccessful in having the granted European patent revoked or
the claims sufficiently narrowed so that our proanthocyanidin polymer
composition and methods of use are not potentially covered. There can be no
assurance that Daniel Jean, Leon Cariel and the Institut des Substances
Vegetales will not assert against us claims relating to this patent. In that
event, we may not 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 we may be able to obtain or result
in the denial of our patent applications in Europe or elsewhere.
In the United States, the PTO has rendered judgment in an Interference
declared between our issued patent covering our specific proanthocyanidin
polymer composition and certain claims of a U.S. application corresponding to
the granted European patent of Leon Cariel and the Institut des Substances
Vegetales by Daniel Jean and Leon Cariel. Judgment was awarded to Shaman on July
14, 1997. Since the period for appeal has passed, this judgment is now final.
Additionally, in connection with the Interference proceeding, we have 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. We believe that this broad claim is subject to attack as invalid in
view of prior art. Based on knowledge of our specific proanthocyanidin polymer
composition, we believe that the manufacture, use or sale of our specific
proanthocyanidin polymer composition would not constitute infringement of this
broad claim, once it issues. However, if Daniel Jean or Leon Cariel bring an
action for infringement of this claim, we may not prevail in defending our
beliefs. In addition, if patents that cover our activities have been or are
issued to other companies, we may be unable to obtain licenses to these patents
at a reasonable cost, or at all, or be able to develop or obtain alternative
technology.
If we cannot obtain such licenses, we could encounter delays or be
precluded from introducing our products to the market. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to us or to protect our trade secrets or know-how. Additional
interference proceedings may be declared or become necessary to determine issues
of invention; such litigation and/or interference proceedings could result in
substantial cost to and diversion of effort by us and may have a material
adverse effect on our business, financial condition and results of operations.
In addition, our efforts may be unsuccessful.
Our competitive position is also dependent upon unpatented trade secrets.
All of our employees have entered into confidentiality agreements. However,
others may independently develop substantially equivalent information and
techniques or otherwise gain access to our trade secrets, our trade secrets may
be disclosed or we may be unable to effectively protect our rights to unpatented
trade secrets. To the extent that we or our consultants or research
collaborators use intellectual property owned by others in their work for us,
disputes also may arise as to the rights in related or resulting know-how and
inventions.
21
<PAGE>
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, we cannot be certain that we were the first to discover
compositions covered by our pending patent applications or the first to file
patent applications on such compositions. Our patent applications may not result
in issued patents and issued patents may not afford comprehensive protection
against potential infringement.
We currently have 12 U.S. patent applications pending with the U.S. PTO
and one international application filed via PCT, but we do not know whether any
of these applications will result in the issuance of any patents or, if any
patents are issued, whether any issued patent will provide significant
proprietary protection or will be circumvented or invalidated. During the course
of patent prosecution, patent applications are evaluated for, among other
things, utility, novelty, non-obviousness and enablement. The PTO may require
that the claims of an initially filed patent application be amended if it is
determined that the scope of the claims includes subject matter that is not
useful, novel, non-obvious or enabled.
Furthermore, in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights. In cases where
one party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may provoke an
interference proceeding in the PTO or such a proceeding may be declared by the
PTO. In general, in an interference proceeding, the PTO would review the
competing patents and/or patent applications to determine the validity of the
competing claims, including but not limited to determining priority of
invention. Any such determination would be subject to appeal in the appropriate
U.S. federal courts.
We may not obtain additional patents and the 20 U.S. patents issued to
date may not provide substantial protection or be of commercial benefit to us.
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 us or non-approval of
pending patent applications could create increased competition, with potential
adverse effects on us and our business prospects. In addition, applications of
our technology may infringe on patents or proprietary rights of others and
licenses that might be required as a result of such infringement for our
processes or products may be unavailable on commercially reasonable terms, if at
all.
We cannot predict whether we or our competitors' patent applications will
result in valid patents being issued. Litigation, which could result in
substantial cost to us, may also be necessary to enforce our patent and
proprietary rights and/or to determine the scope and validity of others'
proprietary rights. We may, on a voluntary or involuntary basis, participate in
interference proceedings that may in the future be declared by the PTO, which
could result in substantial costs to us. The outcome of any such litigation or
interference proceedings may not be favorable to us, we may be unable to obtain
licenses to required technology or we may be unable to license such technology
at a reasonable cost.
Botanicals Risk Factors
GOVERNMENT REGULATION
The manufacturing, processing, formulating, packaging, labeling and
advertising of our BDS products are subject to regulation by one or more federal
agencies, including the FDA, the Federal Trade Commission, the Consumer Product
Safety Commission, the United States Department of Agriculture and the
Environmental Protection Agency. Our activities are also regulated by various
agencies of the states and localities where we will distribute and sell our
products.
The composition and labeling of dietary supplements is most actively
regulated by the FDA under the provisions of the Federal Food, Drug, and
Cosmetic Act. The FFDC Act has been revised in recent years by the Nutrition
Labeling and Education Act of 1990 and by the Dietary Supplement Health and
Education Act of 1994.
22
<PAGE>
Our product candidates are generally regulated as dietary supplements
under DSHEA, and are, therefore, generally not subject to pre-market approval by
the FDA. However, these product candidates are subject to FDA regulation,
particularly relating to adulteration and misbranding. For instance, we are
responsible for ensuring that all dietary ingredients in a supplement are safe,
and must notify the FDA in advance of putting a product containing a new dietary
ingredient (i.e., an ingredient not marketed in the United States before October
15, 1994) on the market and furnish adequate information to provide reasonable
assurance of the ingredient's safety. Currently, we are only pursuing products
that are old dietary ingredients, and are therefore, not subject to this
procedure. Further, if we make statements about a supplement's effects on the
structure or function of the body, we must, among other things, substantiate
that the statements are truthful and not misleading. In addition, our product
labels must bear proper ingredient and nutritional labeling and we must
manufacture our supplements in accordance with current Good Manufacturing
Practice regulations for foods. A product can be removed from the market if it
is shown to pose a significant or unreasonable risk of illness or injury.
Moreover, if the FDA determines that the "intended use" of any of the our
products is for the diagnosis, cure, mitigation, treatment or prevention of
disease, the product would meet the definition of a drug and would require
pre-market approval of safety and effectiveness prior to its manufacture and
distribution. Our failure of to comply with applicable FDA regulatory
requirements may result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines, and criminal prosecution.
In December 1995, the FDA issued proposed regulations to govern the
labeling of dietary supplements. These rules officially took effect, after a
grace period for industry compliance, on March 23, 1999. The new "Supplement
Facts" panel is similar to the "Nutrition Facts" panel on foods, and includes
information such as the complete list of ingredients and levels of vitamins and
minerals. While in our judgment these regulatory changes are generally favorable
to the dietary supplements industry, we can give no assurance that we will not
in the future be subject to additional laws or regulations administered by
various regulatory authorities. In addition, we can give no assurance that
existing laws and regulations will not be repealed or that applicable regulatory
authorities will not interpret them stringently or unfavorably.
We cannot predict the nature of future laws, regulations, interpretations
or applications, nor can we determine what effect either additional government
regulations or administrative orders, when and if promulgated, or disparate
federal, state and local regulatory schemes would have on our business in the
future. Any change could materially and adversely affect our results of
operations and financial condition.
Governmental regulations in foreign countries where we may commence or
expand sales may prevent or delay entry into the market or prevent or delay the
introduction, or require the reformulation, of our products. Compliance with
such foreign governmental regulations is generally the responsibility of our
partners or distributors in those countries, which distributors are independent
contractors over whom we have limited or no control.
TRANSITION OF BUSINESS TO NEW INDUSTRY SEGMENT; NO ASSURANCE OF SUCCESSFUL
PRODUCT DEVELOPMENT
We are in the process of transitioning our operations from pharmaceutical
product development to botanical dietary supplement development and
commercialization. This requires that we learn a new industry segment and create
a new business model. Some skills and relationships developed over time may not
be transferable to our new business. While we have been working with natural
products since our inception, we have no prior experience manufacturing or
marketing dietary supplements. There is no assurance we will be successful in
these activities.
Our products are at various stages of development, ranging from final
initial research to formulation. Additional research and development will be
necessary for us to move additional products toward commercialization. Our
research and development efforts on these or other potential products may not
lead to development of products that are shown to be safe and effective. In
addition, our products may not be capable of being produced in commercial
quantities at acceptable costs, may not be successfully marketed, or may not
achieve market acceptance. Our products may also prove to have undesirable or
unintended side effects that may prevent or limit their commercial use.
Accordingly, any of our product development programs may be curtailed,
redirected, suspended or eliminated at any time.
23
<PAGE>
DEPENDENCE ON PARTNERS
Our success in the botanicals market depends in part upon our ability to
attract, retain and motivate key strategic partners in each major channel. See
"Business--Customers and Partners--Botanicals." We may not be successful in
negotiating or entering into such agreements on terms favorable to us or at all,
and any agreement, if entered into, may be unsuccessful. However, we cannot
assure our current or future stockholders that we will ultimately derive any
significant revenues from any of our existing or future collaborations.
COMPETITION
The business of developing, manufacturing and selling dietary supplements
is highly competitive. Certain of our competitors are substantially larger and
have greater financial, research and development, production, marketing, sales
and other resources than we do. Such companies offer a variety of competitive
products and services and much broader product lines. We face actual and
potential competition not only from these established companies, but also from
start-up companies developing and marketing new commercial products. Our failure
to successfully compete for customers could adversely affect our future growth,
revenues and profitability. See also "Business--Competition--Botanicals."
EFFECT OF PUBLICITY
Our products consist of botanical dietary ingredients that we believe as
safe when taken as we suggest. However, because we depend on consumers'
perception of the safety and quality of our products as well as similar products
distributed by other companies (which may not adhere to the same quality
standards as ours), if our products or a competitor's similar products were
asserted to be harmful to consumers, our business could be adversely affected.
In addition, because we depend on perceptions, adverse publicity associated with
illness or other adverse effects resulting from consumers' failure to use our
products as we suggest, other misuse or abuse of our products or any similar
products distributed by other companies could materially and adversely affect
our business.
Furthermore, we believe the recent growth experienced by the nutritional
supplement market is based in part on national media attention regarding recent
scientific research suggesting potential health benefits from regular
consumption of certain dietary supplements and other nutritional products. This
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and we can
give no assurance of future favorable scientific results and media attention or
of the absence of unfavorable or inconsistent findings.
DEPENDENCE ON SOURCES OF SUPPLY
We currently import all of the plant materials for our products from
countries in Latin and South America, Africa and Southeast Asia. We are
dependent upon a supply of raw plant material to make our products. We do not
have formal agreements in place with all of our suppliers. Continued source of
plant supply 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 our business, financial condition and results
of operations. Although we should be able to raise our prices in response to
significant increases in the cost of these ingredients, we may not be able to
raise prices quickly enough to offset the effect of these increased raw material
costs, if at all.
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 our
24
<PAGE>
current or future products are derived, such destruction could materially and
adversely affect our business, financial condition and results of operations.
LIMITED MANUFACTURING CAPACITY; LIMITED MARKETING STAFF
We currently produce products only in pilot scale quantities and do not
have the staff or facilities necessary to manufacture products in commercial
quantities. Therefore, we must rely on collaborative partners or third-party
manufacturing facilities. Should we or our third-party manufacturers encounter
delays or difficulties in producing, packaging and distributing our finished
products, clinical trials and market introduction and subsequent sales of our
products could be adversely affected.
Contract manufacturers must conform to certain GMP regulations for foods
on an ongoing basis. Our dependence on third parties for the manufacture of our
products may adversely affect our ability to develop and deliver products on a
timely and competitive basis. If we are required to manufacture our own
products, we will be required to build or purchase a manufacturing facility,
will be subject to the regulatory requirements mentioned above, to similar risks
regarding delays or difficulties encountered in manufacturing any such products
and will require substantial additional capital. We may be unable to manufacture
any such products successfully or in a cost-effective manner.
We currently have minimal marketing staff. If we are unable to
successfully establish, execute and finance a complete marketing plan, we may
not achieve a successful product entry into the marketplace. Such failure would
have a material adverse effect on our business, financial condition and results
of operations.
INTELLECTUAL PROPERTY PROTECTION
Our trademarks are valuable assets that are very important to the
marketing of our products. Our policy is to pursue registrations for all of the
trademarks associated with our key products.
We hold certain patents related to our products and intend to pursue
future patents. To the extent we do not have patents on our products,
another company may replicate one or more of our products. See "Risk
Factors--Pharmaceuticals Risk Factors--Uncertainty Regarding Patents and
Proprietary Rights; Current Legal Proceeding Regarding Patents and
Proprietary Rights."
Item 2. Properties
Shaman's headquarters are located in South San Francisco, California. We
lease approximately 73,000 square feet for offices, laboratories, pilot
manufacturing and storage in three adjacent buildings. An additional building
with approximately 43,000 square feet becomes available to us in late 1999. The
lease on these spaces expires February 28, 2003, and we have an option to renew
the lease for two additional five-year periods. The South San Francisco facility
serves as the principal site for research, clinical trial management, process
development, quality assurance and quality control, regulatory and
commercialization activities. We believe that our current facilities are
suitable and adequate to meet our needs for the foreseeable future. In fact, as
a result of our recent restructuring, we intend to sub-lease some of our
facilities. However, there is no assurance we will be successful sub-leasing
these facilities.
Item 3. Legal Proceedings
We have initiated arbitration against Dr. Michael Tempesta with respect
to a February 1990 license agreement. See " Business--Customers and
Partners--Pharmaceuticals."
Ms. Jacqueline Cossmon, Shaman's former Vice President of Investor and
Public Relations filed a complaint against us with the Superior Court of the
State of California, County of San Mateo on December 31, 1997 for wrongful
termination, seeking monetary damages. Pursuant to a confidential settlement
agreement reached between the parties, this matter will be dismissed.
25
<PAGE>
With the exception of the patent opposition proceeding in Europe,
arbitration against Dr. Tempesta and Ms. Cossmon's action, we are not party
to any other material legal proceedings. See "Risk Factors--Pharmaceutical
Risk Factors--Uncertainty Regarding Patents and Proprietary Rights; Current
Legal Proceedings 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, 1998.
26
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our Common Stock was traded on The Nasdaq National Market under the symbol
SHMN since we began trading on January 26, 1993. Effective with the close of
business on February 1, 1999, our Common Stock was delisted from The Nasdaq
National Market and moved to the OTC Bulletin Board effective February 2, 1999.
Set forth below is the range of high and low closing sale prices for our
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> <C> <C>
Q1 FY 97 6.25 3.88
Q2 FY 97 6.19 4.69
Q3 FY 97 7.00 5.12
Q4 FY 97 7.06 4.25
Q1 FY 98 5.50 4.13
Q2 FY 98 5.00 4.41
Q3 FY 98 4.00 3.19
Q4 FY 98 3.31 1.09
Q1 FY99 (through March 26, 1999) 2.03 0.17
</TABLE>
Each share of Series C Preferred Stock is entitled to receive cumulative
dividends paid semi-annually on May 31 and November 30 of each year to the
holders of record of such shares on March 31 and September 30 of such year as
follows: (i) a stock-on-stock dividend of $10.00 per annum, paid in arrears, in
shares of the Common Stock (valued at 85% of the average closing price of the
Common Stock for the 10-day trading period ending three trading days prior to
the date on which the dividend is paid); plus (ii) a cash amount equaling
0.00005% of our net sales in United States, if any, for the preceding two
calendar quarters of our SP-303/Provir product for the treatment of diarrhea
less $5.00 (the value of the semi-annual stock dividend). We intend to honor the
royalty portion of the dividend through sales of our first botanical product, if
any. If, under Delaware law, we are unable to pay the cash amount of the
dividends, then the cash portion of the dividends will be paid in shares of
Common Stock (valued at 85% of the average closing price of the Common Stock for
the 10-day trading period ending three trading days prior to the date on which
the dividend is paid).
Each share of Series D Convertible Preferred Stock is entitled to receive,
when, as, and if declared by the Board of Directors out of funds legally
available for such purpose, cumulative dividends at the rate of $55 per annum.
Dividends on the Series D Preferred Stock are payable in cash or shares of
Common Stock or any combination of cash and shares of Common Stock, at our
option and are payable quarterly on February 1, May 1, August 1 and November 1
of each year.
The delisting of our Common Stock from The Nasdaq National Market
constituted an Optional Redemption Event (as defined in the Certificate of
Designation of Series D Preferred Stock) for our Series D Preferred Stock. In
connection therewith, on February 4, 1999, we issued a Control Notice (as
defined in the Certificate of Designation of Series D Preferred Stock) that
prevented the redemption of the Series D Preferred Stock. This Control Notice
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange. Delivery of the Control Notice had the effect of
increasing the annual dividend to $180 per share and adjusting the conversion
price of the Series D Preferred Stock to 80% of the amount of the conversion
price would otherwise be without regard to any adjustments under the Certificate
of Designation of Series D Preferred Stock.
No dividends have been paid on the Common Stock since our inception, and
we do not anticipate paying any such dividends in the foreseeable future. The
terms of our loan agreement with MMC/GATX Partnership No. 1 restrict the payment
of dividends on any equity security so long as any amount remains outstanding
under such loan agreement. However, MMC/GATX has waived such requirements with
respect to the payment of dividends on the Series C
27
<PAGE>
Preferred Stock. We have not received a waiver from MMC/GATX with respect to the
payment of dividends on the Series D Preferred Stock. We are in the process of
seeking such a waiver. In addition, the Certificate of Designation of
Preferences of Series A Preferred Stock, the Certificate of Designation of
Preferences of Series C Preferred Stock and Certificate of Designation of
Preferences of Series D Preferred Stock require that we pay equivalent per share
dividends to the holders of our Series A Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock, respectively, prior to the payment of
dividends to the holders of the Common Stock.
28
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue from collaborative
agreements $ 2,660 $ 3,500 $ 3,406 $ 2,210 $ 1,360
Operating expenses:
Research and
development 32,393 24,140 19,138 17,635 18,643
General and
administrative 5,565 4,833 3,537 3,705 3,545
-------- -------- -------- -------- --------
Total operating expenses 37,958 28,973 22,675 21,340 22,188
-------- -------- -------- -------- --------
Loss from operations (35,298) (25,473) (19,269) (19,130) (20,828)
Interest income 550 1,218 1,082 1,695 2,045
Interest expense (2,033) (5,033) (603) (569) (698)
-------- -------- -------- -------- --------
Net loss (36,781) (29,288) (18,790) (18,004) (19,481)
-------- -------- -------- -------- --------
Deemed dividend on
Preferred Stock (1,742) - - - -
-------- -------- -------- -------- --------
Net loss applicable to
Common Stockholders $(38,523) $(29,288) $(18,790) $(18,004) $(19,481)
========= ========= ========= ========= =========
Basic and diluted net loss
per Common Share (1) $ (1.92) $ (1.72) $ (1.39) $ (1.37) $( 1.50)
========= ========= ========= ========= =========
Shares used in calculation of
basic and diluted net loss
per Common Share (1) 20,114 17,010 13,496 13,161 12,986
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents,
and investments $ 9,165 $ 21,421 $ 16,533 $ 26,665 $ 39,843
Working capital 1,043 14,547 9,641 22,850 33,422
Total assets 13,139 26,753 22,377 33,810 49,673
Long-term obligations,
including current
installments 5,219 6,802 4,816 6,041 5,017
Senior convertible notes - 9,967 - - -
Accumulated deficit (150,434) (111,910) (82,622) (63,832) (45,828)
Total stockholders'
equity $ 2,110 $ 5,148 $ 11,977 $ 24,205 $ 41,300
</TABLE>
- - ----------
(1)Basic and diluted net loss per share is based on the weighted average number
of Common Shares outstanding during the period. We have not paid any cash
dividends on our capital stock since inception.
29
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview of Historical Operations
To date, Shaman Pharmaceuticals has been primarily focused on discovering
and developing novel pharmaceutical products for major human diseases by
isolating and optimizing active compounds found in tropical plants with a
history of medicinal use. We have conducted human clinical trials with our three
lead product candidates -- SP-303/Provir (Phase III/II), nikkomycin Z (Phase I)
and SP-134101 (Phase I) -- targeting five indications. Due to unforeseen delays
and costs necessary to complete additional necessary trials for our lead
compound, SP-303/Provir for the treatment of diarrhea in people with AIDS, we
have chosen to discontinue all pharmaceutical development, manufacturing and
marketing activities. We intend to sell or outlicense worldwide marketing rights
to our pharmaceutical assets. We plan to focus our efforts on our Botanicals
division.
Effective with the close of business on February 1, 1999, our Common Stock
was delisted from the Nasdaq National Market and moved to the OTC Bulletin Board
effective February 2, 1999.
On February 1, 1999, we announced and initiated implementation of a
restructuring plan which resulted in the closing down of the operations of our
pharmaceutical business. We now intend to outlicense worldwide marketing rights
to all our pharmaceutical compounds and will focus our efforts on the
development and commercialization of botanical dietary supplements through our
Botanicals division. The restructuring plan includes: cessation of
pharmaceutical research and development activities and related operations; sale
or outlicensing of all of our current pharmaceutical research programs;
reduction in force of approximately 60 employees (65% of workforce); dedication
of initially 12 employees (as of February 26, 1998, 5 employees remain) to the
process of closing down the pharmaceutical business; negotiating a termination
of the research and development contract with Lipha S.A., a wholly-owned
subsidiary of Merck KgaA, Darmstadt, Germany ("Lipha/Merck"); settlement of
outstanding long-term equipment financing obligations; sale or disposal of all
of our fixed assets that are not needed for our botanicals business; and
sub-lease a portion of the facility.
The termination of 60 employees occurred on February 1, 1999. We are in
the process of finalizing an estimate of the costs of the restructuring which
will be recorded in the first quarter of 1999. We expect that such charge will
range from $2.4 million to $5.0 million.
Overview of Current Operations
The concept for Shaman's Botanicals division was developed in 1998, and it
has become the focus of our operations in 1999. The purpose of the botanicals
business is to discover, develop and market novel, proprietary botanical dietary
supplements derived from tropical plant sources. The unique positioning of our
botanicals business stems from significant financial investment, more than 10
years of extensive field research by our teams of ethnobotanists and physicians,
and pharmaceutical-level chemical standardization, biological and clinical
testing. In the last decade, we have amassed a large body of information on the
health benefits of thousands of tropical plant species that have a history of
human use and have organized this into an extensive relational database. This
database includes over 2,600 tropical plants, many of which have not been
introduced or fully developed in the U.S. dietary supplement market. We have
identified plants with a documented ethnomedical history of use in our library
and database of botanicals for use in key market categories with significant
commercial potential. Because many of these plants reflect the previously
untapped plant diversity of the rain forests, many represent novel botanical
products that have the opportunity to attain a strong, proprietary market
position.
We began our pharmaceutical operations in March 1990. To date, we have not
sold any products and do not anticipate receiving product revenue in the near
future from our pharmaceutical operations. We anticipate receiving product
revenue from our botanical operations in 1999. Our accumulated deficit at
December 31, 1998, was approximately $150.4 million. We expect to continue to
incur losses in 1999 as we close down our pharmaceutical business and focus our
efforts to discover, develop, and market botanical dietary supplements derived
from tropical plant sources through our botanicals division. As of December 31,
1998, we had cash, cash equivalents and short-term investment balances of
approximately $9.2 million. Unless we are successful in our efforts to sell or
outlicense the clinical
30
<PAGE>
research program or obtain additional funding, our cash resources will be
substantially used in satisfying our existing liabilities, and hence, we will be
unable to fund the operations of our botanicals business.
Results of Operations for the Years Ended December 31, 1998, 1997 and 1996
The results of operations for the years ended December 31, 1998, 1997 and
1996 were for our pharmaceutical operations. Our results of operations for
fiscal year 1999 will not be comparable, as we ceased operations of our
pharmaceutical business and focused our efforts in our botanical business in
first quarter of 1999.
We recorded collaborative revenues of $2.7 million, $3.5 million and $3.4
million for 1998, 1997, and 1996, respectively. Revenues for 1998 resulted from
research funding from our collaboration with Lipha/Merck and research funding
from our collaboration with Ono Pharmaceutical Co. Ltd. of Osaka, Japan ("Ono"),
which expired in May 1998. Revenues for 1997 also resulted from research funding
from our collaboration with Lipha/Merck and Ono. Revenues for 1996 resulted from
research funding from our collaboration with Ono, an additional $1.0 million
payment from Ono for enhanced rights to our antidiabetic compounds, and research
payments and access fees from our collaboration with Lipha/Merck.
In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck. Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front payment of an aggregate of $2.0 million, consisting of a $1.0 million
research payment (which remains recorded as deferred revenue that we have not
yet earned) and a $1.0 million equity investment. We are currently in
negotiations with Lipha/Merck for the discontinuation of this agreement. There
will be no further research payments from Lipha/Merck.
We incurred research and development expenses of $32.4 million, $24.1
million, and $19.1 million for 1998, 1997 and 1996, 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 $8.3 million in
1998 compared with 1997, and increased $5.0 million in 1997 compared with 1996.
The increases in 1998 were primarily attributable to the completion of a $7.0
million Phase III human clinical trial for SP-303/Provir for the treatment of
diarrhea in people with AIDS and $2.4 million of the manufacturing scale-up and
to increased scientific salaries of $1.2 million, which were partially offset by
a reduction of costs associated with our diabetes program of $2.8 million. The
increase in 1997 was primarily attributable to an increase in clinical
development activities with respect to SP-303/Provir of $3.8 million and to
increased scientific salaries of $1.2 million, which were partially offset by
reduced expenses for clinical development activities for nikkomycin Z of $1.1
million. Research and development expenses are expected to decrease in 1999 as
we ceased operations in our pharmaceutical business and focused our efforts in
our botanicals business, effective February 1, 1999.
General and administrative expenses were $5.6 million, $4.8 million and
$3.5 million for 1998, 1997 and 1996, respectively. These expenses include
administrative salaries, consulting, legal, travel and other operating expenses.
General and administrative expenses increased $0.7 million in 1998 compared to
1997, and increased $1.3 million in 1997 compared to 1996. The increase in 1998
over 1997 was primarily attributable to additional costs, including an increase
in compensation, consulting expenses and commercial development activities of
$530,000, related to the development of SP-303/Provir. The increase in 1997 was
primarily attributable to an increase in compensation and marketing research of
$388,000 related to development of SP-303/Provir, as well as additional legal
expenses of $631,000 primarily related to certain disputes related to our
intellectual property rights. General and administrative expenses are expected
to decrease in 1999 as we ceased operations in our pharmaceutical business and
focused our efforts in our botanicals business, effective February 1, 1999.
Interest income was $0.6 million, $1.2 million and $1.1 million for
1998, 1997 and 1996, respectively. Interest income decreased $700,000 in 1998
compared with 1997 and increased $100,000 in 1997 compared with 1996. Interest
income fluctuations have been consistent with changes in average cash and
investment balances with which we substantially funded our operations in 1998,
1997 and 1996. The balances of cash, cash equivalents and investments were $9.2
million, $21.4 million and $16.5 million at December 31, 1998, 1997 and 1996,
respectively.
31
<PAGE>
Interest expense was $2.0 million, $5.0 million and $603,000 for 1998,
1997 and 1996, respectively. Interest expense decreased in 1998 compared with
1997 principally due to a $3.7 million non-cash interest charge related to the
issuance of senior convertible notes in June 1997, offset by interest expense
related to capital lease agreements and the secured debt financing. 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 our secured debt financing
in May 1997. Interest expense in the future will be dependent in part on our
capacity to finance future operating and equipment needs.
At December 31, 1998, we had federal net operating loss carryforwards of
approximately $48.6 million. The federal net operating loss carryforwards will
expire at various dates beginning in 2004 through 2013, 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, 1998, our cash, cash equivalents, and investments
totaled approximately $9.2 million, compared with $21.4 million at December 31,
1997. We invest excess cash according to our investment policy that provides
guidelines with regard to liquidity, type of investment, credit ratings and
concentration limits.
On December 10, 1998, we and certain institutional investors exchanged an
aggregate of $4.8 million (including accrued interest) of the Senior Convertible
Notes for an aggregate of 4,784 shares of our Series D Convertible Preferred
Stock. Each share of Series D Convertible Preferred Stock is entitled to
receive, when, as, and if declared by the Board of Directors out of funds
legally available for such purpose, cumulative dividends at the rate of $55 per
annum. Dividends on the Series D Preferred Stock are payable in cash or shares
of Common Stock or any combination of cash and shares of Common Stock, at our
option and are payable quarterly on February 1, May 1, August 1 and November 1
of each year. Each share of Series D Preferred Stock is convertible, at any
time, into the Common Stock at the lesser of (a) $1.125 per share or (b) 90% of
the low trading price during a designated time period prior to the conversion.
In addition, the holders received an aggregate of 767,469 warrants to purchase
additional shares of Common Stock in exchange for surrendering the redemption
rights previously held by them under the Notes. The warrants were priced at 150%
of the average closing price for the month of December 1998. We have attributed
a value of $943,680 to these warrants.
The delisting of our Common Stock from The Nasdaq National Market
constituted an Optional Redemption Event (as defined in the Certificate of
Designation of Series D Preferred Stock) for the Series D Preferred Stock. In
connection therewith, on February 4, 1999, we issued a Control Notice (as
defined in the Certificate of Designation of Series D Preferred Stock) that
prevented the redemption of the Series D Preferred Stock. This Control Notice
will remain in effect for as long as we are not listed on any of The Nasdaq
National Market, The Nasdaq SmallCap Market, the American Stock Exchange or the
New York Stock Exchange. Delivery of the Control Notice had the effect of
increasing the annual dividend to $180 per share and adjusting the conversion
price of the Series D Preferred Stock to 80% of the amount of the conversion
price would otherwise be.
In December 1998, we completed a private sale of 4,812,071 shares of
Common Stock for aggregate net proceeds of approximately $7.1 million. In
connection with this offering, we have committed a five-year, 3.6% royalty on
net sales of SP-303/Provi, if any, in the United States for distribution to
HIV/AIDS charities. We intend to honor this royalty payment through the sale of
our first botanical product, if any.
In December 1998, we issued 747,206 shares of Common Stock to consultants
for services rendered. We recorded an expense of approximately $1.1 million in
conjunction with the consulting services.
In October 1998, we completed the sale to the public of an aggregate of
140,880 shares of our Series C Convertible Preferred Stock for aggregate gross
proceeds of $14.1 million. Each share of Series C Preferred Stock is entitled to
receive cumulative dividends paid semi-annually to the holders of record of such
shares as follows: (i) an annual stock-on-stock dividend, paid in arrears, in
shares of Common Stock (calculated as the quotient of $10.00 divided by 85% of
the average
32
<PAGE>
closing price of the Common Stock for the 10-day trading period ending three
trading days prior to the date the dividend is paid); plus (ii) a cash amount
equaling 0.00005% of our U.S. net sales of our SP-303/Provir product for the
treatment of diarrhea, if any, for the preceding two calendar quarters less
$5.00. If, under Delaware law, we are unable to pay the cash portion of the
dividends, then the cash portion will be paid in shares of Common Stock (valued
at 85% of the average closing price of the Common Stock for the 10-day trading
period ending three trading days prior to the date on which the dividend is
paid). We intend to honor this royalty portion of the dividend through the sale
of our first botanical product, if any. Each share of the Series C Preferred
Stock was convertible for a period of 30 days after the first issuance (August
18, 1998) and will be convertible again commencing 12 months after the initial
issuance date at the election of each holder, and automatically on the sixth
anniversary of the initial issuance date into the greater of (a) 16.6667 shares
of Common Stock or (b) such number of shares of Common Stock as equals $100 (the
price paid per share of Series C Preferred Stock) divided by 85% of the average
closing price of the Common Stock reported by Nasdaq for the 10-day trading
period ending three trading days prior to the date of conversion. The Common
Stock is currently trading on the OTC Bulletin Board. During the initial 30-day
conversion period for the Series C Preferred Stock, 24,922 shares of the Series
C Preferred Stock were converted into an aggregate of 1,861,550 shares of Common
Stock. In connection with the issuance of the Series C Preferred Stock, we
recognized a non-cash charge in the amount of $679,000.
In June 1998, we entered into Stock Purchase Agreements with certain of our
stockholders (the "Buyers") pursuant to which we acquired the right to sell to
the Buyers, subject to certain conditions up to an aggregate of 7,000 shares of
Series B Custom Convertible Preferred Stock for an aggregate purchase price of
$7,000,000. The Stock Purchase Agreements were terminated upon the closing of
the Series C Convertible Preferred Stock Financing in October 1998. As
consideration for entering into the Stock Purchase Agreements, we issued to the
Buyers warrants to purchase an aggregate of 350,000 shares of Common Stock. The
warrants are exercisable for a period of five years at an exercise price per
share equal to 115% of the average trading price of the Common Stock during
specified measurement periods. We have attributed a value of $1.5 million to
these warrants.
In June 1997, we issued $10.4 million of Senior Convertible Notes. The
notes mature in August 2000 and bear interest at a rate of 5.5% per annum.
Interest on the notes was payable in Common Stock or cash at our option.
Initially, the notes were convertible into Common Stock at 100% of the low
trading price during a designated time period prior to conversion provided that
the conversion price would not be less than $5.50 per share. Starting in
November 1997, the notes were convertible into Common Stock 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 notes (see
next paragraph). Of the notes issued, $400,000 was issued to the placement agent
as part of the placement fee. We paid the placement agent an additional $300,000
in cash. The placement fees and other offering costs were capitalized in other
assets as deferred issuance costs and were amortized to interest expense over
the life of the notes to the extent the notes were not converted to Common
Stock. The net proceeds totaled approximately $9.5 million after the placement
agent's fees and other offering expenses.
In March 1998, we and the purchasers of the notes entered into an Amendment
Agreement (the "Amendment Agreement") with the purchasers of the notes in order
to avoid conversion of the notes at a price that would be unduly dilutive to our
existing stockholders. As consideration for entering into the Amendment
Agreement, we issued to the purchasers of the notes warrants to purchase an
aggregate of 137,500 shares of Common Stock. The warrants are exercisable
through March 18, 2001 at an exercise price of $7.50 per share. We have
attributed a value of $309,000 to these warrants. On December 10, 1998, we
issued to the note holders an aggregate of 4,784 shares of the Series D
Convertible Preferred Stock in exchange for the cancellation of an aggregate of
$4.8 million (including accrued interest) of the notes.
In May 1997, we 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 our 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 Common Stock at $6.25 per share. We have attributed a value of
$648,000 to these warrants.
In April 1997, we sold 1,600,000 shares of Common Stock at $4.97 per share
in a registered direct public offering, which yielded gross proceeds of $7.95
million. The net proceeds of approximately $7.8 million from this offering were
used for the continued research and clinical development of our product
candidates.
33
<PAGE>
In January 1997, we 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 were used for the continued
research and clinical development of our product candidates.
In September 1996, we entered into a five-year collaborative agreement
with Lipha/Merck to jointly develop our antihyperglycemic drugs. Upon signing
the collaboration, we received an annual research fee of $1.5 million which was
amortized to revenue over twelve months, as work was performed. We 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
Common Stock at the time of purchase. In exchange for development and marketing
rights in all countries except Japan, South Korea, and Taiwan (which are covered
under an earlier agreement between Shaman and Ono), Lipha/Merck agreed to
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 Common Stock at the time of purchase. The agreement also
provided for additional preclinical and clinical milestone payments to us in
excess of $10.0 million per compound for each antihyperglycemic drug developed
and commercialized. Lipha/Merck agreed to bear all pre-clinical, clinical,
regulatory and other development expenses associated with the compounds selected
under the agreement. In addition, as products are commercialized, we would
receive royalties on all product sales outside the United States and up to 50%
of the profits (if we exercised our co-promotion rights) or royalties on all
product sales in the United States. Certain of the milestone payments would be
credited against future royalty payments, if any, due to us from sales of
products developed pursuant to the agreement.
In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck. Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front payment of an aggregate of $2.0 million, consisting of a $1.0 million
research payment (which remains recorded as deferred revenue that we have not
yet earned) and a $1.0 million equity investment.
For the year ended December 31, 1998, we recognized $1.9 million in
revenue from the Lipha/Merck collaboration. In addition, we received a total
$2.5 million for issuance of 1,155,239 shares of Common Stock (813,008 shares
priced at $1.85 per share in September 1998 and 342,231 shares priced at $2.92
per share in December 1998), each representing a 20% premium to the weighted
average price of the Common Stock at the time of purchase.
On February 1, 1999, we discontinued all the research and development
activities related to the collaborative agreement. We are currently in
negotiations with Lipha/Merck for the discontinuation of this research
agreement. There will be no further research payments from Lipha/Merck.
In July 1996, we closed a private placement pursuant to Regulation S under
the Securities Act of 1933, as amended, in which we 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
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 Common Stock during the period prior to conversion. The holder
of preferred shares is entitled to a liquidation preference of $8.15 per share.
We expect to incur substantial additional costs in the first quarter of
1999 relating to our restructuring in February 1999. We expect to continue to
incur losses at least through 1999. Our cash, cash equivalents and investment
balances are approximately $9.2 million at December 31, 1998 will be adequate to
fund operations through June 1999. We will need to seek additional funding
through public or private equity or debt financings, collaborative arrangements,
the sale or out-license of the clinical research programs or from other sources
to discover, develop and market our botanical dietary supplements. If additional
funds are raised by issuing equity securities, significant dilution to existing
stockholders may result and there can be no assurance that additional funding
will be available on reasonable terms, or at all.
34
<PAGE>
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Based on recent assessments, we have determined that we will be required
to certify portions of our software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. We presently believe that
with modifications or replacements of existing software and certain hardware,
the Year 2000 issue can be mitigated. We believe that such modification and
replacements are not significant, and should such modification and replacements
be delayed there would be no material impact on our operations.
We are approximately 85% complete with the assessment of all internal
systems that could be significantly affected by the Year 2000. To date, cost
estimates for upgrades for those systems not in compliance total approximately
$200,000. After the assessment phase is completed, we will have to purchase,
install and test the upgrades to ensure they meet internal Year 2000 compliance.
We expect to complete our internal Year 2000 readiness program in the third
quarter of 1999. We are in the process of asking our significant suppliers and
subcontractors that do not share information systems with us (external agents)
whether their systems are Year 2000 compliant. To date, we are not aware of any
external agent with a Year 2000 Issue that would materially impact our results
of operations, liquidity, or capital resources. However, we have no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolutions to process in a timely fashion
could materially impact us.
We currently have no contingency plans in place in the event we do not
complete all phases of the Year 2000 program. We plan to evaluate the status of
completion in second quarter 1999 and determine whether such a plan is
necessary.
Item 7A - Qualitative and Quantitative Disclosure About Market Risk
We are exposed to market risk, including changes to interest rates. A
discussion of our accounting polices for financial instruments and further
disclosures relating to financial instruments is included in the Summary of
Significant Accounting Policies in the Notes to Financial Statements.
We monitor the risks associated with intrest rates and foreign currency
exchange rate risks and have established policies and business practices to
protect against these and other exposures. We place our investments in
instruments that meet high credit quality standards, as specified in our
investment policy guidelines; the policy also limits the amount of credit
exposure to any one issue, isuer, or type of instrument and does not permit
derivative financial instruments in our investment portfolio. As the result, we
do not expect any material loss with respect to our investment portfolio.
35
<PAGE>
The following table provides information about our financial instruments
that are sensitive to changes in interest rates. For investment securities, the
table presents principal cash flows and related weighted-average interest rates
by expected maturity dates.
<TABLE>
<CAPTION>
ASSETS
(in thousands)
Fair Value
at
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Cash
equivalents $2,955 - - - - - $2,955 $2,945
Weighted
average
interest rate 5.28%
Short-term
investments $3,282 - - - - - $3,282 $3,277
Weighted
average
interest rate 5.76%
LIABILITES
(in thousands)
Long-term debt,
including
current portion
- - ----------------
Fixed rate $2,973 $1,371 $540 $540 - - $5,424 $4,628
Weighted
average
interest rate 13.64% 13.56% 12.00% 12.00%
</TABLE>
36
<PAGE>
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 we are
still a relatively young company, have not yet completed a full cycle of
development, regulatory approval and commercialization for any of our products
and are changing our business. There can be no assurance that we will be
successful with our new business. Our botanical products are at various stages
of development. Additional research and development will be necessary for us to
move additional products toward commercialization. The botanical business is
highly competitive. Certain of our competitors are substantially larger and have
greater financial resources than our company. In addition, there can be no
assurance that any plants required by us will be indefinitely available to us.
Also, where access to funding is difficult, our stockholders may face
significant dilution, and our ability to proceed with our programs and plans may
be significantly and adversely affected.
37
<PAGE>
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Shaman Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Shaman Pharmaceuticals,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of our operations and our cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company had cash, cash equivalents and short-term investments at December 31,
1998 aggregating $9.2 million which are not sufficient to enable the Company to
pay its existing liabilities and to fund its operations through December 31,
1999. The Company has incurred recurring operating losses and has total
liabilities at December 31, 1998 in excess of its available cash resources.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements referred to above do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Palo Alto, California
February 11, 1999
38
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,887,496 $ 11,340,702
Short-term investments 3,277,197 10,079,943
Amounts due from related parties 208,898 192,551
Prepaid expenses and other current assets 283,804 553,507
----------- -----------
Total current assets 9,657,395 22,166,703
Property and equipment:
Laboratory equipment 6,336,564 6,211,182
Computer equipment and furniture 1,474,914 1,158,869
Leasehold improvements 7,266,066 7,351,827
----------- -----------
15,077,544 14,721,878
Less: accumulated depreciation and
amortization (11,963,876) (10,749,738)
----------- -----------
3,113,668 3,972,140
Other assets 368,080 613,657
----------- -----------
Total assets $ 13,139,143 $ 26,752,500
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 1,515,230 $ 925,701
Accrued clinical trial costs 2,051,134 1,689,659
Accrued professional fees 948,374 718,625
Accrued compensation 326,797 368,272
Advances--contract research 968,750 1,133,605
Current installments of long-term obligations 2,803,861 2,783,976
------------- -------------
Total current liabilities 8,614,146 7,619,838
Long-term obligations, excluding current
installments 2,415,137 4,017,979
Senior convertible notes - 9,967,044
Stockholders' equity:
Preferred stock, $0.001 par value; issuable in
series; 1,000,000 shares authorized; 519,533
and 400,000 convertible shares issued and
outstanding at December 31, 1998 and 1997,
respectively (Liquidation preference at
December 31, 1998 and 1997 -- $18,429,310 and
$3,258,800, respectively) 520 400
Common stock, $0.001 par value; 40,000,000 shares
authorized; 30,382,948 shares and 17,796,045
shares issued and outstanding at December 31,
1998 and 1997, respectively 30,383 17,796
Additional paid-in capital 152,698,580 117,164,524
Deferred compensation and other adjustments (185,850) (124,910)
Accumulated deficit (150,433,773) (111,910,171)
------------- -------------
Total stockholders' equity 2,109,860 5,147,639
------------- -------------
Total liabilities and stockholders'
equity $ 13,139,143 $ 26,752,500
============= =============
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue from collaborative
agreements $ 2,659,856 $ 3,500,000 $ 3,406,250
Operating expenses:
Research and development 32,393,374 24,140,246 19,138,190
General and administrative 5,565,066 4,833,489 3,537,157
------------- ------------- -------------
Total operating expenses 37,958,440 28,973,735 22,675,347
Loss from operations (35,298,584) (25,473,735) (19,269,097)
Interest income 550,227 1,217,884 1,082,618
Interest expense (2,033,004) (5,032,684) (603,330)
------------- ------------- -------------
Net loss (36,781,361) (29,288,535) (18,789,809)
Deemed dividend on Preferred Stock (1,742,241) - -
Net loss applicable to
Common Stockholders $(38,523,602) $(29,288,535) $(18,789,809)
============= ============ ============
Basic and diluted net loss per
common share $ (1.92) $ (1.72) $ (1.39)
============= ============ ============
Shares used in calculation of
basic and diluted net loss
per common share 20,114,000 17,010,000 13,496,000
============= ============ ============
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Deferred
Convertible Addition Compensation Total
Preferred Common Paid-In and Accumulated Stockholders'
Stock Stock Capital Other Deficit Equity
Adjustments
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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>
41
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Years Ended December 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
Deferred
Convertible Addition Compensation Total
Preferred Common Paid-In and Accumulated Stockholders'
Stock Stock Capital Other Deficit Equity
Adjustments
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31
1997 400 17,796 117,164,524 (124,910) (111,910,171) 5,147,639
Issuance of
15,843 shares
of common
stock upon
the exercise
of stock
options - 16 21,699 - - 21,715
Issuance of
62,312 shares
of common
stock to
employees from
the 1998 special
issuance
plan - 63 80,696 - - 80,759
Issuance of
747,206 shares
of common
stock to
consultants for
consulting
services
rendered - 747 1,073,363 - - 1,074,110
Sale of
1,155,239 shares
of common
stock in
connection with
Lipha/Merck
collaboration - 1,155 2,498,845 - - 2,500,000
Deferred
compensation
related to
granting of
options to
non-employees,
net of
amortization
and reversals - - 162,464 (75,849) - 86,615
Change in unrealized
gain/loss on
available-for-sale
securities - - - 14,909 - 14,909
Value ascribed to
Warrants issued
in conjunction
with Series B
Convertible
Preferred Stock
($1,462,860) - - - - - -
Issuance of
201,645 shares
of common
stock in
connection with
senior convertible
notes quarterly
interest
payment - 202 650,339 - - 650,541
Issuance of
1,076,202 shares
of common
stock upon
the conversion
of 1,209 shares
of Series D
Convertible
Preferred
Stock (1) 1,076 (1,075) - - -
Issuance of
2,571,252 shares
of common
stock upon
the conversion
of senior
convertible
notes - 2,571 5,450,613 - - 5,453,184
Sale of
140,880 shares
of convertible
preferred stock
in connection
with the
Series C
Convertible
Preferred
Stock
Offering,
net of
issuance
costs of $1.5
million 141 - 12,598,553 - - 12,598,694
Value ascribed
to in-the-money
conversion
option of
Series C
Convertible
Preferred
Stock - - 678,636 - - 678,636
Issuance of
1,861,550 shares
of common
stock
upon the
conversion of
24,922 shares
of Series C
Convertible
Preferred
Stock (25) 1,862 (1,837) - - -
Issuance of
83,583 shares
of common
stock in
payment of
Dividends on
Series C
Convertible
Preferred
Stock - 83 (83) - - -
Sale of
4,812,071 shares
of common stock
in connection
with the
private
placement
offering in
December 1998,
net of issuance
costs of $.13
million - 4,812 7,082,132 - - 7,086,944
Issuance of
4,784 shares
of Series D
Convertible
Preferred Stock
in exchange
for cancellation
of senior
convertible
note 5 - 4,176,106 - - 4,176,111
Value ascribed to
in-the-money
conversion option
of Series D
Convertible
Preferred
Stock - - 1,063,605 - - 1,063,605
Value ascribed to
Warrants issued in
conjunction with
Series D
Convertible
Preferred Stock
($943,680) - - - - - -
Net loss - - - - (38,523,602) (38,523,602)
----- ----- ---------- ----- ------------ ------------
Balance at
December 31,
1998 $520 $30,383 $152,698,580 $(185,850) $(150,433,773) $(2,109,860)
===== ======= =========== ========= ============= ===========
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Operating activities:
Net loss applicable to
Common Shareholders $ (38,523,602) $ (29,288,$35) $ (18,789,809)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 1,214,139 1,718,167 2,245,860
Amortization of warrants and
deferred equity costs 286,664 390,729 117,231
Loss on disposal of fixed assets 19,834 - -
Interest expense on issuance of
senior convertible notes - 3,692,140 -
Deemed dividend on
preferred stock 1,742,241 - -
Issuance of common stock to
consultants for services
rendered 1,074,110 - -
Other compensation 80,759 - -
Payment of interest in
common stock 328,743 - -
Changes in operating assets
and liabilities:
Prepaid expenses, current
assets and other assets 755,280 628,198 (80,148)
Accounts payable, accrued
professional fees,
accrued compensation,
accrued clinical trial
costs and contract
research advances 974,423 (748,327) 2,021,220
------------ ------------ ------------
Net cash used in operating
activities (32,047,409) (23,607,628) (14,485,646)
------------ ------------ ------------
Investing activities:
Purchases of
available-for-sale investments (5,255,947) (14,562,627) (10,872,811)
Maturities of
available-for-sale investments 5,032,892 4,954,640 26,325,454
Sales of available-for-sale
investments 7,040,710 - 1,494,000
Capital expenditures (375,501) (913,382) (864,729)
Employee loans, net of repayments (256,347) - -
------------ ------------ ------------
Net cash provided by (used in)
investing activities 6,185,807 (10,521,369) 16,081,914
------------ ------------ ------------
Financing activities:
Proceeds from issuance of
preferred stock, net 12,598,694 - 3,058,223
Proceeds from issuance of
common stock, net 9,608,659 17,446,683 3,412,302
Proceeds from issuance of
long-term obligations - 5,000,000 600,000
Proceeds from issuance of
senior convertible notes, net - 9,479,039 -
Principal payments on
long-term obligations (2,310,080) (2,936,297) (1,825,665)
Proceeds from asset financing
arrangements 511,123 429,023 -
------------ ------------ ------------
Net cash provided by financing
activities 20,408,396 29,418,448 5,244,860
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (5,453,206) (4,710,549) 6,841,128
Cash and cash equivalents at
beginning of period 11,340,702 16,051,251 9,210,123
Cash and cash equivalents at end
of period $ 5,887,496 $ 11,340,702 $ 16,051,251
============ ============= =============
Supplemental information
Interest paid $ 605,069 $ 538,891 $ 603,330
============ ============= =============
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General
To date, Shaman Pharmaceuticals has been primarily focused on discovering
and developing novel pharmaceutical products for major human diseases by
isolating and optimizing active compounds found in tropical plants with a
history of medicinal use. We have conducted human clinical trials with our three
lead product candidates -- SP-303/Provir (Phase III/II), nikkomycin Z (Phase I)
and SP-134101 (Phase I) -- targeting five indications. Due to unforeseen delays
and costs necessary to complete additional necessary trials for our lead
compound, SP-303/Provir for the treatment of diarrhea in people with AIDS, we
have chosen to discontinue all pharmaceutical development, manufacturing and
marketing activities. We intend to sell or outlicense worldwide marketing rights
to our pharmaceutical assets. We plan to focus our efforts on our Botanicals
division.
Matters Affecting Ongoing Operations
The accompanying financial statements have been prepared assuming that we
will continue as a going concern. We have cash, cash equivalents and short-term
investments at December 31, 1998 aggregating $9.2 million which are not
sufficient to enable us to pay existing liabilities and fund our operations
through December 31, 1999. We have total liabilities in excess of our available
cash resources at December 31, 1998. We have had recurring net losses, including
a net loss applicable to common stockholders of $38.5 million in the year ended
December 31, 1998, and have an accumulated deficit of $150.4 million at December
31, 1998. These conditions raise substantial doubt about our ability to continue
as a going concern.
To address these matters, on February 1, 1999, we announced and initiated
the implementation of a Restructuring Plan which resulted in the immediate
cessation of all pharmaceutical research and development activities, a reduction
in workforce of 60 employees, and will result in the closing down of all of the
operations of our pharmaceutical business (see Note 2). After the implementation
of the Restructuring Plan, we expect our available cash resources to be
substantially used before the end of June 1999.
Further, we intend to sell or enter into outlicensing agreements with
respect to all of our current pharmaceutical research programs including
SP-303/Provir, nikkomycin Z and SP-134101. We are currently negotiating for the
termination of our remaining research and development collaboration agreement
with Lipha S.A., a wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany
("Lipha/Merck"). We intend to focus our future efforts on the development and
commercialization of botanical dietary supplements derived from tropical plant
sources.
Revenue Recognition
Revenue under our collaborative research agreements is recognized ratably
as costs are incurred by us 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
requirements 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.
44
<PAGE>
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards, "Accounting for Stock-Based
Compensation" ("SFAS 123") which encourages, but does not require, companies to
record compensation expense for stock-based employee compensation plans at fair
value. We have elected to follow the disclosure requirements of SFAS 123 for the
year ended December 31, 1998, 1997 and 1996 and will continue to measure
stock-based compensation to employees in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Note 8 contains a summary of the pro
forma effects to reported net loss applicable to common stockholders and net
loss per common share for 1998, 1997 and 1996 as if we had elected to recognize
compensation expense based on the fair value of options granted as described by
SFAS 123.
We grant 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. We account for stock option grants to employees and directors in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
and, accordingly, recognize no compensation expense for the stock option grants
to employees and directors.
Per Share Data
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. The impact of stock options and other common stock
equivalents have been excluded from the computation in all years presented as
they are antidilutive.
Comprehensive Loss
As of January 1, 1998, we adopted Financial Accounting Standards Board
("FASB") Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS
130 established new rules for the reporting and displaying of comprehensive
income and its components; however, the adoption of this statement had no impact
on our net loss or total stockholders' equity. SFAS 130 requires unrealized
gains or losses on our available for sale securities, which prior to adoption
were reported in stockholder's equity, to be included in other comprehensive
income (loss). Our comprehensive loss was not materially different from our net
loss applicable to common stockholders in 1998, 1997 and 1996.
Cash, Cash Equivalents, Investments and Concentration of Credit Risk
We consider 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 our policy to maintain high liquidity
and ensure safety of principal. We maintain our cash, cash equivalents and
investments in accounts with several United States banks and brokerage houses.
We determine the appropriate classification of debt securities at the time
of purchase and re-evaluate such determination as of each balance sheet date. As
of December 31, 1998 and 1997, we have classified our 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 other
comprehensive income. 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.
45
<PAGE>
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," we record 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 our estimate of future
undiscounted cash flows, except for a reserve included in the estimated
restructuring charge (see Note 2), we expect to recover the carrying amounts of
our long-lived assets. Nonetheless, it is reasonably possible that the estimate
of undiscounted cash flows may change in the near term resulting in the need to
write-down those assets to fair value.
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information ("FAS131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. We have determined that in
1998, 1997 and 1996, we operated in only one segment.
Reclassification
Certain prior year amounts have been reclassified to conform to current
year's presentation.
2. Restructuring Plan
On February 1, 1999, we announced and initiated implementation of a
restructuring plan which resulted in the closing down of the operations of our
pharmaceutical business. We now intend to outlicense worldwide marketing rights
to all our pharmaceutical compounds and will focus our efforts on the
development and commercialization of botanical dietary supplements through
botanicals division. The restructuring plan includes: cessation of
pharmaceutical research and development activities and related operations; sale
or outlicensing of all of our current pharmaceutical research programs;
reduction in force of approximately 60 employees (65% of our workforce);
dedication of initially 12 employees (as of February 26, 1999, 5 employees
remain) to the process of closing down the pharmaceutical business; termination
of the research and development contract with Lipha/Merck; settlement of
outstanding long-term equipment financing obligations; sale or disposal of all
of our fixed assets that are not needed for our botanicals business; and
sub-lease a portion of the facility.
The termination of 60 employees occurred on February 1, 1999. We are in
the process of determining an estimate of the costs of the restructuring which
will be recorded in the first quarter of 1999. We expect that such charge will
range from $2,400,000 to $5,000,000.
46
<PAGE>
3. Collaborative Relationships
In September 1996, we entered into a five-year collaborative agreement
with Lipha/Merck to jointly develop Shaman's antihyperglycemic drugs. Upon
signing the collaboration, we received an annual research fee of $1.5 million
which was amortized to revenue over twelve months as the work was performed. We
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 Common Stock at the time of purchase. In exchange for development and
marketing rights in all countries except Japan, South Korea, and Taiwan (which
are covered under an earlier agreement between Shaman and Ono Pharmaceutical Co.
Ltd. Osaka, Japan ("Ono"), Lipha/Merck agreed to 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 Common Stock at the time
of purchase. The research payments were recognized as revenue ratably as the
related costs are incurred by us in the performance of our obligations to
perform certain research and clinical trial activities. The agreement also
provided for additional preclinical and clinical milestone payments to us in
excess of $10.0 million per compound for each antihyperglycemic drug developed
and commercialized. Lipha/Merck agreed to bear all pre-clinical, clinical,
regulatory and other development expenses associated with the compounds selected
under the agreement. Preclinical and clinical milestone payments would be
recognized as revenue as certain preclinical hurdles are met and as certain
phases of the clinical trials and the FDA approval process were completed. In
addition, as products were commercialized, Shaman would receive royalties on all
product sales outside the United States and up to 50% of the profits (if we
exercise our co-promotion rights) or royalties on all product sales in the
United States. Certain of the milestone payments would be credited against
future royalty payments, if any, due to us from sales of products developed
pursuant to the agreement.
In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck. Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front payment of an aggregate of $2.0 million, consisting of a $1.0 million
research payment (which remains recorded as deferred revenue that we have not
yet earned) and a $1.0 million equity investment.
For the year ended December 31, 1998, Shaman recognized $1.9 million in
revenue from the Lipha/Merck collaboration. In addition, we received a total
$2.5 million for issuance of 1,155,239 shares of Common Stock (813,008 shares
priced at $1.85 per share in September 1998 and 342,231 shares priced at $2.92
per share in December 1998), each representing a 20% premium to the weighted
average price of Common Stock's stock at the time of purchase. Revenues from
Lipha/Merck accounted for 70%, 43% and 12% of total revenues earned in 1998,
1997 and 1996 respectively.
On February 1, 1999, we discontinued all research and development
activities related to the collaborative agreement. We are currently in
negotiations with Lipha/Merck, for the discontinuation of this research
agreement. There will be no further research payments from Lipha/Merck.
In May 1995, we 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
was obligated to screen 100 diabetes-specific plants per year in vivo, isolate
and identify active compounds, and participate in any medicinal chemistry
modification. In turn, Ono provided us 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 provided $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.
We 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 years ended December 31, 1998, 1997 and 1996, Shaman recognized $790,000,
$2.0 million and $3.0 million, respectively in revenue from the Ono
collaboration. Revenues from Ono accounted for 30%, 57% and 88% of total
revenues earned in 1998, 1997 and 1996, respectively.
In May 1998, our collaborative agreement with Ono, and the ongoing
research and development funding received pursuant thereto, expired under the
original terms thereof and was not renewed. Under the agreement, Ono will
47
<PAGE>
continue to provide milestone payments and royalties to us on any resulting
products Ono develops from compounds identified during the three-year term of
the agreement.
Costs associated with revenue from these collaborations totaled $8.2
million, $11.4 million and $11.6 million for the year ended December 31, 1998,
1997 and 1996, respectively, and are included in research and development
expenses in the accompanying financial statements.
4. Investments
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and government obligations $ 2,255 $ -- $ (5) $ 2,250
U.S. corporate bonds 1,000 -- -- 1,000
U.S. corporate commercial
paper and other 4,984 -- (10) 4,974
------- -------- -------- --------
Total $ 8,239 $ -- $ (15) $ 8,224
======= ======== ======== ========
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 4,957 -- $ (10) $ 4,947
Short-term investments 3,282 -- (5) 3,277
------- -------- -------- --------
Total $ 8,239 $ -- $ (15) $ 8,224
======= ======== ======== ========
December 31, 1997
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
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
======= ======== ======== ========
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 8,345 -- $ (20) $ 8,325
Short-term investments 10,090 -- (10) 10,080
------- -------- -------- --------
Total $18,435 $ -- $ (30) $18,405
======= ======== ======== ========
</TABLE>
The average remaining maturity of the portfolio was approximately less
than one month as of December 31, 1998, and approximately four and one-half
months at December 31, 1997, respectively.
The estimated fair value amounts have been determined by us using
available market information and appropriate valuation methodologies. However,
judgment is required in interpreting market data to develop the estimates of
fair value.
48
<PAGE>
5. Long-Term Obligations
At December 31, 1998, long-term obligations consist of secured and
unsecured term loans and secured borrowings used to acquire property and
equipment, capital lease arrangements and a leasehold improvement financing
obligation.
In May 1997, we 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 Common Stock at $6.25 per share, which are
exercisable over a ten-year period. We have 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 June 1997, we issued $10.4 million of senior convertible notes, with an
original maturity of August 2000. Interest at 5.5% per annum on the notes was
payable in Common Stock or cash at our option. Initially, the notes were
convertible into Common Stock at 100% of the low trading price during a
designated time period prior to conversion provided that the conversion price
would not be less than $5.50 per share. Starting in November 1997, the notes
were convertible into Common Stock 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 March 1998 amendment agreement with the
note holders whereby we 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 as consideration for entering into the amendment agreement. We
have attributed a value of $309,000 to these warrants. This amount was recorded
as a discount on the related debt and was amortized as interest expense over the
term of the loan. Of the notes issued, $400,000 was issued to the placement
agent as part of the placement fee. We 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 were amortized to
interest expense over the life of the notes to the extent the notes were not
converted to Common Stock. The net proceeds totaled approximately $9.5 million
after the placement agent's fees and other offering expenses. In connection with
the issuance of the notes, we recognized a non-cash charge in the amount of
$3,692,000, representing the value attributed to the in-the-money conversion
feature of the senior convertible notes.
Through December 9, 1998, an aggregate principal balance of approximately
$5.6 million of senior convertible notes was converted into an aggregate of
2,571,252 shares of common stock. On December 10, 1998, we issued to the note
holders an aggregate of 4,784 shares of our Series D Convertible Preferred Stock
in exchange for the cancellation of an aggregate of $4.8 million (including
accrued interest) of the notes.
Equipment borrowings totaled $0 and $401,555 at December 31, 1998 and
1997, respectively. The borrowings carried interest at rates ranging from 10.7%
to 12.75% at December 31, 1997, were secured by the equipment acquired, and were
payable in monthly installments ranging from $10,000 to $156,000 through
December 1998.
We 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>
1998 1997
------------ ------------
<S> <C> <C>
At December 31,
Equipment and furniture $ 2,401,286 $ 1,890,164
Less accumulated amortization (1,668,460) (1,354,475)
------------ ------------
$ 732,826 $ 535,689
============ ============
</TABLE>
Amortization of assets acquired under capital leases is included in
depreciation and amortization expense.
49
<PAGE>
In connection with the facility lease described in Note 6, we entered into
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 1999 through 2002. The 1998
payment was not paid until January 1999.
Fair Value of Long-Term Obligations
The fair values of our long-term obligations are estimated using
discounted cash flow analyses based on our 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, 1998:
<TABLE>
<CAPTION>
Carrying Value Fair Value
-------------- ----------
<S> <C> <C>
Leasehold improvements financings $ 2,032,045 $ 2,213,059
Secured Loan $ 2,724,189 $ 2,414,913
</TABLE>
The carrying value of our term loan approximates our fair value because
the interest rates on the note takedowns are periodically reset.
At December 31, 1998, future payments on long-term obligations are as
follows:
<TABLE>
<CAPTION>
Leasehold
Secured Capital Improvement
Loan Leases Financing Total
----------- -------- ------------ -----
<S> <C> <C> <C> <C>
1999 $1,893,219 $ 257,889 $1,080,000 $3,231,108
2000 830,970 281,333 540,000 1,652,303
2001 - 270,635 540,000 810,635
2002 - 60,673 540,000 600,673
2003 - - - -
----------- ---------- ----------- -----------
Total minimum payments $2,724,189 $ 870,530 $2,700,000 $6,294,719
Less amount representing
interest (at rate
ranging from 9.5%
to 12.0%) - (119,766) (667,955) (787,721)
----------- ---------- ----------- -----------
2,724,189 750,764 2,032,045 5,506,998
Less current
installments (1,893,219) (219,232) (691,410) (2,803,861)
----------- ---------- ----------- -----------
Long-term obligations,
excluding current
installments $ 890,970 $ 531,532 $1,340,635 $2,703,137
=========== ========== =========== ==========
</TABLE>
6. Commitments and Contingencies
We lease our research and office facility in South San Francisco,
California under a noncancellable agreement expiring 2003, with options to renew
for a total of ten years. We are required to pay operating costs, including
property taxes, utilities, insurance and maintenance.
At December 31, 1998, the minimum noncancellable future rental payments
under our operating leases are:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ 1,210,837
2000 1,544,555
2001 1,590,892
2002 1,638,618
2003 281,296
------------
$ 6,266,198
============
</TABLE>
50
<PAGE>
Rent expense for each of the three years ended December 31, 1998, 1997 and
1996 was approximately $1,189,000 $1,154,000 and $1,348,000, respectively.
We are involved in a litigation and disputes which are incidental to our
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, we believe the costs associated with all of these actions will not
have a material effect on our 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. We have insurance
coverage which we believe is adequate to protect against such product liability
losses as could materially affect our financial position.
7. Contractual Agreements
We have 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 us to minimum annual payments to our contract partners. In
addition, we 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,
1998, related noncancellable commitments are immaterial.
8. Stockholders' Equity
Preferred Stock
We are authorized to issue 1,000,000 shares of preferred stock (519,533
shares of which are issued and outstanding at December 31, 1998). Our Board of
Directors may set the rights and privileges of any preferred stock issued.
On December 10, 1998, we and certain institutional investors exchanged an
aggregate of $4.8 million (including accrued interest) of the Senior Convertible
Notes (the "Notes") for an aggregate of 4,784 shares of our Series D Convertible
Preferred Stock. Each share of Series D Convertible Preferred Stock is entitled
to receive, when, as, and if declared by the Board of Directors out of funds
legally available for such purpose, cumulative dividends at the rate of $55 per
annum. Dividends on the Series D Preferred Stock are payable in cash or shares
of our Common Stock or any combination of cash and shares of Common Stock, at
our option and are payable quarterly on February 1, May 1, August 1 and November
1 of each year. Each share of Series D Preferred Stock is convertible, at any
time, into Common Stock at the lesser of (a) $1.125 per share or (b) 90% of the
low trading price during a designated time period prior to the conversion. In
addition, the holders received an aggregate of 767,469 warrants to purchase
additional shares of Common Stock in exchange for surrendering the redemption
rights previously held by them under the Notes. The warrants were priced at 150%
of the average closing price for the month of December 1998. We have attributed
a value of $943,680 to these warrants. In connection with the issuance of the
Series D Preferred Stock, we also recognized a non-cash charge in the amount of
$1,063,605, representing the value attributed to the in-the-money conversion
feature of the Series D Preferred Stock.
The delisting of our Common Stock from The Nasdaq National Market
constituted an Optional Redemption Event (as defined in the Certificate of
Designation of Series D Preferred Stock) for the Series D Preferred Stock. In
connection therewith, on February 4, 1999, we issued a Control Notice (as
defined in the Certificate of Designation of Series D Preferred Stock) that
prevented the redemption of the Series D Preferred Stock. This Control Notice
will remain in effect for as long as we are not listed on any of The Nasdaq
National Market, The Nasdaq SmallCap Market, the American Stock Exchange or the
New York Stock Exchange. Delivery of the Control Notice had the effect of
increasing the annual dividend to $180 per share and adjusting the conversion
price of the Series D Preferred Stock to 80% of the amount the conversion price
would otherwise be.
51
<PAGE>
In October 1998, we completed the sale to the public of an aggregate of
140,880 shares of our Series C Convertible Preferred Stock for aggregate gross
proceeds of $14.1 million. Each share of Series C Preferred Stock is entitled to
receive cumulative dividends paid semi-annually to the holders of record of such
shares as follows: (i) an annual stock-on-stock dividend, paid in arrears, in
shares of Common Stock (calculated as the quotient of $10.00 divided by 85% of
the average closing price of the Common Stock for the 10-day trading period
ending three trading days prior to the date the dividend is paid); plus (ii) a
cash amount equaling 0.00005% of our U.S. net sales of our SP-303/Provir product
for the treatment of diarrhea, if any, for the preceding two calendar quarters
less $5.00. If, under Delaware law, we are unable to pay the cash portion of the
dividends, then the cash portion will be paid in shares of Common Stock (valued
at 85% of the average closing price of the Common Stock for the 10-day trading
period ending three trading days prior to the date on which the dividend is
paid). We intend to honor this royalty portion of the dividend through the sale
of our first botanical product, if any. Each share of the Series C Preferred
Stock was convertible for a period of 30 days after the first issuance and will
be convertible again commencing 12 months after the initial issuance date
(August 18, 1998) at the election of each holder, and automatically on the sixth
anniversary of the initial issuance date into greater of (a) 16.6667 shares of
Common Stock or (b) such number of shares of Common Stock as equals $100 (the
price paid per share of Series C Preferred Stock) divided by 85% of the average
closing price of the Common Stock reported by Nasdaq for the 10-day trading
period ending three trading days prior to the date of conversion. The Common
Stock is currently trading on the OTC Bulletin Board. During the initial 30-day
conversion period for the Series C Preferred Stock, 24,922 shares of the Series
C Preferred Stock were converted into an aggregate of 1,861,550 shares of Common
Stock. In connection with the issuance of the Series C Preferred Stock, we
recognized a non-cash charge in the amount of $678,636.
In June 1998, we entered into Stock Purchase Agreements with certain of our
stockholders (the "Buyers") pursuant to which we acquired the right to sell to
the Buyers, subject to certain conditions up to an aggregate of 7,000 shares of
Series B Custom Convertible Preferred Stock for an aggregate purchase price of
$7,000,000. The Stock Purchase Agreements were terminated upon the closing of
the Series C Convertible Preferred Stock Financing in October 1998. As
consideration for entering into the Stock Purchase Agreements, we issued to the
Buyers warrants to purchase an aggregate of 350,000 shares of Common Stock. The
warrants are exercisable for a period of five years at an exercise price per
share equal to 115% of the average trading price of the Common Stock during
specified measurement periods. We have attributed a value of $1.5 million to
these warrants.
In July 1996, we 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 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
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 Common Stock during the period prior to conversion. The holder
of preferred shares is entitled to a liquidation preference of $8.15 per share.
Common Stock
In December 1992, we adopted the 1992 Stock Option Plan ("the Plan") as
the successor plan to our 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 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
52
<PAGE>
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.
On September 18, 1998, the Plan Administrator implemented an option
cancellation/regrant program for all employees of the Company, including our
executive officers. Pursuant to that program, each such employee was given the
opportunity to surrender his or her outstanding options under the Plan with
exercise prices in excess of $1.281 per share in return for a new option grant
for the same number of shares but with an exercise price of $1.281 per share,
the closing selling price per share of Common Stock as reported on the Nasdaq
National Market on the September 18, 1998 grant date of the new option. Options
for a total of 1,855,205 shares with a weighted average exercise price of $5.275
per share were surrendered for cancellation, and new options for the same number
of shares were granted with the $1.281 per share exercise price. To the extent
the higher-priced option was exercisable for any option shares on the September
18, 1998 cancellation date, the new option granted in replacement of that option
will become exercisable for those shares in a series of twelve (12) successive
equal monthly installments upon the optionee's completion of each month of
service over the one (1) year period measured from the September 18, 1998 grant
date. The option will become exercisable for the remaining option shares in one
or more installments over the optionee's period of continued service, with each
such installment to vest on the same vesting date in effect for that installment
under the cancelled higher-priced option.
On October 20, 1998, the Plan Administrator implemented an option
cancellation/regrant program for the non-employee Board members (excluding the
Plan Administrator) and certain key independent consultants holding options
under the Plan. Pursuant to the October program, each such individual was given
the opportunity to surrender his or her outstanding options under the Plan with
exercise prices in excess of $1.4375 per share in return for a new option grant
for the same number of shares but with an exercise price of $1.4375 per share,
the closing selling price per share of Common Stock as reported on the Nasdaq
National Market on the October 20, 1998 grant date of the new option. Options
for a total of 584,639 shares with a weighted average exercise price of $6.123
per share were surrendered for cancellation, and new options for the same number
of shares were granted with the $1.4375 per share exercise price. To the extent
the higher-priced option was exercisable for any option shares on the October
20, 1998 cancellation date, the new option granted in replacement of that option
will become exercisable for those shares in a series of twelve (12) successive
equal monthly installments upon the optionee's completion of each month of
service over the one (1) year period measured from the October 20, 1998 grant
date. The option will become exercisable for the remaining option shares in one
or more installments over the optionee's period of continued service, with each
such installment to vest on the same vesting date in effect for that installment
under the cancelled higher-priced option.
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 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, 1998, all options to
purchase Common Stock issued under this plan were vested.
53
<PAGE>
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, 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
Granted at fair value 4,420,244 1.28-- 4.94 1.48 $1.49
Exercised (15,841) 0.06-- 3.50 0.37
Forfeited (2,782,587) 1.28--13.25 5.54
-----------
Balance at
December 31, 1998 4,413,421 .06--10.75 $1.41
===========
</TABLE>
At December 31, 1998, 607,719 shares under options were exercisable at a
weighted average exercise price of $1.66 per share (1,310,036 shares under
options were exercisable at a weighted average exercise price of $5.25 per share
at December 31, 1997). A stock option grant of 1,500,000 shares of Common Stock
granted on September 18, 1998 at an exercise price of $1.281 per share was
pending stockholder approval.
The following table summarizes information regarding stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Shares under Options
Average Exercisable at
Option Shares Contractual Weighted December 31, 1998
Range of Outstanding at Remaining Average ---------------------
Exercise December 31, Life Exercise Weighted Average
Prices 1998 (Years) Price Number Exercise Price
--------- -------------- ------------- ---------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.06 - $1.50 4,195,223 9.36 $1.27 532,581 $ 1.04
2.03 - 3.63 145,500 9.32 2.64 23,542 3.52
4.13 - 5.38 25,417 8.87 5.01 13,231 5.03
6.38 - 8.13 37,241 7.81 7.04 28,325 7.13
10.50 - 10.75 10,040 4.00 10.50 10,040 10.50
---------- --------
$ 0.06 -$10.75 4,413,421 9.33 $1.41 607,719 $ 1.66
========== ========
</TABLE>
For certain options issued during the years ended December 31, 1993 and
1994, we recorded deferred compensation for the difference between the exercise
price and the fair market value of Common Stock at the date of grant. For
certain additional options issued during the years ended December 31, 1997 and
1998 to non-employees, we 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
We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for our employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 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 our employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
54
<PAGE>
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if we had accounted for our
employee stock options granted subsequent to 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 1998, 1997 and 1996, respectively:
risk-free interest rates of 4.57%, 6.27% and 5.73%; no dividends paid;
volatility factors of the expected market price of Common Stock of .75 and a
weighted-average expected life of the options of 3.84, 5.0 and 3.85 years. The
effects of applying FAS 123 for recognizing compensation expense and providing
pro forma disclosures in 1998, 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 our 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 our 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.
Our pro forma information follows (in thousands except for net loss per share
information):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss applicable to
Common Stockholders
Historical $(38,524) $(29,289) $(18,790)
Pro forma $(40,734) $(31,101) $(20,280)
Net loss per common share
Historical $ (1.92) $ (1.72) $ (1.39)
Pro forma $ (2.03) $ (1.83) $ (1.50)
</TABLE>
Reserved Shares
At December 31, 1998, 7,735,623 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. The
reserved shares excluded shares issuable upon conversion of Series C Preferred
Stock and 2,903,785 shares issuable upon exercise of the Company's stock options
which are exercisable after May 31, 1999.
Warrants
A summary of outstanding warrants to purchase Common Stock at December 31,
1998 is as follows:
<TABLE>
<CAPTION>
Number of Exercise Term
Description Warrants Price in Year Expiration
----------- -------- --------- ------- ----------
<S> <C> <C> <C> <C>
Lease financing
arrangements 91,706 $2.40 - $10.83 5 - 7 2000 - 2002
Series A Convertible
Preferred Stock 550,000 $10.184 6 2002
Secured term loan 200,000 $6.25 10 2007
Senior convertible
notes 137,500 $7.50 3 2001
Series B Convertible
Preferred Stock 350,000 $2.65 - $4.82 5 2003
Series D Convertible
Preferred Stock 767,469 $3.07 5 2003
---------
2,096,675
</TABLE>
55
<PAGE>
9. Taxes
As of December 31, 1998, we had federal net operating loss carryforwards
of approximately $141.2 million. The net operating loss and credit carryforwards
will expire at various dates beginning in 2004 through 2013, 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 our deferred tax assets and liabilities for
federal and state income taxes as of December 31, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 48,600,000 $ 35,200,000
Research credits (expiring in 2004--2013) 3,900,000 2,800,000
Capitalized research and development costs 6,400,000 4,700,000
Other (1,200,000) 400,000
------------ ------------
Total deferred tax assets 57,700,000 43,100,000
Valuation allowance for deferred tax assets (57,700,000) (43,100,000)
------------ ------------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
The net valuation allowance increased by $14.6 million during the year
ended December 31, 1998.
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.
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 our Definitive Proxy
Statement to be filed with the Commission pursuant to Regulation 14A in
connection with our 1999 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.
56
<PAGE>
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, we loaned to Dr. Atul S. Khandwala, our 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. We
forgave $61,461 and $82,217 of such indebtedness in fiscal years 1998 and 1997,
respectively.
On June 17, 1998, we loaned $300,000 to John W.S. Chow, the Vice President,
Technical Operations, to reimburse him for a reasonable difference between the
purchase price of his residence in the Bay Area and the cost of comparable
housing in New Jersey, his former state of residence. The loan is evidenced by
his promissory note of the same date which will become due and payable in a
series of five successive equal annual installments, with the first such
installment due on June 25, 1999. The note will bear interest at a variable per
annum rate equal to the short-term applicable federal rate in effect under the
federal tax laws for January of each calendar year the loan remains outstanding.
Accordingly, the interest rate in effect for the period Dr. Chow's note was
outstanding during the 1998 calendar year was 5.52%. Accrued and unpaid interest
will become due and payable each year on the same date the principal installment
for that year becomes payable. Each installment of principal and accrued
interest will automatically be forgiven as that installment becomes due,
provided Dr. Chow continues in our employ. However, the entire unpaid balance of
the note, together with all accrued and unpaid interest, will become immediately
due and payable upon Dr. Chow's termination of employment with us prior to June
25, 2003, unless Dr. Chow's employment is involuntarily terminated by us other
than for cause. In the event (i) we terminate Dr. Chow's employment for any
reason other than for cause or (ii) Dr. Chow's employment terminates by reason
of his death or disability, then the entire principal balance of the note plus
accrued interest will be forgiven. The amount outstanding on Dr. Chow's note was
approximately $308,700 as of December 31, 1998.
Each of the foregoing loans was 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.
57
<PAGE>
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 under Item 8 above:
Report of Independent Auditors
Balance Sheets at December 31, 1998 and 1997
Statements of Operations for each of the years ended December 31, 1998
and 1997
Statements of Stockholders' Equity for each of the years ended December 31,
1998, 1997 and 1996
Statements of Cash Flows for each of the years ended December 31, 1998,
1997 and 1996
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
(1) A current Report on Form 8-K was filed on December 11, 1999 containing
information required by Item 5, Other Events.
(2) A current Report on Form 8-K was filed on December 15, 1999 containing
information required by Item 5, Other Events.
58
<PAGE>
(c) Exhibits
Exhibit No. Description
- - ---------- -------------------------------------------------------------------
3.1(12) Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on June 3, 1997.
3.2(9) Amended and Restated By-Laws, as amended March 29, 1996.
3.3(14) Form of Certificate of Designations of Series B Custom
Convertible Preferred Stock.
3.4(15) Form of Certificate of Designations of Series C Convertible
Preferred Stock.
3.5(15) Form of Restated Certificate of Designation of Preferences of
Series C Preferred Stock.
3.6(17) Form of Certificate of Designation of Preferences of Series D
Preferred Stock.
4.1(9) Certificate of Designation of Preferences of Series A Preferred
Stock of the Registrant, as filed with the Delaware Secretary of
State on July 27, 1996.
10.1(1)(19) 1990 Stock Option Plan, as amended.
10.2(1)(19) 401(k) Plan.
10.3(1)(19) Form of Stock Purchase Agreement.
10.6(1) Form of Indemnification Agreement.
10.8(1) Form of Agreement with Scientific Strategy Team Members.
10.9(1) Form of Proprietary Information and Inventions
Agreement-Employees.
10.10(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.12(1)(18) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(18) Stock Purchase Agreement dated June 15, 1990, between Shaman and
Lisa A. Conte.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.24(1)(18) Supply Agreement dated June 1, 1992.
10.29(1) Registration Rights Agreement dated October 22, 1992, as amended
December 14, 1992, between Shaman and certain holders of preferred
stock of Shaman.
10.30(1) Industrial Lease Agreement dated January 1, 1993, between Shaman
and Grand/Roebling Investment Company.
10.37(4) Loan and Security Agreement dated September 27, 1993, between
Shaman and Household Commercial of California.
10.39(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.40(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.41(6)(18) 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)(18) License Agreement, dated June 8, 1995, by and between Bayer AG and
Registrant.
10.43(7)(18) Development Agreement, dated January 11, 1996, by and between
Abbott Laboratories and Registrant.
10.47(9)(18) Subscription Agreement dated July 25, 1996 by and between the
Registrant and Fletcher International Limited.
10.48(10)(18)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)(18)Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a. and
the Registrant.
10.50(11)(19)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as Amended
and Restated on February 14, 1997).
10.51(3)(19) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(19) Form of Addendum to Stock Option Agreement (Special Tax Elections).
59
<PAGE>
10.53(3)(19) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.54(11)(19)Form of Non-Employee Director Automatic Stock Option Agreement.
10.55(12) Masoprocol License Agreement, dated as of March 19, 1997, by and
between Access Pharmaceuticals, Inc. and the Registrant.
10.56(12)(18)Amended and Restated Masopracol License Agreement, dated as of
April , 1997, by and between Access Pharmaceuticals, Inc. and
the Registrant.
10.57(12) Loan and Security Agreement, dated as of May 7, 1997, between
MMC/GATX Partnership I and Registrant.
10.57A(12) Amendment No. 1 to Loan and Security Agreement, dated as of June
30, 1997, by and between Registrant and MMC/GATX Partnership
No. I.
10.57B(15) Waiver letter dated July 16, 1998, executed by Shaman
Pharmaceuticals, Inc. and approved by MMC/GATX Partnership No. I
as to the payment of dividends on the Series C Preferred Stock.
10.58(12) Secured Promissory Note, dated May 16, 1997, issued in favor of
MMC/GATX Partnership No. I.
10.59(12) Warrant, granted May 7, 1997, in favor of MMC/GATX Partnership
No. I.
10.60(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX Partnership
No. I and Registrant.
10.61(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.62(12) Amended Engagement Agreement, dated June 30, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.63(12) Form of Note Purchase Agreement, dated as of June 30, 1997, by and
between Registrant and certain investors.
10.64(13) Master Lease Agreement, dated September 15, 1997, between Shaman
and Transamerica Business Credit Corporation, with related
schedules.
10.65(13) Amendment to Note Purchase Agreement, dated as of June 30, 1997, by
and between Registrant and certain investors.
10.66(14) Amendment Agreement, dated as of March 18, 1998, by and between
Registrant and certain investors.
10.67(14) Form of Common Stock Purchase Warrant, dated as of March 18, 1998,
by and between Registrant and certain investors.
10.69(14) Second Amendment Agreement, dated as of June 30, 1998, by and
between Registrant and certain investors.
10.70(17) Exchange Agreement, dated as of December 10, 1998, by and between
Registrant and certain entities.
10.71(19) Common Stock Purchase Agreement dated as of November 18, 1998.
10.72(19)* Employment Agreement dated as of April 1, 1998, by and between
Registrant and John W.S. Chow
10.73(19)* Promissory Note dated as of June 17, 1998, by and between
Registrant and John W.S. Chow
10.74* Development and Commercial Supply Agreement, dated as of December
1, 1998, by and between Registrant and Nycomed Inc.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of Attorney (included under the caption "Signatures").
27* Financial Data Schedule.
* Filed herewith.
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.
(2) Intentionally omitted.
60
<PAGE>
(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.
(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(5) Intentionally omitted.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
(8) Intentionally omitted.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.
(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.
(12) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-31843.
(13) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-49025.
(15) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-2, File No. 333-59053.
(16) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-67023.
(17) Incorporated by reference to exhibits filed on December 11, 1998 with
Registrant's Current Report on Form 8-K.
(18) Confidential treatment has been granted with respect to certain portions of
these agreements.
(19) Management contract or compensation plan.
61
<PAGE>
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: March 31, 1999 SHAMAN PHARMACEUTICALS, INC.
By: /s/ Lisa A. Conte
_______________________________
Lisa A. Conte
President, Chief Executive Officer
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person who signature appears
below constitutes and appoints jointly and severally, Lisa A. Conte and G. Kirk
Raab, or either of them as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
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.
Signature Title Date
--------- ----- ----
/s/Lisa A. Conte President, Chief Executive Officer, March 31, 1999
____________________ Chief Financial Officer and Director
Lisa A. Conte (principal executive and financial officer)
/s/Adrian D. P. Bellamy Director March 31, 1999
________________________
Adrian D.P. Bellamy
/s/Jeffrey Berg Director March 31, 1999
______________________
Jeffrey Berg
/s/Herbert H. McDade, Jr. Director March 31, 1999
______________________
Herbert H. McDade, Jr.
/s/G. Kirk Raab Chairman of the Board March 31, 1999
______________________
G. Kirk Raab
/s/M. David Titus Director March 31, 1999
_____________________
M. David Titus
62
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- - ---------- -------------------------------------------------------------------
3.1(12) Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on June 3, 1997.
3.2(9) Amended and Restated By-Laws, as amended March 29, 1996.
3.3(14) Form of Certificate of Designations of Series B Custom
Convertible Preferred Stock.
3.4(15) Form of Certificate of Designations of Series C Convertible
Preferred Stock.
3.5(15) Form of Restated Certificate of Designation of Preferences of
Series C Preferred Stock.
3.6(17) Form of Certificate of Designation of Preferences of Series D
Preferred Stock.
4.1(9) Certificate of Designation of Preferences of Series A Preferred
Stock of the Registrant, as filed with the Delaware Secretary of
State on July 27, 1996.
10.1(1)(19) 1990 Stock Option Plan, as amended.
10.2(1)(19) 401(k) Plan.
10.3(1)(19) Form of Stock Purchase Agreement.
10.6(1) Form of Indemnification Agreement.
10.8(1) Form of Agreement with Scientific Strategy Team Members.
10.9(1) Form of Proprietary Information and Inventions
Agreement-Employees.
10.10(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.12(1)(18) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(18) Stock Purchase Agreement dated June 15, 1990, between Shaman and
Lisa A. Conte.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.24(1)(18) Supply Agreement dated June 1, 1992.
10.29(1) Registration Rights Agreement dated October 22, 1992, as amended
December 14, 1992, between Shaman and certain holders of preferred
stock of Shaman.
10.30(1) Industrial Lease Agreement dated January 1, 1993, between Shaman
and Grand/Roebling Investment Company.
10.37(4) Loan and Security Agreement dated September 27, 1993, between
Shaman and Household Commercial of California.
10.39(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.40(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.41(6)(18) 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)(18) License Agreement, dated June 8, 1995, by and between Bayer AG and
Registrant.
10.43(7)(18) Development Agreement, dated January 11, 1996, by and between
Abbott Laboratories and Registrant.
10.47(9)(18) Subscription Agreement dated July 25, 1996 by and between the
Registrant and Fletcher International Limited.
10.48(10)(18)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)(18)Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a. and
the Registrant.
10.50(11)(19)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as Amended
and Restated on February 14, 1997).
10.51(3)(19) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(19) Form of Addendum to Stock Option Agreement (Special Tax
Elections).
10.53(3)(19) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
63
<PAGE>
10.54(11)(19)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)(18)Amended and Restated Masopracol License Agreement, dated as of
April , 1997, by and between Access Pharmaceuticals, Inc. and
the Registrant.
10.57(12) Loan and Security Agreement, dated as of May 7, 1997, between
MMC/GATX Partnership I and Registrant.
10.57A(12) Amendment No. 1 to Loan and Security Agreement, dated as of June
30, 1997, by and between Registrant and MMC/GATX Partnership
No. I.
10.57B(15) Waiver letter dated July 16, 1998, executed by Shaman
Pharmaceuticals, Inc. and approved by MMC/GATX Partnership No. I
as to the payment of dividends on the Series C Preferred Stock.
10.58(12) Secured Promissory Note, dated May 16, 1997, issued in favor of
MMC/GATX Partnership No. I.
10.59(12) Warrant, granted May 7, 1997, in favor of MMC/GATX Partnership
No. I.
10.60(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX Partnership
No. I and Registrant.
10.61(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.62(12) Amended Engagement Agreement, dated June 30, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.63(12) Form of Note Purchase Agreement, dated as of June 30, 1997, by and
between Registrant and certain investors.
10.64(13) Master Lease Agreement, dated September 15, 1997, between Shaman
and Transamerica Business Credit Corporation, with related
schedules.
10.65(13) Amendment to Note Purchase Agreement, dated as of June 30, 1997, by
and between Registrant and certain investors.
10.66(14) Amendment Agreement, dated as of March 18, 1998, by and between
Registrant and certain investors.
10.67(14) Form of Common Stock Purchase Warrant, dated as of March 18, 1998,
by and between Registrant and certain investors.
10.69(14) Second Amendment Agreement, dated as of June 30, 1998, by and
between Registrant and certain investors.
10.70(17) Exchange Agreement, dated as of December 10, 1998, by and between
Registrant and certain entities.
10.71(19) Common Stock Purchase Agreement dated as of November 18, 1998.
10.72(19)* Employment Agreement dated as of April 1, 1998, by and between
Registrant and John W.S. Chow
10.73(19)* Promissory Note dated as of June 17, 1998, by and between
Registrant and John W.S. Chow
10.74* Development and Commercial Supply Agreement, dated as of December
1, 1998, by and between Registrant and Nycomed Inc.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of Attorney (included under the caption "Signatures").
27* Financial Data Schedule.
* Filed herewith.
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.
(2) Intentionally omitted.
(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.
64
<PAGE>
(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(5) Intentionally omitted.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
(8) Intentionally omitted.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.
(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.
(12) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-31843.
(13) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-49025.
(15) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-2, File No. 333-59053.
(16) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-67023.
(17) Incorporated by reference to exhibits filed on December 11, 1998 with
Registrant's Current Report on Form 8-K.
(18) Confidential treatment has been granted with respect to certain portions of
these agreements.
(19) Management contract or compensation plan.
65
<PAGE>
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, No. 33-93938, No. 333-09169 amd No. 333-30365)
pertaining to the Company's 1992 Stock Option Plan, in the Registration
Statements (Form S-3, No. 333-49025, No. 333-67023) pertaining to the Company's
Common Stock and in the Registration Statement Form S-2 (No. 333-61261)
pertaining to the Company's Series C Convertible Preferred Stock of our report
dated February 11, 1999, with respect to the financial statements of Shaman
Pharmceuticals, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1998.
ERNST & YOUNG, LLP
Palo Alto, California
March 31, 1999
66
<PAGE>
EXHIBIT 10.72(19)
March 30, 1998
John Wing-Sun Chow, Ph.D.
19 Pleasant Place
North Brunswick, NJ 08902
Dear John:
It is with great pleasure that Shaman Pharmaceuticals, Inc. offers you the
position of Vice President, Product Development and Manufacturing, reporting
directly to Lisa A. Conte, President & Chief Executive Officer. The effective
date of your employment is expected to be on or around May 1, 1998.
Your starting salary will be $165,000 per annum, payable semi-monthly, in
arrears. In addition, you will be eligible for the Executive Bonus Plan. Shaman
will grant you an option to purchase 50,000 shares of Common Stock under the
company's employee stock option program. Following six month cliff vesting,
these options vest monthly over four years 20% vesting in years 1 and 2, 30%
vesting in years 3 and 4. The detailed terms of the option and vesting schedule
will be set forth in the company's stock option plan agreement. In addition,
Shaman agrees to grant you an additional 15,000 shares of Common Stock under the
Company's employee stock option program. These shares will vest 7,500 end of
year three and 7,500 end of year four. The stock option grants will be an
incentive stock option and have a ten year term. Both stock option grants are
contingent upon approval by the company's Board of Directors, the approval of
which we would anticipate occurring at their next scheduled meeting.
This offer includes a relocation package to assist with your transition to the
Bay Area. This includes a $10,000 sign on bonus which will be payable following
your first 30 days of employment. Shaman agrees to pay the closing costs on the
sale of your home in New Jersey as well as the non-recurring closing cost on
your purchase of a new home in the Bay Area in an amount not to exceed $25,000.
The sign on bonus and closing costs are repayable to Shaman, prorated, should
you resign from the Company within two years of your date of hire.
In addition, Shaman will provide you with $300,000 eight year forgivable loan to
reimburse you for a reasonable difference in the purchase price of your
residence here in the Bay Area. The loan will be interest bearing. The loan
interest rate will be the midterm adjusted applicable Federal rate for deemed
demand loans. Both loan and accrued interest will be forgiven in equal
installments over eight years as long as you remain employed by Shaman at least
five years. If you terminate from Shaman before five years, the loan and
interest become immediately due and payable. If you terminate from Shaman after
five years, the remaining balance of the loan and interest will be forgiven over
the remaining time of the eight year period. The loan and accrued interest will
be completely forgiven should Shaman terminate your employment for any reason.
The loan and accrued interest will be taxable according to the current tax law.
This offer includes reasonable moving expenses to relocate your household
furnishings to the Bay Area, in an amount not to exceed $20,000, as long as you
coordinate all activities through our travel consultant. In addition, Shaman
agrees to pay for two house hunting trips for you and your spouse. Shaman agrees
to pay for your flight expenses to visit your family or for your family to
travel to visit you once a month, for up to twelve months. To assist in your
search for housing, Shaman will provide you with a furnished two bedroom
apartment for up to 4 months, not to exceed $2,500 per month. In addition,
Shaman will provide you with executive relocation consulting services.
You are also eligible to participate in the company's Employee Benefits program
which includes four weeks paid vacation, medical and dental coverage, life
insurance, long term disability benefits and a 401(k) plan. Benefit coverage is
effective on your first day of employment. Details of the coverage and benefits
will be outlined for you upon employment.
While we expect that our relationship will be long and mutually beneficial,
please be aware that the duration of your employment will be for an unspecified
term. In addition, you are an at-will employee and you may resign or be
terminated at any time either with or without notice and with or without cause.
Should you decide to leave the company for any reason, you agree to provide the
Company with three months notice.
In the event that the Company decides to terminate your employment for any
reason, except for cause (for definition see section 5e. of the Shaman Stock
Option Agreement) prior to May 1, 2001, we agree to continue your base salary
plus benefits on a monthly basis for up to six months or until you obtain near
full-time employment or consulting of at least 80% of your time, which ever
occurs sooner.
The Immigration Reform and Control Act makes it unlawful for an employer to hire
an individual who is not authorized to work in the United States. You will,
therefore, be required to present documentation on your first day to prove your
employment authorization and identity. If you have any questions regarding
acceptable documentation, please call our Human Resources department at
650-266-7435.
Please confirm your acceptance of this offer by signing and returning the
original letter to our Human Resource Department, attention of Gina Morhun. A
copy is enclosed for your own records. This offer expires on Wednesday, April 1,
1998.
We look forward to having you join us at Shaman. As you know we are entering an
exciting growth phase, and we are certain that you will make a significant
contribution to our success.
Sincerely, Sincerely,
/s/ Gina D. Morhun /s/ Lisa A. Conte
- - ------------------------------- ----------------------------------
Gina D. Morhun Lisa A. Conte
Vice President, Human Resources President & Chief Executive Officer
I understand and accept this offer
/s/ John Wing-Sun Chow
-----------------------
John Wing-Sun Chow
April 1, 1998
-------------
<PAGE>
EXHIBIT 10.73(19)
PROMISSORY NOTE
PAYABLE ON A DESIGNATED DATE
$300,000 South San Francisco, California
1. For value received, the undersigned ("Maker") promises to pay to
Shaman Pharmaceuticals, Inc. ("Payee"), or order, at its offices at 213 East
Grand Avenue, South San Francisco, California, the principal sum of Three
Hundred Thousand Dollars ($300,000), together with interest at the rate
hereinafter provided for on the unpaid balance of this note from time to time
outstanding until paid in full.
2. Interest shall accrue at the annual adjusted short-term Applicable
Federal Rate (AFR) for January of each year payment of principal is due, as
referenced in Table 1 in the CCH-EXP, Tax Rates and Tables P. 430, Applicable
Federal Rates Part 01 OP 02, per annum on the unpaid and outstanding principal
balance of this note commencing on the date hereof and continuing until
repayment of this note in full.
3. Principal shall be payable as follows:
<TABLE>
<CAPTION>
Date Principal Amount
------------- ----------------
<S> <C> <C>
June 25, 1999 60,000.00
June 25, 1999 60,000.00
June 25, 2000 60,000.00
June 25, 2001 60,000.00
June 25, 2002 60,000.00
June 25, 2003 60,000.00
</TABLE>
Accrued interest to the date of payment shall be payable with each principal
payment.
4. Notwithstanding the terms of the preceding paragraph, Payee agrees
to forgive each payment of principal and interest due as set forth above in
paragraph 3 provided Maker is employed by Payee on the date that the payment is
due.
5. The entire principal, together with accrued interest, shall
immediately become due and payable in the following circumstances:
(a) In the event that Maker terminates his employment with Payee
prior to June 25, 2003, for any reason other than those
listed in Paragraph 5(b) and 5(c)of this Promissory Note; and
(b) In the event that Payee terminated Maker's employment for
cause, as defined in Section 5c of the Shaman Stock Option
Agreement, prior to June 25, 2003.
6. The entire principal, together with accrued interest, shall be
completely forgiven by Payee in the following circumstances:
(a) In the event that Maker's employment at Payee is terminated
for any reason by Payee, except for cause, as defined in
Section 5e of the Shaman Stock Option Agreement;
(b) In the event that Maker dies; and
(c) In the even that Maker, owing to disability, in the sole
opinion of Payee, can no longer perform the essential
functions of his position.
7. Maker shall make all payments hereunder to Payee in lawful money
of the united States and in immediately available funds.
8. Maker waives presentment, demand, notice of demand, protest,
notice of protest or notice of nonpayment in connection with the delivery,
acceptance, performance, default or enforcement of this note or of any document
or instrument evidencing any security for payment of this note.
9. Failure at any time to exercise any of the rights of Payee
hereunder shall not constituted a waiver of such rights and shall not be a bar
to exercise of any such rights at a later date. in the event of commencement of
suit to enforce payment of this note, the prevailing party shall be entitled to
receive the costs of collection including reasonable attorneys' fees and court
costs.
10. Nothing contained in this note shall be deemed to require the
payment of interest or other charges by Maker or any other person in excess of
the amount which the Payee shall collect moneys which are deemed to constituted
interest which would increase the effective interest rate to a rate in excess of
that permitted to by charged by applicable law, all such sums deemed to
constitute interest in excess of the legal rate shall be credited against the
principal balance of this note then outstanding, and any excess shall be
returned to Maker.
11. Nothing in this Promissory Note shall be interpreted to alter the
employment relationship between Maker and Payee, which remains, at all time, at
will.
12. The terms of this Promissory Note supersede any terms that are
inconsistent or to the contrary in the letter agreement between Shaman
Pharmaceuticals, Inc. and John Wing-Sun Chow, dated March 30, 1998.
IN WITNESS WHEREOF, the undersigned has caused this promissory note
to be duly executed as of the date first written below.
Dated: June 7, 1998 JOHN WING-SUN CHOW
/s/ John Wing-Sun Chow
----------------------
<PAGE>
EXHIBIT 10.74
DEVELOPMENT & COMMERCIAL SUPPLY
AGREEMENT
THIS AGREEMENT entered into this 1st day of December 1998 by and
between NYCOMED INC., doing business as Nycomed Amersham, with offices at 101
Carnegie Center, Princeton, New Jersey 08540 ("NYCOMED") and SHAMAN
PHARMACEUTICALS INC., with offices at 213 East Grand Avenue, South San
Francisco, California 94080 ("SHAMAN").
WHEREAS, NYCOMED and SHAMAN, collectively referred to as (the "Parties"),
desire to establish mutually agreeable terms for the commercial supply of SP-303
by NYCOMED to SHAMAN.
WHEREAS SHAMAN has provided NYCOMED with certain process information
relating to the manufacture of SP-303, which process has not been demonstrated
to manufacture SP-303 on a commercial scale.
NOW, THEREFORE, in consideration of (i) NYCOMED's agreement to contract
manufacture SP-303, and supply to SHAMAN for the monetary amounts set forth in
this Agreement, (ii) the promises, covenants, agreements and other valuable
consideration hereinafter set forth, the parties thereby agree as follows:
ARTICLE 1. DEFINITIONS
As used in this Agreement, the following words and phrases shall have the
following meanings:
A. "Act" shall mean the United States Food Drug and Cosmetic Act, as amended,
and rules and regulations promulgated thereunder;
B. "Affiliate" of a party hereto shall mean any entity which controls, is
controlled by, or is under common control with such party. For purposes of
this definition, a party shall be deemed to control another entity if
it owns or controls, directly or indirectly, more than fifty percent (50%)
of the voting equity of the other entity (or other parable ownership
interest for an entity other than a corporation) or if it possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such other entity;
C. "API" shall mean bulk quantities of the milled and completed active
pharmaceutical ingredient, SP-303, manufactured in accordance with cGMP
and according to the Specifications provided under this Agreement or as
amended and mutually agreed by both parties.
D. "Step-1 Intermediate" shall mean the dried material resulting from the
butanol extraction manufacturing process;
E. "Step-2 Intermediate" shall mean the dried material resulting from the
column chromatography manufacturing process;
F. "Certificate of Analysis (COA)" shall mean the certificate for each batch
of API delivered hereunder;
G. "cGMP" shall mean current Good Manufacturing Practice as promulgated by
the United States Food and Drug Administration;
H. "DMF" shall mean a Drug Master File for the manufacture of API filed by
NYCOMED and to be maintained by NYCOMED with the FDA or registration
documents for other regulatory authorities;
I. "Drug Product" shall mean any and all pharmaceutical preparations
suitable for human use which contain API;
J. "FDA" shall mean the United States Food and Drug Administration,
or any successor entity thereto;
K. "Latex" shall mean the supernatant portion of Crude Plant Latex meeting
the Specifications in Appendix A, which is the starting material for
manufacturing the API;
L. "CPL By-Product" shall mean the remaining material after the supernatant
Latex is separated from the CPL;
M. "Crude Plant Latex (CPL)" shall mean the entire, unprocessed raw material,
including both the supernatant Latex and the remaining CPL By-Product;
N. "NDA" shall mean SHAMAN's New Drug Application for SP-303 filed by SHAMAN
with the FDA for the treatment of diarrhea in people with AIDS pursuant
to section 505 of the Act;
O. "Specifications" shall mean the specifications for Step-1 Intermediate,
Step-2 Intermediate, Latex, and API set forth in Appendix A hereof, or
as amended and agreed by both parties, which Appendix is incorporated
in and made a part of this Agreement;
P. "Facility" shall mean the facility consisting of one set of
chromatographic columns that NYCOMED will put in place for commercial
manufacturing of API as described in Appendix B;
Q. "Facility Production Capacity" shall be the good faith estimate of
the annual production capacity of the Facility:
(i) The initial annual Facility Production Capacity is estimated to be
5,400 kg of API per year or an amount estimated by NYCOMED and
advised to SHAMAN after three (3) months manufacturing, but no later
than June 1, 1999.
(ii) Starting October 1, 1999 and every year thereafter, NYCOMED shall
inform SHAMAN of the annual Facility Production Capacity for the next
calendar year.
ARTICLE 2. TERM
2.01 This Agreement enters into effect on the date of execution and shall
remain in full force and effect for five (5) years from the date of
execution and shall automatically renew for an additional two (2) years on
the fifth year anniversary date of the Agreement, unless terminated by
either party by giving no less than twenty four (24) months prior notice
to the other party prior to the end of the initial term or for reasons as
described in Articles 8.01, 8.02, 16.06 and 19.01 below.
ARTICLE 3. FACILITY, SUPPLY, FORECAST AND PURCHASE
3.01 Pursuant to the terms and conditions of this Agreement, NYCOMED agrees to
manufacture API for SHAMAN.
3.02 SHAMAN agrees to place firm orders as noted in Article 3.08 to purchase
from NYCOMED in each calendar year the smaller of: (i) 80% of SHAMAN's
commercial requirements of API under the NDA, or (ii) the Facility
Production Capacity.
3.03 NYCOMED and SHAMAN agree to meet and discuss the terms for potential
expansion or modification of the Facility to supply quantities in excess
of the Facility Production Capacity. These terms shall be incorporated
as an amendment to this Agreement.
3.04 As commercial planning commences for additional new drug indications,
SHAMAN and NYCOMED will meet to discuss NYCOMED's ability to supply cGMP
API for these indications.
3.05 NYCOMED shall have the Facility described in Appendix B manufacturing API
by March 31, 1999 and validated and fully operational by April 15, 1999,
including acetone recovery.
3.06 NYCOMED agrees to manufacture for SHAMAN only from the location at 33
Riverside Avenue, Rensselaer, New York 12144.
3.07 Beginning March 1, 1999 SHAMAN will provide NYCOMED with a non-binding
forecast showing SHAMAN's estimated requirements of API for the following
twelve (12) months. Thereafter, SHAMAN will provide NYCOMED every month
with a revised twelve-month non-binding forecast ("Rolling Forecast").
3.08 Firm orders for API shall be placed by SHAMAN in conjunction with the
Rolling Forecast a minimum of ninety (90) days prior to the desired
delivery date.
3.09 Should any batch of API fail to meet Specifications or be deemed
unacceptable for any reason, NYCOMED will produce a replacement batch at
no cost to SHAMAN. The Quality Agreement as noted in Article 10.01 will
delineate the process for disputes related to batch test results. Article
4.07 describes the impact of failed batches on CPL.
3.10 NYCOMED shall manufacture API in accordance with the assurances,
representations, warranties and covenants set forth in this Agreement and
the Quality Agreement described in Article 10.01.
ARTICLE 4. CRUDE PLANT LATEX (CPL) SUPPLY
4.01 SHAMAN will provide a quantity of CPL sufficient to yield the ordered
quantity of API at no charge to NYCOMED.
4.02 The CPL supplied by SHAMAN for production of API is derived from
plant material grown and collected at several locations in South and
Central America. The CPL is sealed in drums and shipped, at SHAMAN's
expense and risk, to NYCOMED's Facility, either directly from the
collection locations or from SHAMAN.
4.03 NYCOMED will store, handle and consume the CPL, Latex, and CPL By-Product
consistent with written instructions from SHAMAN.
4.02 NYCOMED will promptly notify SHAMAN of any deficiencies or abnormalities
in any incoming shipment of CPL.
4.03 With regard to the CPL By-Product, NYCOMED will, as directed by SHAMAN
in writing, either: (i) dispose of the CPL By-Product with no charge
to SHAMAN, or (ii) return the CPL By-Product to SHAMAN.
4.04 At all times, the CPL, Latex, and CPL By-Product will remain the property
of SHAMAN. Upon termination of this Agreement, or at any time, upon
written instruction by SHAMAN, NYCOMED will return all CPL, Latex, and/or
CPL By-Product.
4.05 If at any time in the storage, handling, or manufacturing, NYCOMED causes
through negligence CPL, Latex, or CPL By-Product, to become unusable,
NYCOMED shall promptly notify SHAMAN and will reimburse SHAMAN for the
lost material at a cost not to exceed U.S. $50.00 per gallon of CPL.
ARTICLE 5. SHIPPING AND DELIVERY
5.01 Unless otherwise agreed upon in writing, shipping and delivery dates will
be provided by SHAMAN at the time firm orders are placed.
5.02 NYCOMED shall package, label and otherwise prepare API for bulk delivery
in accordance with applicable transport regulations and guidelines.
NYCOMED shall deliver API, to a carrier mutually agreed upon by NYCOMED
and SHAMAN, FOB Rensselaer, New York.
5.03 Each shipment of API hereunder will be delivered to a location designated
by SHAMAN on the SHAMAN Purchase Order or by subsequent written
instruction given by SHAMAN, and in accordance with the instructions for
shipping and packaging included in such SHAMAN Purchase Order. NYCOMED
will include the current Material Safety Data Sheet ("MSDS") and
Certificate of Analysis ("COA"), as required with each shipment, for API.
5.04 SHAMAN shall notify NYCOMED in writing of any loss, damage, defects or
non-delivery of any separate part of a shipment promptly after delivery,
and if loss, damage, defects or partial non-delivery are not evident to
SHAMAN at the time of delivery, such notification by SHAMAN to NYCOMED
shall be made no later than sixty (60) days after delivery to SHAMAN.
5.05 In the event of partial or full loss of such shipment, the parties will
cooperate to insure that notification and follow-up with the involved
ground and air carriers and customs or other warehouses is made in order
to determine if such missing shipment can be located.
ARTICLE 6. PRICE FOR API
6.01 Validation and commercial requirements F.O.B. Rensselaer, New York pricing
is shown in Appendix C. NYCOMED shall include in this price with no
additional charge:
1) all validation requirements leading to FDA approval of NYCOMED,
2) Pre-Approval Inspection readiness and participation in audits,
3) engineering modification and qualification of process equipment
and facilities described in Appendix B.
6.02 SHAMAN shall provide at no cost to NYCOMED Crude Plant Latex in
sufficient quantities to produce the API.
6.03 NYCOMED shall provide initial chromatographic media. SHAMAN shall be
responsible for all losses of such media except in the case of negligence
on the part of NYCOMED.
6.04 SHAMAN and NYCOMED shall exercise best efforts to insure acetone recovery
is included in the commercial production of API by May 1, 1999. In the
event that such acetone recovery is not in place by May 1, 1999 then
both parties agree to renegotiate the price and purchase commitments in
this Agreement until such recovery is included.
6.05 Beginning October 1, 1999 and every October 1 thereafter, NYCOMED and
SHAMAN will negotiate a per kg price for API to be effective for the
subsequent calendar year. Any increase in this price will not exceed the
increase in the Producer Price Index for Pharmaceutical Chemicals in the
twelve months preceding the most recently published index, except as a
result of documented extraordinary expenses not under the direct control
of NYCOMED (e.g., new regulations, testing requirements, etc. enacted by
the U.S. FDA or any other governmental regulatory body).
6.06 In October of each year, NYCOMED and SHAMAN shall meet and discuss the
management of manufacturing yield and other parameters that could lead to
improved efficiencies. NYCOMED and SHAMAN also agree to work together to
achieve efficiencies which could lead to a 10% API price reduction target
in each of the calendar years 2000 and 2001.
6.07 In order to manufacture API, NYCOMED must proceed with certain
modifications and updates to its production facility and therefore will
incur certain capital, engineering, construction and materials costs. Such
capital related items required for the API will be purchased by NYCOMED
via direct payment made by NYCOMED (the "Advances") to vendors selected by
NYCOMED after consultation with SHAMAN. The planned Advances are listed in
Appendix B and will be limited to a total of U.S. $3 million. NYCOMED must
obtain prior written approval from SHAMAN for Advances of U.S. $100,000 or
more. SHAMAN will respond to requests from NYCOMED for approval of
Advances in writing within twenty-four (24) hours of receipt of a request.
Such Advances will be recorded and reported to SHAMAN on a monthly basis,
and all supporting documents (purchase orders, invoices, etc.) will be
provided on request to SHAMAN.
SHAMAN will reimburse NYCOMED for 100% of the Advances. Advances will be
repaid through payments amortized equally as a per kilogram charge over
the first 7,000 kilograms of API produced by NYCOMED. This quantity shall
not include any API produced as a result of registration batches. SHAMAN's
repayment of the amortized Advances shall be due with payments for API,
commencing with the first payment SHAMAN makes for production of
commercial quantities of API pursuant to this Agreement. In the event that
7,000 kilograms of API is not purchased by SHAMAN by December 31, 1999,
SHAMAN agrees to pay in cash the remaining of any Advances due NYCOMED.
In the event that SHAMAN notifies NYCOMED that SHAMAN will not proceed
with the production of API, SHAMAN will reimburse NYCOMED for 100% of the
Advances as follows: Within thirty (30) days of receipt of such notice,
NYCOMED shall provide an accounting of Advances to SHAMAN in writing,
accompanied by receipts and proof of payment by NYCOMED (the
"Accounting"). Within thirty (30) days of SHAMAN's receipt of the
Accounting, SHAMAN shall reimburse NYCOMED the total amount of the
Advances, less any amounts previously repaid to NYCOMED (i) as a portion
of the per kilogram pricing as described in Article 6.01 of this
Agreement, or (ii) pursuant to a letter of credit or escrow agreement as
described in this Article.
Prior to reimbursement of 100% of the Advances payable by SHAMAN to
NYCOMED, SHAMAN agrees to maintain unrestricted cash in SHAMAN's deposit
and short-term investment accounts (the "Accounts") to not less than U.S.
$4.0 million or such amount as may be currently owed under the Advances
(the "Required Balance"). NYCOMED shall have the right to obtain current
balance information upon NYCOMED's request at any time prior to the
reimbursement of 100% of the Advances due from SHAMAN to NYCOMED.
The Required Balance shall be maintained in the Accounts at all times. In
the event that NYCOMED determines that the balance in the Accounts is less
than the Required Balance and gives notice to SHAMAN in writing, SHAMAN
will promptly deposit $250,000 in an escrow account established with U.S.
Bank Trust N.A. SHAMAN shall then also (i) obtain a letter of credit for
an amount equivalent to the then current balance payable on the Advances
less the amount currently in escrow or (ii) execute an escrow agreement
with NYCOMED for such amount.
6.08 Payment shall be made to NYCOMED net thirty (30) days from the date of
invoice for API from NYCOMED to SHAMAN.
ARTICLE 7. TECHNOLOGY
7.01 NYCOMED acknowledges and agrees that the process, technology and
information provided to NYCOMED by SHAMAN pursuant to this Agreement
belongs to SHAMAN, and that any process improvements, process inventions
or process know-how developed by NYCOMED, or by SHAMAN and NYCOMED
together, pursuant to this Agreement will be owned by SHAMAN, and if
necessary, assigned to SHAMAN. The Parties acknowledge that the
information regarding any such process improvements, process inventions or
process know-how is subject to the terms of the confidentiality provisions
of this Agreement.
7.02 Subject to the terms of this Agreement, SHAMAN grants to NYCOMED a
paid-up, non-exclusive, limited license (the "License") to use all
SHAMAN technology, information and know-how (the "Shaman Technology")
transferred by SHAMAN to NYCOMED. The License is granted for the specific
purpose of fulfilling NYCOMED's obligations under this Agreement. Any
other use of the Shaman Technology is prohibited. Upon termination of this
Agreement, the License terminates and NYCOMED must return all Shaman
Technology to SHAMAN.
ARTICLE 8. TERMINATION
8.01 Upon the occurrence of either of the following events, either party may
terminate this Agreement by giving the other party sixty (60) days prior
written notice:
(a) If the other party is unable to pay its debts, becomes bankrupt
or insolvent or enters into liquidation whether compulsory or
voluntary, or convenes a meeting of its creditors, or has a
receiver appointed over all or part of its assets, or takes or
suffers any similar action in consequence of a debt, or ceases for
any reason to carry on business; or
(b) Upon the breach of any material provision of this Agreement by the
other party if the breach is not cured within sixty (60) days after
written notice thereof to the party in default and the material
breach continues to exist at the time of notice of termination.
8.02 (a) SHAMAN may terminate this Agreement at any time by giving sixty (60)
days written notice to NYCOMED if SHAMAN, in its sole
discretion, determines that it will no longer develop or market API
for the NDA, or if the FDA withholds approval of the manufacture or
marketing of API for the NDA.
(b) In the event SHAMAN elects to terminate this Agreement, NYCOMED
shall take reasonable measures to cease any ongoing production and
limit further expenses associated with such ongoing production.
SHAMAN shall pay NYCOMED for the amount of any lot produced pursuant
to a Purchase Order, for reasonable expenses incurred by NYCOMED
with respect to the remainder of said Purchase Order and for the
value of raw materials purchased in reasonable expectation of the
forecast prior to the effective termination date. Capital related
expenses will be reimbursed as per Article 6.07.
8.03 Termination, expiration, or cancellation of this Agreement through any
means and for any reason shall not relieve the parties of any obligation
accruing prior thereto, including but not limited, to the confidentiality
and proprietary ownership provisions herein and the obligation to pay
money, and shall be without prejudice to the rights and remedies of either
party with respect to the antecedent breach of any of the provisions of
this Agreement.
8.04 Upon termination, expiration or cancellation of this Agreement for any
reason, NYCOMED shall promptly return to SHAMAN any and all technical
information and know-how relating to or including any modification to the
production of API provided by SHAMAN to NYCOMED hereunder, if requested in
writing by SHAMAN.
8.05 Upon termination, expiration or cancellation of this Agreement for any
reason, SHAMAN shall have the right to remove capital equipment described
in Appendix B, provided such items are capable of being removed from
NYCOMED's facility without material disruption or damage, and provided
SHAMAN shall be responsible for all dismantling charges.
8.06 Upon termination, expiration or cancellation of this Agreement for any
reason, NYCOMED shall transfer ownership of the DMF to SHAMAN.
ARTICLE 9. REPRESENTATIONS, WARRANTIES AND COVENANTS
NYCOMED makes the following assurances, representations, warranties and
covenants:
9.01 API shall be merchantable, free from defects and meet the Specifications
and shall not be adulterated or misbranded within the meaning of the Act.
9.02 NYCOMED shall be cognizant of "cGMP" as provided in the Act. NYCOMED is
able to, and shall manufacture API in conformity with the Specifications
and in a manner which fully complies with "cGMP" guidelines and practices.
NYCOMED shall meet the requirements as provided for in the FDA Guide to
Inspection of Bulk Pharmaceutical Chemicals, revised September 1991, and
any subsequently enacted official guidance documents.
9.03 NYCOMED shall not change the manufacturing process, the Specifications,
the raw materials or sources of raw materials used, or the analytical
testing method in a manner which may or may not require FDA or other U.S.
or foreign/international regulatory approval by NYCOMED OR SHAMAN without
the prior written consent of SHAMAN, which consent shall not be
unreasonably withheld or delayed. NYCOMED shall provide SHAMAN with a
detailed written report of all proposed changes to the manufacturing
process, the Specifications, the raw materials, or the analytical method:
(i) that require FDA or other U.S. or foreign/international
regulatory approval, prior to the implementation
thereof; or
(ii) that do not require FDA or other U.S. or
foreign/international regulatory approval, unless
agreed to by SHAMAN.
9.04 (a) If SHAMAN requests in writing a change in the manufacturing
process, the Specifications, the raw materials, source of raw
material or analytical testing method with respect to the API that is
not the result of a requirement of FDA or some other U.S. or
foreign/international regulatory agency, NYCOMED shall use best
efforts to accommodate such request.
(b) If NYCOMED requests in writing a change in the manufacturing process,
the Specifications, the raw materials, source of raw material or
analytical testing method with respect to API that is not the result
of a requirement of FDA or some other U.S. or foreign/international
regulatory agency SHAMAN shall use best efforts to accommodate such
request.
(c) If the result of either of these changes is a significant change in
the manufacturing cost of the API, both parties agree to meet and
negotiate a change in the pricing included in Appendix C.
9.05 Each party agrees to promptly forward to the other party copies of any
such written communication received by such party from the FDA or other
U.S. or foreign regulatory agency which will affect the manufacture of API
as contemplated herein.
9.06 NYCOMED shall conduct its API manufacturing operations hereunder in
compliance with all U.S./foreign/international laws and regulations
including, but not limited to, those dealing with occupational safety and
health, those dealing with public safety and health, those dealing with
protecting the environment, and those dealing with disposal of wastes.
9.07 NYCOMED shall be responsible for all process and equipment validation and
shall take all reasonable steps necessary to pass government inspection
by the FDA.
9.08 Each party hereby represents and warrants to the other
party as follows:
(a) Existence and Power. Such party (i) is duly organized, validly
existing and in good standing under the laws of the state in which
it is organized; (ii) has the power and authority and the legal
right to own and operate its property and assets, to lease the
property and assets it operates under lease, and to carry on its
business as it is now being conducted; and (iii) is in compliance
with all requirements of applicable law, except to the extent that
any noncompliance would not materially adversely affect such party's
ability to perform its obligations under the Agreement.
(b) Authorization and Enforcement of Obligations. Such party (i) has
the power and authority and the legal right to enter into this
Agreement and to perform its obligations hereunder and thereunder and
(ii) has taken all necessary action on its part to authorize the
execution and delivery of the Agreement and the performancem of its
obligations hereunder. The Agreement has been duly executed and
delivered on behalf of such party, and constitutes a legal, valid,
binding obligation, enforceable against such party in accordance
with its terms.
(c) No Consents. All necessary consents, approvals and authorizations of
all governmental authorities and other persons required to be
obtained by such party in connection with the Agreement have been
obtained, except for those which cannot be obtained prior to the
filing of the NDA.
(d) No Conflict. The execution and delivery of the Agreement and the
performance of such party's obligations hereunder and thereunder
(i) do not conflict with or violate any requirement of applicable
laws or regulations or any material contractual obligation of such
party and (ii) do not materially conflict with, or constitute a
material default or require any consent under, any material
contractual obligation of such party. NYCOMED shall not in any
event enter into any agreement or arrangement with any other party
that would prevent or in any way interfere with NYCOMED's
obligations pursuant to this Agreement.
ARTICLE 10. QUALITY AGREEMENT
10.01 NYCOMED and SHAMAN agree to enter into a Quality Agreement within sixty
(60) days of the signing of this Agreement. Such agreement shall describe
the amount and type of testing required, the process for batch review and
release, the process for independent review in the event of disagreement
on test results, the process for modification of processes, procedures,
specifications and test methods, and the authority and responsibilities of
each party. If a Quality Agreement cannot be negotiated satisfactorily,
the terms of this Agreement may be renegotiated.
ARTICLE 11. INDEMNIFICATION
11.01 SHAMAN shall indemnify, defend and hold harmless NYCOMED, its officers,
directors, agents, servants, and employees harmless against all claims,
losses, damages and liabilities, including reasonable legal expenses,
arising out of SHAMAN's acts or omissions under this Agreement, and which
is not attributable to:
(i) any act or negligence of NYCOMED or its agents or employees;
(ii) the failure of NYCOMED to follow the written instructions and
Specifications of SHAMAN;
(iii) NYCOMED's breach of this Agreement.
NYCOMED shall not settle any such claim without the prior written approval
of SHAMAN and that SHAMAN shall have the right, if it so wishes, to
conduct negotiations to settle, settle or to conduct any litigation
arising out of, any such claim. NYCOMED shall provide prompt and written
notice of any claim to SHAMAN and shall cooperate in the defense of the
claim.
11.02 NYCOMED shall indemnify, defend and hold harmless SHAMAN, its officers,
directors, agents, servants, and employees harmless against all claims,
losses, damages, and liabilities including reasonable legal expenses,
arising out of NYCOMED's acts or omissions under this Agreement and which
is not attributable to:
(i) any act of negligence of SHAMAN or its agents or employees; or
(ii) the failure of SHAMAN or its employees to comply with applicable
law or regulations.
SHAMAN shall not settle any such claim without the prior written approval
of NYCOMED, and that NYCOMED shall have the right, if it so wishes, to
conduct negotiations to settle, or to conduct any litigation arising out
of, any such claim. SHAMAN shall provide prompt and written notice of any
such claim to NYCOMED and shall cooperate in the defense of the claim.
11.03 The indemnification obligations set forth in this Article 11 shall survive
the termination of this Agreement.
ARTICLE 12. PATENT INFRINGEMENT INDEMNIFICATION
12.01 SHAMAN shall indemnify, defend and hold NYCOMED harmless and accept all
legal and financial responsibility for any liability, damage, loss, cost
or expense arising out of any patent infringement claims in respect of the
manufacture of the API against NYCOMED hereunder. NYCOMED shall promptly
notify SHAMAN of said claims and at SHAMAN's cost, permit SHAMAN's
attorneys to handle and control such claims or suits. NYCOMED agrees to
provide SHAMAN with reasonable assistance in defending such infringement
action or in prosecuting any related action, at SHAMAN's cost and expense.
12.02 SHAMAN represents that it is not aware of any issued U.S. patents that
would be infringed by the manufacture or use of the API, or the SHAMAN
know-how or SHAMAN Confidential Information as defined in this Agreement
and to be used in the manufacture of API. NYCOMED will promptly notify
SHAMAN of any potential infringement of which it becomes aware during the
course of this Agreement.
ARTICLE 13. CONFIDENTIALITY AND NON-USE
13.01 (a) NYCOMED will not disclose to any third party, or utilize for its
own benefit or the benefit of any third party, any confidential
product information, product formula or other information, including,
but not limited to propriety information obtained from SHAMAN
(hereinafter referred to as "INFORMATION"). However, that the
foregoing provisions shall not apply to any information:
(i) which is now public knowledge or which becomes public knowledge
through no fault of NYCOMED; or
(ii) which is properly provided to NYCOMED without restriction by a
legally entitled independent third party; or
(iii which NYCOMED can show was already in its possession at the
time of receipt from SHAMAN, as evidenced by written records in
NYCOMED's possession.
(b) NYCOMED's obligation to maintain a secret and confidential status for
the disclosed INFORMATION shall endure for five (5) years from
termination of this Agreement. The disclosed INFORMATION shall be
disclosed only to employees of NYCOMED who need to know the
INFORMATION for the purposes of this Agreement.
(c) Any and all INFORMATION in tangible form passed to NYCOMED hereunder
shall, on request, be immediately returnable to SHAMAN.
(d) The INFORMATION passed to NYCOMED shall not be used by NYCOMED except
as hereinafter permitted, under terms of this Agreement.
(e) The provisions of Article 13 shall survive the termination of this
Agreement.
ARTICLE 14. GOVERNMENT INSPECTION
14.01 NYCOMED will notify SHAMAN within twenty-four (24) hours of notification
of any pending or ongoing FDA or any other regulatory government
inspection related to API for the facilities used to produce, test or
warehouse API. NYCOMED shall immediately provide copies of any FDA Form
483 Observations, Warning Letter, or associated correspondence to and
received from the FDA with regard to API within seven (7) days of receipt
and in addition shall provide a facsimile copy within forty-eight (48)
hours to SHAMAN. NYCOMED shall allow SHAMAN to assist in any response to
the FDA including review of any written response made to the FDA by
NYCOMED at SHAMAN's discretion.
14.02 NYCOMED will notify SHAMAN within seven (7) days of receipt of any FDA
Form 483 Observations, Warning Letter, or associated correspondence to and
received from the FDA with regard to any topics other than API that
could potentially impact API. NYCOMED will provide any such pertinent
information in such a manner that confidentiality for any other client(s)
is protected.
ARTICLE 15. RIGHT TO INSPECT
15.01 In performing its obligations under this Agreement, NYCOMED
shall:
(i) permit SHAMAN or its designated representative to inspect on a
regular basis or as needed but not less than once per year that
portion of NYCOMED's facilities where API is manufactured, tested
or stored to evaluate NYCOMED's work practices, supporting systems,
documents and records associated with API for the purpose of
assessing NYCOMED's compliance with applicable regulations and
cGMP as described and provided in the Act, and SHAMAN's quality
standard. Such review shall be conducted upon reasonable prior
notice by SHAMAN but not less than fourteen (14) days prior to the
inspection;
(ii) At least once during each contract year, permit SHAMAN or its
designated representative to review NYCOMED's licenses and permits
relating to the manufacture of API. Any review at NYCOMED's facility
shall be conducted during ordinary business hours, on dates agreeable
to SHAMAN and NYCOMED.
15.02 NYCOMED shall keep SHAMAN fully informed of the steps taken by NYCOMED to
resolve any outstanding issues with the FDA and the anticipated timetable
of resolution of such issues as it applies to API.
ARTICLE 16. RECALL OR SEIZURE
16.01 NYCOMED shall keep SHAMAN fully informed of any notification or other
information; whether received directly or indirectly which might affect
the marketability, safety or effectiveness of API and/or which might
result in the recall or seizure of API or the finished dosage form.
16.02 In the event of any "recall" or "seizure" arising out of or resulting from
NYCOMED's breach of any provision of this Agreement, NYCOMED shall, at the
election of SHAMAN, either:
(i) supply API, without charge to SHAMAN, in an amount sufficient to
replace (a) the amount of API recalled or seized and (b) the amount
of API contained in recalled or seized Drug Product; or
(ii) refund to SHAMAN, or give credit to SHAMAN against outstanding
receivable due from SHAMAN or against the price of API to be
delivered to SHAMAN in the future, in amounts equal to NYCOMED's
price paid by SHAMAN for API so recalled or seized and the API
contained in the Drug Product so recalled or seized plus all
transportation costs and export import duties incurred by SHAMAN and
not recovered by SHAMAN in respect of such recalled or seized API or
Drug Product.
16.03 In the event of any recall or seizure arising out of or resulting from
NYCOMED's breach of this Agreement, NYCOMED shall pay to SHAMAN, in
addition to the amounts set out in Article 16.02 (i), SHAMAN's
out-of-pocket expenses incurred in connection with such recall or seizure
including loss of CPL or Drug Product.
16.04 SHAMAN shall use its best efforts to notify NYCOMED of any recall or
seizure that is likely to affect the manufacture of API as contemplated by
this Agreement promptly following the time SHAMAN becomes aware of the
reasonable likelihood of such recall or seizure.
For purposes of this Article 16 "recall" shall mean any action by SHAMAN or
any Affiliate or subsidiary of SHAMAN to recover title to or possession of
API or Drug Product sold or shipped to third parties. The term "recall"
also includes the failure by SHAMAN to sell or ship API or Drug Product to
third parties which would have been subject to recall if it had been sold
or shipped. For purposes of this Article 16, "seizure" shall mean any
action by any government agency to detain or destroy API or prevent
release of API drug substance or Drug Product.
In the event of a recall as defined in Article 16.05, arising or resulting
from NYCOMED's breach of this Agreement, that has the effect of disrupting
commercial drug supply for a period of sixty (60) days, SHAMAN shall have
the right to terminate this Agreement.
ARTICLE 17. ASSIGNMENT
17.01 Neither of the parties hereto shall assign or transfer its interest or
obligation under this Agreement without the prior written consent of the
other party, which shall not be unreasonably withheld. Notwithstanding,
either party shall have the right to assign this Agreement, or any of its
rights or obligations thereunder, to any successor in interest to all or
substantially all of such party's business or assets related to this
Agreement. Subject to the foregoing, this Agreement will be binding upon
and inure to the benefit of the parties hereto, their successors and
assigns.
ARTICLE 18. GOVERNING LAW AND DISPUTE RESOLUTION
18.01 This Agreement is made in accordance with and shall be governed under the
laws of the State of Delaware, without regard to conflicts of laws rules.
18.02 In the event that, at any time during the term of the Agreement, a
disagreement, dispute controversy or claim should arise out of or relating
to the interpretation of or performance under this Agreement, the Parties
will attempt in good faith to resolve their differences before resorting
to the termination procedures provided herein. If the applicable senior
managers of SHAMAN and NYCOMED cannot resolve any matter within thirty
(30) days, such matter shall be referred to the Chief Executive Officers
of the Parties (or their designees) for an additional thirty (30) days,
following which either party shall be free to take any action and seek any
remedy it may have at law or in equity, including specific performance and
injunctive relief.
ARTICLE 19. FORCE MAJEURE
19.01 Any delay in the performance of any of the duties or obligations of either
party (except the payment of money due hereunder) shall not be considered
a breach of this Agreement and the time required for performance shall be
extended for a period equal to the period of such delay; provided that
such delay has been caused by or is the result of any acts of God, acts of
the public enemy, insurrections, riots, embargoes, labor disputes,
including strikes, lockouts, job actions, or boycotts, equipment failure,
fires, explosions, floods, shortages of material or energy or other
unforeseen causes beyond the reasonable control and without the fault or
negligence of the party so affected. The party so affected shall give
prompt notice to the other party of such cause, and shall take whatever
reasonable steps are necessary to relieve the effect of such cause as
rapidly as reasonably possible. Not withstanding the forgoing, if NYCOMED
is unable to perform its obligations under this Agreement for any of the
above enumerated reasons for a period longer than six (6) months, SHAMAN
shall have a right to terminate this Agreement.
ARTICLE 20. SEVERABILITY
20.01 In the event that any provision of this Agreement is judicially determined
to be void or unenforceable, such provision shall be construed to be
separable from the other provisions of this Agreement which shall retain
full force and effect.
ARTICLE 21. HEADINGS
21.01 All titles and captions in this Agreement are for convenience purposes
only and shall not be of any force or substance.
ARTICLE 22. USE OF NAMES
22.01 Except as expressly required pursuant to the Act, neither party will
without the prior written consent of the other:
(a) use in advertising, publicity, promotional premiums or otherwise,
any trade name, trademark, trade device, service mark, symbol,
or any abbreviation, contraction or simulation thereof owned by
either party, or
(b) represent, either directly or indirectly, that any product or service
of one party is a product or service of the other party.
ARTICLE 23. INDEPENDENT CONTRACTOR
23.01 Each party is acting under this Agreement as an independent contractor and
not as the agent or employee of the other party. Each party understands
and agrees that it has no authority to assume any obligation on behalf of
the other party and that it shall not hold out to third parties that it
has any authority to act on the other party's behalf except as expressly
permitted herein. Unless otherwise expressly stated herein, each party
shall be responsible for its own expenses relating to its performance
under this Agreement and shall not incur expenses for the other party's
account unless expressly authorized herein or by subsequent written
agreements.
ARTICLE 24. WAIVER
24.01 No waiver or modification of any of the terms of this Agreement shall be
valid unless in writing and signed by an authorized representative of both
parties hereto. Failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of such rights nor shall a
waiver by either party in one or more instances be construed as
constituting a continuing waiver or as a waiver in other instances.
ARTICLE 25. PUBLIC DISCLOSURE
25.01 Neither party shall disclose to any third party or originate any
publicity, news release or public announcement, written or oral, whether
to the public or the press, or otherwise, referring to the terms of this
Agreement, including its existence, the subject matter to which it
relates, the performance under it or any of its specific terms and
conditions, except by such announcements as are:
(i) mutually agreed upon by the parties in writing; or
(ii) in the opinion of Counsel for the party making such announcement are
required by law. If a party believes a public announcement to be
required by law with respect to this Agreement, it will give the
other party such notice as is reasonably practicable and an
opportunity to comment upon the announcement.
ARTICLE 26. NOTICES
26.01 Unless otherwise specified herein, all notices required or permitted to be
given under this Agreement shall be in writing and shall be delivered
either personally and promptly confirmed by such registered or certified
mail or overnight courier service or sent by registered or certified mail,
return receipt requested, or by overnight facsimile and promptly confirmed
by such registered courier service, postage prepaid in each case, or by
certified mail or overnight courier service to the receiving party at such
party's address set forth below, or at such other address as may from time
to time be furnished by similar notice by either party. Any notice sent by
registered or certified mail as aforesaid shall be deemed to have been
given when mailed, and shall be effective upon receipt.
If to NYCOMED:
John Fallone
Vice President Manufacturing
Nycomed Amersham
33 Riverside Avenue
Rensselaer, New York 12144
If to SHAMAN:
Lisa Conte
President and CEO
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, CA 94080
Or to such other address as the addressee shall have last furnished in
writing to the addresser.
ARTICLE 27. ENTIRE AGREEMENT
27.01 This Agreement constitutes the entire Agreement between the parties
concerning the supply of API by NYCOMED to SHAMAN, and supersedes all
written or oral agreements or understandings with respect thereto.
27.02 Neither party shall claim any amendment, modification, or release from any
provision hereof unless such an amendment is in writing signed by an
authorized representative of each party.
ARTICLE 28. EXECUTION BY FACSIMILE AND COUNTERPART
28.01 This Agreement may be executed by the parties by facsimile with a
conforming original document.
Please signify your acceptance of the terms and conditions of this Supply
Agreement by signing and dating below.
ACKNOWLEDGED, ACCEPTED AND AGREED TO:
SHAMAN PHARMACEUTICALS, INC.
By: /s/ Lisa A. Conte
__________________________________
Name: Lisa Conte
Title: President and CEO
Date: December 2, 1998
NYCOMED, INC.
By: /s/ John Fallone
__________________________________
Name: John Fallone
Title: Vice President Manufacturing
Date: December 4, 1998
<PAGE>
APPENDIX A
Specifications
(6 pages follow)
Crude Plant Latex (1 page)
Step-1 Intermediate (1 page)
Step-2 Intermediate (2 pages)
API (2 pages)
<PAGE>
APPENDIX B
Plan
(1 page follows)
<PAGE>
APPENDIX C
API Price
Pricing is FOB Rensselaer NY
Pricing for the first initial SP-303
Using fresh acetone $2,896/kg
Acetone recovery and recycle $2,039/kg
This initial price includes amortization of the $3 million on the first
7,000 kg purchased by SHAMAN.
Pricing without capital amortization
Using fresh acetone $2,467/kg
Acetone recovery and recycle $1,610/kg
The price without amortization is the price after all $3 million has been
recovered by NYCOMED either through amortized purchase or direct payment
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> OCT-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.00
<CASH> 5,887
<SECURITIES> 3,277
<RECEIVABLES> 209
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,657
<PP&E> 15,078
<DEPRECIATION> (11,964)
<TOTAL-ASSETS> 13,139
<CURRENT-LIABILITIES> 8,614
<BONDS> 2,415
0
0
<COMMON> 30
<OTHER-SE> 2,080
<TOTAL-LIABILITY-AND-EQUITY> 13,139
<SALES> 0
<TOTAL-REVENUES> 2,660
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 37,958
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,033)
<INCOME-PRETAX> (38,523)
<INCOME-TAX> 0
<INCOME-CONTINUING> (38,523)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,523)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> 0
</TABLE>
