SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d) of the
Securities and Exchange Act of 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-19731
Shaman Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
213 East Grand Avenue, South San Francisco, California 94080
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-952-7070
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing sales price of the Common Stock on the Nasdaq
National Market on February 27, 1998 was $86,810,345.*
The number of shares of the Registrant's Common Stock outstanding was 17,856,477
as of February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the Commission
pursuant to Regulation 14A in connection with the Company's 1998 Annual
Meeting are incorporated herein by reference into Part III of this Report.
- ---------------
*Excludes 494,408 shares of the Registrant's Common Stock held by executive
officers, directors and affiliated parties at February 27, 1998. Exclusion of
such shares should not be construed to indicate that any such person possesses
the power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant or that such person is controlled by or
under common control with the Registrant.
PART I
ITEM 1. BUSINESS
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties that are described more fully in "Item 1 - Risk Factors."
While this outlook represents our current judgment on the future direction of
the business, these risks and uncertainties are only some of the factors that
may ultimately affect the success of Shaman Pharmaceuticals, Inc. Actual results
may differ materially from any future performance suggested in this report.
The Company
Shaman is a leader in the identification and development of novel
pharmaceutical products for the treatment of human diseases through the
isolation and optimization of active compounds found in tropical plants. The
Company believes that by focusing on drugs extracted from plants with a long
history of medicinal use, its drug discovery efforts will be quicker and more
likely to lead to safe and effective pharmaceuticals. Shaman has human clinical
trials underway for its three lead product candidates: Provir, nikkomycin Z, and
SP-134101. Shaman has completed Phase II trials showing efficacy for Provir for
the treatment of AIDS-associated and watery diarrhea. In the first quarter of
1998, Provir is scheduled to enter a pivotal Phase III trial for the treatment
of diarrhea in patients with AIDS. This single study, upon completion, is
intended to serve as the basis for the submission of a New Drug Application
("NDA") with the U.S. Food and Drug Administration ("FDA"). With success, Provir
for diarrhea in patients with AIDS will become the first product commercialized
by Shaman. Two additional dose-optimizing Phase II trials for Provir in watery
diarrhea commenced in 1997. These trials are intended to be completed in the
first half of 1998 and, if successful, will lead to Phase III trials.
Nikkomycin Z, an orally-active product for the treatment of endemic mycoses
and other systemic fungal infections, completed a Phase I trial in the UK in
1997, and the Company filed an Investigational New Drug application ("IND") in
the United States in December 1997. The Company intends to continue multi-dose
Phase I testing of this compound.
Shaman's research and preclinical development is principally focused on the
identification and optimization of compounds to treat Type II (adult onset or
non-insulin dependent) diabetes, an effort that has led to the identification of
21 chemically distinct, orally-active compounds which have demonstrated glucose
lowering effects in preclinical animal testing. In October 1997, Shaman filed an
IND for SP-134101, an oral product for the treatment of Type II diabetes. This
first product to emerge from the diabetes discovery program entered clinical
trials in January 1998. Significant funding, as well as milestone payments for
this program, are provided through collaborations with Lipha, s.a., a
wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany ("Lipha/Merck"), and
Ono Pharmaceutical Co., Ltd. ("Ono").
Background
Shaman builds on the knowledge and expertise of ethnobotanist and physician
teams who work with traditional healers to identify effective treatments for the
therapeutic areas targeted by the Company. These teams gather comparative data
on traditional medicinal uses of plants from geographically diverse tropical
areas and prioritize plant drug candidates based on common use among cultures
and other factors, including cross-checking field-derived information against
the results of literature searches as to chemical constituents, previously
discovered biological activity and other reported medicinal uses. Shaman
isolates and identifies the active compounds from plant extracts by testing for
activity in whole animal models at each step of its purification process. The
Company's
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natural product chemists use chromatography, spectroscopy, nuclear magnetic
resonance ("NMR") and other proven technologies to identify and isolate
compounds and structures. Because these compounds reflect the previously
untapped plant diversity of the rain forests, they have, to date, also exhibited
significant diversity of chemical structure. In addition, the Company's whole
animal screening approach provides the opportunity to discover novel methods of
treatment for diseases in which the underlying mechanism of action of a disease
is complicated and not well understood.
The Shaman Strategy
Shaman's strategy is to employ a drug discovery process focused on diseases
that:
o appear to result from multiple and, in many cases, unknown causes
and therefore may not be amenable to a targeted in vitro drug
discovery process;
o occur in the rain forests and are readily recognized and treated by
traditional healers (e.g., foot ulcers, sweet urine, poor eyesight
and fungal infections are often predictive of Type II diabetes); and
o allow the plant extract treatment to be confirmed in a whole animal
model and then purified to isolate the active compound.
Shaman believes this drug discovery process provides it with the opportunity
to:
o identify novel methods of treating diseases with therapeutic
relevance;
o discover new chemical entities or new classes of compounds to
treat disease; and
o provide early confirmation of efficacy and safety.
Shaman intends to commercialize its products through licensing arrangements
when safety and efficacy have been demonstrated in humans. Shaman intends to
out-license broad applications of its products worldwide while retaining the
opportunity to directly access markets through niche applications and/or
co-promotion.
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Clinical and Research Programs
Shaman has established and is continuing to build a portfolio of product
candidates. The following table describes the major therapeutic areas in which
the Company is conducting its product development and research:
Product Indication Status Commercial Rights
- ------- ---------- ------ -----------------
Provir AIDS-associated Entering Phase III Shaman
diarrhea pivotal study-
Q1, 1998. Completed a
Phase II efficacy
study in Q4, 1997
Provir Watery diarrhea Commenced two Phase II Shaman
dosing trials in Q3 &
Q4, 1997. Completed
initial Phase II
efficacy studies in
1996 & 1997
Provir Pediatric Formulation under Shaman
diarrhea development
Nikkomycin Z Endemic mycoses Completed Phase I study Shaman
in Q2, 1997; multi-dose
Phase I study scheduled
in 1998
Nikkomycin Z Azole-resistant Initiation pending Shaman
and Azoles Candida pre-clinical development
by Pfizer
SP-134101 Type II Diabetes Initiated Phase I study Shaman
in Q1, 1998
Oral Type II Diabetes Preclinical Ono; Lipha/Merck;
antihyperglycemic and Shaman. Shaman
compounds receives royalties
on sales outside
the U.S. and
profit sharing in
the U.S.
Provir
The Shaman-patented compound SP-303 is the active ingredient in Provir.
SP-303 is extracted from the latex of the Croton tree, which grows abundantly in
Latin America. This latex is used orally by many native cultures throughout
Latin America for a variety of medicinal purposes, including respiratory
infections and gastrointestinal problems. Provir is an oral drug that acts as a
specific inhibitor of fluid loss via an antisecretory mechanism to treat
diarrhea. In clinical trials, the Company determined that Provir is not
systemically absorbed, which lessens the potential for drug interactions and
side effects.
Provir has demonstrated initial indications of activity for diarrhea in
patients with AIDS. Based upon successful Phase II study results released in
October 1997 in AIDS patients with diarrhea, Provir is scheduled to enter a
Phase III trial in this population during the first quarter of 1998. If
successful, this single study will serve as the basis for an NDA submission
that the Company is currently targeting for 1999.
Shaman has also completed Phase II trials showing preliminary efficacy for
Provir for the treatment of watery diarrhea. However, in October 1997, interim
results from one outpatient study in mild non-specific diarrhea did not show
significant efficacy and the trial was discontinued. To further determine
Provir's effect in other more severe diarrheas, two additional dose-optimization
Phase II trials in moderate-to-severe traveler's and inpatient acute watery
diarrhea are currently underway.
Diarrhea in Patients with AIDS/HIV
Diarrhea in patients with HIV and AIDS is a devastating syndrome which
afflicts between 20% and 60% of patients. Even given the success of protease
inhibitors and triple anti-HIV regimens in
4
improving patient prognosis, the problem of diarrhea continues and has
emerged as a major medical and quality of life problem as patients attempt to
live a normal lifestyle. Unfortunately, current symptomatic therapies provide
either poor relief or bring with them the burden of unacceptable side effects.
Hence, this population faces a serious unmet medical need. In the face of these
problems, patients with chronic diarrhea have been forced to alter their
lifestyle to accommodate this disruption in the activities of daily life.
Provir is currently being developed for the treatment of diarrhea in
patients with AIDS. A recently completed (October 1997) Phase II study enrolled
AIDS patients with chronic diarrhea. Patients were randomized to receive either
SP-303 500 mg or placebo given every six hours (q6h) for four days. Fifty-one
patients (26 received SP-303, 25 received placebo) were available to evaluate
drug efficacy. There were no significant differences between the treatment arms
with respect to any of the baseline demographic variables examined. Of the 51
fully evaluable patients, 48 (94.1%) had no identifiable pathogen isolated from
their screening stool sample (culture and microscopic examination).
Treatment with SP-303 was well tolerated with no imbalance between groups
in the occurrence of adverse events or in treatment-emergent laboratory
abnormalities, and all were considered mild in nature. At day four, the SP-303
treated group demonstrated a mean reduction from baseline stool weight of 451.3
grams per 24 hours as compared to 150.7 grams per 24 hours in the patients
receiving placebo. In addition, abnormal stool frequency decreased from a mean
of 5.2 per 24 hours at baseline to 2.2 per 24 hours in the Provir-treated group,
compared to 3.1 in the placebo group.
A longitudinal random regression analysis of the treatment effect over four
days indicated the patients treated with SP-303 experienced a statistically
significant reduction in stool weight (p=0.008) and in abnormal stool frequency
(p=0.039) when compared with placebo. The point-in-time analysis comparing
baseline to Day 4 of treatment yielded p-values of p=0.14 in mean reduction in
stool weight, and p=0.26 in mean reduction in abnormal stool frequency. The mean
maximal time between abnormal stools was greater in the SP-303 group (30.6
hours) as compared with patients who received placebo (24.6 hours, p = 0.035).
The results of this study suggest that SP-303 is effective in reducing stool
weight and abnormal stool frequency in patients with AIDS and chronic or
sub-acute diarrhea.
A Phase III trial designed to confirm the Phase II results is planned to
begin in the first quarter of 1998. During the Phase III clinical trial, Provir
will be studied in a larger number of patients for a longer duration of therapy,
including outpatient experience. Agreement has been reached with the U.S. FDA on
the trial design, including endpoints, for this pivotal Phase III study, which,
if successful, may enable the company to file an NDA for this indication in
1999.
Based on these Phase II results and the Phase III plan, Shaman is actively
pursuing a commercialization partnership with other AIDS-focused companies for
this indication.
Watery Diarrhea
Watery diarrhea is often caused by infectious agents such as V. cholerae
and E. coli. These agents secrete toxins that adhere to the intestinal wall and
cause increased secretion of chloride ions from intestinal cells, resulting in
fluid accumulation in the small intestine. This in turn leads to severe and, in
some cases, life threatening diarrhea. According to the 1995 data from the IMS
America, Ltd. ("IMS"), the leading pharmaceutical marketing data firm, over 26
million prescriptions are written annually for watery diarrhea. Moreover,
approximately 67 million over-the-counter product units are sold in the U.S.
alone.
Current primary treatments for watery diarrhea do not address the
dehydration or fluid loss caused by the illness. Watery diarrhea is typically
treated with one of two treatment regimens:
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antibiotics or antimotility agents. Antibiotics kill the bacteria, while
antimotility agents reduce diarrhea frequency by inhibiting peristaltic action
(natural muscular contraction of the intestinal tract). For mild to moderate
cases of watery diarrhea, the use of antibiotics is discouraged by the World
Health Organization ("WHO") and the Centers for Disease Control ("CDC").
Bacteria can, in many cases, build up a resistance to antibiotics and
antibiotics can reduce the body's ability to build natural immunities to disease
and, therefore, increase the likelihood of reinfection.
While antimotility agents are effective in reducing the severity of watery
diarrhea, they often cause severe constipation. In addition, because of reduced
motility in the intestine, the bacteria are often not eliminated and remain in
the gut. When the treatment is stopped, the patient often experiences rebound
diarrhea. Moreover, these agents are not recommended in children and the elderly
because of the risk of prolonging the illness.
Preclinical studies indicate that Provir treats watery diarrhea by
inhibiting the secretion of chloride ions from intestinal cells, specifically
countering fluid loss, a fundamental mechanism causing diarrhea. Based on its
mechanism of action and results of initial clinical testing, it appears that
Provir does not affect the normal motility of the intestine and the lack of
absorption of Provir in the intestine contributes to its safety, its reduced
potential for drug interactions, and its specificity of action.
Shaman has conducted Phase I clinical trials for Provir in more than 150
adults, children and infants as young as three months of age, in both single and
multiple doses. These trials demonstrated that Provir is safe and can be easily
tolerated in doses up to two grams per day for two days. The results also
indicated no significant adverse side effects of the drug.
In November 1996, the Company completed a Phase II trial in 75 patients to
determine the efficacy of Provir in the treatment of traveler's and non-specific
diarrhea. This open-label Phase II study was conducted by Dr. Herbert DuPont, a
world recognized expert in travel medicine, of the University of Texas at
Houston and Baylor College of Medicine. It included American subjects who
suffered from diarrhea upon traveling to Mexico as well as native Mexicans
suffering from diarrhea of unknown cause, or non-specific diarrhea.
In the Phase II study, 89% of the 75 patients treated with Provir
responded favorably (returned to normal bowel function) after 48 hours of
treatment, with over 60% of those patients returning to normal after just 24
hours. Traveler's diarrhea left untreated usually lasts five to seven days.
Non-specific diarrhea usually lasts three to four days. Of the 71 patients
available for follow up, none of the patients experienced worsening of the
diarrhea illness once resolution of the disease began. In addition, no
significant adverse reactions were reported. Of 25 patients with traveler's
diarrhea receiving one or two grams of Provir per day, effectiveness (measured
as a combination of stool frequency, stool consistency, and gastrointestinal
symptoms) was demonstrated in 72% of patients over the course of the study.
Within this patient group, the mean time to last unformed stool, the most
significant indicator of therapeutic effect, was 58% less than historical
controls would indicate. The patients experiencing non-specific diarrhea of
unknown etiology received either a one or two gram dose per day for two days. In
the group of 15 patients receiving the one gram dose, all patients responded to
therapy, and 87% returned to normal stool frequency after 24 hours of treatment.
In the group of 35 patients receiving the two gram dose, 34 patients responded
to therapy, and 80% returned to normal stool frequency after 24 hours of
treatment. The mean time to last unformed stool was reduced by 50% in the one
gram dose group and 32 percent in the two gram dose group compared to the
historical control in a cure study.
In October 1997, the Company determined from an interim analysis of another
Phase II outpatient study of 166 Mexican nationals with mild non-specific
diarrhea that Provir provided no benefit over placebo after two days of
treatment. In this mild, non-specific diarrhea, it was difficult to show an
6
added benefit of Provir therapy during the short course of illness. Based on
these results, the Company suspended its study of mild, non-specific diarrhea
and is now focusing on moderate-to-severe diarrhea.
In the Third and Fourth quarters of 1997, Shaman initiated two
double-blind, randomized, placebo controlled Phase II studies of Provir designed
to determine the optimal effective dose level of Provir for the treatment of
moderate-to-severe watery diarrhea. These studies include an outpatient study of
travelers in Mexico and Jamaica, as well as an in-hospital study in Venezuela.
Pediatric Diarrhea
According to the Journal of Pediatrics, in the United States alone, over
30 million episodes of diarrhea occur annually in children under five years of
age. In addition, there are over one billion episodes of pediatric diarrhea
worldwide annually and four million deaths associated with pediatric diarrhea
per year among children less than five years old in developing countries.
Current recommended therapies for pediatric diarrhea are designed to replace
water and electrolytes. Antimotility agents are contraindicated in children less
than two years of age and not recommended for treatment of diarrhea in children
of any age. In the vast majority of diarrheal illnesses in the United States,
particularly those in children, the use of antibiotics is not recommended.
Shaman is currently engaged in formulation development of Provir as a potential
treatment for pediatric diarrhea in preparation for initiating a clinical
development program.
Nikkomycin Z
Nikkomycin Z was licensed in 1995 from Bayer AG. See
"Business--Collaborative Relationships and License Agreements." Nikkomycin Z is
an orally administered product designed for the treatment of endemic mycoses and
other systemic fungal infections. Nikkomycin Z is novel in its mechanism of
action against fungal infections. Preclinical studies of nikkomycin Z indicate
that it is fungicidal and could prove superior to current treatments. By
inhibiting chitin synthetase, which is found in the cell walls of most fungi,
but not in mammalian cells, nikkomycin Z inhibits cell wall synthesis,
ultimately causing fungal cells to expand and burst. The lack of chitin in
mammalian cells should prevent similar damage to normal cells in tissues
affected by these fungal infections.
Endemic mycoses are systemic fungal infections concentrated in the
southwest, central and northeast regions of the United States. There are three
basic forms of endemic mycoses: coccidiomycosis (valley fever), histoplasmosis
and blastomycosis ("cocci," "histo" and "blasto"). The infecting organisms are
found in soil. When the soil is disturbed (such as during crop planting or
harvesting), the fungi become airborne and may be inhaled into the lungs. Once
infected, otherwise healthy individuals will experience mild flu-like symptoms
but may never be diagnosed with the disease. In more severe cases, however, the
fungus spreads systemically and results in disseminated fungal infections. It is
estimated that approximately 240,000 persons per year in the United States show
clinical symptoms of endemic mycoses. The Company believes that the annual
market for treatment of endemic mycoses in the United States is approximately
$150 million.
Currently, two classes of drugs are commonly prescribed of the treatment
for endemic mycoses: azoles, which are fungistatic (inhibit the growth of the
fungus, but do not kill it) and polyenes (including amphotericin B), which are
fungicidal (kill the fungus). However, often these drugs cannot be tolerated in
high enough doses to kill the fungi.
Nikkomycin Z is an orally active product for the treatment of endemic
mycoses and other systemic fungal infections. A single-dose Phase I trial in the
UK was completed in 1997. Shaman filed an IND in the United States to test
nikkomycin Z in December 1997 and intends to begin multi-dose Phase I testing in
1998.
7
Candidiasis is a fungal infection that can result in serious systemic
disease. Approximately 265,000 patients worldwide are treated annually for
systemic candidiasis. Nikkomycin Z has also been shown to be capable of
interacting in a synergistic fashion with a number of known antifungal
compounds, including fluconazole (Diflucan) and itraconazole (Sporonox), the two
largest selling antifungals in the world. Based on this synergistic activity,
the Company plans to supply nikkomycin Z to Pfizer Corporation for a combination
study that tests nikkomycin Z in combination with fluconazole in treating
azole-resistant esophageal candidiasis. The estimated annual total market of
antifungal agent sales for systemic fungal infections is approximately $2.0
billion.
Virend
Shaman recently suspended a Phase II clinical trial of Virend, a topical
treatment for herpes, which was being studied in combination with oral acyclovir
in patients with AIDS. It was determined from an interim analysis that there
were no additional benefits to the use of Virend over the use of oral acyclovir
alone. Based on these results, the Company has suspended this program.
SP-134101
SP-134101 is a Shaman-patented, oral product for the treatment of Type II
diabetes. In October 1997, Shaman filed the IND for SP-134101, the first product
to emerge from the diabetes discovery effort. A Phase I trial for the compound
began in January 1998. In preclinical studies SP-134101 has been shown to lower
blood glucose, triglycerides, and blood pressure. SP-134101 appears to work by
increasing glucose uptake in the peripheral tissues and decreasing triglyceride
output from the liver.
Drug Discovery Research
Diabetes
Type II diabetes is a chronic disease in which the tissues of the body are
resistant to the actions of insulin (a hormone produced by the pancreas), and
the pancreas cannot secrete enough insulin to overcome this resistance. When
this happens, the ability of insulin to carry out its normal action on the
liver, muscle and adipose tissues is lost, the result is increased blood glucose
and associated symptoms. This disease is the result of multiple causes, many of
which are undefined at the molecular level. In the United States alone,
approximately 625,000 new cases of Type II diabetes are diagnosed each year, and
it is estimated that there will be over 18 million cases by the year 2002 (over
five percent of the population).
Shaman is focused on the development of oral antihyperglycemic (blood
glucose lowering) agents for the treatment of Type II diabetes. The program
involves in vivo screening of plants by oral administration in animal models,
followed by the fractionation of active extracts, the isolation and
identification of active compounds, and the capability to profile and prioritize
promising candidates for clinical development. In just over 24 months of this
program, the Company has identified 21 orally-active compounds for which, to
date, 14 original U.S. patent applications have been filed (five of which have
been issued) and eleven international patent applications have been filed. These
compounds represent new classes and, potentially, new methods for treating Type
II diabetes.
The diabetes research and development program serves as the basis for
Shaman's collaboration with Lipha/Merck and Ono. Significant funding, as well as
milestone payments for this program, result from these collaborations. See
"Business--Collaborative Relationships and License Agreements."
8
The Company filed an IND for its first diabetes compound, SP-134101, in
1997, and began a Phase I trial for the compound in January 1998.
Collaborative Relationships and License Agreements
In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to develop jointly Shaman's antihyperglycemic drugs.
In exchange for development and marketing rights in all countries except Japan,
South Korea and Taiwan (which are covered under an earlier agreement between
Shaman and Ono), Lipha/Merck will provide up to $9.0 million in research
payments and up to $10.5 million in equity investments priced at a 20% premium
to a multi-day volume weighted average price of the Company's Common Stock at
the time of purchase. Of the $4.5 million received on signing the agreement,
$1.5 million was an up-front research payment and $3.0 million was an equity
investment. The agreement also provides for additional preclinical and clinical
milestone payments to the Company in excess of $10.0 million per compound for
each antihyperglycemic drug developed and commercialized.
To date, Shaman has identified 21 proprietary, orally-active compounds
which show preclinical activity as treatments for Type II diabetes. Lipha/Merck
will bear all pre-clinical, clinical, regulatory and other development expenses
associated with the compounds selected under the agreement. In addition, as
products are commercialized, Shaman will receive royalties on all product sales
outside the United States and up to 50% of the profits (if the Company exercises
its co-promotion rights) or royalties on all product sales in the United States.
Certain of the milestone payments will be credited against future royalty
payments, if any, due to the Company from sales of products developed pursuant
to the agreement.
In May 1995, the Company entered into a collaborative agreement with Ono
providing for, among other things, three years of funding for the research and
development of compounds for the treatment of Type II diabetes. Under the terms
of the agreement, Shaman will screen 100 diabetes-specific plants per year in
vivo, isolate and identify active compounds, and participate in any medicinal
chemistry modification. In turn, Ono will provide Shaman with access to Ono's
preclinical and clinical development capabilities through proprietary in vitro
assays and medicinal chemistry efforts. Ono's development and commercialization
rights are for the countries of Japan, South Korea and Taiwan. Under the terms
of the Agreement, Ono will provide $7.0 million in collaborative research
funding and will pay preclinical and clinical milestone payments of $4.0 million
per compound for each antidiabetic drug that is commercialized. Of the $3.0
million received on signing the agreement, $1.0 million was an up-front research
payment. Shaman received an additional $1.0 million payment (beyond the $7.0
million commitment) in December 1996 for enhanced access rights to these
compounds.
In June 1995, the Company licensed several patents from Bayer AG relating
to the use of nikkomycin Z and the composition and use of nikkomycin Z in
combination with other antifungal compounds for the development of antifungal
agents. Under the terms of the agreement, the Company has paid Bayer AG an
initial milestone payment and may be required, upon the occurrence of certain
events, to make additional milestone payments and to pay royalties on any
commercialized products derived from the agreement.
In February 1990, the Company entered into a license agreement with Dr.
Michael Tempesta. There currently exists a dispute with Dr. Tempesta over the
scope and coverage, if any, of the license. The maximum royalty claimed by Dr.
Tempesta is two percent on net sales of a certain antiviral agent. In November
1996, a demand for arbitration was filed by the Company to address a claim made
by Dr. Tempesta that the royalty will be payable with respect to either or both
of Provir and Virend. See "Legal Proceedings."
9
As the Company continues its product development and commercialization, it
intends to enter into additional corporate alliances which may include licenses
and/or marketing rights to selected products and markets.
Manufacturing
Shaman intends to conduct both pilot-scale and commercial manufacturing of
its future products either in-house, with collaborative partners, or through
contract manufacturing facilities. The Company has created an in-house facility
that operates under Good Manufacturing Practices ("GMP") and has conducted
pilot-scale manufacturing of SP-303. The Company has a sufficient quantity of
raw material for SP-303 and SP-303 manufacturing capacity to complete currently
planned clinical trials. In addition, Shaman also expects to establish a second
source manufacturing facility to produce clinical and early commercial lots in
1998.
In January 1996, the Company entered into an agreement with Abbott
Laboratories ("Abbott") for the production of nikkomycin Z. Abbott has developed
processes and manufactured nikkomycin Z in compliance with GMP guidelines for
the Company's clinical trial programs. SP-134101 is being manufactured by a
contract manufacturer in compliance with GMP guidelines for the Company's
clinical trial programs.
Marketing
In July 1997, Shaman hired a senior executive to direct commercial
development, including sales and marketing. The Company's general strategy is to
develop corporate alliances with larger pharmaceutical companies for certain of
its programs in order to take advantage of such companies' abilities to reach
broad-based markets. Shaman is also evaluating the opportunity to retain certain
marketing rights to its products. At the present time, Shaman has no sales
staff. See "Business--Collaborative Relationships and License Agreements" and
"Risk Factors--Limited Manufacturing and Marketing Experience and Capacity."
Patents and Proprietary Technology
Proprietary protection for the Company's product candidates, processes and
know-how is important to the Company's business. The Company's policy is to file
patent applications to protect technology, inventions and improvements that are
considered commercially important to the development of its business. The
Company also relies upon trade secrets, know-how and continuing technological
innovation to develop and maintain its competitive position. The Company plans
to aggressively prosecute and defend its patents and proprietary technology.
The Company has been issued a U.S. patent related to its specific
proanthocyanidin polymer compositions designated SP-303; specifically, the
patent contains composition of matter claims related to SP-303 contained in the
Company's Provir product.
The Company has also filed foreign applications corresponding to its
issued U.S. patents relating to its proanthocyanidin polymer composition. The
Company has been granted patents in Australia, Mexico and New Zealand and has
patent applications pending in Canada, Europe, Japan, the Republic of Korea and
Singapore.
The Company has also recently filed a U.S. patent application directed to
new formulations and methods of using its specific proanthocyanidin polymer
composition for treatment of watery diarrhea. These formulations are contained
in the Company's Provir product.
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The Company has five issued U.S. patents relating to compositions and
methods for treating Type II diabetes, as well as reducing hyperglycemia
associated with other etiologies. The Company also has nine additional U.S.
patent applications still pending which relate to compositions and methods for
treating Type II diabetes, as well as reducing hyperglycemia associated with
other etiologies. The Company has filed eleven foreign applications, i.e.,
international applications under the Patent Cooperation Treaty designating a
number of foreign countries, as well as applications in Taiwan, corresponding to
a number of the U.S. applications and plans to file additional corresponding
foreign applications within the relevant convention periods.
The Company also has one pending U.S. patent application and a
corresponding international patent application designating a number of foreign
countries relating to methods for administering and sustained release
formulations for anti-fungal agents like nikkomycin Z. The methods and
compositions are useful for treatment of fungal infections, particularly
candidiasis, the most frequently encountered life-threatening mycoses. The
Company has licensed several patents from Bayer AG relating to the use of
nikkomycin Z and the composition and use of nikkomycin Z in combination with
other antifungal compounds for the development of antifungal agents.
There can be no assurance that the Company's pending patent applications
will result in patents being issued or that, if issued, patents will afford
protection against competitors with similar technology; nor can there be any
assurance that others will not obtain patents that the Company would need to
license or circumvent. See "Risk Factors--Uncertainty Regarding Patents and
Proprietary Rights."
Raw Materials Supply
The Company imports all of the plant material it screens from foreign
countries, particularly from countries in Latin and South America, Southeast
Asia and Africa. Shaman's relationships with botanical organizations in tropical
regions have enabled the Company to set up large-scale supply arrangements for
the raw material from which some of its lead products are derived. For example,
the plant material required for SP-303 is found in at least seven Latin and
South American countries and can be harvested in a sustainable manner where work
forces already exist. Presently, Shaman is harvesting approximately 12,000
kilograms of the SP-303 source plant per year from South and Central America,
pursuant to supply agreements with corporations working in those regions. The
SP-303 source plant occurs naturally in these areas and, after harvesting, can
be regenerated to maturity in seven years. Shaman is currently engaged in
setting up market-scale, long-term acquisition of quantities of material
adequate to meet projected commercial demands for the launch and sale of Provir.
Shaman requires that all large-scale plant collections be conducted in a
sustainable manner, which could include replanting in areas of intensive wild
harvesting. In the case of SP-303, the source plant can be sustainably harvested
because it grows spontaneously with minimal management. Shaman works with
communities and cooperatives in South and Latin America to harvest the SP-303
source plant and other source plants in a regenerable manner. These communities
and cooperatives, many of which receive support from national and international
government agencies, are experienced in the sustainable harvest of other
tropical forest products, including natural rubber, nuts and fruits. Company
policy also requires that each source plant targeted for large-scale compound
isolation must have multi-country sources of supply or be economically
synthesizable. This policy reduces the risks associated with using foreign
suppliers, such as political or economic instability.
Shaman has entered into supply agreements with companies working in Central
and South America pursuant to which they will supply certain quantities of
Shaman's commercial requirements of the raw material used to produce SP-303 from
their countries. These companies work with cooperatives of indigenous peoples to
supply source plants to Shaman, to transfer material information to Shaman
11
relating to improvements in the collection and harvesting of the raw
material, and to improve sustainable harvesting techniques in order to create a
model of sustainable production in tropical forests. Although the Company has
developed multi-country sources of supply for its key plant materials and has
entered into long-term supply agreements for the source material for SP-303,
there can be no assurance of a continual source of supply of these materials.
See "Risk Factors--Dependence on Sources of Supply."
When it is economically advantageous and technically feasible to
synthesize a compound rather than extract it from raw plant material, the
Company will utilize large-scale chemical synthesis to obtain a sufficient
supply of such compound in order to satisfy its commercial requirements.
However, there can be no assurance that the Company will be successful in
synthesizing any such products.
Competition
Competition in the pharmaceutical industry is extremely intense. The
principal factors upon which such competition is based include therapeutic
efficacy, side-effect profile, ease of use, safety, physician acceptance,
patient compliance, marketing, distribution and price. Many treatments for
infectious and metabolic diseases exist and additional therapeutics are under
development, including other naturally-sourced pharmaceuticals. To the extent
these therapeutics address the disease indications on which the Company has
focused, they may represent significant competition. Many pharmaceutical
companies have significantly greater research and development capabilities, as
well as substantially greater marketing, financial and human resources than the
Company. In addition, many of these competitors have significantly greater
experience than the Company in undertaking preclinical testing and human
clinical trials of new pharmaceutical products and obtaining regulatory
approvals of such products. These companies may represent significant long-term
competition for the Company.
There can be no assurance that developments by other pharmaceutical
companies will not render Shaman's products or technologies obsolete or
noncompetitive, or that the Company will be able to keep pace with technological
developments of its competitors. Many of the Company's competitors have
developed, or are in the process of developing, technologies that are, or in the
future may be, the basis for competitive products. Some of these products may
have an entirely different approach or means of accomplishing the desired
therapeutic effect than products being developed by the Company. These competing
products may be more effective and less costly than the products developed by
Shaman.
Government Regulation
The research and development, manufacture and marketing of Shaman's
products are subject to substantial regulation by the FDA in the United States
and by comparable authorities in other countries. These national agencies and
other federal, state and local entities regulate, among other things, research
and development activities and the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products.
The process required by the FDA before the Company's products may be
marketed in the United States generally involves the following: (i) preclinical
laboratory and animal tests; (ii) submission to the FDA of an IND, which must
become effective before human clinical testing may commence; (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the proposed drug for its intended indications; (iv) the submission to the FDA
of an NDA; (v) satisfactory completion of an FDA inspection of the manufacturing
facilities at which the product is made to assess compliance with GMP. The
testing and approval process requires substantial time, effort and financial
resources.
12
Preclinical tests include laboratory evaluation of the product as well as
animal studies to assess the potential safety and efficacy of the product. The
results of the preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of the IND, which must become
effective before human clinical trials may commence. The IND will automatically
become effective 30 days after receipt by the FDA, unless the FDA before that
time raises concerns or questions about the conduct of the trials as outlined in
the IND. In such cases the IND sponsor and the FDA must resolve any outstanding
concerns before clinical trials can proceed. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials.
Clinical trials involve the administration of the investigational products
to healthy volunteers or patients under the supervision of a qualified principal
investigator. Further, each clinical study must be reviewed and approved by an
independent Institutional Review Board ("IRB") at each institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases which may
overlap. Phase I usually involves the initial introduction of the drug into
healthy human subjects where the product is tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited patient population to (i) determine the efficacy of the product for
specific targeted indications, (ii) determine dose tolerance and optimal dose
and (iii) identify possible adverse effects and safety risks. When Phase II
evaluations demonstrate that the product is effective and has an acceptable
safety profile, Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety in an expanded patient population at
geographically-dispersed clinical study sites. The FDA or the sponsor may
suspend clinical trials at any point in this process for a variety of reasons,
including either party's belief that clinical subjects are being exposed to an
unacceptable health risk.
Occasionally, the FDA will require Phase IV "Post-Marketing Trials" which
are conducted after FDA clearance to gain additional experience from the
treatment of patients in the intended therapeutic area. Other Phase IV
commitments might be additional toxicology or pharmacology studies.
After completion of the required testing, generally an NDA is submitted. FDA
approval of the NDA is required before marketing may begin in the United States.
The NDA must include the results of extensive clinical and other testing and the
compilation of data relating to the product's chemistry, pharmacology and
manufacture, the cost of all of which is substantial. The FDA reviews all NDAs
submitted before it accepts them for filing and may request additional
information rather than accept an NDA for filing. In such an event, the NDA must
be resubmitted with the additional information and, again, is subject to review
before filing. Once the submission is accepted for filing, the FDA begins an
in-depth review of the NDA. Under the Federal Food, Drug and Cosmetic Act, the
FDA has 180 days in which to review the NDA and respond to the applicant. The
review is often extended by mutual agreements of the sponsor and the FDA, or a
major amendment to the submission. The FDA may refer the application to the
appropriate advisory committee for review, evaluation and a recommendation as to
whether the application should be approved.
The FDA is not bound by the recommendation of an advisory committee, but
generally follows the committee's recommendation. If evaluations of the NDA and
the manufacturing facilities are favorable, the FDA may issue either an approval
letter or an approvable letter, which usually
13
contains a number of conditions that must be met in order to secure final
approval of an NDA. When and if those conditions have been met to the FDA's
satisfaction, the FDA will issue an approval letter, authorizing commercial
marketing of the drug for certain indications. If the FDA's evaluation of the
NDA submission or manufacturing facilities is not favorable, the FDA may refuse
to approve the NDA or issue a not approvable letter.
Each drug product manufacturing establishment that supplies drugs to the
U.S. market must be registered with, and be approved by, the FDA prior to
commencing commercial production, and is subject to biennial inspections by the
FDA for GMP compliance after an NDA has been approved. In addition, drug product
manufacturing establishments located in California also must be licensed by the
State of California.
The Company will also be subject to a variety of foreign regulations
governing clinical trials, registrations and sales of its products. Whether or
not FDA approval has been obtained, approval of a product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process varies from country to
country and the time needed to secure approval may be longer or shorter than
that required for FDA approval.
The Healing Forest Conservancy
In January 1990, Shaman formed The Healing Forest Conservancy, a
California not-for-profit public benefit corporation (the "Conservancy"), which
is dedicated to maintaining global plant biodiversity. The Conservancy focuses
on conserving plants that have been used traditionally for medicinal purposes.
Shaman has donated 13,333 shares of Common Stock to the Conservancy's endowment
fund. The Company also plans to donate additional funds when it has achieved
profits from product sales, if any, to provide benefits to indigenous peoples in
the countries where Shaman's source plants are obtained. The Conservancy is also
soliciting private donations to fund its operations and conservation efforts.
Employees
As of February 27, 1998, the Company had 106 employees. Of these
employees, 72 are dedicated to research, development, quality assurance and
quality control, regulatory affairs and preclinical testing. Thirty-four of the
Company's full-time employees hold a Ph.D. or M.D. In addition, the Company
currently fills 15 positions through the use of temporary staff and consultants.
Scientific Strategy Team
Shaman's Scientific Strategy Team ("SST") consists of an interdisciplinary
group of ethnobotanists, scientists, pharmacologists, physicians, pharmacists
and Company personnel. Several members of the SST who are actively working in
the field have agreed to exclusively advise the Company in connection with
medical and ethnobotanical matters and to refrain from consulting with other
pharmaceutical companies on all ethnobotanical matters. Some members may have
collaborative relationships with other pharmaceutical firms for random
collection of plants on a contract basis.
The principal criteria used in selecting members of the SST are breadth of
the scientific discipline, recognized scientific excellence in their fields, and
ability to contribute to the team evaluation process. The Company relies on the
SST to identify plant candidates for Shaman's botanical screening process and to
evaluate the information obtained about these candidates, both in the field and
in literature. SST members who are not employees of the Company are compensated
with stock options for their
14
general contributions throughout the year, and are paid $1,000 per day for
participation at the SST meetings, which occur approximately every 12 months.
Shaman also pays SST members for any additional consulting services and field
expeditions conducted on behalf of the Company.
The SST includes the following members:
Edward F. Anderson, Ph.D. is a Senior Research Botanist at the Desert
Botanical Gardens in Phoenix, Arizona. Formerly, he was a Professor of
Biology at the Whitman College in Walla Walla, Washington. Dr. Anderson
received a B.A. in Biology from Pomona College in California and an M.A. and
a Ph.D. in Botany from Claremont Graduate School and Rancho Santa Ana Botanic
Garden, respectively.
Paul S. Auerbach, M.D. is Chief Operating Officer of MedAmerica in
Oakland, California. Dr. Auerbach was formerly Chief, Division of Emergency
Medicine at Stanford University Hospital in Stanford, California.
Dr. Auerbach earned an A.B. in Religion from Duke University, an M.D. from
Duke University School of Medicine, and was a Sloan fellow, M.S.M. at
Stanford University Graduate School of Business.
Michael J. Balick, Ph.D. is Director of the Institute of Economic
Botany at The New York Botanical Garden. Dr. Balick holds a B.S. in
Agriculture and Plant Science from the University of Delaware and both an
A.M. and a Ph.D. in Biology from Harvard University.
Baruch S. Blumberg, M.D., Ph.D. is Associate Director of Clinical
Research at the Fox Chase Cancer Center in Philadelphia and the first
American dean of a college at Oxford University. Dr. Blumberg became a Nobel
laureate in 1976 for his discovery of the hepatitis B antigen. He received a
B.S. from Union College in New York, an M.D. from the College of Physicians
and Surgeons at Columbia University and a Ph.D. in Biochemistry from Oxford
University.
Anthony Conte is a retired pharmacist and former proprietor of the
Gilliar Drug Company, Inc. Mr. Conte has 30 years of experience in
commercializing pharmaceuticals. He received a B.S. in Pharmacy from Long
Island University, Brooklyn College of Pharmacy and an M.S. in Pharmaceutical
Chemistry from Columbia University. Mr. Conte is the father of Ms. Conte,
President, Chief Executive Officer and a director of Shaman.
James A. Duke, Ph.D. is a recently retired research scientist at the
Agricultural Research Service of the United States Department of Agriculture.
Dr. Duke earned his A.B., B.S. and Ph.D. in Botany from the University of
North Carolina.
Elaine Elisabetsky, Ph.D. is a research fellow of the Brazilian
Research Council, Associate Professor at the Universidade Federal do Rio
Grande do Sul and a board member of the International Society of
Ethnopharmacology. Dr. Elisabetsky holds a B.S. in Biomedical Sciences from
the Escola de Medicina in Sao Paulo, Brazil, a Ph.D. in Pharmacology from the
Departmento de Farmacologia e Bioquimica, Escola Paulista de Medicina in
Brazil, and has received post-doctorate training in ethnobotany and
ethnopharmacology from The New York Botanical Garden.
Norman R. Farnsworth, Ph.D. is Research Professor of Pharmacognosy and
Director of the Program for Collaborative Research in the Pharmaceutical
Sciences at the College of Pharmacy, University of Illinois at Chicago.
Dr. Farnsworth received a B.S. and an M.S. in Pharmacy from the Massachusetts
College of Pharmacy and a Ph.D. in Pharmacognosy from the University of
Pittsburgh.
15
Maurice M. Iwu, Ph.D. is founder and director of BioResources
Development Conservation Programme and Professor of Pharmacognosy and
Medicinal Chemistry at the University of Nigeria, Nsukka. Dr. Iwu earned a
Ph.D. in Pharmacognosy from the University of Bradford, England.
Charles F. Limbach, M.D. is a practitioner of family medicine in
Salinas, California. Dr. Limbach earned a B.A. in Biology from the University
of Michigan and an M.D. from Michigan State University.
Koji Nakanishi, Ph.D. is Centennial Professor of Chemistry at Columbia
University and formerly Director of the Suntory Institute for Bioorganic
Research in Osaka, Japan. Dr. Nakanishi was the recipient of the 1990 Japan
Academy Prize and the Imperial Prize, the highest Japanese honor a scholar
can receive. He received a B.S. and a Ph.D. in Chemistry from Nagoya
University in Japan.
Mark J. Plotkin, Ph.D. is Executive Director of Ethnobiology and
Conservation Team and previously served as Director of Plant Conservation at
the World Wildlife Fund. He also serves as a Research Associate of
Ethnobotanical Conservation at the Botanical Museum at Harvard University and
Secretary of the Ethnobotany Specialist Group, Species Survival for the
International Union for the Conservation of Nature. Dr. Plotkin received an
A.B. from Harvard University Extension, an M.F.S. in Wildlife Ecology from
Yale School of Forestry and Environmental Studies, and a Ph.D. in Biological
Conservation from Tufts University.
Nathaniel Quansah, Ph.D. is an independent ethnobotanical researcher.
Dr. Quansah obtained a B.S. from the University of Cape Coast, Ghana and a
Ph.D. in Botany from Goldsmith's College, University of London.
Robert F. Raffauf, Ph.D. is Professor Emeritus at Northeastern
University's College of Pharmacy. He holds a B.S. in Chemistry/Biology from
the College of the City of New York, an M.A. in Chemistry from Columbia
University and a Ph.D. in Organic/Analytical Chemistry from the University of
Minnesota.
Richard E. Schultes, Ph.D. is Professor Emeritus at Harvard University.
Dr. Schultes has spent 40 years studying the traditional uses of the higher
plants and fungi of the Colombian Amazon. He has been the recipient of
numerous awards, including the Gold Medal of the World Wildlife Fund.
Dr. Schultes holds an A.B., an A.M. and a Ph.D. from Harvard University.
Charles G. Smith, Ph.D. has been a consultant to start-up businesses,
major pharmaceutical companies and venture capital firms since 1986. Most
recently, he served as Vice President of Research and Development at Revlon
Healthcare Group. Dr. Smith received a B.S. in Chemistry from Illinois
Institute of Technology, an M.S. in Biochemistry from Purdue University, and
a Ph.D. in Biochemistry from the University of Wisconsin.
D. Doel Soejarto, Ph.D. is Professor of Pharmacognosy for the
Department of Medicinal Chemistry and Pharmacognosy and for the Program for
Collaborative Research in the Pharmaceutical Sciences at the University of
Illinois at Chicago. Dr. Soejarto holds a B.S. in Biology from the College of
Tjiawi, Java, an A.M. in Biology/Botany from Harvard University and a Ph.D.
in Biology from Harvard University.
Hildebert K.M. Wagner, Ph.D. is Professor of Pharmacognosy in the
Institut Fur Pharmazeutische Biologie at the Ludwig Maximilians University in
Munich, Germany. Dr. Wagner also serves as co-director of the Institute of
Pharmaceutical Biology at the University of Munich. He earned his Ph.D. in
Pharmacognosy at the University of Munich.
16
Risk Factors
This Form 10-K contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-K.
Early Stage of Development; Technological Uncertainty. Shaman has not yet
completed the development of any products. Many of the Company's products will
require significant additional clinical testing and investment prior to
commercialization. Products for therapeutic use in human health care must be
evaluated in extensive human clinical trials to determine their safety and
efficacy as part of a lengthy process to obtain government approval. The
Company's Provir, nikkomycin Z and SP-134101 products are each in clinical
development. Positive results for any of these products in a clinical trial do
not necessarily assure that positive results will be obtained in future clinical
trials or that government approval to commercialize the products will be
obtained.
Clinical trials may be terminated at any time for many reasons, including
toxicity or adverse event reporting. There can be no assurance that any of the
Company's products will be successfully developed, enter into human clinical
trials, prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, obtain required regulatory approvals, be capable of being
produced in commercial quantities at reasonable costs or be successfully
marketed or that the Company will not encounter problems in clinical trials that
will cause the Company to delay or suspend product development. Failure of any
of the Company's products to be commercialized could have a material adverse
effect on the Company's business, financial condition and results of operations.
History of Operating Losses; Products Still in Development; Future
Profitability Uncertain. Shaman was incorporated in 1989 and has experienced
significant operating losses in each of its fiscal years since operations began.
As of December 31, 1997, the Company's accumulated deficit was approximately
$111.9 million. The Company has not generated any product revenues and expects
to incur substantial operating losses over the next several years. All of
Shaman's products and compounds are in research and development, which require
substantial expenditures of funds. In order to generate revenues or profits, the
Company, alone or with others, must successfully develop, test, obtain
regulatory approval for and market its potential products. No assurance can be
given that Shaman's product development efforts will be successful, that
required regulatory approvals will be obtained, or that the products, if
developed and introduced, will be successfully marketed or will achieve market
acceptance.
No Assurance of Successful Product Development. The Company's research and
development programs are at various stages of development, ranging from the
research stage to clinical trials. Substantial additional research and
development will be necessary in order for the Company to move additional
product candidates into clinical testing, and there can be no assurance that any
of the Company's research and development efforts on these or other potential
products, including Provir, nikkomycin Z, and SP-134101 will lead to development
of products that are shown to be safe and effective in clinical trials.
In addition, there can be no assurance that any such products will meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. Further, the Company's products may prove to have undesirable or
unintended side
17
effects that may prevent or limit their commercial use. The Company may find,
at any stage of this complex product development process, that products that
appeared promising in preclinical studies or Phase I and Phase II clinical
trials do not demonstrate efficacy in larger-scale, Phase III clinical trials
and do not receive regulatory approvals. Accordingly, any product development
program undertaken by the Company may be curtailed, redirected, suspended or
eliminated at any time.
In addition, there can be no assurance that the Company's testing and
development schedules will be met. Any failure to meet such schedules could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's clinical trials may be delayed by many
factors, including, but not limited to: slower than anticipated patient
enrollment; difficulty in finding a sufficient number of patients fitting the
appropriate trial profile; difficulties in the acquisition of sufficient
supplies of clinical trial materials; or, failure to show efficacy in clinical
trials or adverse events occurring during the clinical trials. Completion of
testing, studies and trials may take several years, and the length of time
varies substantially with the type, complexity, novelty and intended use of the
product. In addition, data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. Delays or rejections may be encountered based upon many
factors, including changes in regulatory policy during the period of product
development and could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
Future Capital Needs; Uncertainty of Additional Funding. The Company will
require substantial additional funds to conduct the development and testing of
its potential products and to manufacture and market any products that may be
developed. The Company's future capital requirements will depend on numerous
factors, including the progress of its research and development programs, the
progress of preclinical and clinical testing, the time and costs involved in
obtaining regulatory approvals, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
collaborative and licensing relationships, the ability of the Company to
establish additional collaborative relationships for the manufacture and
marketing of its potential products, and the purchase of additional capital
equipment. In addition, Note Purchase Agreements entered into by the Company in
connection with the 1997 Private Placement, provide that under certain
circumstances, the Company would be required to redeem all or some portion of
the $10.4 million principal due thereunder, which redemption could significantly
accelerate the Company's cash expenditures and capital requirements beyond the
levels currently anticipated.
The Company intends to seek additional funding through public or private
equity or debt financings, collaborative arrangements or from other sources. The
Company may seek additional capital at any time that it deems market conditions
to be favorable. If additional funds are raised by issuing equity securities,
significant dilution to existing stockholders may result. In the event that
additional funds are obtained through collaborative agreements, such agreements
may require the company to relinquish rights to certain of its technologies,
product candidates, products or marketing territories that the Company would
otherwise seek to develop or commercialize itself. There can be no assurance
that additional financing will be available on acceptable terms or at all. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate one or more of its research, discovery or development
programs, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Uncertainties Associated with Clinical Trials. Shaman has conducted, and
plans to continue to conduct, extensive and costly clinical trials to assess the
safety and efficacy of its potential products. The rate of completion of the
Company's clinical trials is dependent upon, among other factors, the rate of
completion and approval of trial protocols, the availability of funds for trials
and the rate of
18
patient enrollment. Patient enrollment is a function of many factors, including
the nature of the Company's clinical trial protocols, existence of competing
protocols, size of patient population, proximity of patients to clinical sites
and eligibility criteria for the study. Delays in patient enrollment will result
in increased costs and delays, which could have a material adverse effect on the
Company's ability to complete clinical trials in a timely fashion.
The Company cannot assure that patients enrolled in its clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the U.S. FDA
regulations applicable to such testing can result in delay, suspension or
cancellation of such testing, and/or refusal by the FDA to accept the results of
such testing. In addition, the FDA or the Company may suspend clinical trials at
any time if either of them concludes that any patients participating in any such
trial are being exposed to unacceptable health risks. Further, there can be no
assurance that human clinical testing will demonstrate that any current or
future product candidate is safe or effective or that data derived from any such
study will be suitable for submission to the FDA or other regulatory
authorities. Failure of the Company's clinical trials to demonstrate safety or
efficacy in humans could cause the delay, suspension, or termination of any
product program and could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Collaborative Relationships. The Company's research and
development efforts in its diabetes program and, to a lesser extent, in its
other programs, is dependent upon its arrangements with Lipha/Merck and Ono and
the compliance of such partners with the terms and conditions of such
collaborative agreements including, without limitation, providing funding for
research and development efforts and the achievement of milestones and assisting
the Company in its research and development efforts. These partners may develop
products that may compete with those of the Company. The amount and timing of
resources they allocate to these programs is not within the Company's control.
There can be no assurance that these partners will perform their obligations as
expected or that any significant revenues will ultimately be derived from such
agreements. The Company's agreement with Ono may be terminated in the event Ono
determines further development of compounds is not warranted, provided certain
other conditions are met. Termination of either agreement is subject to certain
surviving obligations. If one or more such partners elected to terminate their
relationships with the Company, or if the Company or its partners fail to
achieve targeted milestones, it could have a material adverse effect on the
Company's ability to fund such programs, or to develop any products on a
collaborative basis with such partners. In addition, the Company may seek future
collaborative agreements in order to commercialize additional product candidates
or that any such agreements will be successful. There can be no assurance that
the Company will be able to enter into such additional agreements and any
failure could have a material effect on the Company's business, financial
condition, and results of operations. See "Business--Collaborative Relationships
and License Agreements."
Rapid Technological Change and Substantial Competition. The pharmaceutical
industry is subject to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology companies and universities is
intense. Many of these entities have significantly greater research and
development capabilities, as well as substantial marketing, manufacturing,
financial and managerial resources, and represent significant competition for
the Company. There can be no assurance that developments by others will not
render the Company's products or technologies noncompetitive or that the Company
will be able to keep pace with technological developments. Competitors have
developed or are in the process of developing technologies that are, or in the
future may be, the basis for competitive products. Some of these products may
have an entirely different approach or means of accomplishing the desired
therapeutic effect than products developed by the Company. These competing
products may be more effective and less costly than the products developed by
the Company. In addition, other forms of medical treatment may offer competition
to the Company's products. The development of competing compounds could have a
material adverse effect on the Company's business,
19
financial condition or results of operations. See "Business--Competition."
Government Regulation; No Assurance of Regulatory Approvals. All new
drugs, including the Company's products under development, are subject to
extensive and rigorous regulation by the federal government, principally the
FDA, and comparable agencies in state and local jurisdictions and in foreign
countries. These authorities impose substantial requirements upon the
preclinical and clinical testing, manufacturing and marketing of pharmaceutical
products. The steps required before a drug may be approved for marketing in the
United States generally include (i) preclinical laboratory and animal tests,
(ii) the submission to the FDA of an IND for human clinical testing, (iii)
adequate and well controlled human clinical trials to establish the safety and
efficacy of the drug, (iv) submission to the FDA of an NDA, and (v) satisfactory
completion of an FDA inspection of the manufacturing facility or facilities at
which the drug is made to assess compliance with GMP.
Lengthy and detailed preclinical and clinical testing, validation of
manufacturing and quality control processes, and other costly and time-consuming
procedures are required. Satisfaction of these requirements typically takes
several years and the time needed to satisfy them may vary substantially, based
on the type, complexity and novelty of the pharmaceutical product. The effect of
government regulation may be to delay or to prevent marketing of potential
products for a considerable period of time and to impose costly procedures upon
the Company's activities. There can be no assurance that the FDA or any other
regulatory agency will grant approval for any products developed by the Company
on a timely basis, or at all. Success in preclinical or early stage clinical
trials does not assure success in later stage clinical trials.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
If regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed. Further,
even if regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product, including
withdrawal of the product from the market. Any delay or failure in obtaining
regulatory approvals would have a material adverse effect on the Company's
business, financial condition and results of operation.
Among the conditions for FDA approval of a pharmaceutical product is the
requirement that the manufacturer's (either the Company's own or a third-party
manufacturer) quality control and manufacturing procedures conform to current
GMP, which must be followed at all times. The FDA strictly enforces GMP
requirements through periodic unannounced inspections. There can be no assurance
that the FDA will determine that the facilities and manufacturing procedures of
the Company or any third-party manufacturer of the Company's planned products
will conform to GMP requirements. Additionally, the Company or its third-party
manufacturer must pass a pre-approval inspection of its manufacturing facilities
by the FDA before obtaining marketing approval. Failure to comply with
applicable regulatory requirements may result in penalties such as restrictions
on a product's marketing or withdrawal of a product from the market.
The FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States could result in new government regulations that
could have a material adverse effect on the Company's business. The Company is
unable to predict the likelihood of adverse governmental regulation that might
arise from future legislative or administrative action, either in the United
States or abroad. See "Business--Government Regulation."
Dependence on Sources of Supply. The Company currently imports all of the
plant materials from which its products are derived from countries in South and
Latin America, Africa and Southeast Asia.
20
To the extent that its products cannot be economically synthesized or
otherwise produced, the Company will continue to be dependent upon a supply of
raw plant material. The Company does not have formal agreements in place with
all of its suppliers. In addition, a continued source of plant supply is subject
to the risks inherent in international trade. These risks include unexpected
changes in regulatory requirements, exchange rates, tariffs and barriers,
difficulties in coordinating and managing foreign operations, political
instability and potentially adverse tax consequences. Interruptions in supply or
material increases in the cost of supply could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, tropical rain forests, and certain irreplaceable plant resources
therein, are currently threatened with destruction. In the event portions of the
rain forests are destroyed which contain the source material from which Shaman's
current or future products are derived, such destruction could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Limited Manufacturing and Marketing Experience and Capacity. The Company
currently produces products only in quantities necessary for clinical trials and
does not have the staff or facilities necessary to manufacture products in
commercial quantities. As a result, the Company must rely on collaborative
partners or third-party manufacturing facilities, which may not be available on
commercially acceptable terms adequate for Shaman's long-term needs. If the
Company should encounter delays or difficulties in establishing relationships
with qualified manufacturers to produce, package and distribute its finished
products, clinical trials, regulatory filings, market introduction and
subsequent sales of such products could be adversely affected.
Contract manufacturers must adhere to GMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program. Contract
manufacturing facilities must pass a pre-approval plant inspection before the
FDA will approve an NDA. Certain material manufacturing changes that occur after
approval are also subject to FDA review and clearance or approval. There can be
no assurance that the FDA or other regulatory agencies will approve the process
or the facilities by which any of the Company's products may be manufactured.
The Company's dependence on third parties for the manufacture of products may
adversely affect the Company's ability to develop and deliver products on a
timely and competitive basis. Should the Company be required to manufacture
products itself, the Company will be subject to the regulatory requirements
described above, to similar risks regarding delays or difficulties encountered
in manufacturing any such products and will require substantial additional
capital. There can be no assurance that the Company will be able to manufacture
any such products successfully or in a cost-effective manner.
The Company currently has no sales staff. To the extent that the Company
does not or is unable to enter into co-promotion agreements or to arrange for
third party distribution of its products, significant additional resources will
be required to develop a complete marketing and sales force. There can be no
assurance that the Company will be able to enter into collaborative agreements
or successfully establish a marketing and sales force.
Uncertainty Regarding Patents and Proprietary Rights. The Company's
success will depend in large part on its ability to obtain and maintain patents,
protect trade secrets and operate without infringing upon the proprietary rights
of others. Moreover, competitors may have filed patent applications, may have
been issued patents or may obtain additional patents and proprietary rights
relating to products or processes competitive with those of the Company. There
can be no assurance that the Company's patent applications will be approved,
that the Company will develop additional proprietary products that are
patentable, that any issued patents will provide the Company with adequate
protection for its inventions or will not be challenged by others, or that the
patents of others will not impair the ability of the Company to commercialize
its products. The patent position of firms in the pharmaceutical industry
generally is highly uncertain, involves complex legal and factual questions, and
has recently been the subject of much litigation. No consistent policy has
emerged from
21
the U.S. Patent and Trademark Office or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents. There can be no assurance that others will not independently develop
similar products, duplicate any of the Company's products or design around any
patents of the Company.
A number of pharmaceutical companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to the Company's business.
Some of these technologies, applications or patents may conflict with the
Company's technologies or patent applications. The European Patent Office, the
French Patent Office, the German Patent Office and the Australian Patent Office,
have each granted a patent containing broad claims to proanthocyanidin polymer
compositions (and methods of use of such compositions), which are similar to the
Company's specific proanthocyanidin polymer composition, to Leon Cariel and the
Institut des Substances Vegetales. The effective filing date of these patents is
prior to the effective filing date of the Company's foreign pending patent
application in Europe. Certain of the foreign patents have been granted in
jurisdictions where examination is not rigorous. The Company has instituted an
Opposition in the European Patent Office against granted European Patent No.
472531 owned by Leon Cariel and Institut des Substances Vegetales. Based on
opinions of foreign counsel, the Company believes that the granted claims are
invalid and intends to vigorously prosecute the Opposition.
There can be no assurance that the Company will be successful in having
the granted European patent revoked or the claims sufficiently narrowed so as
not to potentially cover the Company's proanthocyanidin polymer composition and
methods of use. There can be no assurance that Leon Cariel and the Institut des
Substances Vegetales will not assert claims relating to this patent against the
Company. There can be no assurance that the Company would be able to obtain a
license to this patent at all, or at reasonable cost, or be able to develop or
obtain alternative technology to use in Europe or elsewhere. The earlier
effective filing date of this patent could limit the scope of the patents, if
any, that the Company may be able to obtain or result in the denial of the
Company's patent applications in Europe or elsewhere.
In the United States, the Patent and Trademark Office has rendered judgment
in an Interference declared between the Company's issued patent covering its
specific proanthocyanidin polymer composition and certain claims of U.S.
application corresponding to the granted European patent of Leon Cariel and the
Institut des Substances Vegetales by Daniel Jean and Leon Cariel. Judgment was
awarded to the Company. Since the period for appeal has passed, this judgment is
now final.
Additionally, in connection with the Interference proceeding, the Company
has had an opportunity to review the claims and file history of the Daniel Jean
and Leon Cariel patent application which, under U.S. patent law, are kept
confidential. One broad claim, in particular, of the Daniel Jean and Leon Cariel
patent application, which was not involved in the Interference proceeding and
which has been indicated to be allowable, covers a large variety of
proanthocyanidin polymers. Based on opinion of counsel, the Company believes
that this broad claim is subject to attack as invalid in view of prior art.
Based on knowledge of the Company's specific proanthocyanidin polymer
composition, the Company believes that the manufacture, use or sale of its
specific proanthocyanidin polymer composition would not constitute infringement
of this broad claim, once it issues. There can be no assurances, however, that
the Company would prevail should an action for infringement of such claim be
commenced. In addition, if patents that cover the Company's activities have been
or are issued to other companies, there can be no assurance that the Company
would be able to obtain licenses to these patents at a reasonable cost, or at
all, or be able to develop or obtain alternative technology.
If the Company does not obtain such licenses, it could encounter delays or
be precluded from introducing products to the market. Litigation may be
necessary to defend against or assert claims of
22
infringement, to enforce patents issued to the Company or to protect trade
secrets or know-how owned by the Company. Additional interference proceedings
may be declared or necessary to determine issues of invention; such litigation
and/or interference proceedings could result in substantial cost to and
diversion of effort by, and may have a material adverse effect on, the Company.
In addition, there can be no assurance that these efforts by the Company will be
successful.
The Company's competitive position is also dependent upon unpatented trade
secrets. There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, that such trade secrets will not be
disclosed or that the Company can effectively protect its rights to unpatented
trade secrets. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes also may arise as to the rights in related or resulting
know-how and inventions. See "Business--Patents and Proprietary Rights."
Patent applications in the United States are generally maintained in
secrecy until patents are issued. Since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, Shaman cannot be certain that it was the first to discover
compositions covered by its pending patent applications or the first to file
patent applications on such compositions. There can be no assurance that the
Company's patent applications will result in issued patents or that any of its
issued patents will afford comprehensive protection against potential
infringement.
The Company is prosecuting its patent applications with the PTO but the
Company does not know whether any of its applications will result in the
issuance of any patents or, if any patents are issued, whether any issued patent
will provide significant proprietary protection or will be circumvented or
invalidated. During the course of patent prosecution, patent applications are
evaluated, inter alia, for utility, novelty, non-obviousness and enablement. The
PTO may require that the claims of an initially filed patent application be
amended if it is determined that the scope of the claims includes subject matter
that is not useful, novel, non-obvious or enabled.
Furthermore, in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights. In cases where
one party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may provoke an
interference proceeding in the PTO or such a proceeding may be declared by the
PTO. In general, in an interference proceeding, the PTO would review the
competing patents and/or patent applications to determine the validity of the
competing claims, including but not limited to determining priority of
invention. Any such determination would be subject to appeal in the appropriate
U.S. federal courts.
There can be no assurance that additional patents will be obtained by the
Company or that issued patents will provide a substantial protection or be of
commercial benefit to the Company. The issuance of a patent is not conclusive as
to its validity or enforceability, nor does it provide the patent holder with
freedom to operate without infringing the patent rights of others. A patent
could be challenged by litigation and, if the outcome of such litigation were
adverse to the patent holder, competitors could be free to use the subject
matter covered by the patent, or the patent holder may license the technology to
others in settlement of such litigation. The invalidation of patents owned by or
licensed to the Company or non-approval of pending patent applications could
create increased competition, with potential adverse effects on the Company and
its business prospects. In addition, there can be no assurance that any
applications of the Company's technology will not infringe patents or
proprietary rights of others or that licenses that might be required as a result
of such infringement for the Company's processes or products would be available
on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also
23
be necessary to enforce the Company's patent and proprietary rights and/or to
determine the scope and validity of others' proprietary rights. The Company may
participate in interference proceedings that may in the future be declared by
the U.S. Patent and Trademark Office, which could result in substantial cost to
the Company. There can be no assurance that the outcome of any such litigation
or interference proceedings will be favorable to the Company or that the Company
will be able to obtain licenses to technology that it may require or that, if
obtainable, such technology can be licensed at a reasonable cost.
Year 2000 Compliance. The Company is in the process of assessing the impact
of year 2000 on its operations and systems, including those of its suppliers and
collaborators and other third parties. Management is in the process of
formalizing its assessment procedures and developing a plan to address
identified issues, if any. To date, the Company has evaluated its financial and
accounting systems and concluded that they are not and will not be materially
affected by the year 2000. The Company does not yet know the extent, if any, of
the impact of the year 2000 on its other systems and equipment or those of third
parties with which the Company does business. There can be no assurance that
third parties, such as suppliers, clinical research organizations and
collabortive parties, are using systems that are year 2000 compliant or will
address any year 2000 issues in a timely fashion, or at all. Any year 2000
compliance problems of either the Company, its suppliers, its clinical research
organizations, or its collaborative partners could have a material adverse
effect on the Company's business, operating results and financial conditions.
Uncertainty of Product Pricing, Reimbursement and Related Matters. The
Company's business may be materially adversely affected by the continuing
efforts of governmental and third party payers to contain or reduce the costs of
health care through various means. For example, in certain foreign markets, the
pricing or profitability of health care products is subject to government
control. In the United States, there have been, and the Company expects there
will continue to be, a number of federal and state proposals to implement
similar government control. While the Company cannot predict whether any such
legislative or regulatory proposals or reforms will be adopted, the announcement
of such proposals or reforms could have a material adverse effect on the
Company's ability to raise capital or form collaborations, and the adoption of
such proposals or reforms could have a material adverse effect on the Company's
business, financial condition or results of operations.
In addition, in both the United States and elsewhere, sales of health care
products are dependent in part on the availability of reimbursement from third
party payers, such as government and private insurance plans. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical products and services. If the Company succeeds in bringing one or
more products to the market, there can be no assurance that reimbursement from
third party payers will be available or will be sufficient to allow the Company
to sell its products on a competitive or profitable basis.
Possible Volatility of Stock Price. From time to time, the stock market
has experienced significant price and volume fluctuations that may be unrelated
to the operating performance of particular companies or industries. In addition,
the market price of the Company's Common Stock, like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, has been and
may continue to be highly volatile. Announcements of technological innovations,
regulatory matters or new commercial products by the Company or its competitors,
developments or disputes concerning patent or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by the Company or its competitors, regulatory developments in both
the United States and foreign countries, public concern as to the safety of
pharmaceutical products, and economic and other external factors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of Shaman's Common Stock. See "Part II--Item 5:
Market for Registrant's Common Stock and Related Stockholder Matters."
24
Environmental Regulation. In connection with its research and development
activities and manufacturing of clinical trial materials, the Company is subject
to federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although the Company
believes that it has complied with these laws and regulations in all material
respects and has not been required to take any action to correct any
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future. The Company's research and development activities
involve the controlled use of hazardous materials, chemicals, viruses and
various radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and such liability could exceed the resources of the Company.
Anti-Takeover Effect of Delaware Law and Certain Charter and Bylaws
Provisions. Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. The
Company's Board of Directors has the authority to issue up to 600,000 additional
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions of those shares without any further vote or action
by the stockholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to the Company could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met.
Product Liability Exposure; Limited Insurance Coverage. The Company's
business exposes it to potential product liability risks which are inherent in
the development, testing, manufacture, marketing and sale of pharmaceutical
products. Product liability insurance for the pharmaceutical industry generally
is expensive. There can be no assurance that the Company's present product
liability insurance coverage is adequate. Such existing coverage will not be
adequate as the Company further develops its products, and no assurance can be
given that adequate insurance coverage against all potential claims will be
available in sufficient amounts or at a reasonable cost.
Limitation of Liability and Indemnification. The Company's Certificate of
Incorporation limits, to the maximum extent permitted by Delaware Law, the
personal liability of directors for monetary damages for breach of their
fiduciary duties as a director. The Company's Bylaws provide that the Company
shall indemnify its officers and directors and may indemnify its employees and
other agents to the fullest extent permitted by law. The Company has entered
into indemnification agreements with its officers and directors containing
provisions which are in some respects broader than the specific indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising
25
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance, if available on
reasonable terms.
Section 145 of the Delaware Law provides that a corporation may indemnify
a director, officer, employee or agent made or threatened to be made a party to
an action by reason of the fact that he was a director, officer, employee or
agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred in connection with such action
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Delaware Law does not permit a corporation to eliminate a
director's duty of care, and the provisions of the Company's Certificate of
Incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.
Dependence on Key Personnel. The Company's ability to maintain its
competitive position depends in part upon the continued contributions of its key
senior management. The Company's future performance also depends on its ability
to attract and retain qualified management and scientific personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to continue to attract, assimilate or retain other highly qualified
technical and management personnel in the future. The loss of key personnel or
the failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's business, financial condition
and results of operations.
ITEM 2. PROPERTIES
Shaman's headquarters are located in South San Francisco, California. The
Company leases approximately 73,000 square feet for offices, laboratories, pilot
manufacturing and preclinical testing in three adjacent buildings. An additional
building with approximately 43,000 square feet becomes available to the Company
in late 1999. The lease on these spaces expires February 28, 2003, and the
Company has an option to renew the lease for two additional five-year periods.
The South San Francisco facility serves as the principal site for preclinical
research, clinical trial management, process development, quality assurance and
quality control, regulatory and other affairs. The Company believes that its
current facilities are suitable and adequate to meet its needs for the
foreseeable future. Shaman anticipates it will be able to expand its facilities
to nearby locations as the need develops. There can be no assurance however,
that such space will be available on favorable terms, if at all.
ITEM 3. LEGAL PROCEEDINGS
The Company has initiated arbitration against Dr. Michael Tempesta with
respect to a February 1990 license agreement. See "Business--Collaborative
Relationships and License Agreements."
Ms. Jacqueline Cossmon, the Company's former Vice President of investor and
public relations filed a complaint against the Company with the Superior Court
of the State of California, County of San Mateo on December 31, 1997 for
wrongful termination and is seeking monetary damages. The Company denies any
wrongdoing with respect to Ms. Cossmon and intends to vigorously defend this
action.
With the exception of the patent opposition proceeding in Europe,
arbitration against Dr. Tempesta and Ms. Cossmon's action, the Company is
not party to any other material legal proceedings. See "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights."
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year ended December 31, 1997.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol SHMN. The Company's Common Stock
began trading on January 26, 1993.
Set forth below is the range of high and low closing sale prices for the
Company's common stock for each quarter in the two most recent fiscal years, as
regularly quoted in the Nasdaq National Market.
High Low
Q1 FY 96 $ 7.32 $ 5.13
Q2 FY 96 9.00 6.13
Q3 FY 96 8.63 5.75
Q4 FY 96 7.38 5.38
Q1 FY 97 6.25 3.88
Q2 FY 97 6.19 4.69
Q3 FY 97 7.00 5.12
Q4 FY 97 7.06 4.25
As of February 23, 1998, there were approximately 847 holders of record of
the Company's common stock. No dividends have been paid on the common stock
since the Company's inception, and the Company does not anticipate paying any
dividends in the foreseeable future.
28
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
Year Ended December 31, 1997 1996 1995 1994 1993
- ----------------------- ---- ---- ---- ---- ----
Statements of Operations Data:
Revenue from collaborative
agreements $ 3,500 $ 3,406 $ 2,210 $ 1,360 $ 2,050
Operating expenses (1):
Research and development 24,140 19,138 17,635 18,643 13,646
General and administrative 4,833 3,537 3,705 3,545 2,659
------- ------- ------- ------- -------
Total operating expenses 28,973 22,675 21,340 22,188 16,305
------- ------- ------- ------- -------
Loss from operations (25,473) (19,269) (19,130) (20,828) (14,255)
Interest income 1,218 1,082 1,695 2,045 1,543
Interest expense (cash) (1,341) (603) (569) (698) (315)
Interest expense (non-cash (3,692) -- -- -- --
------- ------- ------- ------- -------
Net loss $(29,288) $(18,790) $(18,004) $(19,481)$(13,027)
========= ========= ========= ========= ========
Net loss per share (2) $ (1.72) $ (1.39) $ (1.37) $ (1.50) $ (1.30)
======= ======= ======= ======= =======
Shares used in calculation
of net loss per share (2) 17,010 13,496 13,161 12,986 10,036
At December 31, 1997 1996 1995 1994 1993
- --------------- ---- ---- ---- ---- ----
Balance Sheet Data:
Cash, cash equivalents,
and investments $ 21,421 $ 16,533 $ 26,665 $ 39,843 $ 57,333
Working capital 14,547 9,641 22,850 33,422 36,711
Total assets 26,753 22,377 33,810 49,673 67,229
Long-term obligations,
excluding current
installments 13,985 2,569 4,930 3,932 3,261
Accumulated deficit (111,910) (82,622) (63,832) (45,828) (26,348)
Total stockholders'
equity $ 5,148 $ 11,977 $ 24,205 $ 41,300 $ 60,436
(1) Certain expenses have been reclassified to conform to 1997 presentation.
(2) Net loss per share is based on the weighted average number of common
shares outstanding during the period and, for periods prior to the
Company's initial public offering in January 1993, certain common
equivalent shares. The company has not paid any dividends on its capital
stock since its inception.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops novel pharmaceutical products for major human diseases by isolating
active compounds from tropical plants. The Company has three compounds in
clinical development: Provir, an oral product for the treatment of
AIDS-associated and watery diarrhea; nikkomycin Z, an oral antifungal for the
treatment of systemic fungal infections; and SP-134101, an oral product for the
treatment of Type II diabetes. Shaman maintains an active Type II diabetes
research program which serves as the basis for its collaborations with Lipha
s.a., a wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany
("Lipha/Merck"), and with Ono Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.
The Company began operations in March 1990. To date, Shaman has not sold
any products and does not anticipate receiving product revenue in the near
future. The Company's accumulated deficit at December 31, 1997, was
approximately $ 111.9 million. Shaman expects to continue to incur substantial
and increasing losses over the next several years, due primarily to the expense
of preclinical studies, clinical trials and its ongoing research program. The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations could be substantial. Shaman has financed its research, development
and administrative activities through various private and public equity
financings, loans and debt financings, and collaborative agreements with
pharmaceutical companies and, to a lesser extent, through equipment and
leasehold improvement lease financings.
Results of Operations for the Years Ended December 31, 1997, 1996 and 1995
The Company recorded collaborative revenues of $3.5 million, $3.4 million,
and $2.2 million for 1997, 1996, and 1995, respectively. Revenues for 1997
resulted from the Company's on-going research funding from Ono and research
funding from Shaman's collaboration with Lipha/Merck. Revenues for 1996 resulted
from the Company's on-going research funding from Ono, an additional $1.0
million payment from Ono for enhanced rights to Shaman's antidiabetic compounds,
and research payments and access fees from Shaman's collaboration with
Lipha/Merck. Revenues in 1995 resulted solely from the Company's relationship
with Ono, and included a one-time access fee associated with the May 1995
commencement of the collaboration. The Company expects that revenues from
collaborative agreements will continue to fluctuate in the future as development
of its various compounds proceeds and new products are partnered for development
and commercialization.
The Company incurred research and development expenses of $24.1 million,
$19.1 million, and $17.6 million for 1997, 1996, and 1995, respectively. These
expenses include salaries for scientific personnel, clinical development costs,
laboratory supplies, patent protection and consulting fees, travel, plant
collections, facilities expenses and other expenditures relating to research and
product development. Research and development expenses increased $5.0 million in
1997 compared with 1996, and increased $1.5 million in 1996 compared with 1995.
The increase in 1997 was primarily attributable to the Company's increased
clinical development activities with respect to Provir, partially offset by
reduced expenses for clinical development activities for nikkomycin Z. The
increase in 1996 was primarily attributable to the Company's clinical
development activities for Provir, as well as additional research and
development activities with respect to nikkomycin Z, partially offset by reduced
expenses for clinical development activities for Virend. Research and
development expenses are expected to increase in 1998 as Provir enters Phase III
clinical development for AIDS-associated diarrhea, other products continue
through development and the Company actively maintains its diabetes research
program.
30
General and administrative expenses were $4.8 million, $3.5 million and
$3.7 million for 1997, 1996 and 1995, respectively. These expenses include
administrative salaries, consulting, legal, travel and other operating expenses.
General and administrative expenses increased $1.3 million in 1997 compared to
1996, and decreased $0.2 million in 1996 compared to 1995. The increase in 1997
was primarily attributable an increase in compensation and marketing research
related to late stage clinical products, as well as additional legal expenses
related to certain disputes related to the Company's intellectual property
rights. The Company's expanded research and clinical activities in 1998 are not
expected to require commensurate increases in general and administrative
support.
Interest income was $1.2 million, $1.1 million and $1.7 million for 1997,
1996 and 1995, respectively. Interest income increased $100,000 in 1997 compared
with 1996 and decreased $600,000 in 1996 compared with 1995. Interest income
fluctuations have been consistent with changes in average cash and investment
balances with which the Company substantially funded its operations in 1997,
1996 and 1995. The balances of cash, cash equivalents and investments were $21.4
million, $16.5 million and $26.7 million at December 31, 1997, 1996 and 1995,
respectively.
Interest expense was $5.0 million, $603,000 and $569,000 for 1997, 1996
and 1995, respectively. Interest expense increased in 1997 compared with 1996
principally due to a $3.7 million non-cash interest charge related to the
issuance of senior convertible notes in June 1997, as well as the interest
expense related to the Company's secured debt financing in May 1997. Interest
expense increased in 1996 compared with 1995 as the Company absorbed a full
year's expense on its unsecured term loan. The Company's general policy is to
finance capital equipment and tenant improvements on a long-term basis, and
interest expense in the future will be dependent in part on the Company's
capacity to finance its future equipment needs.
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $ 102 million. The federal net operating loss
carryforwards will expire at various dates beginning in 2004 through 2012, if
not sooner utilized. Utilization of the net operating losses and credits is
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986, as amended. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Liquidity and Capital Resources
As of December 31, 1997, the Company's cash, cash equivalents, and
investments totaled approximately $21.4 million, compared with $16.5 million at
December 31, 1996. The net increase was primarily attributable to funds received
from the private placement of senior convertible notes in June 1997, registered
direct public offerings in January 1997 and April 1997, the secured loan entered
into in May 1997, and research funding from Shaman's collaboration with
Lipha/Merck and Ono.
In June 1997, the Company privately issued $10.4 million of senior
convertible notes ("The 1997 Private Placement"). The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option. Initially, the notes were
convertible into Common Stock of the Company at 100% of the low trading price
during a designated time period prior to conversion provided that the conversion
price will not be less than $5.50 per share. Starting in November 1997, the
notes are convertible into Common Stock of the Company at a 10% discount from
the low trading price during a designated time period prior to the conversion,
with a floor of $5.50 through March 31, 1998, pursuant to a November 1997
understanding with the note holders to revise the terms of the note. In
connection with this understanding, the Company issued to the note holders
three-year warrrants to purchase an aggregate of 137,500 shares of common stock
at an exercise price of $7.50 per share. The Company filed a registration
statement with the SEC for the resale of shares issued upon conversion of these
notes, which registration statement was declared effective on
31
August 29, 1997. Of the notes issued, $400,000 were issued to the placement
agent as part of the placement fee. The Company paid the placement agent an
additional $300,000 in cash. The placement fees and other offering costs have
been capitalized in other assets as deferred issuance costs and are being
amortized to interest expense over the life of the notes. The net proceeds
totaled approximately $9.5 million after the placement agent's fees and other
offering expenses.
In May 1997, the Company obtained a $5.0 million, 36-month term loan to pay
off pre-existing debt, finance capital asset acquisitions and finance continued
research and clinical development of the Company's existing product candidates.
The loan carries an interest rate of 14.58% and is payable in equal monthly
installments over the term of the loan. The lender was granted ten-year warrants
to purchase 200,000 shares of the Company's Common Stock at $6.25 per share. The
Company has attributed a value of $648,000 to these warrants. This amount has
been recorded as a discount on the related debt and is being amortized as
interest expense over the term of the loan.
In April 1997, the Company sold 1,600,000 shares of Common Stock at $4.97
per share in a registered direct public offering, marketed solely by the
Company, which yielded gross proceeds of $7.95 million. The net proceeds of
approximately $7.8 million from this offering will be used for the continued
research and clinical development of the Company's existing product candidates.
In January 1997, the Company sold 2,000,000 shares of Common Stock in a
registered direct public offering for gross proceeds of $9.0 million. The net
proceeds of approximately $8.1 million from this offering will be used for the
continued research and clinical development of the Company's existing product
candidates.
In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to jointly develop Shaman's antihyperglycemic drugs.
Upon signing the collaboration, the Company received an annual research fee of
$1.5 million which is amortized to revenue over twelve months, as work is
performed. The Company also received approximately $3.0 million for 388,918
shares of Common Stock priced at $7.71 per share, representing a 20% premium to
the weighted average price of the Company's stock at the time of purchase. In
exchange for development and marketing rights in all countries except Japan,
South Korea, and Taiwan (which are covered under an earlier agreement between
Shaman and Ono), Lipha/Merck will provide up to $9.0 million in research
payments and up to $10.5 million in equity investments priced at a 20% premium
to a multi-day volume weighted average price of the Company's common stock at
the time of purchase. The agreement also provides for additional preclinical and
clinical milestone payments to the Company in excess of $10.0 million per
compound for each antihyperglycemic drug developed and commercialized.
Lipha/Merck will bear all pre-clinical, clinical, regulatory and other
development expenses associated with the compounds selected under the agreement.
In addition, as products are commercialized, Shaman will receive royalties on
all product sales outside the United States and up to 50% of the profits (if the
Company exercises its co-promotion rights) or royalties on all product sales in
the United States. Certain of the milestone payments will be credited against
future royalty payments, if any, due to the Company from sales of products
developed pursuant to the agreement.
For the year ended December 31, 1997, Shaman recognized $1.5 million in
revenue from the Lipha/Merck collaboration. Shaman also received $1.5 million
for 200,787 shares of Common Stock priced at $7.47 per share, representing a 20%
premium to the weighted average price of the Company's stock at the time of
purchase.
In July 1996, the Company closed a private placement (the "1996 Private
Placement") pursuant to Regulation S under the Securities Act of 1933, as
amended, in which it received gross proceeds of $3.3 million for the sale of
400,000 shares of Series A Convertible Preferred Stock and for the issuance of a
six-year warrant to purchase 550,000 shares of the Company's Common Stock at an
exercise price of
32
$10.18 per share. The Preferred Stock does not carry a dividend obligation and
will convert into Common Stock no later than July 23, 1999 at a price per share
between $6.00 and $8.15, depending on the market value of the Company's Common
Stock during the period prior to conversion. Holders of preferred shares are
entitled to a liquidation preference of $8.15 per share. In addition to the sale
of Preferred Stock and warrant, the Company has the right, from time to time
during the period beginning January 1997 and ending July 2000, to sell up to
1,200,000 additional shares of Common Stock to the investor at a formula price
of 100% or 101% of a multi-day average of the Company's Common Stock price at
the time of sale. If the Company exercises this right, the investor has the
option to increase the shares purchased by up to an aggregate of 527,500 shares.
Pursuant to the terms of the 1997 Private Placement, the Company may not
exercise this right until late February 1998.
The Company expects to incur substantial additional costs relating to the
continued preclinical and clinical testing of its products, regulatory
activities and research and development programs. The Company anticipates that
its cash, cash equivalents and investment balances of approximately $21.4
million at December 31, 1997, the collaborative revenue committed by
Lipha/Merck, Lipha/Merck's commitment to purchase additional equity and Shaman's
additional rights to sell Common Stock under the 1996 Private Placement will be
adequate to fund operations, including payments due under long-term obligations,
through the end of 1998. Milestone payments which may be received by the Company
from Ono and Lipha/Merck would extend the Company's capacity to finance its
operations beyond that time. However, there can be no assurance that these
milestones will be achieved, or that additional funding, if needed, will be
available on reasonable terms, or at all.
Long-term obligations increased $11.4 million in 1997 compared with 1996
primariy due to the issuance of $10.4 million senior convertible notes in June
1997 along with other various financing activities.
The Company is in the process of assessing the impact of year 2000 on its
operations and systems, including those of its suppliers and collaborators and
other third parties. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues, if any. To date,
the Company has evaluated its financial and accounting systems and concluded
that they are not and will not be materially affected by the year 2000. The
Company does not yet know the extent, if any, of the impact of the year 2000 on
its other systems and equipment or those of third parties with which the Company
does business. There can be no assurance that third parties, such as suppliers,
clinical research organizations and collabortive parties, are using systems that
are year 2000 compliant or will address any year 2000 issues in a timely
fashion, or at all. Any year 2000 compliance problems of either the Company, its
suppliers, its clinical research organizations, or its collaborative partners
could have a material adverse effect on the Company's business, operating
results and financial conditions.
Future Outlook
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that Shaman is
still a relatively young company and has not yet completed a full cycle of
development, regulatory approval and commercialization for any of its products.
The clinical and regulatory processes through which the Company's products must
proceed are complex, uncertain and costly, and no assurance can be given
regarding the timing of clinical or regulatory progress or that the Company will
be successful in commercializing any of its product candidates. These
development processes require substantial amounts of funding, and the Company is
dependent on corporate partners and the equity markets to finance such efforts.
Where access to funding is difficult, the Company's stockholders may face
significant dilution, and the ability of the Company to proceed with its
programs and plans may be significantly and adversely affected. Actions and
33
advances by competitors may also significantly affect the Company's prospects,
as may the existence of patents held by such competitors or potential
competitors. In addition, there can be no assurance that any plants required by
the Company will be indefinitely available or that any compounds derived from
the plant material will result in protected proprietary rights for the Company.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Shaman Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Shaman Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shaman Pharmaceuticals, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Palo Alto, California
January 29, 1998 ERNST & YOUNG LLP
35
BALANCE SHEETS
December 31,
-------------------------------
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,340,702 $ 16,051,251
Short-term investments 10,079,943 481,677
Prepaid expenses and other current assets 746,058 938,872
------------- -------------
Total current assets 22,166,703 17,471,800
------------- -------------
Property and equipment:
Equipment and furniture 7,370,051 6,683,261
Leasehold improvements 7,351,827 7,125,235
------------- -------------
14,721,878 13,808,496
Less: accumulated depreciation and
amortization 10,749,738 9,031,571
------------- -------------
3,972,140 4,776,925
Other assets 613,657 128,080
------------- -------------
Total assets $ 26,752,500 $ 22,376,805
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 925,701 $ 1,445,616
Accrued clinical trial costs 1,689,659 1,233,014
Accrued professional fees 718,625 689,216
Accrued compensation 368,272 332,738
Advances - contract research 1,133,605 1,883,605
Current installments of long-term obligations 2,783,976 2,246,795
------------- -------------
Total current liabilities 7,619,838 7,830,984
Long-term obligations, excluding current
installments 4,017,979 2,568,931
Senior convertible notes 9,967,044 --
Stockholders' equity:
Preferred stock, $0.001 par value;
issuable in series;
1,000,000 shares authorized; 400,000
convertible shares
issued and outstanding at December 31,
1997 and 1996
(Liquidation preference at December 31,
1997 and 1996 - $3,258,800) 400 400
Common stock, $0.001 par value; 40,000,000
shares authorized; 17,796,045 shares
and 13,920,684 shares issued and
outstanding at December 31, 1997 and
1996, respectively 17,796 13,921
Additional paid-in capital 117,164,524 94,604,455
Deferred compensation and other adjustments (124,910) (20,250)
Accumulated deficit (111,910,171) (82,621,636)
------------- -------------
Total stockholders' equity 5,147,639 11,976,890
------------- -------------
Total liabilities and stockholders' equity $ 26,752,500 $ 22,376,805
============= =============
See accompanying notes to financial statements.
36
STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
Revenue from collaborative
agreements $ 3,500,000 $ 3,406,250 $ 2,210,147
Operating expenses:
Research and development 24,140,246 19,138,190 17,634,898
General and administrative 4,833,489 3,537,157 3,704,962
--------------- --------------- --------------
Total operating expenses 28,973,735 22,675,347 21,339,860
--------------- --------------- --------------
Loss from operations (25,473,735) (19,269,097) (19,129,713)
Interest income 1,217,884 1,082,618 1,695,192
Interest expense (cash) (1,340,544) (603,330) (568,985)
Interest expense (non-cash) (3,692,140) -- --
--------------- ---------------- --------------
Net loss $ (29,288,535) $ (18,789,809) $ (18,003,506)
=============== =============== ==============
Net loss per share $ (1.72) $ (1.39) $ (1.37)
=============== =============== ==============
Shares used in calculation
of net loss per share 17,010,000 13,496,000 13,161,000
=============== =============== ==============
See accompanying notes to financial statements.
37
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1996 and 1997
Deferred
Convertible Addition Compensation Total
Preferred Common Paid-In and Accumulated Stockholders'
Stock Stock Capital Other Deficit Equity
Adjustments
- --------------------------------------------------------------------------------
Balance at
December 31,
1994 -- 13,019 88,013,987 (898,737) (45,828,321) 41,299,948
Issuance of
238,297 shares
of common
stock upon
the exercise
of stock
options -- 239 406,176 -- -- 406,415
Unrealized
gain on
available-for-sale
securities -- -- -- 351,259 -- 351,259
Amortization
and reversals
of deferred
compensation -- -- (249,237) 400,522 -- 151,285
Net loss -- -- -- -- (18,003,506)(18,003,506)
------ ------ ------ ------ ----------- -----------
Balance at
December 31,
1995 -- 13,258 88,170,926 (146,956) (63,831,827) 24,205,401
Issuance of
273,978 shares
of common
stock upon
the exercise
of stock
options -- 274 439,806 -- -- 440,080
Issuance of
400,000 shares
of series A
convertible
preferred
stock 400 -- 3,057,823 -- -- 3,058,223
Issuance of
388,918 shares
of common
stock in
connection
with Lipha/Merck
collaboration -- 389 2,971,833 -- -- 2,972,222
Unrealized
loss on
available-for-sale
securities -- -- -- (26,458) -- (26,458)
Amortization
and reversals
of deferred
compensation -- -- (35,933) 153,164 -- 117,231
Net loss -- -- -- -- (18,789,809)(18,789,809)
------ ------ ------ ------ ---------- -----------
Balance at
December 31,
1996 400 13,921 94,604,455 (20,250) (82,621,636) 11,976,890
======= ======= ========== ========== ========== ===========
Issuance of
19,472 shares
of common
stock upon
the exercise
of stock
options -- 19 64,137 -- -- 64,156
Issuance of
2,000,000
shares of common
stock in
connection with
a registered
direct
public offering
in January 1997,
net of
issuance costs
of $.93 million -- 2,000 8,068,410 -- -- 8,070,410
Issuance of
1,6000,000
shares of common
stock in
connection with
a registered
direct public
offering
in April 1997,
net of
issuance costs
of $.13 million -- 1,600 7,822,654 -- -- 7,824,254
Issuance of
200,787 shares
of common
stock in
connection
with Lipha/
Merck
collaboration -- 201 1,492,338 -- -- 1,492,539
Issuance of
55,102 shares
of common
stock upon
conversion of
senior
convertible
notes in
November 1997 -- 55 223,108 -- -- 223,163
Unrealized
loss on
available-for-sale
securities -- -- -- (9,720) -- (9,720)
Deferred
compensation
related to
granting of
options to
non-employees,
net of
amortization
and reversals -- -- 240,282 (94,940) -- 145,342
Value ascribed
to warrants
issued in
conjunction
with secured
loan -- -- 648,000 -- -- 648,000
Value ascribed
to in-the-money
conversion
option of
senior
convertible
notes -- -- 3,692,140 -- -- 3,692,140
Value ascribed
to warrants
issued in
conjunction
with senior
convertible
notes -- -- 309,000 -- -- 309,000
Net loss -- -- -- -- (29,288,535)(29,288,535)
===== ====== ======== ===== ========== ==========
Balance at
December 31,
1997 $400 $17,796 $117,164,524 $(124,910)$(111,910,171)$5,147,639
====== ======= ============ ======== ============ =========
See accompanying notes to financial statements.
38
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Years ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
Operating activities:
Net loss $ (29,288,535) $ (18,789,809) $ (18,003,506)
Adjustments to reconcile net
loss to net cash used
in operating activities:
Depreciation and amortization 2,108,896 2,363,091 2,717,332
Interest expense on issuance
of senior convertible notes 3,692,140 -- --
Changes in operating assets and
liabilities:
Prepaid expenses, current assets
and other assets 628,198 (80,148) 531,303
Accounts payable, accrued
professional fees,
accrued compensation,
accrued clinical
trial costs and contract
research advances (748,327) 2,021,220 206,079
----------- ----------- -----------
Net cash used in
operating activities (23,607,628) (14,485,646) (14,548,792)
----------- ----------- -----------
Investing activities:
Purchases of available-for-sale
investments (14,562,627) (10,872,811) (20,007,947)
Maturities of available-for-sale
investments 4,954,640 26,325,454 33,970,649
Sales of available-for-sale
investments -- 1,494,000 --
Capital expenditures (913,382) (864,729) (411,592)
----------- ----------- -----------
Net cash provided by (used in)
investing activities (10,521,369) 16,081,914 13,551,110
----------- ---------- ----------
Financing activities:
Proceeds from issuance of preferred
stock, net -- 3,058,223 --
Proceeds from issuance of common
stock, net 17,446,683 3,412,302 406,415
Proceeds from issuance of long-term
obligations 5,000,000 600,000 1,900,000
Proceeds from issuance of senior
convertible notes, net 9,479,039 -- --
Principal payments on long-term
obligations (2,936,297) (1,825,665) (875,192)
Proceeds from asset financing
arrangements 429,023 -- --
----------- ----------- -----------
Net cash provided by financing
activities 29,418,448 5,244,860 1,431,223
---------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (4,710,549) 6,841,128 433,541
Cash and cash equivalents at
beginning of period 16,051,251 9,210,123 8,776,582
----------- ----------- -----------
Cash and cash equivalents at end $ 11,340,702 $ 16,051,251 $ 9,210,123
of periiod =========== =========== ===========
Supplemental information
Interest paid $ 538,891 $ 603,330 $ 634,131
=========== =========== ===========
See accompanying notes to financial statements.
39
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops novel pharmaceutical products for major human diseases by isolating
active compounds from tropical plants. The Company has three compounds in
clinical development: Provir, an oral product for the treatment of
AIDS-associated and watery diarrhea; nikkomycin Z, an oral antifungal for the
treatment of systemic fungal infections; and SP-134101, an oral product for the
treatment of Type II diabetes. Shaman maintains an active Type II diabetes
research program which serves as the basis for its collaborations with Lipha
s.a., a wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany
("Lipha/Merck"), and with Ono Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.
Revenue Recognition
Revenue recognized under the Company's collaborative research agreements is
recorded as earned based upon the performance requirements of the contract.
Payments received in advance under these agreements are deferred until earned.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which encourages, but
does not require, companies to record compensation expense for stock-based
employee compensation plans at fair value. The Company has elected to follow the
disclosure requirements of SFAS No. 123 for the year ended December 31, 1997,
1996 and 1995 and will continue to measure stock-based compensation to employees
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the disclosure requirements will have no effect on the
Company's financial position or results of operations. Note 7 contains a summary
of the pro forma effects to reported net loss and net loss per share for 1997,
1996 and 1995 as if the Company had elected to recognize compensation expense
based on the fair value of options granted as described by SFAS 123.
The Company grants stock options to employees and directors for a fixed
number of shares with an exercise price equal to the fair market value of shares
at the date of grant. The Company accounts for stock option grants to employees
and directors in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees and, accordingly, recognizes no compensation expense for the stock
option grants to employees and directors.
Per Share Data
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which the Company adopted in the period ended
December 31, 1997. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options and other common stock equivalents
is excluded. The impact of Statement 128 results in no change to the Company's
net loss per share, as stock options and other common stock equivalents have
been excluded from the current computation as they are antidilutive.
Net loss per share is computed using the weighted average number of shares
of common stock outstanding.
40
Cash, Cash Equivalents, Investments and Concentration of Credit Risk
The Company considers all highly liquid investments with remaining
maturities of three months or less at time of purchase to be cash equivalents.
Investments with maturities of less than one year from the balance sheet date
and with original maturities greater than 90 days are considered short-term
investments. Investments with maturities greater than one year from the balance
sheet date are considered long-term investments. Investments consist primarily
of commercial paper, investments in government securities, corporate bonds and
asset-backed securities. These investments typically bear minimal risk. This
diversification of risk is consistent with the Company's policy to maintain high
liquidity and ensure safety of principal. The Company maintains its cash, cash
equivalents and investments in accounts with several United States banks and
brokerage houses.
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such determination as of each balance
sheet date. As of December 31, 1997 and 1996, the Company has classified its
entire investment portfolio as available-for-sale. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax,
included in stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income or expense. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest income.
Property and Equipment
Property and equipment are stated at cost. Depreciation of equipment and
furniture is provided on a straight-line basis over the estimated useful lives
of the respective assets, which range from three to five years. Equipment held
under capital leases is amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset. Leasehold
improvements are amortized on a straight-line basis over the remaining life of
the lease.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. Collaborative Relationships
In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to jointly develop Shaman's antihyperglycemic drugs.
Upon signing the collaboration, the Company received an annual research fee of
$1.5 million which was amortized to revenue over twelve months as work was
performed. The Company also received approximately $3 million for 388,918 shares
of common stock priced at $7.71 per share, representing a 20% premium to the
weighted average price of the Company's stock at the time of purchase. In
exchange for development and marketing rights in all countries except Japan,
South Korea, and Taiwan (which are covered under an earlier agreement between
Shaman and Ono, Lipha/Merck will provide up to $9.0 million in research
41
payments and up to $10.5 million in equity investments priced at a 20% premium
to a multi-day volume weighted average price of the Company's common stock at
the time of purchase. The agreement also provides for additional preclinical and
clinical milestone payments to the Company in excess of $10.0 million per
compound for each antihyperglycemic drug developed and commercialized.
Lipha/Merck will bear all pre-clinical, clinical, regulatory and other
development expenses associated with the compounds selected under the agreement.
In addition, as products are commercialized, Shaman will receive royalties on
all product sales outside the United States and up to 50% of the profits (if the
company exercises its co-promotion rights) or royalties on all product sales in
the United States. Certain of the milestone payments will be credited against
future royalty payments, if any, due to the Company from sales of products
developed pursuant to the agreement.
For the year ended December 31, 1997,Shaman recognized $1.5 million in
revenue from the Lipha/Merck collaboration. Shaman also received $1.5 million
for 200,787 shares of Common Stock priced at $7.47 per share, representing a 20%
premium to the weighted average price of the Company's stock at the time of
purchase. Revenues from Lipha/Merck accounted for 43% and 12% of total revenues
earned in 1997 and 1996, respectively.
In May 1995, the Company entered into a collaborative agreement with Ono
providing for, among other things, three years of funding for the research and
development of compounds for the treatment of Type II diabetes. Under the
agreement, Shaman will screen 100 diabetes-specific plants per year in vivo,
isolate and identify active compounds, and participate in any medicinal
chemistry modification. In turn, Ono will provide Shaman with access to Ono's
preclinical and clinical development capabilities through proprietary in vitro
assays and medicinal chemistry effort. Ono's development and commercialization
rights are for the countries of Japan, South Korea and Taiwan. Under the terms
of the agreement, Ono will provide up to $7.0 million in collaborative research
funding and will pay preclinical and clinical milestone payments of $4.0 million
per compound for each antidiabetic drug that is commercialized. Of the $3.0
million received on signing the agreement, $1.0 million was an access and
license fee recognized as revenue in 1995, and the remaining $2.0 million was
the annual research and development funding recognized as revenue over the
subsequent year. Shaman received an additional $1.0 million payment (beyond the
$7.0 million commitment) in December 1996 for enhanced access rights to these
compounds. For the year ended December 31, 1997, Shaman recognized $2.0 million
in revenue from the Ono collaboration. Revenues from Ono accounted for 57% and
88% of total revenues earned in 1997 and 1996, respectively.
Costs associated with revenue from these collaborations totaled $11.4
million and $11.6 million for the year ended December 31, 1997 and 1996,
respectively, and are included in research and development expenses in the
accompanying financial statements.
3. Investment Securities
The following is a summary of available-for-sale securities (in thousands):
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
December 31, 1997
-------------------------------------------------------
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
========= ========== =========== =========
42
3. Investment Securities (cont'd)
Above amounts are included in the balance sheet as follows:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------
December 31, 1997
----------------------------------------------------------
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, 1996
----------------------------------------------------------
U.S. Treasury securities and
government obligations $ 499 $ -- $ (17) $ 482
U.S. corporate bonds 2,218 -- -- 2,218
U.S. corporate commercial
paper and other 12,830 -- (3) 12,827
-------- ------- ------ -------
Total $ 15,547 $ -- $ (20) $ 15,527
======== ======== ======== ========
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 15,048 $ -- $ (3) $ 15,045
Short-term investments 499 -- (17) 482
-------- -------- -------- --------
Total $ 15,547 $ -- $ (20) $ 15,527
======== ======== ======== ========
The average remaining maturity of the portfolio was approximately four and a
half months as of December 31, 1997 and 1996, respectively.
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
judgment is required in interpreting market data to develop the estimates of
fair value.
Fair Value of Long-Term Obligations
The fair values of the Company's long-term obligations are estimated using
discounted cash flow analyses based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements. The carrying amounts
and fair values of long-term obligations consisted of the following at December
31, 1997:
Carrying Value Fair Value
-------------- ----------
Leasehold improvements financings $2,093,435 $2,010,938
Equipment borrowings $ 401,555 $ 403,194
Secured Loan $4,190,105 $4,330,073
The carrying value of the Company's term loan approximates its fair value
because the interest rates on the note takedowns are periodically reset.
43
4. Long-Term Obligations
Long-term obligations consist of secured and unsecured term loans, senior
convertible notes, secured borrowings used to acquire property and equipment,
capital lease arrangements and a leasehold improvement financing obligation.
In October 1995, the Company closed a $2.5 million unsecured term loan to
finance capital asset acquisitions and potential facilities expansion. The
Company failed to achieve certain financing and collaborative objectives by May
15, 1996 which resulted in an acceleration of principal. The acceleration
provisions required that principal amortization be shortened from 30 months to
24 months, with the first monthly payment due May 15, 1996. The unsecured term
loan was paid off in May 1997. Interest on each advance was charged at the
London Interbank Offered Rate ("LIBOR") plus 1.5% or prime plus 0.5%. The
interest rate on the loan was approximately 7.14% at May 1997 and 7.13% at
December 31, 1996.
In May 1997, the Company obtained a $5.0 million term loan to payoff
pre-existing debt, finance capital asset acquisitions and finance continued
research and clinical development. The loan is payable in thirty-six equal
monthly installments and the interest rate is 14.58%. The lender was granted
warrants to purchase 200,000 shares of the Company's Common Stock at $6.25 per
share, which are exercisable over a ten year period.
In June 1997, the Company privately issued $10.4 million of senior
convertible notes (The "1997 Private Placement"). The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option. Initially, the notes are
convertible into Common Stock of the Company at 100% of the low trading price
during a designated time period prior to conversion provided that the conversion
price will not be less than $5.50 per share. Starting in November 1997, the
notes are convertible into Common Stock of the Company at a 10% discount from
the low trading price during a designated time period prior to the conversion,
with a floor of $5.50 through March 31, 1998, pursuant to a November 1997
understanding with the note holders to revise the terms of the note. In
connection with this understanding, the Company issued to the note holders
three-year warrrants to purchase an aggregate of 137,500 shares of common stock
at an exercise price of $7.50 per share. In November 1997, a principal amount of
$220,666 was converted into 55,102 shares of the Company's Common Stock.
Of the notes issued, $400,000 were issued to the placement agent as part of
the placement fee. The Company paid the placement agent an additional $300,000
in cash. The placement fees and other offering costs have been capitalized in
other assets as deferred issuance costs and are being amortized to interest
expense ove the life of the notes. The net proceeds totaled approximately $9.5
million after the placement agent's fees and other offering expenses.
The SEC has promulgated requirements for charges to be recognized by
companies which issue certian convertible notes that provide for a guaranteed
discount feature. In connection with the issuance of the notes, the Company
recognized a non-cash charge in the amount of $3,692,000 in the third quarter
ended September 30, 1997. This amount was calculated as required by the SEC.
Equipment borrowings totaled $401,555 and $1,183,335 at December 31, 1997
and 1996, respectively. The borrowings bear interest at rates ranging from 10.7%
to 12.75% at December 31, 1997 and 1996, respectively, are secured by the
equipment acquired, and are payable in monthly installments ranging from $10,000
to $156,000 through December 1998.
44
The Company has also acquired certain equipment and furniture pursuant to
capital lease arrangements. The gross amount of equipment and furniture and the
related accumulated amortization recorded under capital leases included in
property and equipment are as follows:
At December 31, 1997 1996
---- ----
Equipment and furniture $ 1,890,164 $ 1,461,141
Less accumulated amortization (1,354,475) (1,194,475)
----------- -----------
$ 535,689 $ 266,666
=========== ===========
Amortization of assets acquired under capital leases is included with
depreciation and amortization expense.
In connection with the facility lease described in Note 5, the Company
entered an agreement with the former tenant of the facility to acquire
approximately $1.5 million of tenant improvements by making annual payments to
the former tenant, including accrued interest, of $540,000 in 1998 through 2002.
At December 31, 1997, future payments on long-term obligations are as
follows:
Senior Leasehold
Convertible Secured Equipment Capital Improvement
Notes Loan Borrowings Leases Financing Total
---------- --------- --------- --------- ----------- ----------
1998 $ -- $1,558,076 $401,555 $128,382 $540,000 $2,628,013
1999 -- 1,801,058 -- 128,382 540,000 2,469,440
2000 10,179,334 830,971 -- 128,382 540,000 11,678,687
2001 -- -- -- 128,382 540,000 668,382
2002 -- -- -- -- 540,000 540,000
---------- --------- --------- --------- ----------- ----------
Total
minimum
payments 10,179,334 4,190,105 401,555 513,528 2,700,000 17,984,522
Less amount
representing
interest (at
rates ranging
from 10.7% to
14.6% -- -- -- (84,506) (606,565) (691,071)
---------- --------- --------- --------- ---------- ----------
10,179,334 4,190,105 401,555 429,022 2,093,435 17,293,451
Less
current
installments -- (1,558,076) (401,555) (92,507) (540,000) (2,592,138)
---------- --------- --------- --------- ---------- ----------
Long-term
obligations,
excluding
current
install-
ments $10,179,334 $2,632,029 $ -- $336,515 $1,553,435 $14,701,313
=========== =========== ========= ======== =========== ==========
5. Commitments and Contingencies
In January 1993, the Company entered a noncancelable lease for a new
research and office facility in South San Francisco, California. The lease, as
amended in April 1994, provides for future lease payments totaling approximately
$7.7 million through 2003 and options to renew for a total of ten years. The
Company is required to pay operating costs, including property taxes, utilities,
insurance and maintenance.
At December 31, 1997, the minimum noncancelable future rental payments
under the Company's operating leases are:
1998 $1,187,000
1999 1,292,000
2000 1,497,000
2001 1,497,000
2002 1,497,000
Thereafter 762,000
45
Rent expense for each of the three years ended December 31, 1997, 1996 and
1995 was approximately $1,154,000, $1,348,000, and $1,004,000, respectively.
The Company is involved in litigation, arbitration and disputes which are
normal to its business. Management believes losses that might eventually be
sustained from such matters, if any, would not be material to future years'
financial position or results of operations. Further, product liability claims
may be asserted in the future relative to events not known to management at the
present time. The Company has insurance coverage which management believes is
adequate to protect against such product liability losses as could materially
affect the Company's financial position.
6. Contractual Agreements
The Company has entered into license, clinical trial and supply agreements
with universities, research organizations and commercial companies. Certain of
these agreements require payments of royalties on future sales of resulting
products and may subject the Company to minimum annual payments to its contract
partners. In addition, the Company signed an agreement in 1995 which could
result in the payment of milestone installments if certain development
objectives are achieved. To date, payments under these agreements have not been
significant and, at December 31, 1997, related noncancelable commitments are
immaterial.
7. Stockholders' Equity
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock
(400,000 shares of which are issued and outstanding). The Company's Board of
Directors may set the rights and privileges of any preferred stock issued.
In July 1996, the Company closed a private placement pursuant to Regulation
S under the Securities Act of 1933, as amended, in which it received gross
proceeds of $3.3 million for 400,000 shares of Series A convertible preferred
stock ("preferred stock") and a six-year warrant to purchase 550,000 shares of
the Company's common stock at an exercise price of $10.184 per share. The
Preferred Stock does not carry a dividend obligation and will convert into
common stock no later than July 23, 1999 at a price per share between $6.00 and
$8.147, depending on the market value of the Company's common stock during the
period prior to conversion. Holders of preferred shares are entitled to a
liquidation preference of $8.147 per share and have voting rights equivalent to
the number of common shares into which their preferred shares could then be
converted. In addition to the sale of Preferred Stock and warrant, the Company
has the right, from time to time during the period beginning January 1997 and
ending July 2000, to sell up to 1,200,000 additional shares of common stock to
the investor at a formula price of 100% or 101% of a multi-day average of the
Company's common stock price at the time of sale. If the Company exercises this
right, the investor has the option to increase the shares purchased by up to an
aggregate of 527,500 shares.
46
Common Stock
In December 1992, the Company adopted the 1992 Stock Option Plan (the Plan)
as the successor plan to the Company's 1990 Stock Option Plan. The Plan will
terminate on the earlier of December 31, 2002 or the date on which all shares
available for issuance under the Plan have been issued or canceled. The Plan
provides for two separate components: the Discretionary Option Grant Program and
the Automatic Option Grant Program.
Under the Discretionary Option Grant Program, options granted may either be
incentive options or non-statutory options. Incentive options may be granted to
employees at a price not less than the fair market value of the Company's common
stock on the grant date. Non-statutory options may be granted at a price
determined by the plan administrator. Each option granted is exercisable as
determined by the plan administrator, with a term not to exceed ten years. The
Plan also allows for the granting of options with repurchase rights and stock
appreciation rights at the discretion of the plan administrator.
Under the Automatic Option Grant Program, each individual who becomes a
non-employee board member on or after the effective date of the Plan is
automatically granted a non-statutory stock option to purchase 20,000 shares of
common stock. Further, each non-employee board member who has served as a member
for at least six months prior to the annual stockholders' meeting is
automatically granted an annual non-statutory stock option to purchase not more
than 7,500 nor less than 5,000 shares of common stock, depending on a
calculation based on the average selling price of the common stock. The exercise
price of each option granted is the fair value of the common stock on the date
of grant. These options have a ten-year term and vest over 24 months.
Both programs provide for automatic acceleration of the exercise period in
the event of certain corporate transactions, including a merger, asset sale or
change in control of the Company. The Plan was amended in 1997 to increase the
shares authorized for issuance by additional 700,000 shares.
The 1990 Stock Option Plan provided for the granting of incentive and
non-statutory stock options. Both types of options were immediately exercisable
and expire ten years from the date of grant. Vesting of optioned shares was
determined by the board of directors and generally occurred over a two- to
four-year period from the date of grant. At December 31, 1997, all options to
purchase common stock issued under this plan were vested.
A summary of stock option activity is as follows:
Options Outstanding
---------------------------------------------------
Weighted Weighted
Average Average
Number Price Per Exercise Fair Value
of Shares Share Price at Grant Date
------------- ---------- ---------- -------------
Balance at December 31,
1995 1,809,065 $ .06-13.25 $ 4.40
Granted at fair value 847,928 5.88- 8.13 6.75 $ 3.85
Exercised (273,978) .06- 7.86 1.61
Forfeited (281,039) .24-13.25 6.12
---------- ---------- ----- -----
Balance at December 31,
1996 2,101,976 .06-13.25 5.48
Granted at fair value 951,400 4.13- 6.81 5.41 $ 3.46
Exercised (19,472) .24- 5.88 3.29
Forfeited (242,299) 3.50-13.25 6.40
----------- ---------- ----- -----
Balance at December 31,
1997 2,791,605 $ .06-13.25 $ 5.40
=========== =========== ====== ======
At December 31, 1997, 1,310,036 shares under options were exercisable at a
weighted average exercise price of $5.25 per share (968,235 shares at $5.10 per
share at December 31, 1996).
47
The following table summarizes information regarding stock options
outstanding at December 31, 1997:
Weighted Shares under Options
Average Exercisable at
Option Shares Contractual Weighted December 31, 1997
Range of Outstanding at Remaining Average ---------------------
Exercise December 31, Life Exercise Weighted Average
Prices 1997 (Years) Price Number Exercise Price
--------- -------------- ------------- ---------- ------- --------------
$0.06-$ 3.63 684,820 6.20 $ 2.71 517,558 $ 2.46
4.13- 5.25 605,394 8.53 5.07 127,627 5.20
5.38- 6.06 735,288 8.89 5.68 243,280 5.59
6.38- 7.50 571,028 8.01 6.88 235,492 6.91
7.86- 13.25 195,075 5.86 10.41 186,079 10.52
- ------------ ----------- ----- ------ -------- -------
$0.06-$13.25 2,791,605 7.76 $ 5.39 1,310,036 $ 5.25
============ ========= ===== ====== ========= ======
For certain options issued during the years ended December 31, 1993 and
1994, the Company recorded deferred compensation for the difference between the
exercise price and the fair market value of the Company's common stock at the
date of grant. For certain additional options issued during the years ended
December 31, 1996 and 1997 to non-employees, the Company recorded deferred
compensation expense for the fair value of the options at the date of grant.
Deferred compensation is amortized to expense on a straight-line basis over the
vesting period of the options.
Pro Forma Information
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted subsequent to December 31, 1994 under the
fair value method of SFAS 123. The fair value for these options was estimated at
the date of grant using the Black-Scholes option pricing model. The following
are the weighted-average assumptions for 1997, 1996 and 1995 respectively:
risk-free interest rates of 6.27%, 5.73%, and 6.94%; no dividends paid;
volatility factors of the expected market price of the Company's common stock of
.75 and a weighted-average expected life of the options of 5.0, 3.85, and 3.91
years. The effects of applying FAS 123 for recognizing compensation expense and
providing pro forma disclosures in 1997 and 1996 are not likely to be
representative of the effects on reported net income in future years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially
48
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro-forma net loss over the options' vesting periods.
The Company's pro forma information follows (in thousands except for net loss
per share information):
1997 1996 1995
---- ---- ----
Net loss
Historical $ (29,289) $ (18,790) $ (18,004)
Pro forma $ (31,101) $ (20,280) $ (18,731)
Net loss per share
Historical $ (1.72) $ (1.39) $ (1.37)
Pro forma $ (1.83) $ (1.50) $ (1.42)
Reserved Shares
At December 31, 1997, 4,560,284 shares of common stock were reserved
for conversion of outstanding preferred stock and for issuance upon exercise
of outstanding options, warrants and options available for future grant.
Warrants
In connection with obtaining long term debt financing in May 1997, the
Company agreed to issue warrants to purchase a total of 200,000 shares of common
stock at an exercise price of $7.50 per share (see Note 4). These warrants were
determined to have a total value of $648,000 based on the Black Scholes option
pricing model. Such value has been recognized as a reduction to the related debt
and is being amortized to interest expense over the term of such debt.
In connection with an amendment to the conversion terms of senior
convertible notes in November 1997, the Company issued warrants to purchase a
total of 137,500 shares of common stock (see Note 4). These warrants were
determined to have a total value of $309,000 based on the Black Scholes option
pricing model. Such value has been recognized as a reduction to the related
convertible notes and is being amortized to interest expense over the extended
conversion term.
At December 31, 1997, warrants to purchase a total of 979,205 shares of
common stock were outstanding, with exercise prices ranging from $2.40 to $10.83
per share. These warrants, which expire in 1998 through 2007, were issued to
creditors in connection with certain lease financing arrangements and preferred
stock financing arrangements.
8. Taxes
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $102 million. The net operating loss and credit
carryforwards will expire at various dates beginning in 2004 through 2012, if
not sooner utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes.
49
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of December 31, 1997, 1996 and 1995 are as
follows:
Deferred tax assets: 1997 1996 1995
--------- --------- --------
Net operating loss carryforwards $35,200,000 $26,600,000 $20,600,000
Research credits
(expiring in 2004 - 2012) 2,800,000 2,300,000 1,900,000
Capitalized research and
development costs 4,700,000 3,700,000 2,900,000
Other 400,000 400,000 100,000
------------ ----------- -----------
Total deferred tax assets 43,100,000 33,000,000 25,500,000
Valuation allowance for deferred
tax assets (43,100,000) (33,000,000) (25,500,000)
------------ ----------- -----------
Net deferred tax asset $ -- $ -- $ --
============ ============ ===========
The net valuation allowance increased by $6.7 million during the year
ended December 31, 1995.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors and Executive Officers
The information required by this Item 10 concerning the directors and
executive officers of the Company is incorporated by reference from the
information under the captions "Proposal One - Election of Directors Information
With Respect to Nominees" and "Executive Compensation and Other Information -
Directors and Executive Officers" in the Company's Definitive Proxy Statement to
be filed with the Commission pursuant to Regulation 14A in connection with the
Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement").
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The information required by this Item 10 as to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference from
the information under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from
the information under the caption "Executive Compensation and Other Information"
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference from
the information under the caption "Security Ownership of Management and Certain
Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference from
the information under the caption "Executive Compensation and Other Information
- - Certain Relationships and Related Transactions" in the Proxy
Statement.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following Financial Statements together with the Report of
Independent Auditors are filed as part of this Form 10-K under Item
8 above:
Report of Independent Auditors
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for each of the years ended
December 31, 1997, 1996 and 1995
Statements of Stockholders' Equity for each of the years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for each of the years ended
December 31, 1997, 1996 and 1995
Notes to Financial Statements
(a) (2) Financial Statement Schedules
No financial statement schedules are included because they are not
required or the required information is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K
A current Report on Form 8-K was filed on November 19, 1997
containing information required by Item 5, Other Events.
(c) Exhibits
Exhibit No. Description
3.1(12) Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on June 3, 1997.
3.2(9) Amended and Restated By-Laws, as amended March 29, 1996.
4.1(9) Certificate of Designation of Preferences of Series A
Preferred Stock of the Registrant, as filed with the Delaware
Secretary of State on July 27, 1996.
10.1(1)(14) 1990 Stock Option Plan, as amended.
10.2(1)(14) 401(k) Plan.
10.3(1)(14) Form of Stock Purchase Agreement.
10.4(1) Form of Confidentiality Agreement-Employees & Consultants.
10.5(1) Form of Confidentiality Agreement-Strategic Planning.
10.6(1) Form of Indemnification Agreement.
10.7(1)(14) Form of Employment Agreement.
10.8(1) Form of Agreement with Scientific Strategy Team Members.
10.9(1) Form of Proprietary Information and Inventions
Agreement-Employees.
52
10.10(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.11(1) Letter Agreements dated December 8, 1989, May 30, 1990, June
21, 1990, August 24, 1990 and July 22, 1991, between Shaman
and National Institute of Allergy and Infectious Diseases.
10.12(1)(13) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.13(1)(14) Stock Purchase Agreement dated June 15,1990, between Shaman
and Lisa A. Conte.
10.14(1) Master Equipment Lease Agreement dated September 28, 1990,
between Shaman and MMC/GATX Partnership No. I, with related
schedules.
10.15(1) Series B Preferred Stock Warrants dated September 28,1990 and
June 28, 1991, issued to MMC/GATX Partnership No. I.
10.16(1)(13) License Agreement dated December 5, 1990, as amended January
19, 1992, between Shaman and the University of British
Columbia.
10.17(1) Master Equipment Lease Agreement dated December 26, 1990,
between Shaman and Lease Management Services, Inc.
10.18(1) Master Equipment Lease Agreement dated April 22,1991, between
Shaman and Industrial Way I Limited Partnership.
10.19(1)(13) Contract Services Agreement dated May 23, 1991, February 1,
1992, February 4, 1992, September 23, 1992 and October 30,
1992, between Shaman and New Drug Services, Inc.
10.20(1)(13) License Agreement dated September 25, 1991, between Shaman
and Inverni della Beffa SpA.
10.21(1)(13) Manufacturing Agreement dated September 25, 1991 between
Shaman and Indena SpA.
10.22(1)(13) Master Clinical Trial Agreement dated September 30, 1991
between Shaman and International Drug Registration, Inc.
10.23(1) Series D Preferred Stock Warrant dated February 3, 1992,
issued to MMC/GATX Partnership No. I.
10.24(1)(13) Supply Agreement dated June 1, 1992.
10.25(1)(13) Supply Agreement dated June 1, 1992.
10.26(2) Screening Agreement dated August 31, 1992, as amended June 2,
1993, between Shaman and Merck Research Laboratories.
10.27(1)(13) Agreement dated October 16, 1992, between Shaman and
International Medical Technical Consultants, Inc.
10.28(5)(13) Research Agreement dated October 21, 1992, as amended April
27, 1994, between Shaman and Eli Lilly and Company.
10.29(1) Registration Rights Agreement dated October 22, 1992, as
amended December 14, 1992, between Shaman and certain holders
of preferred stock of Shaman.
10.30(1) Industrial Lease Agreement dated January 1, 1993, between
Shaman and Grand/Roebling Investment Company.
10.31(1) Three Party Agreement dated as of January 1, 1993, by and
among Berlex Laboratories, Inc., Shaman and Grand/Roebling
Investment
Company.
10.32(2)(13) Letter Agreement dated March 1, 1993, between Shaman and
Lederle-Praxis Biologicals, Division of American Cynamide
Corporation.
10.33(4) Contract Service Agreements dated May 10, 1993, between
Shaman and R.C. Benson & Sons, Inc.
10.34(4)(13) Clinical Trial Agreement dated July 21, 1993, between Shaman
and the University of Rochester.
10.35(4)(13) Letter Agreement dated August 24, 1993, between Shaman and
University of Michigan.
10.36(4)(13) Laboratory Services Agreement dated September 1, 1993,
between Shaman and Hazelton Washington, Inc.
53
10.37(4) Loan and Security Agreement dated September 27, 1993, between
Shaman and Household Commercial of California.
10.38(4) Master Equipment Lease Agreement dated September 30, 1993,
between Shaman and MMC/GATX Partnership No. I, with related
schedules.
10.39(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.40(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.41(6)(13) Joint Research and Product Development Agreement, dated
May 24, 1995, by and between Ono Pharmaceutical Co., Ltd. and
Registrant.
10.41(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint
Research and Product Development Agreement by and between Ono
Pharmaceutical Co., Ltd. and Registrant.
10.42(6)(13) License Agreement, dated June 8, 1995, by and between Bayer
AG and Registrant.
10.43(7)(13) Development Agreement, dated January 11, 1996, by and between
Abbott Laboratories and Registrant.
10.44(7) Loan Agreement, dated October 20, 1995, by and between The
Daiwa Bank, Limited and Registrant.
10.45(7) Assignment and Assumption, dated February 2, 1996, between
The Daiwa Bank, Limited and The Sumitomo Bank, Limited.
10.46(8) Letter dated March 29, 1996 from The Sumitomo Bank, Limited
to the Registrant amending the Loan Agreement dated October
20, 1995.
10.47(9)(13) Subscription Agreement dated July 25, 1996 by and between the
Registrant and Fletcher International Limited.
10.48(10)(13)Joint Research and Product Development and Commercialization
Agreement dated September 23, 1996, by and between Lipha,
Lyonnaise Industrielle Pharmaceutique s.a. and the
Registrant.
10.49(10)(13)Stock Purchase Agreement dated September 23, 1996, by and
between Lipha, Lyonnaise Industrielle Pharmaceutique s.a. and
the Registrant.
10.50(11)(14)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan
(as Amended and Restated on February 14, 1997).
10.51(3)(14) Form of Notice of Grant with Stock Option Agreement.
10.52(3)(14 Form of Addendum to Stock Option Agreement (Special Tax
Elections).
10.53(3)(14) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.54(11)(14)Form of Non-Employee Director Automatic Stock Option
Agreement.
10.55(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.56(12)(13)Amended and Restated Masopracol License Agreement, dated
as of April __, 1997, by and between Access Pharmaceuticals,
Inc. and the Registrant.
10.57(12) Loan and Security Agreement, dated as of May 7, 1997, between
MMC/GATX Partnership I and Registrant.
10.57A(12) Amendment No. 1 to Loan and Security Agreement, dated as of
[June 30,] 1997, by and between Registrant and MMC/GATX
Partnership No. I.
10.58(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
10.59(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.60(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX
Partnership No. I and Registrant.
10.61(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.62(12) Amended Engagement Agreement, dated June 30, 1997, by and
between Registrant and Diaz & Altschul Capital, LLC.
10.63(12) Form of Note Purchase Agreement, dated as of June 30, 1997,
by and between
54
Registrant and certain investors.
10.64* Master Lease Agreement, dated September 15, 1997, between
Shaman and Transamerica Business Credit Corporation, with
related schedules.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of Attorney (included under the caption "Signatures").
27* Financial Data Schedule.
* Filed herewith.
(1) Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-1, File No.
33-55892 which was declared effective January 26, 1993.
(2) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.
(3) Incorporated by reference to exhibits filed on July 23,
1993 with Registrant's Registration Statement on Form S-8,
File No. 33-66450.
(4) Incorporated by reference to exhibits filed on November 10,
1993 with Registrant's Registration Statement on Form S-1,
File No. 33-71506.
(5) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(6) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995,
as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(8) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(9) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
as amended.
(10) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, as amended.
(11) Incorporated by reference to exhibits filed on June 30,
1997 with Registrant's Registration Statement on Form S-8,
File No. 333-30365.
(12) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form S-3, File
No. 333-31843.
(13) Confidential treatment has been granted with respect to certain
portions of these agreements.
(14) Management contract or compensation plan.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 3, 1998
SHAMAN PHARMACEUTICALS, INC.
By: /s/ Lisa A. Conte
_______________________________
Lisa A. Conte
President, Chief Executive Officer
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person who signature appears
below constitutes and appoints jointly and severally, Lisa A. Conte and G. Kirk
Raab, or either of them as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Lisa A. Conte President, Chief Executive Officer, March 3, 1998
____________________ Chief Financial Officer and Director
Lisa A. Conte (principal executive and financial officer)
/s/Adrian D. P. Bellamy Director March 3, 1998
________________________
Adrian D.P. Bellamy
/s/Herbert H. McDade, Jr. Director March 3, 1998
______________________
Herbert H. McDade, Jr.
56
Signature Title Date
--------- ----- ----
/s/G. Kirk Raab Chairman of the Board March 3, 1998
______________________
G. Kirk Raab
/s/M. David Titus Director March 3, 1998
_____________________
M. David Titus
/s/John A. Young Director March 3, 1998
______________________
John A. Young
57
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-66450, 33-93938, No. 333-09169 and No. 333-30365)
pertaining to the 1992 Stock Option Plan of Shaman Pharmaceuticals, Inc. of
our report dated January 29, 1998, with respect to the financial statements
of Shaman Pharmaceuticals, Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1997.
Palo Alto, California
March 2, 1998 ERNST & YOUNG LLP
58
EXHIBIT 10.64
MASTER LEASE AGREEMENT, WITH RELATED SCHEDULES
BETWEEN
TRANSAMERICA BUSINESS CREDIT CORPORATION
AND
SHAMAN PHARMACEUTICALS
MASTER LEASE AGREEMENT
Lessor: TRANSAMERICA BUSINESS CREDIT CORPORATION
Riverway II
West Office Tower
West Higgins
Rosemont, Illinois 60018
Lessee: SHAMAN PHARMACEUTICALS, INC.
213 East Grand Avenue
South San Francisco, California 94080-4812
The lessor pursuant to this Master Lease Agreement ("Agreement") dated as of
September 15, 1997, is Transamerica Business Credit Corporation ("Lessor"). All
equipment, together with all present and future additions, parts, accessories,
attachments, substitutions, repairs, improvements, and replacements thereof or
thereto, which are the subject of a Lease (as defined in the next sentence)
shall be referred to as "Equipment." Simultaneous with the execution and
delivery of this Agreement, the parties are entering into one or more Lease
Schedules (each, a "Schedule") which refer to and incorporate by reference this
Agreement, each of which constitutes a lease (each, a "Lease") for the Equipment
specified therein. Additional details pertaining to each Lease are specified in
the applicable Schedule. Each Schedule that the parties hereafter enter into
shall constitute a Lease. Lessor has no obligation to enter into any additional
leases with, or extend any future financing to, Lessee.
1. LEASE. Subject to and upon all of the terms and conditions of
this Agreement and each Schedule, Lessor hereby agrees to lease to Lessee and
Lessee hereby agrees to lease from Lessor the Equipment for the Term (as defined
in Paragraph 2 below) thereof. The timing and financial scope of Lessor's
obligation to enter into Leases hereunder are limited as set forth in the
Commitment Letter executed by Lessor and Lessee, dated as of August 26, 1997 and
attached hereto as Exhibit A (the "Commitment Letter").
2. TERM. Each Lease shall be effective and the term of each Lease
("Term") shall commence on the commencement date specified in the applicable
Schedule and, unless sooner terminated (as hereinafter provided), shall expire
at the end of the term specified in such Schedule; provided, however, that
obligations due to be performed by Lessee during the Term shall continue until
they have been performed in full. Schedules will only be executed after the
delivery of the Equipment to Lessee or upon completion of deliveries of items of
such Equipment with aggregate cost of not less than $50,000.
3. RENT. Lessee shall pay as rent to Lessor, for use of the
Equipment during the Term or Renewal Term (as defined in Paragraph 8), rental
payments equal to the sum of all rental payments including, without limitation,
security deposits, advance rents, and interim rents payable in the amounts and
on the dates specified in the applicable Schedule ("Rent"). If any Rent or other
amount payable by Lessee is not paid within five days after the day on which it
becomes payable, Lessee will pay on demand, as a late charge, an amount equal to
5% of such unpaid Rent or other amount but only to the extent permitted by
applicable law. All payments provided for herein shall be payable to Lessor at
its address specified above, or at any other place designated by Lessor.
4. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE. No Lease may
be canceled or terminated except as expressly provided herein. Lessee's
obligation to pay all Rent due or to become due hereunder shall be absolute and
unconditional and shall not be subject to any delay, reduction, set-off,
defense, counterclaim, or recoupment for any reason whatsoever, including any
failure of the Equipment or any representations by the manufacturer or the
vendor thereof. If the Equipment is unsatisfactory for any reason, Lessee shall
make any claim solely against the manufacturer or the vendor thereof and shall,
nevertheless, pay Lessor all
1
Rent payable hereunder.
5. SELECTION AND USE OF EQUIPMENT. Lessee agrees that it
shall be responsible for the selection and use of, and results obtained from,
the Equipment and any other associated equipment or services.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY, EXPRESS
OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE
DESIGN OR CONDITION OF THE EQUIPMENT OR ITS MERCHANTABILITY, SUITABILITY,
QUALITY, OR FITNESS FOR A PARTICULAR PURPOSE, AND HEREBY DISCLAIMS ANY SUCH
WARRANTY. LESSEE SPECIFICALLY WAIVES ALL RIGHTS TO MAKE A CLAIM AGAINST LESSOR
FOR BREACH OF ANY WARRANTY WHATSOEVER. LESSEE LEASES THE EQUIPMENT "AS IS." IN
NO EVENT SHALL LESSOR HAVE ANY LIABILITY, NOR SHALL LESSEE HAVE ANY REMEDY
AGAINST LESSOR, FOR ANY LIABILITY, CLAIM, LOSS, DAMAGE, OR EXPENSE CAUSED
DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR ANY DEFICIENCY OR DEFECT THEREOF OR
THE OPERATION, MAINTENANCE, OR REPAIR THEREOF OR ANY CONSEQUENTIAL DAMAGES AS
THAT TERM IS USED IN SECTION 2-719(3) OF THE MODEL UNIFORM COMMERCIAL CODE, AS
AMENDED FROM TIME TO TIME ("UCC"). Lessor grants to Lessee, for the sole purpose
of prosecuting a claim, the benefits of any and all warranties made available by
the manufacturer or the vendor of the Equipment to the extent assignable.
7. DELIVERY. Lessor hereby appoints Lessee as Lessor's agent
for the sole and limited purpose of accepting delivery of the Equipment from
each vendor thereof. Lessee shall pay any and all delivery and installation
charges. Lessor shall not be liable to Lessee for any delay in, or failure
of, delivery of the Equipment.
8. RENEWAL. So long as no Event of Default or event which, with the
giving of notice, the passage of time, or both, would constitute an Event of
Default, shall have occurred and be continuing, or the Lessee shall not have
exercised its purchase option under Paragraph 9 hereof, each Lease will
automatically renew for a term specified in the applicable Schedule (the
"Renewal Term") on the terms and conditions of this Agreement or as set forth in
such Schedule; provided, however, that Obligations due to be performed by the
Lessee during the Renewal Term shall continue until they have been performed in
full.
9. PURCHASE OPTION. So long as no Event of Default or event which,
with the giving of notice, the passage of time, or both, would constitute an
Event of Default, shall have occurred and be continuing, Lessee may, upon
written notice to Lessor received at least one hundred eighty days before the
expiration of a Term, purchase all, but not less than all, the Equipment covered
by the applicable Lease on the date specified therefor in the applicable
Schedule ("Purchase Date"). The purchase price for such Equipment shall be its
fair market value as set forth in the applicable Schedule determined on an
"In-place, In-use" basis, as mutually agreed by Lessor and Lessee, or, if they
cannot agree, as determined by an independent appraiser selected by Lessor and
approved by Lessee, which approval will not be unreasonably delayed or withheld.
Lessee shall pay the cost of any such appraisal. So long as no Event of Default
or event which, with the giving of notice, the passage of time, or both, would
constitute an Event of Default shall have occurred and be continuing, Lessee
may, upon written notice to Lessor received at least one hundred eighty days
prior to the expiration of the Renewal Term, purchase all, but not less than
all, the Equipment covered by the applicable Schedule by the last date of the
Renewal Term (the "Alternative Purchase Date") at a purchase price equal to its
then fair market value on an "In-place, In-use" basis. On the Purchase Date or
the Alternative Purchase Date, as the case may be, for any Equipment, Lessee
shall pay to Lessor the purchase price, together with all sales and other taxes
applicable to the transfer of the Equipment and any other amount payable and
arising hereunder, in immediately available funds, whereupon Lessor shall
transfer to Lessee, without recourse or warranty of any kind, express or
implied, all of Lessor's right, title, and interest in and to such Equipment on
an "As Is, Where Is" basis.
10. OWNERSHIP; INSPECTION; MARKING; FINANCING STATEMENTS. Lessee
shall affix to the Equipment any labels supplied by Lessor indicating ownership
of such Equipment. The Equipment is and shall be the sole property of Lessor.
Lessee shall have no right, title, or interest therein, except as lessee under a
Lease. The Equipment is and shall at all times be and remain personal property
and shall not become a
2
fixture. Lessee shall obtain and record such instruments and take such steps
as may be necessary to prevent any person from acquiring any rights in the
Equipment by reason of the Equipment being claimed or deemed to be real
property. Upon request by Lessor, Lessee shall obtain and deliver to Lessor
valid and effective waivers, in recordable form, by the owners, landlords, and
mortgagees of the real property upon which the Equipment is located or
certificates of Lessee that it is the owner of such real property or that such
real property is neither leased nor mortgaged. Lessee shall make the Equipment
and its maintenance records available for inspection by Lessor at reasonable
times and upon reasonable notice. Lessee shall execute and deliver to Lessor for
filing any UCC financing statements or similar documents Lessor may reasonably
request.
11. EQUIPMENT USE. Lessee agrees that the Equipment will be operated
by competent, qualified personnel in connection with Lessee's business for the
purpose for which the Equipment was designed and in accordance with applicable
operating instructions, laws, and government regulations, and that Lessee shall
use all reasonable precautions to prevent loss or damage to the Equipment from
fire and other hazards. Lessee shall procure and maintain in effect all orders,
licenses, certificates, permits, approvals, and consents required by federal,
state, or local laws or by any governmental body, agency, or authority in
connection with the delivery, installation, use, and operation of the Equipment.
12. MAINTENANCE. Lessee, at its sole cost and expense, shall keep
the Equipment in a suitable environment as specified by the manufacturer's
guidelines or the equivalent, shall meet all recertification requirements, and
shall maintain the Equipment in its original condition and working order,
ordinary wear and tear excepted. At the reasonable request of Lessor, Lessee
shall furnish all proof of maintenance.
13. ALTERATION; MODIFICATIONS; PARTS. Lessee may alter or modify the
Equipment only with the prior written consent of Lessor. Any alteration shall be
removed and the Equipment restored to its normal, unaltered condition at
Lessee's expense (without damaging the Equipment's originally intended function
or its value) prior to its return to Lessor. Any part installed in connection
with warranty or maintenance service or which cannot be removed in accordance
with the preceding sentence shall be the property of Lessor.
14. RETURN OF EQUIPMENT. Except for Equipment that has suffered a
Casualty Loss (as defined in Paragraph 15 below) and is not required to be
repaired pursuant to Paragraph 15 below or Equipment purchased by Lessee
pursuant to Paragraph 9 above, upon the expiration of the Renewal Term of a
Lease, or upon demand by Lessor pursuant to Paragraph 22 below, Lessee shall
contact Lessor for shipping instructions and, at Lessee's own risk, immediately
return the Equipment, freight prepaid, to a location in the continental United
States specified by Lessor. At the time of such return to Lessor, the Equipment
shall (i) be in the operating order, repair, and condition as required by or
specified in the original specifications and warranties of each manufacturer and
vendor thereof, ordinary wear and tear excepted, (ii) meet all recertification
requirements, and (iii) be capable of being promptly assembled and operated by a
third party purchaser or third party lessee without further repair, replacement,
alterations, or improvements, and in accordance and compliance with any and all
statutes, laws, ordinances, rules, and regulations of any governmental authority
or any political subdivision thereof applicable to the use and operation of the
Equipment. Except as otherwise provided under Paragraph 9 hereof, at least one
hundred eighty days before the expiration of the Renewal Term, Lessee shall give
Lessor notice of its intent to return the Equipment at the end of such Renewal
Term. During the one hundred eighty-day period prior to the end of a Term or the
Renewal Term, Lessor and its prospective purchasers or lessees shall have, upon
not less than two business days' prior notice to Lessee and during normal
business hours, or at any time and without prior notice upon the occurrence and
continuance of an Event of Default, the right of access to the premises on which
the Equipment is located to inspect the Equipment, and Lessee shall cooperate in
all other respects with Lessor's remarketing of the Equipment. The provisions of
this Paragraph 14 are of the essence of the Lease, and upon application to any
court of equity having jurisdiction in the premises, Lessor shall be entitled to
a decree against Lessee requiring specific performance of the covenants of
Lessee set forth in this Paragraph 14. If Lessee fails to return the Equipment
when required, the terms and conditions of the Lease shall continue to be
applicable and Lessee shall continue to pay Rent until the Equipment is received
by Lessor.
15. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessee will maintain, at its
own
3
expense, liability and property damage insurance relating to the Equipment,
insuring against such risks as are customarily insured against on the type of
equipment leased hereunder by businesses in which Lessee is engaged in such
amounts, in such form, and with insurers satisfactory to Lessor; provided,
however, that the amount of insurance against damage or loss shall not be less
than the greater of (a) the replacement value of the Equipment and (b) the
stipulated loss value of the Equipment specified in the applicable Schedule
("Stipulated Loss Value"). Each liability insurance policy shall provide
coverage (including, without limitation, personal injury coverage) of not less
than $1,000,000 for each occurrence, and shall name Lessor as an additional
insured; and each property damage policy shall name Lessor as sole loss payee
and all policies shall contain a clause requiring the insurer to give Lessor at
least thirty days' prior written notice of any alteration in the terms or
cancellation of the policy. Lessee shall furnish to Lessor a copy of each
insurance policy (with endorsements) or other evidence satisfactory to Lessor
that the required insurance coverage is in effect; provided, however, Lessor
shall have no duty to ascertain the existence of or to examine the insurance
policies to advise Lessee if the insurance coverage does not comply with the
requirements of this Paragraph. If Lessee fails to insure the Equipment as
required, Lessor shall have the right but not the obligation to obtain such
insurance, and the cost of the insurance shall be for the account of Lessee due
as part of the next due Rent. Lessee consents to Lessor's release, upon its
failure to obtain appropriate insurance coverage, of any and all information
necessary to obtain insurance with respect to the Equipment or Lessor's interest
therein.
Until the Equipment is returned to and received by Lessor as
provided in Paragraph 14 above, Lessee shall bear the entire risk of theft or
destruction of, or damage to, the Equipment including, without limitation, any
condemnation, seizure, or requisition of title or use ("Casualty Loss"). No
Casualty Loss shall relieve Lessee from its obligations to pay Rent except as
provided in clause (b) below. When any Casualty Loss occurs, Lessee shall
immediately notify Lessor and, at the option of Lessor, shall promptly (a) place
such Equipment in good repair and working order; or (b) pay Lessor an amount
equal to the Stipulated Loss Value of such Equipment and all other amounts
(excluding Rent) payable by Lessee hereunder, together with a late charge on
such amounts at a rate per annum equal to the rate imputed in the Rent payments
hereunder (as reasonably determined by Lessor) from the date of the Casualty
Loss through the date of payment of such amounts, whereupon Lessor shall
transfer to Lessee, without recourse or warranty (express or implied), all of
Lessor's interest, if any, in and to such Equipment on an "AS IS, WHERE IS"
basis. The proceeds of any insurance payable with respect to the Equipment shall
be applied, at the option of Lessor, either towards (i) repair of the Equipment
or (ii) payment of any of Lessee's obligations hereunder. Lessee hereby appoints
Lessor as Lessee's attorney-in-fact to make claim for, receive payment of, and
execute and endorse all documents, checks or drafts issued with respect to any
Casualty Loss under any insurance policy relating to the Equipment.
16. TAXES. Lessee shall pay when due, and indemnify and hold Lessor
harmless from, all sales, use, excise, and other taxes, charges, and fees
(including, without limitation, income, franchise, business and occupation,
gross receipts, licensing, registration, titling, personal property, stamp and
interest equalization taxes, levies, imposts, duties, charges, or withholdings
of any nature), and any fines, penalties, or interest thereon, imposed or levied
by any governmental body, agency, or tax authority upon or in connection with
the Equipment, its purchase, ownership, delivery, leasing, possession, use, or
relocation of the Equipment or otherwise in connection with the transactions
contemplated by each Lease or the Rent thereunder, excluding taxes on or
measured by the net income of Lessor. Upon request, Lessee will provide proof of
payment. Unless Lessor elects otherwise, Lessor will pay all property taxes on
the Equipment for which Lessee shall reimburse Lessor promptly upon request.
Lessee shall timely prepare and file all reports and returns which are required
to be made with respect to any obligation of Lessee under this Paragraph 16.
Lessee shall, to the extent permitted by law, cause all billings of such fees,
taxes, levies, imposts, duties, withholdings, and governmental charges to be
made to Lessor in care of Lessee. Upon request, Lessee will provide Lessor with
copies of all such billings.
17. LESSOR'S PAYMENT. If Lessee fails to perform its obligations
under Paragraph 15 or 16 above, or Paragraph 23 below, Lessor shall have the
right to substitute performance, in which case Lessee shall immediately
reimburse Lessor therefor.
18. GENERAL INDEMNITY. Each Lease is a net lease. Therefore, Lessee
shall indemnify Lessor and its successors and assigns against, and hold Lessor
and its successors and assigns harmless
4
from, any and all claims, actions, damages, obligations, liabilities, and all
costs and expenses, including, without limitation, legal fees incurred by Lessor
or its successors and assigns arising out of each Lease including, without
limitation, the purchase, ownership, delivery, lease, possession, maintenance,
condition, use, or return of the Equipment, or arising by operation of law,
except that Lessee shall not be liable for any claims, actions, damages,
obligations, and costs and expenses determined by a non-appealable, final order
of a court of competent jurisdiction to have occurred as a result of the gross
negligence or willful misconduct of Lessor or its successors and assigns. Lessee
agrees that upon written notice by Lessor of the assertion of any claim, action,
damage, obligation, liability, or lien, Lessee shall assume full responsibility
for the defense thereof, provided that Lessor's failure to give such notice
shall not limit or otherwise affect its rights hereunder. Any payment pursuant
to this Paragraph (except for any payment of Rent) shall be of such amount as
shall be necessary so that, after payment of any taxes required to be paid
thereon by Lessor, including taxes on or measured by the net income of Lessor,
the balance will equal the amount due hereunder. The provisions of this
Paragraph with regard to matters arising during a Lease shall survive the
expiration or termination of such Lease.
19. ASSIGNMENT BY LESSEE. Lessee shall not, without the prior
written consent of Lessor, (a) assign, transfer, pledge, or otherwise dispose of
any Lease or Equipment, or any interest therein; (b) sublease or lend any
Equipment or permit it to be used by anyone other than Lessee and its employees;
or (c) move any Equipment from the location specified for it in the applicable
Schedule, except that Lessee may move Equipment to another location within the
United States provided that Lessee has delivered to Lessor (A) prior written
notice thereof and (B) duly executed financing statements and other agreements
and instruments (all in form and substance satisfactory to Lessor) necessary or,
in the opinion of the Lessor, desirable to protect Lessor's interest in such
Equipment. Notwithstanding anything to the contrary in the immediately preceding
sentence, Lessee may keep any Equipment consisting of motor vehicles or rolling
stock at any location in the United States.
20. ASSIGNMENT BY LESSOR. Lessor may assign its interest or grant a
security interest in any Lease and the Equipment individually or together, in
whole or in part. If Lessee is given written notice of any such assignment, it
shall immediately make all payments of Rent and other amounts hereunder directly
to such assignee. Each such assignee shall have all of the rights of Lessor
under each Lease assigned to it. Lessee shall not assert against any such
assignee any set-off, defense, or counterclaim that Lessee may have against
Lessor or any other person.
21. DEFAULT; NO WAIVER. Lessee or any guarantor of any or all of the
obligations of Lessee hereunder (together with Lessee, the "Lease Parties")
shall be in default under each Lease upon the occurrence of any of the following
events (each, an "Event of Default"): (a) Lessee fails to pay within five days
of when due any amount required to be paid by Lessee under or in connection with
any Lease; (b) any of the Lease Parties fails to perform any other provision
under or in connection with a Lease or violates any of the covenants or
agreements of such Lease Party under or in connection with a Lease; (c) any
representation made or financial information delivered or furnished by any of
the Lease Parties under or in connection with a Lease shall prove to have been
inaccurate in any material respect when made; (d) any of the Lease Parties makes
an assignment for the benefit of creditors, whether voluntary or involuntary, or
consents to the appointment of a trustee or receiver, or if either shall be
appointed for any of the Lease Parties or for a substantial part of its property
without its consent and, in the case of any such involuntary proceeding, such
proceeding remains undismissed or unstayed for forty-five days following the
commencement thereof; (e) any petition or proceeding is filed by or against any
of the Lease Parties under any Federal or State bankruptcy or insolvency code or
similar law and, in the case of any such involuntary petition or proceeding,
such petition or proceeding remains undismissed or unstayed for forty-five days
following the filing or commencement thereof, or any of the Lease Parties takes
any action authorizing any such petition or proceeding; (f) any of the Lease
Parties fails to pay when due any indebtedness for borrowed money or under
conditional sales or installment sales contracts or similar agreements, leases,
or obligations evidenced by bonds, debentures, notes, or other similar
agreements or instruments to any creditor (including Lessor under any other
agreement) after any and all applicable cure periods therefor shall have
elapsed; (g) any judgment shall be rendered against any of the Lease Parties
which shall remain unpaid or unstayed for a period of sixty days; (h) any of the
Lease Parties shall dissolve, liquidate, wind up or cease its business, sell or
otherwise dispose of all or substantially all of its assets, or make any
material change in its lines of business; (i) any of the Lease Parties shall
amend or modify its name, unless such Lease Party delivers to Lessor, thirty
days prior to any such proposed
5
amendment or modification, written notice of such amendment or modification and
within ten days before such amendment or modification delivers executed
financing statements (in form and substance satisfactory to the Lessor); (j) any
of the Lease Parties shall merge or consolidate with any other entity or make
any material change in its capital structure, in each case without Lessor's
prior written consent, which shall not be unreasonably withheld; (k) any of the
Lease Parties shall suffer any loss or suspension of any material license,
permit, or other right or asset necessary to the profitable conduct of its
business, fail generally to pay its debts as they mature, or call a meeting for
purposes of compromising its debts; (l) any of the Lease Parties shall deny or
disaffirm its obligations hereunder or under any of the documents delivered in
connection herewith; or (m) there is a change in more than 35% of the ownership
of any equity interests of any of the Lease Parties on the date hereof or more
than 35% of such interests become subject to any contractual, judicial or
statutory lien, charge, security interest, or encumbrance.
22. REMEDIES. Upon the occurrence and continuation of an Event of
Default, Lessor shall have the right, in its sole discretion, to exercise any
one or more of the following remedies: (a) terminate each Lease; (b) declare any
and all Rent and other amounts then due and any and all Rent and other amounts
to become due under each Lease (collectively, the "Lease Obligations")
immediately due and payable; (c) take possession of any or all items of
Equipment, wherever located, without demand, notice, court order, or other
process of law, and without liability for entry to Lessee's premises, for damage
to Lessee's property, or otherwise; (d) demand that Lessee immediately return
any or all Equipment to Lessor in accordance with Paragraph 14 above, and, for
each day that Lessee shall fail to return any item of Equipment, Lessor may
demand an amount equal to the Rent payable for such Equipment in accordance with
Paragraph 14 above; (e) lease, sell, or otherwise dispose of the Equipment in a
commercially reasonable manner, with or without notice and on public or private
bid; (f) recover the following amounts from the Lessee (as damages, including
reimbursement of costs and expenses, liquidated for all purposes and not as a
penalty): (i) all costs and expenses of Lessor reimbursable to it hereunder,
including, without limitation, expenses of disposition of the Equipment, legal
fees, and all other amounts specified in Paragraph 23 below; (ii) an amount
equal to the sum of (A) any accrued and unpaid Rent through the later of (1) the
date of the applicable default, (2) the date that Lessor has obtained possession
of the Equipment, or (3) such other date as Lessee has made an effective tender
of possession of the Equipment to Lessor (the "Default Date") and (B) if Lessor
resells or re-lets the Equipment, Rent at the periodic rate provided for in each
Lease for the additional period that it takes Lessor to resell or re-let all of
the Equipment; (iii) the present value of all future Rent reserved in the Leases
and contracted to be paid over the unexpired Term of the Leases discounted at
five percent compound interest; (iv) the reversionary value of the Equipment as
of the expiration of the Term of the applicable Lease as set forth on the
applicable Schedule; and (v) any indebtedness for Lessee's indemnity under
Paragraph 18 above, plus a late charge at the rate specified in Paragraph 3
above, less the amount received by Lessor, if any, upon sale or re-let of the
Equipment; and (g) exercise any other right or remedy to recover damages or
enforce the terms of the Leases. Upon the occurrence and continuance of an Event
of Default or an event which with the giving of notice or the passage of time,
or both, would result in an Event of Default, Lessor shall have the right,
whether or not Lessor has made any demand or the obligations of Lessee hereunder
have matured, to appropriate and apply to the payment of the obligations of
Lessee hereunder all security deposits and other deposits (general or special,
time or demand, provisional or final) now or hereafter held by and other
indebtedness or property now or hereafter owing by Lessor to Lessee. Lessor may
pursue any other rights or remedies available at law or in equity, including,
without limitation, rights or remedies seeking damages, specific performance,
and injunctive relief. Any failure of Lessor to require strict performance by
Lessee, or any waiver by Lessor of any provision hereunder or under any
Schedule, shall not be construed as a consent or waiver of any other breach of
the same or of any other provision. Any amendment or waiver of any provision
hereof or under any Schedule or consent to any departure by Lessee herefrom or
therefrom shall be in writing and signed by Lessor.
No right or remedy is exclusive of any other provided herein or
permitted by law or equity. All such rights and remedies shall be cumulative and
may be enforced concurrently or individually from time to time.
23. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all costs
and expenses (including legal fees and expenses) incurred in connection with the
preparation, execution and delivery of this Agreement and any other agreements
and transactions contemplated hereby, which expenses shall not exceed $5,000
without the written consent of Lessee, and all costs and expenses in protecting
and enforcing Lessor's rights and interests in each Lease and the equipment,
including, without limitation, legal, collection, and remarketing fees
6
and expenses incured by Lessor in enforcing the terms, conditiond, or provisions
of each Lease or upon the occurrence and continuation of an Event of Default.
24. LESSEE'S WAIVERS. To the extent permitted by applicable law,
Lessee hereby waives any and all rights and remedies conferred upon a lessee by
Sections 2A-508 through 2A-522 of the UCC. To the extent permitted by applicable
law, Lessee also hereby waives any rights now or hereafter conferred by statute
or otherwise which may require Lessor to sell, lease, or otherwise use any
Equipment in mitigation of Lessor's damages as set forth in Paragraph 22 above
or which may otherwise limit or modify any of Lessor's rights or remedies under
Paragraph 22. Any action by Lessee against Lessor for any default by Lessor
under any Lease shall be commenced within one year after any such cause of
action accrues.
25. NOTICES; ADMINISTRATION. Except as otherwise provided herein,
all notices, approvals, consents, correspondence, or other communications
required or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mail,
postage prepaid, if to Lessor, then to Transamerica Technology Finance Division,
76 Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to Lessor at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department, if to Lessee, then to Shaman Pharmaceuticals, Inc., 213 East Grand
Avenue, South San Francisco, California 94080-4812 or such other address as
shall be designated by Lessee or Lessor to the other party. All such notices and
correspondence shall be effective when received.
26. REPRESENTATIONS. Lessee represents and warrants to Lessor that
(a) Lessee is duly organized, validly existing, and in good standing under the
laws of the State of its incorporation; (b) the execution, delivery, and
performance by Lessee of this Agreement are within Lessee's powers, have been
duly authorized by all necessary action, and do not and will not contravene (i)
Lessee's organizational documents or (ii) any law, regulation, rule, or
contractual restriction binding on or affecting Lessee; (c) no authorization or
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body is required for the due execution, delivery, and
performance by Lessee of this Agreement; (d) each Lease constitutes the legal,
valid, and binding obligations of Lessee enforceable against Lessee in
accordance with its terms; (e) the cost of each item of Equipment does not
exceed the fair and usual price for such type of equipment purchased in like
quantity and reflects all discounts, rebates, and allowances for the Equipment
(including, without limitation, discounts for advertising, prompt payment,
testing, or other services) given to the Lessee by the manufacturer, supplier,
or any other person; and (f) all information supplied by Lessee to Lessor in
connection herewith is correct and does not omit any material statement
necessary to insure that the information supplied is not misleading.
27. FURTHER ASSURANCES. Lessee, upon the request of Lessor, will
execute, acknowledge, record, or file, as the case may be, such further
documents and do such further acts as may be reasonably necessary, desirable, or
proper to carry out more effectively the purposes of this Agreement. Lessee
hereby appoints Lessor as its attorney-in-fact to execute on behalf of Lessee
and authorizes Lessor to file without Lessee's signature any UCC financing
statements and amendments Lessor deems advisable.
28. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as
soon as available, but not later than 120 days after the end of each fiscal year
of Lessee and its consolidated subsidiaries, the consolidated balance sheet,
income statement, and statements of cash flows and shareholders equity for
Lessee and its consolidated subsidiaries (the "Financial Statements") for such
year, reported on by independent certified public accountants without an adverse
qualification; and (b) as soon as available, but not later than 60 days after
the end of each of the first three fiscal quarters in any fiscal year of Lessee
and its consolidated subsidiaries, the Financial Statements for such fiscal
quarter, together with a certification duly executed by a responsible officer of
Lessee that such Financial Statements have been prepared in accordance with
generally accepted accounting principles and are fairly stated in all material
respects (subject to normal year-end audit adjustments). Lessee shall also
deliver to Lessor as soon as available copies of all press releases and other
similar communications issued by Lessee.
29. CONSENT TO JURISDICTION. Lessee irrevocably submits to the
jurisdiction of any Illinois state or federal court sitting in Illinois for any
action or proceeding arising out of or relating to this
7
Agreement or the transactions contemplated hereby, and Lessee irrevocably agrees
that all claims in respect of any such action or proceeding may be heard and
determined in such Illinois state or federal court.
30. WAIVER OF JURY TRIAL. LESSEE AND LESSOR IRREVOCABLY WAIVE
ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
31. FINANCE LEASE. Lessee and Lessor agree that each Lease is a
"Finance Lease" as defined by Section 2A-103(g) of the UCC. Lessee acknowledges
that Lessee has reviewed and approved each written Supply Contract (as defined
by UCC 2A-103(y)) covering Equipment purchased from each "Supplier" (as defined
by UCC 2A-103(x)) thereof.
32. NO AGENCY. Lessee acknowledges and agrees that neither the
manufacturer or supplier, nor any salesman, representative, or other agent of
the manufacturer or supplier, is an agent of Lessor. No salesman,
representative, or agent of the manufacturer or supplier is authorized to waive
or alter any term or condition of this Agreement or any Schedule and no
representation as to the Equipment or any other matter by the manufacturer or
supplier shall in any way affect Lessee's duty to pay Rent and perform its other
obligations as set forth in this Agreement or any Schedule.
33. SPECIAL TAX INDEMNIFICATION. Lessee acknowledges that Lessor, in
determining the Rent due hereunder, has assumed that certain tax benefits as are
provided to an owner of property under the Internal Revenue Code of 1986, as
amended (the "Code"), and under applicable state tax law, including, without
limitation, depreciation deductions under Section 168(b) of the Code, and
deductions under Section 163 of the Code in an amount at least equal to the
amount of interest paid or accrued by Lessor with respect to any indebtedness
incurred by Lessor in financing its purchase of the Equipment, are available to
Lessor as a result of the lease of the Equipment. In the event Lessor is unable
to obtain such tax benefits as a result of an act or omission of Lessee, is
required to include in income any amount other than the Rent, or is required to
recognize income in respect of the Rent earlier than anticipated pursuant to
this Agreement, Lessee shall pay Lessor additional rent ("Additional Rent") in a
lump sum in an amount needed to provide Lessor with the same after-tax yield and
after-tax cash flow as would have been realized by Lessor had Lessor (i) been
able to obtain such tax benefits, (ii) not been required to include any amount
in income other than the Rent, and (iii) not been required to recognize income
in respect of the Rent earlier than anticipated pursuant to this Agreement. The
Additional Rent shall be computed by Lessor, which computation shall be binding
on Lessee. The Additional Rent shall be due immediately upon written notice by
Lessor to Lessee of Lessor's inability to obtain tax benefits, the inclusion of
any amount in income other than the Rent or the recognition of income in respect
of the Rent earlier than anticipated pursuant to this Agreement. The provisions
of this Paragraph 33 shall survive the termination of this Agreement.
34. GOVERNING LAW; SEVERABILITY. EACH LEASE SHALL BE GOVERNED
BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF. IF ANY PROVISION SHALL BE HELD TO BE INVALID OR
UNENFORCEABLE, THE VALIDITY AND ENFORCEABILITY OF THE REMAINING PROVISIONS
SHALL NOT IN ANY WAY BE AFFECTED OR IMPAIRED.
LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND THE SCHEDULE HERETO,
UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS. FURTHER,
LESSEE AND LESSOR AGREE THAT THIS AGREEMENT, THE SCHEDULES DELIVERED IN
CONNECTION HEREWITH FROM TIME TO TIME, AND THE COMMITMENT LETTER ARE THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES,
SUPERSEDING ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER
COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF. SHOULD
THERE EXIST ANY INCONSISTENCY BETWEEN THE TERMS OF THE COMMITMENT LETTER AND
THIS AGREEMENT, THE TERMS OF THIS AGREEMENT SHALL PREVAIL.
8
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be duly executed by their duly authorized officers as of the date
first written above.
SHAMAN PHARMACEUTICALS, INC.
By: /s/ Lisa A. Conte
_______________________
Name: Lisa A. Conte
Title: President & CEO
Federal Tax ID: 94-3095806
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Gary P. Moro
_______________________
Name: Gary P. Moro
Title: Vice President
9
SECRETARY'S CERTIFICATE
I, _______________, hereby state that I am the duly elected acting and
qualified Secretary of Shaman Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), and that:
(a) Through a unanimous consent in lieu of a Board of Directors meeting of
the Company, proposed in accordance with its bylaws and the laws of said State
on the ______ day of _________, signed by quorum for the transaction of
business, the following resolutions were duly and regularly adopted:
RESOLVED, that the form, terms and provisions of all of the
documents and instruments executed by the Company with and/or in favor of
Transamerica Business Credit Corporation (the "Agreements"), and the
transactions contemplated thereby be, and the same are, in all respects
approved, and that the President, each Vice President and each other officer of
the Company (the "Authorized Persons"), or any of them, be, and they hereby are,
authorized, empowered, and directed to execute and deliver the Agreements and
any and all other agreements, documents, instruments and certificates required
or desirable in connection therewith, if necessary or advisable, with such
changes as they may deem in the best interest of the Company, and their
execution and delivery ofthe Agreements, and all such other agreements,
documents, instruments and certificates, shall be deemed to be conclusive
evidence that the same are in all respects authorized and approved; and be it
further
RESOLVED, that the actions of any Authorized Person heretofore taken in
furtherance of the Agreements be, and hereby are, approved, adopted and ratified
in all respects.
(i) The above resolutions: (a) are not contrary to the Articles or
Certificate of Incorporation or bylaws of the Company and (b) have not been
amended, modified, rescinded or revoked and are in full force and effect on the
date hereof.
(iii) The following persons are duly qualified and acting officers
of the Company, duly elected to the offices set forth opposite their respective
names, and the signature appearing opposite the name of each such officer is his
authentic signature:
Name Office Signature
- --------------------- ---------------------- ------------------------
- --------------------- ---------------------- ------------------------
- --------------------- ---------------------- ------------------------
IN WITNESS WHEREOF, I have executed this Certificate, this _________ day
of ___________.
________________________
Secretary
Exhibit A
August 26, 1997
Mr. M. David Titus
Director
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, CA 94080-4812
Dear Dave:
Transamerica Business Credit Corporation - Technology Finance Division
("Lessor") is pleased to offer this commitment (this "Commitment") to lease the
equipment described below to Shaman Pharmaceuticals, Inc. ("Lessee"). This
Commitment supersedes all prior correspondence, proposals, and oral or other
communications relating to leasing arrangements between Lessor and Lessee.
The outline of this offer is as follows:
Lessee: Shaman Pharmaceuticals, Inc.
Lessor: Transamerica Business Credit Corporation - Technology
Finance Division
Equipment: Laboratory and computer equipment and tenant improvements
(all equipment subject to Lessor's approval prior to
funding), including, without limitation, all additions,
improvements, replacements, repairs, appurtenances,
substitutions, and attachments thereto and all proceeds
thereof ("Equipment"). Tenant improvements shall not
exceed 20% of aggregate Equipment Cost.
Equipment Costs: Up to $1,000,000
Equipment Location: South San Francisco, California
Anticipated Delivery: Through June 30, 1998
Lease Term
Commencement: Upon delivery of the Equipment or upon each completion of
deliveries of items of Equipment with aggregate cost of
not less than $50 000, but no later than June 30, 1998.
Term: From each Lease Term Commencement until 48 months from
the first day of the month next following or coincident
with that Lease Term Commencement.
Monthly Rent: Monthly Rent equal to 2.4937% of Equipment Cost will be
payable monthly in advance. The first and last months'
rent will be payable upon each Lease Term Commencement.
Adjustment to
Rental Payments: The Lessor reserves the right to increase the Montly Rent
Payments as of the date of each Lease Term Commencement
proportionally to the change in the weekly average of
the interest rates of four-year U.S. Treasury Securities
from the week ending February 14, 1997 to the week
preceding the date of each Lease Term Commencement, as
published in the Wall Street Journal. As of the date of
each Lease Term Commencement, the Monthly Rent Payments
will be fixed for the term. A schedule of the actual
Monthly Rent Payments will be provided by the Lessor
following each Lease Term Commencement.
Interim Rent: Interim Rent will accrue from each Lease Term Commencement
until the next following first day of a month (unless the
Lease Term Commencement is on the first day of a month).
Interim Rent will be calculated at the daily equivalent
of the currently adjusted Monthly Rent Payment.
Purchase Option: The Lessee will have the option to purchase all (but not
less than all) the Equipment at the expiration of the term
of the lease for the then current Fair Market Value of the
Equipment, plus applicable sales and other taxes.
Fair Market Value will be 10% of Equipment Cost.
Automatic Renewal: In the event the Lessee does not exercise the Purchase
Option described above, the lease will automatically
renew for a term of one year with Monthly Rentals equal to
1.00% of Equipment Cost payable monthly in advance. At the
expiration of the renewal period, the Lessee will have
the option to purchase all (but not less than all) the
Equipment for $1.00, plus applicable sales and other
taxes.
Net Lease: The lease will be a net lease under which the Lessee will
be responsible for maintenance, insurance, taxes, and all
other costs and expenses.
Taxes: Sales or use taxes will be added to the Equipment Cost or
collected on the gross rentals, as appropriate.
Insurance: Prior to any delivery of Equipment, the Lessee will
furnish confirmation of insurance acceptable to the Lessor
covering the Equipment, including primary, all risk,
physical damage, property damage and bodily injury with
appropriate loss payee endorsement in favor of the Lessor.
Conditions Precedent 1. No material adverse change in the financial condition,
to Each Lease Term operation or prospects of the Lessee prior to funding.
Commencement: The Lessor reserves the right to rescind any unused
portion of its commitment in the event of a material
adverse change in the financial condition, operation
or prospects of the Lessee.
2. Completion of the documentation and final terms of the
proposed financing satisfactory to Lessor and Lessor's
counsel.
3. Results of all due diligence, including lien, judgment
and tax searches, reference calls (including to Delphi
Ventures and Silicon Valley Bank) and other matters
Lessor may reasonably request shall be satisfactory
to Lessor and Lessor's counsel.
2
4. Receipt by Lessor of duly executed Lease documentation
in form and substance satisfactory to Lessor and its
counsel.
5. Lessor shall receive title and a valid and perfected
first priority lien and security interest in all
Equipment acquired through the use of this Commitment
and Lessor shall have received satisfactory evidence
that there are no liens on any Equipment except aS
expressly permitted herein.
Additional Covenants: There will be no actual or threatened conflict with, or
violation of, any regulatory statute, standard or rule
relating to the Lessee, its present or future operations,
or the Equipment.
Lessee will be required to provide quarterly financial
information. All information supplied by the Lessee will
be correct and will not omit any statement necessary to
make the information supplied not be misleading. There
will be no material breach of the representations and
warranties of the Lessee in the lease. The representations
will include that the Equipment Cost of each item of the
Equipment does not exceed the fair and usual price for
like quantity purchased of such item and reflects all
discounts, rebates and allowances for the Equipment given
to Lessee or any affiliate of Lessee by the manufacturer,
supplier or anyone else including, without limitation,
discounts for advertising, prompt payment, testing or
other services.
Fees and Expenses: The Lessee will be responsible for the Lessor's reasonable
expenses in connection with closing the transaction. Such
expenses shall not exceed $5,000 without the consent of
the Lessee.
Law: This letter and the proposed Lease are intended to be
governed by and construed in accordance with Illinois law
without regard to its conflict of law provisions.
Indemnity: Lessee agrees to indemnify and to hold harmless Lessor,
and its officers, directors and employees against all
claims, damages, liabilities and expenses which may be
incurred by or asserted against any such person in
connection with or arising out of this letter and the
transactions contemplated hereby, other than claims,
damages, liability, and expense resulting from such
person's gross negligence or willful misconduct.
Confidentiality: This letter is delivered to you with the understanding
that neither it nor its substance shall be disclosed
publicly or privately to any third person except those
who are in a confidential relationship to you (such as
your legal counsel and accountants), or where the same is
required by law and then only on the basis that it not be
further disclosed, which conditions Lessee and its agents
agree to be bound by upon acceptance of this letter.
Without limiting the generality of the foregoing, none of
such persons shall use or refer to Lessor or to any
affiliate name in any disclosures made in connection
with any of the transactions without Lessor's prior
written consent.
Upon completion of the initial takedown by Lessor and
Lessee, the Lessee
3
will no longer be required to obtain Lessor's prior
written consent to disclose the transaction contemplated
hereby. In addition, the Lessee agrees to provide camera
ready artwork of typestyles and logos of the Lessee for
use in promotional material by the Lessor.
Conditions of This Commitment Letter is intended to be a summary of the
Acceptance: most important elements of the agreement to enter into a
leasing transaction with Lessee, and it is subject to
all requirements and conditions contained in Lease
documentation proposed by Lessor or its counsel in the
course of closing the Lease described herein. Not every
provision that imposes duties, obligations, burdens, or
limitations on Lessee is contained herein, but shall be
contained in the final Lease documentation satisfactory
to Lessor and its counsel.
EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY SUIT, ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATED TO
THIS LETTER OR THE TRANSACTION DESCRIBED IN THIS LETTER.
Application Fee: The $10,000 Application Fee previously paid by Lessee
will be first applied to the costs and expenses of the
Lessor in connection with the transaction, and any
remainder shall be applied pro-rata to the second month's
rent due under each Lease.
Commitment This Commitment shall expire on September 3, 1997, unless
Expiration: prior thereto either extended in writing by the Lessor or
accepted as provided below by the Lessee.
Should you have any questions, please call me. If you wish to accept this
Commitment, please so indicate by signing and returning the enclosed duplicate
copy of this letter to me by
September 3, 1997.
Yours truly,
TRANSAMERICA BUSINESS CREDIT CORP.
TECHNOLOGY FINANCE DIVISION
By: /s/ Gerald A. Michaud
_____________________________________
Gerald A. Michaud
Senior Vice President - Marketing
Accepted this 2nd day of September, 1997
Shaman Pharmaceuticals, Inc.
By: /s/ M. David Titus
__________________
M. David Titus
Director
4
SCHEDULE TO MASTER LEASE AGREEMENT
Dated as of ________________
Schedule No. ____
Lessor Name & Mailing Address Lessee Name & Mailing Address
Transamerica Business Credit Corporation Shaman Pharmaceuticals, Inc.
Riverway II 213 East Grand Avenue
West Office Tower South San Francisco, California
9399 West Higgins Road 94080-4812
Rosemont, Illinois 60018
Equipment Location (if different than Lessee's address above):
This Schedule covers the following described equipment ("Equipment"):
See Exhibit II attached hereto and made a part hereof.
The Equipment is hereby leased pursuant to the provisions of the Master Lease
Agreement between the undersigned Lessee and Lessor dated September 15, 1997
(the "Master Lease"), the terms of which are incorporated herein by reference
thereto, plus the following additional terms, provisions, and modifications. The
Lessor reserves the right to adjust the monthly payments in accordance with the
Commitment Letter dated August 26, 1997, if the Lessor has not received this
Schedule and an Acceptance and Delivery Certificate executed by the Lessee
within five business days from the date first set forth above.
1. Term (Number of Months) ____ months
2. Equipment Cost $____________
3. Commencement Date _____________
4. Rate Factor 2.4937% of Equipment
Cost
5. Total Rents $___________
Total sales/use tax $___________ $____________
6. Advance Rents (first and last) $___________
Sales/use tax for advance rent $___________ $____________
7. Monthly rental payments $___________
Monthly sales/use tax $___________ $____________
and the second such rental payment
will be due on _____________
and subsequent rental payments will
be due on the same day of each month thereafter
8. Security Deposit N/A
9. In addition to the monthly rental
payments provided for herein, Lessee shall
pay to Lessor, as interim rent, payable on
the commencement date specified above, an
amount equal to 1/30th of the monthly rental
payment (including monthly sales/use tax)
multiplied by the number of days from and
including the commencement date through the
end of the same calendar month. $___________
Renewal terms:
In the event the Lease does not exercise the Purchase Option described below,
the Lease shall automatically renew for a term of 12 months with Monthly Rental
equal to 1.0% of the original Equipment Cost payable in monthly in advance. At
the expiration of the renewal period, the Lessee shall have the option to
purchase all (but not less than all) the Equipment for $1.00, plus applicable
and other taxes.
Lessee hereby irrevocably authorizes Lessor to insert in this Schedule the
Commencement Date and the due date of the first rental payment.
Except as expressly provided or modified hereby, all the terms and provisions of
the Master Lease Agreement shall remain in full force and effect.
The Purchase Date shall be ______________. The Purchase Price shall be the Fair
Market Value of the Equipment. Lessee and Lessor agree that the Fair Market
Value of the Equipment on the Purchase Date shall be equal to 10% of the
Equipment Cost.
The Stipulated Loss Value of any items of Equipment shall be an amount equal to
the present value of all future Rent discounted at a rate of 5% per annum plus
the Reversionary Value.
The Reversionary Value of any item of Equipment shall be 10% of Equipment Cost.
TRANSAMERICA BUSINESS CREDIT SHAMAN PHARMACEUTICALS, INC.
CORPORATION (Lessee)
(Lessor)
By:__________________________ By:________________________
Title:_______________________ Title:______________________
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EXHIBIT II
To:
___ Schedule to Master Lease Agreement ___ Sale and Leaseback Agreement
___ UCC ___ Bill Of Sale
___ Collateral Access Agreement ___ Opinion of Counsel
Dated ________________
Between
TRANSAMERICA BUSINESS CREDIT CORPORATION
Customer Name: Shaman Pharmaceuticals, Inc.
Equipment Locations: ______________________
______________________
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EQUIPMENT INVOICE SERIAL NO. SUPPLIER/ PURCH. EQUIPMENT
QTY DESCRIPTION NO. VENDOR DATE COST
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Transamerica Business Credit Shaman Pharmaceuticals, Inc.
Corporation
By:___________________ By:____________________
Title:_________________ Title:___________________
ACCEPTANCE AND DELIVERY CERTIFICATE
Shaman Pharmaceuticals, Inc., as lessee ("Lessee") under the Master
Lease Agreement dated as of September 15, 1997 between Lessee and Transamerica
Business Credit Corporation, as Lessor, does hereby acknowledge the acceptance
and delivery of the equipment listed in Lease Schedule No.____, such acceptance
and delivery having been made on the ____ day of ________________.
SHAMAN PHARMACEUTICALS, INC.
By: ______________________
Name:
Title:
SALE AND LEASEBACK AGREEMENT
THIS SALE AND LEASEBACK AGREEMENT (this "Agreement"), is made as of
_____________, among Shaman Pharmaceuticals, Inc., a Delaware corporation
("Seller"), and Transamerica Business Credit Corporation, a Delaware corporation
("Buyer").
W I T N E S S E T H :
WHEREAS, Seller is the owner of the equipment more particularly
described on Exhibit II hereto (the "Equipment");
WHEREAS, Seller desires to sell to Buyer and Buyer desires to
purchase from Seller the Equipment; and
WHEREAS, Buyer, as a condition to such purchase, wishes to lease to
Seller and Seller wishes to lease from Buyer the Equipment under the terms and
conditions of the Master Lease Agreement dated as of September 15, 1997 and
Schedule No. ____ thereto (collectively, as amended, supplemented or otherwise
modified from time to time, the "Lease") between Buyer, as lessor, and Seller,
as lessee.
NOW, THEREFORE, in consideration of the premises herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amount and Terms of Purchase.
(a) Subject to the terms and conditions of this Agreement, and
in reliance upon the representations and warranties of the Seller herein set
forth, the Buyer agrees to purchase all of the Seller's right, title and
interest in and to all of the Equipment such that the Buyer will become the
owner of all such Equipment for all purposes whatsoever. The Seller hereby
agrees that the Buyer is under no obligation to purchase any other equipment now
or in the future and shall not assert a claim that the Buyer may have any such
obligation.
(b) The price to be paid by the Buyer with respect to the
purchase of the Equipment (the "Purchase Price") is $______________. The
Purchase Price shall be payable to the Seller on the Lease Commencement Date (as
defined in the Lease).
(c) The Seller shall pay any and all applicable federal,
state, county or local taxes and any and all present or future taxes or other
governmental charges arising in connection with the sale of the Equipment
hereunder, including sales, use or occupation taxes due upon the purchase by the
Buyer.
(d) The purchase of the Equipment shall be evidenced by a bill
of sale, substantially in the form attached hereto as Exhibit A (the "Bill of
Sale"), duly executed by the Seller.
2. Conditions to Purchase. The obligation of the Buyer
to purchase the Equipment is subject to the following conditions:
(a) The Buyer shall have received this Agreement, duly
executed by the Seller.
(b) The Buyer shall have received the Bill of Sale,
duly executed by the Seller.
(c) The Buyer shall have received the Lease, duly
executed by the Seller.
(d) The Buyer shall have received resolutions of the Board of
Directors of the Seller approving and authorizing the execution, delivery and
performance by the Seller of this Agreement, the Lease and the notices and other
documents to be delivered by the Seller hereunder and thereunder (collectively,
the "Sale and Leaseback Documents").
(e) The Buyer shall have received the certificate of title or
similar evidence of ownership with respect to each item of Equipment and Uniform
Commercial Code financing statements covering the Equipment in form and
substance satisfactory to the Buyer, duly executed by the Seller.
(f) No material adverse change has occurred with respect to
the business, prospects, properties, results of operations, assets, liabilities
or condition (financial or otherwise) of the Seller and its affiliates, taken as
a whole, since December 31, 1996.
(g) The Buyer shall have received all warranties and other
documentation received or executed by Seller in connection with the original
acquisition of the Equipment by the Seller (and by its execution hereof the
Seller hereby assigns to the Buyer all such warranties and other Documentation).
(h) The Buyer shall have received such other approvals,
opinions or documents as the Buyer may reasonably request.
3. Representation and Warranties. To induce the Buyer
to enter into this Agreement, the Seller represents and warrants to the Buyer
that:
(a) The Seller is duly authorized to execute, deliver and
perform its obligations under each of the Sale and Leaseback Documents and all
corporate action required on its part for the due execution, delivery and
performance of the transactions contemplated herein and therein has been duly
and effectively taken.
(b) The execution, delivery and performance by the Seller of
each of the Sale and Leaseback Documents and the consummation of the
transactions contemplated herein
2
and therein does not and will not violate any provision of, or result in a
default under, the Seller's Articles or Certificates of Incorporation or By-laws
or any indenture or agreement to which the Seller is a party or to which its
assets are bound or any order, permit, law, statute, code, ordinance, rule,
regulation, certificate or any other requirement of any governmental authority
or regulatory body to which the Seller is subject, or result in the creation or
imposition of any mortgage, deed of trust, pledge, security interest, lien or
encumbrance of any kind upon or with respect to the Equipment or any proceeds
thereof, other than those in favor of the Buyer as contemplated by the Sale and
Leaseback Documents.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for the due execution, delivery and performance by the Seller of any of
the Sale and Leaseback Documents to which it is a party.
(d) Each Sale and Leaseback Document to which the Seller is a
party constitutes or will constitute, when delivered hereunder, the legal, valid
and binding obligation of the Seller enforceable against the Seller in
accordance with its respective terms, except as such enforceability may be (i)
limited by the effect of applicable bankruptcy, insolvency, reorganization or
similar laws affecting the enforcement of creditors' rights generally or (ii)
subject to the effect of general principles of equity (regardless of whether
such enforceability is considered in a proceeding at equity or at law).
(e) There are no actions, suits, or proceedings pending,
threatened against or affecting the Seller which seek to enjoin, prohibit or
restrain the consummation of any of the transactions contemplated hereby or by
the other Sale and Leaseback Documents.
(f) Each item of Equipment is owned by the Seller free and
clear of any liens and encumbrances of any kind or description. Upon purchase of
the Equipment hereunder, the Buyer will acquire good and marketable title in and
to the Equipment.
All representations and warranties herein shall survive the execution of this
Agreement and the purchase of the Equipment.
4. Indemnities. The Seller agrees to indemnify, defend, and
save harmless the Buyer and its officers, directors, employees, agents, and
attorneys, and each of them (the "Indemnified Parties"), from and against all
claims, actions, suits, and other legal proceedings, damages, costs, interest,
charges, counsel fees and other expenses and penalties (collectively, the
"Indemnified Amounts") which any of the Indemnified Parties may sustain or incur
by reason of or arising out of (i) the Seller's ownership of any Equipment prior
to the date on which such Equipment is sold to the Buyer, or the Seller's acts
or omissions prior to such date under, in connection with or relating to such
Equipment or any of the Sale and Leaseback Documents, (ii) the operation,
maintenance or use of such Equipment prior to such date, (iii) the inaccuracy of
any of the Seller's representations or warranties contained in any of the Sale
and Leaseback
3
Documents, (iv) the breach of any of the Seller's covenants contained in any of
the Sale and Leaseback Documents, (v) any loss or damage to any Equipment in
excess of the deductible which is not paid by insurance or (vi) any sales, use,
excise and other taxes, charges, and fees (including, without limitation,
income, franchise, business and occupation, gross receipts, sales, use,
licensing, registration, titling, personal property, stamp and interest
equalization taxes, levies, imposts, duties, charges or withholdings of any
nature), and any fines, penalties or interest thereon, imposed or levied by any
governmental body, agency or tax authority upon or in connection with the
Equipment, its acquisition, ownership, delivery, leasing, possession, use or
relocation or otherwise in connection with the transactions contemplated by each
Sale and Leaseback Document.
5. Remedies. Upon the Seller's violation of or default under
any provision of this Agreement, the Buyer may (subject to the provisions of the
other Sale and Leaseback Documents) proceed to protect and enforce its rights
either by suit in equity or by action at law or both, whether for the specific
performance of any covenant or agreement contained herein or in aid of the
exercise of any power granted in any Sale and Leaseback Document; it being
intended that the remedies contained in any Sale and Leaseback Document shall be
cumulative and shall be in addition to every other remedy given under such Sale
and Leaseback Document or now or hereafter existing at law or in equity or by
statute or otherwise.
6. Amendments, etc. No amendment or waiver of any provision of
this Agreement, nor consent to any departure therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Buyer, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
7. Notices, etc. All notices and other communications
provided for hereunder shall be in writing and sent:
if to the Seller, at its address at:
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, California 94080-4812
Attention: Mr. M . David Titus
Telephone No.: (650) 952-7070
Telecopy No.: (650) 873-8367
4
if to the Buyer, at its address at:
Transamerica Business Credit Corporation
Technology Finance Division
76 Batterson Park Road
Farmington, Connecticut 06032-2571
Attention: Assistant Vice President,
Lease Administration
Telephone No.: (860) 677-6466
Telecopy No.: (860) 677-6766
with a copy to:
Transamerica Business Credit Corporation
9399 West Higgins Road
Rosemont, Illinois 60018
Attention: Legal Department
Telephone No.: (847) 685-1106
Telecopy No.: (847) 685-1143
or to such other address as shall be designated by such party in a written
notice to the other party. All such notices shall be deemed given (i) if sent by
certified or registered mail, three days after being postmarked, (ii) if sent by
overnight delivery service, when received at the above stated addresses or when
delivery is refused and (iii) if sent by facsimile transmission, when receipt of
such transmission is acknowledged.
8. No Waiver; Remedies. No failure on the part of the Buyer to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
9. Benefit. Without the prior written consent of the
Buyer, the Seller may not transfer, assign or delegate any of its rights,
duties or obligations hereunder.
10. Binding Effect. This Agreement shall be binding
upon and inure to the benefit of the Seller and the Buyer and their
respective successors and assigns.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS
WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.
5
12. Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall constitute an
original and all of which taken together shall constitute one and the same
agreement.
13. Severability. If one or more of the provisions
contained in this Agreement shall be invalid, illegal, or unenforceable in
any respect, the validity, legality, and enforceability of the remaining
provisions contained herein, and any other application thereof, shall not in
any way be affected or impaired thereby.
14. SUBMISSION TO JURISDICTION. ALL DISPUTES ARISING UNDER OR
IN CONNECTION WITH THIS AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER SOUNDING
IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND
FEDERAL COURTS LOCATED IN ILLINOIS, AND THE COURTS TO WHICH AN APPEAL THEREFROM
MAY BE TAKEN; PROVIDED, HOWEVER, THAT THE BUYER SHALL HAVE THE RIGHT, TO THE
EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE SELLER OR ITS
PROPERTY IN ANY LOCATION REASONABLY SELECTED BY THE BUYER IN GOOD FAITH TO
ENABLE THE BUYER TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF THE BUYER. EACH PARTY AGREES THAT IT WILL NOT ASSERT ANY
PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT BY
THE BUYER; IT BEING UNDERSTOOD THAT THIS SENTENCE DOES NOT PRECLUDE THE SELLER
FROM ASSERTING COMPULSORY COUNTERCLAIMS. THE SELLER WAIVES ANY OBJECTION THAT IT
MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE BUYER HAS COMMENCED A
PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON FORUM NON CONVENIENS.
15. JURY TRIAL. THE PARTIES HERETO EACH HEREBY WAIVE TO
THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT.
6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers hereunto duly authorized, as of the
first date written above.
SHAMAN PHARMACEUTICALS, INC.
By: __________________________
Name:
Title:
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: __________________________
Name:
Title:
Exhibit II- Equipment
Exhibit A- Bill of Sale
7
BILL OF SALE
KNOW ALL PERSONS BY THESE PRESENTS Shaman Pharmaceuticals, Inc. (the
"Seller"), for ___________________________________ Dollars ($____________) and
other valuable consideration to it in hand paid, receipt of which is hereby
acknowledged, does unconditionally, absolutely and irrevocably grant, sell,
assign, transfer and convey unto TRANSAMERICA BUSINESS CREDIT CORPORATION and
its assignees or successors (collectively, the "Buyer"), all of the Seller's
right, title and interest in and to the equipment described on Exhibit II hereto
(collectively, the "Equipment").
TO HAVE AND TO HOLD said Equipment unto the said Buyer, to and for
its use forever.
AND, the Seller hereby warrants, covenants and agrees that it (a)
has good and marketable title to the Equipment, free and clear of any liens and
other encumbrances; and (b) will warrant and defend the sale of the Equipment
against any and all persons claiming against such title.
IN WITNESS WHEREOF the Seller has caused this instrument to be duly
executed and delivered as of this ____ day of ____________.
SHAMAN PHARMACEUTICALS, INC.
By: ______________________________
Name:
Title:
COLLATERAL ACCESS AGREEMENT
TRANSAMERICA BUSINESS CREDIT CORPORATION
9399 West Higgins Road, Suite 600
Rosemont, Illinois 60018
____________________, 199___
______________________________
______________________________
______________________________
Re: Shaman Pharmaceuticals, Inc.
Ladies and Gentlemen:
We have been asked by Shaman Pharmaceuticals, Inc., a Delaware
corporation (the "Company") to finance certain equipment (the "Equipment"),
which will be located at the address identified on Schedule A (the "Premises").
The obligations of the Company to us will be secured by, among other things, the
Equipment. We understand that the Company leases the Premises from you pursuant
to a lease or is the owner of the Premises, which is subject to a lien in favor
of you pursuant to a mortgage (such lease or mortgage being referred to as the
"Agreement").
In connection with the extensions of credit to be made to the
Company, Transamerica Business Credit Corporation, ("Transamerica") will be
making customary Uniform Commercial Code filings on behalf of Transamerica with
respect to the Equipment. In addition, we request your acknowledgment and
cooperation for preserving and enforcing Transamerica's security interests. To
expedite the consummation of the proposed financing, we would appreciate your
execution of this letter.
To induce Transamerica to finance the Equipment, and for other good
and valuable consideration, you confirm and acknowledge the following matters to
us:
1. You will allow us, or our auditors or other designees,
reasonable access to the Premises to inspect the Equipment from time to time. In
addition, upon our request, you will grant us and our designees access to the
Premises for 90 days at reasonable times to show the Equipment to potential
purchasers and to remove the Equipment from the Premises.
2. In the event that the Company defaults in its obligations
under the Agreement or you desire or elect to terminate or exercise remedies
under the Agreement for any reason, including a default by the Company under the
Agreement, you will notify us in writing of this fact prior to your terminating
or exercising remedies under the Agreement and retaking possession of the
Premises. You hereby confirm and acknowledge to us that you do not and will not
have any claim to or lien on any of the Equipment, assuming such Equipment
constitutes trade fixtures or personal property, and not part of the building.
We would appreciate your confirming to us your agreement to the
foregoing provisions of this letter by signing and returning to us this letter
at our address shown above.
Very truly yours,
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: ____________________________________
Name:
Title:
ACKNOWLEDGED AND AGREED:
By:______________________________________
Name:
Title:
SCHEDULE A
Equipment Locations:
213 East Grand Avenue
South San Francisco, California 94080-4812
2
INSURANCE REQUIREMENTS
LIABILITY INSURANCE:
All liability policies are to name customer as the insured, and meet, at the
minimum the following requirements:
Minimum limits of liability are:
Bodily Injury: $1,000,000 per occurrence
Property Damage: $1,000,000 per occurrence
All liability insurance policies are to specify TRANSAMERICA BUSINESS CREDIT
CORPORATION (TBCC), as Additional Insured, and must be effective at the time of
shipment of the Equipment from the seller.
PROPERTY INSURANCE:
All property insurance policies are to name customer as the insured, and meet,
at the minimum, the following requirements:
a. Broad Form, Special Form, All Risk with the dollar amount of the deductible
noted. Property insurance coverage should be in an amount equal to the
replacement cost of the Equipment as further described on the attached Exhibit
II.
b. All property insurance policies are to specify TRANSAMERICA BUSINESS CREDIT
CORPORATION (TBCC), as Loss Payee, and must be effective at the time of
shipment of the Equipment from the seller.
GENERAL:
1. All insurance policies are to provide that in the event of material change to
the policy (i.e, terms, conditions, limits, broker or insurer, or cancellation
of the policy or any part) either by the insured or the insurance company, the
insurer will provide 30 days' prior written notice of such material change or
cancellation to TRANSAMERICA BUSINESS CREDIT CORPORATION (TBCC).
2. All insurance policies are to provide that violation of terms, conditions, or
warranties of the policy by the insured or others will not invalidate insofar as
the interest of TRANSAMERICA BUSINESS CREDIT CORPORATION (TBCC), is concerned.
3. In order to eliminate multiple certifications, we encourage blanket liability
and Broad Form, Special Form and All Risk coverage warranted to remain in full
force until at least 30 days' prior written notice is provided as aforesaid.
EXHIBIT A TO UCC-1 FINANCING STATEMENT
COLLATERAL: All equipment and other personal property under Master Lease
Agreement dated as of September 15, 1997 (including any and all modifications,
attachments, related parts, accessories and additions thereto and substitutions
and replacements therefor, in whole or in part, and all chattel paper, rentals,
accounts receivable, general intangibles and other income related thereto or
arising therefrom and all proceeds thereof including, without limitation,
insurance proceed) now or hereafter leased under such Master Lease Agreement and
Schedules.
The Secured Party is a Lessor and the Debtor is a Lessee in respect to the
leased property, and the lease is not intended as a security agreement to create
a security interest in Lessor. This statement is not to be evidence that the
lease is a security agreement, but if it is determined to be so for other
reasons, this financing statement is filed to perfect the Secured Party's
security interest in the property.