As Filed with the Securities and Exchange Commission on November 22, 1999
Registration No. 333-86463
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------
SHAMAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
213 East Grand Avenue
South San Francisco, California 94080-4812
(650) 952-7070
(Address, including zip code, and telephone number, including area code,
of the Registrant's principal executive offices)
LISA A. CONTE
President and Chief Executive Officer
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, California 94080-4812
(650) 952-7070
(Name, address, including zip code, and telephone number,
including area code, of agent for service of process)
Copies to:
Donald C. Reinke
Bruce P. Johnson
Bay Venture Counsel, LLP
1999 Harrison Street, Suite 1300
Oakland, California 94612
510-273-8750
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
--------
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Each Class of to be Price Per Offering Registration
Securities to be Registered Registered(1) Share Price Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series R Convertible Preferred Stock, $.001 par value................. 133,061 $15.00 $1,995,915 $555(4)
Common Stock, $.001 par value (3)...................................... 665,305,000 -- -- --
====================================================================================================================================
</TABLE>
(1) Represents (i) the maximum number of shares of Series R Convertible
Preferred Stock being sold pursuant to this offering, and (ii) an estimated
number of additional shares of common stock as may from time to time become
issuable upon conversion of such preferred stock or by reason of stock
splits, stock dividends and other similar transactions.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, based on the
average of the bid and closed prices on November 10, 1999 as quoted on The
OTC Bulletin Board.
(3) The number of shares of common stock to be registered is estimated using the
conversion price of $0.003 per share which is equal to 10% of the closing
price of the common stock on November 10, 1999.
(4) A registration fee of $591 was previously paid.
---------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
Subject to Completion, Dated ________________, 1999
133,061 Shares of Series R Convertible Preferred Stock
Shaman Pharmaceuticals, Inc.
We have prepared this prospectus to allow the selling stockholders named in this
prospectus under "Principal and Selling Stockholders" to sell 133,061 shares of
our Series R Convertible Preferred Stock, and the shares of common stock
issuable upon conversion of these shares of Series R Preferred Stock. This
offering is not being underwritten. Shaman will not receive any of the proceeds
from the sale of its stock by the selling stockholders named in this prospectus.
Each share of Series R Preferred Stock will automatically convert on February 1,
2000 into a number of shares of common stock equal to $15.00 divided by the
conversion price then in effect. The conversion price shall be equal to the
lesser of the following:
- $0.10, or
- the price that is equal to 10% of the average closing sales
price of our common stock for the 10 trading days ending three
trading days prior to February 1, 2000.
Our common stock trades on the Over-the-Counter Electronic Bulletin Board under
the symbol "SHMN." On November 10, 1999, the last sale price for the common
stock as quoted on the OTC Bulletin Board was $0.03 per share. The Series R
Preferred Stock is quoted on the OTC Bulletin Board under the symbol "SHMNO".
--------------
You should carefully consider the risk factors beginning on page 7 before
purchasing any of the Series R Convertible Preferred Stock or underlying
common stock.
---------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is November 22, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective and all consents have been
obtained from the relevant state securities commissions. We are not offering to
sell these securities and we are not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE>
[This Page Intentionally Left Blank]
2
<PAGE>
You should rely only on the information contained in this prospectus or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Summary..................................................... 4
Summary Financial Information.......................................... 6
Risk Factors........................................................... 7
Where You Can Find More Information.................................... 16
Use of Proceeds........................................................ 16
Price Range of Common Stock............................................ 17
Dividend Policy........................................................ 17
Capitalization......................................................... 18
Selected Financial Data................................................ 19
Management's Discussion and Analysis of Financial Condition And Results
of Operations.......................................................... 20
Business............................................................... 28
Management............................................................. 38
Principal and Selling Stockholders.................................... 51
Plan of Distribution................................................... 54
Description of our Capital Stock....................................... 55
Shares Eligible for Future Sale........................................ 60
Federal Income Tax Considerations...................................... 61
Legal Matters.......................................................... 61
Experts................................................................ 61
Index to Financial Statements.......................................... F-1
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus, including "Risk Factors" and
the financial statements, carefully before making an investment decision.
All information contained in this prospectus reflects a 1-for-20 reverse
stock split of the common stock effected on June 22, 1999.
Shaman Pharmaceuticals, Inc.
Our Business, Strategy and Products
We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
We began implementing our commercialization efforts through our recently
established botanicals division, which we have named ShamanBotanicals.com. Our
commercialization plan includes the use of community building initiatives on the
Internet and other distribution channels, and is based on marketing our
exclusive access to our proprietary branded products. We also have available for
out-licensing a pipeline of botanical product candidates, as well as novel
pharmaceutical product candidates for major human diseases developed by
isolating active compounds from tropical plants with a history of medicinal use.
In 1997, the U.S. dietary supplement market was $12.9 billion, of which
over $4.0 billion was comprised of herbal or botanical dietary supplements. In
1998, this number was projected to reach $5.0 billion, with a compounded yearly
growth rate of approximately 35%. In 1997, 24% of people within U.S. households
reported using botanical dietary supplements. The growth of this market has been
led by consumers who are interested in complementary, 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. We believe that the use of these products will continue to expand
based upon the aging of the U.S. 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
broadening the base of consumer users.
The unique positioning of our botanicals business stems from our
significant financial investment in our prior pharmaceutical product candidates,
more than 10 years of extensive field research by our teams of ethnobotanists
and physicians, and pharmaceutical-level chemical standardization, and
biological and clinical testing. We are applying this methodology to our new
industry, and we intend to set a new standard in this industry. 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 information into an extensive relational database. This database
includes information on 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 rainforests, many represent novel botanical
products that we believe present an opportunity to attain a strong, proprietary
market position. We began marketing our first botanical product, SB-NSF, in
September 1999.
We have the opportunity to differentiate our product candidates in
consumers' minds relative to those of our competitors. Key points of
differentiation include:
- Novel plants/products for unmet needs;
- Documented, first-hand field experience with traditional use;
- Rainforest-based plants and products, since most botanical
supplements products currently come from plants found in
temperate areas;
- Our commitment to conservation and reciprocity;
- Sustainable sourcing and supply;
- Quality manufactured, standardized products; and
- Clinically-tested products.
Our commercialization strategy is to create high-end branding of the Shaman
name on our propriety products addressing serious unmet healthcare concerns, and
to market these proprietary products to specific communities affected by such
healthcare issues. Our e-commerce web site, ShamanBotanicals.com, which is
currently in operation, will be expanded to include several distinct features,
such as exclusive access to our proprietary products, and links to peer-reviewed
clinical data supporting the clinical action of our products. We also intend to
offer access to certain medical experts, in some cases exclusively, for medical
commentary. Other planned features of our web site include bulletin board
postings, community chat rooms, customer security and customization, and
affiliate programs. Finally, information on our reciprocity programs will be
available as well.
4
<PAGE>
Our first product launch was SB-NSF, a botanical dietary supplement to
normalize water flow in the bowel and promote stool formation. SB-NSF will
initially be targeted to people with AIDS/HIV who suffer from chronic diarrhea.
We are currently marketing SB-NSF via the Internet, 1-800 direct response
advertising, limited storefront access in major market cities, and focused mail
order opportunities. In addition, we are working with several leading treatment
activists to have them feature the introduction of this product in their
regional organizations' newsletters. We began marketing SB-NSF in the third
quarter of 1999.
Commencing in the fourth quarter of 1999, we also intend to market SB-NSF
to travelers and others suffering from acute episodes of diarrhea. The product
will be differentiated from that targeted to the AIDS/HIV community in that it
will be packaged in smaller quantities to address the nature of its expected use
in the target customer base.
We believe that selling a traveler's health-related product on the
Internet presents an attractive marketing opportunity since two primary uses of
the Internet are currently healthcare information and travel. We intend to
market this product with banner advertising at affiliate travel sites and point
of purchase at high-risk diarrhea destinations, sample programs to adventure
travel and tour companies traveling to such areas, and other highly focused
target customer programs.
We are also working to develop a second product line based on a diet
system to mitigate Syndrome X symptoms. Syndrome X is the cluster of metabolic
disorders that occur in the face of elevated insulin when an individual is
insulin resistant, yet still maintains glucose control and is therefore not
diabetic. This cluster of coronary heart disease risk factors, such as elevated
triglycerides and lower HDL-cholesterol, the "good" cholesterol, are the silent
killers associated with Syndrome X. Shaman's Sr. Vice President of Clinical
Research, Dr. Gerald Reaven, has developed a trademarked Syndrome X diet system
for persons exhibiting Syndrome X symptoms, and has performed over 20 years of
clinical research documenting the benefits of this diet system. Direct
comparison clinical trial data supports that this diet system provides superior
benefits to those exhibiting Syndrome X symptoms than the low fat/high
carbohydrate diet guidelines recommended by the American Heart Association.
Approximately 30% of the US population is insulin resistant and subject to
Syndrome X. We anticipate that a product line would include bars, drinks, and
snacks which follow the trademarked anti-Syndrome X diet system, infused with
proprietary Shaman botanicals to address further these metabolic disorders.
Many people with AIDS/HIV who are effectively managing the AIDS virus with
their antiviral therapies are now also demonstrating metabolic abnormalities
consistent with insulin resistance and Syndrome X and are progressing to
coronary heart disease and type II diabetes. We intend to leverage the
relationships we will work to establish in the AIDS/HIV community through our
SB-NSF product to commence marketing our Syndrome X diet system in this
community, and intend to initially target this community.
We have identified multiple areas of future dietary supplement product
interest and have identified specific priority product candidates. Some of these
proposed product areas include gastrointestinal relief, sexual function aids,
antioxidants/cardiovascular protectors, sleeping aids, calming agents and weight
management. Products in these areas may be developed under the Shaman brand in
the future, or selectively out-licensed.
Our History
Until December 1998, we were solely focused on developing pharmaceuticals
products derived from tropical plant sources. Our pharmaceutical business model
was dependent upon our ability to launch our first pharmaceutical product in
1999. As a result of the U.S. Food and Drug Administration response to our
proposed fast-track New Drug Application package for our leading pharmaceutical
product candidate, SP-303/Provir and insufficient resources to continue the
costly process of conducting a second pivotal trial which would have created
significant delays, we restructured our business to focus on the development and
marketing of dietary supplements. As a result, we now have available for
out-licensing our pipeline of novel pharmaceutical product candidates for major
human diseases developed by isolating active compounds from tropical plants with
a history of medicinal use.
We were incorporated in California in May 1989, began operations in March
1990 and reincorporated in Delaware in January 1993. Our address is 213 East
Grand Avenue, South San Francisco, California, 94080-4812 and our telephone
number is (650) 952-7070. Our web site is located at
http://www.ShamanBotanicals.com. Information contained on our web site
does not constitute part of this prospectus.
Provir(TM), SP-303(TM), SB-300(TM), ShamanBotanicals.com(TM), Syndrome X
Diet(TM),and our stylized logo are trademarks of Shaman. Shaman
Pharmaceuticals(R)is a registered U.S. trademark of Shaman Pharmaceuticals, Inc.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
We are providing the following information to aid you in the analysis of
the offering. We derived the information for the years ended December 31, 1996,
1997 and 1998 from our audited financial statements for 1996 through 1998 which
are included elsewhere in this prospectus. We derived the unaudited information
for the nine months ended September 30, 1998 and 1999 and at September 30, 1999
(actual) from unaudited financial statements, which are not included in this
prospectus. In the opinion of management, the unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation. The results of operations for the
interim periods shown herein are not necessarily indicative of operating results
for the entire year. This information is only a summary and you should read it
in conjunction with Shaman's financial statements and related notes, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus and contained in annual
reports, quarterly reports and other information on file with the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
Statement of Operations Data
(in thousands, except per share data)
Year Ended Nine Months Ended
December 31, September 30,
--------------------------------- -----------------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ - $ - $ - $ - $ 13
Collaborative agreements 3,406 3,500 2,660 2,285 350
-------- -------- -------- -------- --------
Total revenues 3,406 3,500 2,660 2,285 363
Operating expenses:
Cost of goods sold - - - - 4
Research and development 19,138 24,140 32,393 24,277 5,205
Markeing, general and administrative 3,537 4,833 5,565 4,273 4,688
Restructuring costs - - - - 3,038
-------- -------- -------- -------- --------
Total operating expenses 22,675 28,973 37,958 28,550 12,935
-------- -------- -------- -------- --------
Loss from operations (19,269) (25,473) (35,298) (26,265) (12,572)
Interest income (expense), net 479 (3,815) (1,483) (1,355) (530)
-------- -------- -------- -------- --------
Net loss (18,790) (29,288) (36,781) (27,620) (13,102)
Deemed dividend on Preferred Stock - - (1,742) (678) (4,995)
-------- -------- -------- -------- --------
Net loss applicable to Common Stockholders $(18,790) $(29,288) $(38,523) $ (28,298) $ (18,097)
========= ========= ========= ========= =========
Basic and diluted net loss per Common Share $ (27.85) $ (34.44) $ (38.31) $ (30.76) $ (6.57)
========= ========= ========= ========= =========
Shares used in calculation of basic and
diluted net loss per Common Share 675 850 1,006 920 2,756
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data
(in thousands)
September 30, 1999
----------------------
Actual
-------
(unaudited)
<S> <C>
Cash, cash equivalents, and short-term investments $ 3,991
Working capital (651)
Total assets 8,639
Long-term obligations, including current installments 3,095
Accumulated deficit (168,531)
Total stockholders' equity 385
</TABLE>
6
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information in this prospectus
before deciding to invest in shares of our Series R Convertible Preferred Stock.
The risks and uncertainties described below may not be the only ones facing
Shaman. Additional risks and uncertainties not presently known to us may also
impair our business. These risk factors supplement and do not supercede the risk
factors contained in our annual report on Form 10-K for the year ended December
31, 1998 and any other filings we make with the Securities and Exchange
Commission. If any of the following risks actually occur, our business,
operating results and financial condition and your investment in us could be
materially and adversely affected. In such case, the trading price of our stock,
both common and preferred, could decline and you might lose all or part of your
investment.
This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including the risks faced by us described below and elsewhere in this
prospectus.
Risks Related to the Series R Preferred Stock
You will likely experience immediate and substantial dilution in the book value
of your investment
Assuming that the price at which the Series R Preferred Stock will convert
into shares of common stock is $0.10, each share of Series R Preferred Stock
will convert into 150 shares of common stock. Assuming a price of $15.00 per
share of Series R Preferred Stock, this means that the effective per share price
of the common stock to be issued upon conversion will be $0.10. Although this
price is substantially less than the current market price of our common stock,
it is still substantially higher than the net tangible book value of our common
stock. In the event that the actual conversion price is equal to this price,
purchasers of shares of Series R Preferred Stock, on an as-converted into common
stock basis, in this offering will experience immediate and substantial dilution
of $0.10 in the pro forma net tangible book value per share of common stock.
If we do not have on February 1, 2000, an adequate number of common stock shares
authorized to effect the conversion of all of the preferred stock, all or a
portion of the Series R Preferred Stock may remain outstanding indefinitely or
until an adequate number of common stock shares are authorized, which could
adversely affect the liquidity and price of the Series R Preferred Stock
Each share of our outstanding Series R Preferred Stock will automatically
convert on February 1, 2000 into a number of shares of common stock equal to
$15.00 divided by the conversion price then in effect. The conversion price
shall be equal to the lesser of $0.10 per share, or the price that is equal to
10% of the average closing sales price of our common stock for the 10 trading
days ending three trading days prior to February 1, 2000. Our certificate of
incorporation provides that the Series R Preferred Stock will convert on
February 1, 2000 only to the extent that we have enough common stock shares
authorized to issue all shares of common stock needed to effect the conversion
of all outstanding shares of Series R Preferred Stock, after taking into account
the number of common stock shares necessary to effect the conversion of any then
outstanding shares of Series C Preferred Stock and Series D Preferred Stock. In
the event that we do not have enough shares authorized, only the portion of the
Series R Preferred Stock for which we have authorized shares of common stock,
will be converted, on a pro rata basis among the holders of the Series R
Preferred Stock. The remaining shares will remain outstanding until we have
amended our certificate of incorporation to authorize an adequate number of
common stock shares. Based on the current trading price of our common stock, we
do not have enough common stock available to issue common stock upon conversion
of the outstanding shares of Series R Preferred Stock and will need to authorize
additional shares of common stock to effect the conversion of all shares of our
outstanding preferred stock, which will require stockholder approval. We
anticipate submitting to the stockholders, prior to the conversion date of the
Series R Preferred Stock, a proposal to increase the number of shares of common
stock authorized to be issued to a number adequate to effect the conversion of
all of the outstanding preferred stock, including the Series R Preferred Stock.
If the stockholders do not approve such an increase in the authorized common
stock, all or a portion of the Series R Preferred Stock will likely not convert
on February 1, 2000 and may remain outstanding indefinitely after February 1,
2000 until we are able to amend our certificate of incorporation to authorize
additional shares of common stock to effect this conversion. The delay in
conversion of or the indefinite inability to convert all or a portion of the
Series R Preferred Stock, or the Series C or Series D Preferred Stock, may
decrease the liquidity and the market price of the preferred stock.
7
<PAGE>
Risks Associated with our Business
If we do not raise significant additional capital, we will be unable to fund
continuing operations, and will likely be forced to cease operations
We need substantial working capital to fund our operations. As of
September 30, 1999, we had cash, cash equivalents and short-term investment
balances of approximately $4.0 million. Our long-term capital requirements will
depend on numerous factors, including among others, the extent and progress of
additional development activities related to the botanical products, the success
of any marketing efforts related to the botanical products, the success of any
out-licensing efforts with respect to the pharmaceutical programs. Our
projections show that cash on hand as of September 30,1999, should be sufficient
to fund operations at the current level only through the first quarter of 2000.
Unless we are successful in our efforts to sell or out-license our
pharmaceutical products, or to sell or establish collaborative agreements to
sell our botanical products, we will be unable to fund our current operations
beyond the first quarter of 2000. Sales of our first botanical product, SB-NSF,
have not resulted in any significant revenues or earnings to date. Although the
product was available starting July 30, 1999, Shaman did not start promoting
this product until late September 1999. In addition, unless we are successful in
our efforts to raise additional capital through offerings of equity securities,
to sell or out-license our pharmaceutical products, or to sell or establish
collaborative agreements to sell our botanical products, our cash resources will
be used to satisfy our existing liabilities, and we will therefore be unable to
fund our operations, which may result in significant delay of our planned
activities or the cessation of operations. Even if we are successful in these
efforts to raise additional funds, such funds may not be adequate to fund our
operations on a long-term basis.
We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds 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. We may be unable to obtain adequate financing on
acceptable terms, if at all. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development, or commercialization
programs, or cease operations altogether, which would have a material adverse
effect on our business, financial condition and results of operations.
The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued a notice to the holders of the Series D
Preferred Stock as required under our charter that prevented the redemption of
the Series D Preferred Stock. Under the terms of our charter, the effect of
preventing this redemption event by issuing the notice was to increase the
annual cumulative dividend payable to the Series D Preferred Stock holders to
$180 per share and to adjust the conversion price of the Series D Preferred
Stock to 72% of the lowest trading price for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
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. We do not believe we will be listed on any of
these markets or exchanges in the foreseeable future.
If we are unable to continue as a going concern, stockholders will lose their
investment
We have suffered recurring and significant losses from operations. We have
also relied upon debt and equity financing to fund these losses and cash flow
deficits. Cash flows from future operations, if any, may not be sufficient to
enable us to continue our current level of operations, or to meet our debts as
they come due. Sales of our first botanical product, SB-NSF, have not resulted
in any significant revenues or earnings to date. Although the product was
available starting July 30, 1999, Shaman did not start promoting this product
until late September 1999. As a result of these factors, we may not be able to
continue as a going concern. For the year ended December 31, 1998, our
independent auditors have issued a report, which contains explanatory language
for the uncertainty related to our ability to continue as a going concern. If we
are to remain as a going concern, we will need to become and thereafter remain
profitable and may also need financing in addition to the funds raised in rights
offering. We may not be successful in achieving profitability or in obtaining
new financing and may have to curtail or cease operations, which could cause our
stockholders to lose their investment.
We have a history of operating losses, expect continuing losses and may never
achieve profitability
We have incurred significant losses in each year since our founding in
1989 and expect to continue to incur losses for the foreseeable future. We
8
<PAGE>
incurred a net loss of approximately $13.1 million for the nine months ended
September 30, 1999 and additional non-cash expense of $ 5.0 million incurred in
connection with the issuance of the control notice to holders of Series D
Preferred Stock and the issuance of Series R Preferred Stock in August 1999. As
of September 30, 1999, our accumulated deficit was approximately $168.5 million.
If we are to become and remain profitable, we will need to, among other
things, first generate product revenues. We have not generated any significant
product sales to date. We have changed the direction of our operations and are
pursuing a new business model in the botanical dietary supplement industry. In
the third quarter of 1999, we introduced our first product, SB-NSF, for
commercial sale. Sales of this product have not resulted in any significant
revenues or earnings to date. Although the product was available starting July
30, 1999, Shaman did not start promoting this product until late September 1999.
We are also exploring other botanical dietary supplement products for
development and commercial introduction. In order to generate revenues or
profits, we must successfully market SB-NSF and other products or enter into
collaborative agreements with others who can successfully market them. SB-NSF
and any other products we may introduce may not achieve market acceptance and we
may not achieve profitability.
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 from these products, we must
out-license these product candidates. It is possible that our out-licensing
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 or we may not achieve profitability.
The ownership interests of our common stockholders will be substantially reduced
by future issuances of stock upon exercises and conversions of currently
outstanding options, warrants and preferred stock
We currently have outstanding many securities that are convertible into
shares of common stock. The holders of common stock will be diluted upon the
exercise of outstanding options and warrants and upon conversion of the Series C
Preferred Stock, the Series D Preferred Stock and Series R Preferred Stock. The
Series D Preferred Stock is currently convertible into common stock at a price
equal to 72% of the market price of the common stock, and the Series C Preferred
Stock is currently convertible at a price equal to 85% of the market price of
the common stock and may be freely resold on the public market. The Series R
Preferred Stock will automatically convert on February 1, 2000 at a price equal
to 10% of the market price of our common stock and may be freely resold on the
public market. The common stock issued upon conversion of the Series C, Series D
and Series R Preferred Stock will substantially dilute the existing common stock
and will likely depress the price of the common stock if large amounts are
offered for sale in the open market.
If we are not successful in transitioning into the botanical dietary supplements
business, we may never achieve revenues or profitability
We have transitioned our operations from pharmaceutical product
development to botanical dietary supplement development and commercialization.
We have no experience in this new industry segment and must 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. Our marketing efforts for our first product,
SB-NSF, have not resulted in any significant sales to date. Although the product
was available starting July 30, 1999, we did not start promoting this product
until late September 1999. We have no experience running a business with product
sales. We may not be successful in these activities and may never generate
revenues or profitability from our botanicals business.
Our botanical products are at various stages of development, ranging from
initial research to final formulation. We will need to conduct additional
research and development to move our product candidates toward
commercialization. Our research and development efforts on potential products
may not lead to development of products that we can successfully commercialize.
In addition, we may not be able to produce our products in commercial quantities
at acceptable costs, or to market and sell our products successfully. Our
products may also prove to have undesirable or unintended side effects that may
prevent or limit their commercial use. Accordingly, we may curtail, redirect,
suspend or eliminate our product development or commercialization at any time.
If third party manufacturers on whom we rely fail to perform their services, our
supply of products would be delayed and possibly disrupted
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
9
<PAGE>
manufacturing facilities. We may not be successful in entering into third party
manufacturing arrangements on acceptable terms, if at all. In addition, should
we or our third party manufacturers encounter delays or difficulties in
producing, packaging and distributing our finished products, our clinical trials
and market introduction and subsequent sales of our products could be adversely
affected.
Contract manufacturers must conform to certain Good Manufacturing
Practices 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.
Since we have only a limited marketing staff, we may never achieve adequate
sales and revenues to achieve profitability
We currently have minimal marketing staff. If we are unable to
successfully establish, execute and finance a complete marketing plan for our
first product, SB-NSF, or subsequent products, we may not achieve a successful
product entry into the marketplace and may fail to achieve adequate sales and
revenues from our botanical products to achieve profitability. Our marketing
efforts for SB-NSF have not resulted in any significant sales to date. It is
unlikely we would ever achieve profitability if our first product is not
successfully marketed and sold.
If we fail to compete in the intensely competitive botanical dietary supplement
industry, we may never achieve profitability
The dietary supplement business is highly competitive and is characterized
by significant pressure on pricing and heavy commitment of marketing resources
for commodity products. Although our products are proprietary, we may face
competition from companies developing and marketing new commercial products that
have or claim to have similar functionality. Our failure to successfully compete
for customers would inhibit our future growth, revenues and profitability.
If we do not succeed in marketing our botanical products over the Internet, we
may be unable to sell adequate volumes of our products or generate revenues
adequate to achieve profitability
We are currently marketing our first product, SB-NSF, directly to
consumers through the Internet on our web site and through a toll-free customer
service line. We have no experience in marketing any product on the Internet,
and we have no market visibility or brand name awareness on the Internet.
Although Internet sites marketing dietary supplements do exist, the Internet may
never develop as a strong or viable marketing and distribution channel for
dietary supplements. Our Internet marketing efforts for SB-NSF have not resulted
in any significant sales to date. Although the product was available starting
July 30, 1999, Shaman did not start promoting this product until late September
1999. We may not be successful in using the Internet as a direct marketing and
distribution channel for our products, and if we do not succeed, we may be
unable to generate adequate revenues to achieve profitability.
Since our business plan relies substantially on marketing our future products
over the Internet, if our third party Internet access providers fail to keep our
web site operational, sales of our products would be disrupted and our marketing
efforts would be harmed.
We are currently marketing our first product primarily over the Internet,
and rely on third parties to provide us with access to the Internet and to
enable commerce over our web site, including providing adequate security of
information provided over the web site. Any failure by such third party
providers to provide uninterrupted access by our customers to our web site and
to ensure that commerce can be conducted on our web site would disrupt sales and
discourage use of our web site by customers, which would have a material adverse
effect on our revenues and profits.
On-line security breaches of our web site could harm our business by
substantially increasing our costs, exposing us to liability and harming our
sales and marketing efforts
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We plan to
rely on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information to and from our web site. It is possible that
advances in computer capabilities, new discoveries or other developments will
result in a compromise or breach of the algorithms that we select for this
purpose. We may be required to expend significant capital and other resources to
protect against the threat of such security breaches or to alleviate problems
caused by such breaches. The public's concern over the security of Internet
transactions and the privacy of users may also inhibit the growth of the web as
a means of conducting commercial transactions. To the extent that our activities
or those of third party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability. Our security
10
<PAGE>
measures may not be sufficient to prevent security breaches, and the failure to
prevent such security breaches could increase our costs, disrupt our sales and
marketing efforts and result in costly liability to Shaman.
Government regulation of dietary supplements could increase our costs or
prohibit or limit sales of our products
The manufacturing, processing, formulating, packaging, labeling and
advertising of our botanical dietary supplement products are subject to
regulation in the United States by several federal agencies, including the Food
and Drug Administration, the Federal Trade Commission, the Consumer Product
Safety Commission, the 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.
Our botanical product candidates are generally regulated as dietary
supplements under the 1994 Dietary Supplement Health and Education Act, 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, defined as 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 Practices 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 to comply
with applicable FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines, and criminal
prosecution.
In March 1999, new FDA regulations governing the labeling of dietary
supplements took effect. The new rules require that information such as the
complete list of ingredients and levels of vitamins and minerals be included on
product labels. While in our judgment these regulatory changes are generally
favorable to the dietary supplements industry, in the future we may be subject
to additional laws or regulations that could have an adverse effect on the
industry and on our business. In addition, existing laws and regulations may be
repealed and applicable regulatory authorities may 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.
The costs of compliance with environmental laws and regulations, or our
inability or failure to comply with environmental laws and regulations, could
substantially increase our costs of doing business or result in liability that
could use substantial amounts of our cash resources
In connection with our research and development activities and
manufacturing of materials, we are 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
11
<PAGE>
the risk of accidental contamination or injury from these materials completely.
In the event of 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 require
us to use a large amount of cash, which would then not be available for funding
operations or development and commercialization of our products.
Product liability claims asserted against us in the future could exceed our
insurance coverage and result in substantial liability to Shaman
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. We will also need to increase our insurance coverage as we further
develop our products, and we may be unable to obtain adequate insurance coverage
against all potential claims at a reasonable cost. Some of our development and
manufacturing agreements contain insurance and indemnification provisions
pursuant to which we could be held accountable for certain occurrences. If we
are subject to product liability claims for which we have inadequate insurance,
we could be required to use a large amount of cash, which would then not be
available for funding operations or development and commercialization of our
products.
Since the dietary supplement industry is particularly susceptible to public
perception of its products, negative publicity regarding the safety or quality
of our products could adversely impact our sales of these products
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
sales and our ability to market our products could be adversely affected by that
negative publicity. 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 affect
the market acceptance of our products, decrease sales, and make it more
difficult to market and sell our products.
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 in the
future scientific results and media attention may contain unfavorable or
inconsistent findings that could decrease sales and make it more difficult to
market and sell our products.
Our dependence on raw plant material from Latin and South America, Africa and
Southeast Asia makes us particularly susceptible to the risks of interruptions
in our supplies
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
disrupt or delay sales of our products, inhibit our ability to market our
products, and have a material adverse effect on our business, financial
condition and results of operations. If the prices of raw materials rise, 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 rainforests and irreplaceable plant resources found
only in such rainforests are currently threatened with destruction. The
destruction of portions of the rainforests which contain the source material
from which our current or future products are derived could disrupt supplies,
cause the cost of supplies to increase dramatically, and materially and
adversely affect our business, financial condition and results of operations.
12
<PAGE>
If we fail to protect our intellectual property rights, we could lose our
ability to stop competitors from using our trademarks or selling our products
Our success will be substantially dependent on our proprietary technology.
We rely primarily on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our intellectual property. These means of protecting our proprietary rights may
not be adequate. 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 currently have 20 U.S.
patents issued, 12 U.S. patent applications pending, and one international
application filed. The pending patents may never be approved or issued. Any
issued patents may not provide sufficiently broad protection or may not prove
valid or enforceable in actions against alleged infringers. Others may
independently develop similar products, duplicate any of our products or design
around any of our patents. In addition, many foreign countries may not protect
our products and intellectual property rights to the same extent as the laws of
the United States, and there is considerable variation between countries as to
the level of protection afforded under patents and other proprietary rights.
Such differences may expose us to increased risks of commercialization in each
foreign country in which we may sell products. We also depend on 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. Litigation may be necessary in the future to enforce
our intellectual property rights, protect our trade secrets or to determine the
validity and scope of the intellectual property rights of others. In the event
of litigation to determine the validity of any third party's claims, we could be
required to expend significant resources and divert the efforts of our technical
and management personnel, whether or not such litigation is determined in our
favor.
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. 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.
We are currently in a dispute in Europe regarding a patent for our
proanthocyanidin polymer composition, which covers the active ingredient in
SP-303/Provir. 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 composition, to Leon
Cariel and the Institut des Substances Vegetales. The effective filing date of
these patents is prior to the effective filing date of our foreign pending
patent application in Europe. Certain of the foreign patents have been granted
in jurisdictions where examination is not rigorous. We have 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. In the United States, the Patent and Trademark Office awarded
judgment to us in an Interference regarding this patent dispute.
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. The holders of the
granted European patent may assert against us claims relating to this patent. If
they are successful, 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. If we cannot obtain licenses to the
patent, we may not be able to introduce or sell our SP-303/Provir product in
Europe. 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.
If a third party were to bring an infringement claim against us, we would need
to expend significant resources in our defense; if the claim were successful, we
would need to obtain licenses or develop non-infringing technology
The pharmaceutical industry and, to a lesser extent, the dietary
supplement industry, is subject to frequent litigation regarding patent and
other intellectual property rights. Leading companies and organizations in these
industries have numerous patents that protect their intellectual property rights
in these areas. Third parties may assert claims against us with respect to our
existing and future products. In the event of litigation to determine the
validity of any third party's claims, we could be required to expend significant
resources and divert the efforts of our technical and management personnel,
whether or not such litigation is determined in our favor. In the event of an
adverse result of any such litigation, among other requirements, we could be
required to develop non-infringing technology or to obtain licenses to the
technology that is the subject of the litigation. We may not be successful in
13
<PAGE>
developing non-infringing technology or in obtaining a license to use the
technology on commercially reasonable terms.
If any of our executive officers and key personnel leave Shaman, our
ability to launch our first product or to market our products, and our ability
to develop any new products, could be delayed or disrupted; we could also need
to expend significant resources to hire new personnel
Our success depends in large 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 delay and inhibit our ability to
launch and market our products, develop new products, or effectively manage our
business.
The recent delisting from the Nasdaq National Market may reduce the liquidity
and marketability of our stock and may depress the market price of our stock
On February 2, 1999, Nasdaq delisted our common stock from The Nasdaq
National Market and moved our stock to the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. 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. The reduced
liquidity of our stock and the reduced public access to quotations for our stock
could depress the market price of our stock.
"Penny Stock" regulations may impose restrictions on marketability of our
stock
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. Since our securities that are currently included on the OTC
Bulletin Board are trading at less than $5.00 per share at any time, our stock
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. Accredited investors generally include
investors that 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 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.
Our stock price has been and may continue to be highly volatile
The price of our common stock has been particularly volatile and will
likely continue to fluctuate in the future. 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 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. In addition, 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. 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.
14
<PAGE>
Anti-takeover provisions in our charter documents and Delaware law may inhibit
potential acquisition bids for Shaman, which may adversely affect the market
price of our common stock and the voting rights of the holders of the common
stock
Certain provisions of our charter documents and Delaware law make it more
difficult for a third party to acquire, and may discourage a third party from
attempting to acquire us, even if a change in control would be beneficial to our
stockholders. These provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the common stock. The
provisions include the division of our board of directors into two separate
classes, the ability of the board to elect directors to fill vacancies created
by an expansion of the board, the power of the board to amend our bylaws, and
the requirement that at least 66% of the outstanding shares are required to call
a special meeting of stockholders. Our board also has the authority to issue up
to 493,715 additional shares of preferred stock, and to fix the price, rights,
preferences, privileges and restrictions of those shares without any further
vote or action by the stockholders. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock with voting rights could make it more difficult for a third
party to acquire a majority of the outstanding voting stock. 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.
15
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-1, File No.
333-86463, we have filed with the Securities and Exchange Commission. This
prospectus does not contain all of the information set forth in the registration
statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information regarding Shaman, you may refer
to the registration statement, including its exhibits and schedules. The
registration statement may be inspected at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from the SEC upon payment of the prescribed fees.
We also file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at 75 Park Place, New York, New
York 10007, and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. You may also obtain copies of such material by mail from the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. You may also examine our SEC filings through the
SEC's web site at http://www.sec.gov.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the Series R Preferred
Stock or the underlying common stock by the selling stockholders.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Since February 2, 1999, Shaman's common stock has been traded on the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. under the
symbol "SHMN." Our common stock was traded on the Nasdaq Stock Market from our
initial public offering on January 26, 1993 until February 1, 1999.
Set forth below is the range of high and low closing sale prices for
Shaman's common stock for the periods indicated, as reported by the OTC Bulletin
Board or The Nasdaq Stock Market, as applicable, and as adjusted for the
1-for-20 reverse stock split effected on June 22, 1999:
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
Fiscal Year 1997
First Quarter Ended March 31, 1997 $ 125.00 $ 77.60
Second Quarter Ended June 30, 1997 $ 123.80 $ 93.80
Third Quarter Ended September 30, 1997 $ 140.00 $ 102.40
Fourth Quarter Ended December 31, 1997 $ 141.20 $ 85.00
Fiscal Year 1998
First Quarter Ended March 31, 1998 $ 110.00 $ 82.60
Second Quarter Ended June 30, 1998 $ 100.00 $ 88.20
Third Quarter Ended September 30, 1998 $ 80.00 $ 63.80
Fourth Quarter Ending December 31, 1998 $ 66.20 $ 21.80
Fiscal Year 1999
First Quarter Ended March 31, 1999 $ 40.60 $ 3.40
Second Quarter Ended June 30, 1999 $ 4.69 $ 0.72
Third Quarter Ended September 30, 1999 $ 2.13 $ 0.09
Fourth Quarter Ending December 31,1999
(through November 10, 1999) $ 0.09 $ 0.03
</TABLE>
DIVIDEND POLICY
We have paid no cash dividends on the common stock since our inception and
do not anticipate paying any dividends in the foreseeable future. Our loan
agreement with MMC/GATX Partnership No. 1 restricts the payment of cash
dividends on any equity security so long as any amount remains outstanding under
such loan agreement. In addition, Shaman's charter requires that Shaman pay all
required dividends to the holders of Series C Preferred Stock and Series D
Preferred Stock, respectively, prior to the payment of dividends to the holders
of our common stock or Series R Convertible Preferred Stock. At September 30,
1999, we had an accumulated deficit of $168.5 million and, until this deficit is
eliminated, we will be prohibited from paying cash dividends except out of net
profits.
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CAPITALIZATION
The following table sets forth the unaudited actual capitalization of
Shaman as of September 30, 1999.
<TABLE>
<CAPTION>
September 30, 1999
------------------------------
Actual (1)
------------------------------
(unaudited)
(in thousands, except share and per share amounts)
<S> <C>
Long-term debt and capital lease obligations, including current portion $ 3,095
Stockholders' equity:
Series C Preferred Stock, 200,000 shares authorized and designated;
108,494 shares issued and outstanding, actual -
Series D Preferred Stock, 6,285 shares authorized and designated;
1,205 shares issued and outstanding, actual -
Series R Preferred Stock 1,300,000 shares authorized and designated;
777,101 shares issued and outstanding, actual 1
Common Stock, $.001 par value per share, 220,000,000 shares authorized;
6,543,868 shares issued and outstanding, actual 6
Additional paid-in capital 168,936
Deferred compensation and other adjustments (27)
Accumulated deficit (168,531)
----------
Total stockholders' equity $ 385
----------
Total capitalization $ (2,710)
==========
</TABLE>
- ----------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
18
<PAGE>
SELECTED FINANCIAL DATA
We are providing the following information to aid you in the analysis of
the offering. We derived the information for the years ended December 31, 1994,
1995, 1996, 1997 and 1998 from our audited financial statements for 1994 through
1998. The 1996 through 1998 financial statements are included elsewhere in this
prospectus. We derived the unaudited information for the nine months ended
September 30, 1998 and 1999 and at September 30, 1999 from unaudited financial
statements which are not included in this prospectus. In the opinion of
management, the unaudited financial statements include all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation. The results of operations for the interim periods shown herein are
not necessarily indicative of operating results for the entire year. This
information is only a summary and you should read it in conjunction with
Shaman's financial statements (and related notes) and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this prospectus and contained in annual reports, quarterly reports and other
information on file with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30, 1999
------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Product sales $ - $ - $ - $ - $ - $ - $ 13
Collaborative agreements 1,360 2,210 3,406 3,500 2,660 2,285 350
-------- -------- ------- -------- -------- -------- --------
Total revenues $ 1,360 $ 2,210 $ 3,406 $ 3,500 $ 2,660 $ 2,285 $ 363
Operating expenses:
Cost of goods sold - - - - - - 4
Research and development 18,643 17,635 19,138 24,140 32,393 24,277 5,205
Marketing, general and administrative 3,545 3,705 3,537 4,833 5,565 4,273 4,688
Restructuring costs - - - - - - 3,038
-------- -------- ------- -------- -------- -------- --------
Total operating expenses 22,188 21,340 22,675 28,973 37,958 28,550 12,935
-------- -------- -------- -------- -------- -------- --------
Loss from operations (20,828) (19,130) (19,269) (25,473) (35,298) (26,265) (12,572)
Interest income 2,045 1,695 1,082 1,218 550 444 120
Interest expense (698) (569) (603) (5,033) (2,033) (1,799) (650)
-------- -------- -------- -------- -------- -------- --------
Net loss (19,481) (18,004) (18,790) (29,288) (36,781) (27,620) (13,102)
Deemed dividend on Preferred Stock - - - - (1,742) (678) (4,995)
-------- -------- -------- -------- -------- -------- --------
Net loss applicable to Common Stockholders $(19,481) $(18,004) $(18,790) $(29,288) $(38,523) $(28,298) $(18,097)
========= ========= ========= ========= ========= ========= =========
Basic and diluted net loss per Common Share(1) $ (30.02) $ (27.36) $ (27.85) $ (34.44) $ (38.31) $ (30.76) $ (6.57)
========= ========= ========= ========= ========= ========= =========
Shares used in calculation of basic and
diluted net loss per Common Share(1) 649 658 675 850 1,006 920 2,756
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
----------------------------------------------------- --------------
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, and short-term investments $ 39,843 $ 26,665 $ 16,533 $ 21,421 $ 9,165 $ 3,991
Working capital 33,422 22,850 9,641 14,547 1,043 (651)
Total assets 49,673 33,810 22,377 26,753 13,139 8,639
Long-term obligations, including current installments 5,017 6,041 4,816 6,802 5,219 3,095
Senior convertible notes - - - 9,967 - -
Accumulated deficit (45,828) (63,832) (82,622) (111,910) (150,434) (161,531)
Total stockholders' equity $ 41,300 $ 24,205 $ 11,977 $ 5,148 $ 2,110 $ 385
</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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
In September 1999, we began implementing our commercialization efforts through
our botanicals division, which we have named ShamanBotanicals.com. Our
commercialization plan includes the use of community building initiatives on the
Internet and other distribution channels, and is based on marketing our
exclusive access to our proprietary branded products. We also have available for
out-licensing a pipeline of botanical product candidates, as well as novel
pharmaceutical products for major human diseases developed by isolating active
compounds from tropical plants with a history of medicinal use.
Until December 1998, we were solely focused on developing pharmaceutical
products derived from tropical plant sources. Our pharmaceutical business model
was dependent upon our ability to launch our first pharmaceutical product in
1999. As a result of the U.S. Food and Drug Administration response to our
proposed fast-track New Drug Application package for our leading pharmaceutical
product candidate, SP-303/Provir, and insufficient resources to continue the
costly process of conducting a second pivotal trial which would have created
significant delays, we restructured our business to focus on the development and
marketing of dietary supplements.
Results of Operations for the Quarters Ended September 30, 1998 and 1999
The results of operations for the quarter and nine months ended September
30, 1998 were related to our pharmaceutical operations. Since we ceased
operations of our pharmaceutical business and focused our efforts in our
botanical business starting February 1999, our results of operations for the
nine months ended September 30, 1999 and future periods are not comparable to
the same periods last year.
The sales of our first product, SB-NSF, have not resulted in any
significant revenues or earnings to date. For the quarter ended September 30,
1999, product revenues were $13,000. Although the product was available starting
July 30, 1999, the Company did not start promoting this product until late
September 1999.
We recorded collaborative revenues of $560,000 and $350,000 for the
quarters ended September 30, 1998 and 1999, respectively, and $2,285,00 and
$350,000 for the nine months ended September 30, 1998 and 1999, respectively.
Revenues for the quarter and nine months ended September 30, 1998 resulted from
Shaman's collaboration with Lipha S.A. and research funding from Ono
Pharmaceutical Co., Ltd., which expired in May 1998. Revenues for the quarter
and nine months ended September 30, 1999 resulted from the License Agreement
with Metabolix, Inc.
In December 1998, we renegotiated the terms of the existing agreement with
Lipha S.A. 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 as of June 30, 1999 was recorded as deferred revenue
that we had not yet earned) and a $1.0 million equity investment. We are
currently in negotiations with Lipha S.A. for the discontinuation of this
agreement. There will be no further research payments from Lipha S.A. In August
1999, we issued 133,334 shares of Series R Preferred Stock, having a value of
$2.0 million, to Lipha S.A. in partial settlement of claims made by Lipha S.A.
in connection with the pharmaceutical research and development agreement between
Shaman and Lipha S.A. Out of the $2.0 million, we applied $969,000 to deferred
revenue and the balance to restructuring expenses.
We incurred research and development expenses of $8.5 million and $1.6
million for the quarters ended September 30, 1998 and 1999, respectively, and
$24.3 million and $5.2 million, of which $3.0 million was related to the
research and development of the botanicals division, for the nine months ended
September 30, 1998 and 1999, respectively. This decrease was primarily
attributable to the closing down of our pharmaceutical business as of February
1, 1999. Research and development expenses are expected to continue to decrease
in 1999 as we focus our efforts in our botanicals business.
Marketing, general and administrative expenses were $1.6 million and $1.9
million for the quarters ended September 30, 1998 and 1999, respectively, and
$4.3 million and $4.7 million for the nine months ended September 30, 1998 and
1999, respectively. This increase was primarily attributable to the marketing
expenses related the launch of our first botanical product, SB-NSF. General and
20
<PAGE>
administrative expenses are expected to decrease in 1999 as we focus our efforts
on our botanicals business, partially offset by marketing expenses.
Interest income was $88,000 and $30,000 for the quarters ended September
30, 1998 and 1999, respectively, and $444,000 and $120,000 for the nine months
ended September 30, 1998 and 1999, respectively. Interest income decreased for
the quarter and nine months ended September 30, 1999, compared with the quarter
and nine months ended September 30, 1998, due to lower average cash and
investment balances as we continue to fund our operations. Interest expense was
$488,000 and $180,000 for the quarters ended September 30, 1998 and 1999,
respectively, and $1,799,000 and $650,000 for the nine months ended September
30, 1998 and 1999, respectively. Interest expense decreased for the period ended
September 30, 1999, compared with the period ended September 30, 1998 due to
lower average debt balances.
Restructuring Expenses
On February 1, 1999, we initiated a restructuring plan in which we closed
down the operations of our pharmaceutical business. We now intend to out-license
worldwide marketing rights to all of our pharmaceutical compounds and will focus
our efforts on the development and commercialization of botanical dietary
supplements. The restructuring plan includes: cessation of pharmaceutical
research and development activities and related operations; outlicensing of all
of our current pharmaceutical research programs; reduction in force of
approximately 60 employees (65% of workforce); sale or disposal of all of our
fixed assets that are not needed for our botanicals business; and sub-leasing a
portion of our facility.
The termination of 60 employees occurred on February 1, 1999. The
following table summarizes the Shaman's restructuring activities as of September
30, 1999.
<TABLE>
<CAPTION>
Total
Restructuring Balance
Category Charges Spending September 30, 1999
------------------------------- ------------- ---------- ------------------
(in thousands)
<S> <C> <C> <C>
Severance and related charges $ 467 $ 467 $ 0
Cancellation of contracts 1,200 0 1,200
Other 1,414 1,337 77
Gain on disposal of fixed assets (43) (43) 0
------- ------- -------
$ 3,038 $ 1,761 $ 1,277
======= ======= =======
</TABLE>
At June 30, 1999 we had approximately $969,000 recorded as deferred
revenue, which we had not yet earned. In August 1999, we issued 133,334 shares
of Series R Preferred Stock, having a value of $2.0 million, to Lipha S.A. in
partial settlement of claims made by Lipha S.A. in connection with the
pharmaceutical research and development agreement between Shaman and Lipha S.A.
Out of the $2.0 million, we applied $969,000 to deferred revenue and the balance
to restructuring expenses. We are currently in negotiations with Lipha S.A. for
the discontinuation of the pharmaceutical research and development agreement
between Shaman and Lipha S.A.
Results of Operations for the Years Ended December 31, 1996, 1997 and 1998
The results of operations for the years ended December 31, 1996, 1997 and
1998 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 $3.4 million, $3.5 million and $2.7
million for 1996, 1997, and 1998, 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., 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.
We incurred research and development expenses of $19.1 million, $24.1
million, and $32.4 million for 1996, 1997 and 1998, respectively. These expenses
include salaries for scientific personnel, clinical development costs,
laboratory supplies, patent protection and consulting fees, travel, plant
collections, facilities expenses and other expenditures relating to research and
product development. Research and development expenses increased $5.0 million in
1997 compared with 1996, and $8.3 million in 1998 compared with 1997. The
21
<PAGE>
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. 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. 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 $3.5 million, $4.8 million and
$5.6 million for 1996, 1997 and 1998, respectively. These expenses include
administrative salaries, consulting, legal, travel and other operating expenses.
General and administrative expenses increased $1.3 million in 1997 compared to
1996, and increased $0.7 million in 1998 compared to 1997. 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. 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. 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 $1.1 million, $1.2 million and $0.6 million for 1996,
1997 and 1998, respectively. Interest income increased $100,000 in 1997 compared
with 1996, and decreased $700,000 in 1998 compared with 1997. Interest income
fluctuations have been consistent with changes in average cash and investment
balances with which we substantially funded our operations in 1996, 1997 and
1998. The balances of cash, cash equivalents and investments were $16.5 million,
$21.4 million and $9.2 million at December 31, 1996, 1997 and 1998,
respectively.
Interest expense was $603,000, $5.0 million and $2.0 million for 1996,
1997 and 1998, respectively. Interest expense increased in 1997 compared with
1996 principally due to a $3.7 million non-cash interest charge related to the
issuance of senior convertible notes in June 1997, as well as the interest
expense related to our secured debt financing in May 1997. 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 in the future will be dependent in part
on our capacity to finance future operating and equipment needs.
Delisting of our common stock from Nasdaq National Market
The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued a notice to the holders of the Series D
Preferred Stock as required under our charter that prevented the redemption of
the Series D Preferred Stock. Under the terms of our charter, the effect of
preventing this redemption event by issuing the notice was to increase the
annual cumulative dividend payable to the Series D Preferred Stock holders to
$180 per share and to adjust the conversion price of the Series D Preferred
Stock to 72% of the lowest trading price for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
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. In connection with the issuance of such notice,
we recorded a deemed dividend charge in the amount of $2,273,614 in the first
quarter of 1999. We do not believe we will be listed on any of these markets or
exchanges in the foreseeable future.
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 September 30, 1999, our cash, cash equivalents, and investments
totaled approximately $4.0 million, compared with $9.2 million at December 31,
1998. We invest excess cash according to our investment policy that provides
guidelines with regard to liquidity, type of investment, credit ratings and
concentration limits.
22
<PAGE>
In August 1999, Shaman completed the Series R Preferred Stock rights
offering. In the rights offering, Shaman sold 717,149 shares of Series R
Convertible Preferred Stock at $15.00 per share to Shaman's common stockholders
of record on July 14, 1999, raising net proceeds of approximately $5.7 million.
In August 1999, we entered into a License and Sale Agreement with
Metabolix, Inc. whereby Metabolix, Inc. has licensed certain rights to Shaman's
library of extracts and compounds for research, development, and
commercialization purposes. We have received an up-front license payment of
$350,000 and an additional $55,000 for an option fee to specific piece of
technology. We will receive royalties on any resulting products commercialized.
Metabolix, Inc. also has an option to license further technology for additional
up-front payments over the next four months. In October 1999, we received an
additional $250,000 up-front payment from Metabolix, for which Metabolix
exercised its option to license other technology.
In April 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors, pursuant to which we borrowed approximately $1.0 million
in July 1999. The convertible promissory notes issued pursuant to the credit
agreement were due and payable on the earlier of (i) 30 days subsequent to the
completion of the public rights offering, or (ii) December 31, 1999. Interest on
the convertible promissory notes was accrued at an annual rate of 12%. The
convertible promissory notes were secured by certain assets of Shaman and were
convertible into shares of Series R Preferred Stock, or into common stock if no
public offering occurs prior to December 31, 1999. In connection with the credit
agreement, we issued warrants to purchase shares of Series R Preferred Stock.
The number of shares subject to these warrants is equal to 50% of the debt
amount divided by $15, which was the per share sale price of the Series R
Preferred Stock. These warrants are exercisable, on a cashless basis, commencing
on April 5, 1999, and through the third anniversary date of the public offering.
The conversion price of the convertible promissory notes and the exercise price
of the warrants was $15, which was the per share offering price of the Series R
Preferred Stock. In September 1999, a total of $649,275 of principal and
interest under these notes was converted into 43,285 shares of Series R
Preferred Stock and a total of $374,816 of principal and interest under these
notes was repaid to the note holders.
The delisting of our common stock from The Nasdaq National Market
constituted an Optional Redemption Event, as defined in our Certificate of
Incorporation, for the Series D Preferred Stock. In connection therewith, on
February 4, 1999, we issued a Control Notice, as defined in the Certificate of
Incorporation, 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 72% of the low trading
price during a designated time period prior to the conversion.
In December 1998, we completed a private sale of 240,604 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/Provir, 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, SB-NSF, to be initially marketed to the HIV/AIDS community.
In December 1998, we issued 37,360 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: (1) 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 (2) 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, SB-NSF, to be initially marketed to the HIV/AIDS
community. Each share of the Series C Preferred Stock was convertible for a
period of 30 days after 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 (1) 0.8333 shares of common stock or (2) such number of
shares of common stock as equals $100, which was 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
23
<PAGE>
for the Series C Preferred Stock, 24,922 shares of the Series C Preferred Stock
were converted into an aggregate of 93,077 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 pursuant to which we acquired the right to sell to these
stockholders, 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
these stockholders warrants to purchase an aggregate of 17,500 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 $110.00 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 $110.00 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, Shaman and the purchasers of the notes entered into an
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 6,875
shares of common stock. The warrants are exercisable through March 18, 2001 at
an exercise price of $150.00 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. 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 (1) $22.50 per share or (2) 90% of
the low trading price during a designated time period prior to the conversion.
In addition, the holders received an aggregate of 38,373 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 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 10,000
shares of common stock at $125.00 per share. We have attributed a value of
$648,000 to these warrants.
In April 1997, we sold 80,000 shares of common stock at $99.40 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.
In January 1997, we sold 100,000 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 19,446 shares of common stock priced at $154.20
24
<PAGE>
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 countries
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 57,762 shares of common stock, of which 40,650
shares were priced at $37.00 per share in September 1998 and 17,112 shares were
priced at $58.40 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 27,500 shares of
common stock at an exercise price of $203.60 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 $120.00 and $163.00, 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 $163.00 per
share.
We expect to continue to incur losses through 2000. We need substantial
working capital to fund our operations. As of September 30, 1999, we had cash,
cash equivalents and short-term investment balances of approximately $4.0
million. Our short and long-term capital requirements will depend on numerous
factors, including among others, the extent and progress of additional
development activities related to the botanical products, the success of any
marketing efforts related to the botanical products, the success of any
out-licensing efforts with respect to the pharmaceutical programs, and the
extent and timing of additional costs associated with patents and other
intellectual property rights. Our projections show that cash on hand as of
September 30, 1999 should be sufficient to fund operations at the current level
only through the first quarter of 2000. Unless we are successful in our efforts
to sell or out-license our pharmaceutical products, or to sell or establish
collaborative agreements to sell our botanical products, we will be unable to
fund our current operations beyond the first quarter of 2000. Sales of our first
botanical product, SB-NSF, have not resulted in any significant revenues or
earnings to date. Although the product was available starting July 30, 1999,
Shaman did not start promoting this product until late September 1999. In
addition, unless we are successful in our efforts to raise additional capital
through offerings of equity securities, to sell or out-license our
pharmaceutical products, or to sell or establish collaborative agreements to
sell our botanical products, our cash resources will be used to satisfy our
existing liabilities, and we will be unable to fund our operations, which may
result in significant delay of our planned activities or the cessation of
operations. Even if we are successful in these efforts to raise additional
funds, such funds may not be adequate to fund our operations on a long-term
basis.
In addition, we will likely need additional capital to fund the
redemption of our Series D Preferred Stock or to pay accumulated dividends. The
delisting of our common stock from The Nasdaq National Market on February 2,
1999 constituted an optional redemption event for our Series D Preferred Stock.
Since we do not have adequate resources to pay to redeem the Series D Preferred
Stock, we have issued a notice to the holders of the Series D Preferred Stock as
required under our charter that prevented the redemption of the Series D
Preferred Stock. Under the terms of our charter, the effect of preventing this
redemption event by issuing the notice was to increase the annual cumulative
dividend payable to the Series D Preferred Stock holders to $180 per share and
to adjust the conversion price of the Series D Preferred Stock to 72% of the
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lowest trading price of our common stock for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
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. In connection with the issuance of such notice,
we recorded a deemed dividend charge in the amount of $2,273,614 in the first
quarter of 1999. We do not believe we will be listed on any of these markets or
exchanges in the foreseeable future.
We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds 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. We may be unable to obtain adequate financing on
acceptable terms, if at all. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development, or commercialization
programs, or cease operations altogether, which would 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 not be
required to modify or replace significant portions of our software and hardware
to insure that those systems will properly utilize dates beyond December 31,
1999. We presently believe that with achievable modifications and modest
replacement of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
are not completed on a timely basis, the Year 2000 Issue could have an impact on
our operations.
We have completed the assessment of all internal information technology
and non-information technology systems that could be significantly affected by
the Year 2000. To date, we have incurred approximately $9,000 related to the
Year 2000 compliance and we estimate that upgrades for those systems not in
compliance will total approximately $10,000. We expect to complete our internal
Year 2000 readiness program by November 30, 1999. We are in the process of
querying our significant suppliers and subcontractors regarding their Year 2000
remediation activities. 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 but we are developing a plan based
on the information obtained from third parties and an on-going evaluation of our
systems. We anticipate having a contingency plan in place by November 30, 1999,
which will include development of backup procedures and identification of
alternate suppliers.
Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market risk, including changes to interest rates. A
discussion of our accounting policies 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 interest rates and foreign currency
exchange 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, issuer, or type of instrument and does not permit derivative financial
instruments in our investment portfolio. As a result, we do not expect any
material loss with respect to our investment portfolio.
26
<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>
Fair Value
at
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- ------------------------
(in thousands)
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%
LIABILITIES
- -------------------------
(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>
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BUSINESS
This prospectus also contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks faced by us
described below and elsewhere in this prospectus.
Overview
We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
In September 1999, we began implementing our commercialization efforts through
our recently established botanicals division, which we have named
ShamanBotanicals.com. Our commercialization plan includes the use of community
building initiatives on the Internet and other distribution channels, and is
based on marketing our exclusive access to our proprietary branded products. We
also have available for out-licensing a pipeline of botanical product
candidates, as well as novel pharmaceutical product candidates for major human
diseases developed by isolating active compounds from tropical plants with a
history of medicinal use.
Botanicals
Background
In 1997, the U.S. dietary supplement market was $12.9 billion. Of this,
over $4.0 billion were herbal or botanical dietary supplements. In 1998, this
number was projected to reach $5.0 billion, with a compounded yearly growth rate
of approximately 35%. In 1997, 24% of U.S. households reported using herbal or
botanical dietary supplements. The growth of this market has been led by
consumers who are interested in complementary, 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. We believe 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.
We believe that room exists for significant continuing growth of the
dietary supplement market and expect 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.
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 botanical dietary supplements market. These
companies have increased the visibility of botanical dietary supplements,
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 advertising has resulted in a broader
base of consumers being made aware of, trying and utilizing dietary supplements.
Simultaneous with the broadening of the consumer base, the botanical
dietary supplements 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 of this dietary supplement dramatically. Interestingly, while the
month-on-month growth of sales 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.
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Strategy
The concept for our ShamanBotanicals.com division was developed in 1998,
and 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 through
community building initiatives on the Internet and other focused marketing
channels. The unique positioning of our botanicals business stems from our prior
experience and efforts in developing pharmaceutical products from tropical plant
sources, including 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.
We are applying this methodology to our new industry, and we intend to set a new
standard in this industry. 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 we have organized this information 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 rainforests,
they may represent novel botanical products that have the opportunity to attain
a strong, proprietary market position. We began marketing our first botanical
product, SB-NSF, in September 1999.
We have the opportunity to differentiate our product candidates in
consumers' minds relative to those of our competitors. Key points of
differentiation include:
- Novel plants/proprietary products for unmet needs;
- Documented,first-hand field experience with traditional use;
- Rainforest-based plants and products, since most botanical
supplements products currently come from plants found in
temperate areas;
- Our commitment to conservation and reciprocity;
- Sustainable sourcing and supply;
- Quality manufactured, standardized products; and
- Clinically-tested products.
Our commercialization strategy is to create high-end branding of the
Shaman name, on our propriety products addressing serious unmet healthcare
concerns, and to market these proprietary products to specific communities
affected by such healthcare issues. Our e-commerce web site,
ShamanBotanicals.com, which is currently in operation, will be expanded to
include several distinct features, such as exclusive access to our proprietary
products, and links to peer-reviewed clinical data supporting the clinical
action of our products. We also intend to offer access to certain medical
experts, in some cases exclusively, for medical commentary. Other planned
features of our web site include bulletin board postings, community chat rooms,
customer security and customization, and affiliate programs. Finally,
information on our reciprocity programs will be available as well.
Product Discovery and Development Process
We build on the knowledge and expertise of ethnobotanist and physician
teams who work with traditional healers to identify effective treatments in the
therapeutic areas that we have targeted. 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 our pharmaceutical and
dietary supplement discovery and development programs.
We were able to initiate our botanicals business by further exploring the
botanical library and pipeline we have developed over the past 10 years. In the
last decade, we have amassed a large body of information on the healing benefits
of thousands of tropical plant species that have a history of human use and have
organized this information into an extensive relational database. This database
includes information on 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 are derived from plants from temperate regions. 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.
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We intend to differentiate ourselves within the botanical dietary
supplement marketplace by backing proprietary products and promotion with
quality research, development and manufacturing, a carry-over from our
pharmaceutical culture and skill base. Given consumer demand for quality and the
relative lack of specific regulatory standards in the dietary supplement
industry, we intend to set our own high standard for quality and product
standardization for our botanical products. We intend to develop standardization
processes for the ingredients in all our 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. This
distribution of "third party" literature for education and promotional sales can
be particularly effective with Internet purchases. We believe that these
elements, along with unique formulations and existing and future patents, should
add to the proprietary position of our products.
Products and Product Candidates
Our first botanical dietary supplement product is SB-NSF, which is
designed to normalize water flow in the bowel and promote stool formation.
SB-NSF is an extract of Croton Lechleri, a plant used by indigenous people for
relief of gastrointestinal symptoms, and contains a chemical activity marker,
SP-303, a patented, clinically proven antidiarrhea agent. SB-NSF also has a
patented formulation. The mechanism of SB-NSF is a desirable anti-secretory
activity, and SB-NSF does not have anti-motility effects, such as the side
effects of constipation and cramping associated with the use of immodium and
loperamide. Such anti-motility agents generally cannot be used on a continuous
basis as a result of these side effects.
We began marketing SB-NSF in September 1999, and have focused our
marketing efforts on community building initiatives on the Internet and other
appropriate focused channels of distribution. We have marketed the product
initially to people with HIV/AIDS who suffer from chronic diarrhea, and intend
to begin marketing this product to travelers and others who suffer from acute
bouts of diarrhea. We are also considering developing a pediatric formulation of
SB-NSF, which would complete three distinct commercial product opportunities
from one plant extract, differentiated by formulation, packaging, and target
customer/community base.
We are also working to develop a second product line based on a diet
system to mitigate Syndrome X symptoms. Syndrome X is the cluster of metabolic
disorders that occur in the face of elevated insulin when an individual is
insulin resistant, yet still maintains glucose control and is therefore not
diabetic. This cluster of coronary heart disease risk factors, such as elevated
triglycerides and lower HDL-cholesterol, the "good" cholesterol, are the silent
killers associated with Syndrome X. Shaman's Sr. Vice President of Clinical
Research, Dr. Gerald Reaven, has developed a trademarked Syndrome X diet system
for persons exhibiting Syndrome X symptoms, and has performed over 20 years of
clinical research documenting the benefits of this diet system. Direct
comparison clinical trial data supports that this diet system provides superior
benefits to those exhibiting Syndrome X symptoms than the low fat/high
carbohydrate diet guidelines recommended by the American Heart Association.
Approximately 30% of the US population is insulin resistant and subject to
Syndrome X. We anticipate that a product line would include bars, drinks, and
snacks which follow the trademarked anti-Syndrome X diet system, infused with
proprietary Shaman botanicals to address further these metabolic disorders.
Many people with AIDS/HIV who are effectively managing the AIDS virus with
their antiviral therapies are now also demonstrating metabolic abnormalities
consistent with insulin resistance and Syndrome X and progressing to coronary
heart disease and type II diabetes. We intend to leverage the identity we will
work to establish in the AIDS/HIV community through our SB-NSF product to
commence marketing of our Syndrome X diet system in this community, and intend
to initially target this community.
Future Product Candidates
We have strategically identified multiple areas of dietary supplement
product interest and have identified specific priority product candidates for
the future based on four criteria:
- key market categories with significant commercial potential,
- the needs of an aging demographic in the U.S. population,
- areas where quick, symptomatic relief could be observed, and
- areas where we have first-hand ethnomedical experience and where
- sustainable supply of raw materials exists.
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Some of these proposed product areas include gastrointestinal relief,
sexual function aids, antioxidants/ cardiovascular protectors, sleeping aids,
calming agents and weight management.
Another potential product opportunity is a proprietary, enhanced
formulation of one of the world's leading phytomedicines. We have filed a patent
application for this product. We believe this product represents a significant
out-licensing opportunity.
All of these potential products are based on plant material on the FDA's
grandfathered old dietary ingredient list, which includes dietary ingredients
that were sold in the United States prior to 1994, allowing for immediate
product introduction without a need for regulatory application or approval.
We believe our current and prior research and development efforts would
allow us to introduce up to eight products, including human clinical testing,
within the first two years of our botanicals operations. We believe that all of
these product areas offer significant opportunity for growth. Products in these
areas may be developed for sale under the Shaman brand name in the future, or
selectively out-licensed.
Sales and Marketing
We launched our first product SB-NSF in July 1999, and began marketing
this product in September 1999. SB-NSF is a botanical dietary supplement to
normalize water flow in the bowel and promote stool formation. SB-NSF has
initially been targeted to people with AIDS/HIV who suffer from chronic
diarrhea. We are marketing SB-NSF via the Internet, 1-800 direct response
advertising, advertising in major metropolitan newspapers and in magazines
targeted to the HIV/AIDS community, limited storefront access in major market
cities, and focused mail order opportunities. In addition, Shaman is working
with several leading treatment activists to have them feature the introduction
of this product in their regional organizations' newsletters.
Commencing in the fourth quarter of 1999, we also intend to market SB-NSF
to travelers and others suffering from acute episodes of diarrhea. The product
will be differentiated from that targeted to the AIDS/HIV community in that it
will be a lower dose and packaged in smaller quantities to address the nature of
its expected use in the target customer base.
We believe that selling a traveler's health-related product on the
Internet presents an attractive marketing opportunity since two primary uses of
the Internet are currently healthcare information and travel. We intend to
market this product with banner advertising at affiliate travel web sites and
point of purchase at high-risk diarrhea destinations, sample programs to
adventure travel and tour companies traveling to such areas, and other highly
focused target customer programs.
In marketing a diet system product line to address Syndrome X symptoms, we
intend to leverage the identity we will work to establish in the AIDS/HIV arena
through sales of SB-NSF, and will initially target this community. Similarly to
SB-NSF, we believe we will be able to implement efficient and focused promotion
and distribution to the AIDS/HIV community, and then expand our marketing
efforts to focus on mass market indications.
Thus, our initial customer base communities will include:
- people with AIDS/HIV suffering from chronic diarrhea;
- travelers to high-risk diarrhea destinations;
- people with AIDS/HIV exhibiting Syndrome X symptoms
- the Syndrome X population at large.
Both diarrhea and Syndrome X appear to be under-served and
under-recognized on most Internet healthcare sites. We believe that the features
to be offered on our web site relating to information on these health issues,
together with the exclusive access of our web site to our proprietary products,
presents an opportunity for our website to become one of the definitive sites
for the communities affected by these health concerns for complementary medical
alternatives.
Customers and Partners
The market for dietary supplements in the United States is growing. In
recent consumer surveys, 25% to 30% of consumers report having utilized a
botanical dietary supplement, and 36% report moderate to heavy use of
complementary medicine.
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We believe that our botanicals business has two key initial classes of
customers:
- consumers, primarily in the HIV/AIDS community the traveler's market,
and Syndrome X community to whom we intend to market our first
product, SB-NSF, and our anticipated second anti-Syndrome X diet
product line; and
- mass market and multi-level companies that are interested in
licensing or partnering with us for the commercialization of our
products.
Potential SB-NSF 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 and 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 from 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. In the majority of
cases the symptom is thought to be related to the anti-viral drugs. Diarrhea
therefore remains a serious problem that has not been adequately addressed.
Diarrhea not only compromises the health and quality of life of
individuals with AIDS and HIV but also has been shown to increase dramatically
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.
We believe that a product that normalizes water flow in the bowel and
promotes stool formation represents a large, focused and untapped market
opportunity. We believe that the competitive promotional response may be limited
in this discrete market because no specific dietary supplements or
over-the-counter antidiarrheals have targeted this population to date, likely
because there are no indication or studies in this patient population and the
mechanism of action of anti-motility products is counter-indicated for chronic
diarrhea. Further, we hope eventually to build a niche market position by
catering specifically to the needs of the HIV/AIDS community with a full product
line.
For the traveler's market, SB-NSF provides a natural alternative to
currently available treatments which have unpleasant side effects, such as
constipation and rebound diarrhea. More than 35 million individuals travel
annually to countries that present the risk of traveler's diarrhea.
Potential Partners
We are 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. We are focusing our partnering
efforts initially on the multi-level market arena and then intend to focus on a
large mass market, heavily promotional, healthcare deal which will require a
longer period of time to negotiate.
Mass Market
The entrance of large healthcare and consumer products companies into the
dietary supplement industry has fueled the expanded placement of botanical
dietary supplements 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. Such large promotional expenditures are relatively recent
because historically 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 consumer trial and repurchase. If these trends continue, the growth
of the botanical dietary supplement market could far surpass growth in the past.
Each of these product lines is simply a new opportunity of commodity botanical
products.
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We believe that another key driver of continued growth will be the
introduction of new botanical dietary supplement products. Introduction of new
products has in the past not only brought new consumers into the market but also
fueled the purchase 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 we believe
we are uniquely positioned to meet this need in certain market areas.
We plan to partner with mass market companies in order to expand the
advertising and promotion of our botanical dietary supplement products. Such a
partnership would combine the benefits of our new products with the partner's
ability to generate large advertising and public relations campaigns for our new
product lines, similar to those created for existing consumer product lines. In
addition, we could pursue a licensing arrangement, such as that completed
between PharmaPrint, Inc. and American Home Products, in which the Shaman name
could be co-branded with a product or product line with a partner.
Multi-Level
Multi-level marketing 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 the emotional impact of product stories very important, as
distributors need to believe in the products they are selling to friends.
The primary form of promotion in the multi-level marketing 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 multi-level marketing
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 multi-level marketing.
Our botanical products lend themselves to this market for several reasons.
We have truly novel products--the lifeblood of this distribution channel.
Further, the origins of our products are unique and lend themselves to the type
of interesting and emotionally compelling selling stories required for
peer-to-peer selling. These would make for entertaining sales convention
presentations, featuring famous ethnobotanists and the rainforest. Additionally,
our reciprocity and conservation policies provide interesting content for
responsible and compelling story-based selling.
Internet
We intend to use Internet marketing of our proprietary products as a means
to achieve high-end branding of our products. We believe that this exclusive
access to our proprietary products may be the most important advantage of our
ShamanBotanicals.com e-commerce site. The Internet offers an opportunity to
provide, within the requirements of the Dietary Supplement Health and Education
Act, easily and quickly accessible third-party literature and supportive
information on-line. We expect to offer bulletin board postings, community chat
rooms, patient security and customization as features on our web site. We also
expect to have exclusive access to certain medical experts for medical
commentary. Affiliate programs are expected to be important. For example, since
diarrhea appears as a side effect in the labeling of over 80% of
pharmaceuticals, the indication for our product SB-NSF of normalizing water flow
in the bowel and promoting stool formation, provides a natural link between the
problem caused by these pharmaceutical products and the solution offered by
SB-NSF. Finally, information on our reciprocity programs will be available as
well.
Competition
Competition in the botanical dietary supplement 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(R) Herbal
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brand, Bayer's introduction of botanical ingredients in their One-A-Day(R) line,
and Warner-Lambert's introduction of their Quanterra(R) brand. Overall, the
entrance of these companies is expected to broaden consumer acceptance of
botanical products and grow the total botanical dietary supplement market, with
the mass market becoming the largest, fastest-growing distribution channel. In
order to enter this key channel, we intend to partner with a company with direct
to consumer promotional capabilities and extensive experience in this market. We
believe that a partner in this channel will value the quality and scientific
rigor behind our products.
In the multi-level marketing channel, key players include Shaklee
Corporation, Nu Skin Enterprises, Inc., USANA, Inc. and OmniLife. Again, we
intend to partner with a top-tier company in this channel. We believe that
partners in this channel will appreciate the novel products we have to offer and
the compelling stories of their rainforest and traditional use origins.
We face competition for our first product, SB-NSF, from other
over-the-counter anti-diarrhea products such as Immodium ID and Pepto Bismol.
There is currently no established leader in marketing dietary supplements
through the Internet, although several Internet sites do exist, including
AllHerb.com, Mothernature.com, and Greentree.com. The emerging "drugstore "
sites such as Drugstore.com and PlanetRx.com also carry some dietary
supplements. We intend to start our own website within this distribution
channel, with the unique attraction of our own, proprietary products available
on the site, particularly targeting the HIV/AIDS community. We have reserved the
Internet domain name "ShamanBotanicals.com." We do not expect to compete
head-to-head with the existing Internet sites, where there has been little
differentiation between sites with respect to product offerings. Rather,
ShamanBotanicals.com will focus first on the needs of the HIV/AIDS community,
including information and nutritional products particularly important for people
with diarrhea and other associated problems. The design of our website will be
integral to the launch and sale of our first product, SB-NSF, via the Internet
distribution channel, and other community building initiatives.
Government Regulation
The term "botanical dietary supplement" is defined by the 1994 Dietary
Supplement Health and Education Act as "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." The 1994 Dietary Supplement Health
and Education Act specifically outlines how botanical products are to be
regulated and treated. Some commonly known commodity botanical dietary
supplement products include ginseng, gingko biloba, St. John's wort, and
echinacea. This statutory definition also differentiates botanical dietary
supplements, vitamins and minerals from conventional foods or food additives.
Under the law, botanicals may be sold as dietary supplements with claims as to
their effect on the structure or function of the human body, providing the
seller has adequate documentation for the claims. Botanical dietary supplements
are regulated by the FDA. However, some botanical dietary supplement products
require no review or approval to enter the market, while some new products may
require the submission of basic safety data prior to marketing. As a result, the
FDA regulatory process in the botanical dietary supplement 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 and old dietary ingredients, which had a history of being
marketed in the United States prior to DSHEA. Old dietary ingredients have been
"grand-fathered" under the law, allowing them to be commercialized without
further FDA review. Our pipeline includes more than 400 botanical candidates
that are old dietary ingredients, including several near-term product
candidates, and numerous new dietary ingredients candidates.
Pharmaceuticals
Background
Pharmaceutical companies continually search 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
and address the self-medication and quality of life issues of the current aging
consumer population.
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Strategy
Until recently, we were 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 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 now
intend to out-license worldwide marketing rights to our pharmaceutical assets.
Product Discovery and Development Process
In our efforts to develop pharmaceutical products we previously focused on
drugs extracted from plants with a long history of medicinal use. Through this
process, we successfully identified and developed a number of pharmaceutical
candidates, particularly through the preclinical and early clinical stages.
These efforts have produced a portfolio of product candidates for out-license.
Product Candidates
We conducted human clinical trials with our three leading product
candidates -- SP-303/Provir (Phase III/II), nikkomycin Z (Phase I), and
SP-134101 (Phase I) -- targeting five indications. We have discontinued all
pharmaceutical development, manufacturing and marketing activities and plan to
out-license all of the pharmaceutical applications of our technology.
The following table describes the major therapeutic areas in which we have
had active product development and research. Efforts are being made to
out-license all of these pharmaceutical products:
<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 S.A.;
antihyperglycemic 29 compounds Metabolix; and
compounds Shaman. Shaman
receives royalties
on sales outside
the U.S. and
profit sharing in
the U.S.
</TABLE>
Sales and Marketing
We intend to out-license worldwide marketing rights to our pharmaceutical
assets.
35
<PAGE>
Customers and Partners
We continue to pursue discussions for the out-licensing of our
pharmaceutical assets.
In September 1996, we entered into a five-year collaborative agreement with
Lipha S.A. to develop jointly our antihyperglycemic drugs. In August 1999, we
issued 133,334 shares of Series R Preferred Stock, have a value of $2.0 million,
to Lipha S.A. in partial settlement of claims made by Lipha S.A. in connection
with the pharmaceutical research and development agreement between Shaman and
Lipha S.A. We are currently in negotiations with Lipha S.A. for the
discontinuation of this research agreement. Lipha S.A. will make no further
research payments.
In May 1995, we entered into a collaborative agreement with Ono
Pharmaceutical Co. Ltd. providing for, among other things, three years of
funding for the research and development of compounds for the treatment of Type
II diabetes. Although the on-going research funding period under such agreement
has expired, Ono continues to have contractual obligations to us for the
potential payment of milestones and royalties. There can be no assurance that
such milestones will be attained or that we will receive any future milestone
payments or royalties from Ono.
Competition
The out-licensing 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, we have had significant interest in our products based upon their
novelty, safety, efficacy, and advanced stages of development. We are actively
seeking to out-license our products and we have multiple on-going discussions.
To date, these discussions have not resulted in any out-licensing agreements.
Patents and Proprietary Rights
Proprietary protection for our product candidates, processes and know-how
is important to our business. Our policy is to file patent applications to
protect technology, inventions and improvements that are considered commercially
important to the development of our business. We also rely upon trade secrets,
know-how and continuing technological innovation to develop and maintain our
competitive position. We aggressively prosecute and defend our patents and
proprietary technology.
We have 20 U.S. patents issued to date. In addition, we currently have 12
U.S. patent applications pending with the U.S. Patent and Trademark Office and
multiple applications filed under the Patent Cooperation Treaty. 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.
We have been issued a U.S. patent related to our specific proanthocyanidin
polymer compositions designated SP-303/Provir. Specifically, the patent contains
composition of matter claims related to SP-303/Provir contained in our
SP-303/Provir product. We have also filed foreign applications corresponding to
our issued U.S. patents relating to our proanthocyanidin polymer composition. We
have been granted patents in Australia, Mexico and New Zealand and have patent
applications pending in Canada, Europe, Japan, the Republic of Korea and
Singapore.
We have also filed a U.S. patent application directed to new formulations
and methods of using our specific proanthocyanidin polymer composition for
treatment of watery diarrhea. These formulations are contained in our
SP-303/Provir product.
We have 10 issued U.S. patents relating to compositions and methods for
treating Type II diabetes, as well as reducing hyperglycemia associated with
other etiologies. We also have 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. We have filed 11
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 plan to file additional corresponding foreign
applications within the relevant convention periods.
We also have 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. We have licensed several patents from Bayer AG
relating to the use of nikkomycin Z and the composition and use of nikkomycin Z
36
<PAGE>
in combination with other antifungal compounds for the development of antifungal
agents.
There can be no assurance that our 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 we would need to license or circumvent. See
"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, we formed The Healing Forest Conservancy, a California
not-for-profit public benefit corporation 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. We have donated 667 shares of our
common stock to the Conservancy's endowment fund. We also plan to donate
additional funds when we have achieved profits from product sales, if any, to
provide benefits to indigenous peoples in the countries where our source plants
are obtained.
The Shaman HIV Investment Trust
In 1998, we 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. We have committed to the Trust a
royalty on the first five years of U.S. product net sales of SB-NSF which are
sold in the HIV/AIDS market. The Trust will be administered independently by a
committee of HIV/AIDS community leaders.
The Living With AIDS Initiative
As part of Shaman's Living with AIDS reciprocity initiative, we are
supporting the Trekking with AIDS Dawn Averitt program. Dawn is a 30 year-old
woman who has been living with the HIV virus for 11 years. She is an
internationally known treatment activist supporting grass-roots efforts to
provide education, empowerment, and treatment for all people with AIDS and HIV.
She has recently launched on a five month trek of the Appalachian trail to
promote awareness for the challenging quality of life issues associated with
living with HIV and AIDS. Her broader message is that we all live with
challenges and need to take control of our healthcare and quality of life
choices, a message right in line with the goals of product development and
commercialization at ShamanBotanicals.com.
Employees
In February 1999, we ceased operations in our pharmaceuticals business and
downsized by approximately 60 employees, or 65% of our workforce. As of October
31, 1999, we had 31 employees. These employees focus their activities primarily
on the botanicals business.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to the
executive officers, directors and key employees of Shaman as of October 31,
1999:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------- --- --------------------------------------------------------------------------------
<S> <C> <C>
Lisa A. Conte............ 40 Director, President, Chief Executive Officer, and Chief Financial Officer
Steven R. King, Ph.D..... 41 Senior Vice President, Ethnobotany and Conservation
Gerald M. Reaven, M.D.... 71 Senior Vice President, Clinical Research
Thomas Carlson, M.D...... 43 Vice President, Medical Ethnobotany
John W.S. Chow, Ph.D..... 47 Vice President, Technical Operations
Tom White................ 41 Senior Vice President, Commercial Strategy and Chief Sales and Marketing Officer
G. Kirk Raab (1)......... 64 Chairman of the Board
Loren D. Israelsen....... 43 Director
Adrian D.P. Bellamy (2).. 57 Director
Jeffrey Berg............. 52 Director
Herbert H. McDade, Jr (2) 72 Director
M. David Titus (1)....... 42 Director
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Lisa A. Conte founded Shaman in May 1989 and currently serves as Shaman's
President, Chief Executive Officer, Chief Financial Officer, and Director.
From 1987 to 1989, Ms. Conte was Vice President at Technology Funding, Inc., a
venture capital firm, where she was responsible for the analysis and management
of healthcare industry investments. From 1985 to 1987, she conducted risk and
strategy audits for venture capital portfolio companies at Strategic Decisions
Group, a management consulting firm. Ms. Conte received an A.B. in Biochemistry
from Dartmouth College, an M.S. in Physiology/Pharmacology from the University
of California, San Diego and an M.B.A. from The Amos Tuck School, Dartmouth
College.
Steven R. King, Ph.D. joined Shaman in March 1990. He currently serves as
Senior Vice President, Ethnobotany and Conservation and is responsible for
coordinating our Scientific Strategy Team. From 1989 to 1990, Dr. King was the
chief botanist for Latin America at Arlington, Virginia's Nature Conservancy. He
worked in 1988 as Research Associate for the Committee on Managing Global
Genetic Resources at the National Academy of Sciences, and was a Doctoral Fellow
from 1983 to 1988 at The New York Botanical Garden's Institute of Economic
Botany. Dr. King received a B.A. in Human Ecology from the College of the
Atlantic and M.S. and Ph.D. degrees in Biology from City University of New York.
Gerald M. Reaven, M.D. joined Shaman as a consultant in February 1995 and
became an employee in July 1995. He currently serves as Senior Vice President,
Clinical Research. Dr. Reaven came to Shaman from the Stanford University School
of Medicine where he served as a faculty member since 1960 and a Professor of
Medicine since 1970. Over the last 20 years, Dr. Reaven served as head of the
Division of Endocrinology and Metabolic Diseases, Division of Gerontology and
director of the General Clinical Research Center. Dr. Reaven also served as head
of the Division of Endocrinology, Gerontology and Metabolism at Stanford
University School of Medicine, and Director of the Geriatric Research, Education
and Clinical Center, at the Palo Alto Veterans Affairs Medical Center. Dr.
Reaven received his A.B., B.S. and M.D. from the University of Chicago.
Thomas Carlson, M.D. joined Shaman in October 1992. He currently serves as
Vice President, Medical Ethnobotany and is responsible for developing
ethnobotancial field research and coordinating clinical studies. Dr. Carlson has
conducted research with traditional healers in over 40 different indigenous
groups in 15 different tropical countries. Prior to joining Shaman, from 1990 to
1992, Dr. Carson practiced General Pediatrics at Kaiser Permanente in Santa
Clara, California and worked at the Aravind Childrens and Eye Hospitals in
Madurai, India on child malnutrition and blindness. From 1987 to 1990, Dr.
Carlson completed his Internship and Residence in Pediatrics at Stanford
University Medical Center. Dr. Carlson received his M.D. from Michigan State
University and a B.S. and M.S. in Botany from the University of Michigan.
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<PAGE>
John Chow joined Shaman in April 1998 as Vice President of Technical
Operations. Prior to joining Shaman, from December 1997 to April 1998, Dr. Chow
served as Director, Product and Technology Evaluation at Bristol-Myers Squibb
Company, where he performed technical due diligence toward the acquisition and
licensing of various dosage forms and technologies and reviewed and approved new
product specifications. Prior to holding this position, from July 1980 to
December 1997, Dr. Chow held other positions, also with Bristol-Myers Squibb
Company, where he was responsible for developing strategies for manufacturing
consolidation, facilitating technology transfers of new and existing products,
and directing technical operations of an international plant. Dr. Chow received
a B.S. in Pharmacy from Washington State University, a Ph.D. in Pharmaceutical
Chemistry from Ohio State University and an M.B.A. in Pharmaceutical/Chemical
Studies from Fairleigh Dickinson University.
Tom White joined Shaman in May 1999 as Senior Vice President, Commercial
Strategy, and Chief Sales and Marketing Officer. Prior to joining Shaman, from
April 1998 to May 1999, Mr. White served as Executive Vice President, General
Manager Functional Food & Beverages at Weider Nutrition International. Prior to
that, from June 1995 to March 1998, he was a Principal in the firm of White,
Smith-White & Partners, a consumer products consulting firm, and from August
1993 to May 1995, he served as Director of Marketing for Pete's Brewing Company.
Mr. White received his B.A. in Journalism from the University of Missouri, and
his M.S. in Advertising from Northwestern University.
G. Kirk Raab became a director in January 1992 and Chairman of the Board in
September 1995. Mr. Raab was President, Chief Executive Officer and director of
Genentech, Inc. from February 1990 to July 1995 and President, Chief Operating
Officer and director from February 1985 to January 1990. Before joining
Genentech, Mr. Raab was associated with Abbott Laboratories, serving as
President, Chief Operating Officer and director. Mr. Raab is also Chairman of
the Board of Connectics, Inc., Oxford GlycoSciences (UK) Ltd. and LXR
Biotechnology, Inc., and is a director of Bridge Medical, Inc., Accumetrics,
Inc. and Applied Imaging Corporation. Mr. Raab holds a B.A. in Political Science
from Colgate University.
Loren D. Israelsen became a director in April 1999. Mr. Israelsen has been
President of LDI Group, a consulting firm specializing in dietary supplement and
phytomedicine issues, since 1997. From 1990 to 1997, Mr. Israelsen practiced law
at a private firm. From 1981 to 1990, Mr. Israelsen served in various positions
at Murdock International Corporation, including President from 1989 to 1990,
Vice President of Strategic Development from 1986 to 1989 and General Counsel
from 1981 to 1986. While acting as Vice President of Strategic Development, he
identified and negotiated several license agreements to bring the world's
leading phytomedicines, including Ginkgo biloba extract, milk thistle extract,
echinacea, evening primrose oil, and saw palmetto extract, to the United States.
Mr. Israelsen has served as General Counsel/Vice President to the American
Herbal Products Association, Co-counsel to the European American Phytomedicine
Coalition, industry liaison to FDA's expert advisory committee on Ephedra and
advisor to the Natural Products Quality Assurance Alliance, the Office of
Technology Assessment and the Office of Dietary Supplements. Since 1992, he has
served as Executive Director of the Utah Natural Products Alliance, which was
instrumental in developing and passing the Dietary Supplement Health and
Education Act of 1994.
Adrian D.P. Bellamy became a director in October 1997. Since April 1995,
Mr. Bellamy has served as Chairman and a director of each of Airport Group
International Holdings, L.L.C. and Gucci Group N.V. From September 1983 to April
1995, Mr. Bellamy served as Chairman of the Board of Directors and Chief
Executive Officer of DFS Group Limited, a specialty retailer. He received a B.A.
in Communications and an M.B.A. from the University of South Africa. Mr. Bellamy
is a director of The Body Shop, Inc., The Body Shop International PLC, The Gap,
Inc., Paragon Trade Brands, Inc. and Williams-Sonoma, Inc.
Jeffrey Berg became a director in June 1998. Mr. Berg has been the Chairman
and Chief Executive Officer of International Creative Management, Inc. since
1985. Mr. Berg, one of the leading agents in the entertainment industry, has
been in the entertainment industry for over 25 years. Mr. Berg received a B.A.
from the University of California at Berkeley and a Master of Liberal Arts from
the University of Southern California. He served as Co-Chair of the California
Information Technology Council and is a director of each of Oracle Corporation
and Excite, Inc.
Herbert H. McDade, Jr. became a director in October 1991. He has served as
Chairman of the Board and Chief Executive Officer of Chemex Pharmaceuticals,
Inc. since February 1989 and as Chief Executive Officer from February 1989
through January 1996, when Chemex Pharmaceuticals merged with Access
Pharmaceutical Corporation and the combined entity changed its name to Access
Pharmaceutical Corporation Inc. From October 1986 to January 1988, Mr. McDade
was Chairman, President and Chief Executive Officer of Armour Pharmaceuticals,
Inc., after previously serving as President, International Health Care Division
of the Revlon Health Care Group. Mr. McDade holds a B.S. in Biology from the
University of Notre Dame and a B.P.H. in Theology and Philosophy from Laval
University. He is Chairman of the Board of Access Pharmaceutical Corporation and
a director of Cytrx, Inc., Discovery Ltd. and several privately held companies.
39
<PAGE>
M. David Titus became a director in April 1990. Mr. Titus is currently a
General Partner of Windward Ventures Management, L.P., a venture capital firm,
which he founded in November 1997. Prior to founding Windward Ventures
Management, L.P., Mr. Titus was Managing Director of Windward Ventures, a
venture capital consulting and investment firm, which he founded in 1993. From
May 1986 to December 1992, he served in various capacities at Technology
Funding, Inc., a venture capital firm, including Group Vice President,
Technology Funding, Inc., and General Partner of Technology Funding Limited.
Prior to joining Technology Funding, Inc. in May 1986, Mr. Titus was a founder
and Senior Vice President of the Technology Division of Silicon Valley Bank. Mr.
Titus earned a B.A. in Economics from the University of California, Santa
Barbara. He is a director of several privately held companies.
Number of Directors; Relationships
Our bylaws authorize the board to fix the number of directors serving on
the board, provided that such number shall not be less than five nor more than
nine. The number of directors is currently fixed at seven. All directors hold
office until the second annual meeting of stockholders following the annual
meeting of stockholders at which such director was elected, or until their
successors have been duly elected and qualified.
There are no family relationships among our executive officers or
directors.
Committees of the Board of Directors
Shaman's board of directors has an audit committee which is primarily
responsible for annually recommending independent auditors for appointment by
the board, for reviewing the services performed by our independent auditors and
reviewing reports submitted by the independent auditors. The audit committee
includes two directors, Messrs. Titus and Raab.
The board also has a compensation committee, which is comprised of Messrs.
McDade and Bellamy. The compensation committee reviews and approves our general
compensation policies and practices, sets compensation levels for our executive
officers and administers our 1992 Stock Option Plan and other employee benefits
programs.
Director Compensation
Each non-employee is reimbursed for reasonable expenses incurred in
connection with their attendance at such meetings.
The information given below is for historical purposes because each member
of the board of directors has agreed to surrender their outstanding options to
purchase shares of our common stock.
Shaman's non-employee directors receive stock options under our
1992 Stock Option Plan. See "1992 Stock Option Plan."
On June 30, 1998, Mr. Berg received an option to purchase 1,000 shares of
common stock in connection with his initial appointment to the board pursuant to
the automatic grant provision of the 1992 Stock Option Plan. The option has an
exercise price of $67.50 per share, the fair market value per share of the
common stock on the grant date. Mr. Berg has agreed to surrender these options.
On May 15, 1998, Messrs. McDade, Raab, Titus and Bellamy each received an
option grant for 375 shares of common stock under the automatic option grant
provisions of the 1992 Stock Option Plan. These options have an exercise price
per share of $98.75, the fair market value per share of common stock on that
date. Each of these directors has agreed to surrender these options.
On October 20, 1998, the compensation committee, as administrator of the
1992 Stock Option Plan, implemented an option cancellation/regrant program for
certain key consultants and non-employee directors, other than the members of
the compensation committee, holding options under the plan. Pursuant to this
program, each eligible non-employee director was given the opportunity to
surrender his outstanding options under the 1992 Stock Option Plan with exercise
prices in excess of $28.75 per share in return for a new option grant for the
same number of shares but with an exercise price of $28.75 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. 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 would become exercisable for those shares in a series of 12
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<PAGE>
successive equal monthly installments upon the optionee's completion of each
month of service over the one-year period measured from the October 20, 1998
grant date. The option would 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. The following non-employee
directors participated in the October 20, 1998 cancellation/regrant program with
respect to the indicated number of option shares: Mr. Raab, 17,214 shares with a
weighted average exercise price of $110.56 per share; Mr. Titus, 2,914 shares
with a weighted average exercise price of $128.48 per share; Mr. Berg, 1,000
shares with a weighted average exercise price of $67.50 per share. Each of these
directors has agreed to surrender such options.
On May 1, 1997, the board of directors approved a consulting arrangement
with Mr. Titus, one of its non-employee directors pursuant to which he is to
serve as a consultant to Shaman on financing matters and financial operations.
Under this arrangement, Mr. Titus was paid consulting fees in the amount of
$36,000 for the 1998 fiscal year. This arrangement expired in June 1998. As part
of his initial consulting arrangement, Mr. Titus was granted an option to
purchase up to 700 shares of common stock under the discretionary option grant
program in effect under the 1992 Stock Option Plan. Such option has an exercise
price of $107.50 per share, the fair market value of our common stock on the May
22, 1997 grant date of that option and is exercisable in full at any time prior
to May 22, 2007. This option was surrendered on October 20, 1998 under the
option cancellation/regrant program, in return for a new option grant for the
same number of shares but with an exercise price of $28.75 per share. The option
would have become exercisable in a series of 12 successive equal monthly
installments over the one-year period measured from the October 20, 1998 grant
date, however, Mr. Titus has agreed to surrender this option.
In August 1995, we entered into a consulting arrangement with Mr. G. Kirk
Raab, Chairman of the Board. As consideration for special consulting services
Mr. Raab performed under the consulting arrangement, Mr. Raab was paid an annual
consulting fee of $100,000. In addition, he was granted an option for 10,000
shares of common stock on August 21, 1995 with an exercise price per share of
$110.00, the fair market value per share of common stock on that date. The
option was granted under the discretionary option grant provision of the 1992
Stock Option Plan, and the option would have become exercisable in a series of
48 successive equal monthly installments over the four-year period measured from
the August 21, 1995 grant date, provided Mr. Raab continued to render services
to us pursuant to his consulting arrangement. This option was surrendered on
October 20, 1998 under the option cancellation/regrant program, in return for a
new option grant for the same number of shares but with an exercise price of
$28.75 per share. Mr. Raab has agreed to surrender this replacement option. In
addition, in connection with his services as a director and as Chairman of the
Board, Mr. Raab received an annual retainer fee of $60,000, payable after each
annual meeting of stockholders so long as Mr. Raab continued to render services
to us as Chairman of the Board. We paid a total of $66,667 of the consulting
fees in cash and on November 7, 1998, issued 6,783 shares of common stock in
payment of his consulting services for the 1998 fiscal year. Shaman and Mr. Raab
have agreed to terminate the compensation component of his consulting
arrangement and no further payments are to be due under this arrangement. Mr.
Raab still serves as Chairman of the Board.
In January 1999, we entered into a consulting agreement with Mr. Loren D.
Israelsen, a director and officer, pursuant to which he served as interim Chief
Executive Officer of our ShamanBotanicals.com division. Under this agreement,
Mr. Israelsen was paid a total of $30,000 for his services in January and
February 1999. In addition, upon further funding of Shaman, Mr. Israelsen is to
be paid $10,000 in deferred consulting expenses and an additional $150,000
project retainer to help close a corporate deal for the ShamanBotanicals.com
division. Such retainer will be paid in three installments during the third
quarter of 1999. Mr. Israelsen will also receive a success payment for each
corporate partnership as a percentage of the up front fee received from such
partner, which fee varies from two to five percent depending upon the timing of
closing such partnership.
Compensation Committee Interlocks and Insider Participation
During the 1998 fiscal year, Herbert H. McDade and Adrian D.P. Bellamy
served as members of the compensation committee of the board of directors. No
member of the compensation committee was, at any time during the 1998 fiscal
year or at any earlier time, an officer or employee of Shaman. No executive
officer of Shaman serves as a member of the board of directors or compensation
committee of any entity which has one or more executive officers serving as a
member of Shaman's board of directors or compensation committee.
41
<PAGE>
Executive Compensation
The following table sets forth the compensation earned, for services
rendered in all capacities to us, for each of the last three fiscal years by
Shaman's Chief Executive Officer and the four other highest paid executive
officers serving as such at the end of the 1998 fiscal year whose salary and
bonus for that fiscal year was in excess of $100,000. The individuals named in
the table will be referred to in this prospectus as the Named Officers. No other
executive officer who would otherwise have been included in such table on the
basis of fiscal year 1998 salary and bonus resigned or terminated employment
during the year.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------------------------- ---------------
Awards
---------------
-----------------------------------------------------------------------------
Other Securities
Annual Underlying All Other
Salary Compen- Options/ Compen-
Name and Principal Position Year ($)(1) Bonus ($) sation($) SARS (#) sation($)
- ------------------------------- ---- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lisa A. Conte, President, 1998 311,537(2) 3,000(3) -- 102,250(4) --
Chief Executive Officer 1997 312,901(5) 91,689(6) -- 14,750(4) --
and Chief Financial Officer 1996 286,190(7) 53,000(8) -- 5,250(4) --
Gerald M. Reaven, M.D. 1998 243,015 3,000(3) -- 10,750 --
Senior Vice President, 1997 239,114 25,000(9) -- -- --
Medical and Clinical Advisor 1996 227,878 3,000 -- 250 --
Atul S. Khandwala, Ph.D. (10) 1998 177,474 3,000(3) 125,531(11) 2,000 66,356(12)
Former Senior Vice President, 1997 226,031 20,000(9) -- -- 82,217(13)
Development and Chief 1996 187,563 3,000 51,200(14) 6,250 106,399(15)
Regulatory Officer
Steven R. King, Ph.D. 1998 179,329 3,000(3) -- 7,440 --
Senior Vice President, 1997 176,202 40,000(9) -- -- --
Ethnobotany and Conservation 1996 171,822 3,000 -- 2,750 --
James E. Pennington, M.D. (16) 1998 257,544 3,000(3) -- 6,250 --
Former Senior Vice President, 1997 58,490 70,000(17) -- 6,250 --
Clinical Research and 1996 -- -- -- -- --
Chief Medical Officer
Officer
Laurie Peltier(18), 1998 152,654 3,000(3) -- 3,250 25,000(19)
Vice President, Project 1997 87,674 20,000(20) -- 2,750 19,223(21)
Coordination 1996 -- -- -- -- --
</TABLE>
- ------------------
(1) Includes amounts deferred under our Internal Revenue Code Section 401(k)
Plan and Section 125 Plan.
(2) Includes $59,573 and $13,431 attributable to child care costs and family
travel, respectively.
(3) Represents all employees bonus paid in 1998 for achievement of milestones
in 1997.
(4) Ms. Conte has agreed to surrender all of her currently held options.
(5) Includes $61,214 and $27,287 attributable to child care costs and family
travel, respectively.
(6) Includes $75,000 paid in 1998 for achievement of milestones in 1997.
(7) Includes $49,646 and $16,858 attributable to child care costs and family
travel, respectively.
(8) Includes $50,000 paid in 1997 for achievement of milestones in 1996.
(9) Represents bonus paid in 1998 for achievement of milestones in 1997.
(10) We accepted the resignation of Dr. Khandwala effective October 2, 1998.
(11) Represents amount paid in common stock for services rendered.
(12) Includes $3,000 received as a housing subsidy, $2,018 for travel expenses
and $61,338 for indebtedness for which repayment was forgiven.
(13) Includes $16,500 received as a housing subsidy, $1,164 for travel expenses
and $64,553 in indebtedness for which repayment was forgiven.
42
<PAGE>
(14) Represents fees received from consulting services.
(15) Includes $13,445 received as a housing subsidy, $23,746 for moving and
relocation expenses, $1,562 for travel expenses and $67,646 in
indebtedness for which repayment was forgiven.
(16) Dr. Pennington joined us in September 1997. In 1997, he earned $58,490,
based on an annual salary of $255,000. Dr. Pennington was terminated
effective February 19, 1999 due to the elimination of his position in
connection with the our restructuring.
(17) Includes $60,000 sign-on bonus and $10,000 bonus paid in 1998 for
achievement of milestones in 1997.
(18) Ms. Peltier joined us in June 1997. In 1997, she earned $87,674, based
on an annual salary of $150,000.
(19) Represents closing costs on the sale of Ms. Peltier's former residence.
(20) Includes $10,000 sign-on bonus and $10,000 bonus paid in 1998 for
achievement of milestones in 1997.
(21) Represents moving and relocation expenses.
Stock Option and Stock Appreciation Rights under our 1992 Stock Option Plan
The following table contains information concerning the grant of stock
options under our 1992 Stock Option Plan to the Named Officers during the 1998
fiscal year. Except for the limited stock appreciation right described in
footnote (2) below which formed part of the option grant made to each Named
Officer, no stock appreciation rights were granted to such Named Officers during
the 1998 fiscal year.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term (1)
- ------------------------------------------------------- ----------------------------------------------------
% of Total
Number Options
of Granted
Securities to
Underlying Employees Exercise
Options/SARs in Fiscal Price Expiration
Name(*) Granted(#)(2) Year ($/Share)(3) Date 5% 10%
- --------------------- ------------- ---------- ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lisa A. Conte(4) 27,250 14.60% 25.62 09/17/08 $439,059 $1,112,663
75,000 40.19% 25.62 09/17/08 1,208,421 3,062,376
Gerald M. Reaven, M.D. 10,750 5.76% 25.62 09/17/08 173,207 438,941
Atul S. Khandwala, Ph.D. (5) 2,000 1.07% 28.75 10/19/08 4,221 8,535
Steven R. King, Ph.D. 7,440 3.99% 25.62 09/17/08 119,883 303,808
James Pennington, M.D. (6) 6,250 3.35% 25.62 09/17/08 100,702 255,198
Laurie Peltier 2,750 1.47% 25.62 09/17/08 44,309 112,287
500 0.27% 25.62 09/17/08 8,053 20,413
</TABLE>
- -----------------
(1) Potential realizable value is based on assumption that the market price of
the common stock appreciates at the annual rate shown, compounded
annually, from the date of grant until the end of the 10-year option term.
There can be no assurance that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. As of March 31, 1999, the exercise price of all
options was significantly higher than the trading price of the stock on
that date.
(2) Each option has a maximum term of 10 years, subject to earlier termination
in the event of the optionee's cessation of service with Shaman. Except
for the options for 75,000 shares granted to Ms. Conte, 2,000 shares
granted to Mr. Khandwala and 500 shares granted to Ms. Peltier, each
option granted to the Named Officers in fiscal 1998 were part of the
September 18,1998 cancellation/regrant program. Accordingly, to the extent
the cancelled option for the same number of shares was exercisable for any
of those 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 12 successive equal monthly installments upon
his or her completion of each month of service over the one-year period
measured from the September 18, 1998 grant date. The option will become
43
<PAGE>
exercisable for the remaining option shares in one or more installments
over her period of continued service, with each such installment to vest
on the same vesting date in effect for that installment under the
cancelled option. The options for 75,000 shares to Ms. Conte and 500
shares to Ms. Peltier will become exercisable for 12.5% of the option
shares upon completion of 6 months of service measured from the grant
date, and the balance of the option shares will become exercisable in a
series of 42 successive equal monthly installments over the optionee's
period of continued service thereafter. The option for 2,000 shares to Mr.
Khandwala will become exercisable in a series of six successive equal
monthly installments over the optionee's period of continued service
thereafter. However, each of the options granted to the named executive
officers will become immediately exercisable in full upon an acquisition
of Shaman by merger or asset sale, unless the option is assumed by the
successor entity. Each option includes a limited stock appreciation right
which will result in the cancellation of that option, to the extent
exercisable for vested shares, upon the successful completion of a hostile
tender for securities possessing more than 50% of the combined voting
power of our outstanding voting securities. In return for the cancelled
option, the optionee will receive a cash distribution per cancelled option
share equal to the excess of (1) the highest price paid per share of our
common stock in such hostile tender offer over (2) the exercise price
payable per share under the cancelled option.
(3) The exercise price may be paid in cash or in shares of common stock valued
at fair market value on the exercise date, or through a cashless exercise
procedure involving a same-day sale of the purchased shares. We may also
finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares and the federal and state
income tax liability incurred by the optionee in connection with such
exercise. The optionee may be permitted, subject to the approval of the
compensation committee, as administrator of the 1992 Stock Option Plan, to
apply a portion of the shares purchased under the option or to deliver
existing shares of common stock in satisfaction of such tax liability.
(4) Ms. Conte has agreed to surrender all of her currently held options.
(5) We accepted the resignation of Dr. Khandwala effective October 2, 1998.
(6) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with our restructuring.
Option Exercises and Holdings
The following table provides information with respect to the Named
Officers concerning the exercise of options during the 1998 fiscal year and
unexercised options held as of December 31, 1998. No stock appreciation rights
were exercised during such fiscal year, and except for the limited stock
appreciation right described in footnote (2) to the Stock Option/SAR Grants
Table which forms part of each outstanding stock option, no stock appreciation
rights were outstanding at the end of that fiscal year.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<CAPTION>
Value
Realized Value of Unexcercised
(Market In-the-Money Options
price at at FY-End (Market
Shares exercise No. of Securities price of shares at
Acquired date less Underlying Unexercised FY-End less exercise
on exercise Options at FY-End (#) price) ($)(1)
Name Exercise price) ----------------------------- ---------------------------
(#) ($)(2) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ---------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lisa A. Conte(3) -- -- 4,771 101,229 $130,961 $1,265,364
Gerald M. Reaven, M.D. -- -- 2,687 8,062 $33,594 $100,781
Atul S. Khandwala, Ph.D.(4) -- -- 667 1,333 $6,247 $12,493
Steven R. King, Ph.D. -- -- 2,075 5,648 $25,902 $70,598
James Pennington, M.D.(5) -- -- 781 5,469 $9,766 $68,359
Laurie Peltier -- -- 281 2,969 $3,516 $37,106
</TABLE>
44
<PAGE>
- -----------------
(1) Based on the fair market value of our common stock on December 31, 1998 of
$38.12 per share, the Nasdaq National Market trading price at the close of
business that same day. As of March 31, 1999, these options had very
little value since the exercise price of all options was significantly
higher than the trading price of the stock on that date.
(2) Equal to the closing selling price of the purchased shares on the option
exercise date less the exercise price paid for such shares.
(3) Ms. Conte has agreed to surrender all of her currently held options.
(4) We accepted the resignation of Dr. Khandwala effective October 2, 1998.
(5) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with our restructuring.
Option Repricings
We implemented a special option cancellation/regrant program for all of
our employees, including executive officers, holding stock options with an
exercise price per share in excess of the fair market value of our common stock
on the regrant date. The cancellations/regrants were effected on September 18,
1998, and a number of outstanding options with an exercise price in excess of
$25.62 per share were surrendered for cancellation and new options for the same
aggregate number of shares were granted with an exercise price of $25.62 per
share.
The following table sets forth information with respect to each of the
Named Officers concerning his or her participation in the option
cancellation/regrant program effected on September 18, 1998. We have not
implemented any other option cancellation/regrant programs in which our
executive officers have participated.
<TABLE>
<CAPTION>
Number of Market Length of
Securities Price of Exercise Option Term
Underlying Stock at Price at Remaining at
Options Time of Time of Date of
Repriced Repricing Repricing New Repricing
Repricing or or or Exercise or
Name Date Amended(1) Amendment Amendment Price Amendment
- ------------------ --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lisa A. Conte(2) 9/18/98 500 $25.62 $ 70.00 $25.62 6.4 years
9/18/98 6,750 25.62 70.00 25.62 6.4 years
9/18/98 5,000 25.62 137.50 25.62 7.4 years
9/18/98 250 25.62 117.50 25.62 8.1 years
9/18/98 14,750 25.62 100.32 25.62 8.4 years
Gerald M. 9/18/98 10,000 $25.62 $ 72.50 $25.62 6.4 years
Reaven, M.D. 9/18/98 500 25.62 70.00 25.62 6.4 years
9/18/98 250 25.62 117.50 25.62 8.1 years
Atul S. Khandwala, --- --- --- --- --- ---
Ph.D.(3)
Steven R. King, Ph.D. 9/18/98 1,750 $25.62 $105.00 $25.62 6.2 years
9/18/98 1,250 25.62 70.00 25.62 6.4 years
9/18/98 1,190 25.62 70.00 25.62 6.4 years
9/18/98 500 25.62 70.00 25.62 6.4 years
9/18/98 2,500 25.62 137.50 25.62 7.4 years
9/18/98 250 25.62 117.50 25.62 8.1 years
James Pennington, 9/18/98 6,250 $25.62 $121.26 $25.62 9.0 years
M.D.(4)
Laurie Peltier 9/18/98 2,000 $25.62 $118.76 $25.62 8.8 years
9/18/98 750 25.62 118.76 25.62 8.8 years
</TABLE>
- ----------------------
(1) As of March 31, 1999, the exercise price of the options was significantly
higher than the trading price of stock on that date.
(2) Ms. Conte has agreed to surrender all of her currently held options.
(3) We accepted the resignation of Dr. Khandwala effective October 2, 1998.
45
<PAGE>
(4) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with our restructuring.
1992 Stock Option Plan
Our 1992 Stock Option Plan was adopted by the board of directors on
December 16, 1992, and has been amended several times since its adoption. The
1992 Stock Option Plan will terminate on December 31, 2008. As of June 15, 1999,
7,000,000 shares of common stock have been authorized for issuance under the
1992 Stock Option Plan. In addition, on February 1, 2000, the number of shares
of common stock issuable under the 1992 Stock Option Plan will automatically
increase by that number of shares which, when added to the number of shares
subject to then outstanding options under the 1992 Stock Option Plan and the
number of shares available for future option grant under the 1992 Stock Option
Plan immediately prior to such increase, will equal the lesser of (i) 25,000,000
shares or (ii) twenty percent (20%) of the sum of (i) the number of voting
shares of Shaman's capital stock outstanding at that time plus (ii) the number
of shares of common stock subject to the then outstanding options under the 1992
Stock Option Plan plus (iii) the number of shares available for future option
grant under the 1992 Stock Option Plan, after taking such increase into account.
As of July 13, 1999, approximately 27,608 shares of common stock had been issued
under the 1992 Stock Option Plan, 60,970 shares of common stock were subject to
outstanding options, and 6,911,422 shares of common stock were available for
future option grant. The share reserve under the 1992 Stock Option Plan has an
automatic share increase feature.
Subject to adjustment from time to time, the maximum number of shares of
common stock for which any one individual participating in the 1992 Stock Option
Plan may be granted stock options or separately exercisable stock appreciation
rights per calendar year, beginning with the 1999 calendar year, is 5,000,000
shares.
The 1992 Stock Option Plan contains two separate option grant programs:
- A discretionary option grant program under which key employees,
non-employee directors and consultants may be granted options to
purchase shares of common stock at a fixed price per share, and
- An automatic option grant program under which eligible non-employee
directors will automatically receive a special one-time option grant.
Options granted under the discretionary option grant program are either
incentive stock options designed to meet the requirements of Section 422 of the
Internal Revenue Code or non-statutory options not intended to satisfy such
requirements. All grants under the automatic option grant program are
non-statutory options.
The board of directors may terminate the 1992 Stock Option Plan at any
time. Any options outstanding at the time of such termination will continue to
remain outstanding and exercisable in accordance with the terms and provisions
of the instruments evidencing those grants. The 1992 Stock Option Plan will,
however, automatically terminate on the date all shares available for issuance
are issued as vested shares or cancelled pursuant to the exercise, surrender or
cash-out of outstanding options under the plan.
Discretionary Option Grant Program
The compensation committee of the board of directors administers the
discretionary option grant program. The compensation committee, as administrator
of this program, has full authority to determine the eligible individuals who
are to receive option grants and/or stock appreciation rights, the type of
option, either incentive stock option or non-statutory stock option, or stock
appreciation right, either tandem or limited, to be granted, the number of
shares to be covered by each granted option or right, the date or dates on which
the option or right is to become exercisable and the maximum term for which the
option or right is to remain outstanding.
Options granted under this program may either become exercisable in
periodic installments over the individual's period of service or may be
immediately exercisable for all the option shares at the exercise price paid per
share in the event the individual leaves our service prior to vesting in these
shares. Under the discretionary option grant provision of the 1992 Stock Option
Plan, we may grant options, for incentive stock option grants, at an exercise
price equal to the fair market value on the date of grant or, for non-statutory
grants, at an exercise price less than, equal to or greater than the fair market
value of the common stock on the date of grant. No option may be granted with a
term exceeding ten years. However, each such option may be subject to earlier
termination within a designated period following the optionee's cessation of
service with us. Options are not assignable or transferable by the optionee
except by will or the laws of inheritance following the optionee's death. The
46
<PAGE>
optionee will not acquire any shareholder rights with respect to the option
shares until the option is exercised and the purchase price is paid for the
shares.
The option price may be paid in cash or in shares of common stock held by
the optionee. The compensation committee may also permit an option holder to pay
the option price for the purchased shares through a loan payable in installments
over a period of years.
In the event we are acquired, whether by a merger or asset sale, each
option at the time outstanding will automatically become exercisable for all of
the option shares at the time subject to such option and may be exercised for
any or all of such shares. However, an outstanding option will not so accelerate
if it is to be assumed by the successor corporation or the acceleration of such
option is subject to other limitations imposed by the compensation committee at
the time of the grant.
The compensation committee also has full power and authority, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options in the event of a change in control of Shaman, whether by
hostile tender offer for more than 50% of the outstanding voting stock or proxy
contest of the election of board members, so that each such option will become
exercisable, immediately prior to such change in control, for the total number
of shares of common stock at the time subject to such option.
Should an option expire or terminate for any reason prior to exercise in
full, the shares subject to the portion of the option not so exercised will be
available for subsequent grant under the 1992 Stock Option Plan. In addition,
unvested shares issued under the Plan and subsequently repurchased by us at the
option exercise price paid per share will be added back to the share reserve and
will accordingly be available for subsequent issuance under the 1992 Stock
Option Plan. However, shares subject to any option surrendered or cancelled in
accordance with the stock appreciation right provisions of the 1992 Stock Option
Plan will not be available for subsequent grants.
Automatic Option Grant Program
All grants under the automatic option grant program must be in strict
compliance with the express provisions of that program and no administrative
discretion will be exercised by the compensation committee of the board of
directors. Under the automatic option grant program each non-employee director
will receive:
- On February 1, 2000, a one-time option grant if he or she is serving as
a non-employee director at that time. The option will allow each such
non-employee director to purchase that number of shares of common stock
equal to one half of one percent of the number of voting shares of
Shaman's capital stock outstanding at that time; and
- Upon his or her initial appointment or election to the board of
directors, a special one-time option grant for that number of shares of
common stock equal to one half of one percent of the number of voting
shares of Shaman's capital stock outstanding on February 1, 2000,
provided such individual has not previously been employed by Shaman.
Each option granted under the automatic option grant program will have an
exercise price per share equal to the fair market value per share of common
stock on the grant date payable in cash or shares of common stock, and a maximum
term of ten years, subject to earlier termination upon the optionee's cessation
of board service. The grant will become exercisable for the option shares in a
series of 48 successive equal monthly installments over the optionee's period of
continued board service, measured from the grant date. However, the option will
become immediately exercisable for all of the option shares in the event of an
acquisition of Shaman by merger or asset sale or a hostile takeover by tender
offer for more than 50% of the outstanding voting stock or proxy contest for
board membership.
In addition, each option grant will be automatically cancelled upon the
successful completion of a hostile tender offer for more than 50% of Shaman's
outstanding voting securities. In return, the optionee will be entitled to a
cash distribution from Shaman in an amount per cancelled option share equal to
the excess of (1) the highest price per share of common stock paid in connection
with the tender offer over (2) the exercise price payable for such share.
401(k) Plan
We have a tax qualified salary deferral program under Section 401(k) of
the Internal Revenue Code. Under this program, any employee of Shaman may elect
to contribute up to 20% of his or her eligible earnings per pay period, up to
the maximum amount permitted per calendar year under the Federal tax laws. The
contributed earnings are credited to the employee's account under the 401(k)
47
<PAGE>
Plan, and the account is held in trust as part of the plan assets. Each account
under the 401(k) Plan will be adjusted periodically to reflect its share of the
investment gains, earnings and losses of the trust fund, and the employee may
receive an in service loan distribution until the individual leaves Shaman's
employ, dies or becomes disabled. Alternatively, a terminated employee may defer
the distribution of the account balance until age 65. Although the 401(k) Plan
permits us to make contributions to the plan which either match in whole or in
part the salary deferral contributions made by the participants or which are
otherwise to be allocated to the accounts of participants on the basis of their
eligible earnings for the plan year for which such contribution is made, we have
to date made no contributions to the 401(k) Plan.
Employment Contracts, Termination Agreements and Change of Control Agreements
On March 15, 1999, the board of directors approved a change in control
provision concerning severance benefits for key executives. Pursuant to this
provision, should their employment with us terminate within 12 months after a
change in control, for any reason other than for cause, they will be entitled to
receive in one lump sum payment the cash equivalent of 12 months of base salary
plus any benefits to which they would otherwise be entitled. In connection with
these severance benefits, we have agreed to pay the premiums for any COBRA
coverage to which these individuals or their spouse or dependents are entitled
under a company sponsored medical plan after a change in control. In addition,
in the event of a change in control, all of the options held by such key
executives will automatically become fully vested and exercisable. Such
executives' exercisable shares will be fixed at the termination of their
employment, and they will have a period of 90 days from their termination date
to purchase such exercisable shares, as set forth in the stock option agreements
applicable to their options.
On May 27, 1998, we entered into a letter agreement with Stephanie C. Diaz
pursuant to which she served as Vice President, Chief Financial Officer,
commencing in June 1998. Pursuant to the letter agreement, Ms. Diaz was paid an
annual salary of $135,000 in addition to a $15,000 sign-on bonus. In addition,
Ms. Diaz was granted an option for 2,250 shares of common stock on June 30, 1998
with an exercise price per share of $67.50, the fair market value per share of
common stock on that date. The option became exercisable for 12.5% of the option
shares upon completion of six months of employment and for the balance of the
option shares in 42 equal monthly installments over the next 42 months of
employment. In the event Ms. Diaz's employment is terminated other than for
cause, she was to be paid salary and benefits for six months or until she
obtained full-time employment, whichever occurs first. Ms. Diaz resigned from
Shaman effective January 4, 1999. In connection with a revised agreement, Ms.
Diaz received a payment of three months salary and the continuance of the
exercise period under existing options for a period of 12 months following
termination of her employment.
On March 30, 1998, we entered into a letter agreement with John W.S. Chow,
Ph.D. pursuant to which he was served as Vice President, Technical Operations,
commencing in May 1998. Pursuant to the letter agreement, Dr. Chow was to be
paid an annual salary of $165,000 in addition to the sign-on bonus paid to him
in the amount of $10,000, and he was to be reimbursed, in an amount not to
exceed $25,000, for closing costs incurred in the sale of his former residence
in New Jersey and the purchase of his new residence in the Bay Area. Dr. Chow
will, however, be obligated to repay a prorated portion of both the sign-on
bonus and the reimbursed closing costs should he resign from Shaman within two
years after his hire date. Dr. Chow was also granted an option for 2,500 shares
of common stock on May 15, 1998 with an exercise price per share of $98.75, the
fair market value per share of common stock on that date. The option will become
exercisable in a series of monthly installments over the four year period
measured from the grant date as follows: 10% of the option shares will become
exercisable upon his completion of six months of employment measured from such
grant date, an additional 30% of the option shares will become exercisable in a
series of 18 successive equal monthly installments upon his completion of each
additional month of employment over the next 18 months thereafter, and the
remaining 60% of the option shares will become exercisable in a series of 24
successive equal monthly installments upon his completion of each additional
month of employment during the 3rd and 4th years of employment measured from the
grant date. Dr. Chow was also granted an additional 750 shares of common stock
on May 15, 1998 with an exercise price of $98.75, the fair market value per
share of common stock on that date. The 750 share grant will become exercisable
as follows: 375 shares upon Dr. Chow's completion of three years of employment
measured from the grant date, and the remaining 375 shares upon his completion
of four years of employment measured from the grant date. We further agreed to
pay Dr. Chow's reasonable moving expenses in an amount not to exceed $20,000 and
to provide him with an apartment for up to four months at a rental not to exceed
$2,500 per month. Should we terminate Dr. Chow's employment for any reason other
than for cause prior to May 1, 2001, we would continue to pay Dr. Chow's base
salary plus benefits on a monthly basis for up to six months or until Dr. Chow
obtains near full-time employment or consulting of at least 80% of his time,
whichever occurs sooner. We also extended a $300,000 loan to Dr. Chow in
connection with his purchase of a new residence in the Bay Area. See "Certain
Relationships and Related Transactions."
48
<PAGE>
On August 21, 1997, we entered into a letter agreement with James
Pennington, Ph.D. pursuant to which he served as Senior Vice President, Clinical
Research and Chief Medical Officer, commencing October 1997. Pursuant to the
letter agreement, Dr. Pennington was paid an annual salary of $255,000 in
addition to a sign-on bonus paid to him in the amount of $60,000. In addition,
Dr. Pennington was granted, on September 16, 1997, an option to purchase 6,250
shares of common stock at a purchase price of $121.25 per share. The option had
a term of 10 years and was to become exercisable as follows: 12.5% of the option
shares upon Dr. Pennington's completion of six months of service, measured from
the grant date, and the balance of the option shares in 42 successive equal
monthly installments upon his completion of each of the next 42 months of
service thereafter. In the event that Dr. Pennington's employment is terminated
other than for cause, he would be entitled to receive salary and benefits for
nine months, or, if sooner, until Dr. Pennington obtained near full time
employment or consulting of at least 80% of his time. On February 15, 1999, we
entered into a new agreement with Dr. Pennington in connection with his
resignation as Senior Vice President, Clinical Research and Chief Medical
Officer, effective February 19, 1999. Under this agreement, payments were made
to Dr. Pennington until June 1999, at which time he secured employment elsewhere
and his severance payments were terminated. In addition, options previously
granted to him will continue to vest during this period following his
termination.
On February 9, 1996, we entered into a letter agreement with Atul S.
Khandwala, Ph.D. pursuant to which he served as Senior Vice President,
Development, commencing March 1996. Pursuant to the letter agreement, Dr.
Khandwala was paid an annual salary of $225,000. In addition, Dr. Khandwala was
granted an option to purchase 6,000 shares of common stock at a purchase price
of $137.50 per share. The option had a term of ten years and would become
exercisable over a four-year period in a series of 48 successive equal monthly
installments upon Dr. Khandwala's completion of each month of service with
Shaman over the four-year period measured from March 1, 1996. In the event Dr.
Khandwala's employment is terminated by us for any reason, Dr. Khandwala would
receive salary and benefits for a period of six months. On August 24, 1998, we
entered into a severance agreement with Dr. Khandwala in connection with his
resignation as Senior Vice President, Development and Chief Regulatory Officer
on October 2, 1998. Under this agreement, we will continue to forgive the
remaining balance of his loan over the remaining two and one half years of the
loan term, provided that Dr. Khandwala continues to provide consulting services
to us. On October 28, 1998, we entered into an agreement with Dr. Khandwala
pursuant to which he rendered consulting services to us through April 2, 1999.
In connection with this agreement, we issued to Dr. Khandwala 4,366 shares of
common stock and loaned him the funds necessary to satisfy the federal and state
withholding taxes applicable to those shares. In addition, we granted Dr.
Khandwala an option to purchase 2,000 shares of common stock at an exercise
price of $28.75, the fair market value of our common stock on October 20, 1998.
The option will become exercisable in six successive equal monthly installments
on the last day of each month during the consulting period.
None of our other executive officers have employment agreements with us,
and their employment may be terminated at any time at the discretion of the
board of directors. As administrator of the 1992 Stock Option Plan, the
compensation committee has the authority to provide for accelerated vesting of
the shares of common stock subject to any outstanding options held by the Chief
Executive Officer and our other executive officers or any unvested shares
actually held by those individuals under the 1992 Stock Option Plan upon a
change in control of Shaman effected through a successful tender offer for more
than 50% of our outstanding voting securities or through a change in the
majority of the board as a result of one or more contested elections for board
membership.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our Restated Certificate of Incorporation and Bylaws provide for
indemnification of directors, officers and other agents of Shaman. Each of the
current directors and certain officers and agents of Shaman have entered into
separate indemnification agreements with us.
Certain Relationships and Related Transactions
On June 17, 1998, we loaned $300,000 to John W.S. Chow, Ph.D., 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
49
<PAGE>
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 we terminate Dr. Chow's employment for any reason
other than for cause, or 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, including
accrued interest, was approximately $313,188 as of March 31, 1999 and the
highest amount outstanding on that note during the 1998 fiscal year was
$308,729.
In April 1999, we entered into a credit facility and note purchase
agreement with certain investors, key executives and members of the board of
directors, pursuant to which we borrowed $1,008,010. Certain executive officers
and directors participated in this credit agreement, up to a total of $207,000,
including Lisa A. Conte, Steven R. King, John W.S. Chow, Thomas Carlson, G. Kirk
Raab, Adrian D.P. Bellamy, Herbert H. McDade, Jr. and M. David Titus. The
convertible promissory notes issued pursuant to the credit agreement were due
and payable on the earlier of (1) 30 days subsequent to the completion of the
public offering, or (2) December 31, 1999, for any amounts that were not
converted into Series R Preferred Stock. Interest on the convertible promissory
notes was accrued at an annual rate of 12%. The convertible promissory notes
were secured by certain assets of Shaman and were convertible into shares of the
class and series of equity securities offered by us in the first registered
public offering effected by us after the date of the credit agreement, which is
the Series R Preferred Stock. In connection with the credit agreement, we issued
warrants to purchase shares of the same class and series of equity securities as
those into which the debt is convertible. The number of shares subject to these
warrants is equal to 50% of the debt amount divided by the per share sale price
of the shares sold in the public offering. These warrants are exercisable, on a
cashless basis, commencing on April 5, 1999, and through the third anniversary
date of the public offering. The conversion price of the convertible promissory
notes and the exercise price of the warrants is equal to the per share offering
price in the public offering, which was $15 per share. If a public offering is
not completed prior to December 31, 1999, then the exercise price of the
warrants will be the lower of $0.05 per share of our common stock, or one-third
of the five-day weighted average trading price of our common stock for the
period ending three trading days prior to exercise. In September 1999, the
executive officers and directors holding promissory notes converted an aggregate
of $61,290 in principal and interest under the notes into an aggregate of 4,086
shares of Series R Preferred Stock, at a conversion price of $15 per share. The
remaining principal and interest was repaid to the note holders in September
1999.
See "Employment Contracts, Termination Agreements and Change of Control
Agreements" and "Director Compensation" with respect to further transactions
between us and our officers and directors.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to us with respect
to the beneficial ownership of the common stock and Series R Preferred Stock as
of October 31, 1999 by (1) all persons who are beneficial owners of five percent
or more of the common stock or Series R Preferred Stock, as applicable, (2) each
of the selling stockholders, (3) each director of Shaman, (4) the Named Officers
in the Summary Compensation Table above and (5) all current directors and
executive officers as a group. The number of shares beneficially owned by each
director or executive officer is determined under rules of the SEC and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Shares of common stock or Series R Preferred Stock, as applicable,
subject to options or warrants currently exercisable or exercisable within 60
days of October 31, 1999 are included in the number of shares beneficially owned
by the person holding such option or warrant for computing the percentage
ownership of such person, but are not treated as outstanding for computing the
percentage of any other person. Except as otherwise indicated, we believe that
the beneficial owners of the common stock and Series R Preferred Stock, listed
below, based upon such information furnished by such owners, have sole voting
and investment power with respect to such shares, subject to community property
laws where applicable. The selling stockholders do not have to sell all of the
shares of Series R Preferred Stock that they may own.
<TABLE>
<CAPTION>
Shares of Series R Number of Shares
Preferred Stock of Series R
Name and Address of Shares of Owned Prior to Preferred Stock Series R Preferred Stock
Beneficial Owner (1) Common Stock Owned the Offering Offered Shares Owned After Offering
- ------------------------ ------------------------- ---------------- ------------------ -----------------------------
NUMBER PERCENT (2) NUMBER PERCENT (2)
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
M. David Titus 250 * 1,533(3) 1,533 0 *
Herbert McDade, Jr. 0 * 333(4) 333 0 *
G. Kirk Raab 0(5) * 2,526(6) 2,526 0 *
Adrian D.P. Bellamy 0 * 2,526(7) 2,526 0 *
Jeffry Berg 0 * 0 0 0 *
Loren D. Israelsen 45 * 19,000(8) 0 19,000 2.44%
Lisa A. Conte 23,110 * 3,167(9) 2,500 667 *
Steven R. King, Ph.D. 8,153(10) * 500(4) 500 0 *
Thomas Carlson, M.D. 4,667(11) * 400(4) 400 0 *
John W.S. Chow 1,146(12) * 667(4) 667 0 *
Gerald Reaven, M.D. 10,775(13) * 0 0 0 *
Tom White 25 * 100 0 100 *
Loretta L. Su 436(14) * 203(15) 203 0 *
Jim McCamant 20 * 2,279(16) 2,022 257 *
Phalarope Foundation 3,335 * 1,011(17) 1,011 0 *
Lysander, LLC 3,335 * 1,011(17) 1,011 0 *
Vulcan Ventures, Inc.
110-110th Avenue NW, Ste 550
Belleview, WA 98084 160,394(18) 1.58% 118,596(19) 25,263 93,333 12.01%
Lipha S.A.
37 rue Saint-Romain
69379 Lyon cedex 08 87,247 * 133,334 0 133,334 17.16%
Advantage Fund II LLC 57,084 * 2,233(4) 2,233 0 *
Genesee Fund Ltd. Portfolio B 3,749 * 2,767(4) 2,767 0 *
Harry Mittelman IRA Rollover 0 * 833(4) 833 0 *
Harry & Brenda Mittelman 20 * 840(20) 833 7 *
Rhoda Goldman Subtrust No. 2 2,710 * 1,231(21) 1,096 135 *
Rhoda Goldman Subtrust No. 3 2,710 * 1,231(21) 1,096 135 *
AJ Trusts Partnership 2,710 * 1,231(21) 1,096 135 *
JMJ Trusts Partnership 5,690 * 2,585(22) 2,301 284 *
</TABLE>
51
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS (Continued)
<TABLE>
<CAPTION>
Shares of Series R Number of Shares
Preferred Stock of Series R
Name and Address of Shares of Owned Prior to Preferred Stock Series R Preferred Stock
Beneficial Owner (1) Common Stock Owned the Offering Offered Shares Owned After Offering
- ------------------------ ------------------------- ---------------- ------------------ -----------------------------
NUMBER PERCENT (2) NUMBER PERCENT (2)
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D.Goldman 1997 Charitable
Lead Trust 2,710 * 1,231(21) 1,096 135 *
John and Marcia Goldman Trust 4,337 * 1,969(23) 1,753 216 *
John D. Goldman 1997 Trust 1,335 * 617(24) 549 68 *
Douglas E. Goldman Trust 4,337 * 1,969(23) 1,753 216 *
Douglas E. Goldman 1997 Trust 1,335 * 617(24) 549 68 *
Douglas E. Goldman 1997
Charitable Lead Trust 2,710 * 1,231(21) 1,096 135 *
AWD LLC 1,627 * 745(25) 658 87 *
Alcamin Anstalt-Vaduz 100 * 15,021(26) 15,000 21 *
Daniela Peluso 0 * 667(20) 667 0 *
Rozanne Rapozo 4,380 * 2,678(27) 1,011 1,667 *
MMC/GATX Partnership No. 1 13,885(20) * 39,512(20) 39,512 0 *
Michael Tempesta 95 * 16,667 16,667 0 *
Current Officers and
Directors as a Group
(12 Officers) 48,171(28) * 30,752(29) 10,985 19,767 2.54%
</TABLE>
- ---------
* Less than 1.0%
(1) This table is based upon information supplied to us by executive
officers, directors and stockholders owning greater than five percent, as
set forth in filings required by the Securities and Exchange Commission or
as otherwise provided. The address of each officer and director
identified in this table is that of Shaman's executive offices, 213 East
Grand Avenue, South San Francisco, CA 94080.
(2) Percentage of beneficial ownership is calculated assuming 10,138,902
shares of common stock were outstanding as of October 31, 1999, and
777,101 shares of Series R Preferred Stock were outstanding as of October
31, 1999. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock or
Series R Preferred Stock, as applicable, subject to options, warrants or
convertible promissory notes currently exercisable or convertible, or
exercisable or convertible within 60 days of October 31, 1999, are
included in the number of shares outstanding for computing the percentage
of the person holding such option or warrant but are not included in the
number of shares outstanding for computing the percentage of any other
person.
(3) Includes 833 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(4) Represents shares issuable upon exercise of outstanding warrants within 60
days of October 31, 1999.
(5) Does not include 1,500 shares of Series C Preferred Stock which is
convertible to a certain number of shares of common stock, such number
which shall be determined in accordance with Shaman's certificate of
incorporation.
(6) Includes 833 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(7) Includes 833 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(8) Includes 19,000 shares held by LDI Group, of which Mr. Israelsen owns 80%.
(9) Includes 2,500 shares issuable upon exercise of outstanding warrants
within 60 days of October 31, 1999.
(10) Includes 7,390 shares issuable upon exercise of options within 60 days of
October 31, 1999.
52
<PAGE>
(11) Represents shares issuable upon exercise of options within 60 days of
October 31, 1999.
(12) Represents shares issuable upon exercise of options within 60 days of
October 31, 1999.
(13) Includes 10,750 shares issuable upon exercise of options within 60 days of
October 31, 1999.
(14) Includes 336 shares issuable upon exercise of options within 60 days of
October 31, 1999.
(15) Includes 67 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(16) Includes 667 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(17) Includes 333 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(18) Does not include 20,000 shares of Series C Preferred Stock which is
convertible to a certain number of shares of common stock, such number
which shall be determined in accordance with Shaman's certificate of
incorporation.
(19) Includes 8,333 shares issuable upon exercise of outstanding warrants
within 60 days of October 31, 1999.
(20) Includes 833 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(21) Includes 361 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(22) Includes 759 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(23) Includes 578 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(24) Includes 181 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(25) Includes 217 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(26) Includes 5,000 shares issuable upon exercise of outstanding warrants
within 60 days of October 31, 1999.
(27) Includes 333 shares issuable upon exercise of outstanding warrants within
60 days of October 31, 1999.
(28) Represents total shares held by directors and officers listed above.
Includes 23,953 shares issuable upon exercise of options within 60
days of October 31, 1999.
(29) Includes 6,899 shares issuable upon exercise of outstanding warrants
within 60 days of October 31, 1999.
53
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders have advised Shaman that they, or their respective
distributees, pledgees, donees, transferees, or other successors in interest,
intend to sell all or a portion of their shares from time to time in one or more
transactions on the Over the Counter Bulletin Board at prices and at terms
prevailing at the time of sale or at prices related to the then-current market
price, or in negotiated transactions. The shares may be sold by one or more of
the following methods:
1. by block trade, in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and resell a
portion of the block as principal to facilitate the transaction;
2. by purchases by a broker or dealer as principal for subsequent
resale for its own account under this prospectus;
3. through an over-the-counter distribution in accordance with the
rules of the OTC Bulletin Board;
4. through ordinary brokerage transactions and transactions in which
the broker solicits purchasers; and
5. in privately negotiated transactions.
The selling stockholders shall have the sole and absolute discretion not
to accept any purchase offer or make any sale of Series R Preferred Stock or the
common stock issuable upon conversion of the Series R Preferred Stock if they
deem the purchase price to be unsatisfactory at any particular time. Brokers
acting as agents for the selling stockholders will receive usual and customary
commissions for brokerage transactions, and market makers and block purchasers
purchasing the Series R Preferred Stock or common stock will do so for their own
account and at their own risk.
It is possible that the selling stockholders will attempt to sell shares
of Series R Preferred Stock or common stock in block transactions to market
makers or other purchasers at a price per share which may be below the then
market price. In addition, the selling stockholders or their successors in
interest may enter into hedging transactions with broker-dealers who may engage
in short sales of Series R Preferred Stock or common stock in the course of
hedging the positions they assume with a selling stockholder.
There can be no assurance that all or any of the Series R Preferred Stock
or common stock offered by this prospectus will be issued to, or sold by, the
selling stockholders. The selling stockholders and any brokers, dealers or
agents, upon effecting the sale of any of the Series R Preferred Stock or common
stock offered by this prospectus, may be deemed "underwriters" as that term is
defined under the Securities Act or the Exchange Act, or the rules and
regulations thereunder. Shaman has agreed to pay all expenses incident to the
offering and sale of the shares offered and sold to the public by this
prospectus, other than any underwriting commissions or similar charges.
The selling stockholders and any other persons participating in the sale
or distribution of the Series R Preferred Stock or common stock will be subject
to applicable provisions of the Exchange Act and the rules and regulations
thereunder. These rules may limit the timing of purchases and sales of any of
the Series R Preferred Stock or common stock by the selling stockholders or any
other person participating in the distribution. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other market activities with
respect to the Series R Preferred Stock or common stock for a specified period
of time before the distribution begins. These restrictions may reduce the
marketability of the Series R Preferred Stock or common stock.
Shaman has agreed to indemnify the selling stockholders under certain
limited circumstances against potentially significant liabilities, including
liabilities under the Securities Act, or to contribute to payments these selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make. Conversely, the selling
stockholders have agreed to indemnify Shaman and certain related persons under
certain limited circumstances against potentially significant liabilities,
including liabilities under the Securities Act.
Shaman intends to keep the registration statement of which this prospectus
constitutes a part for up to 18 months following the time the registration
statement is declared effective.
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<PAGE>
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 220,000,000 shares of common
stock, par value $0.001 per share, and 2,000,000 shares of preferred stock, par
value $0.001 per share. We have designated 200,000 shares as Series C Preferred
Stock, 106,823 of which are issued and outstanding; 6,285 shares as Series D
Preferred Stock, 1,195 of which are issued and outstanding; and 1,300,000 shares
as Series R Preferred Stock, 777,101 of which are issued and outstanding, and
73,109 shares of Series R Preferred Stock are issuable upon exercise of
warrants.
Common Stock
As of November 10, 1999, there were 12,807,945 shares of common stock
outstanding held of record by approximately 909 stockholders, which we believe
represents approximately 21,000 beneficial stockholders. The holders of common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor. See "Dividend Policy."
In the event of our liquidation, dissolution, sale or winding up, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock then outstanding. The common stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund rights
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessible.
Preferred Stock
Our board of directors has the authority to issue preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without the further
vote or action by the holders of common stock. The approval of the outstanding
shares of existing series of preferred stock would be required for the issuance
of any additional series of preferred stock with rights, preferences or
privileges senior to those of the existing series of preferred stock. The
issuance of preferred stock may delay, defer, or prevent a change in control of
Shaman without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock.
Series C Preferred Stock
As of November 10, 1999, there were 106,823 shares of Series C Preferred
Stock outstanding held of record by 17 stockholders.
Voting. The holders of the Series C Preferred Stock are entitled during
the first year after August 18, 1998, to six votes for each one share of Series
C Preferred Stock held; and thereafter, to one vote for each share of common
stock into which such share of Series C Preferred Stock is convertible on the
record date for the matter to be voted on.
Dividends. Each share of Series C Preferred Stock shall be entitled to
receive cumulative dividends paid semi-annually on May 30 and November 29 of
each year as follows: (1) a stock-on-stock dividend of $10.00 per annum, paid in
arrears, in shares of common stock, valued at 85% of the average closing price
of the common stock for the 10 trading day period ending three trading days
prior to the date on which the dividend is paid; plus (2) a cash amount equaling
0.00005% of Shaman's United States net sales, if any, for the preceding two
calendar quarters of its SP-303/Provir product for the treatment of diarrhea
less $5.00, which is the value of the semi-annual stock dividend. We have agreed
to honor this royalty with our sales of SB-NSF, to the extent sold to the
HIV/AIDS community. If under Delaware law, we are unable to pay the cash amount
of the above described dividend, then the cash portion shall be payable in
shares of common stock, valued at 85% of the average closing price of the common
stock for the 10 day trading period ending three trading days prior to the date
on which the dividend is paid.
Liquidation Preference. In the event of a liquidation, dissolution, sale
or winding up of Shaman, holders of the Series C Preferred Stock shall be
entitled to receive, prior and in preference to the holders of the common stock,
the Series D Preferred Stock and the Series R Preferred Stock, an amount equal
to $100 per share, plus any accrued and unpaid dividends.
55
<PAGE>
Conversion. Each share of Series C Convertible Preferred Stock shall be
convertible, at any time commencing on August 18, 1999 at the election of each
holder, and automatically on August 18, 2004, into the greater of (1) 0.8333
shares of common stock or (2) such number of shares of common stock as equals
$100 divided by 85% of the average closing price of the common stock for the 10
trading day period ending three trading days prior to the date of conversion.
Redemption. The Series C Preferred Stock is not redeemable.
Priority. The Series C Preferred Stock ranks senior to the common stock,
the Series D Preferred Stock and the Series R Preferred Stock as to dividends,
distributions and distribution of assets upon liquidation, dissolution or
winding up of Shaman.
Series D Preferred Stock
As of November 10, 1999, there were 1,195 shares of Series D Preferred
Stock outstanding held of record by seven stockholders.
Voting. Except as otherwise required by law or expressly provided
in the certificate of incorporation, the Series D Preferred Stock is not
entitled to vote on any matter.
Dividends. Each share of Series D Preferred Stock shall be entitled to
receive cumulative dividends at the rate of $55 per year payable quarterly
commencing on February 1, 1999. These dividends may be paid in cash or, subject
to certain limitations, any combination of cash and shares of common stock.
Dividends not paid on the due date shall accrue interest until paid at the rate
of 12% per annum. If the dividend is paid in shares of common stock, the number
of shares to be delivered to each holder of Series D Preferred Stock shall be
determined by dividing the aggregate dollar amount of the dividend payable to
each such holder by an amount equal to 90% of the outstanding price of the
common stock during 12 trading days ending one day prior to the date of the
conversion.
Liquidation Preference. In the event of a liquidation, dissolution, sale
or winding up of Shaman, holders of the Series D Preferred Stock shall be
entitled to receive, prior and in preference to the holders of the common stock
and the Series R Preferred Stock, but subordinate to the holders of the Series C
Preferred Stock, an amount equal to $1,000 per share, plus any accrued and
unpaid dividends.
Conversion. Each share of Series D Convertible Preferred Stock shall be
convertible at the election of the holder, at any time commencing on the date on
which any shares of Series D Preferred Stock were first issued, into a number of
shares of common stock equal to $1,000 plus any accrued but unpaid dividends and
interest on the Series D Preferred Stock, divided by 90% of the lowest trading
price of the common stock during the 12 trading days ending one day prior to the
date of the conversion.
The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an Optional Redemption Event, as defined in our
Certificate of Incorporation. In connection therewith, on February 4, 1999, we
issued a Control Notice, as defined in our Certificate of Incorporation, 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 72% of the lowest trading price during
a designated time period prior to the conversion.
Redemption. The holders of the Series D Preferred Stock may require that
we redeem all or part of their shares if any of the following optional
redemption events occur: (1) for five consecutive trading days there is no
reported sale price of our common stock on Nasdaq, the New York Stock Exchange
or the American Stock Exchange, (2) our common stock ceases to be listed on
Nasdaq, the NYSE or the AMEX, (3) we merge or effect another transaction in
which we sell all or substantially all of our assets or our stockholders prior
to the transaction do not collectively own at least 51% of the voting securities
of the surviving corporation, or the common stock of the surviving corporation
is not listed on Nasdaq, the NYSE or the AMEX, (4) we adopt changes to our
certificate of incorporation that materially and adversely affect the rights of
the holders of the Series D Preferred Stock in a different and more adverse
manner than they affect the rights of the holders of the common stock, (5) if
the holders are unable for a period ranging from 20 to 30 days to sell their
shares of common stock issuable upon conversion of the Series D Preferred Stock
pursuant to an effective registration statement, or (6) if we fail or default in
performing any material obligation to a holder of Series D Preferred Stock under
the terms of our certificate of incorporation or the Series D Preferred Stock
56
<PAGE>
purchase agreement. The per share redemption price is $1,000 plus 118% of
accrued but unpaid dividends on each share of Series D Preferred Stock.
We may under certain circumstances issue a control notice upon the
occurrence of any of the three optional redemption events described in clauses
(1), (2) and (3) above, which will prevent the requirement that we redeem the
shares. The issuance of this control notice has the effect of increasing the
annual cumulative dividend payable to the Series D Preferred stockholders to
$180 per share, if the redemption event was one of those described in clause (1)
or (2) above, or $300 per share for the redemption event described in clause (3)
above, and adjusting the conversion price of the Series D Preferred Stock to 72%
of the lowest trading price for a designated period prior to the conversion, if
the redemption event was one of those described in clause (1) or (2) above, or
63% of the lowest trading price for a designated period prior to the conversion,
for the redemption event described in clause (3) above.
The delisting of our common stock from The Nasdaq National Market in
February 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued the control notice to the holders of
the Series D Preferred Stock as required under our charter that prevented the
redemption of the Series D Preferred Stock. The notice preventing the redemption
of the Series D Preferred Stock 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 AMEX or the NYSE.
Priority. The Series D Preferred Stock ranks senior to the common stock
and the Series R Preferred Stock but junior to the Series C Preferred Stock as
to dividends, distributions and distributions of assets upon liquidation,
dissolution or winding up of Shaman.
Series R Preferred Stock
As of November 10, 1999, there were 777,101 shares of Series R Preferred
Stock outstanding.
Voting. The holders of the Series R Preferred Stock are entitled
to 100 votes for each share of Series R Preferred Stock held.
Dividends. Subject to preferences that may be applicable to outstanding
preferred stock, the holders of Series R Preferred Stock are entitled to receive
ratably with the holders of the common stock, such dividends, if any, as may be
declared by the board of directors out of funds legally available therefor and
will participate with the common stock pro rata on an as-converted to common
stock basis, based on a conversion ratio of 150 shares of common stock for each
share of Series R Preferred Stock. See "Dividend Policy."
Liquidation Preference. In the event of a liquidation, dissolution, sale
or winding up of Shaman, holders of the Series R Preferred Stock shall be
entitled to receive, prior and in preference to the holders of the common stock,
but subordinate to the holders of the Series C and Series D Preferred Stock, an
amount equal to $15.00 per share, plus any accrued and unpaid dividends.
Conversion. The Series R Preferred Stock is not convertible until February
1, 2000. On that date, each share of Series R Preferred Stock shall be
automatically converted into a number of shares of common stock equal to $15.00
divided by the lower of (1) $0.10, or (2) the per share price that is equal to
10% of the average closing sales price of our common stock for the 10 trading
day period ending three trading days prior to February 1, 2000.
If on February 1, 2000, as a result of the fluctuating conversion price,
we do not have enough shares of common stock authorized under our certificate of
incorporation to effect the conversion of all outstanding shares of Series R
Preferred Stock and our other series of preferred stock, only the portion of the
Series R Preferred Stock, if any, for which there are adequate common stock
shares, after taking into account the common stock shares necessary to effect
the conversion of any then outstanding shares of Series C Preferred Stock and
Series D Preferred Stock, will be converted, allocated pro rata among the
holders of the Series R Preferred Stock. The remaining shares of Series R
Preferred Stock will remain outstanding until three trading days after an
adequate number of common stock shares are authorized to effect the conversion
of these shares under our certificate of incorporation. After February 1, 2000,
if any shares of Series R Preferred Stock remain outstanding, the conversion
price will remain the same as the conversion price in effect on February 1,
2000, subject to adjustments for stock splits, stock dividends and other
recapitalizations. Based on the current trading price of our common stock, we do
not have enough common stock available to issue common stock upon conversion of
the outstanding shares of Series R Preferred Stock and will need to authorize
additional shares of common stock to effect the conversion of all shares of our
57
<PAGE>
outstanding preferred stock, which will require stockholder approval. We
anticipate submitting to the stockholders, prior to the conversion date of the
Series R Preferred Stock, a proposal to increase the number of shares of common
stock authorized to be issued to a number adequate to effect the conversion of
all of the outstanding preferred stock, including the Series R Preferred Stock.
If the stockholders do not approve such an increase in the authorized common
stock, all or a portion of the Series R Preferred Stock will likely not convert
on February 1, 2000 and may remain outstanding indefinitely after February 1,
2000 until we are able to amend our certificate of incorporation to authorize
additional shares of common stock to effect this conversion. The delay in
conversion of or the indefinite inability to convert all or a portion of the
Series R Preferred Stock, or the Series C or Series D Preferred Stock, may
decrease the liquidity and the market price of the preferred stock.
Redemption. The Series R Preferred Stock is not redeemable.
Priority. The Series R Preferred Stock ranks equally with the common stock
and junior to the Series C and Series D Preferred Stock as to dividends, and
ranks senior to the common stock but junior to the Series C and Series D
Preferred Stock as to distributions of assets upon liquidation, dissolution or
winding up of Shaman.
Warrants
As of November 10, 1999, there were outstanding warrants to purchase an
aggregate of 104,833 shares of common stock at a weighted average exercise price
of $115.20 per share, and outstanding warrants to purchase an aggregate of
73,109 shares of Series R Preferred Stock at an exercise price of $15.00 per
share.
Between September 1990 and September 1993, we issued, in connection with
equipment lease financings, warrants to purchase 4,585 shares of common stock at
prices ranging from $48.00 to $216.60 per share. These warrants expire between
September 2000 and September 2002.
In July 1996, we issued to one investor warrants to purchase an aggregate
of 27,500 shares of common stock. These warrants are exercisable through July
26, 2002 at an exercise price of $203.68 per share. We have filed a registration
statement with the SEC for the resale of shares issued upon exercise of these
warrants, which registration statement was declared effective on November 30,
1998.
In May 1997, we issued, in connection with a debt financing, warrants to
purchase 10,000 shares of common stock at an exercise price of $125.00 per
share. These warrants expire on May 7, 2007.
In March 1998, we issued to certain investors warrants to purchase an
aggregate of 6,875 shares of common stock. These warrants are exercisable
through March 18, 2001 at an exercise price of $150.00 per share. We have filed
a registration statement with the SEC for the resale of shares issued upon
exercise of these warrants, which registration statement was declared effective
on July 10, 1998.
In June 1998, we issued to certain investors warrants to purchase an
aggregate of 17,500 shares of common stock. These warrants are exercisable
through June 22, 2003 at an exercise price per share equal to 115% of the
average trading price of the common stock during specified measurement periods.
These warrants provide for adjustment of the number of shares of common stock
issuable upon exercise thereof, including upon the distribution of certain
dividends, upon our reorganization, reclassification or merger, or upon the
division or combination of our common stock. We have filed a registration
statement with the SEC for the resale of shares issued upon exercise of these
warrants, which registration statement was declared effective on July 10, 1998.
In December 1998, we issued to certain investors warrants to purchase an
aggregate of 38,373 shares of common stock. These warrants are exercisable
through December 10, 2003 at an exercise price per share equal to $61.40 per
share.
In April 1999, we issued to MMC/GATX Partnership No. 1 in connection with
the amendment of a loan agreement with GATX a cashless exercise warrant to
purchase 39,512 shares of the Series R Preferred Stock. This Warrant is
exercisable commencing July 16, 1999 and through the seventh anniversary of such
date. The per share exercise price is $15.00.
In April 1999, we also issued to various lenders who were either existing
stockholders, key executives or directors cashless exercise warrants to purchase
33,597 shares of Series R Preferred Stock. These warrants are exercisable
commencing August 23, 1999 and through the third anniversary of such date. The
per share exercise price is $15.00.
58
<PAGE>
As long as any of the foregoing warrants remain unexercised and
outstanding, the holders thereof will have the opportunity to profit from an
increase in the market price of the common stock, if any, without assuming the
risk of ownership.
Registration Rights
We have granted to one investor certain demand rights and rights to be
included in registrations effected by Shaman to register shares of common stock
currently owned or in the future acquired by such investor pursuant to a stock
purchase agreement between us and such investor. The investor has waived these
registration rights with respect to this offering.
We have granted to holders of warrants and convertible notes issued in
connection with a credit facility and note purchase agreement certain demand
registration rights covering the shares of Series R Preferred Stock underlying
these warrants and notes. This prospectus is part of the registration statement
filed by Shaman to register such shares of Series R Preferred Stock in
connection with such registration rights.
Anti-Takeover Effects of Provisions of Certificate of Incorporation and Bylaws
Shaman is subject to the provisions of Section 203 of the Delaware General
Corporation Law statute. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the person becomes an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.
Our Certificate of Incorporation divides the board of directors into two
classes with staggered two-year terms. Under our by-laws, any vacancy on the
board of directors, including a vacancy resulting from an enlargement of the
board of directors, may be filled by a majority of the directors then in office.
The classification of the board of directors and the limitation on filling of
vacancies could make it more difficult for a third party to acquire, or
discourage a third party from acquiring, control of Shaman.
Transfer Agent and Registrar
EquiServe, L.P. is the transfer agent and registrar for our Series R
Preferred Stock and common stock.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of our common stock. In addition, an
active public market for our common stock may not continue in the future.
As of November 10, 1999, there were approximately 12,807,945 shares of
common stock outstanding, 54,318,182 shares of common stock issuable upon
conversion of outstanding shares of Series D Preferred Stock, assuming a
conversion price, which is based on the common stock market price as of November
10, 1999, of $0.022 per share, and 104,833 shares of common stock issuable upon
exercise of outstanding warrants, all of which are freely tradable without
restriction, except for restrictions imposed on the resale of shares held by our
affiliates, as defined in the Securities Act. An additional 333,821,875 shares
of common stock are issuable upon conversion of the Series C Preferred Stock,
assuming a conversion price, which is based on the common stock market price as
of November 10, 1999, of $0.032 per share, all of which are freely tradable
without restriction. There are also 777,101 shares of Series R Preferred Stock
outstanding and 73,109 shares of Series R Preferred Stock are issuable upon
exercise of outstanding warrants. The Series R Preferred Stock is convertible
into common stock on February 1, 2000. On that date, each share of Series R
Preferred Stock will automatically convert into a number of shares of common
stock equal to $15.00 divided by the lower of (1) $0.10, or (2) a per share
price that is equal to 10% of the average closing sales price of our common
stock for the 10 trading days ending three trading days prior to February 1,
2000. Assuming a conversion price of $0.004 per share, upon conversion of the
Series R Preferred Stock on February 1, 2000, 3,188,287,500 shares of common
stock will be issued, or issuable pursuant to warrants, that will be immediately
freely tradable without restriction, other than by our affiliates.
60
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following summarizes certain federal income tax consequences of the
purchase of Series R Preferred Stock or the common stock issuable upon
conversion of the Series R Preferred Stock. This summary is based on current
law, which is subject to change at any time, possibly with retroactive effect.
This summary is not a complete discussion of all federal income tax consequences
of the purchase of Series R Preferred Stock or the common stock issuable upon
conversion of the Series R Preferred Stock, and, in particular, may not address
federal income tax consequences applicable to stockholders subject to special
treatment under federal income tax law. In addition, this summary does not
address the tax consequences of the rights offering under applicable state,
local or foreign tax laws. This discussion assumes that you purchase Series R
Preferred Stock or the common stock issuable upon conversion of the Series R
Preferred Stock for cash and that shares of Shaman stock you purchase pursuant
to this prospectus will constitute capital assets in your hands.
We have not sought, nor do we intend to seek, any ruling from the IRS or an
opinion of counsel related to the tax matters described below. This discussion
is included for your general information only. You should consult your tax
advisor to determine the tax consequences to you of the purchase of Series R
Preferred Stock or the common stock issuable upon conversion of the Series R
Preferred Stock in light of your particular circumstances, including any state,
local and foreign tax consequences.
Taxation of Stockholders
Purchase of Series R Preferred Stock or common stock: You will not
recognize any gain or other income upon the purchase of shares of Series R
Preferred Stock or common stock.
Tax basis of shares: Your tax basis in each share of Series R Preferred
Stock or common stock you purchase will equal your cost for such share.
Holding period of shares: Your holding period for the shares of Series R
Preferred Stock or common stock you purchase will commence the day after you
purchase such share.
Conversion of Series R Preferred Stock to common stock: There is some risk
that the Internal Revenue Service would argue that the conversion of the Series
R Preferred Stock to common stock is properly characterized as a taxable stock
dividend rather than a nontaxable event. If the conversion were treated as a
taxable stock dividend, the Internal Revenue Service may argue that the amount
of the dividend is equal to the amount of the discount from the stated trading
price of the common stock on which the conversion is based. Because the Series R
Preferred Stock will convert automatically and in the full to common stock, and
because the Series R Preferred Stock will not have any declared and unpaid
dividends as of the time the conversion occurs, Shaman anticipates that the
conversion of the Series R Preferred Stock will qualify as a nontaxable event.
If the conversion qualifies as a nontaxable event, your tax basis in your Series
R Preferred Stock will be allocated among the shares of common stock you receive
upon conversion, and the holding period of the shares of common stock will
include your holding period you had in the Series R Preferred Stock prior to
conversion.
LEGAL MATTERS
Bay Venture Counsel, LLP will deliver an opinion to us about the
validity of the issuance of the shares of our Series R Preferred Stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998, as set forth in their report, which contains an
explanatory paragraph describing conditions that raise substantial doubt about
our ability to continue as a going concern as described in Note 1 to the
financial statements. We have included our financial statements in this
prospectus and in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
61
<PAGE>
SHAMAN PHARMACEUTICALS, INC
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors..............................................F-2
Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999
(unaudited)...............................................................F-3
Statements of Operations for the years ended December 31, 1996, 1997,
and 1998 and nine months ended September 30, 1998 and 1999 (unaudited)....F-4
Statements of Stockholders' Equity for the years ended December 31, 1996,
1997, 1998 and nine months ended September 30, 1999 (unaudited)...........F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997,
1998 and nine months ended September 30, 1998 and 1999 (unaudited)........F-8
Notes to Financial Statements...............................................F-9
F-1
<PAGE>
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.
Palo Alto, California
February 11, 1999, except for Note 10, as to which the date is June 22, 1999
ERNST & YOUNG LLP
F-2
<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
BALANCE SHEETS
December 31, September 30,
---------------------------- -------------
1997 1998 1999
----------- ----------- -------------
ASSETS (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 11,340,702 $ 5,887,496 $ 3,991,495
Short-term investments 10,079,943 3,277,197 -
Accounts receivable - - 12,641
Inventory - - 1,029,659
Amounts due from related parties 192,551 208,898 163,028
Prepaid expenses and other current assets 553,507 283,804 1,148,736
----------- ----------- -----------
Total current assets 22,166,703 9,657,395 6,345,559
Property and equipment:
Laboratory equipment 6,211,182 6,336,564 1,089,055
Computer equipment and furniture 1,158,869 1,474,914 382,560
Leasehold improvements 7,351,827 7,266,066 7,179,564
----------- ----------- -----------
14,721,878 15,077,544 8,651,179
Less: accumulated depreciation and amortization (10,749,738) (11,963,876) (6,666,113)
----------- ----------- -----------
3,972,140 3,113,668 1,985,066
Other assets 613,657 368,080 308,080
----------- ----------- -----------
Total assets $ 26,752,500 $ 13,139,143 $ 8,638,705
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 925,701 $ 1,515,230 $ 1,513,948
Accrued clinical trial costs 1,689,659 2,051,134 970,334
Accrued professional fees 718,625 948,374 1,213,971
Accrued compensation 368,272 326,797 183,775
Accrued restructuring costs - - 1,277,209
Advances--contract research 1,133,605 968,750 -
Current installments of long-term obligations 2,783,976 2,803,861 1,837,801
----------- ----------- -----------
Total current liabilities 7,619,838 8,614,146 6,997,038
Long-term obligations, excluding current installments 4,017,979 2,415,137 1,256,899
Senior convertible notes 9,967,044 - -
Stockholders' equity:
Preferred stock, $0.001 par value; issuable in
series; 1,000,000 shares and 2,000,000 shares
authorized at December 31, 1998 and September 30, 1999,
respectively; 400,000, 519,533 and 886,800
convertible shares issued and outstanding at December
31, 1997 and 1998, and September 30, 1999, respectively
(Liquidation preference at December 31, 1997 and
1998, and September 30, 1999 -- $3,258,800, $18,429,310
and $23,710,915, respectively) 400 520 887
Common stock, $0.001 par value; 40,000,000 shares
and 220,000,000 authorized at December 31, 1998 and
September 30, 1999, respectively; 889,802 shares,
1,519,147 shares and 6,543,868 shares issued and
outstanding at December 31, 1997 and 1998, and
September 30, 1999, respectively 890 1,519 6,543
Additional paid-in capital 117,181,430 152,727,444 168,935,581
Deferred compensation and other adjustments (124,910) (185,850) (27,469)
Accumulated deficit (111,910,171) (150,433,773) (168,530,774)
------------ ------------ ------------
Total stockholders' equity 5,147,639 2,109,860 384,768
------------- ------------- ------------
Total liabilities and stockholders' equity $ 26,752,500 $ 13,139,143 $ 8,638,705
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, Nine Months Ended September 30,
----------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ - $ - $ - $ - $ 12,608
Collaborative agreements 3,406,250 3,500,000 2,659,856 2,284,855 350,000
------------- ------------- ------------- ------------- -------------
Total revenue $ 3,406,250 $ 3,500,000 $ 2,659,856 $ 2,284,855 $ 362,608
Operating expenses:
Cost of goods sold - - - - 3,965
Research and development 19,138,190 24,140,246 32,393,374 24,277,208 5,204,926
Marketing, general and administrative 3,537,157 4,833,489 5,565,066 4,273,019 4,688,244
Restructuring costs - - - - 3,038,037
------------- ------------- ------------- ------------- -------------
Total operating expenses 22,675,347 28,973,735 37,958,440 28,550,227 12,935,172
------------- ------------- ------------- ------------- -------------
Loss from operations (19,269,097) (25,473,735) (35,298,584) (26,265,372) (12,572,564)
Interest income 1,082,618 1,217,884 550,227 444,484 119,973
Interest expense (603,330) (5,032,684) (2,033,004) (1,798,921) (649,902)
------------- ------------- ------------- ------------- -------------
Net loss (18,789,809) (29,288,535) (36,781,361) (27,619,809) (13,102,493)
Deemed dividend on Preferred Stock - - (1,742,241) (678,636) (4,994,508)
------------- ------------- ------------- ------------- -------------
Net loss applicable to
Common Stockholders $(18,789,809) $(29,288,535) $(38,523,602) $(28,298,445) $(18,097,001)
============= ============= ============= ============= =============
Basic and diluted net loss per
common share $ (27.85) $ (34.44) $ (38.31) $ (30.76) $ (6.57)
============= ============= ============= ============= =============
Shares used in calculation of
basic and diluted net loss
per common share 674,800 850,500 1,005,700 919,550 2,755,616
============= ============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1997, and 1998
and Nine Months Ended September 30, 1999 (unaudited)
Deferred
Convertible Additional Compensation Total
Preferred Common Paid-In and Other Accumulated Stockholders'
Stock Stock Capital Adjustments Deficit Equity
------------ ----------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - $ 663 $ 88,183,521 $ (146,956) $ (63,831,827) $ 24,205,401
Issuance of 13,699 shares
of common stock upon
the exercise of stock options - 14 440,066 - - 440,080
Issuance of 400,000 shares
of series A convertible
preferred stock 400 - 3,057,823 - - 3,058,223
Issuance of 19,446 shares
of common stock in
connection with
Lipha/Merck collaboration - 19 2,972,203 - - 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 400 696 94,617,680 (20,250) (82,621,636) 11,976,890
Issuance of 974 shares
of common stock upon
the exercise of stock options - 1 64,155 - - 64,156
Issuance of 100,000 shares
of common stock in connection
with a registered direct public
offering in January 1997, net
of issuance costs of $.93 million - 100 8,070,310 - - 8,070,410
Issuance of 80,000 shares
of common stock in connection
with a registered direct public
offering in April 1997, net
of issuance costs of $.13 million - 80 7,824,174 - - 7,824,254
Issuance of 10,039 shares
of common stock in connection
with Lipha/Merck collaboration - 10 1,492,529 - - 1,492,539
Issuance of 2,755 shares
of common stock upon conversion
of senior convertible notes in
November 1997 - 3 223,160 - - 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 $ 890 $117,181,430 $ (124,910) $(111,910,171) $ 5,147,639
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1997, and 1998
and Nine Months Ended September 30, 1999 (unaudited)
Deferred
Convertible Additional Compensation Total
Preferred Common Paid-In and Other Accumulated Stockholders'
Stock Stock Capital Adjustments Deficit Equity
------------ ----------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 400 $ 890 $117,181,430 $ (124,910) $(111,910,171) $ 5,147,639
Issuance of 792 shares
of common stock upon the
exercise of stock options - 1 21,714 - - 21,715
Issuance of 3,116 shares
of common stock to employees
from the 1998 special
issuance plan - 3 80,756 - - 80,759
Issuance of 37,360 shares
of common stock to consultants
for consulting services rendered - 37 1,074,073 - - 1,074,110
Sale of 57,762 shares
of common stock in connection
with Lipha/Merck collaboration - 58 2,499,942 - - 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 10,082 shares
of common stock in connection
with senior convertible notes
quarterly interest payment - 10 650,531 - - 650,541
Issuance of 53,810 shares
of common stock upon the
conversion of 1,209 shares
of Series D Convertible
Preferred Stock (1) 54 (53) - - -
Issuance of 128,563 shares
of common stock upon the
conversion of senior
convertible notes - 129 5,453,055 - - 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 93,077 shares
of common stock upon the
conversion of 24,922 shares
of Series C Convertible
Preferred Stock (25) 93 (68) - - -
Issuance of 4,179 shares
of common stock in
payment of Dividends on
Series C Convertible
Preferred Stock - 4 (4) - - -
Sale of 240,604 shares
of common stock in connection
with the private placement
offering in December 1998,
net of issuance costs of
$.13 million - 240 7,086,704 - - 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 $ 1,519 $152,727,444 $ (185,850) $(150,433,773) $ 2,109,860
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1997, and 1998
and Nine Months Ended September 30, 1999 (unaudited)
Deferred
Convertible Additional Compensation Total
Preferred Common Paid-In and Other Accumulated Stockholders'
Stock Stock Capital Adjustments Deficit Equity
------------ ----------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 520 $ 1,519 $ 152,727,444 $ (185,850) $(150,433,773) $ 2,109,860
Issuance of 34 shares of
common stock upon the
exercise of stock options(unaudited) - - 160 - - 160
Issuance of 27,157 shares
of common stock upon the
conversion of 400,000 shares
of Series A Convertible
Preferred Stock (unaudited) (400) 27 373 - - -
Issuance of 2,227,570 shares
of common stock upon the
conversion of 2,371 shares
of Series D Convertible
Preferred Stock, including
accured dividends and arrearage
interest (unaudited) (2) 2,228 31,133 - - 33,359
Issuance of 2,426,722 shares of
common stock upon the
conversion of 6,645 shares of
Series C Convertible Preferred
Stock (unaudited) (7) 2,427 (2,420) - - -
Issuance of 322,664 shares of
common stock in payment of
Dividends on Series C Convertible
Preferred Stock (unaudited) - 322 (322) - - -
Payment for the value of
fractional shares from the
conversion of senior convertible
notes into Series D Convertible
Preferred Stock (unaudited) - - (2,225) - - (2,225)
Issuance of 20,176 shares of
common stock in payment of
Dividends on Series D Convertible
Preferred Stock (unaudited) - 20 5,024 - - 5,044
Issuance of 16,667 shasres of
Series R Convertible Preferred
Stock in connection with settlement
of litigation (unadutied) 16 - 249,989 - - 250,005
Issuance of 407,847 shares of
Series R Convertible Preferred
Stock in connection with the
rights offering, net of issuance
costs $5.7 million (unaudited) 408 - 5,673,680 - - 5,674,088
Issuance of 175,968 shares of
Series R Convertible Preferred
Stock to consultants and contractors
for services rendered (unaudited) 176 - 2,639,344 - - 2,639,520
Issuance of 133,334 shares of
Series R Convertible Preferred
Stock to Lipha S.A. in partial
settlement of claims (unaudited) 133 - 1,999,877 - - 2,000,010
Issuance of 43,285 shares of
Series R Convertible Preferred
upon conversion of convertible
promissory notes (unaudited) 43 - 649,232 - - 649,275
Value ascribed to the
in-the-money conversion option
of Series D Convertible
Preferred Stock (unaudited) - - 2,273,614 - - 2,273,614
Value ascribed to the
in-the-money conversion of
Series R Convertible Preferred
Stock (unaudited) - - 2,694,713 - - 2,694,713
Value ascribed to warrants issued
in conjunction with Series R
Convertible Preferred Stock
(unaudited) - - 26,180 - - 26,180
Deferred compensation related
to granting of options to
non-employees, net of
amortization and reversals
(unaudited) - - (30,215) 145,964 - 115,749
Change in unrealized gain/loss
on available-for-sale
securities (unaudited) - - - 12,417 - 12,417
Net loss (unaudited) - - - - (18,097,001) (18,097,001)
---------- ---------- ------------ ------------ ------------- ------------
Balance at September
30, 1999 (unaudited) $ 887 $ 6,543 $168,935,581 $ (27,469) $(168,530,774) $ (384,768)
========== ========== ============ ============ ============= ============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Years ended December 31, Nine Months Ended September 30,
----------------------------------------------- ------------------------------
1996 1997 1998 1998 1999
-------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss applicable to
Common Shareholders $ (18,789,809) $ (29,288,535) $ (38,523,602) $ (28,298,438) $ (18,097,001)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 2,245,860 1,718,167 1,214,139 985,697 573,405
Amortization of warrants
and deferred equity costs 117,231 390,729 286,664 492,588 2,891,115
(Gain) loss on disposal of fixed assets - - 19,834 19,834 (43,025)
Interest expense on issuance of
senior convertible notes - 3,692,140 - - -
Deemed dividend on Preferred Stock - - 1,742,241 - 2,381,144
Issuance of common stock to
consultants for services rendered - - 1,074,110 - -
Issuance of Series R Preferred Stock
to consultants and contractors for
services rendered - - - - 2,639,520
Issuance of Series R Preferred Stock
in connection with settlement of
litigation - - - - 250,005
Issuance of Series R Preferred Stock
to Lipha S.A. in partial settlement
of claims - - - - 2,000,010
Series C issuance expense - - - 678,636 -
Other compensation - - 80,759 72,145 -
Payment of interest in common stock - - 328,743 569,229 38,401
Changes in operating assets and liabilities:
Trade accounts receivable - - - - (12,641)
Inventory - - - - (1,029,659)
Prepaid expenses, current assets and
other assets (80,148) 628,198 755,280 (546,912) (804,932)
Accounts payable, accrued professional
fees, accrued compensation, accrued
clinical trial costs, accrued restructuring
costs and contract research advances 2,021,220 (748,327) 974,423 1,860,281 (651,048)
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (14,485,646) (23,607,628) (32,047,409) (24,166,940) (9,864,706)
------------ ------------ ------------ ------------ ------------
Investing activities:
Purchases of available-for-sale investments (10,872,811) (14,562,627) (5,255,947) (1,999,049) -
Maturities of available-for-sale investments 26,325,454 4,954,640 5,032,892 5,058,784 -
Sales of available-for-sale investments 1,494,000 - 7,040,710 6,030,149 3,289,612
Proceeds from sale of fixed assets due to
restructuring - - - - 694,284
Capital expenditures (864,729) (913,382) (375,501) (228,264) (96,062)
Employee loans, net of repayments - - (256,347) - 45,870
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities 16,081,914 (10,521,369) 6,185,807 8,861,620 3,933,704
------------ ------------ ------------ ------------ ------------
Financing activities:
Proceeds from issuance of preferred
stock, net 3,058,223 - 12,598,694 13,052,260 5,672,024
Proceeds from issuance of common
stock, net 3,412,302 17,446,683 9,608,659 1,493,601 -
Issuance of Series R Preferred Stock upon
conversion of convertible promissory notes - - - - 649,275
Proceeds from issuance of long-term obligations 600,000 5,000,000 - - -
Proceeds from issuance of senior
convertible notes, net - 9,479,039 - - -
Principal payments on long-term obligations (1,825,665) (2,936,297) (2,310,080) (1,589,620) (2,286,298)
Proceeds from asset financing arrangements - 429,023 511,123 511,123 -
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 5,244,860 29,418,448 20,408,396 13,467,364 4,035,001
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 6,841,128 (4,710,549) (5,453,206) (1,837,956) (1,896,001)
Cash and cash equivalents at beginning
of period 9,210,123 16,051,251 11,340,702 11,340,702 5,887,496
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 16,051,251 $ 11,340,702 $ 5,887,496 $ 9,502,746 $ 3,991,495
============= ============= ============ ============ ============
Supplemental information
Interest paid $ 603,330 $ 538,891 $ 605,069 $ 648,121 $ 449,326
============= ============= ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(information pertaining to the periods ended
September 30, 1998 and 1999 is unaudited)
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 out-license 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 cash resources available at December
31, 1998 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. 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.
F-9
<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 1996, 1997 and 1998 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 1996, 1997 and 1998.
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, 1997 and 1998, 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.
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.
F-10
<PAGE>
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
1996, 1997 and 1998, we operated in only one segment.
Unaudited Interim Financial Statements
The unaudited interim financial statements include all adjustments,
consisting only of normal recurring accruals, which the Company considers
necessary for a fair presentation of the financial position of the Company as of
September 30, 1999 and the results of operations and statement of cash flows of
the nine months ended September 30, 1998 and 1999, as presented in the
accompanying unaudited interim financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform to the
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 out-license 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 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 recorded
total costs of the restructuring for the nine months ended September 30, 1999 of
$3.0 million.
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
F-11
<PAGE>
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 were 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 were 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 57,762 shares of common stock (40,650 shares priced
at $37.00 per share in September 1998 and 17,112 shares priced at $58.40 per
share in December 1998), each representing a 20% premium to the weighted average
price of common stock at the time of purchase. Revenues from Lipha/Merck
accounted for 12%, 43% and 70% of total revenues earned in 1996, 1997 and 1998
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, 1996, 1997 and 1998, Shaman recognized $3.0
million, $2.0 million and $790,000, respectively in revenue from the Ono
collaboration. Revenues from Ono accounted for 88%, 57% and 30% of total
revenues earned in 1996, 1997 and 1998, 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
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 $11.6
million, $11.4 million and $8.2 million for the year ended December 31, 1996,
1997 and 1998, respectively, and are included in research and development
expenses in the accompanying financial statements.
F-12
<PAGE>
4. Investments
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and government obligations $ 4,625 $ -- $ (10) $ 4,615
U.S. corporate bonds 3,000 -- -- 3,000
U.S. corporate commercial
paper and other 10,810 -- (20) 10,790
------- -------- -------- --------
Total $18,435 $ -- $ (30) $18,405
======= ======== ======== ========
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
======= ======== ======== ========
December 31, 1998
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
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
======= ======== ======== ========
September 30, 1999
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
U.S. Treasury securities and
government obligations $ 1,450 $ -- $ -- $ 1,450
U.S. corporate commercial
paper and other 2,392 -- (3) 2,389
------- -------- -------- --------
Total $ 3,842 $ -- $ (3) $ 3,839
======= ======== ======== ========
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 3,842 -- $ (3) $ 3,839
------- -------- -------- --------
Total $ 3,842 -- $ (3) $ 3,839
======= ======== ======== ========
</TABLE>
The average remaining maturity of the portfolio was approximately four and
one-half months at December 31, 1997 and approximately less than one month as of
December 31, 1998, 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.
F-13
<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 10,000 shares of common stock at $125.00 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 $110.00 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 $110.00
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 6,875 shares of common stock at an exercise price of
$150.00 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 the Senior Convertible Notes was converted into an aggregate of
128,563 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 $401,555 and $0 at December 31, 1997 and
1998, 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>
1997 1998
------------ ------------
<S> <C> <C>
At December 31,
Equipment and furniture $ 1,890,164 $ 2,401,286
Less accumulated amortization (1,354,475) (1,668,460)
------------ ------------
$ 535,689 $ 732,826
============ ============
</TABLE>
Amortization of assets acquired under capital leases is included in
depreciation and amortization expense.
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.
F-14
<PAGE>
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 $ 830,970 $ 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>
Rent expense for each of the three years ended December 31, 1996, 1997 and
1998 was approximately $1,348,000 $1,154,000 and $1,189,000, 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.
F-15
<PAGE>
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) $22.50 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 38,373 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.
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) 0.8333 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 Nasdaq OTC Bulletin Board. During the initial
30-day conversion period for the Series C Preferred Stock, 24,922 shares of the
F-16
<PAGE>
Series C Preferred Stock were converted into an aggregate of 93,077 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 pursuant to which we acquired the right to sell to these
stockholders, 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
these stockholders warrants to purchase an aggregate of 17,500 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 27,500 shares of
common stock at an exercise price of $203.60 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 $120.00 and $163.00, 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 163.00 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 1,000 shares of
common stock. Further, each non-employee board member who has served as a member
for at least six months prior to the annual stockholders' meeting is
automatically granted an annual non-statutory stock option to purchase not more
than 375 nor less than 250 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 $25.62 per share in return for a new option grant
for the same number of shares but with an exercise price of $25.62 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 92,760 shares with a weighted average exercise price of $105.50
per share were surrendered for cancellation, and new options for the same number
of shares were granted with the $25.62 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
F-17
<PAGE>
the opportunity to surrender his or her outstanding options under the Plan with
exercise prices in excess of $28.75 per share in return for a new option grant
for the same number of shares but with an exercise price of $28.75 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 29,232 shares with a weighted average exercise price of $122.46
per share were surrendered for cancellation, and new options for the same number
of shares were granted with the $28.75 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.
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 105,099 $1.20--$265.00 $109.60
Granted at fair value 47,577 82.60-- 136.20 108.20 $69.20
Exercised (974) 4.80-- 117.60 65.80
Forfeited (12,115) 70.00-- 265.00 128.00
-----------
Balance at
December 31, 1997 139,587 1.20-- 265.00 108.00
Granted at fair value 221,017 25.62-- 98.75 29.79 $29.81
Exercised (792) 1.20-- 70.00 27.41
Forfeited (139,135) 25.62-- 265.00 110.84
-----------
Balance at
December 31, 1998 220,677 $1.20-- 215.00 $ 28.13
===========
</TABLE>
At December 31, 1998, 30,407 shares under options were exercisable at a
weighted average exercise price of $33.19 per share (65,502 shares under options
were exercisable at a weighted average exercise price of $105.00 per share at
December 31, 1997). A stock option grant of 75,000 shares of common stock
granted on September 18, 1998 at an exercise price of $25.62 per share was
pending stockholder approval.
F-18
<PAGE>
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>
$1.20 - $ 30.00 209,767 9.36 $ 25.40 26,650 $ 20.74
40.63 - 72.50 7,275 9.32 52.71 1,177 70.34
82.50 - 107.50 1,271 8.87 100.26 662 100.62
127.50 - 162.50 1,862 7.81 140.90 1,416 142.54
210.00 - 215.00 502 4.00 210.02 502 210.02
---------- --------
$1.20 - $215.00 220,677 9.33 $ 28.13 30,407 $ 33.19
========== ========
</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.
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 1996, 1997 and 1998, respectively:
risk-free interest rates of 5.73%, 6.27% and 4.57%; 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 3.85, 5.0 and 3.84 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>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net loss applicable to
Common Stockholders
Historical $(18,790) $(29,289) $(38,524)
Pro forma $(20,280) $(31,101) $(40,734)
Net loss per common share
Historical $ (27.85) $ (34.44) $ (38.31)
Pro forma $ (30.05) $ (36.57) $ (40.50)
</TABLE>
F-19
<PAGE>
Reserved Shares
At December 31, 1998, 386,781 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 145,189 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 4,585 $48.00 - $216.60 5 - 7 2000 - 2002
Series A Convertible Preferred Stock 27,500 $203.68 6 2002
Secured term loan 10,000 $125.00 10 2007
Senior convertible notes 6,875 $150.00 3 2001
Series B Convertible Preferred Stock 17,500 $53.00 - $ 96.40 5 2003
Series D Convertible Preferred Stock 38,373 $61.40 5 2003
---------
104,833
=========
</TABLE>
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, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 35,200,000 $ 48,600,000
Research credits (expiring in 2004--2013) 2,800,000 3,900,000
Capitalized research and development costs 4,700,000 6,400,000
Other 400,000 (1,200,000)
------------ ------------
Total deferred tax assets 43,100,000 57,700,000
Valuation allowance for deferred tax assets (43,100,000) (57,700,000)
------------ ------------
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.
10. Subsequent Events
In April 1999, directors of the Company holding stock options to purchase
an aggregate of 131,717 shares of common stock agreed to surrender these options
to the Company for cancellation.
In April 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors, pursuant to which we borrowed approximately $1.0 million
in July 1999. The convertible promissory notes issued pursuant to the credit
agreement are due and payable on the earlier of (i) 30 days subsequent to the
completion of the public rights offering, or (ii) December 31, 1999. Interest on
F-20
<PAGE>
the convertible promissory notes is accrued at an annual rate of 12%. The
convertible promissory notes are secured by certain assets of Shaman and are
convertible into shares of Series R Preferred Stock, or into common stock if no
public offering occurs prior to December 31, 1999. In connection with the credit
agreement, we issued warrants to purchase shares of Series R Preferred Stock.
The number of shares subject to these warrants is equal to 50% of the debt
amount divided by $15, which is the per share sale price of the shares sold in
the public offering. These warrants are exercisable, on a cashless basis,
commencing on April 5, 1999, and through the third anniversary date of the
public offering. The conversion price of the convertible promissory notes and
the exercise price of the warrants is equal to $15, which is the per share
offering price in the public offering. If a public offering is not completed
prior to December 31, 1999, then the conversion price of the convertible
promissory notes and the exercise price of the warrants will be the lower of
$0.05 per share of our common stock, or 1/3 of the five-day weighted average
trading price of our common stock for the period ending three trading days prior
to conversion or exercise.
In September 1999, a total of $649,275 of principal and interest under
these notes was converted into 43,285 shares of Series R Preferred Stock and a
total of $374,816 of principal and interest under these notes was repaid to the
note holders.
In April 1999, we entered into an amendment agreement with an existing
lender to permit the issuance by us of the convertible promissory notes. In
connection with the amendment, we issued a warrant to purchase shares of Series
R Preferred Stock, or into common stock if no public offering occurs prior to
December 31, 1999. The number of shares subject to these warrants is equal to
$592,685 divided by $15, which was the per share sale price of the shares sold
in the public rights offering. This warrant is exercisable, on a cashless basis,
commencing on April 30, 1999 and through the seventh anniversary date of the
earlier to occur of (i) December 31, 1999, or (ii) the date of the above
offering. The per share exercise price will be equal to $15, which was the per
share offering price of the public rights offering, or, if no offering is
completed by December 31, 1999, then the lower of $0.05 per share of our common
stock, or 1/3 of the five-day weighted average trading price of our common stock
for the period ending three trading days prior to conversion or exercise.
On June 11, 1999, the stockholders approved, and on June 22, 1999, the
Company effected, a one-for-twenty reverse stock split of the Company's
outstanding common stock. All common share and per common share amounts have
been restated to reflect the reverse stock split in all periods presented.
11. Subsequent Events (unaudited)
Series R Preferred Stock Financing
In August 1999, Shaman completed the Series R Preferred Stock offering. In
the rights offering, Shaman sold 717,149 shares of Series R Convertible
Preferred Stock at $15.00 per share to Shaman's common stockholders of record on
July 14, 1999, raising net proceeds of approximately $5.7 million. Each share of
Series R Preferred Stock will automatically convert on February 1, 2000 into
shares of common stock at a conversion price equal to the lesser of (i) $0.10 or
(ii) the price that is equal to 10% of the average closing sales price of our
common stock for the 10 trading days ending three trading days prior to February
1, 2000.
License and Sale Agreement
In August 1999, we entered into a License and Sale Agreement with
Metabolix, Inc. whereby Metabolix, Inc. has licensed certain rights to Shaman's
library of extracts and compounds for research, development, and
commercialization purposes. We have received an up-front license payment of
$350,000 and an additional $55,000 for an option fee to a specific piece of
technology. Shaman will receive royalties on any resulting products
commercialized. Metabolix, Inc. also has an option to license further technology
for additional up-front payments over the next four months. In October 1999, we
received an additional $250,000 up-front payment from Metabolix, for which
Metabolix exercised its option to license other technology.
F-21
<PAGE>
=========================================================================
[LOGO]
Series R Convertible
Preferred Stock
---------------
PROSPECTUS
---------------
November 22, 1999
=========================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses expected to be
incurred by the Registrant in connection with the sale and distribution of the
securities being registered hereby. All amounts are estimated except the
Securities and Exchange Commission registration fee.
SEC registration fee.............. $ 591
Accounting fees and expenses...... $20,000
Legal fees and expenses........... $25,000
Printing and engraving fees....... $10,000
Miscellaneous fees and expenses... $14,409
-------
Total............................. $70,000
=======
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding, if
the person acted in good faith and in a manner the person 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 the
person's conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify any such person serving in any such capacity who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Delaware Court of Chancery or such other court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Registrant's Amended and Restated Certificate of Incorporation
provides that the Registrant's directors shall not be liable to the Registrant
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that exculpation from liabilities is not
permitted under the DGCL as in effect at the time such liability is determined.
The Registrant has entered into indemnification agreements with all of its
officers and directors, as permitted by the DGCL.
Item 15. Recent Sales of Unregistered Securities.
Since August 1996, we have sold and issued the following unregistered
securities (the share numbers and per share prices below reflect the
one-for-twenty reverse stock split of the outstanding common stock effected on
June 22, 1999):
(1) In July 1999, we issued to Michael Tempesta, in connection with the
settlement of litigation between Mr. Tempesta and Shaman, 16,667 shares of
Series R Preferred Stock.
<PAGE>
(2) In April 1999, we issued to MMC/GATX Partnership No. 1 in connection
with the amendment of a loan agreement with GATX a cashless exercise warrant to
purchase 39,512 shares of the Series R Preferred Stock. This Warrant is
exercisable commencing July 16, 1999 and through the seventh anniversary of such
date. The per share exercise price is $15.00.
(3) In April 1999, we also issued to various lenders who were either
existing stockholders, key executives or directors cashless exercise warrants to
purchase 33,597 shares of Series R Preferred Stock. These warrants are
exercisable commencing August 23, 1999 and through the third anniversary of such
date. The per share exercise price is $15.00.
(4) In connection with the April 1999 debt offering, each lender was also
issued a senior subordinated secured convertible promissory note convertible
after the consummation of the Series R Preferred Stock offering and prior to the
earlier to occur of (i) January 1, 2000 and (ii) thirty days following the
consummation date of the offering into an aggregate of 43,285 shares of the
Series R Preferred Stock at a conversion price of $15.00 per share. In September
1999, we issued an aggregate of 43,285 shares of Series R Preferred Stock to the
holders of such promissory notes upon conversion by such persons of a portion of
such promissory notes.
(5) In May 1997, we obtained a $5.0 million term loan to pay off
preexisting debt, finance capital asset acquisition and finance continued
research and development. The lender was granted warrants to purchase 10,000
shares of common stock at an exercise price of $125.00 per share.
These warrants expire May 7, 2007.
(6) On December 10, 1998, Shaman and certain institutional investors
exchanged an aggregate of $4.8 million, including accrued interest, of senior
convertible notes for common stock and an aggregate of 38,373 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.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of the Securities Act. In each such transaction, the recipients of
securities represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the securities issued in such
transactions .
Item 16. Exhibits and Financial Statement Schedules.
The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.
(a) Exhibits
Exhibit
Number Description
- -------- -------------------------------------------------------------------
3.1(22) Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on June 22, 1999.
3.2(9) Amended and Restated Bylaws, as amended March 29, 1996.
4.1(22) Form of Certificate of Designation of Preferences of Series R
Preferred Stock of the Registrant
4.2(21) Form of warrant, dated April 5, 1999, issued to certain investors
of the Registrant.
4.3(21) Form of warrant, dated April 30, 1999, issued to MMC/GATX
Partnership No.1
5.1** Opinion of Bay Venture Counsel,LLP.
10.1(1)(19) 401(k) Plan.
10.2(1)(19) Form of Stock Purchase Agreement.
10.3(1) Form of Indemnification Agreement.
10.4(1) Form of Agreement with Scientific Strategy Team Members.
10.5(1) Form of Proprietary Information and Inventions Agreement-Employees.
10.6(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.7(1)(18) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.12(1) Industrial Lease Agreement dated January 1, 1993, between Shaman
and Grand/ Roebling Investment Company.
10.14(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
II-2
<PAGE>
10.15(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.16(6)(18) Joint Research and Product Development Agreement, dated May 24,
1995, by and between Ono Pharmaceutical Co., Ltd. and Registrant.
10.17(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.
10.18(6)(18) License Agreement, dated June 8, 1995, by and between Bayer AG and
Registrant.
10.20(9)(18) Subscription Agreement dated July 25, 1996 by and between the
Registrant and Fletcher International Limited.
10.21(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.
10.22(10)(18)Stock Purchase Agreement dated September 23, 1996, by and between
Lipha, Lyonnaise Industrielle Pharmaceutique S.A. and the
the Registrant.
10.23(11)(19)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as Amended and
Restated on February 14, 1997).
10.24(3)(19) Form of Notice of Grant with Stock Option Agreement.
10.25(3)(19) Form of Addendum to Stock Option Agreement (Special Tax Elections).
10.26(3)(19) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.27(11)(19)Form of Non-Employee Director Automatic Stock Option Agreement.
10.28(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.29(12)(18)Amended and Restated Masopracol License Agreement, dated as
of April 1997, by and between Access Pharmaceuticals, Inc. and
the Registrant.
10.30(12) Loan and Security Agreement, dated as of May 7, 1997, between
MMC/GATX Partnership I and Registrant.
10.30A(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.
10.30B(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.
10.30C (21) Amendment No. 2 to Loan and Security Agreement, dated as of
April 30, 1999, by and between the Registrant and MMC/GATX
Partnership No. 1.
10.31(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
10.32(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.33(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX Partnership
No. I and Registrant.
10.34(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.35(12) Amended Engagement Agreement, dated June 30, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.36(12) Form of Note Purchase Agreement, dated as of June 30, 1997, by and
between Registrant and certain investors.
10.37(13) Master Lease Agreement, dated September 15, 1997, between
Registrant and Transamerica Business Credit Corporation, with
related schedules.
10.38(13) Amendment to Note Purchase Agreement, dated as of June 30, 1997, by
and between Registrant and Certain investors.
10.39(14) Amendment Agreement, dated as of March 18, 1998, by and between the
Registrant and certain investors.
10.40(14) Form of Common Stock Purchase Warrant, dated as of March 18, 1998,
issued to certain investors.
10.41(14) Second Amendment Agreement, dated as of June 10, 1998, by and
between the Registrant and certain investors.
10.42(17) Exchange Agreement, dated as of December 10, 1998, by and between
Registrant and certain entities.
10.43(19) Common Stock Purchase Agreement dated as of November 18, 1998.
10.44(19)(20)Employment Agreement dated as of April 1, 1998, by and between
Registrant and John W.S. Chow.
10.45(19)(20)Promissory Note dated as of June 17, 1998, by and between
Registrant and John W.S. Chow.
II-3
<PAGE>
10.46(20) Development and Commercial Supply Agreement, dated as of December
1, 1998, by and between Registrant and NYComed Inc.
10.47(21) Form of Credit Facility and Note Purchase Agreement, dated as of
April 5, 1999, by and between the Registrant and the Investors
named therein.
10.47A(21) Amendment No. 1 to Credit Facility and Note Purchase Agreement,
dated as of April 13, 1999, by and between the Registrant and the
Investors named in the Credit Facility and Note Purchase Agreement.
10.47B(21) Amendment No. 2 to Credit Facility and Note Purchase Agreement,
dated as of April 30, 1999, by and between the Registrant and the
Investors named in the Credit Facility and Note Purchase Agreement.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Bay Venture Counsel, LLP (included in the
opinion filed as Exhibit 5.1).
24.1** Power of Attorney (included under the caption "Signatures").
27.1 (20) Financial Data schedule for period ended December 31, 1998.
27.2 (21) Financial Data schedule for period ended June 30, 1999.
27.3 (23) Financial Data schedule for period ended June 30, 1999.
27.4 (24) Financial Data schedule for period ended September 30, 1999.
- ----------
* Filed herewith.
** Previously filed.
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.
(2) Intentionally omitted.
(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.
(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(5) Intentionally omitted.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(8) Intentionally omitted.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.
(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.
(12) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-31843.
(13) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-49025.
(15) 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.
(20) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
(21) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(22) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1, File No. 333-78115, which was declared effective on
July 16, 1999.
(23) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999.
II-4
<PAGE>
(24) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
(b) Financial Statement Schedules
None.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in the volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimates maximum offering range may be reflected in the form of prospectus
filed with the commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation Of Registration
Fee" table in the effective registration statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that paragraphs (1) and (2) do not apply if the information required to
be included in a post-effective amendment by these paragraphs is contained in
periodic reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the Registration Statement.
(B) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(C) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-5
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of South San
Francisco, State of California, on the 18h day of November, 1999.
SHAMAN PHARMACEUTICALS, INC.
By: /s/ Lisa A. Conte
-----------------------
Lisa A. Conte
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Name Title Date
- -------------------------- ------------------------------- -----------------
/s/ Lisa A. Conte
- -------------------------- Director, President, Chief November 18 1999
Lisa A. Conte Executive Officer and Chief
Financial Officer, (Principal
Executive Officer and Principal
Financial and Accounting Officer)
/s/ G. Kirk Raab*
- -------------------------- Chairman of the Board November 18 1999
G. Kirk Raab
/s/ Adrian D.P. Bellamy*
- -------------------------- Director November 18 1999
Adrian D.P. Bellamy
/s/ Jeffrey Berg*
- -------------------------- Director November 18, 1999
Jeffrey Berg
/s/ Herbert H. McDade, Jr.*
- -------------------------- Director November 18, 1999
Herbert H. McDade, Jr.
- -------------------------- Director November __, 1999
M. David Titus
/s/ Loren D. Israelsen*
- -------------------------- Director November 18, 1999
Loren D. Israelsen
By: /s/ Lisa A. Conte
- ------------------------------------ November 18, 1999
Lisa A. Conte, Attorney in fact*
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- -------- -------------------------------------------------------------------
3.1(22) Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on June 22, 1999.
3.2(9) Amended and Restated Bylaws, as amended March 29, 1996.
4.1(22) Form of Certificate of Designation of Preferences of Series R
Preferred Stock of the Registrant
4.2(21) Form of warrant, dated April 5, 1999, issued to certain investors
of the Registrant.
4.3(21) Form of warrant, dated April 30, 1999, issued to MMC/GATX
Partnership No.1
5.1** Opinion of Bay Venture Counsel,LLP.
10.1(1)(19) 401(k) Plan.
10.2(1)(19) Form of Stock Purchase Agreement.
10.3(1) Form of Indemnification Agreement.
10.4(1) Form of Agreement with Scientific Strategy Team Members.
10.5(1) Form of Proprietary Information and Inventions Agreement-Employees.
10.6(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.7(1)(18) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.12(1) Industrial Lease Agreement dated January 1, 1993, between Shaman
and Grand/ Roebling Investment Company.
10.14(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.15(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.16(6)(18) Joint Research and Product Development Agreement, dated May 24,
1995, by and between Ono Pharmaceutical Co., Ltd. and Registrant.
10.17(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.
10.18(6)(18) License Agreement, dated June 8, 1995, by and between Bayer AG and
Registrant.
10.20(9)(18) Subscription Agreement dated July 25, 1996 by and between the
Registrant and Fletcher International Limited.
10.21(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.
10.22(10)(18)Stock Purchase Agreement dated September 23, 1996, by and between
Lipha, Lyonnaise Industrielle Pharmaceutique S.A. and the
the Registrant.
10.23(11)(19)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as Amended and
Restated on February 14, 1997).
10.24(3)(19) Form of Notice of Grant with Stock Option Agreement.
10.25(3)(19) Form of Addendum to Stock Option Agreement (Special Tax Elections).
10.26(3)(19) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.27(11)(19)Form of Non-Employee Director Automatic Stock Option Agreement.
10.28(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.29(12)(18)Amended and Restated Masopracol License Agreement, dated as
of April 1997, by and between Access Pharmaceuticals, Inc. and
the Registrant.
10.30(12) Loan and Security Agreement, dated as of May 7, 1997, between
MMC/GATX Partnership I and Registrant.
10.30A(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.
10.30B(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.
10.30C (21) Amendment No. 2 to Loan and Security Agreement, dated as of
April 30, 1999, by and between the Registrant and MMC/GATX
Partnership No. 1.
10.31(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
II-8
<PAGE>
10.32(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.33(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX Partnership
No. I and Registrant.
10.34(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.35(12) Amended Engagement Agreement, dated June 30, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.36(12) Form of Note Purchase Agreement, dated as of June 30, 1997, by and
between Registrant and certain investors.
10.37(13) Master Lease Agreement, dated September 15, 1997, between
Registrant and Transamerica Business Credit Corporation, with
related schedules.
10.38(13) Amendment to Note Purchase Agreement, dated as of June 30, 1997, by
and between Registrant and Certain investors.
10.39(14) Amendment Agreement, dated as of March 18, 1998, by and between the
Registrant and certain investors.
10.40(14) Form of Common Stock Purchase Warrant, dated as of March 18, 1998,
issued to certain investors.
10.41(14) Second Amendment Agreement, dated as of June 10, 1998, by and
between the Registrant and certain investors.
10.42(17) Exchange Agreement, dated as of December 10, 1998, by and between
Registrant and certain entities.
10.43(19) Common Stock Purchase Agreement dated as of November 18, 1998.
10.44(19)(20)Employment Agreement dated as of April 1, 1998, by and between
Registrant and John W.S. Chow.
10.45(19)(20)Promissory Note dated as of June 17, 1998, by and between
Registrant and John W.S. Chow.
10.46(20) Development and Commercial Supply Agreement, dated as of December
1, 1998, by and between Registrant and NYComed Inc.
10.47(21) Form of Credit Facility and Note Purchase Agreement, dated as of
April 5, 1999, by and between the Registrant and the Investors
named therein.
10.47A(21) Amendment No. 1 to Credit Facility and Note Purchase Agreement,
dated as of April 13, 1999, by and between the Registrant and the
Investors named in the Credit Facility and Note Purchase Agreement.
10.47B(21) Amendment No. 2 to Credit Facility and Note Purchase Agreement,
dated as of April 30, 1999, by and between the Registrant and the
Investors named in the Credit Facility and Note Purchase Agreement.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Bay Venture Counsel, LLP (included in the
opinion filed as Exhibit 5.1).
24.1** Power of Attorney (included under the caption "Signatures").
27.1 (20) Financial Data schedule for period ended December 31, 1998.
27.2 (21) Financial Data schedule for period ended March 31, 1999.
27.3 (23) Financial Data schedule for period ended June 30, 1999.
27.4 (24) Financial Data schedule for period ended September 30, 1999.
- ----------
* Filed herewith.
** Previously filed.
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.
(2) Intentionally omitted.
(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.
(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(5) Intentionally omitted.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(8) Intentionally omitted.
II-9
<PAGE>
(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.
(20) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
(21) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(22) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1, File No. 333-78115, which was declared effective on
July 16, 1999.
(23) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999.
(24) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
II-10
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 11, 1999 (except for Note 10, as to which the
date is June 22, 1999), in the Post-Effective Amendment No. 1 to Registration
Statement (Form S-1) and related Prospectus of Shaman Pharmaceuticals, Inc. for
the registration of 133,061 shares of its Series R Convertible Preferred Stock.
/s/ Ernst & Young LLP
Palo Alto, California
November 17, 1999
