UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21022
SHAMAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
213 East Grand Avenue, South San Francisco, California 94080
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
650-952-7070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $.001 par value, outstanding
as of April 30, 1998: 17,861,362
1
SHAMAN PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
March 31, 1998
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of March 31, 1998 3
(Unaudited) and December 31, 1997
Condensed Statements of Operations for the 4
three months ended March 31, 1998 and March
31, 1997 (unaudited)
Condensed Statements of Cash Flows for the 5
three months ended March 31, 1998 and March
31, 1997 (unaudited)
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosure About
Market Risk 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults in Senior Securities 25
Item 4. Submission of Matters to a Vote of Security 25
Holders
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,953,451 $ 11,340,702
Short-term investments 6,245,679 10,079,943
Amounts due from related parties 179,447 192,551
Prepaid expenses and other 704,558 553,507
current assets ------------- -------------
Total current assets 15,083,135 22,166,703
Property and equipment, net 3,597,846 3,972,140
Other assets 596,120 613,657
------------- -------------
Total assets $ 19,277,101 $ 26,752,500
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIT)
Current liabilities:
Accounts payable and other
accrued expenses $ 1,323,675 $ 925,701
Accrued clinical trial costs 2,509,731 1,689,659
Accrued professional fees 726,056 718,625
Accrued compensation 836,929 368,272
Advances - contract research 289,855 1,133,605
Current installments of long-term obligations 2,583,148 2,783,976
------------- -------------
Total current liabilities 8,269,394 7,619,838
Long-term obligations, excluding
current installments 3,840,075 4,017,979
Senior convertible notes 10,179,334 9,967,044
Stockholders' equity:
Series A preferred stock 400 400
Common stock 17,861 17,796
Additional paid-in capital 117,451,608 117,164,524
Deferred compensation and other
adjustments (82,663) (124,910)
Accumulated deficit (120,398,908) (111,910,171)
------------- -------------
Total stockholders' equity (net capital deficit) (3,011,702) 5,147,639
------------- -------------
Total liabilities and stockholders' equity
(net capital deficit) $ 19,277,101 $ 26,752,500
============= =============
NOTE: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to condensed financial statements.
3
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-------------------------------
1998 1997
------------ ------------
Revenue from collaborative agreements $ 875,000 $ 875,000
Operating expenses:
Research and development 7,513,098 6,015,368
General and administrative 1,276,111 991,099
------------ ------------
Total operating expenses 8,789,209 7,006,467
------------ ------------
Loss from operation (7,914,209) (6,131,467)
Other income (expense):
Interest income 232,368 251,112
Interest expense (806,896) (101,394)
------------ ------------
Net loss $ (8,488,737) $ (5,981,749)
============= =============
Net loss per share $ (0.48) $ (0.39)
============= =============
Shares used in calculation of
net loss per share 17,836,000 15,455,000
============= =============
See Notes to condensed financial statements.
4
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Three Months Ended March 31,
--------------------------------
1998 1997
------------- -------------
Operating activities:
Net loss $ (8,488,737) $ (5,981,749)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 650,912 557,663
Loss on disposal of fixed assets 26,593 --
Payment of interest in Common Stock 288,563 --
Changes in operating assets and liabilities:
Prepaid expenses, other current assets
and other assets (120,410) 119,630
Accounts payable, accrued expenses and
contract research advances 850,384 (1,066,941)
------------ ------------
Net cash used in operating activities (6,792,695) (6,371,397)
------------ ------------
Investing activities:
Purchases of short-term investments (1,999,049) (1,024,373)
Maturities of available-for-sale investments 4,959,136 --
Sales of available-for-sale investments 899,007 --
Capital expenditures (33,143) (210,057)
------------ ------------
Net cash provided (used in)by investing activities 3,825,951 (1,234,430)
------------ ------------
Financing activities:
Proceeds from issuance of Common Stock 12,225 8,112,127
Principal payments on long-term obligations (643,964) (544,694)
Proceeds from asset financing arrangements 211,232 --
------------ ------------
Net cash provided (used in) by financing activities (420,507) 7,567,433
------------ ------------
Net decrease in cash and cash equivalents (3,387,251) (38,394)
Cash and cash equivalents at beginning of period 11,340,702 16,051,251
------------ ------------
Cash and cash equivalents at end of period $ 7,953,451 $ 16,012,857
============ ============
See Notes to condensed financial statements.
5
SHAMAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Basis of Presentation
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops of 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 in patients with AIDS and other watery
diarrhea indications; 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 accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire year.
This unaudited financial data should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K/A, for the fiscal year ended December 31, 1997, filed with
the Securities and Exchange Commission on May 28, 1998.
2. Loss per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. At March 31, 1998 and 1997, outstanding
stock options and other stock equivalents are antidilutive.
3. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, adoption in the quarter ended
March 31, 1998 did not have a material impact on the Company's net income or
stockholders' equity.
6
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for the
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of Statement 131, but does not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments and disclosures.
4. Subsequent Events
Senior Convertible Notes
In May 1998, pursuant to the terms of the Senior Convertible Notes, a
principal amount of $1.9 million was converted into a total of 472,861 shares of
the Company's Common Stock. As a result of converting these notes, the Company's
Senior Convertible Notes' balance has been reduced from $10.2 million, as of
March 31, 1998, to $8.3 million. See "Liquidity and Capital Resources".
7
SHAMAN PHARMACEUTICALS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops of 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 in patients with AIDS and other watery
diarrhea indications; 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 March 31, 1998, was approximately
$120.4 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 financing,
collaborative agreements with pharmaceutical companies and, to a lesser extent,
through equipment and leasehold improvement lease financings.
Results of Operations for the Quarters Ended March 31, 1998 and 1997
The Company recorded collaborative revenues of $875,000 for each of the
quarters ended March 31, 1998 and 1997. Revenues for these three-month periods
resulted from the Company's on-going research funding from Ono and research
funding from Shaman's collaboration with Lipha/Merck. The Company expects that
revenues from collaborative agreements will continue to fluctuate in the future
as development of its various compounds proceeds and new product candidates are
partnered for development and commercialization. In May 1998, the Company's
collaborative agreement with Ono expired under the original terms of the
agreement ("The Agreement") and was not renewed. Although the ongoing research
funding period under The Agreement may have expired, the Company and Ono
continue to have contractual obligations for the potential payment of milestones
and royalties.
The Company incurred research and development expenses of $7.5 million and
$6.0 million for the quarters ended March 31, 1998 and 1997, respectively. This
increase was primarily attributable to the Company's increased clinical
development activities with respect to Provir. Research and development expenses
are expected to increase in 1998 as the Company continues its clinical
development activities with respect to
8
Provir, other products continue through development, and the Company maintains
its diabetes research program.
General and administrative expenses were $1.3 million and $991,000 for the
quarters ended March 31, 1998 and 1997, respectively. This increase was
primarily attributable to increases in compensation and marketing research
related to late stage clinical products, as well as additional legal dispute
costs. The Company's expanded research and clinical activities are not expected
to require commensurate increases in general and administrative support and
expense.
Interest income was $232,000 and $251,000 for the quarters ended March 31,
1998 and 1997, respectively. Interest income decreased for the period ended
March 31, 1998, compared with the period ended March 31, 1997, due to lower
average cash and investment balances as the Company continues to fund its
operations. Interest expense was $807,000 and $101,000 for the quarters ended
March 31, 1998 and 1997, respectively. Interest expense increased for the period
ended March 31, 1998, compared with the period ended March 31, 1997 due to
higher average debt balance and amoritzation of the non-cash interest expense of
$266,000 in connection with certain debt financing.
Liquidity and Capital Resources
As of March 31, 1998, the Company's cash, cash equivalents, and investments
totaled approximately $14.2 million, compared with $21.4 million at December 31,
1997, with an average maturity of 2.3 months and 5.0 months, respectively. The
Company invests excess cash according to its investment policy that provides
guidelines with regard to liquidity, type of investment, credit ratings and
concentration limits.
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 until November 7, 1997 (the "Fixed
Conversion Period"). Thereafter, 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. The Company filed a registration statement
with the Securities and Exchange Commission (the "SEC") for the resale of shares
issued upon conversion of these notes, which registration statement was declared
effective on August 29, 1997. In November 1997, a principal amount of $220,666
was converted into 55,102 shares of the Company's Common Stock. In May 1998,
certain note holders converted a portion of their notes into the Company's
Common Stock. See "Notes to Condensed Financial Statements -- Note 4. Subsequent
Events".
In March 1998, the Company and the purchasers of the Notes entered into an
Amendment Agreement (the "Amendment Agreement") which extended the Fixed
Conversion Period to March 31, 1998. The Amendment Agreement was entered into in
order to avoid conversion of the Notes at a price that would be unduly dilutive
to the Company's existing Stockholders. As consideration for entering into the
9
Amendment Agreement, the Company issued to the Selling Stockholders Warrants to
purchase an aggregate of 137,500 shares of Common Stock. The Warrants are
exercisable through March 18, 2001 at an exercise price of $7.50 per share. The
Company has filed a registration statement with the SEC for the resale of shares
issued upon exercise of the Warrants, which registration statement has not, as
of the date of filing this Quarterly Report been declared effective.
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 annual interest rate of 14.58% and is payable in equal
monthly installments over the term of the loan. The lender was granted an
exercise price of 10 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 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 12 months, as work was
performed. The Company also received approximately $3.0 million for 388,918
shares of Common Stock priced at $7.71 per Common 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.
In July 1996, the Company closed a private placement (the "1996 Private
Placement") pursuant to Regulation S under the Securities Act of 1933, as
amended, in which it received gross proceeds of $3.3 million for the sale of
400,000 shares of Series A Convertible Preferred Stock and for the issuance of a
six-year warrant to purchase 550,000 shares of the Company's Common Stock at an
exercise price of $10.18 per share. The Preferred Stock does not carry a
dividend obligation and will convert into Common Stock no later than July 23,
1999 at a price per share between $6.00 and $8.15, depending on the market value
of the Company's Common Stock during the period prior to conversion. Holders of
preferred shares are entitled to a liquidation preference of $8.15 per share. In
addition to the sale of Preferred Stock and the warrant, the
10
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.
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 $14.2
million at March 31, 1998, 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.
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 product
candidates. The clinical and regulatory processes through which the Company's
products must proceed are complex, uncertain and costly, and no assurance can be
given regarding the timing of clinical or regulatory progress or that the
Company will be successful in commercializing any of its product candidates.
These development processes require substantial amounts of funding, and the
Company is dependent on corporate partners and the equity markets to finance
such efforts. Where access to funding is difficult, the Company's stockholders
may face significant dilution, and the ability of the Company to proceed with
its programs and plans may be significantly and adversely affected. Actions and
advances by competitors may also significantly affect the Company's prospects,
as may the existence of patents held by such competitors or potential
competitors. In addition, there can be no assurance that any plants required by
the Company will be indefinitely available or that any compounds derived from
the plant material will result in protected proprietary rights for the Company.
Item 3. Qualitative and Quantitative Disclosure About Market Risk.
Not Applicable.
11
Risk Factors
This Form 10-Q contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in Form 10-K/A for
fiscal year ended December 31, 1997, filed with the Securities and Exchange
Commission on May 28, 1998.
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 March 31, 1998, the Company's accumulated deficit was approximately $120.4
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.
Future Capital Needs; Uncertainty of Additional Funding. As of March 31,
1998, the Company had cash, cash equivalents and investment balances of
approximately
12
$14.2 million. 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, which include a failure to meet applicable stock market
or exchange listing requirements, the Company would be required to redeem all or
some portion of the $8.1 million principal due thereunder as of May 31, 1998,
which redemption could significantly accelerate the Company's cash expenditures
and capital requirements beyond the levels currently anticipated, and would
materially and adversely affect the Company's ability to conduct its business.
The Company will need to seek additional funding through public or private
equity or debt financings, collaborative arrangements or from other sources. 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.
No Assurance of Successful Product Development. The Company's research and
development programs are at various stages of development, ranging from the
research stage to clinical trials. Substantial additional research and
development will be necessary in order for the Company to move additional
product candidates into clinical testing, and there can be no assurance that any
of the Company's research and development efforts on these or other potential
products, including Provir, nikkomycin Z, and SP-134101 will lead to development
of products that are shown to be safe and effective in clinical trials.
In addition, there can be no assurance that any such products will meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. Further, the Company's products may prove to have undesirable or
unintended side effects that may prevent or limit their commercial use. The
Company may find, at any stage of this complex product development process, that
products that appeared promising in preclinical studies or Phase I and Phase II
clinical trials do not demonstrate efficacy in larger-scale, Phase III clinical
trials and do not receive regulatory approvals.
13
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.
Uncertainties Associated with Clinical Trials. Shaman has conducted, and
plans to continue to conduct, extensive and costly clinical trials to assess the
safety and efficacy of its potential products. The rate of completion of the
Company's clinical trials is dependent upon, among other factors, the rate of
completion and approval of trial protocols, the availability of funds for trials
and the rate of patient enrollment. Patient enrollment is a function of many
factors, including the nature of the Company's clinical trial protocols,
existence of competing protocols, size of patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Delays in
patient enrollment will result in increased costs and delays, which could have a
material adverse effect on the Company's ability to complete clinical trials in
a timely fashion.
The Company cannot assure that patients enrolled in its clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the U.S. FDA
regulations applicable to such testing can result in delay, suspension or
cancellation of such testing, and/or refusal by the FDA to accept the results of
such testing. In addition, the FDA or the Company may suspend clinical trials at
any time if either of them concludes that any patients participating in any such
trial are being exposed to unacceptable health risks. Further, there can be no
assurance that human clinical testing will demonstrate that any current or
future product candidate is safe or effective or that data derived from any such
study will be suitable for submission to the FDA or other regulatory
authorities. Failure of the Company's clinical trials to demonstrate safety or
efficacy in humans could cause the delay, suspension, or termination of any
product program and could have a material adverse effect on the Company's
business, financial condition and results of operations.
14
Dependence on Collaborative Relationships. The Company's research and
development efforts in its diabetes program and, to a lesser extent, in its
other programs, have been dependent upon its arrangements with Lipha/Merck and
Ono and their funding for research and development efforts thereunder. As such
ongoing research and development funding from Ono has ended, the Company must
rely on continue funding from Lipha/Merck or milestone payments from products
developed by either Ono or Lipha/Merck, if any, or must seek new collaborations
to provide further funding for its diabetes program. There can be no assurance
that any significant revenues will ultimately be derived from such agreements.
The Company licensed the use of nikkomycin Z from Bayer AG in June 1995.
Under the terms of this licensing agreement, the Company has paid Bayer an
initial milestone payment and may be required, upon the occurrence of certain
events, to make additional milestone payments and to pay royalties on any
commercialized products derived from nikkomycin Z. The failure of the Company to
pay these milestone payments or the termination of this license agreement could
cause the Company to forfeit its rights to utilized nikkomycin Z and could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company expects to seek additional collaborative agreements to
commercialize its other product candidates and will, in particular, need to rely
on such third party arrangements to commercialize its products outside the
United States. No assurance can be given that the Company will be successful in
negotiating or entering into such agreements on terms favorable to the Company
or at all, or that any such agreement, if entered into by the Company will be
successful. A failure to successfully enter into such agreements and sell
products thereunder would have a material adverse effect on the Company's
business, financial condition and results of operations.
Rapid Technological Change and Substantial Competition. The pharmaceutical
industry is subject to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology companies and universities is
intense. Many of these entities have significantly greater research and
development capabilities, as well as substantial marketing, manufacturing,
financial and managerial resources, and represent significant competition for
the Company. There can be no assurance that developments by others will not
render the Company's products or technologies noncompetitive or that the Company
will be able to keep pace with technological developments. Competitors have
developed or are in the process of developing technologies that are, or in the
future may be, the basis for competitive products. Some of these products may
have an entirely different approach or means of accomplishing the desired
therapeutic effect than products developed by the Company. These competing
products may be more effective and less costly than the products developed by
the Company. In addition, other forms of medical treatment may offer competition
to the Company's products. The development of competing compounds could have a
material adverse effect on the Company's business, financial condition or
results of operations.
15
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
16
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.
The Company will also be subject to a variety of foreign regulations
governing clinical trials, registration and sales of its products. Regardless of
whether FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process varies from country to country and the
time needed to secure approval may be longer or shorter than that required for
FDA approval. Delays in the approval process or the failure to obtain such
foreign approvals would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Sources of Supply. The Company currently imports all of the
plant materials from which its products are derived from countries in South and
Latin America, Africa and Southeast Asia. To the extent that its products cannot
be economically synthesized or otherwise produced, the Company will continue to
be dependent upon a supply of raw plant material. The Company does not have
formal agreements in place with all of its suppliers. In addition, a continued
source of plant supply is subject to the risks inherent in international trade.
These risks include unexpected changes in regulatory requirements, exchange
rates, tariffs and barriers, difficulties in coordinating and managing foreign
operations, political instability and potentially adverse tax consequences.
Interruptions in supply or material increases in the cost of supply could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, tropical rain forests, and certain
irreplaceable plant resources therein, are currently threatened with
destruction. In the event portions of the rain forests are destroyed which
contain the source material from which Shaman's current or future products are
derived, such destruction could have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Manufacturing and Marketing Experience and Capacity. The Company
currently produces products only in quantities necessary for clinical trials and
does not have the staff or facilities necessary to manufacture products in
commercial quantities. As a result, the Company must rely on collaborative
partners 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
17
which any of the Company's products may be manufactured. The Company's
dependence on third parties for the manufacture of products may adversely affect
the Company's ability to develop and deliver products on a timely and
competitive basis. Should the Company be required to manufacture products
itself, the Company will be subject to the regulatory requirements described
above, to similar risks regarding delays or difficulties encountered in
manufacturing any such products and will require substantial additional capital.
There can be no assurance that the Company will be able to manufacture any such
products successfully or in a cost-effective manner.
The Company currently has no sales staff. To the extent that the Company
does not or is unable to enter into co-promotion agreements or to arrange for
third party distribution of its products, significant additional resources will
be required to develop a complete marketing and sales force. There can be no
assurance that the Company will be able to enter into collaborative agreements
or successfully establish a marketing and sales force.
Uncertainty Regarding Patents and Proprietary Rights; Current Legal
Proceedings Regarding Patents and Proprietary Rights. The Company's success will
depend in large part on its ability to obtain and maintain patents, protect
trade secrets and operate without infringing upon the proprietary rights of
others. Moreover, competitors may have filed patent applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to products or processes competitive with those of the Company. There can be no
assurance that the Company's patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any issued patents will provide the Company with adequate protection for its
inventions or will not be challenged by others, or that the patents of others
will not impair the ability of the Company to commercialize its products. The
patent position of firms in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office (the "PTO") or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents. There is considerable variation between countries as to the level of
protection afforded under patents and other proprietary rights. Such differences
may expose the Company to differing risks of commercialization in each foreign
country in which it may sell products. There can be no assurance that others
will not independently develop similar products, duplicate any of the Company's
products or design around any patents of the Company.
A number of pharmaceutical companies and research and academic institutions
have developed technologies, filed patent applications or received patents on
various technologies that may be related to the Company's business. Some of
these technologies, applications or patents may conflict with the Company's
technologies or patent applications. The European Patent Office, the French
Patent Office, the German Patent Office and the Australian Patent Office, have
each granted a patent containing broad claims to proanthocyanidin polymer
compositions (and methods of use of such compositions), which are similar to the
Company's specific proanthocyanidin polymer composition, to Leon Cariel and the
Institut des Substances Vegetales. The effective filing date of these patents is
prior to the effective filing date of the Company's foreign pending patent
application in Europe. Certain of the foreign patents have been
18
granted in jurisdictions where examination is not rigorous. The Company has
instituted an Opposition in the European Patent Office against granted European
Patent No. 472531 owned by Leon Cariel and Institut des Substances Vegetales.
The Company believes that the granted claims are invalid and intends to
vigorously prosecute the Opposition.
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 PTO has rendered judgment in an Interference
declared between the Company's issued patent covering its specific
proanthocyanidin polymer composition and certain claims of U.S. application
corresponding to the granted European patent of Leon Cariel and the Institut des
Substances Vegetales by Daniel Jean and Leon Cariel. Judgment was awarded to the
Company. Since the period for appeal has passed, this judgment is now final.
Additionally, in connection with the Interference proceeding, the Company
has had an opportunity to review the claims and file history of the Daniel Jean
and Leon Cariel patent application which, under U.S. patent law, are kept
confidential. One broad claim, in particular, of the Daniel Jean and Leon Cariel
patent application, which was not involved in the Interference proceeding and
which has been indicated to be allowable, covers a large variety of
proanthocyanidin polymers. The Company believes that this broad claim is subject
to attack as invalid in view of prior art. Based on knowledge of the Company's
specific proanthocyanidin polymer composition, the Company believes that the
manufacture, use or sale of its specific proanthocyanidin polymer composition
would not constitute infringement of this broad claim, once it issues. There can
be no assurances, however, that the Company would prevail should an action for
infringement of such claim be commenced. In addition, if patents that cover the
Company's activities have been or are issued to other companies, there can be no
assurance that the Company would be able to obtain licenses to these patents at
a reasonable cost, or at all, or be able to develop or obtain alternative
technology.
If the Company does not obtain such licenses, it could encounter delays or
be precluded from introducing products to the market. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the Company or to protect trade secrets or know-how owned by the
Company. Additional interference proceedings may be declared or necessary to
determine issues of invention; such litigation and/or interference proceedings
could result in substantial cost to and diversion of effort by, and may have a
material adverse effect on, the Company. In addition, there can be no assurance
that these efforts by the Company will be successful.
19
The Company's competitive position is also dependent upon unpatented trade
secrets. All employees of the Company are bound by confidentiality agreements.
However, there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, that such trade secrets will not be
disclosed or that the Company can effectively protect its rights to unpatented
trade secrets. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes also may arise as to the rights in related or resulting
know-how and inventions.
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
20
or proprietary rights of others or that licenses that might be required as a
result of such infringement for the Company's processes or products would be
available on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others' proprietary rights. The Company may participate in
interference proceedings that may in the future be declared by the U.S. PTO,
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
collaborative parties, are using systems that are year 2000 compliant or will
address any year 2000 issues in a timely fashion, or at all. Any year 2000
compliance problems of either the Company, its suppliers, its clinical research
organizations, or its collaborative partners could have a material adverse
effect on the Company's business, operating results and financial conditions.
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
21
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.
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 with voting rights,
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
22
present plans to issue shares of Preferred Stock with voting rights. 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. Certain of the
Company's development and manufacturing agreements contain insurance and
indemnification provisions pursuant to which the Company could be held
accountable for certain occurrences.
Limitation of Liability and Indemnification. The Company's Certificate of
Incorporation limits, to the maximum extent permitted by Delaware Law, the
personal liability of directors for monetary damages for breach of their
fiduciary duties as a director. The Company's Bylaws provide that the Company
shall indemnify its officers and directors and may indemnify its employees and
other agents to the fullest extent permitted by law. The Company has entered
into indemnification agreements with its officers and directors containing
provisions which are in some respects broader than the specific indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. The
Company currently maintains directors' and officers' insurance.
Section 145 of the Delaware Law provides that a corporation may indemnify a
director, officer, employee or agent made or threatened to be made a party to an
action by reason of the fact that he was a director, officer, employee or agent
of the corporation or was serving at the request of the corporation against
expenses actually and reasonably incurred in connection with such action if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Delaware Law does not permit a corporation to eliminate a
director's duty of care, and the provisions of the Company's Certificate of
Incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.
Dilution. Dilution may occur upon the exercise of outstanding options and
warrants, including the Warrants, and upon conversion of the Notes and if
issued, the Series B Preferred. Stockholders may also suffer additional
dilutions if the Company
23
exercises its right to put additional shares of its Common Stock to Fletcher
International Limited, pursuant to its agreements with such investor.
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.
24
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
4.2* Form of Common Stock Purchase Warrant
10.65* Amendment Agreement
27* Financial Data Schedule
(b) No current reports on Form 8-K were filed during the
quarter ended March 31, 1998.
- ---------------------------
* Previously filed
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: July 9, 1998
Shaman Pharmaceuticals, Inc.
(Registrant)
/s/ Lisa A. Conte
__________________________
Lisa A. Conte
President, Chief Executive Officer and
Chief Financial Officer
(on behalf of the Company and as
principal executive officer & principal
financial and accounting officer)
26