SHAMAN PHARMACEUTICALS INC, 10-Q, 2000-05-15

SHAMAN PHARMACEUTICALS INC
10-Q, 2000-05-15
PHARMACEUTICAL PREPARATIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number: 0-21022

Shaman Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)

Delaware 94-3095806
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)

213 East Grand Avenue, South San Francisco, California 94080
(Address of principal executive offices) (ZIP Code)

Registrant's telephone number, including area code: 650-952-7070

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No

Number of shares of Common Stock, $.001 par value, outstanding as of
April 30, 2000: 38,108,762

<PAGE>

SHAMAN PHARMACEUTICALS, INC.

INDEX FOR FORM 10-Q

MARCH 31, 2000

PAGE
NUMBER
------

PART I FINANCIAL INFORMATION

Item 1. Financial Statements and Notes

Condensed Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 3

Condensed Statements of Operations for the three months
ended March 31, 2000 and March 31, 1999 (unaudited) 4

Condensed Statements of Cash Flows for the three months
ended March 31, 2000 and March 31, 1999 (unaudited) 5

Notes to Condensed Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9

Item 3. Quantitative and Qualitative Disclosures About Market Risk 12

PART II OTHER INFORMATION

Item 1. Legal Proceedings 21

Item 2. Changes in Securities; use of proceeds 21

Item 3. Defaults in Senior Securities 21

Item 4. Submission of Matters to a Vote of Security Holders 21

Item 5. Other Information 22

Item 6. Exhibits and Reports on Form 8-K 23

SIGNATURES 24

2
<PAGE>

All information contained in this Report on Form 10-Q reflects a 1-for-20
reverse stock split of the common stock effected on June 22, 1999 and a 1-for-50
reverse stock split of the common stock effected on January 31, 2000.

PART I FINANCIAL INFORMATION

Item 1. Financial Statements and Notes
<TABLE>
<CAPTION>

SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
A S S E T S
<S> <C> <C>

Current assets:
Cash and cash equivalents ................................................... $ 2,229,506 $ 1,171,798
Accounts receivable (net allowance for uncollectible accounts
of $116,000 as of March 31, 2000 and December 31, 1999) ................... 329,184 337,537
Inventory ................................................................... 1,879,099 1,718,491
Amounts due from employees ................................................. 140,369 153,392
Prepaid expenses and other current assets ................................... 427,827 127,662
------------- -------------
Total current assets .................................... 5,005,985 3,508,880

Property and equipment, net .................................................... 1,656,475 1,818,712
Other assets ................................................................... 308,080 308,080
------------- -------------
Total assets ............................................................. $ 6,970,540 $ 5,635,672
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
Accounts payable and other accrued expenses ................................. $ 1,308,308 $ 1,528,746
Accrued clinical trial costs ................................................ 561,061 585,040
Accrued professional fees ................................................... 857,765 888,553
Accrued compensation ........................................................ 210,148 202,207
Accrued interest ............................................................ 451,422 334,863
Accrued restructuring costs ................................................. 1,010,000 1,010,000
Current installments of long-term obligations ............................... 3,890,578 1,927,366
------------- -------------
Total current liabilities ................................................ 8,289,282 6,476,775

Long-term obligations, excluding current installments ......................... 1,131,070 1,194,991
Stockholders' equity (net capital deficiency):
Preferred Stock ............................................................. 32 877
Common Stock ............................................................... 37,596 1,584
Additional paid-in capital .................................................. 183,812,223 176,594,549
Deferred compensation and other adjustments ................................. (10,450) (14,691)
Accumulated deficit ......................................................... (186,289,213) (178,618,413)
------------- -------------
Total stockholders' equity (net capital deficiency) ...................... (2,449,812) (2,036,094)
------------- -------------
Total liabilities and stockholders' equity (net capital deficiency) ...... $ 6,970,540 $ 5,635,672
============= =============
</TABLE>

NOTE: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

See Notes to condensed financial statements.

3
<PAGE>

SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended March 31,
----------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>

Revenues:
Product Sales ............................................................... $ 52,869 $ --
Less sales returns and allowances............................................ -- --
------------ ------------
Net product sales ....................................................... 52,869 --
Collaborative agreements .................................................... -- --
------------ ------------
Total revenues ................................................................. $ 52,869 --

Operating expenses:
Cost of goods sold ......................................................... 13,366 --
Research and development ................................................... 993,161 2,468,118
Marketing, general and administrative....................................... 1,221,135 1,493,783
Restructuring costs ........................................................ -- 2,188,857
------------ ------------
Total operating expense ............................................... $ 2,227,662 $ 6,150,758

Loss from operations ........................................................... (2,174,793) (6,150,758)

Interest income ............................................................ 16,193 73,878
Interest expense (cash) ................................................... (153,519) (190,568)
Interest expense (non-cash) ................................................ (2,880,161) (68,607)
------------ ------------
Net (loss) ..................................................................... $ (5,192,280) $ (6,336,055)
Preferred Stock dividends ..................................................... (2,478,520) (2,273,614)
------------ ------------
Net loss applicable to common stockholders...................................... $ (7,670,800) $ (8,609,669)
============ ============

Basic and diluted net loss per common share..................................... (0.32) (258.90)

Shares used in the calculation of basic and diluted net loss per common share... 24,217,000 33,255

</TABLE>

See Notes to condensed financial statements.

4
<PAGE>

SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)

Three Months Ended March 31,
-------------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Operating activities:

Net loss ....................................................................... $ (5,192,280) $ (6,336,055)
Adjustments to reconcile net loss applicable to Common Stockholders
to net cash used in operating activities:
Depreciation ................................................................ 169,574 170,749
Non-cash interest expense on amortization of debt discounts and
beneficial conversion .................................................... 2,870,455 108,702
Loss on disposal of fixed assets ............................................ -- 121,696
Payment of interest in Common Stock ......................................... 13,947 14,607
Issuance of convertible promissory notes to consultants for
services rendered......................................................... 150,000 --
Changes in operating assets and liabilities:
Trade accounts receivable ................................................... 8,353 --
Inventory ................................................................... (160,608) --
Prepaid expenses, current assets and other assets ........................... (76,831) (93,999)
Accounts payable, accrued professional fees, accrued compensation,
accrued clinical trial costs and contract research advances .............. (150,703) 392,523
---------- ----------
Net cash used in operating activities .......................................... (2,368,093) (5,621,777)
---------- ----------
Investing activities:
Sales of available-for-sale investments ..................................... -- 2,288,589
Proceeds on sale of fixed assets due to restructuring........................ -- 235,636
Capital expenditures ........................................................ (7,337) (80,836)
Employee loans, net of repayments and forgiveness of interest................ 13,023 8,622
---------- ----------
Net cash provided by investing activities ...................................... 5,686 2,452,011
---------- ----------
Financing activities:
Other Preferred Stock costs .................................................. (18,143) (24,941)
Proceeds from exercise of stock options and warrants.......................... 739,670 --
Principal payments on long-term obligations .................................. (651,412) (985,853)
Proceeds from the issuance of convertible notes .............................. 3,350,000 --
---------- ----------
Net cash provided by (used in) financing activities ............................ 3,420,115 (1,010,794)
---------- ----------
Net increase (decrease) in cash and cash equivalents ........................... 1,057,708 (4,180,560)
Cash and cash equivalents at beginning of period ............................... 1,171,798 5,887,496
---------- ----------
Cash and cash equivalents at end of period ..................................... $ 2,229,506 $ 1,706,936
========== ==========
</TABLE>

See Notes to condensed financial statements.

5
<PAGE>

SHAMAN PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2000
(Unaudited)

1. BASIS OF PRESENTATION

Shaman Pharmaceuticals, Inc., through the main operating division of
Shaman.com, is focused on the discovery, development and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
The Company was incorporated in Delaware on December 21, 1992 and maintains its
offices in South San Francisco, California. In September 1999, we began
implementing our commercialization efforts through our botanicals division. Our
commercialization plans include the use of community building initiatives on the
Internet and other distribution channels, and are 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 the second half of 2000, we intend to collaborate for the
commercialization of our proprietary botanical products. Such collaboration may
take the form of a partnership, licensing relationship, distribution agreement
or other marketing arrangements. Shaman recently initiated a collaborative
effort with one of the leading direct sell companies for the sale and promotion
of Shaman's Diarrhea Formula to the community of those who suffer chronically,
which includes approximately 50 million Irritable Bowel Syndrome ("IBS")
sufferers in the United States.

We anticipate that Shaman.com will provide information, education and
entertainment through community building initiatives over the channels of the
Internet, cable and television from the perspective of the knowledgeable and
trusted voice of natural products. The goal of this effort is to bring natural
medicine usage and informaiton to the mass market and to differentially expand
the market for high quality products through communication of this information.
Such efforts will create brand identity of the Shaman name as a provider of high
quality natural products. Shaman.com's Syndrome X Community, with an installed
base which has grown to several thousand since it was launched just weeks ago,
is an example of such community content efforts.

The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire year. This unaudited financial data should be read in conjunction with
the audited financial statements and notes thereto included in our Annual Report
on Form 10-K and 10-K/A for the fiscal year ended December 31, 1999.

These unaudited interim financial statements have been prepared assuming
that we will continue as a going concern. We need substantial working capital to
fund our operations. As of March 31, 2000, we had cash, cash equivalents and
short-term investment balances of approximately $2.2 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
botanicals products, the success of any marketing efforts related to the
botanicals products, the success of any out-licensing efforts with respect to
the pharmaceuticals programs and the extent and timing of additional costs
associated with patents and other intellectual property rights. Our projections
show that cash on hand plus the additional amount raised in April 2000 in
connection with the issuance of convertible promissory notes will be sufficient
to fund operations at the current level through the third quarter 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 third
quarter 2000. In addition, 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, 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.

6
<PAGE>

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 when needed. 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, which would have a material adverse effect on our business, financial
condition and results of operations.

2. ONE-FOR-50 REVERSE STOCK SPLIT

On January 28, 2000, the stockholders approved and on January 31, 2000,
Shaman effected a 1-for-50 reverse stock split of Shaman'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.

3. CONVERSION OF SERIES R PREFERRED STOCK

On February 1, 2000, the Series R Preferred Stock automatically converted
into a number of shares of Common Stock equal to $15.00 divided by the
conversion price then in effect. The conversion price was equal to the lesser of
(i) $1.00 or (ii) the price equal to 10% of the average closing sales price of
Common Stock for the 10 trading days ending three trading days prior to February
1, 2000. On that day, the conversion price of the Series R Preferred Stock was
$0.497 (taking into effect the 1-for-50 reverse stock split effectuated on
January 31, 2000) and each share of Series R Preferred was converted into 31
shares of Common Stock. A total of 777,101 shares of Series R Preferred Stock
were converted into 24,090,131 shares of Common Stock.

4. ISSUANCE OF CONVERTIBLE PROMISSORY NOTES AND WARRANTS

In February 2000, Shaman and a wholly-owned subsidiary of Shaman (the
"Subsidiary") entered into a convertible note and warrant purchase agreement
(the "Note Agreement") with certain investors (the "Note Holders") in connection
with a bridge loan financing raising cash proceeds of approximately $3.0
million. Interest was accrued at a rate of 12% per annum. The principal amount
and accrued interest were to automatically convert at the sole election of the
Note Holders on April 30, 2000 into (i) shares of Shaman's Common Stock with a
conversion price of $0.497 per share or (ii) capital stock of the Subsidiary
sold in the first equity financing raising at least $5.0 million. Warrants were
issued in an amount equivalent to 40% of the dollar value of each Note Holders'
loan participation. The exercise price of the warrants is equal to the
conversion price of the Notes. These warrants are exercisable through April
2005. In March 2000, Shaman and the Note Holders amended the Note Agreement to
increase the amount of the notes to be issued from $3.0 million to $4.0 million.
In consideration for amending the Note Agreement, we amended the conversion
price of the notes into Shaman's Common Stock from a conversion price of $0.497
to the lower of (i) $0.497 per share or (ii) 10 days weighted average price,
with a floor of $0.30 per share. In April 2000, Shaman further amended the Note
Agreement to increase the amount of the notes to be issued from $4.0 million to
a total of $5.5 million. In consideration for such amendment, we further reduced
the conversion price of the notes such that the unpaid principal and accrued
interest automatically convert into Shaman's Common Stock with a conversion
price of $0.15 per share. The Note Holders received additional warrants to
purchase shares of Common Stock equal to 50% of the dollar value of their loan
participation with an exercise price of $0.10 per share, which warrants are
exercisable through August 30, 2000. Of the $5.5 million raised, we issued
approximately $3.5 million to investors for cash and approximately $2.0 million
to creditors and consultants of Shaman in exchange for services rendered. The
initial sale and subsequent sale of such notes and warrants gave rise to
significant non-cash interest expense due to the value of the warrants and
beneficial conversion features. We filed a Registration Statement on Form S-3
with respect to the shares to be issued upon conversion or exercise of these
convertible promissory notes and warrants. On May 9, 2000, a total of
$5,587,781, which represents principal and accrued interest of the notes, was
converted into 37,251,874 shares of Shaman's Common Stock.

In February 2000, Shaman and the Subsidiary entered into a convertible
promissory note agreement with an existing stockholder in connection with a
bridge loan financing raising cash proceeds of $500,000. Interest was accrued at
a rate of 12% per annum. The principal amount and accrued interest was to be
automatically converted at a 40% discount on April 30, 2000 into capital stock
of the Subsidiary sold in the first equity financing raising at least $5.0
million. In April 2000, Shaman and the stockholder amended the agreement to
extend payment terms by an additional 12 months. In consideration for amending
the agreement, we issued warrants to this stockholder to purchase 5,000,000
shares of Shaman's Common Stock at an exercise price of $0.10 per share. These
warrants are exercisable through April 30, 2001. The sale of such note and

7
<PAGE>

warrant gave rise to significant non-cash interest expense. We have filed a
Registration Statement on Form S-3 with respect to the resale of shares to be
issued upon exercise of these warrants.

In February 2000, we amended the Term Loan Agreement between MMC/GATX
Partnership No. 1 and Shaman Pharmaceuticals, Inc. (the "Loan Agreement") to
permit Shaman to delay principal payments under the Loan Agreement. In
connection with the amendment, we issued warrants to purchase 340,628 shares of
Common Stock at an exercise price of $0.48387 per share. These warrants are
exercisable commencing on February 2, 2000 and through the tenth anniversary of
such date. The issuance of these warrants gave rise to significant non-cash
interest expense. We have filed a Registration Statement on Form S-3 with
respect to the resale of shares to be issued upon exercise of this warrant.

In December 1999, we entered into a note purchase agreement (the "Note")
with an existing stockholder in which we borrowed $200,000 to purchase inventory
for our product, Normal Stool Formula ("NSF"). The loan is due and payable in
May 2000 and the interest is accrued at an annual rate of 10.50%. The Note is
secured by the inventory of our product, NSF. We have an option to extend the
loan for another six months. In April 2000, we exercised our option to extend
the loan for another six months so that the principal and accrued interest is
now due in December 2000. In consideration for extending the loan, we issued to
this stockholder warrants to purchase 201,207 shares of Common Stock at an
exercise price of $0.497 per share. These warrants are exercisable through the
fourth anniversary of this loan and will give rise to significant non-cash
interest expense. We have filed a Registration Statement on Form S-3 with
respect to the resale of shares to be issued upon exercise of this warrant.

8
<PAGE>

SHAMAN PHARMACEUTICALS, INC.

ITEM 2. 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. Our commercialization plans include the use of
community building initiatives on the Internet and other distribution chanels,
and are 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.

RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999

The results of operations for the quarter ended March 31, 1999 relate to
our pharmaceutical operations and botanical operations. Since we ceased
operations of our pharmaceutical business and focused our efforts in our
botanical business in February 1999, our results of operations for the quarter
ended March 31, 2000 are not comparable to the same period last year.

Net sales from our first botanical dietary supplement product, Normal Stool
Formula ("NSF") were $53,000 for the quarter ended March 31, 2000. These sales
were predominantly direct sales by Shaman. As part of our Wholesale Distribution
Agreement with Cardinal Distribution ("Cardinal"), Shaman agreed to exclusively
distribute NSF to Medicine Shoppe retailers and certain HIV specialty pharmacies
for a period of six months. This exclusivity expires on June 15, 2000.
Cardinal's purchases in the fourth quarter 1999 were to fill the Medicine Shoppe
distribution channel. Once Wholesale Distribution Agreement expires, we are free
to expand distribution and sales of NSF to other retailers. The product was
available via Internet and 800 telephone channels only starting July 30, 1999.
Limited promotional support for NSF began in late September 1999. We recorded
cost of goods sold of $13,000 for the NSF product.

We incurred research and development expenses of $993,000 and $2.5 million
for the quarters ended March 31, 2000 and 1999, respectively. Of the $2.5
million of research and development expenses incurred in the quarter ended March
31, 1999, $149,000 was related to the research and development of the botanicals
division. This decrease was primarily attributable to the closing down of our
pharmaceutical business as of February 1, 1999. Research and development
expenses will vary in 2000 as we develop and commercialize new botanical
products in the second half of the year.

Marketing, general and administrative expenses were $1.2 million and $1.5
million for the quarters ended March 31, 2000 and 1999, respectively. Marketing,
general and administrative expenses are expected to increase in 2000 as we
continue to focus our efforts in our botanicals business and continue to promote
NSF and future product candidates.

Interest income was $16,000 and $74,000 for the quarters ended March 31,
2000 and 1999, respectively. Interest income decreased for the period ended
March 31, 2000, compared with the period ended March 31, 1999, due to lower
average cash and investment balances as we continue to fund our operations.
Interest expense was $3.0 million and $259,000 for the quarters ended March 31,
2000 and 1999, respectively. Interest expense increased for the period ended
March 31, 2000, compared with the period ended March 31, 1999 due to a $2.8
million non-cash interest charge related to the beneficial conversion feature of
convertible notes and amortization of the warrants issued in connection with the
issuance of the notes.

9
<PAGE>

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 focus our
efforts on the development and commercialization of botanical dietary
supplements. The restructuring plan included: 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 the sub-lease
of a portion of our facility.

The termination of 60 employees occurred on February 1, 1999. The
following table summarizes the Company's restructuring activities as of March
31, 2000.

<TABLE>
<CAPTION>
Accrued
Total Net Cash Balance at
Restructuring Outflow Non-Cash March 31,
Category Charges (Inflow) Items 2000
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and related charges...................... $ 325 $ 325 $ -- $ --
Cancellation of contracts ......................... 1,310 300 -- 1,010
Lipha S.A. settlement of claims.................... 1,031 1,031 -- --
Gain on disposal of fixed assets................... (38) (38) -- --
Reversal of estimated liabilities
related to pharmaceutical operations............. (450) -- (450) --
-------- -------- ------- -------
$ 2,178 $ 1,618 $ (450) $ 1,010
======== ======== ======= =======
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2000, our cash, cash equivalents and investments totaled
approximately $2.2 million, compared with $1.2 million at December 31, 1999. We
invest excess cash according to our investment policy that provides guidelines
with regard to liquidity, type of investment, credit ratings and concentration
limits.

In February 2000, Shaman and the Subsidiary entered into a convertible note
and warrant purchase agreement (the "Note Agreement") with certain investors
(the "Note Holders") in connection with a bridge loan financing raising cash
proceeds of approximately $3.0 million. Interest was accrued at a rate of 12%
per annum. The principal amount and accrued interest were to automatically
convert at the sole election of the Note Holders on April 30, 2000 into (i)
shares of Shaman's Common Stock with a conversion price of $0.497 per share or
(ii) capital stock of the Subsidiary sold in the first equity financing raising
at least $5.0 million. Warrants were issued in an amount equivalent to 40% of
the dollar value of each Note Holders' loan participation. The exercise price of
the warrants is equal to the conversion price of the Notes. These warrants are
exercisable through April 2005. In March 2000, Shaman and the Note Holders
amended the Note Agreement to increase the amount of the notes to be issued from
$3.0 million to $4.0 million. In consideration for amending the Note Agreement,
we amended the conversion price of the notes into Shaman's Common Stock from a
conversion price of $0.497 to the lower of (i) $0.497 per share or (ii) 10 days
weighted average price, with a floor of $0.30 per share. In April 2000, Shaman
further amended the Note Agreement to increase the amount of the notes to be
issued from $4.0 million to a total of $5.5 million. In consideration for such
amendment, we further reduced the conversion price of the notes such that the
unpaid principal and accrued interest automatically convert into Shaman's Common
Stock with a conversion price of $0.15 per share. The Note Holders received
additional warrants to purchase shares of Common Stock equal to 50% of the
dollar value of their loan participation with an exercise price of $0.10 per
share, which warrants are exercisable through August 30, 2000. Of the $5.5
million raised, we issued approximately $3.5 million to investors for cash and
approximately $2.0 million to creditors and consultants of Shaman in exchange
for services rendered. The initial sale and subsequent sale of such notes and
warrants gave rise to significant non-cash interest expense due to the value of
the warrants and beneficial conversion features. We filed a Registration
Statement on Form S-3 with respect to the shares to be issued upon conversion or
exercise of these convertible promissory notes and warrants. On May 9, 2000,
a total of $5,587,781, which represents principal and accrued interest of the
notes, was converted into 37,251,874 shares of Shaman's Common Stock.

10
<PAGE>

of the Subsidiary sold in the first equity financing raising at least $5.0
million. In April 2000, Shaman and the stockholder amended the agreement to
extend payment terms by an additional 12 months. In consideration for amending
the agreement, we issued warrants to this stockholder to purchase 5,000,000
shares of Shaman's Common Stock at an exercise price of $0.10 per share. These
warrants are exercisable through April 30, 2001. The sale of such note and
warrant gave rise to significant non-cash interest expense. We have filed a
Registration Statement on Form S-3 with respect to the resale of shares to be
issued upon exercise of these warrants.

We expect to continue to incur losses through 2000. We need substantial
working capital to fund our operations. As of March 31, 2000, we had cash, cash
equivalents and short-term investment balances of approximately $2.2 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 botanicals products, the success of any marketing efforts related
to the botanicals products, the success of any out-licensing efforts with
respect to the pharmaceuticals programs and the extent and timing of additional
costs associated with patents and other intellectual property rights. Our
projections show that cash on hand plus additional amounts raised in April 2000
in connection with the issuance of convertible promissory notes will be
sufficient to fund operations at the current level through the third quarter
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 third quarter 2000. 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. Our auditors have included a paragraph in their report on the
audited financial statements as of and for the year ended December 31, 1999
indicating that substantial doubt exists as to our ability to continue as a
going concern.

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 when needed. 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, 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.

We have completed the assessment of all internal information technology
and non-information technology systems that could be significantly affected by
the Year 2000. We have incurred approximately $10,000 related to the Year 2000
compliance and completed our internal Year 2000 readiness program in December
1999. We also completed the querying of 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 were 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 did not experience nor do we currently anticipate any material adverse
effects on our business, results of operations or financial condition as a
result of Year 2000 issues involving its internal use systems, third party
products nor any of its software products. Costs incurred in readying for Year
2000 uncertainties, including contingency planning and remediation efforts were
expensed as incurred. We do not anticipate any material costs remaining in
connection with Year 2000 uncertainties.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

NONE.

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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This Form 10-Q contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below and also in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in our
Form 10-K and Form 10-K/A for the fiscal year ended December 31, 1999.

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 March 31,
2000, we had cash, cash equivalents and short-term investment balances of
approximately $2.2 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 and the success of
any out-licensing efforts with respect to the pharmaceutical programs. Our
projections show that cash on hand plus the additional amounts raised in April
2000 in connection with the issuance of convertible promissory notes will be
sufficient to fund operations at the current level through the third quarter
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 third quarter 2000. 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. Our
auditors have included a paragraph in their report indicating that substantial
doubt exists as to our ability to continue as a going concern.

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 incurred a
net loss of approximately $5.2 million for the quarter ended March 31, 2000 and
additional deemed dividends of $2.5 million incurred in connection with the
issuance of Series R Preferred Stock and the issuance of convertible promissory
notes and warrants. As of March 31, 2000, our accumulated deficit was
approximately $186.3 million.

If we are to become and remain profitable, we will first need to, among
other things, 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 second half of 2000, we intend to out-license our proprietary botanical
product to mass-market partners and focus on the content, education and media
business. 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 NSF and other products or enter into
collaborative agreements with others who can successfully market them. NSF and
any other products we may introduce may not achieve market acceptance and we may
not achieve profitability. Our auditors have included a paragraph in their
report indicating that substantial doubt exists as to our ability to continue as
a going concern.

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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 our licensees or we 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.

IF WE ARE NOT SUCCESSFUL IN TRANSITIONING INTO THE BOTANICAL DIETARY 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. 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 botanical 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
manufacturing facilities. We may not be successful in entering into third party
manufacturing arrangements on acceptable terms, if at all. In addition, should
our third party manufacturers or we 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, 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. 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.

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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

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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:

o unexpected changes in regulatory requirements;
o exchange rates, tariffs and barriers;
o difficulties in coordinating and managing foreign operations;
o political instability; and
o 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,

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cause the cost of supplies to increase dramatically and materially and adversely
affect our business, financial condition and results of operations.

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 21 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

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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
developing non-infringing technology or in obtaining a license to use the
technology on commercially reasonable terms.

"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.

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
500,000 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.

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RISK ASSOCIATED WITH OUR NEW BUSINESS FOCUS

IF WE ARE NOT SUCCESSFUL IN TRANSITIONING INTO THE CONTENT, EDUCATION AND MEDIA
BUSINESS, WE MAY NEVER ACHIEVE REVENUES OR PROFITABILITY

We have transitioned our operations from pharmaceutical product
development to botanical dietary supplement development and commercialization
and now intend to transition into the content and media business in mid 2000. 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. We have no experience running the content and media
business. We may not be successful in these activities and may never generate
revenues or profitability from our new business.

IF WE FACE INTENSE COMPETITION IN PROVIDING OUR INTERNET-BASED HEALTH
INFORMATION SERVICES, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY

The number of Internet websites offering users healthcare content,
products and services is vast and increasing at a rapid rate. These companies
compete with us for users, advertisers and other sources of online revenue. In
addition, traditional media and healthcare providers compete for consumers'
attention both through traditional means as well as through new Internet
initiatives. We believe that competition for healthcare consumers will continue
to increase as the Internet develops as a communication and commercial medium.

There are a number of competitors delivering online health content who
will also seek advertising revenue and it is likely that more competitors will
emerge in the near future. Such competitors include, among others:
Healtheon/WebMD, drkoop.com, Mediconsult, Medscape and InteliHealth. Many of our
competitors enjoy significant competitive advantages including: greater
resources that can be devoted to the development, promotion and sale of their
products and services; longer operating histories; greater brand recognition and
larger customer bases.

THE INTERNET INDUSTRY IS HIGHLY COMPETITIVE AND CHANGING RAPIDLY, AND WE MAY
NOT HAVE THE RESOURCES TO COMPETE ADEQUATELY

Many of these competitors have more cash available to spend, longer
operating histories and stronger brand recognition than we do. Some have
internal distribution or other opportunities to support their business that we
neither have nor are able to replicate for a reasonable investment.

COMPETITION FOR HIGHLY-SKILLED PERSONNEL IS INTENSE AND THE SUCCESS OF OUR
BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL

Our performance depends on the continued services and performance of our
executive officers and key employees. Our future success also depends on our
ability to identify, attract, hire, train, retain and motivate highly skilled
technical, managerial, editorial, marketing and customer service personnel.
Competition for highly-skilled personnel is intense. In particular, skilled
technical employees are highly sought after in the Silicon Valley area and we
cannot guarantee that we will be able to attract or retain these employees.

WE MAY BE SUBJECT TO LIABILITY FOR INFORMATION RETRIEVED FROM OUR WEB SITE

As a publisher and distributor of online information, we may be subject to
third party claims for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of information
supplied on our Web sites. We could also become liable if confidential
information is disclosed inappropriately. These types of claims have been
brought, sometimes successfully, against online service providers in the past.
We could be subject to liability with respect to content that may be accessible
through our Web sites or third party Web sites linked from our Web sites. For
example, claims could be made against us if material deemed inappropriate for
viewing by children could be accessed through our Web sites or if a
professional, patient or consumer relies on healthcare information accessed
through our Web sites to their detriment. Even if any of the kinds of claims
described above do not result in liability to us, we could incur significant
costs in investigating and defending against them and in implementing measures
to reduce our exposure to this kind of liability. Our insurance may not cover
potential claims of this type or may not be adequate to cover all costs incurred
in defense of potential claims or to indemnify us for all liability that may be
imposed.

19
<PAGE>

OUR BUSINESS PROSPECTS DEPEND ON THE CONTINUED GROWTH IN USE OF THE INTERNET

We believe that our future success will require the continued development
and widespread acceptance of the Internet and online services as a medium for
obtaining and distributing healthcare and medical information. Internet use is
at an early stage of development and may be inhibited by a number of factors,
such as:

o Internet infrastructure which is not able to support the demands
placed on it or its performance and reliability declining as
usage increases;
o exchange rates, tariffs and barriers;
o security concerns with respect to transmission over the Internet
of confidential information;
o privacy concerns; and
o governmental regulation.

OUR BUSINESS PROSPECTS ARE UNCERTAIN, AS THE MARKET FOR ONLINE HEALTHCARE
INFORMATION AND SERVICES IS STILL DEVELOPING

The online healthcare information market is in the early stages of
development, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced competing products and services. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty and risk. Therefore, it is difficult to predict with any
assurance the size of the market for online healthcare information or its growth
rate. We cannot guarantee consumers will view obtaining healthcare information
through the Internet as an acceptable way to address their healthcare
information needs.

GOVERNMENT REGULATION OF THE INTERNET MAY RESULT IN INCREASED COSTS OF USING THE
INTERNET, WHICH COULD ADVERSELY AFFECT OUR BUSINESS

Currently, there are a number of laws that regulate communications or
commerce on the Internet. Several telecommunications carriers have petitioned
the Federal Communications Commission to regulate Internet service providers and
online service providers in a manner similar to long distance telephone carriers
and to impose access fees on these providers. Regulation of this type, if
imposed, could substantially increase the cost of communicating on the Internet
and adversely affect our business, results of operations and the market price of
our Common Stock.

WE MAY BE SUBJECT TO LIABILITY FOR CLAIMS THAT THE DISTRIBUTION OF MEDICAL
INFORMATION TO CONSUMERS CONSTITUTES PRACTICING MEDICINE OVER THE INTERNET

States and other licensing and accrediting authorities prohibit the
unlicensed practice of medicine. We do not believe that our publication and
distribution of healthcare information online constitutes practicing medicine.
However, we cannot guarantee that one or more states or other governmental
bodies will not assert claims contrary to our belief. Any claims of this nature
could result in our spending a significant amount of time and money to defend
and dispose of them.

20
<PAGE>

PART II OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities and Use of Proceeds

ONE-FOR-50 REVERSE STOCK SPLIT

CONVERSION OF SERIES R PREFERRED STOCK

Item 3. Defaults in Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

1. (a) A Special Meeting of Stockholders of Shaman Pharmaceuticals,
Inc. was held on January 28, 2000.

(b) The matters voted upon at the meeting and voting of the
stockholders with respect thereto are as follows:

(i) To approve an amendment to the Amended and Restated Certificate
of Incorporation to increase the number of authorized shares of the
Company's Common Stock by 280,000,000 shares, from 220,000,000
shares to 500,000,000 shares;

For: 14,489,710 Against: 316,906
Abstain: 1,910

(ii) To authorize the Board of Directors to effect, as soon as
practicable following the Special Meeting, any one of five different
reverse stock splits of the Company's Common Stock in a ratio of
from one-for-fifty to up to one-for-one thousand;

For: 14,749,851 Against: 56,981
Abstain: 1,695

(iii)To authorize and approve the Series R Preferred Stock Option
Plan.

For: 12,219,705 Against: 58,503
Abstain: 6,646 Broker Non-Vote: 2,523,672

21
<PAGE>
2. (a) A Special Meeting of Stockholders of Shaman Pharmaceuticals,
Inc. was held on March 31, 2000.

(b) The matters to be voted upon at the meeting were adjourned to
April 2000:

(i) To approve the transfer of all of the assets and liabilities of
Shaman Pharmaceuticals, Inc. to a wholly-owned subsidiary,
Shaman.com, Inc. ("Shaman.com") in exchange for shares of Common
Stock of Shaman.com;

(ii) To approve an amendment to the Amended and Restated Certificate
of Incorporation to delete the provision stating that a sale of all
or substantially all of the assets of the Company will be treated as
a liquidation, dissolution or winding up of the Company, for
purposes of causing a required liquidation preference distribution
to the holders of Series C Preferred Stock;

Item 5. Other information

In February 2000, Shaman and a wholly-owned subsidiary of Shaman (the
"Subsidiary") entered into a convertible note and warrant purchase agreement
(the "Note Agreement") with certain investors (the "Note Holders") in connection
with a bridge loan financing raising cash proceeds of approximately $3.0
million. Interest was accrued at a rate of 12% per annum. The principal amount
and accrued interest were to automatically convert at the sole election of the
Note Holders on April 30, 2000 into (i) shares of Shaman's Common Stock with a
conversion price of $0.497 per share or (ii) capital stock of the Subsidiary
sold in the first equity financing raising at least $5.0 million. Warrants were
issued in an amount equivalent to 40% of the dollar value of each Note Holders'
loan participation. The exercise price of the warrants is equal to the
conversion price of the Notes. These warrants are exercisable through April
2005. In March 2000, Shaman and the Note Holders amended the Note Agreement to
increase the amount of the notes to be issued from $3.0 million to $4.0 million.
In consideration for amending the Note Agreement, we amended the conversion
price of the notes into Shaman's Common Stock from a conversion price of $0.497
to the lower of (i) $0.497 per share or (ii) 10 days weighted average price,
with a floor of $0.30 per share. In April 2000, Shaman further amended the Note
Agreement to increase the amount of the notes to be issued from $4.0 million to
a total of $5.5 million. In consideration for such amendment, we further reduced
the conversion price of the notes such that the unpaid principal and accrued
interest automatically convert into Shaman's Common Stock with a conversion
price of $0.15 per share. The Note Holders received additional warrants to
purchase shares of Common Stock equal to 50% of the dollar value of their loan
participation with an exercise price of $0.10 per share, which warrants are
exercisable through August 30, 2000. Of the $5.5 million raised, we issued
approximately $3.5 million to investors for cash and approximately $2.0 million
to creditors and consultants of Shaman in exchange for services rendered. The
initial sale and subsequent sale of such notes and warrants gave rise to
significant non-cash interest expense due to the value of the warrants and
beneficial conversion features. We filed a Registration Statement on Form
S-3 with respect to the shares to be issued upon conversion or exercise of these
convertible promissory notes and warrants. On May 9, 2000, a total of
$5,587,781, which represents principal and accrued interest of the notes, was
converted into 37,251,874 shares of Shaman's Common Stock.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit No. Description
----------- -----------------------

27 Financial Data Schedule

(b) Current reports on Form 8-K that were filed during the quarter ended
March 31, 2000.

On February 15, 2000, Ernst & Young LLP was dismissed as the Company's
independent auditors. The reports of Ernst & Young on the financial statements
for December 31, 1998 and 1997 (the two most recent audited fiscal years)
contained no adverse opinion or disclaimer of opinion. The report of Ernst &
Young for the year ended December 31, 1998 contains an explanatory paragraph
with respect to the Company's ability to continue as a going concern as
mentioned in Note 1 of the notes to the financial statements. The Company's
Board of Directors participated in and approved the decision to hire new
independent accountants. In connection with its audits for December 31, 1998 and
1997 (the two most recent audited fiscal years) and subsequent interim periods
through February 15, 2000, there have been no disagreements with Ernst & Young
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Ernst & Young would have caused them to make reference
thereto in their report on the financial statements for such years. During
December 31, 1998 and 1997 (the two most recent audited fiscal years) and
subsequent interim periods through February 15, 2000, there have been no
reportable events (as defined in Regulation S-K Item 304 (a) (l) (iv). The
Company has furnished Ernst & Young with a copy of the disclosure made in the
Form 8-K filed with the Commission in connection with the change in its
certified public accountants. Ernst & Young furnished the Company with a letter
addressed to the SEC stating whether or not it agrees with the statements made
in the Form 8-K. A copy of such letter, dated February 18, 2000, is filed as
Exhibit 16 to the Form 8-K.

The Company has elected BDO Seidman, LLP as its new independent accountants
as of February 15, 2000. During the two most recent fiscal years and through
February 15, 2000, the Company has not consulted with BDO Seidman, LLP regarding
either (i) the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on the Company's financial statements, and neither a written report was
provided to the Company nor oral advice that BDO Seidman, LLP concluded was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issued; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item 304 (a)
(I) (iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or a reportable event, as that term is defined in Item 304 (a)
(l) (iv) of Regulation S-K.

23
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: May 12, 2000

SHAMAN PHARMACEUTICALS, INC.
(Registrant)

/s/ Lisa A. Conte
____________________________________
Lisa A. Conte
President, Chief Executive Officer and
Chief Financial Officer
(on behalf of the Company and as principal
executive officer and principal financial
officer)

24
<PAGE>

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